FEDERAL COURT OF AUSTRALIA Bridgestone Australia Ltd v Commissioner of Taxation [2002] FCA 1533 No question of principle. Income Tax Assessment Act 1936 (Cth), Part IVA Bailey v The Commissioner of Taxation of the Commonwealth of Australia [1977] 136 CLR 214 discussed Snook v London and West Riding Investments Ltd [1967] 2 QB 786 applied Sharrment Pty Ltd v Official Trustee (1988) 18 FCR 449 applied Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] 179 ALR 625 referred to Eastern Nitrogen Ltd v Commissioner of Taxation [2001] 108 FCR 27 cited BRIDGESTONE AUSTRALIA LTD (ACN 007 516 841) v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA NO S 91 OF 2001 NO S 92 OF 2001 NO S 93 OF 2001 NO S 94 OF 2001 NO S 95 OF 2001 NO S 96 OF 2001 NO S 97 OF 2001 NO S 98 OF 2001 NO S 99 OF 2001 O'LOUGHLIN J 11 DECEMBER 2002 ADELAIDE IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY S 91 OF 2001 S 92 OF 2001 S 93 OF 2001 S 94 OF 2001 S 95 OF 2001 S 96 OF 2001 S 97 OF 2001 S 98 OF 2001 S 99 OF 2001 BETWEEN: BRIDGESTONE AUSTRALIA LTD (ACN 007 516 841) APPLICANT AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: O'LOUGHLIN J DATE OF ORDER: 11 DECEMBER 2002 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. The respondent provide, within 21 days of this date, further and better particulars of his Statement of Facts, Issues and Contentions as sought by the applicant in pars 1.2.4 and 1.2.5 of its Notice of Motion dated and filed on 18 July 2002. 2. That each party pay its own costs on and in respect of the Notice of Motion. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY S 91 OF 2001 S 92 OF 2001 S 93 OF 2001 S 94 OF 2001 S 95 OF 2001 S 96 OF 2001 S 97 OF 2001 S 98 OF 2001 S 99 OF 2001 BETWEEN: BRIDGESTONE AUSTRALIA LTD (ACN 007 516 841) APPLICANT AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: O'LOUGHLIN J DATE: 11 DECEMBER 2002 PLACE: ADELAIDE REASONS FOR JUDGMENT application for further and better particulars 1 These proceedings arise as a consequence of the applicant, Bridgestone Australia Ltd ("Bridgestone"), having entered into two transactions ("the transactions") in 1990 with the former State Bank of South Australia ("the Bank") for the sale and leaseback of certain items of plant and equipment. Bridgestone claimed in its taxation returns deductions for certain of the lease payments that it made to the Bank pursuant to the transactions during the 1990 to 1994 years of income, and other deductions that were based on depreciation and the value of the plant and equipment scrapped that were the subject of the transactions for its 1995 to 1998 years of income. (Bridgestone's years of income conclude on 31 December). The respondent, the Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner"), disallowed the deductions that Bridgestone claimed in those nine years of income. The total of the deductions that were disallowed was $45,404,220.03. 2 The Commissioner issued assessments of income tax on 28 September 1998 for each of the first five years of income and later issued assessments for the years 1995 to 1998. In respect of each of the nine years, Bridgestone lodged an objection against the assessment but all objections were wholly disallowed by the Commissioner on 7 May 2001. On 29 June 2001, Bridgestone filed its several applications in the South Australia registry of this Court seeking to have each of the Commissioner's assessments set aside. 3 On 8 May 2002, the Commissioner filed his Statement of Facts, Issues and Contentions and shortly thereafter, on 5 June 2002, in response to Bridgestone's request in a letter dated 22 May 2002 ("Bridgestone's request"), he filed further and better particulars of that Statement. Bridgestone, being unhappy with the extent of the Commissioner's response to its request for further and better particulars, has now applied to the Court, by notice of motion dated 18 July 2002, for an order or orders that the Commissioner answer the outstanding requests. 4 There are two matters to be resolved; the first of them arises as a consequence of the Commissioner having alleged that the transactions into which Bridgestone and the Bank entered were a sham; the second relates to the Commissioner's claim that the transactions constituted a scheme to which Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the ITAA") applied. 5 It is well settled, as a result of the decision of the High Court in Bailey v The Commissioner of Taxation of the Commonwealth of Australia [1977] 136 CLR 214 ("Bailey"), that the Commissioner is required to particularise the case which he intends to present to the Court. In Bailey, which dealt with s 260 of the ITAA, Aickin J (with whom all other members of the Court were in substantial agreement) explained why it was important that the Commissioner make clear the case which the taxpayer had to meet. At the same time, his Honour was alert to the difficulties that the Commissioner faced and he made it clear that the Court would permit the Commissioner to move his position if and when further evidence unfolded during the course of the trial. His Honour said at 227-228: "There is nothing in the policy of the Act nor in general considerations of policy to require that the Commissioner should not inform the appellant prior to the commencement of the hearing of those details so that the case may proceed in an orderly and comprehensible