Andrew Thorpe and Commissioner of Taxation Ms G Ettinger, Senior Member 10 April 2014 Perth
[2014] AATA 210
[2014] AATA 210
Division GENERAL ADMINISTRATIVE DIVISION File Numbers
2008/4784-5 & 2010/5083-4
Re
Andrew Thorpe
APPLICANT
And
Commissioner of Taxation
RESPONDENT
Tribunal Ms G Ettinger, Senior Member
Date 10 April 2014 Place Perth Decision
The Tribunal varies the decisions in matters 2008/4784-5 and 2010/5083-4 as indicated in the Reasons for Decision which follow. The decision to refuse a deduction for the payments made to Mrs Spencer is affirmed. The 50% penalty imposed by the Commissioner of Taxation is affirmed, although the actual amount of penalty payable may vary due to the deductions allowed, as detailed below.
...(Sgd) G Ettinger...................
Ms G Ettinger, Senior Member
CATCHWORDS
TAXATION – Applicant failed to declare income from Maylands Project – Applicant’s assessable income increased following audit – 50% penalty imposed for recklessness – Whether amounts are deductible as being related to Maylands real estate project – Further considerations ; whether moneys obtained from long term client of Applicant’s legal practice invested without client’s consent constituted a loan to the solicitor or his practice – Whether repayments of monies are deductible - moneys provided by client were a loan to the Applicant.
LEGISLATION
Income Tax Assessment Act 1997 (Cth) ss 6-5, 8-1
Taxation Administration Act 1953 (Cth)
CASES
Barbaro v Minister for Immigration and Ethnic Affairs (1982) 44 ALR 690
Commissioner of Taxation v Dalco (1990) 168 CLR 614
Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
Commissioner of Taxes (South Australia) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108
General Medical Council v Spackman [1943] AC 627
Grefeld & Grefeld & Anor [2010] FamCA 504
Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452
Legal Practitioners Complaints Committee v Thorpe [2008] WASC 9
LVR (WA) Pty Ltd v Administrative Appeals Tribunal (2012) 203 FCR 166
Re A Solicitor [1993] QB 69
Re A Taxpayer (NSW 1934) [No 2] (1934) 3 ATD 79
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47
Thorpe and Commissioner of Taxation [2011] AATA 638
Thorpe v Commissioner of Taxation [2012] FCA 997
Thorpe v Legal Practitioners Complaints Committee [2007] WASCA 8
Vadasz and Commissioner of Taxation (2006) 63 ATR 1236
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028
SECONDARY MATERIALS
Taxation Ruling TR 92/3
REASONS FOR DECISION
Ms G Ettinger, Senior Member
SUMMARY
Mr Andrew Thorpe was a legal practitioner in Perth. He was suspended from practice on 20 September 2004, and struck off in 2008. The matters before this Tribunal arise out of the notices of assessment made by the Commissioner of Taxation (the Commissioner), in regard to the years ending 30 June 2003 and 30 June 2004. Following an audit in 2007, the Commissioner issued amended notices of assessment, increasing Mr Thorpe’s assessable amounts substantially, and imposed penalties of 50% of the shortfall amount calculated on the basis that Mr Thorpe had been reckless in not disclosing income from a real estate development (the Maylands Project).
Following objections, in 2008, Mr Thorpe lodged applications for review at this Tribunal. He also lodged further objections with the Commissioner in 2009. The Commissioner allowed the objections in part in 2010, and reduced the taxable income, with a proportional reduction in penalty.
Mr Thorpe lodged further applications for review at this Tribunal in November 2010. The Commissioner was the Respondent at the Tribunal when the matters were heard in July 2011, the decisions being handed down in September 2011 (Thorpe and Commissioner of Taxation [2011] AATA 638).
Mr Thorpe appealed against the Tribunal’s decision to the Federal Court. On 7 September 2012, that appeal was allowed by consent, and the matter remitted to the Tribunal, differently constituted, to be heard and decided again with the hearing of further evidence (Thorpe v Commissioner of Taxation [2012] FCA 997). The Respondent consented to those orders on the basis that it conceded the Tribunal erred in law in substantially reproducing the Respondent’s submissions as its reasons, without attribution (Cf LVR (WA) Pty Ltd v Administrative Appeals Tribunal (2012) 203 FCR 166). As part of the remittal, the Federal Court directed that the transcript of evidence and each of the exhibits received at the hearing before the Tribunal on 28 July 2011 be part of the evidence in the further hearing. Mr Thorpe was self-represented during the preparation for the remittal hearing before me in July 2013, and represented by Mr P Fletcher of Paul Fletcher and Co., Commercial Lawyers during the hearing.
An issue which was also dealt with at the first Tribunal hearing was the provision of over $100,000 by a long term client of Mr Thorpe, Mrs Margaret Spencer. Mrs Spencer’s money was invested by Mr Thorpe (and/or Mr Thorpe and his then partner in a legal practice, Mr Duckham), in the Arthur River Roadhouse owned by Prudential Holdings Pty Ltd (Prudential), and lost when the Arthur River Roadhouse failed.
Mr Thorpe repaid Mrs Spencer in two separate tranches, being $99,207.75 in August 2002, and $12,851.77 in July 2003. There was disagreement regarding the source of the funds which were used to repay Mrs Spencer. There was further disagreement between the parties regarding whether Mrs Spencer had lent the money to Mr Thorpe and/or his practice, or whether she had lent the money to be invested in the Arthur River Roadhouse.
Mr Thorpe was allowed several extensions of time to file documents for the remittal hearing. Even on the first day of the hearing before me in July 2013, further documents were sought to be tendered. I took them into evidence over the objections of Mr Stephen Wright, of counsel, who appeared for the Commissioner, as they seemed to me, to be relevant to the matters I had to decide. The Respondent was, in turn, given every opportunity to apply for an adjournment, to adduce further evidence, and to make submissions. After the first day of hearing was adjourned on 29 July 2013, and even when it resumed two days later, further documents were tendered by the Applicant. A third day of hearing during which Mr Wright cross-examined Mr Thorpe on the basis of an Affidavit with 11 annexures he had filed (Exhibit A19), was listed some weeks later. Final submissions were made in writing, with oral submissions at the end of January 2014.
The Respondent raised issues regarding Mr Thorpe’s credit, and made submissions regarding the state of his records during the relevant years, and the substantiation of his claims. I am mindful that Mr Thorpe has given quite inconsistent evidence about the activities relevant to these appeals, that is the Maylands Joint Venture and Mrs Spencer’s money over the years, including to the Legal Practitioners Disciplinary Tribunal, two hearings of the Supreme Court of Western Australia, and to this Tribunal.
Mr Thorpe’s record keeping also appears to have been less than accurate, and quite unconventional. Even Mr Fletcher commented at [26] of the Applicant’s closing submissions (dated 29 October 2013), that:
The financial statements attached to the letter to Mrs Spencer can certainly be criticised for being sloppy and in some respects inaccurate, nevertheless they are fundamentally consistent with Mr Thorpe’s case and, importantly, with his initial evidence when first questioned by the Complaints Committee.
I have decided to vary the decisions of the Commissioner in regard to the available deductions for the Maylands Project as indicated in the paragraphs below. I find the money provided by Mrs Spencer was a loan to Mr Thorpe and accordingly, not deductible. The 50% penalty is affirmed, although the actual amount may vary due to the deductions. My reasons follow.
ISSUES BEFORE THE TRIBUNAL
There were three major issues before the Tribunal.
