Liberty Financial's Sherman Ma
An appeals court has ruled that one facet of the complex internal treasury operations of Liberty Financial and entities associated with its controlling shareholder Sherman Ma, at least in the past, did not amount to a contrived “scheme” in order to obtain a tax benefit.
A full bench of the Federal Court of Australia upheld an appeal by Minerva Financial Group Pty Ltd that overturned an earlier decision in favour of the Commissioner of Taxation.
Minerva Financial Group Trust’s principal activity “is investing in securitised trusts and warehouse trusts” according to special purpose financial accounts for 2018 and 2019 filed with the ASX at the time of the Liberty Financial IPO and listing in late 2019.
The trustee of this Minerva trust was (and remains) Liberty Fiduciary Ltd – the same entity that today is the responsible entity of the Liberty Financial Group Trust, the trust that is “stapled” to Liberty Financial Group Limited.
The ultimate parent entity of Minerva Financial Group is, or was, Quaker Partners LLC and the immediate parent is Vesta BV.
Vesta is the entity through which Liberty’s founder Sherman Ma holds his 77 per cent stake in Liberty.
At issue was the tax payable on the “considerable profits earned” from 2012 to 2015 by Minerva.
During those years, the full court wrote in its judgement, “profits earned in Minerva Financial Group Pty Ltd were distributed to the trustee of Minerva Financial Group Trust and then to Jupiter” – Jupiter being another offshore-based entity owned by Sherman Ma (and which appears to be no longer relevant to the present day operations of the Liberty group).
The essence of the Australian Taxation Office’s case against Minerva is that is was seeking to minimise its taxation liabilities, by structuring and financing its affairs in a manner that made it liable for withholding tax (at a rate of 10 per cent) rather than company tax (at a rate of 30 per cent).
In the lower court, the primary judge had concluded that “the substance of the schemes was that the funds associated with Minerva’s net income flowed predominantly to Liberty Fiduciary in the form of loans” the three judges of the full court wrote in their judgement.
“It was submitted [by the Tax Office] that the difference between the form and substance of the schemes ‘was indicative of a dominant purpose of achieving the tax benefit because the funds flowed to Fiduciary ... but with a reduced tax impost in comparison to that which would have arisen...[had] the cash flowed to Fiduciary as income’.”
The Tax Commissioner’s case, the judgement explains, “rested upon a comparison between the way in which the [Liberty] finance business was structured in 2007 and the way in which income flows occurred in the relevant years.
“It assumed, in effect, that there was no objective reason for the change in income flows other than a desire to secure a tax advantage.”
The full court dismissed this reasoning.
“A case of that kind fails to engage with the unchallenged finding that the restructure in 2007 was not a scheme to which Part IVA applied and the evidence as to the changed commercial circumstances, including the business’ need for further sources of capital.
“Those changes had consequences for the role of Liberty Fiduciary, including as to its sources of income.
“The appellant was entitled to point to these matters as part of the context in which the objective reasons for the distributions of income from Minerva were to be evaluated.”
The full court also cited the evidence of Liberty’s group treasurer “that at the time of establishing Minerva he considered that distributing income to the ordinary unitholder allowed income to be distributed to the ultimate unitholders (Ma’s Vesta) and provided borrowing flexibility and better capital management for the Liberty group.
“Distributions … would have become encumbered by the charge held by senior lenders over Liberty Fiduciary’s assets.”
In one passage late in the judgement, the full court in effect summarised their thinking on the whole case:
“At the end of the day, the appellant as trustee of Minerva made a distribution of distributable income in accordance with the terms of the trust constitution and the terms on which the units in it had been issued.
“The making of that distribution resulted in [the trust] being able to make a distribution to its unitholders which resulted in a real benefit to those unitholders.
“It was not disputed that a tax benefit had been obtained by the appellant. If distributions had been made differently more Australian tax would have been payable.
“But the identification of a tax benefit does not answer the question posited by section 177D.
“Nothing in the surrounding context objectively supports a conclusion that any party to any of the schemes either entered into or carried out any of the schemes for a dominant purpose of enabling the appellant to obtain a tax benefit.”
The full bench of the Federal Court comprised justices Anthony Besanko, Craig Colvin and Lisa Hespe.