Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation
[2022] FCA 971
•19 August 2022
FEDERAL COURT OF AUSTRALIA
Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971
File number: QUD 512 of 2018 Judgment of: LOGAN J Date of judgment: 19 August 2022 Catchwords: TAXATION – appeal from taxation objection decision under Pt IVC of the Taxation Administration Act 1953 (Cth) (TAA) – ss 8-1 and 25-35 Income Tax Assessment Act 1999 (Cth) (IAA) – where Commissioner issued amended assessments of income tax and penalty assessments in relation to claims for the write off of purportedly “bad” debts, “management fees” and “interest” said to be incurred in respect of purported “loans” – where burden falls on taxpayer to establish that the Commissioner’s assessments were excessive – where the taxpayer failed to establish on the balance of probabilities the alleged debts existed during the relevant income year or that the debts were in fact “bad” – where taxpayer failed to establish on the balance of probabilities that the alleged “management fees” were actually rendered or incurred in the income years claimed – where taxpayer failed to establish on the balance of probabilities that purported loans were actually made, the proceeds of the loans were used in producing assessable income or that the interest claimed was in relation to the alleged loans – application dismissed
TAXATION – appeal from taxation objection decision under Pt IVC of the TAA – s 8-1 IAA – where value of “management fees” and interest were no more than an ex post facto constructions designed to be fiscally convenient for tax purposes – where deductions claimed amounted to shams – whether conduct of the controlling mind and will of the taxpayers, an experienced accountant, amounted to fraud or wilful blindness – held: in fixing the amounts of alleged “management fees” and interest charges, the controlling mind and will of the taxpayers was mistaken to the point of wilful blindness as to the ability to claim deductions in issue
TAXATION – Pt IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA) – where Commissioner alleged that interest and facilities fees were incurred for the purpose of producing a tax benefit – where taxpayer established in relation to a limited subset of loans that the dominant purpose of each loan was to obtain working capital to carry on its business – held: Pt IVA has no application in relation to the interest and facility fee deductions upon which the taxpayer succeeded in discharging its onus in establishing that such deduction were deductible under s 8-1 of the IAA
TAXATION – power of Commissioner to make an original assessment following expiry of limitation in s 171A ITAA – whether taxpayer had a “tax loss” – held: s 171A ITAA was not a source of statutory authority for the making assessments for the 2001, 2002 and 2004 income years
TAXATION – deemed notices of assessment under s 166A(3) of ITAA – whether the taxpayer was a “full self-assessment taxpayer” – taxpayer not a “full self-assessment taxpayer” within the meaning of the ITAA
TAXATION – tax shortfall penalties – appeal from taxation objection decision under Pt IVC of the TAA – s 284-90 of sch 1 to TAA – whether intentional disregard or recklessness appropriate – where conduct of controlling mind and will of taxpayers amounted to wilful blindness to application of income tax legislation – held: recklessness penalty appropriate
Legislation: Corporations Act 2001 (Cth) ss 1305, 1307
Crimes Act 1914 (Cth) s 43
Evidence Act 1905 (Cth) s 7E
Evidence Act 1995 (Cth) ss 69, 128, 140
Income Tax Assessment Act 1936 (Cth) ss 6, 95, 166A, 170, 171A, 177A, 177C, 177D, 177F, 187, 190, 265-5, Pt IVA
Income Tax Assessment Act 1997 (Cth) s 8-1, 25-35, 36-10, 36-25, 995-1, 960-100, Sch 2F
Taxation Administration Act 1953 (Cth) ss 14ZZ, 14ZZO, 284-90
Cases cited: Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230
Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCA 974
Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353
Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22
Begg v Deputy Commissioner of Taxation (SA) [1937] SASR 97
BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424
Briginshaw v Briginshaw (1938) 60 CLR 336
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111; (2001) 46 ATR 347; [2001] FCA 164
Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1953) 89 CLR 428
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168
Devaynes v Noble (1816) 1 Mer 572
Dinshaw v Bombay Commissioner of Income Tax (1934) 50 TLR 527
Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471
Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153
Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375
Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325
Federal Commissioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526
Federal Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562
Federal Commissioner of Taxation v Clark (2011) 190 FCR 206
Federal Commissioner of Taxation v EA Marr & Sons (Sales) Ltd (1984) 2 FCR 326
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216
Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164
Federal Commissioner of Taxation v Metal Manufacturers Ltd (2001) 108 FCR 150
Federal Commissioner of TaxationvMyer Emporium Ltd (1987) 163 CLR 199
Federal Commissioner of Taxation v Munro (1926) 38 CLR 153
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359
Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
Federal Commissioner of Taxation v Roberts & Smith (1992) 37 FCR 246
Federal Commissioner of Taxation v Tasman Group Services Pty Ltd (2009) 180 FCR 128
Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd (1979) 43 FLR 217
Fitzroy Services Pty Ltd v Federal Commissioner of Taxation (2013) 93 ATR 855
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1
GE Crane Sales Pty Ltd v Federal Commissioner of Taxation (1971) 126 CLR 177
Getswift Ltd v Webb (2021) 283 FCR 328
Hart v Federal Commissioner of Taxation (2003) 131 FCR 203
Hitch v Stone (Inspector of Taxes) [2001] STC 214
I-MED Radiology Network Limited v The Director of Professional Services Review [2020] FCA 1645
Inland Revenue Commissioners v Europa Oil (NZ) Ltd [1971] AC 760
Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455
Olsson v Dyson (1969) 120 CLR 365
Point v Federal Commissioner of Taxation (1970) 119 CLR 453
R v Crabbe (1985) 156 CLR 464
Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516
RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785
Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 67 FCR 243
Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449
Slutzkin v Federal Commissioner of Taxation (1977) 140 CLR 314
Snook v London & West Riding Investments Ltd [1967] 2 QB 786
Stubbings v Jams 2 Pty Ltd (2022) 96 ALJR 271
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337
Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1
Yeung v Federal Commissioner of Taxation (1988) 88 ATC 4,193
WorkPac v Rossato (2021) 95 ALJR 681
Division: General Division Registry: Queensland National Practice Area: Taxation Number of paragraphs: 479 Date of last submission: 17 February 2022 Dates of hearing: 11 – 25 June 2019
14 – 16 October 2019
25 – 26 October 2021
7 December 2021Counsel for the Applicant: Mr J Hyde Page Solicitor for the Applicant: Mark J Ord Lawyer & Consultant Counsel for the Respondent: Ms KA Stern QC with Ms JE Jaques and Ms CT Ensor Solicitor for the Respondent: Australian Government Solicitor ORDERS
QUD 512 of 2018 BETWEEN: ANGLO AMERICAN INVESTMENTS PTY LTD ATF THE ANGLO AMERICAN CHARITABLE AND CULTURAL TRUST
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
BEDE CARRAN
Other
VANDA RUSSELL GOULD
Other
ORDER MADE BY:
LOGAN J
DATE OF ORDER:
19 AUGUST 2022
THE COURT ORDERS THAT:
1.In respect of each proceeding, the parties endeavour to bring in, on or before 17 October 2022, short minutes of orders to give effect to these reasons for judgment.
2.Failing the filing of agreed short minutes of orders in accordance with Order 1:
(a)the proceedings be listed thereafter on a date to be fixed by the Court after consultation with the parties for the hearing of submissions as to the consequential orders which should be made; and
(b)the parties are to file, on or before 17 October 2022, their respective proposed minutes of orders, together with a related, explanatory outline of submissions of not more than five pages.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
LOGAN J:
Anglo American Investments Pty Ltd (Anglo American), in its capacity as trustee of the Anglo American Charitable and Cultural Trust (AA Trust), has exercised the right of appeal conferred by s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) (TAA) to appeal to the Court against an objection decision of the respondent Commissioner of Taxation (Commissioner) dated 1 June 2018.
PROCEDURE FOR DETERMINING APPEAL
Save where necessary separately to identify Anglo American or where context otherwise indicates, references in these reasons for judgment to the AA Trust are to be read as a reference to Anglo American in its capacity as trustee of the AA Trust. It is convenient to adopt that approach because, under Australian income tax law, the income of a trust estate falls for assessment and taxation as if the trust concerned were a separate legal entity, rather than, as is a trust under the general law, just fiduciary obligations assumed by or imposed on a person in relation to particular property.
For like reasons, and after identifying the trustee concerned, I have adopted this same practice in relation to other trusts relevant to this proceeding.
Although the TAA terms the chosen means of challenge an “appeal”, the proceeding is one heard in the Court’s original jurisdiction. The proceeding involves a determination by the Court about whether, on the evidence and having regard to the grounds of objection and the applicable taxation law, an applicant has proved the assessment(s) concerned to be excessive: s 14ZZO, TAA. In recognition of this feature, the initiating party, is termed an “applicant”, rather than an “appellant” under the rules of court.
As to any facts entailed in this proof and because the proceeding is civil in character, it is both necessary and sufficient for an applicant to satisfy the Court of those facts on the balance of probabilities: s 140(1), Evidence Act 1995 (Cth) (Evidence Act). Some facts I am asked by the Commissioner to find would entail conclusions that fraud or falsification of documents has occurred. Such conclusions may not be reached without adverting to the factors set out in s 140(2) of the Evidence Act. I have taken such factors into account in relation to whether to make any such conclusions.
At the time when judgement was reserved in this proceeding, the parties jointly requested that it be determined at the same time as the then pending and now heard separate taxation appeals (proceedings QUD 513 of 2018 and QUD 399 of 2019) were determined. This was because of an overlap, albeit not a complete symmetry, in relevant evidence and because an issue common to each proceeding was the credibility of a principal witness for the applicant in each proceeding, Mr Vanda Russell Gould (Mr Gould). The parties jointly requested that the Court’s original jurisdiction in each proceeding be exercised by the same judge. It was not possible for all of the proceedings to be heard at the same time.
The adoption of such a procedure can be fraught to say the least, because it may give rise to an apprehension of bias: Getswift Ltd v Webb (2021) 283 FCR 328. Pragmatic reasons intruded into this request and, given that it was jointly made by independently advised parties, my acceptance of it. At the time when the joint request was made, there was (and remain) a finite number of judges assigned to the Court’s Taxation “National Practice Area”. One had already heard a case in which Mr Gould was a witness. At the time, some other judges had such cases pending. It was therefore desirable to minimise the possibility that adoption of a rule of necessity might have to be considered, should it become necessary to constitute a Full Court for the purpose of exercising appellate jurisdiction. In those circumstances I considered it to be in the interests of justice that I hear and determine this proceeding, together with the related proceeding.
Given the course adopted and the reasons for it, it should not be left to assumption that, for the purpose of determining this proceeding, I have had regard solely to the evidence tendered and admitted in this proceeding. This proceeding must, and has been, determined solely by reference to that evidence alone. I have paid no regard to the evidence tendered in the proceeding later heard by me. It is not relevant. Nor have I had any regard to conclusions reached in relation to Mr Gould’s evidence either by me in relation to the later heard proceeding or in any other taxation appeal already heard and determined by the Court. These, too, are not relevant.
