Electricity Supply Industry Superannuation (Qld) Ltd v Deputy Commissioner of Taxation [2003] FCAFC 138 (25 June 2003)

Last Updated: 25 June 2003

FEDERAL COURT OF AUSTRALIA

Electricity Supply Industry Superannuation (Qld) Ltd v Deputy Commissioner of Taxation [2003] FCAFC 138

INCOME TAX - appeal - anti-avoidance - taxpayer was a member of a trust - trust established to maximise after tax returns to its members - taxpayer could require trustee to distribute dividend income from the trust in a particular way - trustee "streamed" franked dividends to taxpayer so that it could take advantage of franking credit benefits - whether s 177EA of the Income Tax Assessment Act 1936 (Cth) applied to the arrangement

Electricity Act 1976 (Qld)

Electricity Act 1994 (Qld)

Taxation Administration Act 1953 (Cth) s 13(c)(1), 14(a), 14(b), 14ZAAA, 14ZAF, 14ZAF(2), 14ZAM, 14ZAS(1), 14ZAZA, 14ZZ

Income Tax Assessment Act 1936 (Cth) Part 1VA, 177A(1), 177A(3), 177(13)(a), 177EA, 177EA(3), 177EA(3)(e), 177EA(4), 177EA(5), 177EA(5)(b), 177EA(13)(a), 177EA, 13(c)(i)

Kent v The Vessel "Maria Luisa" as Surrogate for the Vessels "Monika" and "Boston Bay" [2003] FCAFC 93

Payne v Federal Commissioner of Taxation (1994) ATC 4191

ELECTRICITY SUPPLY INDUSTRY SUPERANNUATION (QLD) LTD v DEPUTY COMMISSIONER OF TAXATION

Q 172 OF 2002

ELECTRICITY SUPPLY INDUSTRY SUPERANNUATION (QLD) LTD v DEPUTY COMMISSIONER OF TAXATION

Q 189 OF 2002

SPENDER, HILL & HELY JJ

25 JUNE 2003

SYDNEY BY VIDEO LINK (HEARD IN BRISBANE)

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	Q 172 OF 2002

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ELECTRICITY SUPPLY INDUSTRY SUPERANNUATION (QLD) LTD ACN 069 634 439 APPELLANT
AND:	DEPUTY COMMISSIONER OF TAXATION RESPONDENT
	Q 189 OF 2002
BETWEEN:	ELECTRICITY SUPPLY INDUSTRY SUPERANNUATION (QLD) LTD ACN 069 634 439 APPELLANT
AND:	DEPUTY COMMISSIONER OF TAXATION RESPONDENT
JUDGES:	SPENDER, HILL & HELY JJ
DATE:	25 JUNE 2003
WHERE MADE:	BRISBANE

THE COURT ORDERS THAT:

1. The appeal is dismissed with costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	Q 172 OF 2002

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	ELECTRICITY SUPPLY INDUSTRY SUPERANNUATION (QLD) LTD ACN 069 634 439 APPELLANT
AND:	DEPUTY COMMISSIONER OF TAXATION RESPONDENT

	Q 189 OF 2002
BETWEEN:	ELECTRICITY SUPPLY INDUSTRY SUPERANNUATION (QLD) LTD ACN 069 634 439 APPELLANT
AND:	DEPUTY COMMISSIONER OF TAXATION RESPONDENT

JUDGES:	SPENDER, HILL & HELY JJ
DATE:	25 JUNE 2003
PLACE:	BRISBANE

REASONS FOR JUDGMENT

THE COURT:

1 The Queensland Electricity Supply Industry Superannuation Board ("the QESISB") was established by the Electricity Act 1976 (Qld) to manage and superintend the Queensland Electricity Supply Industry Employees' Superannuation Scheme ("the QESIESS") for the purpose of providing superannuation benefits to persons employed in the electricity supply industry and their dependents. The Electricity Act 1976 (Qld) was repealed by the Electricity Act 1994 (Qld) which provided for an approved industry superannuation scheme. Since 1 July 1995 the approved scheme has been Electricity Supply Industry (ESI) Super, which is a continuation of QESIESS. The appellant ("ESI") is the trustee of ESI Super, and is the successor to the QESISB.