manner. It is not in the interests of the proper administration of justice that, when the matter comes before the court, the appellant should have to speculate about, and adduce evidence to negate, every possible kind of agreement or arrangement and avoidance which the imagination of his advisers can conjure up. Such a process is not merely time-wasting but is likely to obscure the real issues. It is no doubt possible that in the course of the evidence facts may emerge which were not previously known to the Commissioner and which suggest that there was some contract, agreement or arrangement other than that which he had previously supposed existed and which would support the actual assessment, but that is a situation which can readily be cured by amendment and it cannot be doubted that the Commissioner would in those circumstances be permitted to amend his particulars even though he would again have to specify the details of the arrangement which he was then alleging." 6 Mason J (as he then was) was most forthright in Bailey, saying that there was no foundation for the notion that the Commissioner stands apart from ordinary litigants in some special position in relation to the giving of particulars. He explained at 220: "An order for particulars does no more than require the Commissioner to furnish in advance of the hearing particulars of the case which he intends to present in Court. ALLEGATION THAT THE TRANSACTIONS WERE A sham 7 The Commissioner pleaded in par 59 of his Statement of Facts, Issues and Contentions as follows: "59. In relation to each [transaction], the agreements which purported to confer rights and obligations in relation to the items of plant and equipment: (1) were a sham; (2) were not intended by the parties to be performed in the capacities and in the manner provided for in the agreements." Bridgestone requested and received satisfactory answers to five out of eight requests that it made for better particularity of the Commissioner's pleadings. 8 The requests and answers that remain in contention are as follows: Request: "1.4 identify the rights and obligations the [Commissioner] contends those agreements purported to confer." Answer: "The purported agreements were a sham which were not intended by the parties to be performed in the capacities and in the manner provided for in the agreements." Request: "1.7 in what capacity does the [Commissioner] contend that each of the parties to the agreements intended to perform them." Answer: "The [Commissioner] does not contend that the parties intended to perform the agreements. The [Commissioner] contends that the agreements were shams which the putative parties did not intend to perform in the capacities and in the manner provided for in the agreements." Request: "1.8 in what manner does the [Commissioner] contend that the parties intended to perform those agreements?" Answer: "The [Commissioner] does not contend that the parties intended to perform the agreements. The [Commissioner] contends that the agreements were shams which the putative parties did not intend to perform in the capacities and in the manner provided for in the agreements." 9 Before considering these three requests and the answers that the Commissioner gave to them, counsel for Bridgestone first referred to the request for further and better particulars that was contained in par 1.1 and the Commissioner's answer to that request: Request: "1. In relation to Paragraph 59 of the [Commissioner's Statement of Facts, Issues and Contentions]: 1.1 identify the agreements referred to in the first line of that paragraph." Answer: "The agreements are the purported agreements whereby [Bridgestone] 'enter(ed) into the [transactions]' which are alleged at pages 2 and 3 of the letter from Piper Alderman, [Bridgestone's] solicitors, to the Commissioner dated 24 May 1996 and in paragraphs 30, 31 and 45 of the Third More Explicit Amended Statement of Claim filed on 3 November 2000 in the SA Supreme Court Proceedings." [Bridgestone is suing certain of its advisers in the Supreme Court to recover the losses (if any) that it might suffer as a result of the assessments for income tax that are the subject of these proceedings.] 10 The information that is contained in the solicitor's letter and Bridgestone's pleadings explain that Bridgestone entered into the first sale and leaseback transaction with the Bank on 11 May 1990 and the second sale and leaseback transaction with the Bank eighteen days later on 29 June 1990. The solicitors wrote the Commissioner on 24 May 1996 stating that there were "significant commercial benefits of raising finance in that manner". They recounted the size of Bridgestone's borrowings, the cost of those borrowings and the difficulties of raising further equity capital. They discussed the relative financial merits of the sale and leaseback transactions and claimed that "Tax considerations were only ancillary considerations". They listed what they perceived to be the "significant commercial benefits". 