Assignment Questions 1 2.docxAssignment Question – Term 1 of .docx

Assignment Questions 1 2.docx
Assignment Question – Term 1 of 2020
Question One
“In my view there was an identity of interest in the transaction,
as between AXA and Macquarie Bank, which was not simply
that of vendor and purchaser. Macquarie Bank had, in effect,
undertaken to assist AXA to dispose of AXA Health in a way
which would minimise AXA’s capital gains tax exposure. They
were to have an ongoing relationship with respect to any short-
term profit on resale. Their relationship was not at arms length.
Their dealings reflected that fact.”
Required:
Critically discuss the decision of the court in Federal
Commissioner of Taxation v AXA Asia Pacific Holdings Ltd
[2010] FCAFC 134 by considering the above extract from the
decision of Dowsett J.
Question Two
S 110-45(1B) of the ITAA 97 reads as follows: “Expenditure
does not form part of the second or third element of the cost
base to the extent that you have deducted or can deduct it.”
Required:
Critically discuss the practical application of the above
provision, with specific reference to the meaning of the words
“you have deducted or can deduct it”.
The End
Federal Commissioner of Taxation v AXA Asia Pacific
Holdings Ltd.pdf
FEDERAL COURT OF AUSTRALIA

Federal Commissioner of Taxation v AXA Asia Pacific
Holdings Ltd
[2010] FCAFC 134
Dowsett, Edmonds and Gordon JJ
17-19 May, 18 November 2010 – Melbourne
Capital gains tax — Scrip-for-scrip roll-over relief under —
Whether the parties to the
transaction dealt with each other “at arms length” — Pt IVA of
the Income Tax
Assessment Act 1936 (Cth) — Whether the respondent obtained
a “tax benefit” in
connection with the scheme — Identification of the alternative
postulate — Income
Tax Assessment Act 1997 (Cth), Subdiv 124-M — Income Tax
Assessment Act 1936
(Cth), Pt IVA.
Under a leveraged buy-out arrangement organised by Macquarie
Bank Ltd, the taxpayer’s
subsidiary was first sold for $550,000,000 to a company (MB
Health) that was incorporated
as a non-wholly-owned subsidiary of Macquarie Bank (and in
which Macquarie Bank and
other related entities held interests). Under the arrangement,
Macquarie Bank would then
on-sell the subsidiary to a third party and the taxpayer would
share in the profits from the
sale. The proceeds for the sale to MB Health comprised
$50,000,000 in cash and
replacement shares in MB Health. These replacement shares did
not amount to a “significant

stake” which thereby allowed the taxpayer to unilaterally
choose the scrip-for-scrip roll-over
in Subdiv 124-M of the Income Tax Assessment Act 1997 (Cth)
(the ITAA 1997) to defer the
gain made on the sale.
Macquarie Bank would be paid a fee of several million dollars
for arranging the sale in
this way. Related underwriting agreements and various options
were also executed to
provide for the payment of the fee, and to protect the interests
of the parties. At the same
time, the taxpayer was considering selling the subsidiary
directly to an interested third party
(Medical Benefits Fund of Australia Ltd (MBF)).
The Commissioner argued that the taxpayer and Macquarie
Bank (on behalf of MB
Health) had “colluded” to structure the transaction in a way that
would attract the
scrip-for-scrip roll-over and, as a result, the parties could not be
said to be dealing with each
other at “arms length” for the purpose of qualifying for the roll-
over (in terms of the
requirements of s 124-780(4) of the ITAA 1997). The
Commissioner also argued that Pt IVA
of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936)
applied to the scheme (which
was broadly defined as all the steps from the incorporation of
MB Health to the choice of
the roll-over). The Commissioner claimed that in the absence of
the scheme, the taxpayer
would have made a direct sale of the subsidiary to another
related Macquarie Bank
company, and for which roll-over could not have applied.

At first instance, in AXA Asia Pacific Holdings Ltd v FCT
(2009) 77 ATR 829, the Federal
Court held that the taxpayer and Macquarie Bank (on behalf of
MB Health) had satisfied the
arms length conditions for the roll-over as it considered there
was no evidence either of
collusion or the submission of one party’s will to the other. The
court also found that Pt IVA
of the ITAA 1936 did not apply as no tax benefit arose under
the scheme as it could not be
180 FEDERAL COURT OF AUSTRALIA [(2010)
reasonable to expect that if the subsidiary had not been sold in
this way to MB Health, it
would have been sold directly to the other related Macquarie
Bank company as Macquarie
Bank would not have derived its fees under this sale.
On appeal, the Commissioner claimed that the court at first
instance erred in its
conclusion that the taxpayer and Macquarie Bank dealt with
each other at arms length. In
particular, the Commissioner submitted that the fact that a
transaction was devised by
Macquarie Bank for a fee to obtain a revenue advantage for the
taxpayer meant that the
parties were not dealing with each other at arms length for the
purposes of s 124-780(4) of
the ITAA 1997. In regard to Pt IVA of the ITAA 1936, the
Commissioner claimed that the
court at first instance erred in finding there was no tax benefit.
The Commissioner relied on
the alternative postulate that if the taxpayer had not entered into

the scheme, it would have
been expected to have disposed of its subsidiary directly to
another related Macquarie Bank
company and that the court at first instance erred in rejecting
this alternative postulate
merely on the basis that Macquarie Bank would not have agreed
to such a transaction
because it would have deprived it of its fees.
Held, dismissing the appeal:
Non-arms length dealing
(Per Edmonds and Gordon JJ):
(1) Although the structure through which the acquisition would
be achieved contained
features attractive to the taxpayer (including the roll-over), this
did not make the transaction
a non-arms length transaction. This was essentially because the
taxpayer was motivated to
sell its business and Macquarie Bank was motivated to acquire
it in order to on-sell it.
(2) The fact that a purchaser of an asset seeks to obtain, for its
own benefit, a collateral
advantage from the purchase transaction (in this case, the
earning of fees) over and above
the acquisition of the asset, cannot of itself lead to a conclusion
that the parties to the
transaction were not dealing with each other at arms length.
(3) In addition, there was no evidence that the purchase price
did not represent the market
value of the asset. The fact that the vendor (the taxpayer) had
the right to participate in any

profit arising to the purchaser (Macquarie Bank) from the
onward sale of the asset did not
indicate otherwise. To the contrary, this reflected the bargaining
power which the vendor
(the taxpayer), brought to bear on the overall architecture of the
transaction.
(Per Dowsett J in dissent):
(4) There was an “identity of interest” in the transaction, as
between the taxpayer and
Macquarie Bank, which was not simply that of vendor and
purchaser as the transaction was
designed to enable Macquarie Bank to obtain fees for their
services, and not to just acquire
an asset (that is, MB Health).
(5) In the context of this ongoing relationship (which included
an interest in any profit on
the re-sale of MB Health) their relationship was not at arms
length and that their dealings
reflected this fact.
Part IVA of the Income Tax Assessment Act 1936 (Cth)
(6) The onus is on the taxpayer to establish that a tax benefit
was not obtained in
connection with the scheme, that is, the taxpayer must show that
the amount would not have
been included, or might not reasonably be expected to have
been included, in its assessable
income if the scheme had not been entered into or carried out.
(7) An objective inquiry is required as to what would have been
included or might
reasonably be expected to have been included in the assessable

income had the “scheme”
not been entered into or carried out. This requires a comparison
between the “scheme” and
an alternative postulate, or counterfactual. The alternative
postulate requires a prediction as
to events which would have taken place if the scheme had not
been entered into or carried
out. That prediction must be sufficiently reliable for it to be
regarded as reasonable and must
be more than a possibility.
(8) The events that would have, or might reasonably be
expected to have, taken place in
the absence of the scheme and which are identified as a result of
the objective inquiry are
not confined or defined by the scheme itself.
18181 ATR 180] FCT v AXA ASIA PACIFIC HOLDINGS LTD
(9) In the end, the court will decide what would have been done,
or might reasonably be
expected to have been done, in lieu of the scheme having regard
to all of the evidence that
is led.
(10) The objective facts before the court at first instance were
that the related
underwriting agreement and options would not have been
entered into had the scheme not
been carried out and, therefore, the fees payable to Macquarie
Bank under those agreements
would have been lost. These objective facts were accepted by
court at first instance and
thereby discharged the taxpayer’s onus of proving that the

Commissioner’s alternative
postulate “was not sufficiently reliable for it to be regarded as
reasonable.”
(11) The Commissioner’s submission that it was a “given” that a
direct sale of the
taxpayer’s subsidiary would have taken place absent the scheme
is contrary to the evidence
and ignores the significance of the fees that were imposed under
the related underwriting
agreement. In short, the evidence demonstrated that a direct sale
would not have (or would
not reasonably be expected to have) occurred because it would
have, inter alia, denied
Macquarie Bank its fees.
(12) The Commissioner’s submission that the court at first
instance erred in failing to
consider the “putative purpose” of the scheme was without
foundation as there was no
factual finding that the “putative purpose” of the scheme was to
attract the benefit of the
scrip-for-scrip roll-over. In addition, looking to the “putative
purpose” of the scheme is not
contemplated by s 177C(1)(a) of the ITAA 1936 and is contrary
to the notion that the
inquiry be one based on objective fact.
Cases Cited
ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312.
Australian Trade Commission v WA Meat Exports Pty Ltd
(1987) 7 AAR 248; 75 ALR
287.

AW Furse No 5 Will Trust, Trustee for Estate of v FCT (1990)
21 ATR 1123; 91 ATC
4007.
Barnsdall v FCT (1988) 19 ATR 1352; 88 ATC 4565; 81 ALR
173.
Baxter v FCT (2002) 51 ATR 209; 2002 ATC 4917; 196 ALR
519.
Collis v FCT (1996) 33 ATR 438; 96 ATC 4831.
Epov v FCT (2007) 65 ATR 399; 2007 ATC 4092.
FCT v Dalco (1990) 168 CLR 614; 20 ATR 1370; 64 ALJR 166;
90 ATC 4088; 90 ALR
341.
FCT v Hart (2004) 217 CLR 216; 55 ATR 712; 78 ALJR 875;
2004 ATC 4599; 206 ALR
207.
FCT v Lenzo (2008) 167 FCR 255; 71 ATR 511; 2008 ATC 20-
014; 247 ALR 242.
FCT v Mochkin (2003) 127 FCR 185; 52 ATR 198; 2003 ATC
4272.
FCT v Peabody (1994) 181 CLR 359; 28 ATR 344; 68 ALJR
680; 94 ATC 4663; 123
ALR 451.
FCT v Spotless Services Ltd (1996) 186 CLR 404; 34 ATR 183;
71 ALJR 81; 96 ATC
5201; 141 ALR 92.