2 On 14 January 1999 ESI sought a private ruling from the respondent ("the Commissioner") under s 14ZAF of the Taxation Administration Act 1953 (Cth) ("the TAA") in relation to an arrangement in respect of the income years 30 June 1997-30 June 1999. On 15 December 2000 ESI applied to the Commissioner for a ruling in respect of the income year ended 30 June 2000 in respect of the same arrangement.

3 An "arrangement" for the purposes of s 14ZAF includes a scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking: TAA s 14ZAF(2); s 14ZAAA. The set of facts which constituted the "arrangement" in respect of which the private ruling was sought were described in an opinion of Counsel dated 14 January 1999 under the heading "Full Description of Facts", which was attached to and formed part of the application dated 14 January 1999. The Commissioner sought further information (presumably pursuant to TAA, s 14ZAM) which was supplied to him by documents forwarded under cover of a letter dated 14 May 2000 from ESI's accountants.

4 The notice of private ruling (to be referred to hereafter) identified the arrangement to which the private ruling relates (TAA, s 14ZAS(1)) as "the facts as identified in your letters dated 14 January 1999 and 14 May 2000" ("the ruling application materials"). The essential facts as disclosed by the ruling application materials are as summarised hereunder.

The arrangement for the purposes of s 14ZAF of TAA

5 The Queensland Investment Corporation Trust ("the QT"), under its then name of Queensland Treasury Corporation Investment Trust, was constituted by a Trust Deed made on 30 June 1989 ("the Deed"). The original trustee was Queensland Treasury Corporation. On 1 July 1991 the original trustee was replaced by the Queensland Investment Corporation ("QIC"). The trustee of the QT for the time being is referred to hereafter as "the QT trustee".

6 Under the Deed, the beneficial entitlement of a member to the Trust Fund was measured by the amount standing to the credit of the Member's Account maintained pursuant to cl 3 of the Deed. The "Trust Fund" consisted of all the cash, investments and property for the time being held by the Trustee upon the trusts set out in the Deed (cl 1.1).

7 Under the Deed, the QT trustee was obliged to credit net annual receipts and accretions to capital to various corpus and income accounts (cl 11). The income accounts included a Franked Dividend Income Account (cl 11.7.1) and an Unfranked Dividend Income Account (cl 11.7.2) as well as other accounts. By cl 15 the total amount so credited was required to be apportioned among the members proportionately to each member's investment in the QT. The QT trustee had the power to allocate from which (income or corpus accretion) accounts a member's entitlement was to be satisfied (cl 15.2; 15.5). Members were entitled to advise the QT trustee of their preferences as to the accounts to be appropriated toward their distribution entitlements. So far as practicable the QT trustee was obliged to exercise its allocation powers in accordance with the member's notified wishes (cl 15.8).

8 The QT was so structured that one of the strategies open to the QT trustee was to retain in the Franked Dividend Income Account franked dividends received by it from companies whose shares formed part of the Trust Fund, and to stream those dividends to those of the members who would thereby obtain a tax advantage. Because some members of the QT were exempt from income tax, they would not benefit from receiving a distribution from the Franked Dividend Income Account, as opposed to some other income account.

9 Prior to 1990 QESISB invested the assets of QESIESS under the management of its own officers and of funds managers who were paid management fees. On 27 March 1990 the Queensland Minister for Resource Industries received a written proposal from the Treasurer and Minister for Regional Development for Queensland that the investment of the surplus funds administered by QESISB should be undertaken by the Queensland Treasury Corporation. Under the heading "Reasons for Proposal", there appeared inter alia, the following:

"(vii) Tax Advantages of OTC Investment Trust

The QTC invests funds both for Superannuation schemes which are liable to pay tax (e.g. GOSUPER, State Service Super (employee contributions), Police Super, and Parliamentary Contributory Super) and also for organisations which are not liable to pay tax (e.g. Workers' Compensation, State Service Super (employer contributions), and general Government cash balances).

This has provided a unique opportunity to legally reduce substantially (and in less than two years eliminate completely) the income tax obligations of the taxpaying Super funds.

By placing all the funds in a single Trust the various categories of investment earnings can be `streamed' to different fund clients in the most tax-effective way. For example, interest earnings which afford no tax shelter are streamed to the non-taxpaying funds whilst dividends carrying imputation credits are attributed to the tax-paying funds.

This is a major benefit which could be provided by the QTC to the QESISB and the LGSB and is not otherwise available to them."

