Minerva Financial Group Pty Ltd v Commissioner of Taxation

by Toby Eggleston, Ryan Leslie, James Pettigrew

The Full Federal Court decision in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28, represents a significant win for taxpayers and important guidance on the operation of Australia's general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936. In particular, the application of Part IVA involves a careful weighing of all the relevant facts and circumstances. The Court's emphasis on considering the eight factors in Part IVA holistically, and its rejection of the Commissioner's attempt to focus on particular factors in isolation, is a timely reminder of the need to view transactions and arrangements in their full context.

Background

The case involved the Minerva Financial Group Pty Ltd (Minerva), a member of the Liberty group of companies and trusts that provides non-bank financial services. In 2007, in anticipation of an initial public offering (IPO), the Liberty group reorganized itself into a "trust silo" and a "corporate silo". As part of this restructure:

• A unit trust, the Minerva Financial Group Trust (MFGT), was established with units held by Minerva. These units were subsequently transferred to other entities in the Liberty group, being Jupiter Holdings BV and later Vesta Funding BV.
• Another unit trust, the Minerva Holding Trust (MHT), was established. MFGT held ordinary units in MHT. MHT's other unitholders (referred to as "special unitholders") were Liberty Financial Pty Ltd (LF) and another Liberty group entity.
• MHT became the holder of residual income units (RIUs) and residual capital units (RCUs) in new securitisation trusts used by the Liberty group to fund its lending. Prior to the 2007 restructure, LF had held the RIUs and RCUs in securitisation trusts established by the group and received distributions of residual income and capital on those units.

A simplified diagram of the group following these steps is as follows:.

In the 2012 to 2015 income years, MHT resolved to distribute effectively all of its income (being distributions received on the RIUs) to the ordinary unitholder, MFGT. MFGT in turn distributed that income to its non-resident unitholders, Jupiter/Vesta. Those distributions, being distributions of interest income to which a non-resident was presently entitled, were subject to withholding tax of 10% rather than the 30% corporate tax rate that would have applied if the income had instead been distributed to LF.

The Commissioner's Determinations and the AAT Decision

The Commissioner determined that Minerva had obtained a "tax benefit" in connection with a "scheme" to which Part IVA applied. The Commissioner issued amended assessments to Minerva to include additional amounts in its assessable income for the 2012 to 2015 income years. Minerva objected to the amended assessments. The Commissioner disallowed the objections. Minerva appealed to the Federal Court.

At first instance, the Federal Court held in favour of the ATO deciding that Part IVA applied in relation to a number of schemes identified by the ATO, each of which comprised the determination to make no more than nominal distributions to the special unitholders. However, the court held that Part IVA did not apply to a scheme essentially comprising the establishment of the stapled structure – broadly on the basis that the structure was adopted for commercial reasons associated with the planned IPO. That aspect of the decision was not challenged by the Commissioner on appeal.

The Full Federal Court Decision

On appeal, the Full Federal Court (Besanko, Colvin and Hespe JJ) unanimously allowed Minerva's appeal, holding that Part IVA did not apply to any of the schemes identified by the Commissioner. The Court set aside the decision of the primary judge and remitted the matter to the Commissioner for redetermination.

The Court made the following key observations about the operation of Part IVA:

• The term "scheme" is broadly defined. It encompasses an agreement, arrangement, understanding, promise, plan, proposal, action, course of action or course of conduct. It also includes a unilateral action.
• For Part IVA to apply, it must be concluded, having regard to the eight statutory factors, that a person who entered into or carried out the scheme or any part of the scheme did so for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme.
• The conclusion as to the requisite purpose is drawn from an objective consideration of the eight statutory factors. It does not involve an inquiry into the subjective purpose of any party to the scheme.
• It is not sufficient that a scheme results in a tax benefit being obtained. Nor is it sufficient that a taxpayer would not have entered into the scheme "but for" the tax benefit. Obtaining a tax benefit, even where that is the only benefit of the scheme, does not of itself lead to a conclusion that the scheme is one to which Part IVA applies.
• Merely because a taxpayer chooses between two forms of transaction based on taxation considerations does not mean that it is to be concluded, having regard to the Part IVA factors, that the dominant purpose of the taxpayer was to obtain a tax benefit. Part IVA does not apply merely because the Commissioner can identify another means of achieving the same or similar outcome which would have resulted in more tax being payable.

The Court then considered each of the eight factors in s 177D(2) of the ITAA36 and concluded that, viewed holistically, they did not support an objective conclusion that any party entered into or carried out the schemes identified by the Commissioner for the dominant purpose of enabling Minerva to obtain a tax benefit.

In summary:

• The distributions were made by Minerva as trustee of MHT in accordance with the trust constitution and consistently with the different rights attaching to the classes of units – the terms of the trust provided that ordinary unitholders were entitled to the income of the trust as a default position, such that the special unitholders had no default entitlement to income.
• The evidence did not show that the non-payment of distributions to LF as a special unitholder adversely affected LF's profitability, solvency or credit rating. The evidence did not show that LF had an unmet capital need that would have been satisfied by distributions from MHT.
• The making of distributions to MFGT rather than LF had real commercial and financial consequences beyond the tax saving. Relevantly, the distributions enabled Jupiter to repay debts owed to LF and enabled Vesta to increase its capital investment in MFGT.
• Viewed in the context of the restructure that had occurred in 2007 (which the Commissioner did not assert was a scheme to which Part IVA applied), there was no basis to conclude objectively that distributions were made as they were for the dominant purpose of Minerva obtaining a tax benefit.

