The counterfactual analysis under s 177C(1)(a) must demonstrate a reasonable expectation — more than a mere possibility — that the relevant amount would have been included in the taxpayer's assessable income, and the correct taxpayer as the recipient of the tax benefit must be identified.
Later decisions that cite Federal Commissioner of Taxation v Peabody
Decisions cited by Federal Commissioner of Taxation v Peabody
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v PEABODY [1994] HCA 43; (1994)
181 CLR 359, (1994) 123 ALR 451, (1994)
28 ATR 344,
(1994) 94 ATC 4663
F.C. 94/037
Number of pages - 10
Income Tax (Cth)
HIGH COURT OF AUSTRALIA
MASON CJ, BRENNAN, DEANE, DAWSON, TOOHEY, GAUDRON AND McHUGH JJ
CATCHWORDS
Income Tax (Cth) - Scheme to reduce tax - Tax benefit in connexion with scheme - Commissioner's power to cancel benefit - Scheme Identification of facts by Commissioner as scheme - whether binding on power to cancel benefit - Reasonable expectation of inclusion of amount in taxpayer's assessable income - Purpose of entering scheme - Income Tax Assessment Act 1936 (Cth), ss. 177A(1) "scheme", (5), 177c(1)(a), 177D, 177F(1).
HEARING
1993, November 9, 10; 1994, September 28ORDER
Appeal dismissed with costs.DECISION
MASON CJ, BRENNAN, DEANE, DAWSON, TOOHEY, GAUDRON AND McHUGH JJ
2. Mrs Peabody's husband, Terrence Elmore Peabody, had established
in 1963 with his father and another partner a fly ash business. Fly
ash is a light, powdery substance, also known as pozzolan, which is a
by-product of coal burnt in power stations. When blended with cement,
fly ash adds strength and durability to concrete and reduces its cost.
The business successfully developed the process for the use of fly ash
in structural concrete and in 1985 was owned as to 62% by the Peabody
interests and as to 38% by a Mr Ray Kleinschmidt or interests
associated with him. The business comprised four main companies:
Pozzolanic Enterprises Pty. Ltd., Pozzolanic (Queensland) Pty. Ltd.,
Pozzolanic Bulk Carriers (Queensland) Pty. Ltd. and Coastal Bulk
Haulage Pty. Ltd. There were other companies but they were all
subsidiaries of one or other of these companies which may be referred
to as the Pozzolanic Group.
3. The shares in the Pozzolanic Group which were owned by the
Peabody interests were held in the name of TEP Holdings Pty. Ltd.
("TEP Holdings"). That company held the shares as trustee of a
discretionary trust known as the Peabody Family Trust. Mrs Peabody
and her two children were the beneficiaries under the trust and she
and her husband were the only directors of TEP Holdings.
4. In 1985 Mr Peabody formulated a plan, which he had been
considering for some time, whereby TEP Holdings would acquire
Mr Kleinschmidt's interest in the Pozzolanic Group, publicly float
50% of that group and retain control of the remaining 50%. Mr Peabody
and Mr Kleinschmidt reached an agreement that the latter would sell
the whole of his interest in the group to the Peabody interests.
Mr Kleinschmidt did not want the price of his shares - which was some
$8.6 million - to be disclosed publicly and Mr Peabody agreed that
there should be no public disclosure.
5. There was an expectation that the public float would be
capitalized at a figure well in excess of the $24 million which was
the basis of the price agreed for the purchase of the Kleinschmidt
shares. It was anticipated that difficulties might arise if it became
necessary to disclose in the prospectus for the float that the shares
acquired by the Peabody interests from Mr Kleinschmidt had been
acquired a short time before at a figure substantially less than that
for which they were offered to the public. Advice was obtained from
senior counsel that disclosure was not required, but the advice was
qualified.
6. Discussion between Mr Peabody and his advisers revealed the
possibility of the Peabody interests acquiring the Kleinschmidt shares
and converting them to a different class with restricted rights which
would render them almost worthless. The consequence of that would be
that the shares held by TEP Holdings would increase in value by the
amount shed by the Kleinschmidt shares. Mr Peabody's solicitor
pointed out that TEP Holdings could then sell the shares it had always
owned to a public company formed for the purpose of the float for a
price which reflected the increased value and so avoid the application
of s.26AAA of the Act which at that time included as assessable income
any profit arising from the sale of property acquired within 12 months
of the sale. No decision was made initially whether TEP Holdings or a
separate company would be the purchaser of the Kleinschmidt shares.