The submission recommended the investment on the basis of arguments summarised as follows:

"(i) The QTC was set up to invest Government and semi-Government superannuation funds. It is a contradiction of this concept to have two Boards investing separately.

(ii) There is potential for Companies Code conflicts between the QTC and the other Funds' equity investments.

(iii) The `checks and balances' so crucial for semi-Government financial bodies are in place for the QTC but not the QESISB and LGSB. Recent State Bank of Victoria developments highlight the importance of this.

(iv) Investment is a complex, sophisticated, specialist function. It needs professional specialists, not an unsupervised `one man band'.

(v) Investment by the QTC would involve lower cost, because it does not pay fees to outside managers for equity or fixed interest investments, and provides economies of scale.

(vi) QTC property investments are large and high-quality whereas QESISB and LGSB are in only small, lower-quality investments. This is another major advantage of size.

(vii) The QTC provides a major tax advantage because it is able to mix taxed and non-taxed funds and stream the tax benefits for maximum advantage."

10 On 28 March 1990 the Minister for Resource Industries accepted the proposal.

11 On 14 June 1990, the Governor in Council revoked all existing approvals authorising investment of moneys by QESISB for the QESIESS, and authorised QESISB on a continuing basis, to invest the moneys held by it as trustee of QESIESS in the QT by becoming a member of that Trust and lodging such moneys with the QT in accordance with that Deed.

12 As and from 22 June 1990 QESIESS became a member of the QT and subscribed to the Trust Fund to constitute its Member's Account. The facts referred to in the opinion of Counsel earlier referred to include a statement that QESISB "transferred the bulk of its assets to QIC as trustee for QICIT in return for units", but the composition of those assets does not appear from the ruling materials.

13 As indicated above, on and from 1 July 1995 ESI succeeded to the rights and obligations of QESISB in relation to ESI Super. The funds subscribed to the QT prior to the appointment of ESI in 1995 remain invested in the QT and subject to the terms of the Deed.

14 Monies contributed to the QT were invested by the QT trustee in all major asset classes; specifically cash, Australian fixed interest, Australian equities, property, overseas equities and overseas fixed interest.

15 The balance of the investment by ESI, and its predecessor QESISB in the QT increased from $414 million at 30 June 1992 to $1084 million at 30 June 1998.

16 For the year ended 30 June 1997 the appellant received a total distribution from the QT of $158,185,176.92. On 30 June 1997 the QT trustee determined that 9.761 per cent of the fully franked and partly franked dividends standing to the credit of the Franked Dividend Income Account for the year ended 30 June 1997 should be distributed to the appellant. The appellant's percentage interest in the trust fund was 6.2 per cent. The appellant received an allocation of franked dividends of $16,908,324.85 which entitled it to a tax credit or rebate of $8,783,209.72.

17 If the QT trustee had made no specific allocation pursuant to cl 15.2 of the Deed, then although the appellant would have received the same overall cash distribution, it would have received $10,881,115.42 of fully and partly franked dividends which would give rise to a tax rebate of $5,652,311.48.

18 The franked dividends included in the distribution to the appellant between 13 May 1997 and 30 June 1997 gave rise to rebates of $57,101.85, whereas had the QT trustee not made its allocation under cl 15.2 of the Deed, the default pro-rata entitlement of the appellant would have been $20,681.61. The significance of those dates appears from the ruling given in response to Question 1 referred to hereunder.

19 The appellant had not given any notice to the QT trustee pursuant to cl 15.8 of the Deed in relation to the 1997 income year.

20 On 29 June 1998, the appellant gave notice to the QT trustee in the following term:

"I refer to our recent discussions regarding the 1997/98 distribution to be undertaken by QICIT and issue this notice to the Trustee in accordance with clause 15.8 of the QICIT Trust Deed.

The Fund's preference for the 1997/98 financial year is to share in the Income and Corpus accounts of QICIT (including the franked dividend income account) to the same extent as has been the practice in prior years.

Your assistance is therefore sought to advise the Trustee of this notice for its consideration in the determination of Electricity Supply Industry Superannuation Fund's entitlement to amounts standing to the credit of the Income and Corpus accounts of QICIT in respect of the 1997/98 distribution."