The first relates to:
·Mr Thorpe’s role in the Maylands Joint Venture, or Maylands Project;
·the characterisation of the funds Mr Thorpe provided to the Maylands Project;
·the substantiation of expenditure Mr Thorpe claims he made towards the Maylands Project, and deductibility of the expenditure he says he made.
Another main issue relates to funds from Mrs Margaret Spencer, a long term client of Mr Thorpe to his legal practice (AC Thorpe Barristers and Solicitors) and/or the earlier practice, Duckham Thorpe:
·the characterisation of funds provided by Mrs Spencer; whether they were loans to Mr Thorpe or to the legal practice either of Mr Thorpe or Duckham Thorpe, or loans to Prudential for investment in the Arthur River Roadhouse;
·The source of the two repayments, being $99,207.75 which was repaid to Mrs Spencer in August 2002, and $12,851.77 which was repaid in July 2003;
·Whether, alternatively, the payments were by way of return of moneys held by the Applicant on trust for Mrs Spencer or were of a capital nature or were private and domestic in nature.
The final issue concerns penalties imposed by the Commissioner, and whether any discretion to reduce them should be exercised.
RELEVANT LEGISLATION
The relevant legislation in this matter is the Income Tax Assessment Act 1997 (the Act) in particular sections 6-5 and 8-1.
The issues in relation to the quantum of the assessment concern whether income was derived under section 6-5 of the Act, and in relation to deductions under section 8-1 of the Act.
At the relevant time, section 6-5 of the Act provided:
(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.
(2) If you are an Australian resident, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia, during the income year.
...
(4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
At the relevant time section 8-1 of the Act provided:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature.
In relation to penalty, at the relevant time (being when the amended assessment was issued on 14 March 2007), section 284-75(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) provided:
(1) You are liable to an administrative penalty if:
(a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and
(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
(c) you have a shortfall amount as a result of the statement.
Section 284-80 of the TAA defined a shortfall amount as the amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been.
Section 284-90 of the TAA defines the base penalty amount by reference to a table which includes Item 2 – 50% of your shortfall amount or part if your shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a taxation law.
Section 298-20 of the TAA provides that: The Commissioner may remit all or a part of the penalty. Accordingly, the Tribunal standing in the shoes of the Commissioner may also remit all or part of the penalty.
ONUS OF PROOF
Both parties made comprehensive submissions about the onus, and standard of proof.
As this is a taxation matter, the Applicant bears the onus of proving that the assessments are excessive. Section 14ZZK(b)(i) of the TAA provides that:
On an application for review of a reviewable decision:
…
(b) the applicant has the burden of proving that:
(i) if the taxation decision concerned is an assessment (other than a franking assessment) - the assessment is excessive; or
…
The onus is on the Applicant to show that his taxable income is less than the amount assessed, and to prove what the correct assessment ought to be: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; Vadasz and Commissioner of Taxation (2006) 63 ATR 1236 at [31]-[32].
Mr Wright made submissions about the unreliability of Mr Thorpe’s evidence, submitting he had given different versions of events relevant to this matter to the Full Court of the Supreme Court of Western Australia, and to the Legal Practitioners Disciplinary Tribunal, and noted that in a previous hearing, his documentary records had been described as opaque and unreliable.
Mr Wright submitted that although a taxpayer's evidence given on oath would not necessarily be insufficient to discharge his burden, some other corroborative evidence was usually required which made it more probable than not that his sworn testimony was to be believed: (Nguyen and Commissioner of Taxation [2011] AATA 544 at [7]). He emphasized that this was particularly so in Mr Thorpe’s case because of the issues of credit which had arisen.
Mr Fletcher also referred to Nguyen, submitting however that Mr Thorpe had produced documentary evidence to corroborate his testimony, and had discharged his evidentiary burden so that the Tribunal could confidently draw the necessary inferences from the direct oral and documentary evidence which he had put before the Tribunal.
I have noted the submissions of the parties. In coming to the correct or preferable decision, the Tribunal must take into account relevant documents, the oral evidence of the Applicant, the guidance of the case law, and of course the legislation.
The Respondent has submitted that in determining the weight to be given to the previous findings of the Legal Practitioners Disciplinary Tribunal and the Supreme Court, the Tribunal should take into account the undesirability of requiring the parties to re-litigate a matter that has already been the subject of extensive litigation in other places.
I am mindful that this Tribunal is not bound by the rules of evidence, but may inform itself on any matter in such manner as it thinks appropriate, (section 33 of the AAT Act). It may use findings of another tribunal or court as evidence upon which it bases its findings: Re a solicitor [1993] QB 69; General Medical Council v Spackman [1943] AC 627; Barbaro v Minister for Immigration and Ethnic Affairs (1982) 44 ALR 690. There is a discretion as to the weight given to any source of information.
I moved then to consider the Maylands Project.
THE MAYLANDS PROJECT
The tax years subject of this matter are 2003 and 2004, and the development in question was the Maylands Project. The questions to be considered involved what Mr Thorpe’s assessable income was from the sale of seven of the 16 units (six in the relevant years), from the Maylands Project. I also had to consider whether the moneys advanced by Mr Thorpe for renovations in the Maylands project were loans or had some other character.
I am mindful that the Respondent had previously recognised that the funds expended by Mr Thorpe that were applied to the acquisition of the six lots, the net proceeds of which were allocated to him, and money advanced for the renovation and refurbishment of all the units was an outgoing incurred in generating his assessable income.
I had to consider whether the deductions claimed by Mr Thorpe in relation to the Maylands Project arose from money he provided as loans to the Project, or to the other parties, or whether it could be substantiated as outgoings incurred by him in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (section 8-1 of the Act).
Well traversed authority for the above, being incurred in the course of gaining or producing income is Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 where it was said in relation to section 51(1), the predecessor to section 8-1, that:
… to come within the initial part of [s 51(1)] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.
Mr Thorpe’s role in the Maylands Joint Venture, & characterisation of the funds Mr Thorpe provided to the Joint Venture
The starting point in relation to Mr Thorpe’s role in the Maylands Project is the Joint Venture Agreement dated February 2003, which stated as follows:
JOINT VENTURE AGREEMENT
This Joint Venture Agreement is made the day of February 2003.
BETWEEN
Aaronisle Pty Ltd (ACN 072 385 543) of 12 Kings Park Road, West Perth (“Aaronisle”) and
Clark Gray of 8C Edgehill Street, Scarborough (“Gray”) and
Gerardus Hendricus Vile of 8B Edgehill Street, Scarborough (“Vile”) and
Andrew Cecil Thorpe of 192 Subiaco Road, Subiaco WA (“Thorpe”).
RECITALS
A.Aaronisle and Vile are the registered proprietors of eight lots each within the land situate and known as 18 Kirkham Hill Terrace, Maylands being more particularly described as Lots 1-16 on Strata Plan 29780 being the whole of the land in Certificates of Title Volume 2514 Folios 812-827 (“the land”).
B.Gray is the sole director and shareholder of Aaronisle.
C.At the request of Aaronisle, Gray and Vile, Thorpe has advanced funds for the purchase of seven of the lots within the land.
D.Thorpe has agreed to participate with Aaronisle and Vile in a joint venture agreement for the renovation and refurbishment of the lots.
E.Aaronisle and Vile have agreed to give security over their interest in the land for repayment of monies advanced by Thorpe and Aaronisle has agreed to give security for other monies owed to Thorpe by Aaronisle and Gray. Aaronisle, Gray and Vile have been advised that they have the right to obtain independent legal advice before entering into this agreement.
