FEDERAL COURT OF AUSTRALIA Mills v Commissioner of Taxation [2011] FCA 205 Citation: Mills v Commissioner of Taxation [2011] FCA 205 Parties: ANDREW VINCENT MILLS v COMMISSIONER OF TAXATION File number(s): NSD 52 of 2010 Judge: EMMETT J Date of judgment: 11 March 2011 Catchwords: INCOME TAX – imputation system – schemes to reduce income tax – whether non-incidental purpose in issuing certain securities was to enable holders of securities to obtain imputation benefit under the Income Tax Assessment Act 1997 (Cth) – where relevant securities issued in New Zealand – consideration of relevant circumstances of a scheme set out in s 177(EA)(1) of the Income Tax Assessment Act 1936 (Cth) INCOME TAX – determination by Commissioner of Taxation under s 177EA(5)(b) of the Income Tax Assessment Act 1997 (Cth) that no imputation benefit to arise in respect of distribution to taxpayer – whether Commissioner's determination properly made – whether Commissioner erred in exercising discretion under s 177EA(5)(b) rather than s 177EA(5)(a) Legislation: Banking Act 1959 (Cth) Income Tax Assessment Act 1936 (Cth) ss 23AH, 46, 177D, 177EA Income Tax Assessment Act 1997 (Cth) s 26-26, div 200, ss 202-5, 202-15, 202-30, 202-40, 202-45, 202-50, 202-75, 202-80, div 207, ss 215-10, 974-5, 974-15, 974-20, 974-75, 974-115, 974-120 Taxation Administration Act 1953 (Cth) ss 14ZZO, 14ZZP Cases cited: Commissioner of Taxation v Sleight (2004) 136 FCR 211 Date of hearing: 13 December 2010 and 14 December 2010 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 148 Counsel for the Applicant: A. Slater QC, D. F. C. Thomas Solicitor for the Applicant: Freehills Counsel for the Respondent: J. Hmelnitsky Solicitor for the Respondent: Australian Government Solicitor IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 52 of 2010 BETWEEN: ANDREW VINCENT MILLS Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: EMMETT J DATE OF ORDER: 11 MARCH 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The applicant pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 52 of 2010 BETWEEN: ANDREW VINCENT MILLS Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: EMMETT J DATE: 11 MARCH 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The principal question in this proceeding, which was brought under Part IVC of the Taxation Administration Act 1953 (Cth) (the Administration Act), is whether a purpose of the Commonwealth Bank of Australia (the Bank), not being an incidental purpose, in issuing certain securities (the Relevant Securities), was to enable holders of the Relevant Securities to obtain an imputation benefit under the Income Tax Assessment Act 1997 (Cth) (the 1997 Act). The question arises under Part IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act), which deals with schemes to reduce income tax. THE STATUTORY PROVISIONS IN QUESTION 2 Section 177EA, which is in Part IVA of the 1936 Act, deals with the creation of franking debits and the cancellation of franking credits. Section 177EA applies if five prerequisites are satisfied. The first four prerequisites may be summarised relevantly as follows: (a) There is a scheme for a disposition of membership interests in a corporate tax entity. (b) A frankable distribution has been paid to a person in respect of the membership interests. (c) The distribution was a franked distribution. (d) The person (the relevant taxpayer) would, but for the operation of s 177EA, receive imputation benefits as a result of the distribution. 3 Under s 177EA(14), a scheme for the disposition of membership interests includes a scheme that involves issuing the membership interests. It is common ground that: the Bank is a corporate tax entity for the purpose of s 177EA; the Relevant Securities are membership interests in the Bank; the Bank issued Relevant Securities to the applicant, Mr Andrew Mills (the Taxpayer); a frankable distribution has been made to the Taxpayer in respect of those Relevant Securities; that distribution was a franked distribution; and but for the operation of s 177EA, the Taxpayer would receive imputation benefits as a result of the distribution. Accordingly, the first four prerequisites have been satisfied. The principal question in the proceeding is whether the fifth prerequisite has been satisfied. 4 The fifth prerequisite is as follows: (e) Having regard to the relevant circumstances of the scheme, it would be concluded that one of the persons who entered into or carried out the scheme did so for a purpose (whether or not the dominant purpose, but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit. Under s 177EA(1), relevant circumstances of a scheme include the ten matters referred to in s 177EA(17)(a) to s 177EA(17)(i) and the eight matters referred to in s 177D(b)(i) to s 177D(b)(viii), which is also in Part IVA of the 1936 Act. It will be necessary to examine each of these matters in detail below. 5 Where s 177EA applies, the Commissioner of Taxation (the Commissioner) may, under s 177EA(5), make either of the following determinations: (a) if the corporate tax entity is a party to the scheme, a determination that a franking debit of the entity arises in respect of each distribution made to the relevant taxpayer, or (b) a determination that no imputation benefit is to arise in respect of a distribution that is made to the relevant taxpayer. The Commissioner made a determination, in accordance with s 177EA(5)(b), that no imputation benefit was to arise in respect of the distribution made to the Taxpayer. The second question in the proceeding is whether, if s 177EA(3)(e) was satisfied, the Commissioner properly made the determination under s 177EA(5)(b). 6 In order to explain the significance of the making of a determination under s 177EA(5), it is necessary to say something about Part 3-6 of the 1997 Act, which describes the Imputation System of the Australian income tax regime. It will also be necessary to say something about Division 974 of Part 6-1 of the 1997 Act, which is concerned particularly with Debt and Equity Interests in the context of taxation. 7 Division 200 of Part 3-6 provides an overview of the Imputation System. The Imputation System partially integrates the income tax liabilities of an Australian corporate tax entity and its members by allowing: the entity, when distributing profits to its members, to pass to those members credit for income tax paid by the entity on those profits, the entity's Australian members to claim a tax offset for that credit, and the entity's Australian members to claim a refund, if they are unable to utilise fully the tax offset in reducing their income tax. When an Australian corporate tax entity distributes profits to its members, the entity has the option of passing to those members credit for income tax paid by the entity on the profits. That is done by franking the distribution. A corporate tax entity franks a distribution by allocating a franking credit to it. Only some kinds of distribution can be franked. Those are called frankable distributions. However, a corporate tax entity must not frank a distribution from profits with a franking credit that exceeds the maximum amount of income tax that could have been paid by the entity on the profits distributed. 8 The main object of Part 3-6 is to allow corporate tax entities to pass to their members the benefit of having paid income tax on the profits underlying certain distributions by the entity. Other objects are to ensure that: the Imputation System is not used to give the benefit of income tax paid by a corporate tax entity to members who do not have a sufficient economic interest in the entity, the Imputation System is not used to prefer some members over others when passing on the benefits of having paid income tax, and the membership of a corporate tax entity is not manipulated to create either of those two outcomes. 9 Under s 202-5, an entity franks a distribution if the entity is a franking entity, the distribution is a frankable distribution and the entity allocates a franking credit to the distribution. Under s 202-15, an entity is a franking entity if it is a corporate tax entity. 10 Subdivision 202-C specifies those distributions that can be franked. Section 202-35 states that the object of subdivision 202-C is to ensure that only distributions equivalent to realised taxed profits can be franked. Generally, distributions that are made out of realised profits can be franked. Under s 202-30, distributions and non-share dividends are frankable unless the legislation specifies that they are unfrankable. The distribution to the Taxpayer that is in question in this proceeding is a non-share dividend for the purposes of s 202-30. 11 Section 202-40 provides that a distribution is a frankable distribution to the extent that it is not unfrankable. Under s 202-40(2), a non-share dividend is a frankable distribution to the extent that it is not unfrankable under s 202-45. Section 202-45 has no application to the distribution made to the Taxpayer. 12 Under s 202-75, an entity that makes a frankable distribution must give the recipient a distribution statement in accordance with s 202-80. The statement must be in the approved form and must contain specified information. The amount of the franking credit on a distribution is that stated in the distribution statement, unless the amount stated exceeds the maximum franking credit for the distribution. In that case, the amount of the franking credit on the distribution is taken to be the maximum franking credit for the distribution, as worked out under subdivision 202-D. 13 Division 207 deals with the effect of receiving a franked distribution. If a corporate tax entity makes a franked distribution to one of its members, then, as a general rule: an amount equal to the franking credit on the distribution is included in that member's assessable income, and the member is entitled to a tax offset equal to the same amount. 14 Division 974 of the 1997 Act specifies whether, for tax purposes, an interest is a debt interest or an equity interest. An interest that could be characterised as both a debt interest and an equity interest will be treated as a debt interest for tax purposes. It is important to determine whether an interest is a debt interest or an equity interest because returns on debt interests are not frankable, but may be deductible, while returns on equity interests are not deductible but may be frankable. Division 974 has the effect that interests that are not shares may be recognised as equity in a company. An interest that is an equity interest in a company, but is not a share, will be treated in the same way as a share for some tax purposes, particularly in relation to the determination of the tax treatment of returns on the interest. Under s 974-5, the test for distinguishing between debt interest and equity interest focuses on economic substance rather than mere legal form. 15 One object of Division 974 is to establish a test for determining, for particular tax purposes, whether a scheme, or the combined operation of a number of schemes, gives rise to a debt interest or gives rise to an equity interest. Another object is that that test is to operate on the basis of the economic substance of the rights and obligations arising under the scheme or schemes, rather than merely on the basis of the legal form of the scheme or schemes. Thus, the test is intended to operate, for example, to deny deductibility, but allow franking, for interest in relation to a scheme that has the legal form of a loan, if the economic substance of the rights and obligations arising under the relevant scheme gives the interest characteristics that are the same as, or similar to, those of a dividend on an ordinary share, and thereby prevent deductible returns on equity. The test is also intended to operate, for example, to allow a deduction, but not franking, for a dividend in relation to a scheme that has the legal form of an ordinary share, if the economic substance of the rights and obligations arising under the relevant scheme gives the dividend characteristics that are the same as, or similar to, those of deductible interest on an ordinary loan, and thereby prevent frankable returns on debt. 16 In furtherance of those objects, s 974-15(1) provides that a scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in s 974-20(1) in relation to the entity. Under s 974-20(1) a scheme satisfies the debt test in relation to an entity if, relevantly: the scheme is a financing arrangement for the entity; the entity receives a financial benefit under the scheme; the entity has an effectively non-contingent obligation under the scheme to provide a financial benefit to one or more entities after the time when the financial benefit is received; it is substantially more likely than not that the value provided, as worked out under s 974-20(2), will be at least equal to the value received, as worked out under s 974-20(3); and the value provided and the value received are not both nil. 17 Under s 974-75(1), a scheme satisfies the equity test in relation to a company if it gives rise to an interest set out in the table contained in s 974-75(1). The interests set out in the table are, relevantly, as follows: 1. An interest in the company as a member or stockholder of the company. 