21 In the year ended 30 June 1998 the appellant received a total distribution from the QT of $108,745,523.38. On 30 June 1998 the QT trustee determined that 7.011 per cent of the fully franked and partly franked dividends standing to the credit of the Franked Dividend Income Account for the year ended 30 June 1998 should be distributed to the appellant. The appellant's percentage interest in the trust fund was 5.8 per cent. The appellant received an allocation of franked dividends of $13,687,160.31 which entitled it to a tax credit or rebate of $6,983,308.75.

22 If the QT trustee had made no specific allocation pursuant to cl 15.2 of the Deed, then although the appellant would have received the same overall cash distribution, it would have received fully and partly franked dividends of $11,543,599.90 which would give rise to a rebate of $5,889,645.50.

23 On 25 June 1999, the appellant gave notice to the QT trustee in the following terms:

"I refer to our recent discussions regarding the 1998/99 distribution to be undertaken by QICIT and issue this notice to the Trustee in accordance with clause 15.8 of the QICIT Trust Deed.

The Fund's preference for the 1998/99 financial year is to share in the Income and Corpus accounts of QICIT (including the franked dividend income account) to the same extent as has been the practice in prior years, except that I ask you to take into consideration that the Fund has net capital losses carried forward of $6,014,155.

Your assistance is therefore sought to advise the Trustee of this notice for its consideration in the determination of Electricity Supply Industry Superannuation Fund's entitlement to amounts standing to the credit of the Income and Corpus accounts of QICIT in respect of the 1998/99 distribution."

24 The appellant did not ask the Commissioner to assume, and the Commissioner did not state that he assumed, that any notice under cl 15.8 of the Deed would be given in relation to the income year 2000.

25 For the purpose of the rulings in issue, the Commissioner made the following assumptions:

(a) the QT holds no shares in unlisted companies; and

(b) for the 1999 and 2000 years of income a greater than pro-rata allocation of franked dividends will be allocated to the appellant by the QT trustee.

26 The only information contained in the ruling application materials concerning events after the QESISB's June 1990 decision to invest in the QT is the annual distribution request, resolutions and advices.

The ruling

27 ESI put six questions to the Commissioner to be answered by way of ruling. Those questions and the Commissioner's ruling in relation to them, are as follows:

"1. Can section 177EA of the 1936 Act apply to a franked distribution made on 30 June 1997 by the trustee of QTrust to ESuper that relates to the allocation of dividends declared or paid to it by a company before 13 May 1997?

ANSWER

No. The application of sec 177EA is limited to the declaration of dividends or distribution made after 7.30 pm by legal time in the Australian Capital Territory on 13 May 1997. It also has no application to dividends included in distributions that were declared prior to the operative date: vide particulars of application contained in sec 160 AQCNB.

2. Does section 177EA of the 1936 Act apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution or a specified part of a distribution made by the trustee of QTrust to ESuper in the 1997 year of income?

ANSWER

Yes. For the year ended 30 June 1997, the Commissioner can make a determination limiting the application of sec 177EA to the franking credits, made after 13 May 1997, that exceeded the notional pro rata franking credits by $36,420 ($57,101 less $20,681).

3. Does section 177EA of the 1936 Act apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution or a specified part of a distribution made by the trustee of QTrust to ESuper in the 1998 year of income?

ANSWER

Yes. For the year ended 30 June 1998, the Commissioner can make a determination applying sec 177EA to the franking credits that exceeded the notional pro rata franking credits by $1,093,663 ($6,983,308 less $5,889,645).

4. If the trustee of QTrust exercises its power of allocation pursuant to clause 15.2 of the deed to allocate more income that is attributable to franked dividends for the 1999 year of income to ESuper than would be attributed to it if the power were not exercised, will section 177EA of the 1936 Act apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution or a specified part of a distribution made by the trustee of QTrust to ESuper in the 1999 year of income?

ANSWER

Yes. The Commissioner can make a determination applying sec 177EA to the franking credits that will exceed the notional pro rata franking credits.

5. If the trustee of QTrust exercises its power of allocation pursuant to clause 15.2 of the deed to allocate more income that is attributable to franked dividends for the 2000 year of income to ESuper than would be attributed to it if the power were not exercised, will section 177EA of the 1936 Act apply to allow the Commissioner to make a determination that no franking credit benefit is to arise in respect of a distribution or a specified part of a distribution made by the trustee of QTrust to ESuper in the 2000 year of income?

ANSWER

Yes. The Commissioner can make a determination applying sec 177EA to the franking credits that will exceed the notional pro rata franking credits.