FCT v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410;
79 ATR 780; 2010 ATC
20-198; 272 ALR 40.
Gauci v FCT (1975) 135 CLR 81; 5 ATR 672; 50 ALJR 358; 34
LGRA 321; 75 ATC
4257; 8 ALR 155.
Granby Pty Ltd v FCT (1995) 30 ATR 400; 95 ATC 4240; 129
ALR 503.
McAndrew v FCT (1956) 98 CLR 263; [1956] ALR 1008.
McCormack v FCT (1979) 143 CLR 284; 9 ATR 610; 53 ALJR
436; 79 ATC 4111; 23
ALR 583.
McCutcheon v FCT (2008) 168 FCR 149; 69 ATR 607; 2008
ATC 20-009.
RAL v FCT (2002) 50 ATR 1076; 2002 ATC 109.
Spencer v Commonwealth (1907) 5 CLR 418 at 427; 14 ALR
253.
WD & HO Wills (Aust) Pty Ltd v FCT (1996) 65 FCR 298; 32
ATR 168; 96 ATC 4223.
Appeal
This was an appeal by the Commissioner to the full Federal
Court from a decision of

the Federal Court at first instance in which the court dismissed
the Commissioner’s
appeal.
M Moshinsky SC and D Mandie, for the appellant.
G J Davies QC and A T Broadfoot, for the respondent.
Cur adv vult
18 November 2010
Dowsett J.
Introduction
I have read the reasons prepared by Edmonds and Gordon JJ and
agree that, to the
extent that the appellant (the Commissioner) relies upon Pt IVA
of the Income Tax
Assessment Act 1936 (Cth) (the ITAA 1936) the appeal should
fail. My reasons for that
view are substantially the same as those given by their Honours.
However I conclude
that the Commissioner should succeed on the “roll-over” point
in connection with
Subdiv 124-M of the Income Tax Assessment Act 1997 (Cth)
(the ITAA 1997). I do not
propose to rehearse in detail the facts of the case. They appear
from the judgment at first
instance (AXA Asia Pacific Holdings Ltd v FCT (2009) 77 ATR
829; 2009 ATC 20-151)
and from their Honours’ reasons.
I shall refer to the parties and other entities identified in the
primary judge’s reasons as

follows:
the appellant: the “Commissioner”;
the respondent: “AXA;”
Medical Benefits Fund of Australia Ltd: “MBF”;
AXA Australian Health Insurance Pty Ltd: “AXA Health”;
Macquarie Bank Ltd
(other than Macquarie Advisory, but including Macquarie
PTG):
“Macquarie Bank”;
Macquarie’s advisory arm: “Macquarie advisory”;
Macquarie’s Principal Transactions Group: “Macquarie PTG”;
British United Provident Insurance Ltd: “BUPA”;
Macquarie Health Acquisitions Pty Ltd: “Macquarie Health
Acquisitions”;
Macquarie Health Holdings Pty Ltd: “Macquarie Health
Holdings”;
Macquarie Health Funding Pty Ltd: “Macquarie Health
Funding”;
BUPA Australia Pty Ltd: “BUPA Australia”;
MB Health Holdings Pty Ltd “MB Health Holdings”.

(Dowsett J)
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The separate identification of Macquarie Bank, Macquarie
advisory and Macquarie
PTG is necessary at some stages in the consideration of this
case. However, as I
understand it, the only relevant legal entity is Macquarie Bank
Ltd of which Macquarie
advisory and Macquarie PTG are parts. The need for separate
identification arises out of
the different functions performed for AXA by Macquarie
advisory and Macquarie PTG,
leading to the erection of a “Chinese Wall” to separate the
involvement of Macquarie
advisory and Macquarie PTG. Of course, that process, laudable
as it may have been, did
not change the fact that Macquarie Bank was involved in both
capacities. As will be
seen, the Chinese Wall was erected after significant information
had already been given
to Macquarie PTG and after the general structure of the relevant
transaction had
emerged. As the question is whether Macquarie Health
Acquisitions (or Macquarie
Health Funding) dealt with AXA at arms length in the
transaction for the sale of AXA
Health, the effect of the Chinese Wall may be of some
importance. It is common ground
that Macquarie Bank’s conduct in connection with the

transaction is to be attributed to
Macquarie Health Acquisitions (and Macquarie Health
Funding).
The relevant provisions
The ITAA 1997 provides for relief from capital gains tax where
a capital gain is made
as a result of the exchange of shares in the capital of one
corporation for shares in the
capital of another. The purpose of this relief is to facilitate
takeovers. The present case
concerns a transaction by which AXA transferred all of the
shares in AXA Health to
Macquarie Health Funding pursuant to an agreement with
Macquarie Health Acquisitions
which held all of the issued shares in Macquarie Health
Funding. The transaction was
much more complicated than is suggested by that short
description and involved other
parties, directly and indirectly. However it was the disposition
by AXA of the shares in
AXA Health which generated the relevant capital gain. It is
common ground that AXA
will be entitled to roll-over relief if it is able to satisfy the
requirements of s 124-780(4)
and (5) which provides:
(4) The conditions specified in subsection (5) must be satisfied
if the original interest
holder and an acquiring entity did not deal with each other at
arms length and:
(a) neither the original entity nor the replacement entity had at
least 300 members just
before the arrangement started; or

(b) the original interest holder, the original entity and an
acquiring entity were all
members o f the same linked group just before that time.
Note There are some cases where a company will not be
regarded as having 300
members: see section 124-810.
(5) The conditions are:
(a) the market value of the original interest holder’s capital
proceeds for the exchange is
at least substantially the same as the market value of its original
interest; and
(b) its replacement interest carries the same kind of rights and
obligations as those
attached to its original interest.
…
(7) A company is the ultimate holding company of a wholly-
owned group if it is not a
100% subsidiary of another company in the group.
The term “arms length” is defined in s 995-1 of the ITAA 1997
as follows:
… in determining whether parties deal at arms length, consider
any connection between
them and any other relevant circumstance.
Definitions
The present appeal focuses upon the meaning of the expression

“did not deal with
each other at arms length” where it appears in s 124-780(4) and
its application to the
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facts of this case. The learned primary Judge referred to a
number of cases in which
similar expressions have been considered. In particular his
Honour referred to definitions
identified by the full court in Australian Trade Commission v
WA Meat Exports Pty Ltd
(1987) 7 AAR 248 at 252; 75 ALR 287 at 291 as follows:
The first matter to be determined is the meaning of the phrase
“not at arms length” where
used in s 4(8) of the Export Market Development Grants Act
1974 (Cth). It is, of course,
often found in revenue statutes …. The ordinary meaning of the
phrase is explained in
Osborn’s Concise Law Dictionary, 6th ed at 32: “The
relationship which exists between
parties who are strangers to each other, and who bear no special
duty, obligation, or relation
to each other, for example, vendor and purchaser. …”

A similar explanation is given by Black’s Law Dictionary, 5th
ed at 100: “arms length
transaction. Said of a transaction negotiated by unrelated
parties, each acting in his or her
own self interest; the basis for a fair market value
determination. Commonly applied in
areas of taxation when there are dealings between related
corporations, for example, parent
and subsidiary. … The standard under which unrelated parties,
each acting in his or her own
best interest, would carry out a particular transaction. For
example, if a corporation sells
property to its sole shareholder for $10,000, in testing whether
$10,000 is an ‘arms length’
price it must be ascertained for how much the corporation could
have sold the property to a
disinterested third party in a bargained transaction.”
I add 2 more general definitions. The Oxford English
Dictionary, 2nd ed (1989) states:
… at arms length: as far out or away from one as one can reach
with the arm; hence, away
from close contact or familiarity, at a distance; spec. in Law,
without fiduciary relations, as
those of trustee or solicitor to a client; (at) arms length: …,
designating a sale or transaction
in which neither party controls the other.
The Collins Australian Dictionary, 7th ed (2005) defines the
term as meaning:
… at a distance; away from familiarity with or subjection to
another.
The cases

I should briefly examine the cases. The first in time is the
decision of the full court
(Beaumont, Wilcox and Burchett JJ) in WA Meat Exports. That
case concerned a “grant
entitlement” in respect of eligible expenditure. Eligible
expenditure was expenditure
which, in the opinion of the relevant decision-maker, had been
incurred by a person
primarily and principally for the purpose of expanding the
export of goods produced,
assembled or processed in Australia. Excluded from the
definition of expenditure was
any amount paid to a person by a prescribed associate. The term
“prescribed associate”
was defined to include “any person determined by the [decision-
maker] to be a person
not at arms length with the claimant. …” In that case the
claimant company had retained
the services of a former employee, such services being provided
by him as an employee
of another company which he owned. After the references to
Osborne and Black referred
to above, the court observed (at AAR 252; ALR 291):
There is no reason to suppose that the ordinary meaning of the
phrase was not intended to
be applied here. That is to say, the context of s 4 is consistent
with the disqualification of
expenditure by one party in favour of another where one of
them has the ability to exert
personal influence or control over the other. It is evident that
the policy of the legislation
would seek to exclude payments to such persons, because, if
such payments were not
excluded, abuse of the incentive scheme provided by the Act

would be open. An obvious
example is the possibility that parties might seek to inflate the
fees payable for particular
services.
In Re Hains; Barnsdall v FCT (1988) 19 ATR 1352; 88 ATC
4565; 81 ALR 173,
Davies J considered a provision which provided that:
(Dowsett J)
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• where a taxpayer had sold property within 12 months of its
purchase;
• there was no consideration, or inadequate or excessive
consideration for the sale;
and
• the Commissioner was satisfied that having regard to any
connection between
the taxpayer and the purchaser or any other relevant
circumstances, the taxpayer
and the other person were not dealing with each other at arms
length;

then certain tax consequences followed. His Honour considered
that the expression “not
dealing with each other at arms length” differed from the
expression “not at arms length”
used in WA Meat Exports. Davies J observed that (at ATR
1355; ATC 4568; ALR 176):
That term should not be read as if the words “dealing with”
were not present. The
Commissioner is required to be satisfied not merely of a
connection between a taxpayer and
the person to whom the taxpayer transferred, but also of the fact
that they were not dealing
with each other at arms length. A finding as to a connection
between the parties is simply a
step in the course of reasoning and will not be determinative
unless it leads to the ultimate
conclusion.
The taxpayer had sold shares to a company which he owned.
After examining a
number of cases his Honour observed (at ATR 1356; ATC 4568;
ALR 177):
It will be seen that those cases looked primarily to the
relationship between the
contracting parties and to influence and control.
I do not disagree with this analysis, but I accept … [the]
submission that there may be
transactions between related parties in which the parties deal
with each other at arms length.
This may occur notwithstanding a close relationship between
the parties or the power of one
party to control the other.