IT IS AGREED THAT:
1.In consideration of Thorpe funding of the purchase of seven of the lots and foregoing his entitlement to professional fees for all work in relation to the purchase and settlement of the land Thorpe will be paid the nett proceeds from the sale of the seven strata lots being lots 1, 6, 8, 11, 12, 14 & 15.
2.Thorpe may borrow against the title to the seven lots at his absolute discretion and may require Aaronisle and Vile to execute a mortgage or mortgages of the land or any part thereof in Thorpe’s name or the name of a financial institution of Thorpe’s choosing as security for such borrowing. Aaronisle, Vile and Gray will do all things reasonably necessary to enable Thorpe to borrow.
3.Thorpe will advance to Aaronisle and Vile up to $100,000 for the renovation and refurbishment of the improvements on the land.
4.After renovation and refurbishment the lots shall be sold by Squires Real Estate or any other agent approved by Thorpe as agents for the vendors. After settlement Thorpe is to take the whole of the nett proceeds from the seven lots.
5.Thorpe will be paid such other money as he has expended pursuant to this Deed from the sale of the remaining lots.
As can be seen above, the Agreement was between Clark Gray, who was the sole director and shareholder of Aaronisle, Gerardus Hendricus Vile, and Mr Thorpe. The property was owned by Aaronisle and Vile, and was being contributed to by the parties to the joint venture. Mr Thorpe was to carry out the legal work in connection with the purchase and settlement of the land, foregoing his entitlement to professional fees, and to fund the purchase of seven strata lots, being numbers 1, 6, 8, 11, 12, 14 & 15.
The Agreement also specified relevantly that Mr Thorpe would advance to Aaronisle and Vile up to $100,000 for the renovation and refurbishment of the improvements on the land. Following completion, the various lots would be sold, and Mr Thorpe was to take the whole of the net proceeds from the seven lots allocated to him. A further clause stated that: Thorpe will be paid such other money as he has expended pursuant to this Deed from the sale of the remaining lots.
The Commissioner, in his assessment decision, observed that the transactions Mr Thorpe undertook with his joint venturers may have qualified as isolated transactions in that Mr Thorpe’s usual occupation was that of being a lawyer, but that, pursuant to Taxation Ruling TR 92/3, they nevertheless attracted the concept of income according to ordinary concepts and usages. It was clear from the Joint Venture Agreement, the Commissioner found, that Mr Thorpe’s purpose in entering into the arrangement was to make a profit or gain. He agreed to purchase seven strata units which were to be renovated and sold, with Mr Thorpe benefiting from the net proceeds of sale. There was no disagreement between the parties regarding the proceeds of the sale of each of the relevant units as they appeared in the T-documents. Mr Thorpe’s assessable income pursuant to section 6-5 of the Act, accordingly, included profit from the Joint Venture.
However, it is not in dispute that Mr Thorpe did not declare the income from the sale of the units to the Commissioner in the relevant income tax years. As the years in question were 2003 and 2004, only six of the seven units (that is with the exception of unit six), had to be taken into account because unit six was sold in the following financial year (November 2004).
Mr Thorpe’s evidence was that he funded the purchase of the properties according to the Joint Venture Agreement. He carried out the legal work in connection with the purchase of the land, and sale of the completed units. His early arguments in regard to the non-declaration of income from the sale of the units were that there was no net assessable income from the Maylands Project in the relevant years, because the balance sheet showed a shortfall in each. It was not until the remittal hearing that he acknowledged that the profits from the six units, renovated and sold, were assessable income.
The Respondent agreed that the money paid by Mr Thorpe to purchase the seven units was a deductible expense, but did not agree in regard to the money advanced for renovations because the Commissioner characterised that money as a loan. Mr Wright agreed that the meaning of the word advanced could be ambiguous. However, he argued that in considering Clause 3 of the Joint Venture Agreement in the context of the whole Agreement, and the promise of repayment in Clause 5, the moneys advanced were a loan, and hence not deductible pursuant to section 8-1 of the Act.
The Commissioner submitted that quite apart from the use of the term advance, the effect of Clauses 3 and 5 of the Joint Venture Agreement was that the Applicant was required to pay up to a specified sum of money, and was entitled to be repaid that amount at a later point in time, i.e. upon the sale of the remaining units. That, the Commissioner submitted, constituted a loan: see Sackville and Lehane JJ said in Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313 where their Honours quoted the following definition:
A loan of money may be defined, in general terms, as a simple contract whereby one person (the lender) pays or agrees to pay a sum of money in consideration of a promise by another person (the borrower) to repay the money upon demand or at a fixed date. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid. The essence of the transaction is the promise of repayment.
The Commissioner also referred to Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028 at [1199] where Rares J said:
It is consistent with a transaction of loan that a borrower can promise to pay the lender from a particular source and the lender can agree that it will have no other recourse against the borrower than whatever is realised from that source: [various citations omitted]. Non-recourse loans are a commonplace.
Mr Wright also submitted that the fact Mr Thorpe paid invoices made out to Aaronisle and Gray (some of which were in the T-documents), directly to the third party suppliers, and recorded the payments in a schedule, was entirely consistent with the characterisation of the payments as loans by the Applicant.
The Commissioner submitted that notwithstanding his earlier assessment of Mr Thorpe’s assessable income, he was not bound by that, and emphasised that it was up to the Applicant to prove the amended assessments were excessive.
Mr Fletcher submitted that whilst the Joint Venture Agreement may not have been a well drafted document, the use of the word advanced to describe the funds Mr Thorpe made available to the Joint Venture, should be accorded a neutral meaning, being provided, rather than characterised as a loan. Mr Fletcher submitted that none of the costs had the criteria applied to characterise a loan.
Mr Fletcher submitted that the renovation costs and stamp duty paid by Mr Thorpe were deductible expenses in a venture such as the Maylands Project.
I noted that Mr Thorpe’s arguments in relation to whether advanced meant he lent the money to the Maylands Project changed over a period of time. He wrote to his accountant, Mark Bell on 11 April 2006 stating that in connection with the Maylands Project he provided loans to Aaronisle, and made payments to the project. He stated:
I enclose a copy of the Maylands Joint Venture agreement. I was supposed to spend ONLY $100,000 – which was to be repaid at the end. You will see that I ended-up spending at least $366,000 - without interest and borrowing expenses. Being unable to speak to Gray – other than via Supreme Court writs – makes the process of sorting out what from the proceeds was repayment of loans and what was distribution of profits extremely difficult.
I prefer Mr Fletcher’s submissions, and am satisfied that pursuant to the Joint Venture Agreement, Mr Thorpe provided money for the refurbishment of the units in the Maylands Project.
As I am satisfied that the starting point for Mr Thorpe’s assessable income from the sale of the six refurbished units in 2003/2004 was the profit derived from the sales of units 1, 8, 11, 12, 14 & 15, (with the exception of number 6 which was sold in the following financial year), I am in a position to consider the schedules of expenses, Exhibits A6, A8 and A19 which Mr Thorpe provided as substantiation for his expenditure on the Maylands Project.
I reiterate the comments of the Supreme Court of Western Australia that Mr Thorpe’s record keeping was grossly inadequate record keeping over a prolonged period of time. In regard to this hearing, his documents were not provided to the Tribunal and to the Commissioner in an orderly manner, and the account keeping in regard to the Maylands Project can hardly be said to have been professional. Mr Thorpe gave evidence that his ledger (Exhibit A8), was set up largely to record payments for the Maylands Project, and included loans to Aaronisle and Gray. The ledger related to the Maylands Project, but not solely he said, and was in part, records of Mr Clark Gray’s private expenditure. There can be no disagreement that the latter cannot be deductible. Exhibit A7 was a compilation of a bundle of bank statements and credit card statements. Mr Thorpe also compiled a schedule of expenditure which was a combination of cash, cheques and credit card payments, as Exhibit A6, and provided further updates and variations to the documents as Exhibit A19, ACT-1, in September 2013, well after the substantive hearing.