A consequence of the course requested by the parties and adopted by me has been that judgment in this proceeding has been delivered later than would otherwise have been the case. Generally, in cases where questions of credibility arise, it is not desirable that judgement be reserved for such a lengthy period. Each party to this proceeding, for its or his own reasons nonetheless requested the adoption of a procedure which would necessarily entail a longer than usual reservation of judgement. A permitted re-opening of the proceeding has also contributed to the delay in its determination. As it happens, and quite apart from the benefit of extensive, contemporaneous trial notes, Mr Gould made an indelibly enduring impression on me throughout the course of his oral evidence.
ASSESSMENTS, OBJECTION AND ISSUES
By his objection decision, the Commissioner disallowed in full the AA Trust’s objections to, and instead confirmed, the following assessments:
(a)amended assessments of income tax dated 12 March 2015 for the years ended 30 June 2001, 2002, 2004, 2005, 2007, 2008 and 2009; and, related to these,
(b)assessments of shortfall penalties for the years ended 30 June 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008 and 2009.
The AA Trust seeks to prove that the income tax assessments are excessive (and thus that there were no shortfalls to attract penalties) by establishing that it was, in the income years in question, entitled to certain deductions under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). In respect of some of the claimed deductions, those concerning alleged bad debts written off, s 25-35 of the ITAA 1997 is also relied upon.
The deductions claimed fall into three broad categories:
(a)an alleged “management fee”;
(b)alleged bad debts written off; and
(c)alleged interest on what are said to be loans, alleged to be in respect of funds borrowed in the course of the gaining or producing of assessable income or in the carrying on of a business by the AA Trust:
(i)a loan the origin of which was said to be $3,063,050 loaned to the AA Trust by its related Australian entity, Darlington McCarthur Pty Ltd (Darlington McCarthur), in 1992, which loan was said to have been novated four times thereafter with the balance fluctuating such that in June 1999 the AA Trust owed the novated loan debt (by then, $2.2 million) to its related entity, CVC Investment Nominees Pty Ltd (CVC IN) (the Onshore Debt). The amount of interest on the Onshore Debt from time to time was said to have been fixed by agreements, concluded annually; and
(ii)loans totalling some $4.2 million, said to have been made to the AA Trust by a Samoan entity, Hua Wang Bank Berhad (HWBB). Loans were said to have been made by HWBB from July 1994 onwards. The loans were said to have been repaid in full by the AA Trust in July 2005.
Although it is necessary to reach a conclusion specific to each claimed dedication, it does not follow that evidence led in relation to one such deduction is completely irrelevant to one or more of the other claimed deductions. In particular, conclusions I have reached as to Mr Gould’s credibility, the reliability of various general ledger entries or general practices have been informed by an assessment of the whole of the evidence. Ultimate control of particular entities is also an overlapping issue.
It was submitted on behalf of the AA Trust that it was a “distraction” to make findings in relation to the nature and extent, if any, of Mr Gould’s involvement with or control over a number of companies shown on the evidence to have an interest, direct or indirect, in a party to an alleged transaction which was said to have resulted in one or more of the deductions claimed. More particularly, it was submitted that whether Mr Gould was the owner of the Cayman Islands incorporated company, JA Investments Limited (JA Investments) and whether Mr Gould was the owner of HWBB, or just the person who initiated HWBB’s transactions, and the precise relationship between Mr Gould and two overseas businessmen, Mr Ian Gowrie-Smith (Mr Gowrie-Smith) and Mr Peter Borgas (Mr Borgas) were “distractions”. It was put that, “These topics are too nuanced and complex to support a meaningful inference about Mr Gould’s credibility as a witness”. It was also submitted, and the fact is, that there are other proceedings in the Court, one to which Mr Gould personally and the Commissioner are parties and other audits conducted by the Commissioner in which such issues are not “distractions” but central.
Merely because some factual issues may be at large both in this proceeding and another is no reason not to resolve such an issue for the purpose of this proceeding if, truly, the resolution of that issue is relevant to whether, in this proceeding, the AA Trust has proved the assessments concerned to be excessive. Any such conclusion is res inter alios acta in another taxation appeal brought by a different applicant. That extends to the taxation appeals later heard by me. By agreement between the parties, the evidence tendered and admitted in this proceeding forms part of the evidence in those later heard proceedings. But it may be that, taken in conjunction with other evidence, including oral evidence, different conclusions are open in those later proceedings and reached, assuming those same issues are relevant in those later proceedings.
One, but by no means the only basis upon which the Commissioner submitted that the assessments were not proved to be excessive was that, on detailed analysis, Mr Gould was a pervasive, controlling, interested presence and the alleged deductions were the product of ex post facto, fiscal opportunism rather than contemporaneous legal relationships. In short, the Commissioner sought to paint Mr Gould as a fiscal Svengali. In truth, what the AA Trust terms a “distraction” is what the Commissioner terms a relevant, wider context. That wider context is, indeed, relevant.
Consideration of the deductions claimed in the wider context in which they occurred necessarily entails, in relation to each deduction claimed, detailing the ownership and control, including the making of findings on such subjects where controversial, of a large number of corporate actors, as well as detailing the roles undertaken by a number of individuals apart from Mr Gould.
MR GOULD AND HIS EVIDENCE
Before turning to individual deduction claims, it is desirable to make some general observations about Mr Gould as a witness.
The bulk of Mr Gould’s evidence in chief was given by affidavit. However, I had the benefit of observing him over an extended period in which he gave oral evidence. His evidence was subject to a direction made pursuant to s 128 of the Evidence Act. In respect of his evidence in chief, Mr Gould was the subject of a wide-ranging, meticulously prepared and carefully conducted cross-examination, as well as a considered re-examination.
Mr Gould combines formal, post-graduate education in commerce with lengthy practical experience as a chartered accountant. He was an astute, engaged and engaging witness, of obvious high intelligence, possessed of great powers of sustained concentration, notwithstanding the length and detail of his cross examination. He was obviously well aware of the taxation consequences of particular types of receipts or expenditures. When he disagreed with propositions put to him in cross examination, which was not an infrequent occurrence, he did so firmly but politely. He was steadfast in this but this was, as a matter of distinct impression by observation, and with all respect to Mr Gould, tinged with a degree of stubborn pride, sometimes even superiority, in relation to counsel. The stubbornness was, I thought evident, when he was confronted in cross-examination, more than once, with documentary evidence inconsistent with his affidavit evidence or other explanations.
My impression in respect of these latter qualities was formed when observing, and listening to, his evidence on subjects such as to how he came in his various affidavits, long after an event, to offer transactional explanations, how apparently inconsistent financial records were to be explained, how recorded and claimed amounts of interest or management fees had come to be fixed, whether and to what extent he controlled various entities, steps taken for what was said to be “asset protection” in the early 1990s in the context of his and his then wife’s divorce and matrimonial property proceedings in the then Family Court of Australia and whether the character of particular transactions was an ex post facto characterisation by him. All of this, and more, was the subject of detailed submission by the Commissioner in relation to Mr Gould’s credibility.
As is revealed below, there is a good deal of merit in the Commissioner’s submission on the subject of Mr Gould’s credibility. The Commissioner went as far as to submit that Mr Gould had been actively dishonest both in respect of the claimed deductions, which were said to be grounded in sham transactions, and in his evidence relating to them. There was certainly a proper basis for the making of such a submission. It is clear that Mr Gould was a decisive presence in relation to various corporate actors. I do consider that there was a good deal of reconstructive extemporising from documents in Mr Gould’s evidence, rather than truly recalled events, although less so, I thought, in relation to dealings between the AA Trust and HWBB. As I highlight below, Mr Gould was in effective control of each. HWBB was an important source of funds for the AA Trust for many years. Mr Gould had every reason to have a good, independent recollection of their dealings and, I thought, displayed that.
My mind has truly fluctuated as to whether Mr Gould’s evidence about management fee, interest and other deduction claims was actively dishonest or just the result of his closing his eyes to the obvious and operating on a belief held at the time when particular deductions claimed, and still held, that he could equate deduction pretence with reality. In Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265, at 279, Windeyer J referred to a belief, “that by doing what he did he could somehow make appearance and pretence into reality. In this he was not dishonest or fraudulent, merely mistaken”. A finding that an alleged transaction or other state of affairs is a sham may, but need not, entail a finding of fraud or dishonesty on the part of the relevant human actors.
A tempering consideration in relation to a conclusion of dishonesty or fraud in relation to Mr Gould is that he is not by training or experience a lawyer. He is, however, a well-qualified and experienced chartered accountant and, as I have already indicated, displayed a good knowledge of the taxation consequences of particular transactions.
Recently, in Stubbings v Jams 2 Pty Ltd (2022) 96 ALJR 271, at [165] – [166], Steward J drew attention to the understanding expressed by the High Court in R v Crabbe (1985) 156 CLR 464 (Crabbe) of what in law constitutes “wilful blindness”. In Crabbe, at 470, Gibbs CJ, Wilson, Brennan, Deane and Dawson JJ stated that “wilful blindness” exists:
When a person deliberately refrains from making inquiries because he prefers not to have the result, when he wilfully shuts his eyes for fear that he may learn the truth, he may for some purposes be treated as having the knowledge which he deliberately abstained from acquiring.
In that same case, at 470 – 471, their Honours also cited with approval this description of “wilful blindness” offered by Professor Glanville Williams:
A court can properly find wilful blindness only where it can almost be said that the defendant actually knew. He suspected the fact; he realised its probability; but he refrained from obtaining the final confirmation because he wanted in the event to be able to deny knowledge. This, and this alone, is wilful blindness. It requires in effect a finding that the defendant intended to cheat the administration of justice.
As I detail below, again and again in this case I was exposed to evidence in respect of deductions claimed where it was inherently improbable that the alleged expenditure liability concerned, if it was incurred in the amount claimed or at all to the entity concerned, was incurred prior to the close of the income year in relation to which the deduction was claimed. This pattern occurred in circumstances where Mr Gould was the relevant directing mind and will. And yet in listening to his oral evidence, and reflecting upon his evidence and the evidence as a whole, I was left with the strong and distinct impression that, for all of his knowledge and experience, he had convinced himself that it was possible, in relation to entities which he controlled and by an act of will on his part, to designate, after the end of an income year, that those entities had been in a particular relationship, and incurred particular liabilities in particular amounts, during that income year. That act of will then seemed to have been carried over into entries in general ledgers. I am not persuaded that he was actively dishonest. However, given his knowledge and experience and understanding of tax consequences of particular expenditures, I am quite sure, even allowing for the strictures of s 140(2) of the Evidence Act, that, again and again, he has closed his eyes to the obvious to the point of wilful blindness. In respect of the deduction claims concerned, it is not necessary to go further in order to hold that the AA Trust has not proved the assessments to be excessive.
I was disposed to reach this conclusion as to Mr Gould’s overall credibility in any event on the evidence led prior to granting leave on 5 August 2021 to re-open the hearing of this proceeding: see Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCA 974. I have additionally taken into account evidence, documentary and oral, introduced as a sequel to the order then made in deciding whether in any way to alter this conclusion.
