Analysis Of Recent Full Federal Court Decision In Australian Tax Case – Withholding Tax

Application of Part IVA in Minerva Financial Group: Focusing on
Commercial Substance over Tax Effects

Introduction

In Minerva Financial Group Pty Ltd v Commissioner of
Taxation [2024] FCAFC 28¹, the Full Federal Court
reversed the Federal Court’s decision in finding that
Australia’s general anti-avoidance rules (Part IVA) did not
apply to income distributions made by a trust within a stapled
group structure. This article analyses the Full Federal Court’s
reasons for their judgment, highlighting the emphasis placed on the
commercial substance over mere tax outcomes obtained.

Background

The facts can be summarised as follows:

• The appellant, Minerva Financial Group Pty Ltd is a member of
  the Liberty group.




• Prior to 2007, the Liberty group had a history of establishing
  securitisation trusts. The units in those trusts were wholly owned
  by a company in the Liberty group.




• In 2007, the Liberty group undertook a restructure in
  anticipation of an initial public offering (IPO) of stapled
  securities, whereby it would have a ‘trust silo’ and a
  ‘corporate silo’.




• Minerva Holding Trust (MHT) was established to hold all of the
  units in new securitisation trusts going forward. MHT issued an
  ordinary unit to the ‘trust silo’ and a special unit to the
  ‘corporate silo’.




• The IPO was postponed and in the 2012 to 2015 income years,
  income earned by MHT (from the securitisation trusts) was mainly
  distributed to the ‘trust silo’ (via the ordinary unit) and
  then to the ultimate non-resident shareholders. Further MHT lent
  amounts it received as distributions from the securitisation trusts
  to the ‘corporate silo’.




• The tax consequence was that profits earned by the ‘trust
  silo’ were subject to a withholding tax of 10 percent rather
  than a corporate tax rate of 30 percent (if the profits from the
  securitisation trusts had instead been earned by the ‘corporate
  silo’ as was the case prior to 2007).

The Commissioner sought to apply Part IVA to include amounts in
the appellant’s assessable income for the 2012 to 2015 income
years, arguing that the income would otherwise have been
distributed to the corporate silo, as it had prior to 2007.

Diagram Explaining Full Federal Court Case

Source: Minerva
Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC
28 at paragraph 18

Application of Part IVA

For Part IVA to apply, it must be concluded a party entered into
a scheme(s) with the dominant purpose (having regard to the
objective factors in s.177D of the Income Tax Assessment Act 1936
(Cth)) of gaining a tax benefit.

The primary judge had held that Part IVA applied to two of three
schemes asserted by the Commissioner – the common features of
these schemes being:

• The choice made by the taxpayer, as trustee of MHT, not to
  exercise its discretion to distribute any more than a nominal
  amount of MHT’s distributable income to the ‘corporate
  silo’ via the special unit and to distribute the majority of
  the income to the ‘trust silo’ via the ordinary unit;
  and




• The lending by MHT of the amounts it received as distributions
  from the securitisation trusts to the ‘corporate
  silo’.

Importantly, the primary judge held that Part IVA did not apply
to the 2007 restructure itself.

The Full Federal Court found that the primary judge had not
considered the objective factors in s.177D appropriately and
instead had focused on the subjective purpose of the trustee of
MHT. In particular, the primary judge had held that there was a
dominant purpose of obtaining a tax benefit because the taxpayer
did not proffer a commercial reason why they had only distributed
nominal amounts to the ‘corporate silo’.

In finding that there was no dominant purpose of obtaining a tax
benefit, the Full Federal Court observed:

• There was nothing extraordinary about distributions flowing in
  accordance with the terms of the trust constitution.




• Setting-off intra-group balances in ledger account entries was
  also not unorthodox for transactions within a commonly owned
  group.




• The mere fact that the structure diverged from the
  pre-restructure course of conduct was of no relevance, particularly
  as the Commissioner did not seek to challenge the primary
  judge’s conclusion that Part IVA did not apply to the 2007
  restructure itself.




• The flow of income distributions from MHT to the ‘trust
  silo’ merely resulted from the ‘trust silo’ holding the
  ordinary units in MHT.




• The loans by MHT to the ‘corporate silo’ did not create
  a mismatch between the form and the substance of the scheme.




• The distribution of income to the ‘trust silo’ (and
  subsequently its non-resident owners) had real economic and
  financial consequences that would not have flowed to those owners
  if income had instead been distributed to the ‘corporate
  silo’, by for example, enabling the repayment of debts owed to
  the ‘corporate silo’.

Overall, the Court held that no objective factor clearly pointed
to a dominant purpose of tax avoidance.

Conclusion

The emphasis of commercial purpose over tax benefit alone,
reinforces Part IVA’s objective analysis requirement. Part IVA
cannot simply be triggered by the obtaining of tax benefits.
Commercial realities and consequences for the relevant parties
matter greatly in the Part IVA balance.

Once it was accepted that the 2007 restructure did not
constitute a scheme entered into for the dominant purpose of
obtaining a tax benefit, the Commissioner’s arguments comparing
the post-restructure state of affairs to the pre-restructure tax
outcomes were no longer relevant. This case provides helpful
guidance for taxpayers seeking to restructure who have a clear
economic and commercial rationale for doing so.

Footnote

1. https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/2024/2024fcafc0028.

Originally published 08 April 2024

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