In that case the taxpayer submitted that the Commissioner, in
reaching his decision,
had considered only the relationship between the parties and not
the nature of the
transaction, or the circumstances in which the parties had dealt
with each other. Davies J
rejected this criticism, observing that there was other material
bearing upon the question,
including evidence that the shares were not sold on the open
market, but rather
transferred pursuant to a private transaction “of a somewhat
unusual character.” The
“unusual” nature of the transaction was that the taxpayer had
acquired rights to the
allotment of shares in a public company and granted to his
company options to acquire
such shares when they were allotted. The price payable was
such that the taxpayer’s
costs and receipts matched. On this material his Honour
considered that the conclusion
was inevitable that the parties had not dealt at arms length,
observing (at ATR 1357; ATC
4569; ALR 178) that:
Proof that a transaction was fair is not sufficient to show, in the
context, that the dealing
was at arms length. The term “at arms length” in s 26AAA(4)(b)
is not to be construed as
meaning “for a fair price.” Indeed, this provision did not turn
its attention primarily to price,
but the price paid may be a relevant factor. The provision did
not purport to fix a fair price
for the transaction but rather, when a finding had been made
that the dealing was not at arms
length, fixed and [sic] arbitrary consideration, the value of the
property at the time of its

sale.
The subject transaction was one between [the taxpayer] and his
private company. It was a
private transaction with a company which he controlled and
which was his investment and
share dealing arm. Such a transaction is not an arms length
dealing for the purposes of
s 26AAA(4).
Trustee for Estate of AW Furse No 5 Will Trust v FCT (1990)
21 ATR 1123; 91 ATC
4007 concerned a provision in the ITAA 1936 dealing with
assessable income:
… derived by a trustee, directly or indirectly, under or as a
result of an agreement … any 2
or more of the parties to which were not dealing with each other
at arms length in relation to
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the agreement and the amount of the assessable income so
derived is greater than the
amount … of the assessable income that, in the opinion of the
Commissioner, would have
been derived by the trustee, directly or indirectly, under or as a
result of that agreement if

the parties to the agreement had dealt with each other at arms
length in relation to the
agreement. …
Hill J said (at ATR 1132; ATC 4014-4015):
The first of the 2 issues is not to be decided solely by asking
whether the parties to the
relevant agreement were at arms length to each other. The
emphasis in this subsection is
rather upon whether those parties, in relation to the agreement,
dealt with each other at arms
length. The fact that the parties are themselves not at arms
length does not mean that they
may not, in respect of a particular dealing, deal with each other
at arms length. This is not to
say that the relationship between the parties is irrelevant to the
issue to be determined under
the subsection.
His Honour then referred to the decision of Davies J in Hains
and continued:
What is required in determining whether parties dealt with each
other in respect of the
particular dealing at arms length is an assessment whether in
respect of that dealing they
dealt with each other as arms length parties would normally do,
so that the outcome of their
dealing is a matter of real bargaining.
Both Hains and Furse highlight the need to examine the course
of the dealings between
the parties in order to determine whether they have dealt with
each other at arms length.

Granby Pty Ltd v FCT (1995) 30 ATR 400; 95 ATC 4240; 129
ALR 503 concerned the
calculation of a cost base for capital gains tax purposes. Section
160ZH(9)(c) provided
that in determining such cost base, certain consequences would
follow if the
consideration paid by the taxpayer was less than the market
value of the asset at the time
of the acquisition, and the taxpayer and the person from whom
it had acquired the asset
were not dealing with each other at arms length in connection
with the acquisition. Lee J
said (at ATR 403; ATC 4243; ALR 506):
The expression “dealing with each other at arms length”
involves an analysis of the manner
in which the parties to a transaction conducted themselves in
forming that transaction. What
is asked is whether the parties behaved in the manner in which
parties at arms length would
be expected to behave in conducting their affairs. Of course, it
is relevant to that inquiry to
determine the nature of the relationship between the parties, for
if the parties are not parties
at arms length the inference may be drawn that they did not deal
with each other at arms
length.
Again the relevant considerations were the relationship between
the parties and the
extent to which their conduct of the transaction was consistent
with that which one
would expect in negotiation between parties at arms length. His
Honour then observed
(at ATR 403-404; ATC 4243-4244; ALR 506-507) that whatever
else the expression

might mean, it at least meant that the parties to a transaction
had acted “severally and
independently in forming their bargain.” His Honour continued:
That is not to say, however, that parties at arms length will be
dealing with each at arms
length in a transaction in which they collude to achieve a
particular result, or in which one
of the parties submits the exercise of its will to the dictation of
the other, perhaps, to
promote the interests of the other.
His Honour was there identifying circumstances in which
parties, otherwise at arms
length, nonetheless might be found to have dealt with each
other, other than at arms
length. His Honour was certainly not saying that, in general, it
is necessary that the
parties collude in order that they be found not to have dealt with
each other at arms
(Dowsett J)
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length. Nor was he necessarily seeking to describe exhaustively
the circumstances in
which parties, otherwise at arms length, would be said to have
dealt other than at arms
length. His Honour then observed that:
… there was no evidence that the lessor corporations and the
partnership acted in concert
with an ulterior purpose, or that the lessor corporations
accepted dictation or instruction
from the partnership to the exclusion of the exercise of the
independent minds of the
corporations. …
The words “ulterior purpose” seem to mean a purpose “beyond
what is immediate or
present” or “beyond what is openly stated or evident;
intentionally concealed or kept in
the background”: New Shorter Oxford English Dictionary
(1993).
Collis v FCT (1996) 33 ATR 438; 96 ATC 4831, concerned the
profit arising from the
sale of land and the effect for tax purposes of s 26AAA of the
ITAA 1936. 4 parcels of
land had been offered for sale at auction. A factory was built on
3 of the parcels. The 4th
parcel was used for access to the factory. The taxpayers owned
all 4 parcels, the 4th
block having only recently been acquired. The company
occupying and operating the
factory was also owned by them. The 4 parcels were sold
together by auction. After the
fall of the hammer the taxpayers asked the purchaser to sign 2
contracts for purchase,
one over the 4th block for $200,000, and the other over the

other 3 blocks for
$1,437,000. Section 26AAA provided that certain tax
consequences would flow if the
Commissioner was satisfied that, having regard to any
connection between the taxpayer
and the purchaser, or any other relevant circumstances, the
parties had not dealt with
each other at arms length. The question was whether or not the
arrangements which
occurred after the fall of the hammer constituted a dealing not
at arms length.
Jenkinson J said (at ATR 442; ATC 4836-4837):
There is nothing in the material before the tribunal to suggest,
nor was it submitted, that
[the purchaser] and the applicants were not dealing with each
other at arms length at and
before the fall of the hammer. The fact that the oral contract
was unenforceable – and
remained unenforceable until [the purchaser] became the
registered proprietor of the subject
land - would not affect the operation of s 26AAA(2).
Presumably the parties have taken the
view that the making of the subsequent written contract for the
sale of the subject land and
the written contract for the sale of the factory land had the
result that the oral contract was
thereupon rescinded, no doubt pursuant to an implied term of
each of the written contracts
that that should be so. The oral contract being rescinded, the
subject land could not perhaps
be said to have been sold “in pursuance of” that contract. …
The form of contract for purchase of the whole of the land
offered at the auction was
before the tribunal. … On the evidence before the tribunal [the

purchaser] could be expected
to be indifferent as to whether he made the 2 contracts proposed
or the one contract which
the applicants had represented that they were willing to make
with the successful bidder at
the auction, provided that he was satisfied that the former
course would not expose him to
any disadvantage or risk of disadvantage not attendant on the
latter course. The evidence
before the tribunal strongly suggested that he was so satisfied,
and the tribunal appears to
have found that he was. If he was, the inference – which it is for
the tribunal, not for the
court, to draw – seems irresistible that [the purchaser] did not
deal with the applicants at
arms length.
His Honour then referred to the observations of Lee J in Granby
and continued:
I respectfully agree. The inference must surely be drawn that
[the purchaser], being
indifferent, submitted the exercise of his will to the applicants’
wishes in acceding to their
request.
As in the earlier cases, Jenkinson J focussed upon the way in
which the parties dealt
with each other. The purchaser had bid for all 4 blocks as one
parcel but agreed to sign
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21
22
2 contracts although it yielded no further benefit to him.
Clearly, his agreement was for
no purpose other than to oblige the vendors. In these
circumstances, the parties could be
seen to be other than at arms length. On the other hand, if a
potential purchaser were to
include a particular term in its offer to a potential vendor, in the
expectation that the
latter would find it attractive, thus inducing it to sell to the
purchaser, the position may be
otherwise. The purchaser will have made the offer in order to
advance its own interests.
ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312
concerned the construction of
the term “bona fide arms length” offer in a contract for the
supply of packaging.
Dodds-Streeton J said (at 334-335 [223]-[226]):
[223] The above authorities indicate that an arms length
relationship is that of strangers,
or parties who are unaffected by existing mutual duties,
liabilities, obligations,
cross-ownership of assets, or identity of interests which might:
(a) enable either party to
influence or control the other; or (b) induce either party to serve
that common interest in
such a way as to modify the terms on which strangers would
deal.

[224] The concept of an arms length relationship is distinct
from that of an arms length
dealing or transaction, despite the potential overlap. Unrelated
parties may collude or
otherwise deal with each other in an interested way, so that
neither the dealing nor the
resultant transaction may properly be considered arms length.
[225] Where the parties are not in an arms length relationship, it
is recognised that the
inference may be drawn that they did not deal with each other at
arms length. It may further
be inferred that the resultant transaction is not arms length.
[226] Related parties may nevertheless, in some circumstances,
demonstrate a dealing
which displaces the inference based on their relationship. They
may engage in the
disinterested bargaining characteristic of strangers, applying
independent separate wills. The
circumstances of the impugned transaction may be such that,
despite the parties’ connection
or common interest, the interposition of some independent
process (such as the sale of
shares on the stock exchange) ensures that the transaction itself
is arms length, in the sense
that it could equally have been concluded by unrelated parties,
consulting their own
self-interest and uninfluenced by any particular association or
interest in common.
The learned primary judge also referred to the decision of Gyles
J in Baxter v FCT
(2002) 51 ATR 209; 2002 ATC 4917; 196 ALR 519, identifying
the proposition that the

fact that a transaction is devised in a certain way so as to obtain
a revenue advantage
does not mean that the transaction is not at arms length. I accept
that the offer and
acceptance of a proposal which has a tax-related attraction for
the offeree may not
necessarily lead to the conclusion that the transaction is not at
arms length. For reasons
which I have given, the offer may well have been motivated by
the offeror’s self-interest.
However, there will be cases in which one side accommodates
the other simply because
it is able to do so without loss or inconvenience to itself, or
because there are extraneous
reasons for wanting so to do. I use the word “extraneous” in lieu
of the word “ulterior”
used in Granby, but with the purpose of describing a motivation
other than that of
facilitating the proposed transaction.
Gyles J found difficulty with the proposition that parties at arms
length might become
involved in transactions which were not at arms length. I
suspect that his Honour meant
that the very fact of entering into a non-arms length transaction
means that the parties are
not at arms length for the purposes of that transaction. I agree
with that proposition.
In summary
I have no real difficulty with any of the propositions which
emerge from those cases.
They may be summarised as follows:
• in determining whether parties have dealt with each other at

arms length in a
particular transaction, one may have regard to the relationship
between them;
(Dowsett J)
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26
• one must also examine the circumstances of the transaction
and the context in
which it occurred;
• one should do so with a view to determining whether or not
the parties have
conducted the transaction in a way which one would expect of
parties dealing at
arms length in such a transaction;
• relevant factors which may emerge include existing mutual
duties, liabilities,
obligations, cross-ownership of assets, or identity of interests
which might
enable either party to influence or control the other, or induce
either party to
serve a common interest and so modify the terms on which
strangers would
deal;