In coming to a decision regarding what amount of money which Mr Thorpe claimed he paid for refurbishment for the Maylands Project was deductible, I have also taken into account what he was reimbursed.
Mr Fletcher acknowledged that the amounts in the Clark Gray and Aaronisle columns in Exhibit A6, were funds lent to Clark Gray and Aaronisle, and were repayable to Mr Thorpe by them out of their share of the proceeds of the sale of the remaining Maylands units. Mr Fletcher referred to a repayment of $207,217 to Mr Thorpe from Aaronisle and Gray, of which $55,000 was received from Sizer Developments Pty Ltd.
The calculations made by Mr Thorpe in regard to the items he claimed were deductible were not always accurate as pointed out by Mr Wright. I have not attempted to make further calculations or add up items, but note here that the amounts repaid to Mr Thorpe mentioned in the paragraph directly above this one, cannot form the basis of another deduction, to avoid any amounts of expenditure being deducted twice. .
The substantiation of expenditure Mr Thorpe made towards the Maylands Project, & deductibility of the expenditure
Mr Fletcher referred to the principles involved in tax deductibility, and submitted that Exhibit A6 detailed the deductible expenditure incurred by Mr Thorpe. Mr Fletcher also referred to application of the appropriate accounting approach in order to determine Mr Thorpe’s assessable income. He referred to Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452 and the judgment of Dixon J in Commissioner of Taxes (South Australia) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108. Mr Fletcher referred to passages at 154-155 from the latter case as follows:
In the present case we are concerned with rival methods of accounting directed to the same purpose, namely, the purpose of ascertaining the true income… the enquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer’s true income…
We are so accustomed to commercial accounts of manufacturing or trading operations, where the object is to show the gain upon a comparison of the respective positions of the beginning and end of a period of production or trading, that it is easy to forget the reasons which underlie the application of such a method of accounting to the purpose of ascertaining taxable income. Although the field of profit-making which it covers in practice is probably much greater than any other among the manifold forms of income or revenue, it is a system of accounting which does not represent the primary or basal position from which an investigation of income for taxation purposes begins. Speaking in general, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realised or immediately realisable form.
Mr Fletcher acknowledged the presence of discrepancies and inaccuracies in Mr Thorpe’s records. He submitted however, that as Mr Thorpe came across errors or discrepancies, or discovered further supporting documents, he made corrections to Exhibit A6. By way of example, Mr Fletcher referred to Item 157 in the schedule, submitting that the $13,225.27 inadvertently omitted from the schedule had been against Mr Thorpe’s interests, and in favour of the Commissioner. He also pointed to others.
In that regard, as already noted above, as recently as September 2013, following the substantive hearing, Mr Thorpe tendered an Affidavit with 11 annexures (Exhibit A19) in an attempt to further substantiate his claims. He was cross-examined on those by Mr Wright.
Mr Fletcher also acknowledged that the amounts in the Clark Gray and Aaronisle columns were funds lent to Clark Gray and Aaronisle, and were repayable to Mr Thorpe from the sale of the remaining Maylands units. He referred to a repayment of $207,217 Mr Thorpe recovered of which he said $55,000 was received from Sizer Developments Pty Ltd.
Mr Wright made submissions about the fact Mr Thorpe made most of the payments for the Maylands Project out of his trust account, and that those were not his funds.
I am satisfied that although that may not have been the most correct way of operating, and it was generally agreed that Mr Thorpe’s record keeping was not in a conventional order, Mr Thorpe, a sole practitioner, operated in that way, and that the funds he received were also channelled into the trust account.
For the sake of completeness, I note that no deductions were claimed or can be made in connection with the refurbishment of Unit 3 which was sold below market price, and which Mr Thorpe acquired personally, and which he occupied for a time.
I am satisfied that as the income from the sales of seven of the units (six in 2003/2004), was income in Mr Thorpe’s hands, and he provided the funds for the refurbishment of the units, it must follow that certain of the expenditure he made in connection with the Maylands Project (that part which could not be characterised as loans), should, for purposes of this review, be deductible in the 2003/2004 years. Mr Fletcher noted that the Commissioner had previously credited Mr Thorpe with deductions in respect of the cost of acquisition, stamp duty, refurbishment, holding costs and selling expenses of six units i.e. units 11, 12, & 14 in 2003, and units 1, 8, & 15 in 2004.
I now turn to the specifics of the individual claims, noting in particular, evidence given by Mr Thorpe in cross-examination directed to Exhibit A19, and his submissions regarding substantiation of the claims in relation to the Maylands Project. The state of the records was such that even in relation to Exhibit A19, filed very late in the proceedings, the figures, and the arithmetic were not entirely accurate, as frequently highlighted by Mr Wright. However, I accept that Mr Thorpe was the sole source of funds for the Maylands refurbishment. Before dealing with the specific items, I make a number of points.
I have heard Mr Thorpe’s evidence about the purchase of beer for the workers, and evidence that it was purchased in the vicinity of the Maylands Project. I am not satisfied that the provision of beer to the workers or other purchases from Liquorland have the necessary nexus to outgoings incurred by Mr Thorpe in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (section 8-1 of the Act). I am not satisfied that it can qualify as a deduction pursuant to section 8-1 of the Act. All purchases of alcoholic beverages claimed are refused as deductions.
In coming to a decision regarding the deductibility of the individual items claimed, I have considered the Respondent’s categorisation of the items claimed, into five groups at [131]–[136] of the Respondent’s Closing Submissions, Mr Thorpe’s evidence in cross-examination in relation to Exhibit A19, and Mr Fletcher’s ‘Submissions in Reply’ at [24] in regard to [132]–[136] of the Respondent’s Closing Submissions.
As noted above, I refuse the claims for the purchase of beer on the basis they do not satisfy the requirements of section 8-1 of the Act.
Many of the items claimed did not have invoices or conventional supporting documentation. Mr Clark Gray’s American Express statements in particular, were a cause for concern. Mr Thorpe’s evidence was that he paid Mr Gray’s American Express accounts, including the amounts relevant to the Maylands Project, and that Mr Gray had an arrangement whereby he made the payments via a travel agent, thereby gaining frequent flyer points. I do not intend to comment on that arrangement. However, I am satisfied that as indicated in the paragraphs below, certain items of the expenditure from the American Express accounts claimed in relation to the Maylands Project can be held to be deductible in the 2003/2004 years.
In relation to Item 62, I am satisfied that Exhibit A19, ACT-2 is a copy of Clark Gray’s American Express statement dated 25 February 2003. I am satisfied with Mr Thorpe’s evidence that the $11,312.39 (with the exception of the accounts for Liquorland or beer which I refuse), included building supplies and other materials, and constituted deductible expenditure on the Maylands Project, and that Mr Thorpe had paid it. I note for the sake of completeness that as Mr Wright pointed out, the figures actually added up to $12,560.41, but will accept Mr Thorpe’s figure of $11,312.39. The remaining amounts may have been loans to Mr Gray, are his personal expenditure, and are not deductible. They do not concern me here.
The submissions of the Respondent categorising the various claims follow, with Mr Thorpe’s evidence or submissions, and my decision on particular items.