Including evidence introduced on re-opening, the following emerged. At the time when Mr Gould initially gave evidence in this proceeding, he was the subject of a then unresolved criminal proceeding in the District Court of New South Wales. The indictment presented by the Crown in right of the Commonwealth in that proceeding alleged that he had attempted to pervert the course of justice, contrary to s 43 of the Crimes Act 1914 (Cth). The conduct particularised related to an attempt to influence Mr Borgas (of whom more below by reference to the evidence led in the present proceeding) in relation to oral evidence Mr Borgas was to give in a taxation appeal proceeding in this Court. Initially, a trial on this indictment resulted in a hung jury. A second trial was held in which the jury returned a verdict of guilty. On 17 December 2020, Mr Gould was sentenced to a term of imprisonment of 3 years and 4 months with a non-parole period of 1 year and 8 months to commence on 11 May 2020. Mr Gould sought leave to appeal against his conviction and appealed against the sentence imposed. The Crown also appealed against the sentence imposed. On 10 May 2021, the New South Wales Court of Criminal Appeal refused Mr Gould’s application for leave to appeal against his conviction and also dismissed his appeal against the sentence. The Crown’s sentence appeal was successful. The sentence imposed on 17 December 2020 was quashed. In lieu, Mr Gould was sentenced to a total term of imprisonment of 6 years, commencing on 11 May 2020 and expiring on 10 May 2026, comprising a non-parole period of 3 years and 6 months and a balance of term of 2 years and 6 months.
The outcome of these criminal proceedings was tendered, and could be admitted, solely in relation to credit. The reasons for judgment of the New South Wales Court of Criminal Appeal are not at all relevant. All that is relevant, and then only as to credit is the ultimate outcome in terms of conviction and sentence. Since then, Mr Gould has made a second, presently unresolved application to the New South Wales Court of Criminal Appeal for leave to appeal against his conviction.
However that may be, the position which presently obtains is that Mr Gould is a person who has been convicted of an attempt to pervert the course of justice in relation, as it happens, to a taxation appeal in this Court. Necessarily, the conduct with which this criminal proceeding was concerned occurred after the events which are at issue in this proceeding. As I have mentioned, even before this evidence was admitted, my mind had fluctuated as to whether Mr Gould was actively dishonest. Of course his conviction, in conjunction with evidence earlier tendered, could admit of a conclusion of active dishonesty, both in relation to earlier accounting for and claiming of particular types of expenditures and in giving later evidence about them. Equally however, there is no necessary symmetry between years later dishonestly seeking to influence a witness and a years earlier, mistakenly (to the point of wilful blindness) held view as to what was permissible in relation to a deduction claim. As to Mr Gould’s credibility, the end result, on the whole of the evidence, remains as I have indicated above. Even on the basis of this conclusion, a corollary is that the accuracy of descriptive entries in various accounting records for which Mr Gould had supervisory responsibility is not to be regarded as reliable. I give numerous examples below of why this is so.
I turn now to consider each group of deductions claimed.
MANAGEMENT FEES
In respect of the 2007 income year, the AA Trust claimed as a deduction under s 8-1 of the ITAA 1997 an amount of $123,276.00 in respect of “management fees”. This was said to be an amount owed to Southsea Investments Pty Ltd (subsequently renamed Southsea Nominees from 27 October 1998) as trustee for the Gould Family Trust (GF Trust).
Southsea Investments was trustee of the GF Trust from June 2001 until after the last of the income years with which this proceeding is concerned, the 2009 income year.
It was common ground that Mr Gould controlled both the AA Trust and the GF Trust.
Also in respect of the 2007 income year, the AA Trust claimed as deductions the following expenses:
(a)bank fees of $60; and
(b)a filing fee of $212.
In respect of the 2007 income year, the total of deductions claimed by the AA Trust was therefore $123,548.
As it happened, in respect of that same income year, the declared assessable income of the AA Trust was $123,548. That assessable income comprised interest recorded in the general ledger of the AA Trust as owed to it by Melbourne Insurance Co Pty Ltd (Melbourne Insurance).
Melbourne Insurance was another company controlled by Mr Gould.
The claimed management fee is the next (and last for the financial year) journal entry in that ledger. As recorded, it has the effect of increasing the debt owed by the AA Trust to the GF Trust.
It is opportune at this juncture to make reference to a submission by the Commissioner about the obscuring of the date (“5/08/201”) on the general ledger of the AA Trust.
Such obscuring was characteristic of ledgers in evidence. These ledgers were printed out by Mr Ben Jones (Mr Jones), a then recently admitted solicitor employed by the firm acting for the AA Trust, who was engaged to undertake various record retrieval and summation tasks on behalf of the AA Trust. Mr Jones gave evidence in the proceeding. I thought he gave honest evidence in relation to the record retrieval and preparation of summary tasks consigned to him. Notably, he was not asked by the Commissioner to explain the obscuring mentioned. More particularly, it was not put to him that he had deliberately done this, either of his own volition or at the request of Mr Gould. Nonetheless, the Commissioner sought to make something sinister of this on the part of Mr Gould, who could not offer a definitive explanation in respect of the obscuring. But there was no evidence led of any tampering with the accounting software programme (MYOB) used for the storage and retrieval of the ledger data or of some manual process of redaction. The precise year omission in relation to print date is just unexplained.
Fabrication of the books of a corporation is a federal offence: s 1307, Corporations Act 2001 (Cth) (Corporations Act). Further reflection on the ramifications of such conduct, if proved, in respect of an exercise of Commonwealth judicial power would doubtless disclose other offences applicable to such conduct.
In the course of cross examination, Mr Gould accepted that an invoice dated 30 June 1994 for $1,000,000, which had been submitted to the Commissioner in respect of management fees as between other entities was “false” and had not been created on the stated date. That admission was consistent with the letterhead displaying a telephone number which did not exist as at the purported date of the invoice. His precise involvement in the creation of this false invoice is unclear. However, the provision of the false invoice to the Commissioner occurred after the issuing of an assessment in respect of an alleged understatement of income in the 1994 income year and so as to support an objection against that assessment.
It was put that the obscuring of the print year was serious, because alterations might have been made to a ledger at any time prior to their being printed out and disclosed to the Commissioner and then tendered. In truth, however, there is nothing in terms of any involvement of Mr Gould in the obscuring which rises beyond “inexact proofs, indefinite testimony, or indirect inferences”: Briginshaw v Briginshaw (1938) 60 CLR 336, at 362. Having regard to s 140(2) of the Evidence Act, that is no basis for the drawing of any sinister inference and I draw none in respect of the obscuring of the print year in the ledgers. Neither, in any event, is it necessary so to do to determine the fate of the claimed management fee (or other) deductions. That is because it does not follow from an absence of any sinister quality in the obscuring of a print year that what is recorded in a ledger should be accepted as accurate, be that for tax purposes or otherwise.
Taken in conjunction with the other deductions claimed in that income year, the claimed management fee was fixed in an amount which resulted in a nil taxable income for the AA Trust for the 2007 income year.
A management fee in the amount of $123,276 is recorded as an expense in the profit and loss statement for the AA Trust for the 2007 income year.
In respect of the 2007 income year, no corresponding management fee was recorded in the financial statements of the GF Trust. However, a management fee in a corresponding amount was included in the assessable income of the VR Gould Family Settlement Share Trust (Gould Share Trust) for the 2007 income year. Yet no management fee income was included in the financial statements of the Gould Share Trust for that year.
The trustee of the Gould Share Trust was South Seas Holdings Pty Ltd, another company controlled by Mr Gould. In the 2007 income year, the Gould Share Trust had assessable income exceeding the amount of the management fee. However, it also had available carry forward losses via the application of which its taxable income for that income year was nil. In contrast, in that same income year, the inclusion of this management fee in the assessable income of the GF Trust would have changed what was otherwise a declared nil taxable income into a taxable income equal to the amount of that management fee.
On behalf of the AA Trust, I was asked to accept that there had been some sort of informal novation of that trust’s liability to pay the management fee as between the GF Trust and the Gould Share Trust or, alternatively, that Mr Gould had undertaken management services personally but directed that his remuneration take the form of a debt obligation to one of his private entities. It was submitted that, “It was definitely one of Mr Gould’s entities that was the obligee, and the management services were definitely provided.”
Reference was also made on behalf of the AA Trust to the closely held nature of each of the corporations and trusts concerned and to the ability and actuality of Mr Gould’s control over them. It was put that in such circumstances, an absence of formal written agreements was hardly novel and not at all antithetical to the creation of binding legal obligations by informal agreements the outcome of which were evidenced by the transactions recorded in the ledgers.
Regard to the Commissioner’s objection decision discloses that the better part of a decade had passed between the end of the 2007 income year and an inquiry made by the Commissioner by a letter of 12 January 2016 concerning the management fee claim and other transactions just described.
The submission made on behalf of the AA Trust was that the source of the obligation to pay the management fee was contractual.
I readily accept that the law of the land is that a valid contract can be formed or its existence inferred by conduct attended with much informality. The position is as stated by Allsop J (as his Honour then was), with the agreement of Drummond and Mansfield JJ, in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 (Branir v Owston Nominees), at [369]:
… [A] number of authorities discuss the need not to constrict one’s thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often, and perhaps generally do, arise in that way. They can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting i’s and crossing t’s or where they think they have done so. Here, the i’s were not dotted and the t’s were not crossed because of Mr Graham’s conduct. Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: ‘‘and we hereby agree to be bound’’ in this or that respect. The essential question in such cases is whether the parties’ conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract. The authority for the above can be found in, at least, the following: Meates v Attorney-General [1983] NZLR 308 at 377 per Cooke J (as his Lordship then was); Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117-11,118 per McHugh JA (Hope and Mahoney JJA concurring); Vroon BV v Foster’s Brewing Group [1994] 2 VR 32 at 81-83 per Ormiston J (as his Honour then was); Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 555 per McHugh JA (with whom Samuels JA concurred); Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 611 per Bingham J (as his Lordship then was) affirmed on appeal at 615; Pobjie Agencies v Vinidex Tubemakers [2000] NSWCA 105 at [22]-[24] per Mason P (with whom Meagher and Handley JJA concurred); Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61 at [74] - [80] per Heydon JA; though see Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 178 per Tadgell J (as his Honour then was); and in this context see also Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473 at 489 per Kearney J and Manzi v Smith (1975) 132 CLR 671 at 674.
In relation to small business, it is an unremarkable given (although, with respect, the Commissioner’s submissions in this case suggest he is unable or unwilling to accept or even understand this) that great informality can and often does attend the formation of legal relations. That is the point made in Branir v Owston Nominees. Even more this is so where the relevant corporate actors are or are represented by the same individual acting in different capacities or by individuals who are close family members or business associates. Sometimes the only documentary manifestation of that legal relationship may be a transaction recorded in a ledger or perhaps just an annually prepared profit and loss account and accompanying annotations. There may then, in a taxation appeal, be related oral evidence of the individual(s) concerned that the transaction was as so recorded, for example and relevantly, a fee for the rendering of a managerial service by or on behalf of one entity to another.