2. An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect contingent on the economic performance of the company. 3. An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of the company. 4. An interest issued by the company that gives its holder a right to be issued with an equity interest in the company, or is an interest that will, or may, convert into an equity interest in the company. It is common ground that the Relevant Securities are equity interests under Division 974. 18 Subdivision 974-E of Division 974 deals with non-share distributions by a company. Under s 974-115, a company makes a non-share distribution to a person if the person holds a non-share equity interest in the company and the company distributes money or other property to the person, or credits an amount to the person, as the holder of that interest. Under s 974-120, all non-share distributions are non-share dividends, except to the extent to which the company debits the distribution against the company's non-share capital account or against the company's share capital account. THE RELEVANT SECURITIES 19 The Taxpayer subscribed for Relevant Securities in accordance with the Terms of an offer made in a prospectus issued by the Bank and dated 7 September 2009 (the Prospectus). It is necessary to describe the Relevant Securities in more detail, and to refer to relevant parts of the Prospectus. 20 The Relevant Securities are described in the Prospectus as Perpetual Exchangeable Resalable Listed Securities. They consist of: An unsecured subordinated note issued by the New Zealand branch of the Bank (the Notes), and A preference share issued by the Bank (the Preference Shares). The Notes and the Preference Shares cannot normally be traded separately, and so are described as stapled. 21 The Prospectus begins with a number of important notices, including a reference to restrictions on foreign jurisdictions, which is repeated in the body of the Prospectus. That notice states that the offer made by the Prospectus was available to persons receiving the Prospectus in Australia, and that the invitation to apply for the Relevant Interests was not extended to investors located or resident outside Australia, other than certain institutional investors at the discretion of the Bank. The offer made by the Prospectus was to three classes as follows: holders of Ordinary Shares in the Bank, or of certain earlier issues of Perpetual Exchangeable Resalable Listed Securities, who are registered with an Australian address; Australian residents who are clients of the broker to the offer; and institutional investors in Australia and in certain overseas jurisdictions. The notice also states that distribution of the Prospectus in jurisdictions outside Australia may be restricted by law, and that a potential investor in a jurisdiction outside Australia who came into possession of the Prospectus should seek advice on and observe any such restrictions. The offer was to be available to persons within Australia and no action was to be taken to register the Prospectus or otherwise permit a public offering of the Relevant Securities in any jurisdiction outside Australia. The offer was not made to any person in any jurisdiction where the laws of that jurisdiction would require the Prospectus to be registered or other action to be taken by the Bank. Those provisions hold some significance in relation to the relevant circumstances under s 177EA(17). 22 The Prospectus states that distributions would be non-cumulative and that, if a distribution is not paid on a distribution payment date, the holder of the Relevant Securities has no claim or entitlement in respect of non-payment nor any right to receive that distribution at any later time. Finally, the Prospectus states that distributions are discretionary. However, if distributions on Relevant Securities are not paid, the Bank will be restricted from paying dividends, interest or distributions, or returning capital, on ordinary shares issued by the Bank and certain other securities of the Bank. 23 The Prospectus also states that Relevant Securities are expected to be Exchanged on 31 October 2014 by one of three methods, as follows: Resale: the Bank may arrange a sale where the purchaser will acquire all Relevant Securities for their face value of $200; Conversion: if Resale does not occur, the Relevant Securities will convert into a variable number of Bank Ordinary Shares worth approximately $202.02 if certain conditions are satisfied; Repurchase: if Resale and Conversion have not occurred, the Bank may, subject to the prior written approval of the Australian Prudential Regulation Authority (APRA), elect to repurchase all Relevant Securities for their face value of $200. If Relevant Securities are not exchanged on 31 October 2014, the same possible outcomes will apply to each subsequent distribution payment date until exchange occurs. 24 The Prospectus says that holders of Relevant Securities do not have a right to request exchange. However, the Bank may, with the written approval of APRA, exchange all Relevant Securities if certain events occur. Those events may be summarised as follows: A Tax Event: when the Bank receives an opinion that there is a material risk that the Bank would be exposed to an increase in costs, including taxes, in relation to Relevant Securities or that any distribution would not be frankable or franking credits may not be available to hold it; A Regulatory Event: when the Bank receives advice that, as a result of a change or a proposed change of law or regulation, additional requirements would be imposed on the Bank in relation to the Preference Shares or stapled securities that the Bank determines to be unacceptable; or A NOHC Event: involving a restructuring of the Bank to create a non-operating holding company. 25 In addition, Relevant Securities must, subject to APRA's approval, be exchanged if an Acquisition Event occurs. An Acquisition Event occurs if a takeover bid is made to acquire Ordinary Shares of the Bank and the offeror's voting power in the Bank becomes greater than 50 percent, or a court approves a scheme or arrangement that will result in a person having voting power in the Bank of more than 50 percent. 26 An Assignment Event in relation to a Note is the occurrence of one of a number of events described in the Note Terms, including: the Bank ceasing or suspending its business, a winding up proceeding being commenced in respect of the Bank, or regulatory steps being taken by APRA in respect of the Bank. The Bank may also elect that an Assignment Event occur. 27 If an Assignment Event occurs, the Bank may elect for some or all of the Notes to be de-stapled from the Preference Shares and assigned to the Bank. If the Bank makes that election, holders will hold only a Preference Share for each of the Relevant Securities in relation to which the Bank has elected assignment. Thereafter, dividends become payable on the Preference Shares in respect of the Relevant Securities that have had their corresponding Notes assigned. The dividend payable on a Preference Share following an Assignment Event is equivalent to the interest payable on the stapled Note prior to the Assignment Event. 28 The Relevant Securities entitle the holders to quarterly distributions, expected to be fully franked, that are subject to certain payment tests set out in the Terms relating to the Relevant Securities. The Prospectus describes Distributions as comprising either interest or dividends. Until an Assignment Event, they will comprise interest on Notes, while after an Assignment Event, they will comprise dividends on Preference Shares. Regardless of whether a Distribution is paid as interest on Notes or a dividend on Preference Shares, the amount of the Distribution will be calculated on the same basis. Holders will not be entitled to both interest on Notes and dividends on Preference Shares at the same time. 29 The Prospectus states that the Bank expects that Distributions will be fully franked. If Distributions are fully franked, holders of Relevant Securities will receive a combination of cash and franking credits. However, if a Distribution is unfranked or not fully franked, the cash component will generally be increased to compensate holders for the unfranked portion of the Distribution. 30 The Prospectus describes in detail how the Distribution Rate is to be calculated. It states that the Distribution Rate is a floating rate and would be set on the first business day of each quarterly distribution period by adding the margin of 3.400 percent to the Bank Bill Swap Rate on that date, and multiplying the result by (1 – the Australian corporate tax rate applicable at the relevant Distribution payment date and which is currently 30 percent). The Prospectus then gives an example on the assumption that the Bank Bill Swap Rate for the relevant distribution period was 3.280 percent. On that basis, the Distribution Rate would be calculated as follows: Bank Bill Swap Rate: 3.280 percent Plus margin: 3.400 percent Equals: 6.680 percent Multiplied by (1 – the Australian corporate tax rate): 0.700 Distribution Rate: 4.676 percent The Prospectus then explains the impact of franking credits, which it describes as representing the holder's share of tax paid by the Bank. Thus, if the potential value of the franking credits is taken into account in full, the fully franked Distribution Rate of 4.676 percent shown in the above example would be equivalent to an unfranked distribution rate of approximately 6.680 percent. 31 The Commissioner attaches considerable significance to the method by which the Distribution Rate is calculated. He contends that it is highly significant, for reasons that will appear below, that the return on the Relevant Securities that investors are invited to expect depends upon franking credits being available to the holders of Relevant Securities. 32 The Prospectus provides that the Relevant Securities were to be issued to Macquarie Group Holdings New Zealand Limited, as the Initial Holder. The Initial Holder was then to transfer the Relevant Securities to successful applicants under the offer made by the Prospectus. The arrangements with the Initial Holder were governed by an agreement summarised in the Prospectus. The Commissioner attaches significance to the fact that the Relevant Securities were to be issued, in the first instance, to a New Zealand entity by the New Zealand branch of the Bank. PROCEDURAL BACKGROUND 33 The Prospectus makes reference to the dispute between the Bank and the Commissioner that gives rise to this proceeding. The Prospectus states that the Bank understands that the Commissioner may form the view that the benefits of the franking credits should be denied to holders of Relevant Securities, even if the Bank has franked the relevant distributions and that, if the Commissioner forms that view, the Bank intends to have that view tested in Court. The Prospectus says that the Bank and the Commissioner had agreed to certain arrangements that will ensure that holders of Relevant Securities will not be impacted by that process. 34 The arrangements consist of a deed dated 27 August 2009 between the Bank and the Commissioner (the Compromise Deed). By clause 1(b) of the Compromise Deed, the Commissioner agreed not to make a determination under s 177EA(5)(b) of the 1936 Act in respect of frankable distributions on Relevant Securities that are paid, payable or expected to be payable, to any investor other than the Nominated Investor. The Taxpayer is the Nominated Investor for the purposes of the Compromise Deed. Clause 1 further provided that the Bank would procure that any objection by the Taxpayer against any determination by the Commissioner under s 177EA(5)(b) would be made within 14 days of receipt of the determination and that, within 14 days of receipt of the objection, the Commissioner would either allow or disallow the objection. 35 By clause 2(a) of the Compromise Deed, the parties agreed that, if the Commissioner disallows the objection, the Taxpayer would commence a proceeding under Part IVC of the Administration Act in respect of the objection decision within 14 days of receipt of notice of the objection decision. The parties agreed to do everything in their power to prosecute the litigation expeditiously and to limit disputes about the facts in evidence. By clause 2(a)(3), the Bank agreed to procure that the Taxpayer would not challenge the objection decision on any basis other than that the Commissioner was not entitled to make, or ought not as a matter of discretion to have made, the relevant determination under s 177EA(5)(b). 