• where the parties are not in an arms length relationship, one
may infer that they
did not deal with each other at arms length, and that the
resultant transaction is
not at arms length;
• however related parties may, in some circumstances, so
conduct a dealing as to
displace any inference based on the relationship;
• unrelated parties may, on occasions, deal with each other in
such a way that the
resultant transaction may not properly be considered to be at
arms length.
Is s 124-780(5) engaged?
In the present case AXA bears the burden imposed by s 14ZZO
of the Taxation
Administration Act 1953 (Cth) (the TAA) of establishing that
the Commissioner’s
assessment was excessive. In order to do this it undertakes the
task of demonstrating that
it was not obliged to comply with the requirements of s 124-
780(5) of the ITAA 1997,
that subsection not being engaged pursuant to s 124-780(4). It is
common ground that
AXA cannot satisfy the requirements of s 124-780(5)(b).
However s 124-780(4) will
only engage the operation of s 124-780(5) if the parties to the
relevant transaction did not
deal with each other at arms length, and either:
(a) neither the original entity nor the replacement entity had at
least 300 members

just before the arrangement started; or
(b) the original interest-holder, the original entity and an
acquiring entity were all
members of the same linked group just before that time.
It seems to be common ground that for present purposes s 124-
780(4)(a) applies whilst
s 124-780(4)(b) does not. Thus, if the relevant parties did not
deal at arms length,
s 124-780(4) will operate to engage s 124-780(5). It is therefore
necessary that AXA
demonstrate that it dealt with Macquarie Bank at arms length.
At first instance
The primary judge said (at ATR 873 [101]; ATC 10,501-10,502
[101]), concerning the
decision in ACI Operations (at 334 [223]-[224] and 336 [239]-
[241]):
Counsel for the Commissioner relied particularly on so much of
Dodds-Streeton J’s
judgment as commences “Unrelated parties …”. I would, with
respect, regard that passage
as unobjectionable, but it expresses the point at a very high
level of generality. It leaves
open the factual, and I consider more problematic, questions
which will arise in every case
where there was “collusion” or rehearsed dealings to the extent
sufficient to justify the
conclusion that the parties did not deal with each other at arms
length.
I do not entirely understand the term “rehearsed dealings.”
Presumably, it means

something like collusion. It suggests an act previously agreed
upon. The word
“collusion” itself carries negative overtones. The New Shorter
Oxford Dictionary (1993)
defines it to mean: “… secret agreement or understanding for
nefarious purposes;
conspiracy; fraud, trickery.” Its legal meaning is said to be: “…
an agreement between 2
or more people, especially ostensible opponents in a suit, to act
to the prejudice of a third
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party or for an improper purpose.” The word “collude” means:
“… conspire, plot,
connive; act in secret concert.” Nothing in the wording of s
124-780 suggests the need to
prove any degree of moral impropriety. None of the other cases,
nor the dictionary
references adopted in WA Meat Exports suggests the necessary
involvement of an
element of collusion. As far as I can see the term is used only in
Granby, but Lee J was
suggesting only that collusion between interested parties would
mean that dealings were
not at arms length. Collis and ACI suggest that the “dictation”

contemplated in Granby
need not involve moral, legal or physical obligation. The cases
generally support an
approach which involves examination of the parties’ dealings in
order to determine
whether they have dealt with each other in the way in which
parties at arms length might
deal in such a transaction. Collusion might be an example of
dealings not at arms length.
Submission of the will of one party to that of the other may be
the cause of a transaction
being other than at arms length. Neither “label” exhaustively
identifies the essential
indicia of such a transaction.
The primary judge (at ATR 873 [103]; ATC 10,502 [103])
accepted denials by
Messrs Owen and Penn that AXA and Macquarie Bank had
colluded with a view to
devising a means to avoid the incidence of capital gains tax or
otherwise. His Honour
also observed that the Commissioner had not strongly pressed
the assertion of collusion.
His Honour found no evidence of collaboration between AXA
and Macquarie Bank, and
that there was no suggestion in the evidence that AXA or any of
its directors or senior
executives knew, before 1 March 2002, that Macquarie Bank
proposed a structure in
which any acquirer of AXA Health shares would not be wholly
owned by Macquarie
Bank. AXA understood that there would be roll-over relief on
its capital gain. However
his Honour considered that such knowledge did not amount to
collusion or submission
by Macquarie Bank of its will to the wishes of AXA or vice

versa.
These comments suggest that his Honour limited his inquiry to
the alternatives
expressed by Lee J in Granby (at ATR 403-404; ATC 4243-
4244; ALR 507) (collusion or
submission of the will). In my view that approach involved a
narrower test than is
established by the cases. This is particularly so, given the
connotations attaching to the
word’ “collusion” and to the concept of submission of the will.
As is demonstrated by
Collis, mere agreement out of lack of interest may be sufficient
to deprive a transaction
of arms length status. Whilst Jenkinson J seems to have
considered such agreement to
involve submission of the will, the expression seems a little too
dramatic for use in
describing a commonplace event. The cases indicate that the
proper approach necessarily
involves an examination of the relationships between the parties
and an assessment of
their conduct against expectations as to the way in which a
similar transaction would be
conducted at arms length.
The appeal
In the notice of appeal the Commissioner asserts that the
primary judge erred in
holding that AXA and Macquarie Bank had dealt with each at
arms length and, in
particular, that:
3. The learned judge erred in failing to hold that AXA and
[Macquarie Health Funding]

did not deal with each other “at arms length” within the
meaning of s 124-780(4) of
the ITAA 1997 in circumstances where:
(a) in return for a fee, [Macquarie Bank] (on behalf of
[Macquarie Health
Funding]) designed the structure of the transaction to further
the interests of
AXA by reducing the capital gains tax payable upon its disposal
of shares in
AXA Health;
(b) further or alternatively, in return for a fee, [Macquarie
Bank] (on behalf of
(Dowsett J)
31
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33
[Macquarie Health Funding]) prepared the terms of the
transaction so as to
further the interests of AXA by reducing the capital gains tax
payable upon
its disposal of shares in AXA Health;
(c) further or alternatively, in negotiating the terms of the
transaction, the parties
worked together to further the interests of AXA by reducing the
capital gains

tax payable upon its disposal of shares in AXA Health.
4. The learned judge erred in concluding that the fact that a
transaction is devised in a
certain way by a party to obtain a revenue advantage for the
other party does not
mean that the transaction is a non-arms length one for the
purposes of s 124-780(4)
of the ITAA 1997.
This approach focuses upon both the relationship between AXA
and Macquarie Bank
and the conduct of negotiations between them. In his written
submissions the
Commissioner submits that the primary judge erred in his
interpretation of the
requirement that there be an arms length dealing and in his
conclusions on the facts.
The dealings
During 2001, Macquarie advisory was advising AXA concerning
the proposed
disposal of its subsidy AXA Health. A possible buyer was MBF.
Negotiations had been
continuing for some time. As appears from the primary judge’s
reasons (at ATR 834 [6];
ATC 10,468 [6]) Macquarie advisory “had become concerned
that … ‘there were no
competitive forces driving the negotiations with MBF.’” There
was also concern about
the financial ability of MBF to fund the acquisition and
complete the transaction. For
these reasons Ms Birch of Macquarie advisory and others were
considering alternative
options, including a preliminary investigation as to the viability

of an initial public
offering of shares. Subsequently there was consideration of a
leveraged buy-out.
Macquarie advisory sought to engage Macquarie PTG in the
process. On 18 November,
Mr McLean of Macquarie advisory had sent an e-mail to
Macquarie Bank personnel,
including Mr Facioni who was responsible for the operation of
Macquarie PTG. A
meeting with AXA was scheduled for 21 November 2001 at
which Macquarie PTG was
to make a presentation concerning a proposed initial public
offering or leveraged
buy-out. The e-mail appears at appeal book Pt B vol 1, tab 55. It
included the following
information:
• that AXA was very interested in an initial public offer or an
management
buy-out/leveraged buy-out;
• “Negotiations continue with MBF – the latest development is
that we have set
up a 2 week deadline to resolve the (long list of) outstanding
issues. By the end
of this 2 week period (Friday, 30 November) it is likely we will
either call off
negotiations or start frantically trying to document a deal by
Christmas. As a
reminder, MBF are offering a ‘pivot price’ of $560,000,000,
with an upside
sharing mechanism that could achieve total consideration of up
to
$640,000,000-$650,000,000 if the business performs well (and a
downside risk
sharing mechanism if adverse regulatory events occur). AXA is

likely to have to
provide MBF with around $250,000,000 of vendor finance,
which AXA is
unsurprisingly not particularly happy about;”
• Mr McLean’s assessment of AXA’s likely reaction to various
price ranges;
• that AXA would probably prefer the management buy-
out/leveraged buy-out
over an initial public offering because it would be implemented
more quickly
and have lower transaction costs; and
34
35
• that Mr McLean would confer with the various addressees to
ensure that “we are
all happy with” the proposed presentation to AXA.
The letters “MBO” mean “management buy-out”. The
distinction between an
management buy-out and a leveraged buy-out is not presently
relevant.
In providing this information to Macquarie Bank, Mr McLean
was assisting
Macquarie Bank to prepare its proposal to AXA. It is not clear
whether he did so in the
belief that Macquarie Bank would use the information in order

to assist AXA to achieve
its goal or for its own purposes. However the e-mail suggests
that he was participating as
an officer of a potential purchaser. The presentation occurred on
21 November 2001. It
seems from the presentation slides used on that occasion, that
Macquarie Bank’s
involvement as a purchaser was already contemplated. In the
presentation, the proposed
price range reflected the range suggested by Mr McLean. AXA
had previously
determined that AXA Health was worth $570,000,000 plus a
further $105,000,000,
representing one-half of its valuation of “agreed synergies”.
Thus AXA was asserting a
total valuation of $675,000,000. Whether Mr McLean knew of
this view is not clear, but
he seems to have had knowledge of AXA’s expectations.
Macquarie Bank suggested that the leveraged buy-out process
might be conducted in
parallel with a trade sale to MBF and an initial public offering
at no additional cost to
AXA. His Honour understood this to mean that if negotiations
with MBF came to
fruition, AXA Health could be on-sold from Macquarie Bank to
MBF. This suggests that
the relationship between AXA and Macquarie Bank was not that
usually found between
potential seller and potential buyer.
Although at some stages it was suggested that Macquarie Bank
might retain AXA
Health for up to 3 years in the hope of re-selling at a profit, the
evidence generally
suggests an intention to dispose of it as soon as was practicable.