We have set out the Court's analysis of each factor in more detail below.

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

The Court observed that the distributions were made by Minerva as trustee of MHT in accordance with the MHT trust constitution and consistently with the rights attaching to the different classes of units. In particular, the default position under the trust constitution was that income would be distributed to the ordinary unitholder (MFGT) unless the trustee exercised a discretion to distribute income to the special unitholders. The manner in which the scheme was carried out did not suggest that any party entered into or carried out the scheme for the dominant purpose of enabling Minerva to obtain a tax benefit.

The Court also noted that there was nothing unorthodox about the intra-group loans or the use of "loan offsets" to effect the payment of the distributions within the Liberty group. The distributions had real economic and financial consequences for the parties. The use of loan offsets did not point to a dominant tax avoidance purpose.

The form and substance of the scheme

The Court agreed with the primary judge that there was no difference between the form and substance of the scheme. The form of the scheme was that MFGT benefited from the distributions from MHT by virtue of its status as ordinary unitholder. The substance was the same. The Court rejected the Commissioner's argument that there was a disparity between the form and substance because the "substance" of the scheme was said to involve the funds flowing to LF in the form of loans from MHT. The Court held this argument conflated the notion of income with the notion of cash flows.

The time at which the scheme was entered into and the period over which it was carried out

The time at which the scheme was entered into (by the trustee resolving to make the distributions) was reflective of the terms of the trust constitution. The timing of the resolution did not point towards any party having a dominant purpose of enabling Minerva to obtain a tax benefit.

The result achieved by the scheme that, but for Part IVA, would have been achieved under the tax law

The Court acknowledged that viewing this factor in isolation, less tax was paid by distributing the income to MFGT and then to non-resident unitholders than if the distributions had been made to LF. However, the Court cautioned that this factor must be considered holistically together with the other factors and cannot be viewed in isolation from the commercial consequences of the scheme and reiterated that the mere obtainment of a tax benefit is not something which points in favour of dominant purpose – the same point has been made by prior courts and was recently reiterated in the PepsiCo DPT case. The distributions to the non-resident unitholders had commercial and financial consequences beyond the tax saving. This factor was neutral.

 The change in financial position of the taxpayer and any person connected with the taxpayer resulting from the scheme

The Court rejected the Commissioner's argument that it was reasonably foreseeable that LF's financial position would be adversely affected by the non-payment of distributions because it would have lower retained earnings and capital adequacy to support its business. The Court noted:

• This argument discounted the financial benefits to Jupiter and Vesta from receiving the distributions, which allowed them to repay debts and increase their equity investment.
• The evidence did not show that, if LF had received the distributions in the relevant income years, it would have been able to fund its future growth without the need for further equity contributions.
• LF's credit rating did not depend solely on its capital adequacy ratio. LF was profitable and maintained its credit rating during the relevant years. Its capital needs grew because its business grew, not because it did not receive distributions from MHT.

The Court also cautioned that the analysis of the purpose factors needs to be consistent, and that there was a degree of inconsistency in the Commissioner arguing both that LF could have distributed (as dividends) additional income it would have been distributed under the counterfactual, and that LF’s financial position was impacted by not receiving the income distributions (which the Commissioner postulated it would not have retained).

Any other consequences of the scheme

The Court agreed with the primary judge that there were no relevant non-financial or non-fiscal consequences of the scheme.

The nature of the connection between the taxpayer and a person whose financial position is affected by the scheme

The Court acknowledged that the entities that had benefited from the distributions (MFGT, Jupiter and Vesta) were all connected to Minerva by common ownership. However:

• The fact that the transactions occurred within a commonly owned group and were effected by book entries did not of itself point towards the scheme being implemented for a tax avoidance purpose.
• Once it was accepted that the creation of the trust and corporate silos under the 2007 restructure was not a scheme to which Part IVA applied – a finding by the primary judge which was not challenged on appeal, the interconnected nature of the entities did not assist in determining whether a party had the requisite purpose in implementing the scheme.

Key Takeaways

This decision provides important guidance on the application of Part IVA. In particular:

1. It reaffirmed that Part IVA is concerned with the objective purpose of a person who entered into or carried out a scheme, determined by reference to the eight statutory factors. The subjective purpose, intention or motive of a party is not directly relevant.
2. Identifying an alternative course of action that would have resulted in more tax being payable is not of itself sufficient to attract the operation of Part IVA. The eight factors must still be considered, having regard to the commercial consequences of the scheme and any alternative postulate.
3. The fact that parties to a scheme are members of the same corporate group and the fact that intra-group transactions may be effected by book entries does not necessarily point to the scheme being entered into or carried out for a tax avoidance purpose.
4. A critical aspect of the Court's reasoning was that the 2007 restructure (which involved the creation of the "trust silo" and the "corporate silo") was not a scheme to which Part IVA applied. Once that was accepted, the Commissioner's attempt to contrast the position before and after the restructure was not an appropriate basis from which to reason that a party had a tax avoidance purpose in implementing the scheme.