36 Clause 2(b) of the Compromise Deed then provided that the Bank would elect that an Assignment Event occur in respect of all Notes on or before the next interest payment date after, relevantly, the date that any Part IVC proceedings have been concluded and there exists a valid determination that no imputation benefit arises in respect of all or a specified part of a Distribution. By clause 2(c), the Bank agreed to pay to the Commissioner an amount calculated to compensate the Commissioner for the amount of the tax liability that would otherwise flow in respect of the franking credits on all of the Relevant Securities other than those held by the Taxpayer. 37 On 14 December 2009, the Commissioner made a determination under s 177EA(5)(b) of the 1936 Act to deny franking credits on Distributions to be made on or about 1 February 2010 on the Relevant Securities issued by the Bank to the Taxpayer. The Commissioner determined that no imputation benefit was to arise in respect of that Distribution. In accordance with that determination, franking credits of $65.70 were denied on the basis of the expectation that the Distribution to the Taxpayer would be in the amount of $153.29. 38 On 23 December 2009, the Commissioner issued class ruling CR 2009/78 (the Class Ruling). The Class Ruling considered how the law applies to the scheme involving the Relevant Securities. Paragraph 98 of the Class Ruling stated that it was considered that the conditions in s 177EA(3)(a) to s 177EA(3)(d) were satisfied and that the issue was whether, having regard to the relevant circumstances of the scheme, it would be concluded that the scheme was entered into or carried out for the purpose of enabling the Taxpayer to obtain an imputation benefit under the scheme. Paragraph 101 said that it would not be reasonable to conclude that in entering into the scheme, the Bank and the holders of the Relevant Securities demonstrated a more than incidental purpose of securing imputation benefits for the holders of the Preference Shares or the Ordinary Shares after the stapled security had been de-stapled and the holders no longer had as part of the Relevant Security any interest in a Note. 39 On 23 December 2009, the New Zealand branch of the Bank lodged an application for a private binding ruling with the New Zealand Inland Revenue Department. The application sought confirmation that Distributions on the Notes forming part of the Relevant Securities would be deductible against the income of the New Zealand branch of the Bank. 40 On 29 December 2009, the Taxpayer objected to the determination under s 177EA(5)(b) that no imputation benefit was to arise in respect of the Distribution expected to be paid on 1 February 2010 on the Relevant Securities held by the Taxpayer. On 12 January 2010, the Commissioner disallowed the Taxpayer's objection. On 25 January 2010, the Taxpayer appealed to the Federal Court of Australia against the Commissioner's objection decision disallowing his objection. That is the proceeding presently before the Court. 41 The principal issue in the proceeding is whether, having regard to the relevant circumstances of the scheme relating to the Relevant Securities, it would be concluded that the Bank, one of the persons who carried out the scheme, did so for a purpose, other than an incidental purpose, of enabling the Taxpayer to obtain an imputation benefit. The subsidiary question is whether, assuming the answer to the first question is yes, the Commissioner properly exercised his discretion to make a determination under s 177EA(5)(b) to deny the Taxpayer an imputation benefit. PRUDENTIAL REQUIREMENTS OF APRA 42 The Bank is an authorised deposit taking institution for the purposes of the Banking Act 1959 (Cth). As such, the Bank is required to comply with certain prudential requirements of APRA, including prudential standard APS 110, concerning Capital Adequacy, and prudential standard APS 111, concerning Measurement of Capital. 43 The aim of APS 110 is to ensure that authorised deposit taking institutions maintain adequate capital, on both an individual and group basis, to act as a buffer against the risks associated with their activities. APS 110 outlines the overall framework adopted by APRA for the purpose of assessing the capital adequacy of an authorised deposit taking institution. Under clause 6 of APS 110, the board of directors of an authorised deposit taking institution has a duty to ensure that the institution maintains an appropriate level and quality of capital commensurate with the level and extent of risk to which the institution is exposed from its activities. APRA assesses the institution's financial strength at three levels in order to ensure that the institution is adequately capitalised, both on an individual and a group basis. Those levels are, relevantly: Level 1: the institution itself and any subsidiaries of the institution specified in the relevant approval on a consolidated basis. Level 2: the consolidation of the institution and all its subsidiary entities other than non-consolidated subsidiaries. Level 3: the conglomerate group at the widest level. 44 Under APS 111, authorised deposit taking institutions must hold a minimum amount of Tier 1 capital, as capital base on both an individual authorised deposit taking institution basis and consolidated banking group basis. That requirement is to ensure capital adequacy. In addition, authorised deposit taking institutions may include an amount of Tier 2 capital as part of their required capital holdings, up to the limits specified in APS 111. Tier 1 capital consists of the highest quality capital components. Tier 2 capital includes other components that, to varying degrees, fall short of the quality of Tier 1 capital. Nonetheless, Tier 2 capital contributes to the overall strength of an institution as a going concern. 45 Under clause 14 of APS 110, an authorised deposit taking institution is subject to a prudential capital ratio as determined by APRA, being a proportion of its total risk-weighted assets, half of which must be held in the form of Tier 1 capital. An institution must at all times maintain a risk based capital ratio in excess of its prudential capital ratio. Under clause 16, APRA may require an institution to hold more than 50 percent of its required prudential capital ratio in the form of Tier 1 capital. Under clause 19, an institution must obtain APRA's consent prior to making any planned reduction in its capital, whether at Level 1, Level 2 or Level 3. 46 Under clause 5 of APS 111, an authorised deposit taking institution must, for capital adequacy purposes, hold the minimal levels of capital required by APS 110. As part of those requirements, an institution must hold Tier 1 capital to the extent required by APS 111. In addition, an institution may include Tier 2 capital as part of its required capital holdings up to the limits specified in APS 111. 47 Under APS 111, a category of capital is a group of components of capital, namely: Fundamental Tier 1 capital Residual Tier 1 capital, both non-innovative and innovative Upper Tier 2 capital Lower Tier 2 capital 48 Tier 1 capital comprises the highest quality components of capital that fully satisfy all of the following essential characteristics: providing a permanent and unrestricted commitment of funds; being freely available to absorb losses; not imposing any unavoidable servicing charge against earnings; ranking behind the claims of depositors and other creditors in the event of winding up. Tier 1 capital is divided into Fundamental Tier 1 capital and Residual Tier 1 capital. 49 Fundamental Tier 1 capital is the highest form of capital. It consists of: paid up ordinary shares; general reserves; retained earnings; current year earnings; foreign currency translation reserves; capital profits reserves; minority interests arising from consolidation of Tier 1 capital of subsidiaries. 50 Residual Tier 1 capital consists of all other components of capital qualifying for Tier 1 status. Residual Tier 1 capital is divided into non-innovative capital and innovative capital. 51 Non-innovative residual Tier 1 capital comprises perpetual non-cumulative preference shares that satisfy the following criteria: The instrument is unsecured and paid up. The instrument is perpetual, in that it does not have a maturity date, is not redeemable at the option of the holder and has no provision that requires future redemption by the issuer. The instrument does not impose any fixed servicing costs on the issuer, such that dividend or interest payments to the holders of the investment are at the discretion of the issuer and any unpaid dividends or interest are non-cumulative. The instrument is able to absorb losses incurred by the issuer on a going concern basis and in the winding up of the issuer such that the instrument is treated as a specific class of share capital or members' interest of the issuer and the issuer does not have any liability to make a dividend or interest payment on the instrument if making the payment would result in the issuer becoming insolvent. The instrument is subordinated in right of repayment of principal interest and dividends to all depositors and other creditors of the issuer. 52 In addition, perpetual non-cumulative preference shares must also satisfy the following criteria in order to qualify as non-innovative residual Tier 1 capital: The preference shares have not been issued indirectly through a special purpose vehicle. Perpetual non-cumulative preference shares issued through stapled structures are permitted subject to the condition that the preference shares are issued directly by an authorised deposit taking institution and are stapled to securities issued directly by an overseas branch of the institution. The stapled structure must not involve any use of special purpose vehicles and must be simple and transparent. 53 The capital adequacy requirements of APRA applying to authorised deposit taking institutions such as the Bank include: a minimum ratio of total capital to risk weighted assets, the prudential capital ratio, which is 8 percent by default but may be increased by APRA; a requirement that at least half of the capital required to meet the prudential capital ratio be Tier 1 capital; a limit on Residual Tier 1 capital to 25 percent of the amount of Tier 1 capital, with any excess being treated as Upper Tier 2 capital instead of Tier 1 capital; a limit on innovative Residual Tier 1 capital to 15 percent of the amount of Tier 1 capital, with any excess being treated as Upper Tier 2 capital instead of Tier 1 capital. 54 Those capital adequacy requirements apply at both Level 1 and Level 2. At Level 1, the capital adequacy requirements must be collectively met by the institution and any subsidiaries approved by APRA. At Level 2, the capital adequacy requirements must be collectively met by the institution and all of its subsidiaries, other than subsidiaries involved in certain excluded business activities. THE DECISION TO ISSUE THE RELEVANT SECURITIES 55 The Bank's Fundamental Tier 1 capital consists primarily of shareholders' equity, principally ordinary share capital, reserves and retained earnings. A significant increase in the Bank's Fundamental Tier 1 capital occurred between 30 June 2008 and 30 June 2009, largely as a result of three issues of ordinary shares. The Bank's Fundamental Tier 1 capital also increases from time to time through a dividend reinvestment plan, which permits shareholders to receive ordinary shares in the Bank in lieu of their dividend entitlements and through increases in retained earnings as the Bank generally does not distribute all of its profit as dividends. 56 The Bank's board of directors determines the Bank's capital management strategy, based on recommendations from the Bank's Chief Financial Officer and the Bank's Group Treasurer. In considering capital strategy, the Chief Financial Officer and Group Treasurer are assisted by the Bank's capital management division, which is also responsible for executing capital raisings and other capital management initiatives approved by the Bank's board. Capital management decisions are influenced by reference to a range of factors including the following: APRA's prudential standards; directions given to the Bank by APRA; market perception of the adequacy of the Bank's capital levels and the Bank's position in relation to other major banks; market conditions; the Bank's business strategy; and the cost of the different types of capital. 