Category 1 consists of items which the Respondent accepts are substantiated by an invoice and documentation evidencing the Applicant paid the amount of the invoice. The Respondent maintains his position made in Part C of his Closing Submissions, being in summary that the expenditure on the refurbishment of the units was by way of loans. In the alternative, the Commissioner accepts these items would be allowable deductions to the Applicant.
(a)Items in the year ended 30 June 2003: 27, 29, 45, 46, 67, 86, 90, 110, 111, 115. Total = $25,136.40
(b)Items in the year ended 30 June 2004: 131, 132, 133, 141, 142, 143, 144, 145, 146, 147, 159, 172, 173, 174, 175, 179. Total = $3,919.05
I accept that the claim for Trevors Carpets for Item 110 is deductible. I accept the explanation in regard to the full payment for carpets, and find that Item 149A (see below in Category 4), is also deductible.
I accept that Items 130 – 133 and 141 – 147, being payments to Western Power relate to the Maylands Project, and are deductible.
The Respondent’s concessions in regard to the above items are accepted by the Tribunal.
Category 2 consists of items which the Respondent submits were paid for by cash, but for which there was no invoice, or were not incurred by the Applicant in producing assessable income. The Respondent maintains his position made in Part C of his Closing Submissions, being in summary that the expenditure on the refurbishment of the units was by way of loans. He further submits the items following were not allowable deductions to the Applicant in any event, as they were not substantiated.
(a)Items in the year ended 30 June 2003: 22, 24, 25, 28, 33, 34, 35, 36, 43, 56, 68, 74, 75, 76, 77, 94. Total = $15,233.38
(b)Items in the year ended 30 June 2004: 161, 162, 170. Total = $3,235.
Mr Fletcher submitted that Items 22, 24, 25, 33, 43, 94, 161, 162 & 170 had receipts evidencing payment. Mr Fletcher also submitted that items 56, 74 – 77 were paid by cheque with identified cheque numbers. Item 29 was agreed by the parties at the hearing as having cash paid, and receipt available.
The Tribunal accepts Mr Fletcher’s submissions on items 22, 24, 25, 29, 33, 43, 94, 161, 162 & 170 and on items 56, 74 – 77.
The Tribunal has further considered Items 28, 34, 35, 36, and 68 which the Respondent has refused to accept as deductible pursuant to section 8-1 of the Act, and on which Mr Fletcher did not make comment in his Closing Submissions.
Item 28 is shown as wages cash Rcpt 5, $1,925 and is deductible.
Item 34 is shown as Exchequer Australia Pty Ltd cash $780. It was a cash payment, no receipt is recorded, no explanation was given regarding the provenance of Exchequer Australia Pty Ltd, and the Tribunal finds the item is not deductible.
Item 35 is Bunnings Inglewood credit card $68.62. The purchase is likely to have related to the Maylands Project and is deductible.
Item 36 is shown as Bunnings Wembly $43.26. The purchase was made outside the vicinity of the Maylands Project, there is no receipt recorded, and even given the generous considerations of the Tribunal as to other items, is not deductible.
Item 68 is shown as workers’ wages – Maylands – cash $1,200. There is no further detail provided. The Tribunal finds the item deductible on the basis it was incurred at a relevant date, and was claimed to relate to the Maylands Project.
Category 3 consists of items for which there is no invoice. The Respondent maintains his position made in Part C of his Closing Submissions, being in summary that the expenditure on the refurbishment of the units was by way of loans. He further submits the items following were not allowable deductions to the Applicant in any event. as they were not substantiated.
(a)Items in the year ended 30 June 2003: 62, 63, 64, 80, 82, 88, 92, 93, 95, 98, 122. Total = $42,579.70
(b)Items in the year ended 30 June 2004: 123, 124, 126, 128, 130, 134, 137, 138, 139, 148, 149. Total = $29,998.05
Mr Fletcher submitted that Item 62, ([58] & [61] of the Applicant’s Closing Submissions and Exhibit A8) and Item 88, were American Express payments for which invoices were produced. Invoices for items 64 and 95 were provided. Item 130 was a credit card payment to Western Power (Items 129 – 133). Items 87, 92 and 93 were evidenced by Citibank cheque stubs. Mr Fletcher submitted in reference to Category 3, that all the other items were identified by cheque in the trust ledger, Exhibit A8.
I noted that Item 88 related to Mr Gray’s American Express statement for 27 March 2003. I am satisfied that the expenditure indicated by Mr Thorpe as relating to the Maylands Project with the exception of the Liquorland purchases, and having been paid by Mr Thorpe, can be held to be deductible.
Mr Fletcher submitted in the Applicant’s Closing Submissions at [57], that Item 123 incorrectly treated the entirety of $66,061.75 (cheque 698), as being unrelated to the Maylands Project. He submitted that $12,205.52 of that expenditure was expenditure on the Maylands Project, being building supplies from Bunnings as indicated on the credit card statement at Exhibit A19, ACT-7. I am satisfied with Mr Thorpe’s explanation and the figures at Exhibit A19, ACT-7, that $12,205.52 of the $66,061.75 paid, comprised expenditure for the Maylands Project, and is deductible.
The Tribunal accepts the submissions as noted above given by Mr Fletcher on Mr Thorpe’s behalf: Item 64 Security Engineering Gate, 592, $3,403.13; Item 82, cheque 614, $880 wages; Item 95, Trevors carpets $6,528; Item 98 wages cheque 629, $1,500; Item 122, Plumbco Plumbing Services; Item 122 (Exhibit A6), Plumbco Plumbing Services, 87, Citibank $1,204 (Exhibit A15); Item 124 P Byrne Services,701, $4,401; Item 126 Civil Hirings, 703 $1,895.30; Item 128 Sliding Door Doctor 706 $340; Item 134 Anderson Smith Consulting 719 $1,518.; Item 137 CV & MD Ellyard 725 $3,828.; Item 138 Localmen Maintenance, 726, $2,607.88; Item 139 MI Constructions, 727, $330; Item 148, wages 738, $1,490.; Item 149, wages, 737, $1,315.
The Tribunal is not satisfied that Items 63and 80 are deductible. Item 63 is shown as a payment of $7,300.71 to Andrew Hall. I am not satisfied that I have had any explanation regarding this payment. Item 80, $526.26 was also a payment to Andrew Hall.
Category 4 is considered by the Respondent to consist of items for which there is an invoice but no documentary evidence of payment being made by the Applicant. The Respondent maintains his position made in Part C of his Closing Submissions, being in summary that the expenditure on the refurbishment of the units was by way of loans. He further submits the following items were not allowable deductions to the Applicant in any event as they were not substantiated.
(a)Items in the year ended 30 June 2003: 69, 70, 71, 72, 78, 79, 81, 83, 84, 85, 89, 96, 100, 101, 103, 104, 105, 106, 112, 114. Total = $70,236.29.
(b)Items in the year ended 30 June 2004: 125, 127, 129, 135, 136, 140, 149a, 150, 151, 152, 153, 154, 169, 171. Total = $88,372.32
Mr Fletcher submitted that Item 171 was a payment made by credit card to the Water Corporation paid at the same time as Item 172. The Respondent conceded that the claim for Item 171 ($248.85) was substantiated.
Mr Fletcher submitted that there was documentary evidence in the form of cheques listed in the ledger, Exhibit A8, for Items 69- 71, 78, 79, 81, 83 – 85, 89, 100, 101, 103 – 106, 114, 125, 127, 135, 136 140, 150 – 154, & 171. Item 72, which I noted was to MKW, 599, $12,078 was shown in Exhibit A10 and Exhibit A19, ACT-1.
