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The ATO has published a Decision Impact Statement in relation to the High Court decision in Mills v FCT [2012] HCA 51.

The case concerned whether, in terms of the general anti-avoidance rule in s177EA of ITAA 1936, the Commonwealth Bank of Australia (the Bank) had a more than incidental purpose of enabling investors to obtain imputation benefits from the issue of hybrid stapled securities called "Perpetual Exchangeable Resaleable Listed Securities V" (PERLS V).

PERLS V are stapled securities each comprising an unsecured subordinated Note issued by the Bank through its New Zealand branch and a Preference Share in the Bank. PERLS V qualified as non-innovative residual Tier 1 capital for regulatory purposes. Distributions to investors of PERLS V were calculated by reference to a benchmark interest rate reduced by the value of the Australian franking benefit provided to investors.

Funds raised through the issue of PERLS V were lent by the New Zealand branch of the Bank to a New Zealand subsidiary or were otherwise employed in the branch business. The income of the New Zealand branch is exempt from Australian tax under s23AH of ITAA36 and the Bank claimed deductions for the distributions on the note in New Zealand. 

A Determination under s177EA(5)(b) of ITAA36 was made by the Commissioner, to deny imputation benefits attached to a distribution expected to be made in February 2010 to the taxpayer as a representative of all investors. The taxpayer was unsuccessful in challenging the Determination before the Federal Court, and on appeal to the Full Federal Court, but was successful in the High Court.

Specifically, the issue before the High Court was whether, having regard to relevant circumstances, s177EA applied to deny imputation benefits attached to distributions to investors on the basis that the arrangement was entered into or carried out for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling investors to obtain the imputation benefits.

The High Court held that the Bank did have a purpose of enabling investors to obtain franking credits but that this purpose was subordinate or incidental to its purpose of raising Tier 1 capital. On this basis, s 177EA had no application.

In relation to the use in New Zealand of the funds raised by the issue of PERLS V, the High Court (Gageler J) said:

"The circumstances that Tier 1 capital raised by the Bank from the issue of PERLS V was to be used by the Bank to generate income in New Zealand not taxable in Australia, and that distributions on the notes were deductible against assessable income in New Zealand, are required to be taken into account as relevant circumstances (ss 177EA(17)(ga), 177D(b)(ii) and 177D(b)(vi)). However, their probative value for the purpose of answering the question ultimately posed by s 177EA(3)(e) is elusive. They do not make it more or less likely that the Bank had a purpose of enabling the holders of PERLS V to obtain franking credits and they do nothing to alter the relationship between that purpose and its purpose of raising Tier 1 capital."

The Decision Impact Statement states as follows:

"As indicated in previous Decision Impact Statements on Part IVA, the ATO will take all decisions of the High Court and Federal Court into account in applying Part IVA to the particular facts of cases...

If the same facts and circumstances subsist in other cases of Tier 1 capital-raising, it is clear that s177EA will not apply...

Whether s177EA applies in situations other than the particular circumstances of the Tier 1 capital-raising considered in this decision will depend on the facts and circumstances of each case...

TR2009/3 deals with arrangements that are somewhat different from the one considered in this decision. However, aspects of the Ruling will need to be considered, and possibly amended, to take into account the reasoning of the High Court."


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