57 On 9 September 2008, the Chief Financial Officer and Group Treasurer presented a paper to the board in which they recommended that the Bank offer to new investors an alternative non-innovative Tier 1 security, being the Relevant Securities. The recommendation was given for a number of reasons, as follows: There was a substantial capital requirement over the next 12 months due to business growth, potential acquisitions and foreign exchange movements. If an earlier issue of securities similar to the Relevant Securities were to be redeemed for cash of $750 million in March 2009, the total capital ratio would be reduced and that would necessitate additional Tier 2 to be raised at higher prices. The structured transaction would provide a diversified, cheaper source of funding. There was a window of opportunity for an issue of Tier 1 capital between two other major banks entering the market, namely ANZ and NAB. At that time, the Bank group had hybrid Tier 1 capital, which was ineligible to be included in the Tier 1 ratio, but still contributed to total capital. The Relevant Securities would compare favourably to the cost of Tier 2 capital. 58 The recommendation stated that the Bank currently had $1.35 billion of hybrid Tier 1 securities on issue, which were ineligible to be included in its Tier 1 capital ratio but continued to be included in the group's Total Capital ratio. Beyond 2010, when the current transition rules were to cease to apply, the older style innovative hybrid securities would be limited to 15% of the Tier 1 capital. The recommendation went on to say that it was proposed that the terms for the Relevant Securities would be similar to earlier issues of similar securities, namely, a convertible non-innovative hybrid Tier 1 security with a conversion term of approximately 5 years. The recommendation said that those terms mirrored those for all recent hybrid securities issued by the Bank. 59 At the meeting of the board of directors of the Bank held on 9 September 2008, the directors decided not to proceed with the issue of the Relevant Securities at that time. The main reason discussed for not proceeding with the proposed issue at that stage was that the Bank was, at that time, considering a potential acquisition of BankWest. That was material commercially sensitive information that the Bank was not required to disclose to ASX, because it concerned an incomplete transaction. However, the Bank would have been required to disclose that information in any prospectus for the Relevant Securities that was issued at that time. 60 On 10 February 2009, the Chief Financial Officer and Group Treasurer presented a further paper to the directors of the Bank recommending that the Relevant Securities be offered to new investors. They gave the following reasons: The current economic environment continued to place pressure on the Tier 1 ratio targets. With recent large equity raisings, the Relevant Securities would provide a diversified, cost effective way to increase Tier 1 capital. The Relevant Securities compared favourably with Tier 2 capital. With the recent large equity raisings, there was hybrid Tier 1 capacity for up to $900 million to be included in Tier 1 as at June 2009. Additional capacity would also arise from 2010, when capital transition rules ceased to apply, and the older style innovative hybrid style securities would be limited to 15 percent of Tier 1 capital. A proposed issue provided greater capital flexibility for market opportunities. 61 The paper said that it was proposed that the terms for the Relevant Securities would be similar to the terms of an earlier issue of similar securities, namely, a convertible non-innovative hybrid Tier 1 security with a conversion term of approximately 5 years. The paper stated that those terms mirrored those for all recent hybrid securities issued by the Bank. The paper described the expected economics of the proposed structure for the Relevant Securities. It stated that, assuming an issue price of BBSW + 3.5 to 4.0%, the economics of the Relevant Securities compared well to other funding instruments, such as offshore Tier 1, Tier 2 and senior debt. In addition, it would provide diversification of funding, which was said to be a key benefit at that point in time. At the meeting of directors of the Bank held on 10 February 2009, the directors approved the pursuit of a non-innovative residual Tier 1 capital issue offering of the Relevant Securities for $500 million with the potential to increase the issue up to $1.5 billion, to be launched when there was sufficient market capacity. 62 On 14 July 2009 the Chief Financial Officer presented a further paper to the directors of the Bank concerning a proposed capital issue. The paper was prepared by the Chief Financial Officer and the Group Treasurer. The paper reported that, since April 2009, there had been a significant improvement in markets, with secondary trading levels for hybrid securities increasing significantly, and that there had been several hybrid Tier 1 issues completed successfully in offshore markets in recent weeks. The paper indicated that current forecasts suggested that approximately $700 million of additional capital would be required by June 2010 and that the Bank group had non-innovative Tier 1 hybrid capacity of $1.1 billion at June 2009. 63 A section of the paper described discussions with the Commissioner in relation to the franking of the Relevant Securities. The paper said that the Bank had been pursuing a ruling process on the structure of the issue with the Commissioner, and that recent feedback indicated that the Commissioner's preliminary view was adverse on one issue, as a result of which the Commissioner might deny franking credits to holders of the Relevant Securities. The paper said that that would require the Bank to pay cash to holders, to gross up their payments, reflecting the loss of value. The paper said that, under the view indicated by the Commissioner, the Bank would be required to frank the distributions on the relevant Securities because they would be regarded as equity for tax purposes, but that the benefit of those franking credits would be denied to holders. Another section of the paper described the economics of the proposed transaction. The economic cost of the Relevant Securities was stated to be 5.58 percent, compared with a cost of 14.20 percent for ordinary shares. 64 At the meeting of the directors of the Bank held on 14 July 2009, the directors noted that management expected to launch a non-innovative hybrid Tier 1 transaction following the announcement of results in August 2009. The directors also noted the tax issues associated with the proposal. 65 Further papers prepared by the Chief Financial Officer and the Group Treasurer were presented to the directors of the Bank at their meeting held on 12 August 2009. One paper said that market conditions continued to be strong and that the Relevant Securities remained the preferred approach. The paper said that no competing transactions were expected and that a transaction of $1 billion should be achievable with pricing of approximately 36% over BBSW. Another paper said that there had been several discussions with the Commissioner and that an understanding had been reached for the treatment of the Relevant Securities. The Commissioner's view was that the franking credits attached to payments on the Relevant Securities should be denied to holders but that the Commissioner would agree to a settlement process on the basis that the question would be tested in Court and, if the Bank lost the proceeding, a cash payment would be made to the Commissioner to settle the tax obligation on behalf of holders. The paper said that, in practice, the franking credits would be allowed to holders and the Bank would make a compensating payment to the Commissioner. In that way, the dispute would not have a material impact on holders and would not require a significant level of disclosure. The paper concluded that, if the Bank were to be successful in the proceeding, the economic cost of the Relevant Securities would be 5.86% per annum but if the Bank was unsuccessful, the expected economic cost would be 7.87% per annum. 66 At the meeting of the directors held on 12 August 2009, the directors approved an offer of the Relevant Securities of approximately $600 million, with the ability to issue more or less up to $1.2 billion, subject to all necessary internal and regulatory approvals being obtained. On 14 August 2009, a further paper was provided to the Bank directors by the Chief Financial Officer and the Group Treasurer seeking approval of the prospectus for the Relevant Securities. The paper reported that discussions with the Commissioner were close to finalisation with the outcome expected to be as previously described. The paper said that it was expected that the Commissioner would issue an unfavourable determination to an investor nominated by the Bank, which would subsequently be challenged in Court. The Commissioner would enter into an agreement with the Bank such that, if the Commissioner's view was upheld, the Bank would make a payment to the Commissioner on behalf of holders and there would be no additional impact on the holders. 67 On 28 August 2009, a prospectus for the Relevant Securities was lodged with the Australian Securities Investment Commission (the Commission). However, on 7 September 2009, the approval of the directors of the Bank was sought for an increase in the issue size of the Relevant Securities. The Chief Financial Officer and Group Treasurer reported that capital forecasts showed that there was Tier 1 hybrid capacity over the following 12 months for an offer size of up to $1.9 billion. They reported that, if the amount of Relevant Securities was $2 billion, there would be an estimated excess of $332 million reclassified as Tier 2 at December 2009, which would decrease to $95 million by June 2010. 68 At the meeting of the directors of the Bank held on 7 September 2009, the Group Treasurer informed the directors of strong feedback from brokers indicating a likely final demand close to $3 billion. The directors agreed to increase the maximum size of the issue of the Relevant Securities to $2.25 billion. They also resolved that the general offer to Australian residents, other than existing shareholders or holders of prior issues of similar securities, be cancelled. Accordingly, on 7 September 2009 a draft replacement prospectus for the Relevant Securities was lodged with the Commission. 69 The Relevant Securities were issued on 14 October 2009. A media release dated 15 October 2009 reported that the first Distribution in respect of the Relevant Securities would be $3.0657 per security on 1 February 2010, being a Distribution Rate of 5.0862 percent. The press release said that the Distribution was due to be paid on 1 February 2010 with the record date being 25 January 2010. The announcement said that the Distribution would cover a period of 110 days and was expected to be fully franked. The announcement also drew attention to the fact that the Bank had a discretion not to pay the Distribution in full. As indicated above, on 27 August 2009 the Bank and the Commissioner entered into the Compromise Deed. 70 As at 23 April 2010: there were 780,156 holders of ordinary shares in the Bank; there were 1,548,727,174 ordinary shares in the Bank issued; there were 75,507 holders of ordinary shares in the Bank resident outside Australia; and the non-resident holders of ordinary shares in the Bank held 22,832,703 ordinary shares. 71 Two Distributions have so far been made in respect of the Relevant Securities. The first was on 1 February 2010 and the second was on 30 April 2010. The total franking credits attached to those Distributions were approximately $24.2 million. 72 The majority of the funds raised by the issue of Relevant Securities were lent by the New Zealand branch of the Bank to ASB Bank Limited, a new Zealand resident subsidiary of the Bank. The remaining proceeds, consisting of $NZ500 million, were obtained by the New Zealand branch of the Bank to fund the business undertaken by that branch. The funds used by the New Zealand branch to pay Distributions on the Relevant Securities will be earned from the various business activities of the New Zealand branch, including the loan to ASB Bank Limited. 