6. If the answers to any of questions 2, 3, 4 or 5 is yes, will the Commissioner determine that no franking credit benefit arises only in respect of that part of a franked distribution that exceeds a notional pro rata franked distribution based on ESuper's unitholding?

ANSWER

Yes."

28 It is only questions 2-6, and the ruling in relation to them, which are relevant to the present proceedings. "ESuper" is a reference to ESI.

29 ESI was dissatisfied with the private ruling and lodged a notice of objection against it (TAA, s 14ZAZA). The objection was disallowed by the Commissioner. ESI filed an appeal to this Court against the Commissioner's objection decision on the basis that it is an appellable objection decision for the purposes of s 14ZZ of the TAA. That appeal was dismissed by the primary judge. ESI appeals to the Full Court from the judgment of the primary judge given on 17 October 2002. That appeal is Q 172 of 2002. On 20 November 2002 the primary judge made various costs orders in consequence of the dismissal of the substantive application. ESI also appeals from the order for costs made against it on that occasion. That appeal is Q 189 of 2002. The same grounds of appeal are relied upon. No separate submissions were put in relation to Q 189 of 2002, and the fate of that appeal follows the result in Q 172 of 2002.

Part 1VA of TAA

30 Section 177EA is an anti-avoidance provision in Part 1VA of the Income Tax Assessment Act 1936 (Cth) ("the ITAA") which deals with schemes to reduce income tax. The section is directed to franking credit trading and franking credit streaming schemes, where one of the purposes is to obtain a franking credit benefit. The section only applies where the elements specified in s 177EA(3) exist. That section provides:

"177EA(3) Application of section. This section applies if:

(a) there is a scheme for a disposition of shares, or an interest in shares, in a company; and

(b) a frankable dividend has been paid, or is payable or expected to be payable, in respect of the shares or a distribution has been paid, or is payable or expected to be payable, in respect of the interest, as the case may be; and

(c) the dividend or distribution was, or is expected to be, franked; and

(d) except for this section, a person (the relevant taxpayer) would receive, or could reasonably be expected to receive, franking credit benefits as a result of the dividend or distribution; and

(e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain a franking credit benefit."

31 Relevant definitions are found in subsections (13) and (14):

"177EA(13) Meaning of interest in shares. A person has an interest in shares if:

(a) the person has any legal or equitable interest in the shares; or

(b) the person is a partner in a partnership and:

(i) the assets of the partnership include, or will include, the shares; or

(ii) the partnership derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from dividends paid on the shares; or

(c) the person is a beneficiary of a trust (including a potential beneficiary of a discretionary trust) and:

(i) the shares form, or will form, part of the trust estate; or

(ii) the trust derives, or will derive, income indirectly through interposed companies, trusts or partnerships, from dividends paid on the shares.

177EA(14) Meaning of scheme for a disposition. A scheme for a disposition of shares or an interest in shares includes, but is not limited to, a scheme that involves any of the following:

(a) issuing the shares or creating the interest;

(b) entering into any contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the shares or interest;

(c) creating, varying or revoking a trust in relation to the shares or interest;

(d) creating, altering or extinguishing a right, power or liability attaching to, or otherwise relating to, the shares or interest;

(e) substantially altering any of the risks of loss, or opportunities for profit or gain, involved in holding or owning the shares or having the interest;

(f) the shares or interest beginning to be included, or ceasing to be included, in any of the insurance funds of a life assurance company."

32 "Scheme" means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct.

(s 177A(1)). A scheme may be a unilateral one (s 177A(3)).

33 The operative provision of s 177EA is subsection (5):

"177EA(5) Commissioner to determine franking debit or deny franking credit.

The Commissioner may make, in writing, either of the following determinations:

(a) if the company is a party to the scheme, a determination that a franking debit or exempting debit of the company arises in respect of each dividend paid to the relevant taxpayer;

(b) a determination that no franking credit benefit is to arise in respect of a dividend or a specified part of a dividend paid, or in respect of a distribution or a specified part of a distribution made, to the relevant taxpayer.

A determination does not form part of an assessment."

34 Central to the operation of s 177EA is the identification of a "scheme for a disposition of shares", or a "scheme for a disposition of ... an interest in shares" to which the section applies. If there is a scheme for a disposition of shares, or of an interest in shares, to which the section applies, then the Commissioner can make a determination to create a franking debit of the company in which those shares are held, or to disallow any franking credit benefit in respect of a dividend on those shares, or a distribution in respect of the interest in those shares.