Further, Macquarie
Bank seems never to have necessarily expected to derive a
profit on resale, although it no
doubt hoped for such an outcome. The evidence suggests that
Macquarie Bank’s interest
in the transaction was substantially focussed upon the fees to be
derived from facilitating
it and not from the acquisition of the asset. In that sense
Macquarie Bank was not a
willing purchaser, dealing with a not unwilling vendor, to
paraphrase the language of
Griffith CJ in Spencer v Commonwealth (1907) 5 CLR 418 at
427 at 432. Rather, it was
anxious to facilitate such a sale, even if it had temporarily to
acquire AXA Health itself.
Nor was the transaction of the kind contemplated by Isaacs J (at
441) in the same case,
when he said:
To arrive at the value of the land at that date, we have, as I
conceive, to suppose it sold then,
not by means of a forced sale, but by voluntary bargaining
between the plaintiff and a
purchaser, willing to trade, but neither of them so anxious to do
so that he would overlook
any ordinary business consideration.
His Honour was clearly speaking of a buyer wishing to acquire
the land, not facilitate
a sale to somebody else.
Mr Facioni said in evidence that Macquarie Bank’s interest was
in earning the fees
associated with setting up and completing the transaction,
suggesting that the possibility
of profit on any resale of AXA Health was largely incidental to

the motivation which led
it to enter into the transaction. He said at paras 9-10 of his
affidavit:
9. [Macquarie Bank] did not intend to become a permanent or
long-term owner of a
private health insurance business. It had never carried on such a
business and did not seek to
do so at this time. At the time of conceiving and developing the
proposal regarding AXA
Health I envisaged that [Macquarie Bank] would pre-arrange a
full or partial sale of AXA
Health before entering into any binding agreement with the
applicant to acquire the
company, in effect a form of sub-underwriting. This could
potentially be done by organising
(Dowsett J)
36
37
38
39
40
an equity consortium of private investors, thus mitigating the
burden and risk for
[Macquarie Bank] of on-selling AXA Health.

10. I considered that organising an equity consortium as part of
the leveraged buy-out
would have significant advantages for [Macquarie Bank]. As the
arranger of the equity
consortium, [Macquarie Bank] would derive significant fees
from the consortium members
as consideration for the provision of advisory, equity,
underwriting and debt arranging
services to the consortium. I considered this to be particularly
attractive in view of the fact
that [Macquarie Bank] would also derive a significant
underwriting fee from the applicant.
At para 43 he said:
In the course of preparing this affidavit I have become aware
that the respondent has
suggested that if the applicant had not sold AXA Health to
[Macquarie Health Acquisitions],
it would have sold AXA Health directly to MB Health Holdings.
That suggestion is
incorrect. The transaction with the applicant to purchase AXA
Health had been originated,
structured, negotiated and executed by [Macquarie Bank]. MB
Health Holdings, BUPA and
[BUPA Australia] were participants in the transaction, with
[Macquarie Bank] as the overall
transaction sponsor. [Macquarie Bank] stood to receive certain
financial benefits for
arranging and leading the transaction and for assuming certain
material risks (financial and
reputational) and devoting significant resources throughout the
course of the transaction. At
no time was MB Health Holdings in a position independently to
offer to acquire AXA
Health and, as a 50% shareholder in MB Health Holdings with

significant commercial
benefit at stake, [Macquarie Bank] would not have permitted
such a transaction to occur.
This evidence suggests strongly that in negotiating the
agreement to acquire AXA
Health from AXA, Macquarie Bank was not negotiating as a
potential purchaser in the
sense used by the High Court in Spencer. The primary
motivation seems not to have
been either long-term acquisition of the business, or even
acquisition for the purpose of
resale at a profit. The primary incentive for its involvement in
the transaction appears to
have been the associated fees, both those to be received from
AXA and those to be
received from the proposed consortium: see also the judgment at
first instance (at ATR
843-844 [24]-[26]; ATC 10,476-10,477 [24]-[26] and ATR 846
[31]-[32]; ATC
10,478-10,479 [31]-[32]).
Various other contemporaneous documents demonstrate the
ambiguous nature of the
relationship between Macquarie Bank and AXA. In a “proposal
summary” for Project
Huey (apparently a name used to identify the AXA Health
project) it is said that:
AXA has appointed Macquarie Bank Ltd … to act as financial
adviser in regard to the
divestment.
As part of this role, Macquarie Bank is exploring the feasibility
of a management buyout
of AXA Health for [$550-$600] million.

Thus, at this stage, Macquarie Bank did not see itself as a buyer
but as an adviser.
Under the heading “Constraints” the document states:
While critical to establishing the feasibility of a management
buy-out of AXA Health,
AXA has not consented to Macquarie Bank approaching a bank
prior to the expiry of
MBF’s exclusivity period (31 December 2001). Further,
Macquarie Bank has not yet
conducted financial, accounting or legal due diligence on the
business or sought the advice
of an independent consultant.
Accordingly, this paper and all representations made to AXA
are subject to achieving
Macquarie Bank’s assumptions relating to debt and
confirmatory due diligence on AXA
Health.
The reference to the need for AXA’s consent to Macquarie
Bank’s approaching a bank
suggests that the latter was to act on behalf of AXA in so doing.
This is hardly consistent
with Macquarie Bank being involved in an arms length
transaction with AXA. In the
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43

44
45
document Macquarie Bank discloses its own interests in
investing up to $125,000,000 in
the project, the balance to be provided by a strategic partner. A
number of possible
strategic partners are identified, including BUPA. Macquarie
Bank’s involvement was
also said to involve receipt of fees. Under the heading
“Potential upside” (apparently
from Macquarie Bank’s point of view) the “transaction
structuring opportunities” are
said to be to “[m]anage capital gains tax exposure for AXA on
sale (share in up to
$100,000,000 NPV uplift to AXA)” and various other matters.
Some of the other
potential advantages may have involved longer-term ownership.
However it seems clear
that Macquarie Bank saw itself as providing a service to AXA,
which service included
management of AXA’s capital gains tax exposure.
In a memorandum dated 22 January 2002 it is suggested that
Macquarie Bank was
interested in acquiring AXA Health for the purpose of resale at
a profit. However the
proposed structure seems to have contemplated resale within 6
months. In a subsequent
internal briefing memorandum dated 22 February 2002 the
preferred option was resale
within 3-12 months, although retention for 2-3 years was also
contemplated. Macquarie

Bank was described as:
Promoter, equity arranger/participant, debt arranger, financial
adviser. Ongoing strategic
relationship covering M&A and ECM Services, funds
management, x-distribution [sic] of
retail products.
In identifying returns to Macquarie Bank, various fees were
identified totalling
$20,000,000-$54,000,000, including some fees payable by
entities other than AXA. A
possible profit of $16,000,000-$20,000,000 from equity
participation was also
contemplated.
The ultimate proposal advanced for approval by Macquarie
Bank involved an equity
exposure limited to $20,000,000. In the end the equity sell down
agreement provided that
AXA would participate in any profit derived from the
subsequent disposition of AXA
Health or its business within 12 months of the completion of the
underwriting agreement.
No such profit was derived. Pursuant to the underwriting
agreement a $5,000,000
underwriting fee was payable to Macquarie Bank. Pursuant to
the equity sell down
agreement a further fee of $5,000,000 was payable for procuring
Macquarie Health
Acquisitions as purchaser to satisfy its obligations under the
agreement. By the time that
the transaction documentation was completed BUPA had
effectively committed itself to
taking all of the shares in AXA Health in the event that
Macquarie Bank had not

otherwise been able to dispose of its interest.
Macquarie Bank’s ambiguous position had not passed
unnoticed. On 26 Novem-
ber 2001, Mr McLean wrote to Mr Facioni, pointing out
difficulties which Ms Foster of
AXA had identified. They included pursuing the leveraged buy-
out with Macquarie Bank
in face of the exclusivity arrangement which existed between
AXA and MBF. She had
also raised the question of a conflict of interest on the part of
Macquarie Bank as
between the role of Macquarie advisory and Macquarie Bank’s
role in any leveraged
buy-out. Ms Foster was also concerned about the fact that
Macquarie Bank, as a potential
purchaser, had received more information than any other
potential bidder for AXA
Health. She suggested that Macquarie Bank should reduce the
level of its advisory fees
given that it was to get “a good deal” on the leveraged buy-out.
As I have previously
observed, Mr McLean’s interest in the transaction seems not to
have been limited to
advising AXA on behalf of Macquarie advisory. He suggested,
apparently as a way of
avoiding an accusation that AXA was negotiating with
Macquarie Bank in breach of the
exclusivity agreement with MBF, that: “… there is an argument
that we are really
looking at financing options for AXA Health … rather than
negotiating a sale. …”
However he considered this to be “hard to maintain if we go
much further.” Mr McLean

(Dowsett J)
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49
suggested that if Macquarie Bank acquired AXA Health, “we
could announce the deal
and then give alternative bidders one month to beat the offer in
order to ensure that the
market is fully tested (although it probably is already).” Ms
Foster apparently replied that
she did not think that this was “a full answer” as Macquarie
Bank had “access to
information that others do not.” Mr McLean then suggested that:
“… we could perhaps
agree to set up Chinese Walls between our advisory team and
our leveraged buy-out
team, to put the leveraged buy-out team in the same position as
they would be in if they
were from a party external to Macquarie Bank.” In view of the
information already
supplied, this precaution seems to have emerged at a rather late
stage. Mr McLean
continued:
I’m not sure AXA should be concerned about that – it is in their
best interests to give us
enough information to put in a fully informed bid (and they are
not risking a breach of

confidentiality doing this, given that Macquarie Bank knows the
deal already). If the issue is
that there is not a level playing field between potential bidders,
we could use a mechanism
such as the “one month to bid” option mentioned above. If AXA
really finds this difficult,
we could perhaps look to set up Chinese Walls to limit the flow
of information.
As to the question of reduction in fees he said:
The answer here is pretty clear – if we take this up Macquarie
Bank will be taking some
very material risks and is likely to pay a figure close to what a
synergy buyer is offering for
the business. At the price paid, the deal may or may not go well
for Macquarie Bank: it is
not appropriate for us to lose our fee given that we are paying a
full price for the business.
The advice is a separate deal from the acquisition.
AXA was concerned to ensure that it participated in any profit
derived by Macquarie
Bank from on-selling its interest in AXA Health at a profit.
Whether the concern was
primarily financial or more about reputation in the business
community is unclear.
However it is clear that AXA and Macquarie Bank accepted that
there might be a
relatively quick resale at a profit, suggesting doubts about
whether the price being paid to
AXA was market price.
These considerations suggest that this was not a case in which
the sale price was
negotiated between a willing, but not overly anxious vendor and

a willing, but not overly
anxious purchaser. It was negotiated between a relatively
anxious vendor (although that
may not matter much) and a merchant bank which was anxious
to derive fees from the
transaction, and was willing to facilitate it by making a short-
term investment on its own
accord in the expectation that it would recoup it, possibly with a
profit, possibly at a loss.
However, by the time that the agreement was made, the
possibility of a loss was gone.
There was, however, the chance of a profit which Macquarie
Bank would share with
AXA.
The early stages of the negotiation, from which the ultimate
form of the transaction
largely emerged, took place against a background of the
knowledge provided to
Mr Facioni and others by Mr McLean. He had derived it from
his position as adviser to
AXA. The information included AXA’s likely attitude to
possible monetary yields from
the proposed sale and the state of dealings between AXA and
MBF, the other likely
purchaser. The position was such that both Ms Foster (for AXA)
and Mr McLean were
concerned at the possibility of conflict of interest. Those
concerns were justified. It is
also clear that the transaction was structured so as to minimise
AXA’s exposure to
capital gains tax. This was not a case of a potential purchaser
offering a potential vendor
a tax advantage by structuring the transaction in a way which
yielded a particular benefit
to the latter as part of the inducement for accepting the offer.

