The principal significance of the case today is its part in judicial interpretation of the section 260 anti-avoidance provisions of the Income Tax Assessment Act 1936.
In 1968 a company called Vam Limited proposed to explore for natural gas in fields in South Australia and in south-western Queensland.
Mullens & Co stockbrokers knew about the offer (and had had other dealings with Vam) and was in the opposite situation, it had access to funds and had income which it could usefully offset with deductions, but had no particular interest in Vamgas.
The Vam shareholders created trusts under which they took up their Vamgas rights and paid for their new shares with money provided by Mullens.
The benefits of this scheme were, In effect the Vam shareholders had swapped their potential tax deductions for a combination of short-term finance and protection against the share price falling.
Seven partners of the Mullens stockbroking firm and four companies associated with them appealed to the Supreme Court of NSW against the tax assessments made by the Australian Taxation Office (ATO).
[2] The ATO argued that either the two Vam transactions above were shams, or that if they were real then they came under the section 260 anti-avoidance provisions of the Income Tax Assessment Act 1936.
A "sham" in this context would mean there was some different underlying arrangement between the parties, and the documents they made were never meant to be enforced (or worse, written or re-written after the fact).
Barwick and Stephen on the other hand firstly disagreed with Justice Sheppard's initial conclusion that the transactions could have been shams, finding the documentation and negotiations between the parties ample.
They noted in particular that Mullens didn't get the "two-way" option it had wanted (the right to force the Vam shareholders to buy back), so there was a real commercial risk being borne.
Stephen noted Justice Menzies in Ellers Motor Sales Pty Ltd v Federal Commissioner of Taxation (1969)[4] who said it could not be that an advantage in one part of the act "was given merely to be taken away by the operation of s.260".
The decision here that section 260 did not apply extended the prior "choice principle" from Keighery v Federal Commissioner of Taxation.
Foreigners were unable to use the imputation credits and so instead "sold" them to Australian institutions by transferring the shares to them just across the dividend record date.