73 The Commissioner contends that the Distribution made to the Taxpayer on 1 February 2010 in respect of Relevant Securities held by him was sourced from unrealised or untaxed profits for the purpose of s 177EA(17)(ga) of the 1936 Act. The Commissioner regards the source of the Distribution as a matter relevant to determining whether the requisite purpose is present. The Taxpayer accepts that the Commissioner is not and should not be precluded from contending that the distribution received by the Taxpayer was sourced from unrealised or untaxed profits. THE CORRECT APPROACH TO S 177EA 74 Several general questions as to the proper approach to s 177EA have been raised. It is desirable to say something about those questions before dealing with the specific provisions of s 177EA(17). The Bank's Actual Purpose 75 The Taxpayer contends that, because the relevant circumstances for the purpose of s 177EA(3)(e) are said to include the matters set out in s 177EA(17), regard may be had to the actual decision-making processes of the person whose purpose is in question. While he accepts that the purpose of the Bank is to be deduced objectively, in light of the relevant matters, the Taxpayer contends that one of the relevant matters, since s 177EA(17) is not exhaustive, is the actual purpose of the Bank. 76 The subjective state of mind of a person is not a matter listed in s 177EA(17) to which regard may be had. Rather, s 177EA(17) requires consideration of a number of matters that, together with other matters, constitute relevant circumstances, regard to which must be had in reaching a conclusion as to the purpose of a person by reference to objective factors. While the relevant circumstances are not limited to the matters enumerated in s 177EA(17), a distinction must be drawn between a person's actual purpose, on the one hand, and the purpose to be imputed from the consideration of the relevant circumstances, on the other. Thus, s 177EA(3)(e) requires a conclusion to be drawn about a person's purpose, which itself involves the question of whether a purpose should be imputed to that person, by reference to the matters specified in s 177EA(17), irrespective of what the actual purpose might have been. Section 177EA, like the balance of Part IVA, is concerned with the imputed purpose, worked out objectively, without regard to the actual or subjective motives of the relevant person. The Dichotomy between Debt and Equity 77 Income tax law in relation to distributions of profits by a company draws a fundamental distinction between cases where, on the one hand, the taxable fund of profits is ascertained after the prior deduction of a payment made to an investor and, on the other hand, cases where a share of the taxable fund of profits is distributed to the investor. In the first case, the payment to the investor is an expense incurred in gaining the income and is an allowable deduction, reducing the company's tax burden, while the payment is fully assessable in the hands of the investor. In the second case, tax is payable by the company without deduction for the payment, but the investor's tax is adjusted for the tax borne by the company. 78 Preference Shares confer on their holders the right to receive dividends. The holders were given a preference in that they would receive fixed dividends in preference to other shareholders. The preference might also extend to receiving a return of capital in preference to other shareholders. The quid pro quo for such a preference may be a limitation on the right to share in surplus profits or surplus capital. Because of such restrictions, preference shares sometimes exhibit some of the characteristics of debt. Nevertheless, the holders of preference shares are members or contributories of the company and not creditors. They rank behind creditors both for distributions of profits and distributions of capital. 79 The distinction between equity and debt is recognised in the 1997 Act by a division based on economic substance rather than legal form, as demonstrated by ss 974-5 and 974-10. By the operation of those provisions, the Notes that constitute a component of the Relevant Securities are treated as non-share equity and not as debt. Accordingly, the effect is that the interest on the Notes, although incurred in carrying on the Bank's business, is to be treated as a non-deductible non-share dividend. It is to be treated as a dividend in that it is both frankable, under s 202-30 and s 202-40, and required to be franked, under s 203-50(1)(b). The Object of Section 177EA 80 The explanatory memorandum for the Bill that inserted s 177EA described the provision as a general anti-avoidance provision, which was to target franking credit trading and dividend streaming schemes, where one of the non-incidental purposes of the scheme was to obtain a franking credit benefit. The provision was intended to protect the revenue by curbing the unintended usage of such schemes. The explanatory memorandum stated that two of the underlying principles of the imputation system were: that the benefits of imputation should only be available to the true economic owners of shares, and only to the extent that those taxpayers are able to use the franking credits themselves, and that the tax paid at a company level would be, in broad terms, imputed to shareholders of the company proportionately to their shareholding. Franking credit trading schemes, on the other hand, allowed franking credits to be transferred inappropriately by, for example, allowing the full value of franking credits to be accessed without bearing the economic risk of holding the shares. Such schemes were said to undermine the first principle. Further, companies could also engage in dividend streaming by distributing franking credits to only selected shareholders. That practice would undermine the second principle by attributing tax paid on behalf of all shareholders to only some of the shareholders. Generally, that entailed the streaming of franking credits to taxable residents and away from non-residents and tax exempt recipients. The explanatory memorandum described the provision as a general anti-avoidance rule and anti-streaming measure to restore those underlying principles of the imputation system. 81 The explanatory memorandum also asserted that one result of the policy in relation to imputation was that there would be an intended level of wastage of franking credits, resulting from their distribution to persons who could not use them. The memorandum stated that abuse of the imputation system would occur when franked distributions were diverted from the real owners of interests in companies, who have no use or a relatively limited use for franking benefits, to a person who had a relatively greater use for them but who was not in substance the owner of an interest in the company. That is described as franking credit trading. 82 Another abuse of the imputation system was said to occur when there is selective direction of franked dividends to only those shareholders, or holders of interest in shares, who have the greatest use for franking benefits. That is described as dividend streaming. 83 The Taxpayer says that neither of those abuses is apparent in the scheme involving the Relevant Securities. He says that the effect of Division 974 is that the Relevant Securities are to be treated as equity interests, and not debt, and that the holders of relevant securities are truly members of the Bank. Further, there is no streaming of franked dividends to the holders of the Relevant Securities as shareholders who have a greater use for franking benefits. 84 The Commissioner, on the other hand, asserts that the contentions of the Taxpayer ignore the scheme of Part 3-6 and s 177EA itself. Section 177EA expressly denies imputation benefits in relation to interests that fall on the equity side of the division between debt and equity interests. The Commissioner says that s 177EA operates both in relation to benefits that have been obtained in respect of equity interests in legal form, such as ordinary shares, and in respect of interests, such as the Relevant Securities, that are required to be treated as equity for tax purposes. 85 The Commissioner says that the imputation system does not operate solely by reference to the distinction between debt and equity. In every case where s 177EA applies, the relevant instrument is neither frankable nor deductible. He says that the supposed symmetry between non-deductibility and frankability is an illusion in the present case because the Bank not only pays interest out of profits that are not taxed in Australia but also obtains a deduction for that payment in New Zealand. Accordingly, on the Taxpayer's case, the Relevant Securities would be both deductible and frankable. 86 Part 3-6 restricts the benefit of the imputation system so that only the owners of companies may receive imputation benefits. The owners may receive imputation benefits only proportionately to their stake in the company and may receive them only in respect of distributed taxed income. Those objectives are achieved not only by the detailed rules contained in Part 3-6 but also by the operation of s 177EA, which is a flexible general anti-avoidance rule, with a low threshold for an avoidance purpose to deal with cases not covered by the specific rule. Thus, the Commissioner says, s 177EA itself is a guide to the policy of Part 3-6, in that it operates by ascertaining the relevant purpose by reference to features that are central to the operation of the imputation system. Accordingly, the matters to be considered under s 177EA(17) include whether the recipient is really an owner, the extent to which a return is like interest and whether the source of the distribution is taxed or realised profits. Therefore, the Commissioner says, there is no inconsistency between the operation of s 177EA contended for by the Commissioner and the policy underlying Part 3-6. 87 The Commissioner contends that s 177EA is intended to address circumstances not expressly contemplated at the time when it was enacted. One of those circumstances is the extent to which franking credits are obtained on distributions that are sourced from unrealised or untaxed profits. Hence, s 177EA(17)(ga) was subsequently inserted into s 177EA(17), to deal with that circumstance. That provision, which is of great significance in the present case, has nothing especially to do with schemes involving dividend streaming or franking credit trading, as described in the explanatory memorandum. 88 The Commissioner says that the best guide to the mischief to which s 177EA is directed is the terms of the provision itself. The question of whether a person has a non-incidental purpose of enabling a taxpayer to obtain an imputation benefit is best worked out by reference to the particular scheme under consideration and the particular circumstances of the relevant case. The purpose of s 177EA, which, significantly, is located in Part IVA, dealing with anti-avoidance, is to protect the integrity of the Imputation System. That is made clear in the wide terms of s 177EA itself and its place in Part IVA. 89 A supplementary explanatory memorandum in connection with s 177EA stated that the object of s 177EA was to prevent abuse of the Imputation System through schemes that circumvent the basic rules for the franking of dividends. It stated that s 177EA was intended to be a catch-all provision to deal with schemes not otherwise prevented by the basic rules. The supplementary memorandum then repeated the references to the policy of the 1997 Act and to franking credit trading and dividend streaming. That does not warrant an approach to s 177EA that limits its operation only to schemes involving trading in franking credits or dividend streaming. Nevertheless, such references in the explanatory memorandum might be called on in the event of ambiguity as to the proper construction of specific provisions. 90 The Taxpayer contends that the only non-incidental purpose for which the Relevant Securities were issued by the Bank was to raise Tier 1 capital, in circumstances where the Bank had a need for such capital. He says that the terms of issue of the Relevant Securities, and the treatment of the relevant Securities and of the Distributions in respect of them, are not inconsistent with the policy of the 1997 Act or the legislative scheme and purpose of the Imputation System. The Taxpayer says that the Bank simply complied with the dictates of the 1997 Act. The Taxpayer asserts that there is nothing in the circumstances surrounding the offer and issue of the Relevant Securities that suggests that the policy of the 1997 Act has been offended in relation to the treatment of non-share dividends or in relation to the franking of distributions. The terms on which the Relevant Securities were offered, issued and transferred did not stream Distributions or imputation benefits to any particular class of investors selected by reference to their ability to make use of imputation benefits. 91 The Relevant Securities were offered to investors to whom such an offer could lawfully be made. While there were regulatory constraints on the Bank's making of an offer to investors in some jurisdictions, such as the United States, there was no constraint on investors in those jurisdictions subsequently acquiring Relevant Securities. Indeed, there are presently holders of Relevant Securities who are not resident in Australia. 92 The Commissioner accepts that the raising of Tier 1 capital was a significant purpose of the Bank in issuing the Relevant Securities. However, the Commissioner says, that purpose of the Bank must be put in the right perspective. The cost of achieving that purpose was significantly reduced by the fact that the Notes would be franked, notwithstanding that they were a deductible interest expense for the New Zealand branch of the Bank. The imputation system seeks to avoid double taxation by providing a mechanism for the tax paid by companies to be credited to their resident members. 