ESI's interest in shares

35 By virtue of its membership of QT, ESI had an equitable interest in all of the assets of the QT held for the time being by the QT trustee and forming part of the Trust Fund notwithstanding provisions in the Deed (eg cl 2.6) which denied any entitlement in a member to require the transfer to him of any of the investments comprised in the Trust Fund. That is so both under the general law (see the cases referred to in Kent v The Vessel "Maria Luisa" as Surrogate for the Vessels "Monika" and "Boston Bay" [2003] FCAFC 93 at [58] and by virtue of the deeming provisions of s 177EA(13)).

36 Thus when QESIESS became a member of QT there was a disposition to it of interests in the Trust Fund measured in accordance with cl 3.1 of the Deed. To the extent that the Trust Fund included shares in companies, there was a disposition of an interest in these shares to QESIESS: cl 3.1, s 177EA(13)(a), 13(c)(i) and ss 14(a), (b). As the QT trustee acquired shares in companies thereafter as additions to the Trust Fund there was a disposition of an interest in those shares in favour of the members of the QT including QESIESS/ESI. The disposition of that interest arose by virtue of the circumstance that the shares become an asset of the QT, of which QESIESS/ESI was a member or beneficiary: cl 3.1, s 177EA(13)(a) and 13(c)(1) and ss 14(a), (b).

37 As the primary judge said, the interests in the Trust Fund were not static. The interests in shares varied from time to time, depending upon the mix of the investments in the Trust Fund and the identity of the companies, the shares in which were held at any one time. Membership of the QT ensured that changes in ownership of shares held by the QT trustee translated into changes in the interest in those shares held by each member. This finding was not challenged.

Was there a scheme for the disposition of shares, or an interest in shares in a company?: s 177EA(3)(a)

38 At first instance the Commissioner submitted that the scheme was one for a disposition of an interest in a share which comprised the following steps:

"(a) the establishment of the QT on the terms of the Deed, in particular Recital A, clauses 3.1, 11.7, 15.2, 15.5 and 15.8 and its acquisition of shares as assets of the QT;

(b) the acquisition by the Trustee of QESIESS/ESI Super of [membership interests under clause 3.1 of the Deed] in the QT in the knowledge that:

(i) the assets of the QT included shares in public companies;

(ii) the specified provisions of the Deed permitted franked dividend streaming to be made to taxpaying entities such as ESI Super, while streaming income carrying no tax credits to non-tax paying entities; and

(c) the implementation of that scheme of disposition on an annual basis by the Trustee, on behalf of ESI Super, giving notice to the trustee of the QT pursuant to clause 15.8 of the Deed."

39 The primary judge found that the Commissioner was correct in his identification of a scheme for the disposition of an interest in a share involving the steps which the Commissioner particularised. The scheme may have been better expressed if it commenced with par (b), but this is a minor and immaterial criticism. His Honour held that a scheme for the purposes of s 177A(1) is not something which is limited to a particular point in time and to particular persons or participants at that point in time. Giving effect to a scheme over a period of time, during which the participants may change from time to time, is a course of action or conduct, which is itself a scheme within the definition in s 177A(1). The scheme was intended to operate over time, and involved the annual distribution of income earned in a financial year by streaming the income to members, including the streaming of franking credit benefits, on the basis of the member being best able to utilise the income streamed to it in a tax effective way. A fair reading of his Honour's judgment is that the scheme was one for the disposition of an interest in the shares which from time to time were assets of the QT Trust.

40 The primary judge observed that in each year after it became a member of the QT, QESIESS/ESI Super received dividends from the Franked Dividend Income Account pursuant to determinations made under clauses 15.2 and 15.5. The letters of 29 June 1998 and 25 June 1999 were notifications given by ESI pursuant to its right to do so under cl 15.8 of the Deed. The QT trustee was obliged to act in conformity with the notifications if it was of the opinion that it was practical to do so. The giving of the notices was an attempt by ESI to stream to itself the dividends from the Franked Dividend Income Account in an amount greater than its pro rata entitlement to the aggregate income in all accounts of the QT for that year and thereby to obtain a franking credit benefit greater than it would obtain on a pro rata distribution of the account on the basis of the amounts credited to each Members' Accrual Account.