11 Counsel for Bridgestone complained, however, that the Commissioner's reply to Bridgestone's request failed to identify any agreement. It is true, as he pointed out, that the word "agreement" does not appear in either page 2 or page 3 of the Solicitors' letter, but it is quite clear that a fair reading of the letter points, at the least, to an agreement having been struck between Bridgestone and the Bank. If, however, there is some further agreement upon which the Commissioner will or may rely, he has failed to particularise it. Bridgestone did not seek further and better particulars of the Commissioner's answers to the requests contained in pars 1.1, 1.2 and 1.3, but counsel for Bridgestone drew attention to those answers because, so he submitted, the manner in which the Commissioner answered those requests explains why Bridgestone needs the further and better particulars that it has sought in respect of the Commissioner's answers to the request in pars 1.4, 1.7 and 1.8. In pars 1.2 and 1.3, Bridgestone had asked the Commissioner to identify by name the parties to each of the agreements and had sought the usual particulars as to whether the agreements were in writing or oral etc. In response to both requests, the Commissioner had answered, somewhat surprisingly in my opinion, that the best particulars of the parties and the best particulars of the agreements: "… which the [Commissioner] is able to give are as set out under paragraph 1.1 above." That answer suggests that the Commissioner's knowledge about the transaction is extremely limited – it is open to the suggestion that he has made no inquiries, that he has examined no documents and that he knows no more about the transaction than what he has read in the Solicitors' letter and Bridgestone's statement of claim. 12 In resisting Bridgestone's request for further and better particulars, counsel for the Commissioner submitted that it was neither necessary nor appropriate for the Commissioner to provide particulars of the matters that are set out in pars 1.4, 1.7 and 1.8 of Bridgestone's request. This, so it was argued, was because the Commissioner's particulars in response to the request in par 1.6 gave Bridgestone the information to which it was entitled. The particulars in that paragraph made the following points: * the purported sale of the assets was not an effective disposition of the assets from Bridgestone to the Bank; * the assets that were purportedly transferred were fixtures which were incapable of transfer from Bridgestone to the Bank; * at all material times, Bridgestone remained the owner of the assets; * the terms of the transactions were ineffective to create an interest that was sufficient to support a lease; * the leases were not genuine commercial leases for the purposes of the ITAA; * the valuation on which the purported transactions was based was not appropriate to be used in transactions which purported to effect a transfer of title; * the transactions were, in substance, a form of financing for Bridgestone; * at all material times, "the parties knew and intended" that at the expiration of the purported leases, the only party that could or would acquire the assets was Bridgestone. 13 Based upon the particularity in par 1.6, I have concluded that Bridgestone is not entitled to the particulars that it has sought in pars 1.4, 1.7 and 1.8 of Bridgestone's request. I have come to that conclusion because of my understanding of the meaning of the word "sham". Lord Diplock described the word in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802 ("Snook") in these terms: "As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a 'sham', it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating …" Lockhart J, in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454 referred to the passage in the judgment of Lord Diplock in Snook and said: "A 'sham' is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive." Applying these authorities, it seems to me that it is sufficient for the Commissioner to assert that the transactions are not what they purport to be (that is, they are shams); he does not have to say what their true effect is or may be. By this means, the issue is joined. Bridgestone knows that the onus that has been cast upon it is to satisfy the Court that in 1990 it did sell its plant and equipment to the Bank for valuable consideration and that it did, thereafter, lease that plant and equipment from the Bank and that the contract of sale and the contract of lease were, in all respects, effective at law to perfect the sale and to perfect the lease. The Commissioner could have, if he were so minded, alleged that the effect of the transactions was something other than a sale and a lease, but he has chosen not to do so. That lightens the burden somewhat for Bridgestone: it does not have to negative some additional assertion – it merely has to satisfy the Court, on the balance of probabilities, that the sale and the subsequent lease were valid and effective transactions. ALLEGATION THAT THE TRANSACTIONS CONSTITUTED A SCHEME TO WHICH PART IVA APPLIES 14 In par 63 of his Statement of Facts, Issues and Contentions, the Commissioner made the following claims: "63. Alternatively, if the amounts were deductible to [Bridgestone] in any of the years of income (which is denied), then for each [transaction]: (1) there is a scheme to which Part IVA of the [ITAA] applies, namely, the [first transaction] Scheme and the [second transaction] Scheme; (2) [Bridgestone] obtained a tax benefit as defined in s.177C of the [ITAA] in connection with each scheme: a) in each of the years of income ended 31 December 1990 to 1994 (inclusive), being a deduction for the lease payments, alternatively, so