This was rather a case of
Macquarie Bank using its cash resources to provide a service to
AXA, its client, for a
fee.
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Section 124-780(4) of the ITAA 1997 addresses dealings
between the “original interest
holder” and “an acquiring entity.” In the present case, AXA was
the original interest
holder. It is common ground that Macquarie Bank acted on
behalf of the acquirer,
whether it was Macquarie Health Acquisitions or Macquarie
Health Funding, and that it
is Macquarie Bank’s conduct which is to be assessed, together
with AXA’s, for the
purpose of determining whether the parties dealt with each other
at arms length. The
dealings in question were those which led to the exchange of
shares in AXA Health for
shares in Macquarie Health Acquisitions.
Conclusion
The evidence demonstrates the following aspects of those

dealings:
• Macquarie Bank was engaged in the dealings for the purpose
of assisting AXA
to dispose of AXA Health;
• Macquarie Bank received information concerning the dealings
between AXA
and MBF, the other possible acquirer, which information
informed its dealings
with AXA regarding the acquisition of AXA Health;
• at least a substantial part of the benefit which Macquarie Bank
expected to
derive from the transaction was comprised of fees for
facilitating it and from the
acquirer;
• Macquarie Bank advised AXA on the advantages and
disadvantages of the
proposed transaction;
• Macquarie Bank’s facilitation of the transaction included its
own short-term
capital participation, at least partly for the purpose of earning
its fees;
• both AXA and Macquarie Bank were conscious that there was
at least a
possibility that Macquarie Bank could make a profit on a quick
resale of its
interest in AXA Health, leading AXA to demand and receive a
promise that it
would share in any such profit; and
• by the time that the transaction was effected, Macquarie

Bank’s capital exposure
was minimal or non-existent.
In my view there was an identity of interest in the transaction,
as between AXA and
Macquarie Bank, which was not simply that of vendor and
purchaser. Macquarie Bank
had, in effect, undertaken to assist AXA to dispose of AXA
Health in a way which would
minimise AXA’s capital gains tax exposure. They were to have
an ongoing relationship
with respect to any short-term profit on resale. Their
relationship was not at arms length.
Their dealings reflected that fact. Those dealings were
inevitably coloured by the
disclosures made by Mr McLean in November 2001. From
Macquarie Bank’s point of
view the parameters of the transaction were effectively set by
knowledge of AXA’s
ambitions for the sale and the state of negotiations with MBF.
Mr McLean’s motivation
may have been to benefit AXA, and Macquarie Bank may also
have had that intention.
Indeed, that is the point. The transaction was designed to enable
Macquarie Bank to
obtain fees for services, not to acquire an asset. The
negotiations concerning AXA’s
participation in any profit on resale suggested a perception that
Macquarie Bank’s offer
might not reflect market price.
Orders
I would allow the appeal and set aside the orders below. I would
order that the
application be dismissed with consequential costs orders in

respect of the proceedings
below and on appeal.
(Dowsett J)
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Edmonds and Gordon JJ.
Introduction
The respondent, AXA Asia Pacific Holdings Ltd, disposed of its
shares in a
wholly-owned subsidiary, AXA Health Insurance Pty Ltd, on 30
August 2002 for
$570,000,000 pursuant to agreements entered into on 4 June
2002. The trial judge held
that under Subdiv 124-M of the Income Tax Assessment Act
1997 (Cth) (the ITAA 1997),
AXA was entitled to partial roll-over relief for $383,125,293 of
the capital proceeds on
the disposal of its shares in AXA Health.
There were 3 substantive issues before the trial judge:
(1) did AXA deal at arms length with Macquarie Bank Ltd? A
subsidiary of

Macquarie Bank (Macquarie Health Funding Pty Ltd) as
nominee for Macquarie
Health Acquisitions Pty Ltd) acquired the shares in AXA
Health;
(2) if yes to (1), did Pt IVA of the Income Tax Assessment Act
1936 (Cth) (the ITAA
1936) operate to deny AXA the partial roll-over relief? and
(3) did the Commissioner of Taxation err in assessing penalty
tax?
The trial judge (AXA Asia Pacific Holdings Ltd v FCT (2009)
77 ATR 829) found that
AXA and Macquarie Bank dealt with each other at arms length
and Pt IVA of the ITAA
1936 did not apply. Given the findings of the trial judge, it was
unnecessary for his
Honour to consider the third substantive issue.
On appeal, the Commissioner challenged both of the trial
judge’s findings – that AXA
and Macquarie Bank dealt with each other at arms length and
that Pt IVA did not apply.
The parties accepted that consideration of the third issue
(penalties) should be deferred
until the substantive appeal was determined. First, the
Commissioner submitted that the
trial judge erred in his interpretation of s 124-780(4) of the
ITAA 1997 and in his
conclusion that AXA and Macquarie Health Funding dealt with
each other at arms
length: appeal grounds 1-4. In broad terms, the Commissioner
submitted that AXA did
not deal at arms length with Macquarie Bank because
“Macquarie Bank’s role in
structuring the transactions, so as to minimise the capital gains

tax payable by AXA,
meant that Macquarie Health Funding (which was a subsidiary
of Macquarie Bank
created for the purposes of the transactions) did not deal with
AXA at arms length.”
Next, if the Commissioner’s appeal against the trial judge’s
finding that AXA and
Macquarie Health Funding dealt with each other at arms length
was dismissed, the
Commissioner submitted that the trial judge erred in finding
that Pt IVA of the ITAA
1936 did not apply to disallow the partial roll-over relief
because AXA obtained a “tax
benefit” within the meaning of s 177C(1)(a) of the ITAA 1936
and, further, having regard
to the matters set out in s 177D(b) of the ITAA 1936, it would
be concluded that one of
the persons who entered into or carried out the scheme or any
part of the scheme did so
for the purpose of enabling AXA to obtain that tax benefit in
connection with the
scheme: appeal grounds 5-15.
For the reasons that follow, we would dismiss the appeal. The
trial judge was correct
to conclude that AXA and Macquarie Health Funding dealt with
each other at arms
length and that AXA did not obtain a tax benefit within the
meaning of s 177C(1)(a) of
the ITAA 1936.
Facts
No ground of appeal challenged the findings of fact by the trial
judge. What follows is

a summary of the facts set out (at ATR 833-865 [2]-[81]; ATC
10,467-10,469 [2]-[81]) of
his Honour’s reasons for decision.
AXA Health, a wholly owned subsidiary of AXA, inter alia,
operated a profitable
health insurance business trading as “HBA” in Victoria and
“Mutual Community” in
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South Australia. By the end of 2000, a committee established to
conduct a strategic
review of AXA’s health insurance business determined that
AXA Health’s position was
unsustainable in the long-term. A number of courses open to
AXA were considered,
including the acquisition of another health insurance business or
businesses (Medical
Benefits Fund of Australia Ltd (MBF), Medibank Private or the

acquisition of a
combination of smaller health insurers), a strategic alliance with
MBF or, if none of
those proved viable, the divestment of AXA Health. The
committee’s chairman (Mr Les
Owen, AXA’s group chief executive (Mr Owen)) concluded the
most propitious options
were a merger with MBF or the sale of the existing business to
MBF.
In early 2001, AXA engaged Macquarie Bank (through its
advisory arm (Macquarie
Bank advisory)) to assist it in an approach to MBF. Despite
negotiations in the first half
of 2001 between AXA and MBF about the possible merger of
MBF with the business of
AXA Health, the negotiations had concluded unsuccessfully by
July 2001.
On 27 July 2001 and again on 13 August 2001, MBF made “an
indicative proposal” to
AXA to acquire AXA Health. On 13 August, the headline price
was increased to
$535,000,000. Under both proposals, the sum to be paid at
settlement was $250,000,000
with the balance to be paid by way of vendor finance. AXA’s
board considered the
proposal on 29 August 2001. MBF’s offer was significantly
below AXA’s valuation of
AXA Health of $675,000,000 comprising a “stand alone”
valuation of $570,000,000 and
an “agreed synergies” valuation of $105,000,000. The AXA
board were told that the tax
effects (a capital gains tax liability of approximately
$140,000,000 and revenue loss trade
offs) would impact on the net proceeds. The board resolved to

give MBF a short period
of exclusivity it had requested (subject to appropriate
milestones) to move the parties
toward a satisfactory price and funding structure.
At about the same time, Macquarie Bank advisory was assisting
AXA to locate other
domestic and foreign sources of interest in AXA Health
including meeting with
representatives of British United Provident Insurance Ltd
(BUPA) of the United
Kingdom. Ms Marianne Birch, a division director with
Macquarie Bank advisory
(Ms Birch), was one of the group who met with BUPA.
ultimately concluded that there was little or no domestic or
foreign interest in the
acquisition of AXA Health. By October 2001, Macquarie Bank
advisory was
investigating 2 further options – an initial public offering and a
leveraged buy-out of
AXA Health. The prospect of a leveraged buy-out had been
raised by Ms Susan Foster,
AXA’s strategic projects manager (Ms Foster). Macquarie Bank
advisory contacted
another arm of Macquarie Bank to assist – the principal
transactions group (Macquarie
Bank PTG). Mr Richard Facioni, an executive director of
Macquarie Bank (Mr Facioni),
was the head of Macquarie Bank PTG.
On 21 November 2001, Macquarie Bank PTG made a
presentation to AXA. Mr Owen,
Ms Foster and Mr Andrew Penn, AXA’s general manager of
operations (Mr Penn),
attended. (Mr Penn was the executive with overall responsibility