93 However, the Commissioner says, no such alignment is to be found in the present circumstances, because the Bank has covered part of its cost of raising capital by providing imputation benefits in respect of deductible interest payments. The Commissioner says that the Bank's purpose in providing the imputation benefits in the present circumstances was more than an incidental purpose. The Commissioner says that the policy that permits distributions to be franked is subject to a determination of the very kind now in issue. To the extent that s 177EA advances legislative policy, it is the policy embodied in the Imputation System, not in the definitional divide between debt and equity. THE BANK'S PURPOSE 94 It is possible to arrive at the relevant conclusion as to purpose by making a global assessment of the facts, so long as it is clear that all of the relevant matters referred to in s 177EA(17) are taken into account. There may be overlap among the various matters. Some of them may point one way. Others may point in the opposite direction. Some may be neutral. Section 177EA(3)(e) requires an evaluation of all of the matters, alone or in combination, some for and some against, in order to reach the appropriate conclusion. Further, there is no inconsistency between a finding that the purpose of a person lay in the pursuit of some commercial benefit in the course of carrying out a business, and a finding that a non-incidental purpose was to enable a relevant taxpayer to obtain an imputation benefit (see, for example, Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [67]). 95 The Taxpayer complains that the reasoning of the Commissioner in making his determination under s 177EA(5)(b) involved the examination of the individual paragraphs of s 177EA(17) on a strictly literal reading, without regard either to the context or purpose of those paragraphs or the object of s 177EA as a whole. While it is necessary, ultimately, to make an evaluation of all of the relevant matters, both alone and in combination, in order to reach a conclusion such as is called for by s 177EA(3)(e), it is necessary to deal with each of the matters separately in the first instance. 96 The first matter to be considered, under s 177EA(17)(a), is the extent and duration of the risks of loss and the opportunities of profit or gain, from holding the Relevant Securities, that are respectively borne by or accrue to the Bank and the Taxpayer. It is also necessary to have regard to whether there has been any change in those risks and opportunities for the Taxpayer or the Bank. 97 The Commissioner contends that those matters focus attention on the nature of the Taxpayer's ownership of the Relevant Securities, on which the frankable distribution of 1 February 2010 was paid. He says that the provision draws attention primarily to whether the Taxpayer is really the holder of the Relevant Securities on which the frankable distribution is paid and whether, and the extent to which, some other party has really borne the risks of ownership of the Relevant Securities. The Commissioner accepts that this matter is most applicable to trading schemes of the kind referred to in the explanatory memorandum. However, he says, the provision also permits consideration of the extent to which the holder of Relevant Securities is exposed to the risks of being a shareholder. That is, he says, it may to some extent require consideration of the extent to which the Relevant Securities are like equity. 98 The Taxpayer disputes that contention. However, against the possibility that there was some substance in the contention, the Taxpayer adduced evidence from Professor John Handley, who is an Associate Professor of Finance at the University of Melbourne. Professor Handley holds the degrees of Bachelor of Commerce and Bachelor of Mathematics from the University of Newcastle and the degrees of Master of Commerce and Doctor of Philosophy from the University of Melbourne. Professor Handley was asked to set out his views on the extent and duration of the risks of loss and the opportunities for profit or gain on an investment in Relevant Securities. 99 Professor Handley first outlined the factors that contribute to the risk of loss and opportunity for gain in relation to periodic Distributions on the Relevant Securities prior to an Exchange Event. Those factors include the following: The Distributions are discretionary and are subject to certain payment tests and, therefore, there is a possibility that they may not be paid. The Distributions are non-cumulative and, accordingly, the holder has no right to demand payment of any Distribution that has not been paid. The Distributions rank ahead of dividends on Ordinary Shares but are subordinated to certain other distributions. The Distribution Rate is based on a benchmark interest rate, which is floating. Accordingly, if that benchmark rate increases the Distribution will increase, but if the benchmark rate decreases the Distribution will decrease. The Distribution Rate is dependent upon the Australian current corporate tax rate. If the corporate tax rate increases, the cash amount of the Distribution will decrease and if the corporate tax rate decreases, the cash amount of the Distribution will increase. 100 Professor Handley considers that those factors suggest that there is a substantial risk of loss, primarily from non-payment, with some opportunities for gain, primarily from possible increases in the benchmark rate in relation to the periodic Distributions. He considers, however, that, as a practical matter, the risk of loss is mitigated, but not eliminated, by the facts that: The Bank has a strong profit and dividend history. Although the payment of a Distribution is discretionary, non-payment will restrict the Bank from making distributions or returning capital on Ordinary Shares and other junior ranked securities. Although Distributions are non-cumulative, the Bank has the option to make up any unpaid Distribution in the form of an optional dividend. Although the cash amount of the Distribution is based on the corporate tax rate applicable to the relevant distribution period, changes in the corporate tax rate have no effect on the equivalent unfranked amount of the Distribution, assuming the potential value of the franking credit is taken into account in full. 101 Professor Handley also identified the factors that contribute to the risk of loss and opportunity for gain in relation to return on the Relevant Securities in the event of an Exchange Event. Those factors include the following: The Relevant Securities rank, in effect, as a preference share in the event of a winding-up, ahead of Ordinary Shares, but behind creditors. If Exchange occurs by Resale or Repurchase, the holder receives a fixed cash amount. If Exchange occurs by Conversion, the holder receives a variable number of Ordinary Shares, a transaction designed to provide the holder with the same dollar value of Ordinary Shares at Conversion, being approximately $202.02, irrespective of the price of Ordinary Shares at that time. Exchange by Resale requires the Bank to arrange a third party purchaser to buy the Relevant Securities at face value, but that may not be possible at the time. Exchange by Repurchase requires the Bank to buy back the Relevant Securities at face value, subject to the approval of APRA. That is dependent on the refinancing capacity of the Bank at the time. Exchange by Conversion provides the holder with Ordinary Shares rather than cash. A holder who wishes to cash out the investment would then need to sell the shares on the market and so would be exposed to movements in the price of Ordinary Shares between the date of Conversion and the date of sale. The second Conversion condition eliminates the exposure that a holder would otherwise have to an Ordinary Share price below a certain level. The Bank chooses the method of Exchange, whether Resale, Conversion or Repurchase. 102 Professor Handley considers that those factors suggest that there is some risk of loss and some opportunity for gain, primarily from possible differences in the value of shares received on Conversion, in relation to return on Exchange. However, the holder will receive a return of $202.02 in shares on Conversion only if the volume weighted average price, which is used in determining the number of shares on Conversion, is equal to the share price at the time. The holder is therefore exposed to movements in the price of Ordinary Shares over the 21 business days up to and including the date of Conversion. Further, a holder who wishes to cash out would have an additional exposure to movements in the price of Ordinary Shares between the date of Conversion and the date when the Ordinary Shares are sold. 103 The holder of Relevant Securities could also dispose of the holder's investment in them prior to an Exchange Event, by selling them on the market. Depending upon the sale price, the holder may make either a capital gain or a capital loss. The highest and lowest closing prices of Relevant Securities from 14 October 2009 to 21 May 2010 were $210.50 and $203.05 respectively. 104 However, Exchange by way of Conversion is not certain, as the Bank has other alternatives available, namely Resale or Repurchase. Accordingly, a holder's exposure to movements in the price of Ordinary Shares around the time of Conversion is but one factor contributing to the risk of loss and opportunity for gain at the time of Exchange. After examining market information concerning the price of Ordinary Shares in the Bank, Professor Handley concluded that, while the holders of Relevant Securities are likely to receive approximately $202.02 on Conversion, there is an exposure to movements in the price of Ordinary Shares in the Bank around the date of Conversion, and in some cases that could lead to a material gain or loss on Conversion. 105 Professor Handley considered that the holders of Relevant Securities are exposed to the same risks of loss and opportunities for gain on the investment, regardless of whether it is in the form of a stapled security, prior to an Assignment Event, or a Preference Share, after an Assignment Event. His reason for that conclusion is that the return is the same, whether it is a distribution in respect of the Note or a dividend in respect of a Preference Share. If Exchange occurs, the holder receives the same fixed cash amount, regardless of whether an Assignment Event has occurred. Similarly, if Exchange occurs by Conversion, the holder receives the same number of Ordinary Shares, regardless of whether an Assignment Event has occurred. 106 Professor Handley concludes that the Relevant Securities have features that expose investors to equity-like risks in that, like ordinary shares, payment of the periodic Distribution is subject to the discretion of the Bank and to payment tests, including availability of profits in the current period. As with ordinary shares, the holders generally rank behind other creditors of the Bank in a winding up, although they rank as a preference share and therefore ahead of the holders of ordinary shares. At the same time, the Relevant Securities have some debt-like features, although those features are qualified by the equity-like aspects. Like senior debt, the periodic distribution is based on an external benchmark interest rate, but the significantly higher margin indicates that the market was of the view that the risk of an investment in the Relevant Securities was greater than the risk of an investment in senior debt of the Bank at the time of issue. Further, like senior debt, the holders of Relevant Securities expect to have their capital repaid at maturity. However, unlike senior debt, repayment may be in the form of a parcel of Ordinary Shares rather than cash. That exposes investors to movements in the price of Ordinary Shares in the Bank around the time of Conversion and beyond, if the holder continues to hold the Ordinary Shares. 107 The opinions of Professor Handley are unremarkable. His conclusions are derived from the nature of the rights attached to the Relevant Securities. Ultimately, Professor Handley is more or less equivocal as to the extent to which the holder of Relevant Securities is exposed to the risk of loss and has opportunity for profit or gain. 108 In any event, the language of s 177EA(17)(a) calls for consideration of the risk of loss or the opportunity for profit from holding Relevant Securities that are borne by or accrue to parties to the scheme, and whether there is any change in those risks and opportunities. I do not consider that this analysis of risk and opportunity in relation to the holding of the Relevant Securities is a relevant matter under s 177EA(17)(a). There is no suggestion that the Taxpayer entered into an arrangement that modified his exposure to the risk of loss or the opportunity for gain arising from the holding of the Relevant Securities. Nor is there any suggestion that the Taxpayer entered into any arrangement that transferred the exposure to risk or the opportunity for gain to a third party. The terms of the Relevant Securities and the rights arising from holding them are stated in the Note Terms and the Preference Share Terms forming part of the Prospectus. While the rights of holders change from time to time, in the circumstances described above, the risk of loss and the opportunity for gain are determined at the time when the Relevant Securities are issued. While the Relevant Securities have some equity-like aspects, the distribution rights are very similar to rights to receipt of interest. However, those rights remain static from the time of issue. I do not consider that the relevant matter points towards a purpose of enabling the holder to obtain an imputation benefit. Nor does it point away from such a purpose. 