That the AA Trust incurred a management fee in the amount of $123,276 is proved prima facie by the entry in its accounts: s 1305, Corporations Act, Federal Commissioner of Taxation v Clark (2011) 190 FCR 206 (Clark), at [65]; and see also in any event, s 69, Evidence Act.
As to the operation of s 1305 of the Corporations Act, the evidentiary effect of the tender of the general ledger with the management fee entry is as stated by Austin J in Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 (Rich), at 396, in a passage cited with approval by Edmonds and Gordon JJ in Clark, at [65]:
The statement in s 1305(1) that the company’s books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a “first view”. All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.
With respect to the discharge by the AA Trust of its onus of proof, much lies behind the qualification in Rich as to the effect of s 1305 of the Corporations Act, “all other things being equal”.
One difficulty for the AA Trust is that there are inconsistencies as noted above as between its accounts for the 2007 year and the financial accounts of the GF Trust and the Gould Share Trust. These accounts, too, have a prima facie evidentiary status. These inconsistencies are not answered by a claimed “novation” of the AA Trust’s management fee liability from the GF Trust to the Gould Share Trust. That is because the inconsistencies extend to an inconsistency between the 2007 income year taxation return for the Gould Share Trust, which records management fee assessable income and the financial accounts of the Gould Share Trust, which record no such income.
Assuming, however, that the 2007 taxation return for the Gould Share Trust is accurate, this does not prove a novation. At most, the taxation return reflects an assumption of, but it is not probative of, the occurrence of a novation. The same would be true even if the financial accounts of the Gould Share Trust recorded an entry in respect of a debt owed by the AA Trust in respect of a management fee: Fitzroy Services Pty Ltd v Federal Commissioner of Taxation (2013) 93 ATR 855 (Fitzroy Services v Federal Commissioner of Taxation); 2013 ATC 20-394, at [39].
For there to have been a novation in the 2007 income year to the Gould Share Trust of the alleged debt constituted by the liability of the AA Trust to the GF Trust in respect of a management fee, a tripartite agreement as between each of those trustees would have been necessary: Olsson v Dyson (1969) 120 CLR 365, at 388 per Windeyer J. Having regard to Branir v Owston Nominees and given that Mr Gould, in different capacities, controlled each of the trustees, it is theoretically possible that he might, before the end of the 2007 income year, have resolved informally and on behalf of each of them that the management fee liability be novated.
However, I am just not satisfied on the balance of probabilities that there was ever any management fee liability to novate, let alone that there was ever any novation.
Any contract for the performance of management services in the 2007 income year for the AA Trust by Mr Gould on behalf of the GF Trust would have to have been made at some stage either before or during that income year. Once again, it may be accepted, given that Mr Gould controlled each trustee and having regard to Branir v Owston Nominees, that great informality might have attended the making of any such contract. In theory, there might have been an informal agreement that services would be performed for a price to be determined. Or, services having been performed, it might have been agreed that a particular amount should be paid in recognition of those services. Or even, for business reasons, it might have been determined unilaterally that a particular amount should be paid for such performed services. But in all such cases, the liability in a particular event would have to be incurred before the end of the income year.
Yet, as the Commissioner submitted, it seems inherently likely, more probable than not, that this is what occurred.
The exact symmetry between the amount of the management fee and, in conjunction with the fees incurred, the total amount necessary completely to extinguish the assessable income for the AA Trust for the 2007 year is one indication of this. It is hardly coincidental. Further, that the amount of the management fee has been so calculated tells against it being fixed before the end of the income year. It also tells not just against this being any reflection of the value of any service performed for the AA Trust by the GF Trust via Mr Gould but also against whether any such expense was incurred at all.
Of course it must be accepted, as was put on behalf of the AA Trust, that it is not for the Commissioner to dictate to those in business how to run their businesses profitably or prudently: Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 (Tweddle), at 7. But in Tweddle, unlike in the present case, there was no question that the deduction claimed had in fact been incurred.
On the evidence, a history of claiming management fees of fortuitous amounts is revealed in relation to entities controlled by Mr Gould.
The AA Trust was settled on 30 June 1992. On and from its inception, the AA Trust has carried on business, in accordance with Mr Gould’s instructions, serving his private business interests and those of his family and friends and charities of interest to him. The timing of the establishment of the AA Trust was no coincidence, given the then recent breakdown of Mr Gould’s then marriage. That absence of coincidence may well mean there is substance in Mr Gould’s asserted motivation, “asset protection” for the establishment of that trust. It is not necessary in these proceedings to determine whether the AA Trust was effective in that regard, only to recognise that his now former wife never had a role in it and that it thereafter served the interests mentioned.
On the very day the AA Trust was settled, a “management” fee” in the amount of $190,175.72 was purportedly incurred by that trust. The effect of a deduction in that amount was to reduce the taxable income of the AA Trust for that income year to $0.34. Mr Gould stated in evidence that there could have been “some pre-existing arrangement”. Given the date on which the AA Trust was established, that seems not just speculation but unlikely. In truth, Mr Gould could offer no explanation as to how on the last day of the income year and on the first day of its existence the AA Trust could possibly have had any occasion to incur management services attracting a fee in that amount.
In the 2001 to 2014 income years, the only other income year in which a “management fee” was purportedly incurred by the AA Trust was the 2003 income year. In that income year, a liability to “Joynook Pty Ltd” in respect of management fees of $4,735 was purportedly incurred. As in the 2007 income year, the amount of this purported management fee debt was exactly equal to and negated the purported derivation of $4,735 in respect of management services provided to Melbourne Corporation Pty Ltd (Melbourne Corporation), another entity controlled by Mr Gould. Over this period and save for the 2003 and 2007 income years, the AA Trust continued to operate, and necessarily needed so to do via an individual, but otherwise, on the face of things, had a carry forward loss available to absorb declared assessable income. Viewing the evidence as a whole, there is persuasive merit in the Commissioner’s submission that it should be inferred that the absence of even the purported incurring of a “management fee” by the AA Trust in those other years was not a coincidence. I find accordingly.
Mr Gould’s evidence was that decisions concerning management fees were taken prior to the end of a given income year. Yet the symmetry or near symmetry with assessable income of the amounts of the management fees in the income years mentioned tells against this. Further, the absence of any consistency as to the provider of the claimed management service over the years tells against there being, prior to the 2007 income year, some standing agreement for the provision of such services from year to year by a given entity.
Also inconsistent with the fixing before the end of an income year of the amount of a management fee is a July 1997 memorandum in evidence directed by a Ms Christine Dyet (Ms Dyet) to Mr Gould in which Ms Dyet sought advice as to the management fees for the 1997 year for CVC Investment Managers Pty Ltd (renamed Leagou Pty Ltd on 18 April 2005) (CVC IM), another entity controlled by Mr Gould. Ms Dyet was apparently at the time a person working in or for Mr Gould’s incorporated accountancy practice. In that income year and in respect of that entity, Mr Gould had evidently made no decision in respect of the amount to be charged in respect of management services prior to the end of the income year. As it happens, it is also CVC IM which is the recipient of the purported invoice for $1,000,000, acknowledged by Mr Gould to be false, mentioned above, in respect of management fees. Viewed in isolation, this memorandum of a decade before the 2007 income year and in respect of another entity could carry little weight in relation to whether the AA Trust had discharged its onus of proof in respect of the management fee expense it claimed in respect of the 2007 year. However, viewed against the presence in the 1992 and 2003 income years of management fee deduction claims of a fiscally convenient amount, and the absence of such a fee in income years where a loss was available, it enhances a conclusion that the prima facie position apparent from the accounts of the AA Trust is unreliable.
Mr Gould’s evidence was that each year he would review the draft financial statements of an entity so as to decide whether he would cause accounting journal entries to be made and whether to term those entries management fees or interest income. He stated that:
I would certainly have a look at the prima facie taxable income. That’s what I was interested in. The actual detailed accounting was of less interest to me, but the tax effect was certainly of interest to me.
Mr Gould stated in evidence that he considered it was possible, even though he may in providing services have been acting on behalf of a number of different entities over the course of a given income year, to decide, at the end of the year, that only one of those entities would charge the management fee in respect of the provision of those services.
Mr Gould admitted in the course of his evidence that, as a rule, he was not be terribly worried about working out the fairness of management fees between his “own individual companies” and that in most years, despite, as he claimed, having done work, he would not bother to cause management fees to be levied as between such entities. The AA Trust was such an entity.
I thought these were candid concessions, so candid that, looking at the whole of the evidence in this case, it made me doubt that Mr Gould, for all his education and experience, approached the fixing of management fees (and, as will be seen, interest), either before or, more likely than not, after the end of an income year, with a dishonest mind, as opposed to closing his eyes to the obvious and instead operating on the basis that he could cause whatever entity he controlled to fix or, as the case may be, to record the incurring of a management fee in whatever amount was fiscally advantageous, irrespective of whether it was that entity which, via him, had provided management services to another and irrespective of whether there was any anterior agreement, however informal, in respect of the provision of that service by that entity. I thought Mr Gould was less candid in relation to the evidence he gave when the July 1997 memorandum just mentioned was put to him in the context of a suggestion that, as a matter of practice by him, amounts only came to be fixed after the conclusion of an income year to which the amount purportedly related. He stated that he could not be certain in any year that accrued amounts were put into the accounts prior to the end of the year of income. This answer, I thought, concealed more than it revealed about whether the amounts were incurred at all before the end of a given income year.
I take a sham to be as described by Lockhart J (Foster J agreeing) in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449, at 454, being a description subsequently approved by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, at [46]:
A “sham” is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.
As Scott No 2 illustrates and as Gleeson CJ, Gummow and Crennan JJ allowed in Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 (Raftland), at [34] – [36], the term “sham” has ambiguous qualities but can be employed in a less pejorative sense to describe a document brought into existence “as a mere piece of machinery” serving some purpose other than constituting the whole of an arrangement. A document brought into existence as a disguise for no transaction at all can also be described as a sham: Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 67 FCR 243 (Richard Walter), at 245 per Lockhart J and at 257-258 per Hill J. That need not involve fraud in the sense of a deliberate intention to deceive a third party in order for the mere piece of machinery to have no effect in law at all. At the very least, I am well satisfied that the entry in the general ledger was a mere piece of machinery, just the manifestation of a construct by Mr Gould. It was therefore in this sense a sham. It is quite possible that Mr Gould’s intention was fraudulent, that his intent in causing the AA Trust to make the management fee claim was not just wilfully blind but more sinister. However, it is unnecessary to reach that conclusion in order to hold that the position apparently evidenced by the ledger entry was but a disguise for no transaction at all. It is not necessary to reach a more pejorative conclusion in order to hold, as I do, that the deduction claimed is grounded in a sham. I am well satisfied of this, even taking into account s 140(2) of the Evidence Act
In short then, the evidentiary position revealed by financial accounts is contradictory and at odds with Mr Gould’s oral evidence. An onus of proof is not discharged by unresolved contradictions in evidence. On the balance of probabilities, the transaction recorded in the accounts which grounds the deduction claimed is just a sham.
