In 2022, the decision of the Federal Court in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2022] FCA 1092 raised the question that tax benefits emanating from trustee decisions could be subject Part IVA. At that time, we said we think ‘no’ (see here).

The taxpayer appealed to the Full Federal Court (Full Court) and in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28 (Minerva) the Court upheld the taxpayer’s appeal.

What was Minerva about?

Minerva involved a group of financial services businesses (called the Liberty Group) undertaking a restructure in preparation for an initial public offering (IPO) of stapled securities. The IPO did not go ahead but the restructure did.

Significant to that restructure was the decision to establish all future securitisation trusts under a holding trust (Minerva Holding Trust (MHT)), rather than under the main operating company (Liberty Financial Pty Ltd (LF)), as had been done in the past. The structure (post restructure) was:

In the 2012 to 2015 income years, MHT resolved to distribute all its income to the ordinary unitholder, MFGT (rather than to the special unitholder – LF). MFGT in turn distributed that income to its non-resident unitholders. Those distributions, being distributions of interest, were subject to withholding tax of 10% rather than the 30% corporate tax rate that would have applied if MHT distributed the income to LF.

The Commissioner determined under Part IVA of the Income Tax Assessment Act 1936 that the taxpayer had obtained a “tax benefit” in connection with a “scheme” and issued amended assessments for the 2012 to 2015 income years. The taxpayer unsuccessfully objected to the amended assessments and appealed to the Federal Court.

The Commissioner successfully argued in the Federal Court that Part IVA applied to two schemes identified by the Commissioner – the second and third schemes – each of which involved the trustee of MHT determining not to make more than nominal distributions to special unitholders, but Part IVA did not apply to the first scheme.

The second scheme involved, among other things:

implementing a series of transactions to ensure that MFGT became the sole ordinary unitholder in MHT;
the trustee of MHT choosing not to exercise its discretion to make any (or any substantial) distribution in respect of the distributable income of MHT to special unitholders of MHT (including LF); and
the trustee of MHT, as the residual income unit holder in the securitisation trusts, lending monies to LF.

The third scheme, in summary, comprised points 2 and 3 (above) from the second scheme.

The taxpayer appealed to the Full Court and the Commissioner added a fourth scheme consisting only of the non-exercise of the discretion of the trustee of MHT to make distributions to the special unitholders.

What did the Full Court say?

The Full Court unanimously allowed the taxpayer’s appeal and held that Part IVA did not apply to any of the schemes identified by the Commissioner.

Before looking at the Full Court’s reasons in detail, in what may become de rigueur in opinions on Part IVA, at paragraph 60 in Minerva the Full Court restated the following principles:

(1) For Part IVA to apply it must be shown that having regard to the eight matters “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 enabling the relevant taxpayer and one or more other taxpayers to obtain a tax benefit in connection with the scheme: s 177D; Commissioner of Taxation (Cth) v Hart [2004] HCA 26; (2004) 217 CLR 216 at [44].

(2) The inquiry mandated by s 177D is directed at a conclusion to be drawn in respect of the dominant purpose of a person who entered into or carried out the scheme or any part of the scheme. It is not an enquiry about the purpose of a scheme or part of a scheme: Hart at [63].

(3) The inquiry required by Part IVA is an objective, not subjective inquiry: Hart at [37].

(4) The fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D: Hart at [15]. The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies: Hart at [53].

(5) Even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction: Hart at [15]. Simply to show that a taxpayer has obtained a tax benefit does not show that Part IVA applies: Hart [53].

(6) 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 factors listed in s 177D, that the dominant purpose of the taxpayer was to obtain a tax benefit: Hart at [15]. 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.

(7) However, a transaction may take such a form that a conclusion of the kind described in s 177D is required even though the transaction also advances a wider commercial objective. There is a false dichotomy between rational commercial decisions and obtaining a tax benefit: Hart at [51]. The presence of a discernible commercial end does not determine the answer to the question posed by s 177D: Hart at [64]. The terms of Part IVA do not reference “bona fide commercial reasons” or any equivalent expression: Hart at [47].

(8) There is a distinction between a taxpayer adopting a form of transaction that is influenced by taxation considerations (where the presence of a fiscal objective does not mean that it is to be concluded, having regard to the factors listed in s 177D, that the dominant purpose of the taxpayer was to obtain a tax benefit) and a taxpayer taking steps to maximise after-tax returns in a manner objectively indicating the presence of a dominant purpose to obtain a tax benefit: Hart at [16]–[18]; Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 416, 423.

(9) Although the conclusion as to purpose may be a conclusion to be drawn in respect of a person who only entered into or carried out part of the scheme, the factors are to be applied having regard to the scheme as a whole and not to part of the scheme: Commissioner of Taxation v Macquarie Bank Limited [2013] FCAFC 13; (2013) 210 FCR 164 at [199] (Middleton and Robertson JJ).

(10) Although all of the eight factors must be considered, not all the factors in s 177D(2) will have the same relevance or the same importance in every case.

(11) Statements about why the taxpayer acted as they did or about why a party to the transaction structured the transaction the way they did are not statements which are an answer to the question posed by s 177D(2). That section requires a conclusion about purpose to be drawn from the eight objective matters; it does not require or even permit any inquiry into the subjective motives of the taxpayer or others who entered into or carried out the scheme or any part of it: Hart at [65].

(12) The inquiry directed by Part IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D will require consideration of what other possibilities existed to achieve the same commercial end: Hart at [66].

In Minerva, the Full Court applied the eight factors in section 177D and concluded that they did not support the conclusion that a party entered into or carried out the schemes identified by the Commissioner for the dominant purpose of obtaining a tax benefit.

We summarise the Full Court’s analysis of the eight factors in the table below. Green shading shows the Federal Court or Full Court considered the factor did not support a dominant purpose of obtaining a tax benefit, red the factor supported that purpose, and amber the factor is neutral.

Conclusion on dominant purpose

After considering the eight factors, the Full Court concluded that no party entered into or carried out any of the schemes identified by the Commissioner with the dominant purpose of obtaining a tax benefit. Consequently, the Full Court allowed the taxpayer’s appeal.

What does Minerva mean?

It is not known at the date of writing if Commissioner will seek special leave to appeal to the High Court. However, as it stands the Full Court’s decision offers useful guidance on Part IVA.

Part IVA is concerned with the objective purpose by reference to the eight factors in section 177D. The subjective purpose, intention or motive is not relevant;
merely because a taxpayer chooses between two forms of transaction based on taxation considerations does not mean of itself, having regard to the factors listed in section 177D, that the dominant purpose of the taxpayer was to obtain a tax benefit; and
particularly relevant for private groups, the fact that the parties to a scheme are members of the same group does not of itself point to the scheme having a dominant purpose of obtaining a tax benefit.

For more information please contact:

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au

Kaitilin Lowdon
Special Counsel
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au

Kseniia Gasiuk
Associate
T +61 3 9611 0160
E kgasiuk@sladen.com.au