7. There was further discussion about the method of financing the
purchase of the Kleinschmidt shares. It became apparent that there
were advantages if a financier, rather than simply lending the
necessary money, were to subscribe for redeemable preference shares
in the company which was to purchase the shares. By this method, the
cost of the finance would be considerably reduced. The financier
would receive dividends on the preference shares equal to the interest
which it would have received under a conventional arrangement but less
the tax which it would have paid on that interest. The financier
would receive under s.46 of the Act, as it then was, a rebate of
100% of tax in respect of the dividends. Thus the financier would
effectively receive a tax-free dividend equivalent to the after-tax
interest. Once the dividends had been declared, the preference shares
would be redeemed so that the financier would receive back an amount
which would be the equivalent of the principal of a loan.
8. It was decided that TEP Holdings should acquire a shelf company,
Loftway Pty. Ltd. ("Loftway"), to purchase the Kleinschmidt shares in
the Pozzolanic Group. This was done and the shares in Loftway were
held by TEP Holdings in its capacity as trustee of the Peabody Family
Trust. Westpac Banking Corporation ("Westpac") became the financier.
Loftway purchased the Kleinschmidt shares for the sum of $8,656,177.
The money to pay for these shares was provided by Westpac subscribing
for redeemable preference shares in Loftway. After the Kleinschmidt
shares in the Pozzolanic Group had been acquired by Loftway, the four
Pozzolanic companies each declared dividends which were paid to
Loftway. With this money Loftway in turn declared the appropriate
dividend to be paid to Westpac.
9. Each of the four companies in the Pozzolanic Group, with the
consent of Loftway, passed special resolutions converting the shares
which Loftway had purchased in them into 'Z' class preference shares
which carried restricted rights reducing their value from some $8.6
million to something less than $500. As a consequence, the shares
in the Pozzolanic Group held by TEP Holdings, which previously
represented only 62% of the equity in the group, came to represent
virtually 100% of that equity. Thereafter, TEP Holdings (and
Mr Peabody in respect of a small number of shares in his name) agreed
to sell the whole of the ordinary shares in the Pozzolanic Group
to a company which eventually became Pozzolanic Industries Ltd.
("Pozzolanic Industries") for $30 million. The purchase price was
payable partly in cash and partly in shares in Pozzolanic Industries
with the result that TEP Holdings eventually held 50% of the shares in
Pozzolanic Industries. The remaining 50% of the shares in Pozzolanic
Industries were floated to the public. No mention was made in the
prospectus for the float of the price paid for the purchase of the
Kleinschmidt shares.
10. With money raised by the sale, TEP Holdings lent an amount to
Loftway which enabled it to redeem the preference shares held by
Westpac. It appears that eventually Loftway transferred the 'Z' class
shares in the Pozzolanic Group to TEP Holdings which then transferred
them to Pozzolanic Industries either by way of gift or at par
value. TEP Holdings forgave Loftway the debt arising out of the
above-mentioned loan by TEP Holdings to Loftway.
11 The determination made by the Commissioner under s.177F of the
Act was that the sum of $888,005 should be included in the assessable
income of Mrs Peabody for the year ended 30 June 1986. This was done
pursuant to s.97 of the Act upon the basis that Mrs Peabody was a
beneficiary of a trust estate presently entitled to a share of the
income of the trust estate. That figure represented one-third of the
profit for the purposes of s.26AAA which the Commissioner claims TEP
Holdings would have realized if it had bought the Kleinschmidt shares
and sold them within 12 months of their acquisition.
12. The trustees of the Peabody Family Trust had resolved to
distribute the whole of the income of the trust estate (including
specifically any amounts which the Commissioner should add as a result
of amended assessments) equally among the three beneficiaries of
whom Mrs Peabody was one. As a result Mrs Peabody was said by the
Commissioner to have derived, by the application of s.97, assessable
income in the sum of $888,005.
13. The Commissioner's discretion to cancel a tax benefit under s.177F
is dependent upon a tax benefit having been obtained by a taxpayer in
connection with a scheme to which Pt IVA applies. "Scheme" is defined
broadly in s.177A(1) as meaning:
"(a) any agreement, arrangement, understanding, promise or
undertaking, whether express or implied and whether or
not enforceable, or intended to be enforceable, by
legal proceedings; and
(b) any scheme, plan, proposal, action, course of action
or course of conduct".