41 On the hearing of the appeal, Counsel for ESI accepted that in 1990 there was a scheme for a disposition of an interest in the shares then forming part of the Trust Fund, but contended that on the facts appearing in the ruling materials, the only shares which could properly be the subject of a determination under s 177EA(5) in the ruling years are the shares (if any) which were assets of the QT both before QESISB made its investment in the QT in June 1990, and in the ruling years. In ESI's submission, subsequently acquired shares, that is shares acquired by the QT trustee after June 1990, were acquired by the QT trustee in the course of the management of the investment portfolio of the QT, in the exercise of its investment skills and pursuant to its power of management of the trust assets. ESI played no role in the selection or acquisition of the subsequently acquired shares. The decision of the QT to invest in the subsequently acquired shares was not a "scheme for a disposition of an interest" in respect of which it could be said that any party had a (non-incidental) purpose of conferring franking benefits on ESI.

42 ESI accepts, correctly, that there was a scheme for a disposition of an interest in shares in 1990, but contends that the only shares the subject of that scheme were shares which formed part of the trust fund at that time. Whilst it is true to say that the only shares in which ESI acquired an interest upon it becoming a member of the Fund were shares which then formed part of the Trust Fund, both the original plan, scheme or proposal, and the course of conduct by which it was carried into effect, were broader than that.

43 The Trust Deed contemplated that further cash might be vested in the QT trustee from time to time (Recital E), and the Trust Fund was defined so as to include the investments for the time being held on the trusts of the Deed. The scheme was not spent at the point at which QESIESS became a member of the Trust Fund in 1990. The scheme was ongoing in its nature and was, both according to its terms and as carried into effect, a scheme for a disposition of an interest in shares in those companies which were from time to time held on the terms of the trust by the QT trustee. It does not matter that after the acquired shares were not identified or identifiable at the point at which ESI became a member of the QT trust.

44 Section 177EA(5) can only operate on a scheme for a disposition of an interest in shares which meets the purpose test laid down in s 177EA(3)(e). Section 177EA(4) provides that it is not to be concluded that a person entered into or carried out a scheme for the purpose of enabling the relevant taxpayer to obtain a franking credit benefit merely because the person acquired an interest in shares in the company.

45 Here ESI did not merely acquire an interest in shares in the companies whose shares were part of the Trust Fund of the QT Trust. ESI acquired its interest by virtue of its membership of the QT Trust which was both constituted and administered on the basis that dividends declared on the shares forming part of the Trust Fund would be streamed by the QT trustee in favour of taxpaying members of the QT Trust in a proportion greater than their membership interest. As the primary judge found, at the time QESIESS became a member of the QT Trust, and thereafter, QESIESS/ESI objectively had an expectation engendered by the terms of the QT Trust and the manner of its implementation, that it and other members similarly placed, would receive a disproportionate distribution of franked dividends to other members whose position was such that they would receive no benefit from a distribution of franked dividends.

46 ESI submits that it is not sufficient to attract the operation of s 177EA that there be a scheme for a disposition of an interest in one parcel of shares and a franking credit benefit in respect of an interest in another parcel of shares. For the section to apply, the "scheme for a disposition" in respect of which the s 177EA(3)(e) purpose is found must be a scheme for a disposition of an interest in the shares, the dividends on which give rise to the impugned franking credit benefit. So much may be accepted. But once the scheme is identified as a scheme for a disposition of an interest in shares held by the QT trustee from time to time as assets of the Trust Fund, the submission leads nowhere.

47 Alternatively, ESI submits that if and insofar as a distribution is one of dividends on shares which were transferred by ESI to the QT at the time at which ESI became a member of the QT, the finding of purpose required by s 177EA(3)(e) cannot be made. That is because franking credit benefits would have accrued to ESI on those shares had they been retained by ESI, so that it cannot have been the purpose of the parties entering into the scheme to enable ESI to obtain franking credit benefits in respect of those shares.

48 The ruling application materials disclose that QESISB was compelled in 1990 by Order in Council to transfer the bulk of its assets to the QT, including its own equity portfolio. It is a reasonable inference that the value of the assets transferred was credited to QESISB's Members Account maintained pursuant to cl 3 of the Trust Deed.