109 The second matter, under s 177EA(17)(b), is whether the Taxpayer would, in the year of income in which the relevant distribution was made, namely the year ending 30 June 2010, derive a greater benefit from franking credits than would other entities who hold membership interests in the Bank. Section 177EA(19) lists some of the cases in which a taxpayer to whom a distribution flows indirectly receives a greater benefit from franking credits than other entities who hold membership interests. Those circumstances include, but are not limited to, the following: The entity is not an Australian resident. The entity would not be entitled to any tax offset under Division 207 of the 1997 Act because of the distribution. The amount of income tax that would be payable by the entity because of the distribution is less than the tax offset to which the entity would be entitled. The entity is a corporate tax entity but no franking credit arises for the entity as a result of the distribution. The entity is a corporate tax entity but cannot use franking credits received on the distribution to frank distributions to its own members. 110 In the explanatory memorandum, the matters referred to in s 177EA(17)(b) are described as the tax profiles of the parties to the scheme. The Commissioner contends that that description highlights the matters with which s 177EA(17)(b) is concerned, namely the extent to which a taxpayer who enters into a scheme is more able than other shareholders to enjoy franking credits. Only certain investors will be in a position to utilise franking credits fully. Accordingly, a scheme primarily directed at, or primarily taken up by, such investors may point to the existence of the relevant purpose. 111 The Taxpayer points out that the Relevant Securities are available for ownership by any person who can be an owner of Ordinary Shares. There is no impediment to an acquisition of Relevant Securities by non-resident investors after they have been issued. While the proportion of holders of Relevant Securities who are non-resident is low, so is the proportion of holders of Ordinary Shares who are non-resident. The Taxpayer says that those circumstances indicate an absence from the arrangement for issue of the Relevant Securities of any purpose, collateral or otherwise, of enabling any taxpayer to obtain an imputation benefit. 112 It is possible that, because of matters relating to the regulation of public offerings, and the cost of satisfying regulatory bodies in other jurisdictions, the Relevant Securities were not offered to investors other than Australian residents. However, there was no evidence as to why the Relevant Securities were not offered to prospective investors outside Australia. Further, unless the holder can make use of the franking credit, the Relevant Securities are not of as great a value. They are of greater value to an Australian resident, who can take advantage of the franking credit. The fact that holders of Ordinary Shares in the Bank are also mostly Australian residents is equivocal in circumstances where all distributions on Ordinary Shares in the Bank have been fully franked. I consider that the matter described in s 177EA(17)(b) points to the relevant purpose. 113 The third matter, under s 177EA(17)(c), is whether, apart from the scheme, the Bank would have retained the franking credits or would have used the franking credits to pay a franked distribution to another entity holding membership interests in the Bank. The Taxpayer contends that, if the Bank had not issued the Relevant Securities, it would most likely have satisfied its need for Tier 1 capital by an issue of perpetual non-cumulative preference shares. Such securities, from an investor's viewpoint, would have had the same characteristics and attraction. Distributions on such a capital raising would have been franked in the same way and to the same extent as the Relevant Securities. 114 However, even if that were a likely alternative to the Relevant Securities, s 177EA(17)(c) requires a judgment about purpose, having regard to all the relevant circumstances, most of which do not depend upon an alternative circumstance. The Bank implemented a scheme whereby investors obtained an imputation benefit. Their return was calculated by reference to that benefit. The payment was nevertheless deductible to the Bank against its New Zealand income. While the fact that the Bank could otherwise have used the franking credits in a different transaction may be relevant, it is far from determinative. I do not consider that the matter in s 177EA(17)(c) points towards or away from the relevant purpose. 115 The fourth matter, under s 177EA(17)(d), is whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity who holds membership interest in the Bank. That consideration is relevant to the streaming or deflection of franking credits away from shareholders to whom they are of little value. As with s 177EA(17)(c) the circumstance does not point towards the relevant purpose. 116 Section 177EA(17)(e) only applies where the relevant scheme involves the issue of a non-share equity interest to which s 215-10 of the 1997 Act applies. Section 215-10 does not apply. The fifth matter, therefore, has no relevance in the present case. 117 The sixth matter, under s 177EA(17)(f), is whether any consideration paid or given by or on behalf of, or received by or on behalf of, the Taxpayer, in connection with the scheme (for example, the amount of any interest on a loan), was calculated by reference to the imputation benefits to be received by the Taxpayer. The Taxpayer contends that this circumstance is directed to franking credit trading of which there is no element in connection with the issue of the Relevant Securities. Distributions on the Relevant Securities are calculated on an after tax basis. That is to say, the amount distributable is increased if the Distributions are not franked. He says that that is a normal incident of an investment in a security treated for tax purposes as a preference share, by which the investor is assured of the promised preferential rate of return on the securities. That puts the securities in the same position as was formerly occupied by preference shares, the dividends upon which carried an entitlement to a rebate of tax under s 46 of the 1936 Act. He points out that there is no return to the Bank of the value of the imputation credits. 118 However, the return to the holder of the Relevant Securities is calculated by reference to franking credits. The Bank has an obligation to compensate the holder to the extent that franking credits are unavailable, thus ensuring that the total return to the holder of Relevant Securities is always equal to the sum of the Distribution paid together with the financial benefit of the attached franking credit. Thus, the imputation benefit is integral to the return on the Note. The imputation benefit is the very thing that makes an investment in the Relevant Securities commercially acceptable. I consider that this circumstance points towards the relevant purpose, which was not merely incidental. 119 The seventh matter, under s 177EA(17)(g), is whether a deduction is allowable, or a capital loss is incurred, in connection with a distribution that is made or that flows indirectly under the scheme. The Commissioner accepts that there is no deduction available against Australian tax for Distributions made by the New Zealand branch of the Bank. The provision is not concerned with whether a deduction is allowable for, or a capital loss is incurred by, the distribution itself, but with whether the assessable income derived on receipt of the distribution is offset by a loss deductible or allowable to the recipient of the dividend. That is the position with schemes by way of dividend stripping or franking credit trading. There is no such scheme in the present case. This matter therefore tends to point away from the relevant purpose. 120 The eighth matter, described in s 177EA(17)(ga), is whether a distribution that is made under the scheme to the Taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits. The Commissioner relies heavily upon this provision, the construction of which is subject to dispute between the parties. 121 The provision was inserted by Act No 79 of 2007, which also repealed the dividend tainting rules of the 1936 Act, by which dividend rebates were denied in respect of dividends out of untaxed profits. The amendment was part of the replacement of dividend rebates under s 46 by the application of the imputation system to corporate dividends. The Taxpayer contends that the mischief to which both the repealed provisions and this provision were directed is the making of franked distributions out of unrealised or untaxed profits or from shared capital accounts, including tainted capital accounts, as a means of liberating franking credits that would otherwise be trapped in the company because of the absence of distributable profits. 122 The Taxpayer contends that the distributions of the Relevant Securities are not made from unrealised or untaxed profits. Rather, he says, they are paid from the income of the Bank as an expense of deriving profits from which dividends are paid. It is only for the purposes of the 1997 Act, and by virtue of the deeming provisions of the 1997 Act, that the Relevant Securities are treated as equity interests and the interest on the Notes as a non-share dividend. He says that, if it were appropriate to impute the effect of the deeming to the identification of the fund from which the payments are made, the distributions are paid from the taxed trading profits of the Bank. He says that the fact that the Relevant Securities are issued from the New Zealand branch of the Bank does not make them a deposit liability of the New Zealand branch. The liability to pay distributions is not limited to the New Zealand assets of the Bank. Therefore, he says, the distributions are not sourced in New Zealand profits and would not be so sourced, even if they were secured on the New Zealand assets of the Bank, which they are not. He says that the issue of and Distributions on the Relevant Securities are not within the mischief to which s 177EA(17)(ga) is directed. 123 The Commissioner says, on the other hand, that it is wrong to assume that the provision is concerned solely with circumstances that would previously have been addressed by the dividend tainting rules. Rather, he says, the fact that the provision was inserted into s 177EA(17) indicates that that it was intended to be part of the general anti-avoidance scheme contained in s 177EA. 124 The distribution in question is, at least in legal form, a payment of interest on a promissory note. As such, it is not a distribution of, or a payment that is sourced from, profits of the Bank, in the sense in which that expression is used in the context of company law. The reference to profits in the provision must be construed in the context of the provision as a whole, namely as an anti-avoidance provision that applies equally to schemes involving a dividend on shares as well as to schemes in which the distribution is in respect of a non-share dividend, and thus not necessarily involving a distribution of profits in the company law sense. Thus, s 177EA applies, according to s 177EA(12), to a non-share equity interest in the same way as it applies to a membership interest, to an equity holder in the same way as it applies to a member, and to a non-share dividend in the same way as it applies to a distribution. 125 The distribution in question was paid by the New Zealand branch of the Bank, the income of which is exempt from tax in Australia under s 23AH of the 1936 Act. It is accepted by the Taxpayer that the funds used by the Bank's New Zealand branch to pay the distribution on the Notes were earned by the Bank's New Zealand branch. Further, the distributions were not sourced from the Bank's share capital account. In those circumstances, the Commissioner says, the distribution was sourced directly or indirectly from untaxed profits of the Bank. 126 The conclusion to be drawn from this circumstance is that the Bank had a purpose of providing imputation benefits. The imputation system attempts to align companies and their members for tax purposes, but only those members who are the true economic owners of the company, being members who will ultimately take their share of its taxed income. The fact that the Relevant Securities subject the Bank to an expense of deriving profits, from which dividends are paid, to be met from an income source that bears no Australian income tax, indicates that the circumstances of the holders of the Relevant Securities are very far removed from those of the real economic owners of the Bank taking their share of its taxed income. I consider that this circumstance points towards the relevant purpose. 