14. Under s.177A(3) the scheme, plan, proposal, action, course of action
or course of conduct may be unilateral. Section 177A(5) provides:
"A reference in this Part to a scheme or a part of a
scheme being entered into or carried out by a person for a
particular purpose shall be read as including a reference to
the scheme or the part of the scheme being entered into or
carried out by the person for 2 or more purposes of which
that particular purpose is the dominant purpose."
15. Under s.177C(1)(a) a reference in Pt IVA to the obtaining of a
tax benefit in connection with a scheme is to be read relevantly as a
reference to:
"(a) an amount not being included in the assessable income
of the taxpayer of a year of income where that amount
would have been included, or might reasonably be
expected to have been included, in the assessable
income of the taxpayer of that year of income if the
scheme had not been entered into or carried out".
16. Section 177D, so far as is relevant, provides that Pt IVA shall
apply to a scheme, where:
"(a) a taxpayer (in this section referred to as the
'relevant taxpayer') has obtained, or would but for
section 177F obtain, a tax benefit in connection with
the scheme; and
(b) having regard to -
(i) the manner in which the scheme was entered into
or carried out;
(ii) the form and substance of the scheme;
(iii) the time at which the scheme was entered into
and the length of the period during which the
scheme was carried out;
(iv) the result in relation to the operation of this
Act that, but for this Part, would be achieved
by the scheme;
(v) any change in the financial position of the
relevant taxpayer that has resulted, will
result, or may reasonably be expected to
result, from the scheme;
(vi) any change in the financial position of any
person who has, or has had, any connection
(whether of a business, family or other nature)
with the relevant taxpayer, being a change that
has resulted, will result or may reasonably be
expected to result, from the scheme;
(vii) any other consequence for the relevant
taxpayer, or for any person referred to in
sub-paragraph (vi), of the scheme having been
entered into or carried out; and
(viii) the nature of any connection (whether of a
business, family or other nature) between the
relevant taxpayer and any person referred to in
sub-paragraph (vi),
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 to obtain a tax benefit in connection with
the scheme or of enabling the relevant taxpayer and another
taxpayer or other taxpayers each to obtain a tax benefit in
connection with the scheme (whether or not that person who
entered into or carried out the scheme or any part of the
scheme is the relevant taxpayer or is the other taxpayer or
one of the other taxpayers)".
17. Where a tax benefit has been obtained, or would but for s.177F be
obtained, by a taxpayer in connection with a scheme to which Pt IVA
applies, the Commissioner may under s.177F(1)(a) - "in the case of a
tax benefit that is referable to an amount not being included in the
assessable income of the taxpayer of a year of income - determine that
the whole or a part of that amount shall be included in the assessable
income of the taxpayer of that year of income". The amount so
determined shall, under s.177F(2), be deemed to be included in the
assessable income by virtue of such provision of the Act as the
Commissioner determines.
18. The scheme in this case as originally identified by the
Commissioner extended "to the conversion of the (Kleinschmidt shares)
to 'Z' class shares, with the result being that same were not
subsequently sold to the newly-formed public company Pozzolanic
Industries Ltd.". Subsequently, in the Federal Court proceedings, the
Commissioner particularized the scheme as including the following
steps:
"(1) The purchase of all the shares of (the Pozzolanic
Group) which were owned by R.T. Kleinschmidt by
(Loftway);
(2) The issue of preference shares by (Loftway) to
(Westpac);
(3) The conversion of shares in the (Pozzolanic Group) to
'Z' class preference shares;
(4) The reduction in the considered value of the
(Pozzolanic Group) shares by (Loftway);
(5) The special resolution by the (Pozzolanic Group) to
remove the right of 'Z' class preference shareholders
to receive preferential dividends;
(6) The loan made by (TEP Holdings) which was the trustee
of the Peabody Family Trust to (Loftway) and the terms
and conditions of that loan;
(7) The public float of Pozzolanic Industries Ltd. which
float excluded the 'Z' class shares;
(8) The redemption of its preference shares in the target
entities by (Loftway) from (Westpac);
(9) The sale of the (Pozzolanic Group) 'Z' class shares
by Loftway to (TEP Holdings) for a consideration of
$476.00;
(10) The transfer of the shares by (TEP Holdings) as a gift
or at par value to Pozzolanic Industries Ltd.".