of disposing of AXA
Health on the most favourable terms). The leveraged buy-out
proposed by Macquarie
Bank PTG was that AXA Health be sold “into an unlisted,
leveraged structure.” A
company would be established to acquire AXA Health in which
Macquarie Bank and
other investors would hold the equity. Debt finance of
$300,000,000 would be obtained.
The leveraged buy-out proposal was to be conducted in parallel
with a trade sale to MBF
so that if AXA’s negotiations with MBF succeeded, AXA
Health could be on-sold from
the Macquarie Bank structure to MBF. (In fact, in the first week
of November 2001,
AXA and MBF were still seeking to effect a sale of AXA Health
to MBF. Mr Owen of
AXA granted MBF a further period of exclusivity until 31
December 2001).
The AXA board met on 30 November 2001. Mr Penn told the
board that except for a
(Edmonds and Gordon JJ)
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sale to MBF, the prospects of disposing of AXA Health for a
price in line with AXA’s
expectations were limited. The board resolved to continue
discussions with MBF and
progress investigations into the initial public offering and the
leveraged buy-out options
to determine price and feasibility.
Macquarie Bank PTG prepared a memorandum dated 7
December 2001 which
proposed the creation of a new entity “BidCo” to acquire AXA
Health. The
memorandum also addressed, inter alia, the advantages and risks
to Macquarie Bank of
such a transaction. Although the scrip-for-scrip exchange was
not mentioned, the trial
judge concluded that the evidence left “little doubt that at least
someone in Macquarie
Bank PTG had it in mind to structure the transaction in such a
way that capital gains tax
would not be payable.” On 9 December 2001, a form of the
memorandum (in the same
terms as the one prepared on 7 December 2001) was sent to the
chief executive officer of
Macquarie Bank and to the head of the investment banking
group within Macquarie
Bank.
The AXA board met again on 20 December 2001. The board
considered a paper
(contributed to by Macquarie Bank advisory) which compared
options for the disposal of
AXA Health. The board endorsed a recommendation that AXA
maintain a tough line

with MBF and not to extend exclusivity beyond 31 December
2001 unless there was
agreement on value and if not, then pursue the initial public
offering/leveraged buy-out
without precluding ongoing discussions with MBF. A “Chinese
wall” was in place
between Macquarie Bank advisory and Macquarie Bank PTG in
relation to the disposal
of AXA Health.
During January 2002, a number of events occurred. On 2
January 2002 (immediately
after the exclusivity period provided to MBF had expired),
provided Mr Penn with a table setting out the net present value
of the various options
then potentially available for the sale of AXA Health. The tax
payable by AXA was one
of the economic implications. On 22 January 2002, Macquarie
Bank PTG prepared a
confidential memorandum which identified the key steps in its
proposal for an leveraged
buy-out of AXA Health. The memorandum again referred to the
idea of Macquarie Bank
establishing BidCo, which would acquire AXA Health. The
memorandum was the first
documentary reference for the balance of the consideration
(after the deposit) to be
convertible shares in BidCo. BidCo ultimately became
Macquarie Health Acquisitions.
On 16 January 2002, Macquarie Bank advisory met again with
representatives of
BUPA. Mr Owen was told of BUPA’s interest. He authorised
to raise with BUPA the possibility of BUPA participating in the

leveraged buy-out
proposed by Macquarie Bank PTG, or of BUPA making a bid
for the outright acquisition
of AXA Health. BUPA told Ms Birch of Macquarie Bank
advisory that BUPA could not
finance an outright acquisition of AXA Health but was keen to
participate in a leveraged
buy-out by contributing equity. Ms Birch told the BUPA
representative that Macquarie
Bank advisory could not deal with BUPA about equity
participation in a leveraged
buy-out (because of the “Chinese Wall”) and gave the
representative Mr Facioni’s
telephone number. Mr Facioni provided BUPA with a detailed
briefing paper which, inter
alia, summarised the financial position of AXA Health, the
proposed structure for the
leveraged buy-out and provided that Macquarie Bank would be
retained to act as
financial advisors to BidCo and would receive fees for financial
advice and debt and
equity arranging.
At the same time, AXA was still considering a sale of AXA
Health to MBF. On
11 February 2002, Mr Penn advised Mr Owen his preference
was for a direct sale to
MBF rather than the leveraged buy-out proposal. Macquarie
Bank PTG spent February
preparing drafts of an “indicative bid” for AXA Health.
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On 27 February 2002, AXA’s board considered a paper prepared
by Mr Owen. The
paper informed the board that progress on both options (direct
sale to MBF and the
leveraged buy-out) was continuing slowly and that AXA would
continue with the
strategy of working with both parties. The board minutes record
that it appeared that the
leveraged buy-out team intended to realise the investment
through a subsequent initial
public offering and AXA would seek to ensure participation in
any excess over the offer
from the leveraged buy-out team.
On 1 March 2002, Macquarie Bank made a “non-binding” bid
for AXA Health,
described as an “unconditional underwriting.” The bid’s form
was devised by Macquarie
Bank PTG and other groups in Macquarie Bank, but not
Macquarie Bank advisory. AXA
had no input into the structure or form of the bid. Letters of
support from third party
investors were included in the bid. The bid contained, inter alia,
provisions that:
(1) Macquarie Bank was not a strategic acquirer nor long-term
owner of AXA

Health;
(2) Macquarie Bank would undertake the acquisition through a
Macquarie Bank
special purpose company – Macquarie Health Acquisitions;
(3) Macquarie Bank would assume the risk of on-selling AXA
Health either by
on-sale to a private equity consortium or an initial public
offering;
(4) AXA was to receive a minimum price of $550,000,000 plus
up to a further
$10,000,000 if AXA Health was subsequently sold by way of an
initial public
offering within 12 months;
(5) consideration of $550,000,000 would be paid by a
$65,000,000 non-refundable
deposit plus $485,000,000 vendor financing in the form of
converting vendor
shares in AXA Health;
(6) AXA would grant Macquarie Bank a period of exclusivity
during which time
AXA would undertake not to enter into discussions with third
parties in relation
to a trade sale or initial public offering of AXA Health; and
(7) an underwriting fee of $10,000,000 plus stamp duty on share
transfers would be
payable by AXA to Macquarie Bank.
On 8 March 2002, AXA responded to the bid. AXA gave, to
adopt the words of the
trial judge, “limited, provisional and somewhat cautious support

to the Macquarie Bank
bid.” AXA required a number of issues to be addressed
(including that the voting and
distribution entitlements of the vendor shares had to be
increased) and proposed a
number of other modifications (including a base price of
$560,000,000 and a requirement
that AXA share, to the extent of 50%, in any profit made from
the on-sale of AXA Health
under certain conditions).
After discussions between Macquarie Bank and the proposed
investors, on
16 April 2002 Macquarie Bank submitted a revised non-binding
bid for AXA Health. It
followed the same general approach as the initial bid. The total
price was increased to
$560,000,000 made up of $65,000,000 cash deposit and
convertible vendor shares to the
value of $495,000,000, AXA was to be entitled to a share of
50% (reducing pro-rata to
30% over 12 months) of any profit made from any on-sale of
AXA Health for more than
$575,000,000 (net of costs) within 12 months and, subject to
negotiation, AXA would
have 25% of the voting power at a general meeting of
and would have one seat on the board.
On 17 April 2002, the AXA board considered 2 options – the
sale to MBF and
Macquarie Bank’s non-binding bid. The scrip-for-scrip roll-over
provisions in the
Macquarie Bank bid were discussed at this meeting. The board
resolved that the

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Macquarie Bank bid should be progressed to a heads of
agreement and that MBF should
be informed that although AXA would continue to negotiate
with MBF, it was no longer
the preferred buyer.
On 19 April 2002, AXA responded to the “key commercial
issues” of Macquarie
Bank’s revised bid. AXA’s response included seeking to extend
the profit share in the
event of the initial public offering or trade sale to 18 months,
and aggregating the
underwriting fee and stamp duty at $10,000,000. Negotiations
of the “key commercial
issues” continued on 22, 24 and 26 April 2002.
On 29 April 2002, representatives from Macquarie Bank
advisory (representing AXA),
Macquarie Bank PTG and BUPA met for the first and only time.
The file note of the
meeting records, inter alia, that AXA expressed concern that it

would be “embarrassed
by an on-sale through an initial public offering at a significant
profit” and further
questioned what benefit it would obtain from paying large fees
to Macquarie Bank to sell
AXA Health to BUPA. The filenote further recorded that AXA
would seek “appropriate
profit share terms” to address these concerns.
On the same day, 29 April 2002, AXA extended the period of
exclusivity to Macquarie
Bank to 14 May 2002. As a result, AXA could negotiate with
MBF but not with any
other prospective acquirer, including BUPA. The concerns of
AXA concerning BUPA’s
larger equity stake in the acquisition of AXA Health were again
expressed in an e-mail
from Mr Owen on 7 May 2002, where he stated that AXA would
“not be at all happy” if
a trade sale to BUPA took place and that if BUPA were
“changing their position in the
whole business” that AXA should be talking with them directly.
Mr Green responded on
8 May 2002. The issue was not addressed.
On 3 May 2002, AXA’s solicitors produced a first draft of the
heads of agreement.
The parties to the agreement were to be AXA, Macquarie Bank,
Macquarie Health
Acquisitions, and Macquarie Health Holdings Pty Ltd.
On 8 May 2002, Mr Bob Herbert of Macquarie Bank sent an e-
mail to others within
Macquarie Bank attaching a draft transaction description of how
AXA Health was to be
acquired. The document described, in some detail, the proposed

arrangement including
aspects that had been negotiated with AXA and aspects that had
been negotiated with
BUPA. The document included a diagram that set out the
“acquisition structure to
facilitate a scrip-for-scrip bid for AXA Health,” explaining the
details of the companies
and their relationship.
On the same day, 8 May 2002, Mr Herbert wrote another
memorandum jointly with
Mr Greg Pahek (an executive of Macquarie Bank PTG) seeking
approval for the
establishment of 3 special purpose companies required to
complete the acquisition of
AXA Health. These companies were Macquarie Health
Holdings, Macquarie Health
Acquisitions and Macquarie Health Funding. Macquarie Health
Holdings was to have
100 ordinary shares of which 99 were to be held by Macquarie
Bank and one was to be
held by BDW Nominees Pty Ltd (a special purpose company
owned by Macquarie
Bank’s legal advisors, Blake Dawson Waldron). Macquarie
Health Acquisitions was to
have 100 ordinary shares of which 99 were to be held by
Macquarie Bank and one was
to be held by Macquarie Health Holdings. Macquarie Health
Funding was to be wholly
owned by Macquarie Health Acquisitions. The memorandum
included another diagram
explaining the structure of the proposed acquisition. The
companies were duly
incorporated on 10 May 2002.
Between 10 and 20 May 2002, further draft heads of agreement

were being prepared
by AXA’s solicitors. During this time, the agreement was
renamed the “underwriting
agreement.” On 20 May 2002, a new warranty was inserted to be
given by Macquarie
Bank that Macquarie Health Holdings would not be a wholly
owned subsidiary of
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Macquarie Bank. On 22 May 2002, Macquarie Bank and BUPA
Australia Pty Ltd
(BAPL, the wholly owned subsidiary of BUPA) procured the
incorporation of a company
called MB Health Holdings Pty Ltd. By 22 May 2002, the price
being offered by
Macquarie Bank had risen to a total of $595,000,000,
comprising of a deposit of $57.6
million and vendor shares in Macquarie Health Acquisitions of
$537.4 million.