Mr Fletcher also submitted that Item 96 was a payment from Mr Thorpe’s general account, cheque stub 501, and related to the second payment for Security Engineering for a gate $3,703.12, the first payment having been item 64.
Mr Fletcher submitted that Item 112 was a payment by credit card at the same time as Items 110, 111, 115.
Item 149a was a payment by credit card, invoice at ACT-6, endorsed with a signed authority for payment by Mr Thorpe (dealt with above in relation to item 110, Trevor’s carpets ).
The Tribunal was satisfied with the substantiation provided by Mr Thorpe in regard to the Category 4 items.
Category 5 consisted, according to the Commissioner, of items where the evidence showed the payment was not made by the Applicant personally, but from the AC Thorpe Barristers and Solicitors Trust account. The Respondent maintains his position made in Part C of his Closing Submissions, being in summary that the expenditure on the refurbishment of the units was by way of loans. He further submits the following items were not allowable deductions to the Applicant, because the payment was not made by the Applicant personally.
(a)Items in the year ended 30 June 2003: 5, 10, 21, 26, 30, 40, 44, 47, 50, 53, 116, 117, 118, 119, 120, 121. Total = $44,065.05
(b)Items in the year ended 30 June 2004: 155, 156, 157, 158, 163, 164, 165, 166, 176, 177, 178, 180, 181, 182. Total = $65,560.52
Mr Fletcher submitted, and the Tribunal accepted that Mr Thorpe had been the sole source of funds for the Maylands Project. Mr Fletcher submitted that Mr Thorpe deposited his own money into his trust account, including the money he borrowed, the proceeds of sales of his apartments, and the money repaid by Gray/Aaronisle.
The Tribunal has already commented that the operation by Mr Thorpe of his trust account was very unconventional, but accepts that payments made from the trust account of Mr Thorpe’s practice, may still be accepted as deductible payments provided they were otherwise deductible items in connection with the Maylands Project.
Mr Fletcher submitted that Items 5, 10, 21, 26, 44, 47, 50 and 53 were not paid from Mr Thorpe’s trust account, but were paid from his general account (Exhibit A6 and Exhibit A19, ACT-1).
I accept Mr Thorpe’s explanation in regard to Item 157 as explained at [12] of Exhibit A19, and accept that $13,225.27 comprised payments made for the Maylands Project; further that the cheque stub number 762 evidences payment (Exhibit A13).
I have checked the items enumerated above by the Respondent, and considered whether they were deductible items in regard to the Maylands Project. They appear from the various schedules provided, in particular Exhibit A19-ACT1, to have been expenditure by Mr Thorpe directly related to the Maylands Project, in a way similar to many of the other items discussed above. I accordingly find they were deductible.
I find, as stated in the paragraphs above, in regard to the individual deductible items for the Maylands Project. I have not attempted to add the figures as there are others, such as the Commissioner’s officers who would be far more competent to do so.
MRS SPENCER’S FUNDS
Characterisation of Mrs Spencer’s funds
I have noted that Mrs Spencer, who was a long term client of Mr Thorpe’s legal practice, (dating back to the 1980s), provided funds to Mr Thorpe to invest on her behalf from 1988. He held her power of attorney from that time. Between 1991 and 1993, funds from Mrs Spencer provided either directly to Mr Thorpe, AC Thorpe Barristers and Solicitors or Duckham Thorpe, were invested by the legal practice in the Arthur River Roadhouse. It is not in dispute that Mr Thorpe repaid Mrs Spencer $99,207.75 out of his trust account in August 2002, and repaid $12,851.77 to her in July 2003. Mr Thorpe’s evidence was that the first amount was paid out of his own funds from the trust account, and that he borrowed the second amount from his daughter. If those amounts are held not to be loans, from Mrs Spencer to Mr Thorpe, or outgoing of a private or capital nature, they may be deductible, and relevant to the 2003 and 2004 years. For the sake of completeness, I have noted Mr Thorpe’s evidence that Duckham Thorpe operated from 1990 to 1993.
Accordingly, the issues before me include a consideration of the characterisation of those funds, a consideration of whether they were loans to Mr Thorpe, AC Thorpe Barristers and Solicitors, or Duckham Thorpe, or loans to Prudential for investment in the Arthur River Roadhouse.
A further question concerns the source of the two repayments, being $99,207.75 which was repaid to Mrs Spencer in August 2002, and $12,851.77 which was repaid in July 2003, and whether those payments are deductible.
Mrs Spencer was not called to give evidence at the hearing before me, and there was no statement from her before me. I noted that she had given evidence before the Legal Practitioners Disciplinary Tribunal. I also had before me as Exhibit A2, an Affidavit of Ms Anna Maria Buckley, prepared in December 2003, on behalf of the Legal Practitioners Complaints Committee with annexures, being a trust ledger for Mrs Spencer for the period January 1988 to June 1994, and a schedule of investments for the same period.
Exhibit A3 was a letter from Mr Thorpe to Mrs Spencer dated 25 July 1995 with annexures, being her reconstructed trust account ledger showing various transactions including figures shown as loans to Prudential, and interest payments from Prudential between 1991 and 1993. Mr Wright pointed out a number of errors such as entries in incorrect columns in the trust ledger, during the hearing. I am satisfied from the evidence and submissions that the ledger was not an accurate document.
In the letter at Exhibit A3, Mr Thorpe indicated to Mrs Spencer that:
Since August 1991 monies have been invested on your behalf in the Arthur River Roadhouse conducted by Prudential Holdings Pty Ltd. …
The monies which are listed as having been loaned by Duckham Thorpe were monies paid to maintain the various payments from your account at a time when the bulk of your monies were invested in the Arthur River Roadhouse. Those monies are still to be repaid. There are costs outstanding of approximately $5,000.00, no accounts having been rendered since June 1992.
The above indicates to me that the state of Mr Thorpe’s record keeping was, as pointed out by the Supreme Court of Western Australia and the Legal Practitioners Disciplinary Tribunal, less than satisfactory. In that regard, I note also the last sentence quoted above, in which Mr Thorpe informs Mrs Spencer on 25 July 1995, that no accounts had been rendered since June 1992.
I accept from the evidence and submissions that Mr Thorpe invested Mrs Spencer’s funds in the Arthur River Roadhouse, without security. Mr Thorpe also acted, as held by the Supreme Court of Western Australia in (Legal Practitioners Complaints Committee v Thorpe [2008] WASC 9), in a position of conflict of interest in that he arranged for Duckham Thorpe to take out a second mortgage over the Arthur River Roadhouse to secure their legal costs and advances made to his client, Prudential. The Arthur River Roadhouse failed. The evidence was that the other six to eight creditors were paid, but that Mrs Spencer, who had been given no security over her funds, was not paid out of that pool. Mr Thorpe said to me that, instead, he repaid the loans which were made from Mrs Spencer to Prudential, from his trust account, and his own funds, (and not out of the legal practice), out of a sense of obligation. He said that he always intended to pay her back.
Mr Fletcher submitted that notwithstanding Mr Thorpe’s evidence before the Legal Practitioners Disciplinary Tribunal that Mrs Spencer’s money was a loan to him, (as confirmed by a finding of the Full Court of the Supreme Court of Western Australia in Thorpe v Legal Practitioners Complaints Committee [2007] WASCA 8), the money lent by Mrs Spencer for investment in the Arthur River Roadhouse was not a loan to Mr Thorpe, or to the legal practice. He emphasised that Mr Thorpe had authority (power of attorney dated 1988), from Mrs Spencer to invest her money in the Arthur River Roadhouse.