19. At first instance in the Federal Court, O'Loughlin J took the
view that Mr Kleinschmidt's wish to keep confidential the price which
was paid for his shares played no part in the decision to convert
those shares into 'Z' class shares. That conversion, he said, was
implemented to avoid the provisions of s.26AAA of the Act and was
to be considered separately from the method adopted to finance the
purchase of the Kleinschmidt shares, the purpose of which was plainly
commercial. The relevant scheme might, O'Loughlin J concluded, be
confined to the conversion of the Kleinschmidt shares to 'Z' class
shares, but he was of the view that even if it extended to the issue
of redeemable preference shares by Loftway as a means of obtaining
cheap finance, the dominant purpose was still to avoid the application
of s.26AAA and so obtain a tax benefit.
20. The Full Court of the Federal Court took a different view. They
pointed out that the scheme identified by the Commissioner comprised a
series of steps, of which the conversion of the Kleinschmidt shares to
'Z' class shares was only one. In their view it was not open to the
Court to take one step and classify it as a scheme in itself. The
discretion vested in the Commissioner to make a determination under
s.177F(1) was, the Full Court said, dependent upon the existence of
a scheme to which Pt IVA applied in connection with which a taxpayer
obtained a tax benefit and it was not possible to substitute some
other scheme for the scheme upon which the Commissioner exercised his
discretion under that section. That discretion was exercisable by the
Commissioner and not by the Court so that, in the view of the Full
Court, it was not possible to support the validity of its exercise
upon a basis other than that adopted by the Commissioner - that is to
say, to do so by reference to a scheme other than that identified by
the Commissioner.
21. The Full Court concluded, therefore, that the only relevant scheme
was that identified by the Commissioner. The scheme identified was a
course of action or conduct by Mr Peabody commencing with the purchase
of the Kleinschmidt shares and ending with the transfer of those
shares to Pozzolanic Industries. The dominant purpose of Mr Peabody
in entering into or carrying out that scheme was, in the view of the
Full Court, commercial, namely, the acquisition of the Kleinschmidt
shares and the flotation of a public company. It was not, so the
Full Court said, to enable the taxpayer, Mrs Peabody, to obtain a tax
benefit in connection with the scheme.
22. The Full Court also concluded that, in any event, it was not
reasonable to expect that, if the scheme had not been entered into or
carried out, the assessable income of Mrs Peabody would have included
the amount in question. Such an expectation could only be based upon
the view that TEP Holdings would have purchased the Kleinschmidt
shares and that, in the view of the Full Court, was not a reasonable
expectation.
23. Accordingly, the Full Court allowed the appeal and upheld
Mrs Peabody's objection to the amended assessment of income tax in
respect of the year of income ended 30 June 1986.
24. Under s.177F(1), the Commissioner's discretion to cancel a tax
benefit extends only to a tax benefit obtained in connection with a
scheme to which Pt IVA applies. The existence of the discretion is
not made to depend upon the Commissioner's opinion or satisfaction
that there is a tax benefit or that, if there is a tax benefit, it
was obtained in connection with a Pt IVA scheme. Those are posited
as objective facts ((2) See McAndrew v. Federal Commissioner of
Taxation [1956] HCA 62; (1956) 98 CLR 263 at 276-277 per Kitto J; cf. Avon Downs Pty.
Ltd. v. Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353 at 360 per
Dixon J). The erroneous identification by the Commissioner of a
scheme as being one to which Pt IVA applies or a misconception on his
part as to the connection of a tax benefit with such a scheme will
result in the wrongful exercise of the discretion conferred by
s.177F(1) only if in the event the tax benefit which the Commissioner
purports to cancel is not a tax benefit within the meaning of Pt IVA.
That is unlikely to be the case if the error goes to the mere detail of
a scheme relied upon by the Commissioner. An error of a more
fundamental kind, however, may have that result - where, for example,
it leads to the identification of the wrong taxpayer as the recipient
of the tax benefit. But the question in every case must be whether a
tax benefit which the Commissioner has purported to cancel is in fact a
tax benefit obtained in connection with a Pt IVA scheme and so
susceptible to cancellation at the discretion of the Commissioner.