Meanwhile, AXA continued to deal with MBF as a possible
(though not a preferred)
buyer.
On 27 May 2002, Mr Facioni put the proposal for the
acquisition of AXA Health (the
proposition summary) to senior executives in Macquarie Bank
for approval. The
proposition summary provided that the transaction would occur
in 4 stages. The first
stage was the establishment of the transaction entities
Macquarie Health Funding
(described as “Fundco”), Macquarie Health Holdings,
and MB Health Holdings (described as “NewCo”), which had
already occurred: see at
[85]-[86] above. The proposition summary provided that MB
Health Holdings’s role
would be to acquire AXA Health either by the exercise of a put
option by AXA to
provide AXA with a “fallback” method of completing the sale
of AXA Health, or, in the
event that such an option was not exercised, by the acquisition
of Macquarie Health
Funding from Macquarie Health Acquisitions. MB Health
Holdings would also have the
task of raising debt funding from the banks, the equity funding
from Macquarie Bank
and BAPL, to fund the acquisition of AXA Health.
The second stage was the “announcement,” which proposed that
Macquarie Bank
would enter into a series of agreements which would “evidence
the various parties’
intentions in respect of AXA Health.” These agreements were a

binding conditional
underwriting agreement with AXA, a binding equity
participation agreement with BUPA
and BAPL, 2 put options granted by BAPL to Macquarie Bank,
one call option granted
by Macquarie Bank to BAPL and credit-approved commitments
from 2 named banks.
The third stage was described as “financial close” which
described the execution of
the sale documentation to acquire AXA Health and was divided
into 4 categories,
namely, capitalisation of the structure, the acquisition of AXA
Health, the Macquarie
Bank sell-down, and banking arrangements.
The final stage was “completion” which described the
procedures necessary to settle
the sale. The proposition summary further outlined, inter alia,
the transaction’s risks and
benefits to Macquarie Bank. The proposition summary was
approved by the executives
subject to 14 conditions.
On 30 May 2002, Macquarie Bank, BAPL, MB Health Holdings
and BUPA entered
into an “equity participation agreement.” By this agreement,
Macquarie Bank and BAPL
agreed to establish a consortium to own and operate AXA
Health, and that MB Health
Holdings would be the vehicle through which this would occur.
Macquarie Bank and
BAPL would each have a 50 per cent interest in MB Health
Holdings, to be adjusted by
factors such as “any sell-down” by Macquarie Bank under the
agreement. Under the

equity participation agreement, BAPL granted Macquarie Bank
2 put options and
Macquarie Bank granted BAPL one call option in respect of
Macquarie Bank’s shares in
MB Health Holdings.
On the same day, 30 May 2002, Macquarie Bank forwarded its
proposed offer for the
sale of AXA Health to AXA. As the trial judge’s reasons for
decision explained (at ATR
858-859 [61]-[62]; ATC 10,489 [61]-[62]):
[61] Also on 30 May 2002 (which was a Friday), Macquarie
Bank forwarded its
“proposed offer” for the sale of AXA Health to [AXA],
attaching agreements in executable
form, in which it made its preparedness to execute those
agreements conditional upon
[AXA] confirming in writing, by 7 pm on Monday, 3 June 2002,
that it ([AXA]) had ceased
87
88
89
90
91
92

93
discussions and negotiations with all other prospective bidders,
including MBF. Indeed,
Macquarie Bank’s letter of 30 May stated that, absent [AXA]
indicating its intention to
“proceed with [the] proposal” by 7 pm on 3 June, the proposal
would be withdrawn.
[AXA’s] sub-committee met on the afternoon of 3 June 2002. It
considered a further letter
of that day from Macquarie Bank which pointed out certain
benefits which the Macquarie
Bank proposal involved for [AXA], and which extended the 7
pm deadline for acceptance to
midnight. On the same day, Mr Owen wrote to Mr Conde
indicating a preparedness to sign
an agreement for the sale of AXA Health to MBF that day, so
long as certain conditions
could be met. Mr Owen spoke to Mr Conde by telephone on the
evening of 3 June, in the
course of which it became clear that [AXA] would be unable to
conclude an agreement with
MBF. Mr Owen so informed the sub-committee at about 9.15
pm. The sub-committee then
decided that [AXA] should accept the offer from Macquarie
Bank.
[62] Macquarie Bank was informed of that decision.
Negotiations between [AXA] and
Macquarie Bank re-commenced at about 11.30 pm on 3 June
2002, an in-principle
agreement was reached at about 9 am on 4 June 2002, the
transaction documents were
circulated for comment at about 1 pm, and the documents were

executed at about 8 pm. The
transaction documents so executed were the underwriting
agreement, to which the parties
were [AXA], Macquarie Bank, Macquarie Health Acquisitions
and Macquarie Health
Holdings, and an “equity sell down agreement,” to which the
parties were [AXA],
Macquarie Bank and Macquarie Health Acquisitions.
The underwriting agreement provided that on the completion
date (30 August 2002),
AXA would exchange, and Macquarie Health Acquisitions
would buy, the shares in
AXA Health: cl 4.1 of the underwriting agreement. In exchange
for the shares in AXA
Health, Macquarie Health Acquisitions would pay $57.6 million
in cash to AXA and
Macquarie Health Acquisitions would issue to AXA 537.4
million shares with a value of
$537.4 million, totalling $595,000,000: cl 4.2 of the
underwriting agreement. This
amount was later adjusted pursuant to the agreement to
$570,000,000. The underwriting
agreement further provided for a put option to be granted to
AXA (cl 10(a), Sch 3) and
for Macquarie Bank and Macquarie Health Holdings to grant
AXA a call option over
their ordinary shares in Macquarie Health Acquisitions (cl 11,
Sch 4). These options
were only be exercised if the “vendor shares” (convertible
ordinary shares in the capital
of Macquarie Health Acquisitions) were converted and would
expire if not exercised
within 2 months of conversion or upon the exercise of the put
option (whichever
occurred first). The agreement further described the vendor

shares, redeemable
preference shares and the voting rights in Macquarie Health
Acquisitions that the holder
of the vendor shares would obtain. Finally, the underwriting
agreement provided, inter
alia, that AXA agreed to pay Macquarie Bank an “underwriting
fee” of $5,000,000 on
the completion date.
Also on 4 June 2002, AXA, Macquarie Bank and Macquarie
Health Acquisitions
executed the equity sell down agreement. The agreement
enabled AXA to participate in
such profit that may be made by the on-sale of AXA Health,
while at the same time
allowing Macquarie Bank a return on its investment. Under this
agreement, AXA agreed
to pay Macquarie Bank an “equity sell-down fee” of $5,000,000
in consideration for
Macquarie Bank procuring Macquarie Health Acquisitions to
satisfy its obligations under
the agreement.
Between 4 June 2002 and 30 August 2002, the parties engaged
in “intense
negotiations” and entered into a number of further agreements
to complete the
transaction. The trial judge described the period immediately
prior to the completion date
(30 August 2002) as follows (at ATR 863-864 [76]-[79]; ATC
10,493-10,494 [76]-[79]):
[76] It seems that the last week before execution of the
transaction documents was a very
busy time for all concerned. On 25 August 2002, the parties on
the BUPA side of Macquarie

Bank, as it were, executed a deed to amend the equity
participation agreement. In relation to
94
95
96
Macquarie Bank’s shareholding in MB Health Holdings, BAPL
granted to Macquarie Bank
a put option and Macquarie Bank granted to BAPL a call option,
the exercise of which in
each case was tied to the exercise by [AXA] of its right to
convert its vendor shares in
Macquarie Health Acquisitions, the exercise by [AXA] of its put
option over those shares, or
the expiry of that put option, as the case required. On the same
day, those parties executed a
shareholders’ deed to regulate the operation and governance of
MB Health Holdings.
[77] On 26 August 2002 [AXA], Macquarie Bank, Macquarie
Health Acquisitions and
Macquarie Health Holdings by deed amended the underwriting
agreement. One of the
amendments was to replace cl 4.1 with the following:
4.1 Exchange of Shares
(a) The parties agree that on the Completion Date, AXA will
exchange and

Macquarie Health Acquisitions will buy the Shares for the
Purchase Price
free of Encumbrances and other third party rights.
(b) Macquarie Health Acquisitions may, on Completion, direct
AXA to
execute an instrument of transfer of the Shares to Newco or
other
nominee company.
(c) Where Macquarie Health Acquisitions gives a direction in
accordance
with clause 4.1(b), the duly executed instruments of transfer to
be
delivered by AXA on Completion must be in favour of Newco
or other
nominee company.
On the same day, [AXA], Macquarie Bank, Macquarie Health
Acquisitions and Macquarie
Health Funding by deed replaced the equity sell down
agreement. At least to the extent
relevant for present purposes, what I have written at [74] may
likewise be said about the
deed of 26 August (save for the fact that “NewCo” had by then
been interposed in the form
of Macquarie Health Funding, and was itself a party to the
deed). On the same day, [AXA],
Macquarie Bank, Macquarie Health Acquisitions, Macquarie
Health Holdings and the
National Mutual Life Association of Australasia Ltd executed
the covenant agreement. It
contained a range of provisions calculated to govern the parties’
obligations in the
intervening period while the commercial business of AXA
Health was effectively under the

control of Macquarie Bank, but might (depending on how
matters turned out) ultimately be
returned to [AXA]. …
[78] On 29 August 2002, Macquarie Health Acquisitions and
Macquarie Health Funding
entered into what was described as “Macquarie Health
Acquisitions undertaking”. By it,
Macquarie Health Acquisitions agreed to direct [AXA] to
execute an instrument of transfer
of its shares in AXA Health to Macquarie Health Funding, and
agreed to pay [AXA] the
purchase price for those shares. Macquarie Health Acquisitions
assigned to Macquarie
Health Funding certain benefits, or expected benefits, arising
under detailed provisions of
other instruments then executed or expected to be executed. The
consideration passing from
Macquarie Health Funding to Macquarie Health Acquisitions
was an agreement to issue to
Macquarie Health Acquisitions, upon completion under the
underwriting agreement,
240,000,000 ordinary shares in Macquarie Health Funding (of a
value, it seems, of
$240,000,000). Macquarie Health Funding also agreed to pay to
Macquarie Health
Acquisitions, on the “settlement date,” the sum of
$330,000,000, described as “deferred
consideration.” The “settlement date” was the earlier of 2 dates,
one of which was the date
specified by [AXA] for the conversion of its vendor shares in
Macquarie Health
Acquisitions in a notice of intention to convert (if one were
given) in that behalf. As will
appear, the combination of these sums ($240,000,000 and
$330,000,000) represented the

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