much of the lease payments as represents the difference between the total and the amount which would have continued to be paid by [Bridgestone] as financing costs if it had not entered into the [transaction]. b) in each of the years of income ended 31 December 1995 to 1998 (inclusive), being a deduction for the depreciation costs and further or alternatively, the value of the plant scrapped, or alternatively, so much thereof as would not have been allowable or might reasonably be expected not to have been allowable as a deduction to [Bridgestone] if the scheme had not been entered into or carried out ("the tax benefit"). (3) having regard to the matters referred to in s.177D of the [ITAA], it would be concluded that [Bridgestone], or one of the persons, who entered into or carried out each scheme, or any part of each scheme, did so for the dominant purpose of enabling [Bridgestone] to obtain the tax benefit in connection with each scheme; (4) the [Commissioner] properly determined that Part IVA applied so as to cancel the tax benefit obtained in connection with each scheme. 15 Bridgestone has complained that the Commissioner's answers to certain of the requests for further and better particulars were inadequate. The first such complaint was as follows: Request: "3.2 Identify by name the person or persons who/which entered into or carried out each of the component parts or steps comprising the 'scheme' (such persons being hereafter referred to as 'the parties'). Answer: "The names of the person or persons who/which entered into or carried out the component parts or steps of the Scheme are identified in the second column headed "Participants" in each section to the schedule attached to the [Commissioner's Statement of Facts Issues and Contentions]." 16 The schedule that is attached to the Commissioner's Statement of Facts, Issues and Contentions identifies as the alleged participants in the scheme: Bridgestone, its accounting advisers Deloitte Ross Tohmatsu ("the Accountants"), the Bank, a company called Ayers Finniss Limited and the following unidentified people: "Each person who is a party to an agreement. Each person who is a director or officer of any company, being one of the parties. Each person who was an advisor to any one or all of the parties and entities referred to above and who gave advice in connection with an agreement and fact or matter referred to in Section B of the Statement of Facts, Issues and Contentions." 17 Mr Edmonds SC, counsel for Bridgestone, submitted that the contents of the schedule do not constitute an identification of the relevant persons as asserted in the Commissioner's answer. Whilst he conceded that Bridgestone would have some knowledge of the identity of some of the parties: for example, it would well know the identity of its officers and advisors who were involved directly or indirectly in the transactions: it has no way of knowing the numbers of the persons from the Bank or the Accountants who may have been involved but who had no contact with Bridgestone, nor would it know the identity of the advisors (if any) to the Accountants, the Bank or Ayers Finnis. 18 Mr Edmonds submitted that the obligation that rested upon the Commissioner was to let Bridgestone know his present state of knowledge. Should it thereafter transpire during the process of discovery, or in the course of evidence, that other parties are, to the Commissioner's knowledge, identifiable as parties to the scheme, then the appropriate course of action would be for the Commissioner to amend his particulars and to make known to Bridgestone without the further intervention of the Court the details of such additional parties. I agree. There will be an order that the Commissioner give, within twenty-one days of this date, further and better particulars of the answer to the request contained in par 3.2 of Bridgestone's request. 19 The second of Bridgestone's complaints was as follows: Request: "3.4 In respect of which of the parties identified in response to Paragraph 3.2 has [the Commissioner] concluded, by reference to s. 177D(b) of the [ITAA], that he, she, it or they, in entering into or carrying out the 'scheme' had the dominant purpose of obtaining a tax benefit for [Bridgestone]." Answer: "The [Commissioner] refers to and repeats: (1) the Preamble set out above and, in particular, s.14ZZO(b)(i) of the [Taxation Administration Act 1953 (Cth)]; and (2) paragraph 63(3) of the [Commissioner's Statement of Facts, Issues and Contentions]. Save as aforesaid, [Bridgestone] is not entitled to the particulars which are sought." In the preamble, the Commissioner had stated that, as he was not a party to the transactions, his knowledge of the facts was and is limited, and under s 14ZZO Bridgestone bears the burden of proving that the assessments are excessive. The effect of par 177D(b) of the ITAA is that Pt IVA will apply to any scheme if, after having regard to the several matters that are there listed: "… 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 …" 20 In short, the Commissioner has not supplied any particularity in response to this request. His reference to the Preamble, the provisions of subpar 14ZZO(b)(i) and subpar 63(3) of his Statement of Facts, Issues and Contentions is no more than an attempted explanation for his inability to better identify the persons who might be said to