For the reasons I have canvassed, it is unlikely, in the sense of less probable than not, that any liability to the GF Trust in the claimed amount in respect of management services was incurred prior to the conclusion of the 2007 income year. In contrast, it is more likely than not that the amount specified in the general ledger of the AA Trust is nothing more than a construct, a balancing amount selected by Mr Gould for fiscal advantage at some point after 30 June 2007. The apparent supporting accounting entry in the general ledger of the AA Trust was a mere façade for no anterior agreement at all for the GF Trust to furnish a management service, much less reflective of services which were rendered on behalf of the GF Trust pursuant to any such agreement.
The AA Trust has not proved on the balance of probabilities that any management service was provided to it by the GF Trust in the 2007 income year, let alone that it incurred a fee in the amount claimed in respect of any such service.
As to the submission that the AA Trust necessarily must have incurred some expense in respect of its management, as it could only act via an individual who undertook services, the deduction claimed is in a particular amount and said to have been provided by a particular entity, the GF Trust. The AA Trust has not discharged its onus of proving that it incurred the expense claimed. It does seem inherently likely that Mr Gould and perhaps subordinate staff performed services for the AA Trust in the 2007 income year. But the nature and extent of such services, much less via which entity and whether they resulted in the incurring of any expense by the AA Trust for them is not proved. Mr Gould’s personal tax return for the 2007 income year does not disclose any income received from the AA Trust in respect of the provision of services to it.
The onus of proof in a taxation appeal is not discharged by judicial acknowledgement of a theoretical possibility. It is nothing to the point that, had an agreement, however informal, been made in advance, and my conclusion is that there was no such agreement, management services might have been provided on behalf of the GF Trust to the AA Trust for fees that resulted in the incurring by the AA Trust of a deduction under s 8-1 of the ITAA 1997.
It was also put on behalf of the AA Trust that the amount of the management fee claimed was not so disproportionate to the income derived as would lead to a conclusion that it had not been incurred for the purpose of gaining or producing assessable income or in the course of carrying on a business to that end. After all, so the submission went, in the 2007 income year, the AA Trust was “a business entity with assets in the order of $6,559,705”. Thus, the observations made in Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 (Fletcher), at 18 with respect to a possible need, flowing from a “disproportion between the detriment of the outgoing and the benefit of the income” to resolve how the outgoing was to be characterised for the purposes of s 8-1 of the ITAA 1997 was said not to arise for consideration in the present case in relation to the management fees claimed.
I agree that Fletcher is distinguishable but not for the reason assigned on behalf of the AA Trust. In Fletcher, unlike the present case, the controversial, claimed outgoing had not been held to be a sham: see Fletcher, at 13 – 14. Given that finding, it is not necessary to consider the circumstance of a fee which was incurred but is said, as in Fletcher, to be of such a disproportionate amount as not to have been incurred for a purpose specified in s 8-1 of the ITAA 1997.
While these are reasons in themselves to dismiss the claimed management fee deduction, there are other bases which reinforce that conclusion.
One basis is that the arbitrary, ex post facto, fiscally advantageous assignment after the conclusion of a given income year of a label “management fee” to a claimed deduction in respect of an expense never actually incurred in that income year was also, on the evidence and as detailed below, followed in respect of purported interest deductions claimed by the AA Trust.
Another basis for concluding that the management fee deduction claim is but an artificial construct is revealed by examining, as the Commissioner contended it should be, a wider transactional context in which that claim has been made.
The 2006 general ledger of the AA Trust records a transfer from Melbourne Insurance to the AA Trust on 11 July 2005, resulting in a liability of the AA Trust to Melbourne Insurance in excess of $4 million. On 1 July 2005, a $900,000 liability to Normandy Finance and Investments Limited (Normandy Finance) was incurred. Normandy Finance was incorporated in the United Kingdom on 28 April 1983. It was, in 2005, ultimately controlled by Mr Gould. Also on 1 July 2005, the general ledger of the AA Trust discloses that a loan of $900,000 was purportedly made by the AA Trust to a Dr Robert Read (Dr Read). The general ledger also discloses that some of the funds received from Melbourne Insurance were also passed to Dr Read.
The evidence discloses that, in the 2007 income year, Melbourne Insurance had disposed of investments with profit. It will be recalled that, in that same income year and according to the general ledger of the AA Trust, that trust derived interest income of $123,458.00 from Melbourne Insurance.
In contrast, in the 2006 income year, Melbourne Insurance neither disposed of investments nor paid any interest. In respect of that income year, its general ledger also records no interest accrued in respect of the loan to the AA Trust (nor in respect of a sizeable loan to Southsea Investments, then known as Southsea Nominees. That suggests that these loans between these entities controlled by Mr Gould were interest free.
Via the purported incurring of an interest liability to the AA Trust in the 2007 income year, Melbourne Insurance was placed in a loss position for that income year. Yet the fiscally convenient, for Melbourne Insurance, purported incurring of that interest liability gave assessable income to the AA Trust; and hence a need (in conjunction with the modest fees undoubtedly paid to unrelated third parties) to cancel the tax effect of that by a purported incurring by the AA Trust of the claimed management fee expense.
That is sufficient to underscore why it was that the claimed management fee was conjured. There is, however, a yet wider context against which, the claimed management fee can be viewed. The 2006 income year loans by Melbourne Insurance to the AA Trust and Southsea Investments are, according to the financial accounts of Melbourne Insurance, sourced from a purported loan to Melbourne Insurance of $5,499,992 from Lubbock Fine, a firm of chartered accountants in the United Kingdom with whom Mr Gould dealt. It may be, as the Commissioner submitted, that in these movements of funds there is a “round-robin” evidenced; with the AA Trust being just a conduit for the movement of funds between Melbourne Insurance, Normandy Finance and Dr Read. However this may be, a corollary was a need to create a deduction for the AA Trust in the 2007 income year. The means chosen, inferentially by Mr Gould, given his overall, pervasive control, was a management fee grounded not in any anterior agreement on the part of the AA Trust to incur the same but rather in a fiscally convenient decision, a mere pretence, made by Mr Gould after the close of that income year.
In turn, the incurring by Melbourne Corporation of the recorded interest liability to the AA Trust in the 2007 looks also to have been “fiscally convenient”, especially given the apparently interest free nature in the 2006 income year of loans as between entities controlled by Mr Gould. However, it is not necessary, in order to determine the present taxation appeal, to reach any concluded view on that subject.
The Commissioner also made a determination under Pt IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) by which he cancelled the tax benefit resulting from the claimed management fee deduction. It is not necessary to consider the correctness of that determination. Where the deduction is but a sham, there is no expenditure incurred or related deduction at all and thus nothing to cancel. I do no more than record that, were I mistaken as to the existence of a sham, it is clear to the point of demonstration that the dominant purpose of the management fee incurred in the 2007 income year was to gain a tax benefit. On the evidence, there is no evident association between the amount of the fee claimed and the provision of any service at all let alone services for which a comprehensible basis, commercial or even idiosyncratic, for the amount of the claimed fee is evidenced. The only relevant association is between the fee claimed and the amount of interest income derived by the AA Trust in the 2007 income year.
BAD DEBTS WRITTEN OFF?
The AA Trust has claimed five deductions under s 8-1 or alternatively s 25-35 of the ITAA 1997 in respect of alleged bad debts allegedly written off. These and the related income years are:
(a)2005 year – loan of $90,000 to Auto France Pty Ltd (Auto France);
(b)2005 year – loan of $120,000 to St Wenn Pty Ltd (St Wenn);
(c)2005 year – loan of $50,000 to Walsh Family Holdings Pty Ltd (formerly GPM (Australia) Pty Ltd) (Walsh Family Holdings);
(d)2008 year – loan of $173,295 to Trenton Developments Pty Ltd (formerly Hagar Pty Ltd (Trenton); and
(e)2009 year – loan of $185,000 to Dr Read.
It is desirable first to set out some general principles governing eligibility to claim these particular deductions.
There is no mutual antipathy, as long ago there once was in income tax law, between the claiming of a deduction in respect of a bad debt written off under s 8-1 of the ITAA 1997 and s 25-35 of that Act: Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153, at 162.
For a bad debt to be deductible under s 8-1(1) of the ITAA 1997 requires nothing more or less than that the debt constitute expenditure incurred which satisfies either or each of the positive limbs of that subsection (and does not fall within an exclusory limb). Contrary to a submission made on behalf of the Commissioner, it is not necessary (although it would be sufficient) in relation to the second positive limb (s 8-1(1)(b)), that the bad debt constitute expenditure necessarily incurred in carrying on a money-lending business for the purpose of gaining or producing assessable income. Instead, as was correctly submitted on behalf of the AA Trust, for a deduction to be allowable under this limb of s 8-1, all that is necessary in this case is that the AA Trust carries on a “business of some kind in which each of the loans was a profit-making enterprise such that any profits would have been ordinary income” on the basis upheld in Federal Commissioner of TaxationvMyer Emporium Ltd (1987) 163 CLR 199 (Myer Emporium).
For a deduction to be allowed under s 25-35 of the ITAA 1997:
(a)there must be a debt owed to the taxpayer;
(b)that debt must be objectively “bad”;
(c)the debt must be written off as bad during the income year; and
(d)the debt must:
(i)have been brought to account by the taxpayer as assessable income; or
(ii)be in respect of money lent in the ordinary course of a business of money lending by the taxpayer.
As can be seen, there can be an overlap of application as between s 8-1(1)(b) and a case falling within the alternative posited by s 25-35.
A debt will be a bad debt if it is reasonably regarded as irrecoverable: GE Crane Sales Pty Ltd v Federal Commissioner of Taxation (1971) 126 CLR 177 (GE Crane), at 194 – 195. That is a question of fact. Necessarily, the answer to that question is inherently specific to the circumstances of a given case.