49 QESISB by transferring its equity portfolio into the QT gave up its full legal and equitable interest in the shares which constituted that portfolio in return for a pro rata interest in all the assets of the QT Trust, including the shares transferred, in accordance with ESI's membership interest. The position is no different from what it would have been had QESISB sold its portfolio to a third party and invested the proceeds of sale in the QT. It is not to the point that ESI/QESISB could have received franking credit benefits in relation to a particular parcel of shares otherwise than by becoming a member of the QT Trust as, eg, by retaining that parcel (if already owned), or by purchasing the parcel. What does matter is that the QT Trust was set up and administered on the basis that a member such as EIS would acquire franking credit benefits in excess of those to which it might otherwise be entitled by virtue of its pro rata interest in the Trust Fund. It is that circumstance which takes the case outside s 177EA(4), and which justifies a finding that the purpose test in s 177EA(3)(e) is satisfied.

50 For this reason the franking credits available on the distribution by the QT trustee in respect of any shares which ESI transferred into the QT should be treated in the same way as any other franking credits that were available to ESI in respect of any other distributions of dividends from the QT Trust.

51 ESI also submits that the Commissioner could not make a ruling on whether a distribution made by the QT to ESI was one in respect of which a determination pursuant to s 177EA(5)(b) could be made without establishing, by way of enquiry under s 14ZAM:

(a) what amounts of dividend income were included in the distribution;

(b) in respect of each amount of dividend income included in the distribution:

(i) which shares or parcel of shares the dividends were paid on, and

(ii) what franking credit benefits were received by ESI in respect of that dividend income (such that a relevant part of the distribution was treated as franked pursuant to s 177EA(16));

(c) when each such share, or parcel of shares, was acquired by the QT; and

(d) whether the shares were acquired by the QT from the Appellant.

52 At least to some extent, this submission is built upon arguments already rejected, namely that the scheme was confined in its operation to shares which formed part of the Trust Fund when ESI became a member of the QT Trust, and that the s 177EA(3)(e) purpose is not satisfied in relation to any share portfolio transferred by EIS to the QT trustee in return for membership interests. Had either of these submissions been accepted it may be that further information may have been required, although the ruling materials did not, or did not distinctly, raise these matters. Payne v Federal Commissioner of Taxation (1994) ATC 4191 confirms that if ruling materials are inadequate to enable a conclusion to be drawn on the questions raised, the ruling can and should be remitted to the Commissioner for further enquiries to be made. In the circumstances, it is not necessary to pursue this aspect of the matter any further.

53 However, ESI submits that a "proportional" determination such as was propounded in the ruling is not one which is authorised by s 177EA(5)(b). It is unclear whether this submission is put independently of the two arguments already rejected, as the appellant's supplementary submissions filed after the conclusion of the argument simply put the proposition, without any elaboration.

54 The rulings given are responsive to the questions upon which an answer by way of ruling was sought. The ruling (taking the 1998 financial year by way of example) is that the Commissioner can make a determination applying s 177EA to the franking credits that exceed the notional pro rata franking credits by $1,093,663 ($6,983,308 less $5,889,645). The ruling thus describes the result of the application of s 177EA in terms of the franking credit benefits that will and will not be available as a result of the application of the section in that financial year.

55 The fact that the ruling is expressed in terms of the result of the application of s 177EA(5), rather than in the precise terms of the section, is not a matter which invalidates or undermines the ruling given. The ruling states the Commissioner "can make" a s 177EA determination which will have the specified result. If and insofar as it is necessary for a valid s 177EA(5) determination that it specify, in terms, the specified parts of the dividends paid or distributions made to EIS in respect of which no franking credit benefit is to arise, those are matters to be attended to when the determination is made. Of course, the ruling is not itself a s 177EA(5) determination.

Conclusion

56 The primary judge found that the provisions of s 177EA(3)(b), (c), (d) and (e) were satisfied. No submission to the contrary was put on the hearing of the appeal. As EIS's submissions in relation to the absence of a scheme for a disposition of an interest in the after acquired shares fails, it follows that the appeals should be dismissed with costs.

I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Dated: 25 June 2003

Counsel for the Appellant:	Mr A Slater QC, Mr M Robertson
Solicitor for the Appellant:	Blake Dawson Waldron
Counsel for the Respondent:	Mr G Pagone QC, Mr S Lumb, Ms K Mellifont
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	13 May 2003
Date of Judgment:	25 June 2003