Mr Fletcher submitted further, that what constitutes a loan is a question of law, and cannot in any case, be decided on Mr Thorpe’s views. Mr Fletcher directed me to indicia of what constitutes a loan. He made submissions regarding the non-existence of a formal contract of loan between Mr Thorpe (or the legal practice), and Mrs Spencer. He commented upon the indicia on which he sought to rely, as stated in CL Pannam, ‘The Law of Money Lenders in Australia and New Zealand (1964)’ at page 6. Mr Fletcher sought also to rely on indicia of a loan stated in Grefeld & Grefeld & Anor [2010] FamCA 504. In that case, Mr Fletcher submitted, the characteristics of a loan were not found to exist. The Court there stated in relation to a loan:
In a normal situation one would expect:
·The real lender to know about the borrowing;
·Some definition of the period of the loan;
·Some definition of the interest payable; and
·Some form of documentation to validate or authenticate a loan for a significant sum of money.
Mr Fletcher submitted that Mr Thorpe admitted he had acted incorrectly in handling Mrs Spencer’s money. However, he submitted that there was no loan from Mrs Spencer to Mr Thorpe or the practice. He relied, Mr Fletcher submitted, upon the fact there was no written contract, no period defined for any loan, and no definition of interest payable.
Mr Fletcher referred to Mr Thorpe’s evidence, stating that at transcript p105, it was put to Mr Thorpe in cross-examination that Mrs Spencer had lent money to him, or to him and to Mr Duckham, and that they had on-lent the money to Prudential. He referred to Mr Thorpe’s evidence, which was that, whilst there were other persons from whom Mr Thorpe and Mr Duckham had borrowed money to on-lend to Prudential, in Mrs Spencer’s case, the loan to Prudential was by Mrs Spencer, of her funds. Mr Thorpe noted he had authority from Mrs Spencer to invest her funds, and that Prudential paid interest to Mrs Spencer for a time. Mr Fletcher stated that Mr Thorpe gave his explanation for his prior inconsistent testimony to the Legal Practitioners Disciplinary Tribunal:
I suddenly got this feeling that there might be an allegation that I had stolen the money. And…it caused me to lose my judgment at that time. I should have addressed it then and there, but there I was in front of an inquiry and a complaints committee, and suddenly it looked like the options were, you borrowed it or you stole it. So I didn’t – I mean, I was prepared, at that time, to take the unprofessional consequence being that I borrowed it. But when I then looked at everything and went through the documents and started to appreciate the totality of it all, away from the harsh light of a Practitioners Complaints Committee Inquiry, it was clear that I never borrowed the money. And I maintained that position from then on and that was the basis of my appeal to the Full Court.
Further, Mr Fletcher submitted that, notwithstanding the earlier evidence, Mr Thorpe had maintained for the past ten years that Mrs Spencer’s money was lent to Prudential (and not to him), for purposes of investment in the Arthur River Roadhouse.
Mr Fletcher acknowledged on behalf of Mr Thorpe that Mr Thorpe represented to Mrs Spencer from about June 1997 that her loan to Prudential was continuing to earn interest when in fact the investment had been lost, (stated Trs page 110, [35]): Mr Thorpe stated:
Mrs Spencer didn’t know her monies had been lost. I intended to find the money to reimburse her, and until that time I maintained the charade that her monies were earning interest.
Mr Fletcher submitted that Mr Thorpe admitted that he had misled Mrs Spencer that her funds were still invested successfully, and continuing to earn interest. He construed that as being consistent with both Mr Thorpe and Mrs Spencer being aware at the time, that the investment with Prudential was an investment by her, of her funds, put in place by Mr Thorpe. Mr Fletcher also submitted that that evidence was consistent with the basis upon which the payments to Mrs Spencer in compensation for her loss were deductible as being a loss which Mr Thorpe, as her solicitor and fiduciary, recognised he was responsible to make good. Mr Fletcher cited the case of Re A Taxpayer (NSW 1934) [No 2] (1934) 3 ATD 79, where it was held that money paid by a solicitor to settle claims against him by clients in relation to money misappropriated by his clerk was a deductible outgoing.
In further submitting that the money lent by Mrs Spencer was lent directly to Prudential, and not to Mr Thorpe or to the legal practice, Mr Fletcher referred me to the transcript of the Supreme Court proceedings at pp 24 & 25:
Question: Did you ever ask Mrs Spencer if you could borrow her money? Answer: No.
Question: Did you enter into any loan agreement with Mrs Spencer? Answer: No.
Question: Did you have any authority from Mr Duckham, with your then partnership, to borrow from a client such as Mrs Spencer, for the firm? Answer: No.
Question: Did Prudential pay interest on the loan funds it received out of Mrs Spencer’s money? Answer: For a period time until it defaulted. But initially, yes, it paid interest on the borrowings from Mrs Spencer.
Question: Did you return your personal income tax return for the relevant periods within which Prudential interest was paid that interest, as your income? Answer: The partnership did not return that interest as the partnership income.
….
I am also mindful of the submissions of the Respondent in regard to the funds provided by Mrs Spencer. Mr Wright dealt with those from [50] – [74] of the Respondent’s Closing Submissions. Mr Wright submitted that it was Mr Thorpe’s dealings with Mrs Spencer in misleading her about her money, and the losses in the Arthur River Roadhouse, the lack of documentation and security for her funds, the inconsistency in his evidence, and other related matters which ultimately led him to be found to be guilty of unprofessional conduct, and struck off. Mr Wright also submitted that this Tribunal was entitled to rely on the findings of the Supreme Court of Western Australia that Mr Thorpe borrowed money from Mrs Spencer which he invested in the Arthur River Roadhouse.
I am not satisfied from the evidence that Mrs Spencer lent the funds she provided to Prudential rather than to Mr Thorpe. I have noted that the Supreme Court of Western Australia in Thorpe v Legal Practitioners Complaints Committee [2007] WASC 8, during which hearing Mr Thorpe gave no evidence, commented on the situation with finances related to the Arthur River Roadhouse, and stated at [17]:
The statements provided to Mrs S which were in evidence before the Tribunal are very difficult to understand, and cannot readily be married up with events in the chronology, to the extent that there is an agreed chronology. …
and further at [20], … It is not possible to discern how a loan of $100,000 at 6 per cent on one month’s call becomes an amount of a little over $97,000 on three months’ notice with the position in relation to interest on that loan being a mystery. I mention these matters because they are an illustration of the opaque nature of the practitioner’s records.
In Thorpe 2007, at [24], the Court observed that Mr Thorpe had advised the Law Complaints Officer that one of the persons from whom he had borrowed various amounts of money in 1992 was Mrs Spencer. The Court in Thorpe 2007 continued at [50]:
It seems to me that the conclusion that the practitioner was using Mrs S as a banker was clearly open, having regard to the way in which moneys were advanced from time to time, the lack of any documentation, the varying ways in which the transaction was described from time to time, and the revealing attitude displayed in documents ….
The Court also noted that Mrs Spencer, whilst aware that her money was to be invested in the Arthur River Roadhouse because Mr Thorpe thought it was a good investment, did not know that she had in fact lent it to Mr Thorpe.