25. Of course, the Commissioner may be required to supply particulars
of the scheme relied on ((3) See Bailey v. Federal Commissioner of
Taxation [1977] HCA 11; (1977) 136 CLR 214.) and in this case has supplied them in
the form of the ten steps identified by the Commissioner. But the
Commissioner is entitled to put his case in alternative ways. If,
within a wider scheme which has been identified, the Commissioner
seeks also to rely upon a narrower scheme as meeting the requirements
of Pt IVA, then in our view there is no reason why the Commissioner
should not be permitted to do so ((4) See Xco Pty. Ltd. v. Federal
Commissioner of Taxation [1971] HCA 37; (1971) 124 CLR 343 at 349 per Gibbs J),
provided it causes no undue embarrassment or surprise to the other
side. If it does, the situation may be cured by amendment, provided
the interests of justice allow such a course ((5) Bailey v. Federal
Commissioner of Taxation (1977) 136 CLR at 219.).
26. In this case, O'Loughlin J at first instance took the view that
the Commissioner had particularized the scheme too widely and that it
should be confined to the devaluation of the Kleinschmidt shares and
the subsequent disposal of them. He was not bound to accept the wider
scheme advanced by the Commissioner before him and there was no
unfairness to the taxpayer in his reaching the conclusion which he
did, notwithstanding the apparent failure of the Commissioner to
advance alternative schemes. The argument of the Commissioner plainly
relied upon the devaluation of the Kleinschmidt shares as evidence of
a dominant purpose on the part of Mr Peabody to obtain a tax benefit,
however widely the particulars were otherwise drawn. Before us the
Commissioner sought to rely upon the narrower scheme identified by the
judge at first instance and, in our view, he was entitled to do so.
27. However, the Full Court was of the view that the only scheme
available to be considered in connection with the tax benefit
cancelled by the Commissioner was the whole scheme embraced by the
particulars provided by the Commissioner. In relation to that scheme
the Full Court concluded that the dominant purpose of Mr Peabody - the
only relevant person to enter into and carry out the scheme - was of
a commercial nature and not to enable Mrs Peabody to obtain a tax
benefit. The Commissioner's answer to that was that the provisions of
Pt IVA cover not only a scheme but any part of a scheme. That is to
be seen, he said, in ss.177D and 177A. In s.177D it is contemplated
that the person by reference to whose purpose the nature of the scheme
is to be determined may be a person who enters into or carries out
only part of the scheme. Section 177A(5) provides that it is the
dominant purpose of a person entering into or carrying out part of a
scheme which is relevant where that person has two or more purposes.
The consequence, so the Commissioner argued, was that if Mr Peabody's
dominant purpose in carrying out that part of the scheme which
consisted of the devaluation of the Kleinschmidt shares was to obtain
a tax benefit, then any tax benefit obtained as a consequence was
obtained in connection with a scheme within the meaning of Pt IVA.
28. But Pt IVA does not provide that a scheme includes part of a
scheme and it is possible, despite the very wide definition of a
scheme, to conceive of a set of circumstances which constitutes only
part of a scheme and not a scheme in itself. That will occur where
the circumstances are incapable of standing on their own without being
"robbed of all practical meaning" ((6) See Inland Revenue
Commissioners v. Brebner (1967) 2 AC 18 at 27.). In that event, it is
not possible in our view to say that those circumstances constitute a
scheme rather than part of a scheme merely because of the provision
made by ss.177D and 177A. The fact that the relevant purpose under
s.177D may be the purpose or dominant purpose under s.177A(5) of a
person who carries out only part of the scheme is insufficient to
enable part of a scheme to be regarded as a scheme on its own. That,
of course, does not mean that if part of a scheme may be identified as
a scheme in itself the Commissioner is precluded from relying upon it
as well as the wider scheme.
29. The Commissioner also contested the alternative basis upon which
the Full Court decided against him, namely, that any tax benefit was
not obtained by Mrs Peabody. He argued that, if the Kleinschmidt
shares had not been converted to 'Z' class preference shares, a
proportion of the amount of profit which would have been derived from
their sale, made necessary because of the float, might reasonably be
expected to have been included in Mrs Peabody's assessable income for
the year ended 30 June 1986.
30. The difficulty faced by the Commissioner in making that submission
was not in establishing that a tax benefit was obtained by reason of
the conversion of the Kleinschmidt shares to 'Z' class preference
shares, but in establishing that the tax benefit was obtained by
Mrs Peabody in the relevant year of income. As O'Loughlin J observed
at first instance:
"The Peabody interests had negotiated the purchase of a
large parcel of shares in the group based on the group
having a net worth of about $24m. Within a period of
12 months of that purchase there was to be a public float
based on the group having a net worth of $30m. Somebody
(the particular taxpayer or taxpayers within the Peabody
family who would purchase the Kleinschmidt shares) stood to
make a capital gain that was equivalent to about 38% of $6m.