It was put on behalf of the Commissioner that, “Generally, one would expect to have seen appropriate steps being taken in an attempt to recover the debt before it is determined to be bad, such as obtaining and enforcing judgment against a debtor.” This submission, with respect, is wrong. It is completely at odds with the advice of the Judicial Committee of the Privy Council in relation to a similar question which arose under Indian income tax law: Dinshaw v Bombay Commissioner of Income Tax (1934) 50 TLR 527 (Dinshaw). Their Lordships make it pellucid in that case, at 528, that the question whether a debt is bad ought not to be approached on the basis of a priori assumptions as to what is necessary in order for a debt to be characterised as “bad”. In that case, the flawed assumption was that, in respect of a corporate debtor, the company had to have ceased to be a going concern in order for a creditor to which it was indebted to write off the debt as bad. The flawed assumption in the Commissioner’s submission is that appropriate steps must have been taken to recover the debt such as obtaining and seeking to enforce a judgement. The flaw in each of these approaches is that they impermissibly elevate a circumstance which undoubtedly can ground a reasonable conclusion as to irrecoverability into a rule of general application. In commercial practice, especially with small business, many a reasonable decision is taken for practical business reasons that even to initiate court proceedings in respect of a given debt, much less to prosecute them to judgement and attempted execution on a judgement is, given the costs of litigation and the amount of the debt, likely to be an exercise in throwing good money after bad. The debtor might have refused after repeated demands to pay the debt. Follow up phone calls or emails might no longer be answered or returned. This might, in turn, be a sequel to a period in which earlier debts were paid outside usual trading terms. Or it may just be that it is known that other creditors have already had such an experience. It might, objectively, against such a background, be perfectly reasonable, as a matter of practical business judgement (qv GE Crane at 187 per Menzies J), for the creditor to treat the extending of credit to the debtor as, in hindsight, a mistake and to write the debt off as bad. A variety of circumstances as infinite and varied as is the experience of conducting businesses in practice might reasonably yield a conclusion that a given debt is bad. Insularity of thinking on this subject is to be eschewed. The question as to whether, objectively, a debt is “bad” is inherently case specific, as Gordon J, applying the authorities mentioned in this, and the preceding paragraph recognised, in BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746; 2009 ATC 20-097, at [121]. In answering this question, the subjective assessment of the creditor is a relevant but not determinative circumstance.
What is clear is that in order to be deductible under s 25-35, the debt must be written off as bad during the income year, not afterwards with reference to that income year: Point v Federal Commissioner of Taxation (1970) 119 CLR 453 (Point), at 458.
I turn then to consider each individual bad debt deduction claim.
2005 year – loan of $90,000 to Auto France
It was put on behalf of the AA Trust that, “There is plentiful evidence of the Applicant making loans and receiving interest income through the period starting 1 July 1992 and concluding after 30 June 2009.” From this it was said to follow that one business conducted by the AA Trust over this period was money lending.
At a general level of abstraction, it may be accepted that there is plentiful evidence that the AA Trust has at least purported to make loans and receive interest over this period. But the difficulty for the AA Trust, in terms of its discharging the onus of proof, is, as the Commissioner’s submissions highlighted, that this evidence is contradictory. Further, the onus of proof is not discharged at a general level of abstraction. Particular proofs are required in order to show the deduction claimed falls within s 25-35 or even s 8-1 of the ITAA 1997.
The critique offered by the Commissioner in submissions of the flaws in the endeavour by the AA Trust to discharge its onus of proof in relation to the alleged writing off of the alleged Auto France debt is well-grounded in the evidence.
Mr Gould’s evidence was that he made a $90,000 loan to Auto France “during the 1980s” “on a basis that would entitle the lender to a ‘share of the company profits’ and that, during the 1992 calendar year, the loan was assigned to AA Company by it incurring a debt to Darlington McCarthur. Darlington McCarthur was another company controlled by Mr Gould. Mr Gould stated that the debt was novated to Auto France (Aust) Pty Ltd (Auto France (Aust)) in or about May 1994. Mr Gould could not recall whether there was any document in existence by which this novation was effected. None was in evidence.
The documentary evidence, such as it is, is inconsistent with Mr Gould’s recollection and also itself contradictory.
Mr Gould’s recollection that the loan dated from the 1980s is not consistent with documentary evidence. There is evidence of a $195,000 debt owed by Auto France but that is recorded in the 1991 income year balance sheet of the GF Trust and it is also recorded as having been repaid in 1991. The 1990 accounts of the GF Trust record it received income from the “Auto France Unit Trust”. Quite how that related to Auto France was not explained.
The alleged loan, if made, appears to have been made by another company controlled by Mr Gould, Yale Investments Pty Ltd (Yale Investments), not by the AA Trust. In evidence is a deed of assignment dated 30 November 1990, which records that Yale Investments assigned the debt to Darlington McCarthur. Yet, also inconsistently with the deduction claimed, the financial statements of Yale Investments record the debt as having been wholly repaid to it in 1992. Inconsistent, in turn, with that is a report dated 30 April 1993, prepared at Mr Gould’s direction for the purposes of Family Court proceedings to which he and his now former wife were parties, which records that the debt remained owing to Yale Investments.
The existence of the alleged debt is not recorded in such of the general ledgers of the AA Trust as are in evidence in respect of the period from 1992 to 2005. The financial statements of the AA Trust first record the debt in 1992, not 1993, showing it as a non-current receivable. Yet in 1994 the debt is recorded in the financial statements of the AA Trust as a current receivable.
On 19 April 1994, Auto France changed its name to French Spare Parts Pty Ltd. From 12 September 1994, a corporate registration strike off action was in progress. The AA Trust continued to record the debt as owed by Auto France. As proximate to the 2005 income year as 2001, the AA Trust accounts continued to record the debt as a current receivable owed by Auto France. By that stage, Auto France had been deregistered for over 6 years. In itself, that recording is unexplained and odd. It is also inconsistent with Mr Gould’s evidence that the debt had been novated.
There is no evidence that the AA Trust derived any income from the alleged debt.
Mr Gould stated that in 2005 he had investigated Auto France (Aust)’s capacity to repay the debt and concluded the debt was bad. As mentioned, the subjective view of a creditor is relevant but not determinative. The test is objective. Auto France (Aust) was not in external administration in 2005. There is no evidence that it was insolvent in 2005. Auto France (Aust) remained in operation until 17 July 2013. In light of Dinshaw, it is not essential that Auto France (Aust) have ceased operations in 2005 in order for it to be open to conclude that the alleged debt was, at that time, bad. But there needs to be some evidence reasonably capable of supporting a conclusion that the debt was bad in that income year. There is none.
Assuming that the claimed debt existed in the 2005 income year, there is also no evidence that, during that income year, as opposed to after that income year, the debt was written off as bad. Yet, as Point confirms in respect of the materially similar predecessor provision, that is an essential element of the allowance of a deduction under s 25-35 of the ITAA 1997.
There is nothing oppressive about the longstanding feature of income tax law, currently found in s 14ZZO(b)(i) of the TAA, that the burden of proving an assessment to be excessive lies on an applicant in a taxation appeal. Necessarily, the Commissioner, unlike a participant, is a stranger to transactions forming the taxable facts. Here, one of the non-strangers is the AA Trust and, more particularly, Mr Gould. Of course over a quarter of a century had passed between the time of the alleged and the time of trial and, of course, as in Clark, an accounting record might be a source of evidence which, all other things being equal, proves the existence of the debt concerned. But here, all other things are not equal in relation even to proof of the existence of the debt, let alone of other elements necessary to prove deductibility under s 25-35 or even s 8-1 of the ITAA 1997.
As at 11 May 1992, Mr Gould was, beneficially, a shareholder in Auto France. The evidence is that one of the recorded shareholders in Auto France held their share for him. He also held office as company secretary of Auto France (Aust) until 26 January 1994. The registered office of Auto France (Aust) remained at the offices of incorporated accountancy practices with which Mr Gould was associated Gould Ralph Pty Ltd (Gould Ralph) or Gould Ralph Services Pty Ltd (Gould Ralph Services) from its incorporation on 2 May 1994 to 1 July 2013. Mr Gould was therefore an appropriate witness. I thought his recollection that there had been a long ago dealing with Auto France was not contrived but his recollection was imperfect and not sufficiently reliable to explain the inconsistencies mentioned.
In the present context and as a starting point, the AA Trust had to prove that the debt still existed such that, in the 2005 income year, it could be, and was, written off. It was not obliged to prove this to absolute demonstration, only on the balance of probabilities. That is not achieved by inconsistent evidence, which leaves the position as to whether the debt still existed in the 2005 income year conjectural. It was incumbent upon the AA Trust, not upon the Commissioner, to provide a satisfactory explanation of the apparent inconsistencies which yielded satisfaction that it was more likely than not that the debt still exited in that income year. This it did not do.
The deduction claimed is not made out, either under s 25-35 or s 8-1 of the ITAA 1997.
2005 year – loan of $120,000 to St Wenn
Mr Gould’s evidence was that he made a loan $120,000 to St Wenn Investments Pty Ltd (St Wenn Investments), not St Wenn, “during the 1980s” and “on a basis that would entitle the lender to a share of the company profits”. His evidence was also that, during the 1992 calendar year, this loan was assigned to the AA Trust by it incurring a debt to Darlington McCarthur.
Quite how a loan said to have been made personally by Mr Gould became a debt which Darlington McCarthur could assign was, as the Commissioner submitted, not clear on the evidence. It was for the AA Trust, albeit just on the basis of the balance of probabilities, to tender evidence that yielded that clarity.
Such evidence as there was about this deduction claim, apart from Mr Gould’s personal evidence, yielded only inconsistencies, including inconsistencies with his recollection of events.
Further, in respect of each of the 6 expenditure items in this category, the AA Trust has not proved that the expenditure was in fact made as a loan advance to the specified entity or the VR Gould Family Settlement Trust. The AA Trust relies on entries in general ledgers, financial statements and Mr Gould’s Prior Attribution evidence, none of which, for reasons already given, is reliable. In respect of the three payments alleged to have been made to third parties on behalf of Fennelltown, there is no document in evidence that proves that Fennelltown had incurred such expenditure or directed the AA Trust to pay it by way of loan advance.
For these reasons, the deduction claim in respect of this category of expenditure wholly fails.
Category 21 – Loan advances to unrelated entities – Dennis Flynn
The case for the AA Trust is that interest incurred on funds borrowed to make this loan was deductible on the basis that the loan was interest bearing. This expenditure category consists of a 14 February 2001, $100,000 payment to Mr Dennis Flynn. Subject to the Commissioner’s overarching submission about the HWBB loan, there is no issue between the parties in respect of categorisation or as to the deductibility of the interest incurred to the extent to which this payment was sourced in a loan from HWBB.
PART IVA
Given the conclusions reached in respect of a failure to discharge the onus of proof in relation to each of the deduction claims save, subject to the operation of Pt IVA of the ITAA 1936, the very few as detailed above concerning interest and facility fees paid to HWBB, it is only necessary to consider Pt IVA in relation to a tax benefit arising from those interest and facility fee deduction claims. Indeed, so limited has been the discharge of the onus of proof by the AA Trust in respect of such deduction claims, it may seem superfluous to consider Part IVA at all. However, the subject was fully argued and it is as well to express a conclusion about the application of Part IVA in any event against the contingency that the conclusions reached above concerning the various categories of expenditure alleged to have been sourced in funds borrowed from HWBB by the AA Trust are erroneous.
Materially, the Commissioner came to posit two alternative schemes:
(a)The charging of interest on the advances from HWBB to the AA Trust was a scheme the dominant purpose of which was to obtain a tax deduction for that interest.
(b)The borrowing from HWBB and the charging of interest on that borrowing was a scheme to which Pt IVA applied. The tax benefit was the deduction for the interest (and bank fees and the like).