I have noted that the Legal Practitioners Disciplinary Tribunal held that Mrs Spencer, had lent the funds which were invested in the Arthur River Roadhouse to Mr Thorpe, and that this had been ratified by the Full Court of the Supreme Court of Western Australia. I am mindful that the Tribunal may, pursuant to section 33 of the Administrative Appeals Tribunal Act 1975, inform itself on any matter in such manner as it thinks appropriate. In that regard, I am satisfied that the findings made by the Court and the Tribunal, whilst not binding, are persuasive.
I am not satisfied from the evidence before me, taking into account also, the findings of the Supreme Court of Western Australia and the Legal Practitioners Disciplinary Tribunal that Mrs Spencer’s funds were lent directly to the Arthur River Roadhouse. The paucity of documentation appears to have been a feature of the way Mr Thorpe conducted business at the relevant time. It was described by the Supreme Court of Western Australia in Legal Practitioners Complaints Committee v Thorpe [2008] WASC 9 as grossly inadequate record keeping over a prolonged period of time. I prefer that evidence over Mr Thorpe’s.
Source of the funds and repayment of the money to Mrs Spencer
The Tribunal accepts that Mrs Spencer was repaid $99,207 to in August 2002, and $12,851.77 in July 2003.
Mr Thorpe gave various reasons for repayment of the money to Mrs Spencer being:
·he took the view he had invested it on her behalf, lost it, and that he was personally liable;
·Mrs Spencer’s daughter was demanding he repay the money; and
·At the time of the disciplinary hearings, he thought that the repayment might save his practising certificate, (he was struck off in 2008).
A further reason why Mr Thorpe paid Mrs Spencer was, Mr Fletcher added, that Mr Thorpe was at all relevant times under an obligation to comply with the Professional Conduct Rules applicable to solicitors in Western Australia. He acknowledged that Mr Thorpe’s conduct with regard to Mrs Spencer’s trust account did not meet the requisite standard, but that he was nevertheless obliged to comply with the Rules, and not engage in conduct which might bring the legal profession into disrepute.
Mr Thorpe’s evidence was that the repayment of the $99,207 to Mrs Spencer was from funds in his trust account, that being his money. His evidence about the repayment of the $12,851.77 repaid to Mrs Spencer in July 2003, was that his daughter lent him the money. There was no documentation to corroborate his statements. However the Supreme Court of Western Australia accepted that the repayments were probably paid by the practitioner from his own funds.
In summary, and I have not recounted the full details here, Mr Thorpe’s evidence was that the money emanated the sale of certain real estate. The money was available, Mr Thorpe said, to repay Mrs Spencer $99,207.75 in August 2002. Mr Thorpe told me that his daughter lent him the $12,851.77 which he repaid to Mrs Spencer in July 2003. As to the Arthur River Roadhouse; Mr Thorpe’s evidence was that at the time it was to be repossessed, he and Mr Duckham took out a second mortgage (unregistered), as security for Mrs Spencer’s money. I have however noted the Supreme Court of Western Australia’s finding that Mr Thorpe was in a position of conflict of interest in that he arranged for Duckham Thorpe to take out a second mortgage over the Arthur River Roadhouse to secure their legal costs and advances made to his client, Prudential. I prefer the findings of the Supreme Court of Western Australia being that Mr Thorpe took out a mortgage to protect his own interests, not those of Mrs Spencer.
I have noted that the Supreme Court of Western Australia accepted that the repayments were probably paid by the practitioner from his own funds. However, I have no evidence to satisfy me that the funds used to repay Mrs Spencer were Mr Thorpe’s.
Deductibility of the payments to Mrs Spencer
Without wanting to labour the point, Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 is authority in the interpretation of section 8-1 of the Act. There must be a connection between the expenditure incurred and that which is productive of assessable income.
Mr Fletcher argued that damages for professional negligence paid to a client by a professional such as a solicitor may, according to Parsons, be deductible. He also cited Re A Taxpayer (NSW 1934) [No 2] (1934) 3 ATD 79, where money paid by a solicitor to settle claims against him in relation to money misappropriated by his clerk was held to be deductible. That case can be distinguished on the basis that it is factually quite a different situation.
I have already referred to the paucity of documentation which unfortunately was a feature of Mr Thorpe’s business dealings at the relevant time. Mr Thorpe has not established to my satisfaction that the funds Mrs Spencer provided which were invested in the Arthur River Roadhouse were a loan directly from her to Prudential for that investment. I am satisfied from the evidence given previously in the disciplinary proceedings, and prefer that to Mr Thorpe’s present position, that the funds provided by Mrs Spencer were loaned to Mr Thorpe and/or his practice.
The repayment will have been repayment of a loan made to Mr Thorpe or the practice from Mrs Spencer. Regardless of the provenance of those funds, deductibility accordingly does not arise.
Accordingly, the amounts repaid to Mrs Spencer are not deductible as claimed in the 2003/2004 years.
PENALTIES
The Commissioner imposed a penalty of 50% of the tax shortfall for the years 2003/2004, because he held that the shortfall resulted from recklessness by Mr Thorpe in relation to the reporting of his assessable income. I am satisfied that it arose principally because Mr Thorpe did not include the income from the Maylands Project in his tax returns. Omission of reporting of income resulting in a tax shortfall may result in a finding that the taxpayer has made a false or misleading statement. The Commissioner maintained his position regarding recklessness, acknowledging however that if the shortfall amount was reduced as a result of further deductions being allowed, then the penalty would be further reduced proportionally.
Mr Thorpe’s original argument, and that made in both his witness statements, had been that only when the costs of the development were repaid, would any of the return become income requiring declaration. Following legal and accounting advice, he acknowledged that that was incorrect. In that regard, I am mindful that at the relevant time he was a solicitor in practice, had worked in journalism and real estate, and had a tax agent who lodged his returns. He was in a position to obtain further advice if he required it.
Mr Fletcher submitted on behalf of Mr Thorpe that he had not been reckless, and had a reasonably arguable position with respect to the deductions claimed, so that a remission of penalty was applicable. He submitted that if Mr Thorpe succeeded on his claims for deductions, then the penalties should be wholly remitted.
As already stated, essentially, the 50% penalty for recklessness was imposed by the Commissioner because Mr Thorpe failed to report assessable income received from the Maylands Project in the relevant years. Nothing can change that.
I touch upon the issue of remission of penalty which may be invoked where an outcome is harsh or unjust in the particular circumstances of the Applicant. There may also be special circumstances which may be considered to remit penalty. I am not satisfied that either situation applies in Mr Thorpe’s case.
The reduction in assessable income which has resulted since he has been able to substantiate some of the expenses for the Maylands Project may lessen the quantum of the penalty, but do not in my view remit the penalty for recklessness which arises due to the non-declaration of the income from the Maylands Project.
DECISION
The Tribunal varies the decisions in matters 2008/4784-5 and 2010/5083-4 as indicated in the Reasons for Decision. The decision to refuse a deduction for the payments made to Mrs Spencer is affirmed. The 50% penalty imposed by the Commissioner of Taxation is affirmed, although the actual amount of penalty payable may vary due to the deductions allowed.
I certify that the preceding 142 (one hundred and forty two) paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member ..(Sgd) T Freeman...............
Associate
Dated 10 April 2014
Dates of hearing 29 July 2013, 1 August 2013, 11 October 2013 and 28 January 2014 Date final submissions received 4 December 2013 Representative for the Applicant Mr Paul Fletcher Solicitors for the Applicant Paul Fletcher & Co. Commercial Lawyers Counsel for the Respondent
Mr Stephen Wright Representative for the Respondent Mr Timothy Burrows Solicitors for the Respondent Australian Government Solicitor
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