However that taxpayer or those taxpayers would be liable
to tax on that capital gain unless some lawful avoidance
measure could be implemented."
31. The purchase of the Kleinschmidt shares was necessary for the
purposes of the float. The actual purchaser of those shares was
Loftway and it is apparent that Loftway, or some other company
performing the same role, was required to be the purchaser in order
to obtain the cheaper finance for the purchase, regardless of the
subsequent devaluation of the shares. It was not contested by the
Commissioner that the decision to finance the purchase of the
Kleinschmidt shares through Loftway was other than a rational,
commercial decision. The scheme for cheaper finance required both the
purchaser of the Kleinschmidt shares and the financier holding the
redeemable preference shares in the purchaser to be entitled to a
rebate under s.46 of the Act in respect of dividends received by them.
The Commissioner contended that the purchaser might reasonably be
expected to have been TEP Holdings had there been no devaluation of
the Kleinschmidt shares. A reasonable expectation requires more than
a possibility. It 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 ((7) See Dunn v. Shapowloff (1978) 2 NSWLR
235 at 249 per Mahoney JA.).
32. There were difficulties in the way of TEP Holdings itself
financing the purchase of the Kleinschmidt shares, regardless of any
subsequent devaluation. Even if it had been possible for that company
to issue and pay dividends upon redeemable preference shares having
regard to its status as a trustee, it is far from clear that it could
have established any entitlement to a rebate in respect of the
dividends paid on the Kleinschmidt shares acquired by it. In order
to establish an entitlement to a rebate, it would have been necessary
for TEP Holdings, a trustee, to acquire the Kleinschmidt shares
beneficially so that it was entitled beneficially to the dividends.
If the shares were acquired by TEP Holdings on behalf of the trust,
the dividends would not have been included in its taxable income
((8) See the Act, s.96.) and there would have been no rebate in respect
of them ((9) s.46(2).). Since the purchase of the Kleinschmidt
shares had to be financed whether or not they were subsequently
devalued, any uncertainty as to the entitlement of TEP Holdings to a
rebate in respect of dividends upon those shares made it unlikely that
TEP Holdings would have been chosen as the purchaser of the shares.
The Full Court was correct in its conclusion that there was no
reasonable expectation that TEP Holdings would have acquired the
Kleinschmidt shares as part of the exercise involved in the float. It
may be added that, in any event, even if TEP Holdings had been able to
acquire the Kleinschmidt shares in its own right and not as trustee, it
would appear that there would have been no present entitlement on Mrs
Peabody's part to any proportion of any profit arising from the sale of
those shares.
33. It necessarily follows that any profit obtained from the sale of
those shares, had the devaluation not taken place, would have been
obtained by Loftway so that any tax benefit in connection with the
devaluation and subsequent disposal of the Kleinschmidt shares was
obtained by that company. There is no reason to suppose, and the
Commissioner was unable to demonstrate, that, had the devaluation not
taken place and had that profit been made by Loftway, it would have
flowed, or could reasonably be expected to have flowed, to TEP
Holdings and hence to Mrs Peabody in the year ended 30 June 1986. In
other words, and quite apart from any income tax which Loftway might
have been liable to pay in respect of the profit, there was no
reasonable expectation that Loftway would have declared dividends
which would have reached the Peabody Family Trust in that year of
income.
34. The Commissioner advanced examples in an effort to show that, even
assuming that finance was raised by Loftway by the issue of preference
shares, the acquisition and disposal of the Kleinschmidt shares might
have taken place in a manner which would have resulted in Mrs Peabody
obtaining a tax benefit in the relevant year of income. But the
method adopted by Loftway, apart from the devaluation of the
Kleinschmidt shares, was found below to be entirely explicable upon
a commercial basis and it could not be said of any of the examples
advanced that, even if commercially possible, they would have been
adopted in the absence of the devaluation as a matter of reasonable
expectation.
35. For these reasons, it cannot be said that the amount which the
Commissioner included in Mrs Peabody's assessable income for the year
ended 30 June 1986 was an amount which would have been included or
might reasonably be expected to have been included in her assessable
income for that year had the devaluation of the Kleinschmidt shares
not taken place. Mrs Peabody did not, therefore, obtain a tax benefit
in connection with a Pt IVA scheme and, accordingly, the appeal must
be dismissed.