It was submitted on behalf of the AA Trust that such a refinement entailed a denial of procedural fairness to it. I do not accept this. These have always been said to be a feature of a scheme as identified by the Commissioner. The AA Trust has, accordingly, suffered no evidentiary embarrassment by the way in which the Commissioner came to posit the schemes.
In relation to Pt IVA, as with other grounds upon which it alleges the assessments concerned to be excessive, the AA Trust bears the onus of proving that that there is no tax benefit in connection with a scheme: Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164, at [154] per Middleton and Robertson JJ. That does not necessarily mean that the AA Trust must establish that each counterfactual posited by the Commissioner is unreasonable or that, if it does not do this, then, on that ground, it has failed to prove that the assessment is excessive. Even if the AA Trust were to establish that the Commissioner’s counterfactual was unreasonable, it would not necessarily follow that it had established that the assessment was excessive. That is because the issue which flows from the text of Pt IVA is not whether the Commissioner puts forward a reasonable counterfactual. As was observed in RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785; 2011 ATC 20-275, at [131], the error in such an approach is in the conception:
… that if the Commissioner’s counterfactual is reasonable that is the end of the matter; even if the court were to conclude, on all the evidence, inferences and logic referred to, that if the scheme had not been entered into the taxpayer would have or might reasonably be expected to have done something which did not give rise to a tax benefit, or which gave rise to a tax benefit less than that thrown up by the Commissioner’s counterfactual.
It is possible, in such circumstances, that before reaching any such conclusion, the taxpayer and the Commissioner might, for procedural fairness reasons, have to be afforded an opportunity to be heard by the Court. However, the question is always one for the Court to determine objectively, and on all of the evidence, as well as the apparent logic of events, what would have or might reasonably be expected to have occurred if the scheme had not been entered into.
What constitutes a “scheme” for the purposes of Pt IVA is defined by s 177A of the ITAA 1936. The definition is broad. As to this, Gummow and Hayne JJ observed in Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 (Hart), at [43]:
It encompasses not only a series of steps which together can be said to constitute a “scheme” or a “plan” but also (by its reference to ‘‘action’’ in the singular) the taking of but one step. The very breadth of the definition of ‘‘scheme’’ is consistent with the objective nature of the inquiries that are to be made under Pt IVA.
I accept that each of the alternatives identified by the Commissioner constitutes a “scheme” in terms of s 177A. That is not to say that, in the present case, consideration of the narrower scheme can be contextually divorced from the borrowing to which it related. Further and in any event, an error in detailing a scheme would not necessarily vitiate a determination to cancel the alleged tax benefit. That is because, “the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connection with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner’’: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, at 382.
More particularly, having regard to s 177D, the question is whether the relevant taxpayer (here, the AA Trust) has obtained, or would but for s 177F, obtain a tax benefit in connection with the scheme; and, having regard to the matters referred to in s 177D(b):
… it would be concluded that the person, or 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 the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer … to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer …)?
The eight matters referred to in s 177D(b) may be considered either individually or in combination. It is neither necessary nor desirable to adopt a mechanical, check-list approach to these eight matters, only to take such of them as are raised on the evidence into account in the making of an overall assessment of purpose. The test posited in s 177D is an objective one. That does not mean that it is irrelevant to take into account the subjective purpose of a relevant actor, only that any such purpose is not determinative and cannot prevail over what, objectively and taking into account such of the matters in s 177D as are applicable, is the purpose. Consideration of the matters specified in s 177D extends to considering a posited scheme in a wider context in order objectively to determine purpose.
The effect of the definition in s 177A(5) is that “purpose” in s 177D refers to the “dominant purpose”.
Having regard to paragraph (1)(b) of the definition in s 177C of “tax benefit”, the tax benefits of present relevance, are the deductions otherwise allowable under s 8-1 of the ITAA 1997 in respect of interest and facility fees.
Given that the tax benefits in question were interest and facility fees, what, objectively, was the dominant purpose in relation to each posited scheme cannot be divorced from the borrowing. Even though the narrower formulation of the scheme does not specify borrowing, the borrowing was “an indispensable part of that which produced the tax benefit”: Hart, at [9] per Gleeson CJ and McHugh J. As already mentioned, the borrowing provides the context in which each deduction claimed was incurred.
Both in form and in substance, what the AA Trust incurred were liabilities in respect of interest and facility fees in respect of advances under a prevailing loan facility. In keeping with that form and substance, withholding tax was paid by the AA Trust in respect of its remittances to HWBB.
One submission made by the Commissioner was that:
the AA Trust has not proven the use of the funds for the reasons set out above concerning the use of the HWBB funds and the reasons why these have not been proven to be for the purposes of deriving assessable income or carrying on a business for such purpose.
But one matter to which s 177D(b), by sub-paragraph (iv), directs attention is, “the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme”. The AA Trust has proven, to the very limited extent revealed above, that, but for the operation of Pt IVA, the result would be that it obtained a deduction under s 8-1 of the ITAA 1997, because it satisfied the elements of that provision.
Other postulates put by the Commissioner which arise for consideration under s 177D(b)(iv) are:
(a)if the AA Trust had not borrowed from HWBB, the conclusion must be that the AA Trust would not have borrowed from any entity because it did not have a use for funds; or, alternatively and in any event,
(b)had the AA Trust not borrowed from HWBB, the conclusion must be that the AA Trust would not have been able to borrow from any entity because the AA Trust has not proven that it could do so.
The relationship between the AA Trust and HWBB was qualitatively different to the relationship between HWBB and the clients (or their entities) of Mr Gould’s incorporated accountancy practice who invested in Samoan superannuation funds and, as part of another scheme, already described above, came to take what at least purported to be loans from HWBB. Those clients were not part of a group controlled by Mr Gould and Mr Gould was not causing the entities within that group, including the AA Trust and HWBB, to operate for altruistic reasons.
As already highlighted above when considering the subject of sham, the evidence discloses that the funds held the AA Trust fluctuated markedly. The AA Trust had a need for capital. To the very limited extent to which it has succeeded in relation to its s 8-1 claims in respect of interest and facility fees and the like, it had a need for capital for purposes which fell within either or each of the positive limbs of s 8-1 of the ITAA 1997. Advances from HWBB to it pursuant to the loan facility in place from time to time coincided with when its own financial resources were relatively depleted, including on occasion because it had made a payment of interest which it was obliged to make pursuant to that loan facility. Not just as a result of a matching deposit (as with the clients), HWBB had funds available which it could and did lend to the AA Trust.
Again, to the limited extent so proved by the AA Trust, as far as HWBB was concerned, the change in financial position as a result of the making of an advance attracting an interest and facility fee liability was that HWBB’s capital was diminished in return for any an obligation to repay that capital in accordance with the prevailing loan agreement and, in the meantime, an obligation to pay interest as compensation for the use by the AA Trust of that capital. In return for the making available of the facility, HWBB received the facility fee for which the prevailing loan agreement provided. As for the AA Trust, in return for an obligation to pay a facility fee, it obtained an ability, subject to the prevailing facility limit, to receive advances from HWBB as required to meet a need for working capital. Its financial position changed from time to time as it drew down advances which augmented its working capital but at the cost of incurring a liability to pay interest.
Once again, to the limited extent proved in relation to its s 8-1 claim, as far as the AA Trust was concerned, the dominant purpose in each instance was the obtaining of working capital in order to carry on its business as identified above. That, in so doing, a deduction was allowable in respect of interest and facility fees was merely an incidental purpose or consequence: Federal Commissioner of Taxation v Metal Manufacturers Ltd (2001) 108 FCR 150; Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27.
So far as HWBB was concerned, the dominant purpose was the obtaining of a return by way of interest on capital deployed by advances under the prevailing loan facility and a facility fee in respect of any unused amount within the prevailing facility limit, not the obtaining of a tax benefit for the AA Trust. Within the group controlled by Mr Gould, HWBB could, and did, act as a banker or in-house financier, relative to, materially, the AA Trust. In this regard, that was the business which it carried on. It is nothing to the point that, in relation to its dealings with what I have termed “the clients”, one might question whether HWBB was just a banker or financier. It may well be that, in relation to those clients, a better description of the business of HWBB would be “facilitator of avoidance of Australian tax and laws governing superannuation funds”. Even so, it did not carry on this or any other aspect of its business for free. To operate, HWBB needed to, and did, derive income from its various activities.
The Commissioner put forward that HWBB was a mere conduit. This is nothing more than a rehearsal of a submission rejected more than once in relation to separate legal entities within a group, one of which undertakes the business of in-house financier: Federal Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562, at 569; Federal Commissioner of Taxation v Tasman Group Services Pty Ltd (2009) 180 FCR 128, at [56]; BHP Billiton Finance, at [18] to [21]; and Ashwick, at [40] to [43]. This particular business of HWBB was neither an appendage to a business carried on by a group of companies controlled by Mr Gould nor was it a mere conduit of the business of the AA Trust. As mentioned, HWBB, too, was not operated for altruistic reasons. The evidence demonstrates that it was generally profitable. To operate, it had expenses such as those of its service provider, Asiaciti, to meet. It is not reasonable to expect that it would have advanced funds to the AA Trust interest free.
An analysis of funds available to the AA Trust at the time when advances occurred means that not borrowing was not an option that “might reasonably be expected to have been obtained” for the AA Trust; not if it were to continue to carry on its business. Commercial suicide is not a reasonable alternative postulate. From 1999 at least, the assessment, necessarily one made by Mr Gould, was that it needed more than the existing facility limit of $1 million in order to carry on its business. Subsequent events show that, objectively, there was such a need. Mr Good’s evidence confirms that it was unlikely that, at the time, the AA Trust could have obtained from an Australian bank a facility with the limit for which the 1999 agreement provided and in any event not at a rate which HWBB offered. That rate was competitive but it was not fixed at such a level that one might reasonably conclude that it was so fixed solely for the purpose of the obtaining by the AA Trust of the tax benefit of a deduction in respect of that interest. Objectively, and on the whole of the evidence, if it were to continue to carry on business, the AA Trust was always going to do what it did, obtain from HWBB an increase in a facility limit and take advances from HWBB within that limit at a competitive interest rate and on terms that additionally provided for a facility fee, as, when and to the extent required.
For these reasons, Pt IVA has no application in the circumstances of the present case to the particular interest and facility fee deduction claims upon which the AA Trust has succeeded in discharging its onus of proof. It follows that, to the extent that the Commissioner’s assessments deny such deductions, they have been proved to be excessive.
AMENDMENT – S 171A – 2001, 2002 AND 2004 INCOME YEARS
The AA Trust contends that it satisfies either or each of items 3 and 4 in the table under s 171A(1) of the ITAA 1936 such that the time within which the Commissioner was empowered to assess it has expired.
The controversial issue in relation to this contention is whether it had a “tax loss”, as defined.
The tax return of the AA Trust in respect of each of 2001, 2002 and 2004 income years disclosed an excess of allowable deductions over assessable income, and also recorded a carry forward tax loss from the previous year. The AA Trust contends that, on either view of what it is to have a tax loss, it had a tax loss.