have had a "dominant purpose of enabling [Bridgestone] to obtain a tax benefit". When pleading subpar 63(3) of his Statement of Facts, Issues and Contentions, the Commissioner could have limited his allegation to Bridgestone; he could have pleaded that "… it would be concluded that Bridgestone, in entering into or carrying out each scheme … did so for the dominant purpose etc …". But he chose not to do so. Instead, he pleaded that "… it would be concluded that Bridgestone, or one of the persons, who entered into or carried out each scheme … did so for the dominant purpose etc …". The Commissioner could, of course, apply to amend his pleading by deleting the words "or one of the persons", but if he wishes to retain these words, he must identify the persons to whom he is referring. If he does not know their identity, he must say so. Without this identification, Bridgestone does not know what evidence it must call to meet its statutory onus. There will be an order that the Commissioner give further and better particulars of the answer to the request contained in par 3.4 of Bridgestone's request. 21 Bridgestone's next complaint was as follows: Request: "3.5 If the [Commissioner] relies on the purpose of a person or persons who/which was/were not a party or parties to the 'scheme' in concluding that a party or parties did so for the dominant purpose of obtaining a tax benefit for [Bridgestone] in connection with the 'scheme': 3.5.1 identify that person or those persons; 3.5.2 identify that party or those parties; 3.5.3 identify the facts relied upon as to why it is 'possible and appropriate' to attribute the purpose of that person to those persons to that party or those parties; and 3.5.4 identify which of the matters set out in Paragraphs (i) to (vii) of s.177D(b) of the Act make it 'possible and appropriate' to so attribute that purpose." 22 The seven matters that are referred to in par 177D(b) of the ITAA are: "(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 subparagraph (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 subparagraph (vi);" 23 Counsel for Bridgestone submitted that this request in par 3.5 was designed to enable Bridgestone to identify whether the Commissioner was relying on the purpose of some party other than a person who was not a party to the scheme. As to this, the High Court said, in a unanimous decision in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] 179 ALR 625 at [95]: "… it is to be expected that those who participate in a complex international, commercial transaction will be concerned about its tax implications, and will seek expert advice. Attributing the purpose of a professional adviser to one or more of the corporate parties in the present case is both possible and appropriate." 24 In answer to this request for further and better particulars, the Commissioner had referred to and repeated the particulars that he had given in answer to the request that was contained in par 3.4. The Commissioner had also repeated his earlier assertion that the onus rested on Bridgestone to satisfy the Court that a reasonable person would conclude that none of the participants in the scheme had a dominant purpose of obtaining for Bridgestone a tax benefit: Eastern Nitrogen Ltd v Commissioner of Taxation [2001] 108 FCR 27 at [86] per Carr J. As a consequence, the Commissioner quite rightly submitted that the matters upon which he may rely to support his contention about a dominant purpose may depend upon the evidence that is adduced by Bridgestone. That does not mean, however, that the Commissioner can remain silent until he has heard the totality of Bridgestone's evidence. The obligation upon the Commissioner is, like discovery, an ongoing obligation. He is required to give to Bridgestone particulars of the information (of the nature sought by Bridgestone in par 3.5) as and when it comes to his knowledge. In my opinion, the Commissioner has recognised his obligations appropriately. He gave an extensive answer in excess of three pages. Although counsel for Bridgestone claimed that those answers were inadequate, he fell short of identifying specifically any such inadequacy. At this stage in the proceedings I do not consider that it would be appropriate to make an order against the Commissioner to supply further and better particulars in answer to the request that is contained in par 3.5 of Bridgestone's request. 25 On the applicant's notice of motion dated and filed on 18 July 2002, there will be an order that the respondent provide further and better particulars of his Statement of Facts, Issues and Contentions as sought by the applicant in pars 3.2 and 3.4 of Bridgestone's request. I decline to make the further orders as sought by Bridgestone. Bridgestone was successful in obtaining some of the orders that it sought on its notice of motion but it was not entirely successful. In my opinion, it would be appropriate that each party pay its own costs on and in respect of the notice of motion; there will an order accordingly. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Loughlin. Associate: Dated: 11 December 2002 Counsel for the Applicant: Mr R F Edmonds SC and Ms E Collins Solicitor for the Applicant: Messrs Piper Alderman Counsel for the Respondent: Ms M M Gordon Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 27 August 2002 Date of Judgment: 11 December 2002