127 The ninth matter, which is described in s 177EA(17)(h), is whether the Distribution in question is equivalent to the receipt by the Taxpayer of interest or of an amount in the nature of, or similar to, interest. The Taxpayer accepts that, in legal form, the Distributions on the Relevant Securities are interest on the Notes component. However, he says, for the purposes of the 1997 Act, they are denied that character and instead, by reference to their economic substance, attributed the character of dividends. In consequence, the Bank is denied a deduction for the interest by s 26-26 and is required to frank the Distributions. Accordingly, he says, the Distribution in question is not in the nature of, or similar to, interest, but is instead a non-share dividend. 128 The payment of the Distribution is a payment of legal form interest, notwithstanding that it is deemed to be a frankable distribution by reason of the operation of other provisions of the tax legislation. The fact that the payment has a particular character for some purposes does not obviate the need to characterise the payment for the purposes of s 177EA(17)(h). There is no reason why a payment that is deemed to be a distribution on non-share equity, by the operation of Division 974, could not also be treated as being equivalent to a payment of interest for the purposes of s 177EA(17)(h). 129 The nature of the payment received by the Taxpayer that is in question can be described as being similar to interest in numerous respects. The payments are regular and in a fixed amount. They are paid in respect of a specific outlay which, as a matter of commerce, the holders of the Relevant Securities expect to be returned to them either in cash or in kind. The rate of the Distribution is variable but is not dependent in any way upon the fortunes of the Bank. Rather, any variation is the result of a variation in the benchmark interest rate, not in the profitability of the Bank. The receipt of a Distribution in question by the Taxpayer is equivalent to the receipt of interest or of an amount in the nature of or similar to interest. I consider that this circumstance points towards the existence of the relevant purpose. 130 The tenth matter, under s 117EA(17)(i), is the period for which the Taxpayer held the Relevant Securities. There is no arrangement whereby the Relevant Securities should be held only briefly. They are held until sale and are not redeemable. I do not consider that this circumstance points to the relevant purpose, but away from it. 131 Finally, under s 177EA(17)(j), any of the matters referred to in s 177D(b)(i) to s 177D(b)(viii) is a relevant circumstance. Many of those matters have no application beyond the extent to which those circumstances have already been taken into account, having regard to the other matters referred to in s 177EA(17). 132 Section 177D(b)(ii) refers to the form and substance of the scheme. The Distributions on the Notes take the form of frankable distributions but, in substance, represent a deductible expense to the Bank. The substance of what they achieve for the Bank, namely deductible and frankable capital, points towards the existence of the relevant purpose. 133 Section 177D(b)(iv) refers to the result in relation to the operation of the tax legislation that, but for Part IVA, would be achieved by the scheme. But for the operation of s 177EA, the Relevant Securities would deliver imputation benefits on deductible interest payments. The Taxpayer says that the result achieved in relation to the operation of the tax legislation is precisely the result mandated by the legislation. He says that the tax character attributed to the Relevant Securities, and to Distributions upon them, is that directed by the deeming effect of Division 974. That is to say, the Bank is denied a deduction for the interest on the Notes and is obliged to attach franking credits to the payments as non-share dividends, or else it would face losing the imputation credits. The legislation, in accordance with the policy evinced in s 974-5, treats the Relevant Securities according to their economic substance, which is equivalent to preference shares. I consider that this matter points towards the relevant purpose. 134 Having regard to all the relevant matters and circumstances, some of which do not point towards the relevant purpose, I consider, on balance, that overall they point towards the purpose of enabling holders of Relevant Securities, such as the Taxpayer, to obtain an imputation benefit. That is a basic and fundamentally important aspect of the terms of the Notes. The characteristics of the Relevant Securities are much more like those of debt than of equity. By issuing the Relevant Securities in New Zealand, the Bank was able to achieve the result that it obtained a deduction in New Zealand in respect of the Distributions on the Relevant Securities, but had the advantage, in terms of cost, of offering Australian residents the imputation benefit. THE COMMISSIONER'S DETERMINATION 135 The second question only arises if the relevant purpose is found. For the reasons indicated above, I have concluded that a purpose of the Bank in carrying out the scheme involving the issue of the Relevant Securities, not being merely an incidental purpose, was to enable the holders, including the Taxpayer, to obtain an imputation benefit. Accordingly, it is necessary to consider the determination made by the Commissioner under s 177EA(5). 136 The Taxpayer says that the combined effect of s 14ZZO(b)(iii) and s 14ZZP of the Administration Act is that the Court may set aside the Commissioner's determination if it is demonstrated that the determination should not have been made or should have been made differently. He says that an exercise of discretion by the Commissioner, such as is involved in making a determination under s 177EA(5), may be set aside where, inter alia, he fails to take into account a relevant consideration or acts upon a wrong principle. In addition, the taxpayer says, where the result reached by the Commissioner is unreasonable, the Court may infer that the Commissioner's discretion has miscarried in one of those two respects. 137 The Taxpayer says that the Commissioner failed to have regard to a core policy underpinning s 177EA, when it came to the exercise of the discretion to make a determination under s 177EA(5)(b). He says that that policy is that there is a level of wastage of franking credits intended to result from their distribution to persons who cannot use them. However, he says, the Commissioner appears to have given no consideration to that policy, in that there is no reference to that policy in the Commissioner's reasons for his decision. 138 The Taxpayer says that the unreasonableness of the result reached by the Commissioner's exercise of the discretion gives rise to an inference that the discretion miscarried in a fundamental respect. He says that the determination was unreasonable on three bases. 139 The first basis is that the determination is inconsistent with the intended operation of the discretion. The explanatory memorandum stated that, where there are numerous shareholders, it will generally be appropriate to debit the company's franking account, namely, make a determination under s 177EA(5)(a). Only if that action will not effectively counteract the scheme will it be more appropriate to deny the shareholders the franking credit benefit directly by making a determination under s 177EA(5)(b). He says that, in the present case, since there are 33,000 holders of Relevant Securities, the effect of the scheme would be wholly counteracted by a reduction in the Bank's franking account. 140 The second basis is that the determination is contrary to the policy that franking credits will be subject to a level of wastage. The exercise of discretion by the Commissioner in the present case ensures that 100 percent of the franking credits referable to Distributions under the Relevant Securities are wasted, because the Bank is required to make a deduction in its franking account balance but no holder of a Relevant Securities will be allowed to receive the benefit of the credits. In contrast, a determination under s 177EA(5)(a), by reference to the proportion of Ordinary Shares in the Bank held by non-residents, would ensure that the level of wastage intended by the Parliament would be maintained. 141 The third basis on which the Taxpayer says that the exercise of discretion was unreasonable is that the denial to individual holders of a franking credit is inconsistent with the fact that the holders were not parties to the scheme and are not alleged to have had the proscribed purpose. 142 The Taxpayer says that the absence of any consideration in the Commissioner's reasons for his exercise of the discretion to the various matters identified in the explanatory memorandum, including the extent of the detriment suffered by the Revenue as a result of the scheme and the possibility of denying a franking credit on a partial basis only, reinforces the contention that the Commissioner considered the discretion to be freestanding once the conditions for its exercise were enlivened. They say that that approach to the exercise of the discretion is fundamentally wrong. 143 I do not consider that there is any substance in the Taxpayer's complaint. Once the preconditions to the making of a determination under s 177EA(5) are found to exist, the Commissioner may make a determination either under s 177EA(5)(a) or under s 177EA(5)(b) as he sees fit. A taxpayer's remedy, if dissatisfied with that determination, is to show that the preconditions did not exist, namely, in the present case, that the purpose referred to in s 177EA(3)(e) was not present. However, once such a purpose is found, a taxpayer cannot escape the consequences by showing that the Bank had some other purpose that the Commissioner failed to take into account or that the Commissioner failed to take some other consideration, such as the policy of the 1997 Act or the 1936 Act, into account when making a determination. 144 In any event, the Taxpayer's complaint about the exercise of discretion is based upon a series of false suppositions. Clearly enough, the purpose for which a power is conferred is a relevant consideration in the exercise of the power. However, the terms of the explanatory memorandum published in connection with the legislative provision that created the power are not a mandatory relevant consideration in the exercise of the power. So long as the Commissioner has properly considered the purpose for which the power conferred by s 177EA(5) was conferred, that is sufficient. 145 The Taxpayer's contentions falsely elevate a supposition of the explanatory memorandum, namely that there will ordinarily be a wastage of franking credits resulting from their distribution to persons who cannot use them, into a statement of policy. Such wastage will often occur. However, there is a specific power conferred by s 177EA(5)(b) to deny imputation benefits to all recipients. Where that power is exercised, such wastage will not occur. There is no legislative or other policy that required that there be some wastage. 146 The decision to make a determination under s 177EA(5) may depend upon the Commissioner's assessment of whether the determination would effectively counteract the relevant scheme. However, the fact that the relevant scheme might also have been counteracted by a determination under s 177EA(5)(a) does not demonstrate that there was any error in the making of a determination under s 177EA(5)(b). The Taxpayer's contentions impermissibly elevate the explanatory memorandum about the generic use of the power into a fetter on its exercise. 147 I am not persuaded that there was any error on the part of the Commissioner in choosing to exercise the discretion conferred by s 177EA(5)(b) rather than that conferred by s 177EA(5)(a), once it was established that the prerequisites for the exercise of the discretion under s 177EA(5) had been established. That prerequisite was established once a conclusion was reached that the purpose referred to in s 177EA(3)(e) was present. CONCLUSION 148 The appeal must be dismissed. The Taxpayer should pay the Commissioner's costs. I certify that the preceding one hundred and forty-eight (148) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 11 March 2011