Not so, submits the Commissioner. The Commissioner submits that “tax loss” is defined in s 6(1) of the ITAA 1936 to have the same meaning as in the ITAA 1997. In the ITAA 1997, “tax loss” is defined in s 995-1. In turn and materially (via paragraph (a) of the definition), that definition directs attention to “a tax loss worked out under s 36-10 of the ITAA 1997”. The Commissioner submits that, just as Anglo American as trustee of the AA Trust has “net income” under Div 6 as defined in s 95 of the ITAA 1936, rather than taxable income, it also does not have a “tax loss”. That submission proceeds from the references in items 1 and 2 in the table under s 171A(1) of the ITAA 1936 to “taxable income” to s 95 of that Act, which refers to “net income” of a trust estate, rather than to “taxable income”.
The riposte of the AA Trust to this submission of the Commissioner is that, “Whatever infelicities of language there may be in Div 36, they count for little given the number of statutory provisions that provide for the treatment of trust tax losses.” Particular reference is then made to s 36-25 of the ITAA 1997 and to sch 2F of the ITAA 1936, each of which makes particular provision in respect of certain trusts and their tax losses.
The use by the AA Trust of the description “infelicities of language” is certainly apt, even something of an understatement. A clue to the resolution of what is truly a difficult issue of statutory construction may be offered by s 265-5 within sch 2F of the ITAA 1936 in its reference, in the overview to that schedule to the prospect that, in certain circumstances, a trust “may have to work out in a special way its net income and tax loss for the income year”. Looking overall at the tax treatment of trusts, including to the provisions identified by the AA Trust, “net income” looks to be a quite discrete concept to “tax loss” in relation to a trust. Both s 36-25 of the ITAA 1997 and sch 2F of the ITAA 1936 would indeed be rendered meaningless if a trust could not have a “tax loss”. Further, the specification in s 36-10 of the ITAA 1997 of how to calculate a “tax loss” owes nothing either to “taxable income” or to “net income” but instead looks to assessable income, allowable deductions, any tax losses from previous years and any net exempt income.
It follows that s 171A was not a source of statutory authority for the making of assessments for the 2001, 2002 and 2004 income years.
AMENDMENT – S 166A – 2005, 2007, 2008 AND 2009 INCOME YEARS
The AA Trust submits that s 166A(3) of the ITAA 1936 is applicable such that each tax return it lodged for the 2005, 2007, 2008 and 2009 income years is deemed to be a notice of assessment. On this basis, it submits that s 170(1) of the ITAA 1936 is applicable such that the Commissioner was unable to amend those deemed assessments unless the Commissioner was of the opinion there has been fraud or evasion for the purposes of s 170(5) of that Act. In amplification, it submits that the definition of full self-assessment taxpayer, found in s 6(1) of the ITAA 1936, viewed as a whole, “suggests the class of entities intended to have full self-assessment status are entities engaged in commerce” and that the intent would be thwarted were a trustee company to be excluded. In any event, it submits that it is a company and hence within the definition of “full self-assessment taxpayer”.
It is not, with respect, at all apparent to me that any theme of engagement in commerce permeates the definition of “full self-assessment taxpayer” in s 6(1) of the ITAA 1936. If there is any theme, textually, in that definition, it is that trusts are to be differentiated from companies with only certain types of trust being a “full self-assessment taxpayer”.
Further, as the Commissioner pointed out in submissions, in the ITAA 1936, “company”, by s 6(1), has the meaning given by s 995-1(1) of the ITAA 1997. In that section, “company” means, materially, a “body corporate”. In turn, a “body corporate” is, by s 960-100(1)(b) of the ITAA 1997 defined as an “entity”. By s 960-100(4) it is provided that, “If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity.” An example given under that subsection, which differentiates acting in a personal capacity from acting in the capacity of trustee, is apt. One provision which refers to an entity of a particular kind is the definition in s 995-1(1) of “company”, which refers to a body corporate. That reference, in light of s 960-100(4) is not to a company acting as trustee.
On either approach, the AA Trust was not, in the income years suggested, a “full self-assessment taxpayer”.
“FRAUD OR EVASION”?
The Commissioner also formed an opinion, for the purposes of s 170 of the ITAA 1936, that there had been an avoidance of tax due to fraud or evasion.
For the purposes of this provision, an avoidance of tax occurs where less tax has been paid than ought to have been paid but for the fraud or evasion: Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23, at 34.
The relevant principles and practice in relation to a challenge in a court to such an opinion were long ago stated by Dixon J (with whom McTiernan and Webb JJ agreed) and also by Williams J in Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 (Denver Chemical Manufacturing). Sir Owen Dixon had then but recently elaborated on the grounds on which a decision based on a subjective state of mind of the Commissioner might be reviewed in a court in Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353. For present purposes, it is necessary only to refer to Denver Chemical Manufacturing.
The following emerges from Denver Chemical Manufacturing:
(a)The Commissioner’s opinion may be challenged not on the basis of its “intrinsic correctness” but rather whether he has exercised his function according to law and thus on grounds such as whether the Commissioner has addressed himself to the question posed by the section, otherwise made some mistake of law, taken some extraneous reason into consideration or excluded from consideration some factor which should affect the formation of the opinion, per Dixon J at 312-313; or on the ground that the commissioner has acted capriciously or arbitrarily, per Williams J at 317.
(b)The challenge is to be determined by reference to the material before the Commissioner when he formed the opinion and the reasons for that opinion, if given: per Dixon J at 313; per Williams J at 317.
(c)“Evasion” at least “means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.” per Dixon J at 313.
(d)Once it has been found that there has been fraud or evasion the Commissioner is at liberty to reconsider the whole matter, and he is not limited merely to rectifying the consequences of the fraud or evasion: per Dixon J at 314; per Williams J at 318.
To this it might be added that “fraud” carries its ordinary, common law meaning. It occurs where a false statement has been made to the Commissioner either knowingly or with reckless indifference to its truth: Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455, 2003 ATC 4375, at [111].
The AA Trust advanced elaborate arguments as to why the Commissioner’s opinion had not been formed according to law. A fundamental difficulty with these arguments was, as the Commissioner highlighted in submissions, that, contrary to Denver Chemical Manufacturing, the arguments of the AA Trust proceeded from a foundation which was not proved. Though a very great deal indeed of evidence was tendered in this proceeding, that evidence did not include a discrete identification of exactly what was before the Commissioner at the time when he formed his opinion as to fraud or evasion. Necessarily, that was immediately prior to the making of the assessments concerned, not at the objection stage. Further, the reasons given at the objection stage, which are in evidence, are not the reasons of the Commissioner for the original forming of the opinion on the basis of which the assessments were made. Those reasons, if given, are also not in evidence. It would be possible to review the opinion absent those reasons but not in the absence of the evidence before the Commissioner.
Herein may lie one difficulty in the change which has been made in relation to an exercise of judicial power in a taxation appeal. The present appeal is expressed to be against the objection decision: s 14ZZ(1)(a)(ii), TAA. However, the burden which falls on the AA Trust is not to prove that the objection decision was wrong but rather that the assessment is excessive: s 14ZZO, TAA. One way of doing that is to show that there was no power to make the assessment because, materially, an opinion as to fraud or evasion was not formed according to law.
As enacted and for many years thereafter, there was no asymmetry in the ITAA 1936 between the right of appeal to a court exercising original jurisdiction, Commonwealth judicial power and the onus of proof. By the former s 187(b) of the ITAA 1936, a taxpayer dissatisfied with the Commissioner’s decision on an objection was entitled to require the Commissioner to treat his objection as an appeal and to forward it to the court then exercising the relevant original jurisdiction. In that appeal, the taxpayer had the onus of proving the assessment to be excessive: see the former s 190(b) of the ITAA 1936. The ITAA 1936 as enacted replicated the earlier method by which Commonwealth judicial power could be invoked to challenge an assessed liability to income tax. In that method, the objection supplied the grounds upon which the court determined whether the assessment was excessive with the Commissioner’s objection decision supplying nothing more than the pre-condition to an ability to refer the objection against the assessment to the court.
Part of the problem which bedevils the AA Trust in its attempted challenge may therefore be the confusion in thinking that presently attends the formulation in the TAA for the invocation of judicial power. Although the appeal is said to be against an objection decision, that decision, the reasons for it and the evidence before the Commissioner at the time it was made are truly a distraction, because the onus on the taxpayer is to prove the assessment to be excessive: Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168, at 198 per Brennan J, at 221, per Dawson J and, at 227, per Toohey J.
For these reasons, the ground challenging the Commissioner’s opinion with respect to fraud or evasion fails.
PENALTIES
The Commissioner’s assessing position, maintained on the appeal, was that the shortfall amount resulted from intentional disregard of a taxation law by the AA Trust or its agent, resulting in a penalty of 75% of the shortfall amount pursuant to item 1 in the table in s 284-90(1) of sch 1 to the TAA. In the alternative, the Commissioner submitted that the AA Trust or its agent had at least been reckless and so penalties should have been imposed at a rate of 50% pursuant to item 2 in the table in s 284-90(1) of sch 1 to the TAA.
While the primary position of the AA Trust was that there was no shortfall, it submitted in the alternative that, as to penalty, there was no “culpable conduct” and so no exposure to penalty or, at most, there was a failure to take reasonable care. The AA Trust also made the point, which is true in the abstract, that it did not follow that all tax shortfalls were the result of conduct of the same character. As to the latter point, so pervasive was Mr Gould’s control and so consistent were his behaviours, I am not persuaded that there is any relevant distinction to draw as between shortfalls for penalty purposes.
The conclusion which I have reached concerning an absence of active dishonesty by Mr Gould precludes, in my view, a finding of intentional disregard for penalty purposes. In some circumstances in relation to criminal liability, wilful blindness can supply the requisite element of knowledge. However, the text of item 1 in the table in s 284-90(1) of sch 1 to the TAA is against a like conclusion in relation to penalty and suggests that there must be an actual intention, not an equivalent of one.
A taxpayer or agent who was wilfully blind would at least be reckless.
In Hart v Federal Commissioner of Taxation (2003) 131 FCR 203, at [33] and [43], the members of the Full Court approved this statement by Cooper J in BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111; (2001) 46 ATR 347; [2001] FCA 164, at [77], as to the meaning of recklessness:
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and a reasonable person in the position of the statement maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.
[emphasis added]
In my view, Mr Gould was at least grossly indifferent as to whether expenditures claimed by the AA Trust as deductions were truly incurred or incurred in the amounts claimed. A reasonable person in his position would have seen there was a real risk that the deductions claimed were not allowable to the AA Trust under a taxation law. Fiscally, his conduct was, objectively, outrageous, much more than just a failure to take reasonable care. In these circumstances, the appropriate characterisation is that it was reckless, so attracting penalty at a rate of 50%, pursuant to item 2 in the table in s 284-90(1) of sch 1 to the TAA.
It follows that the penalty assessments are, to this extent, proved to be excessive. That are also excessive in that, to the very limited extent indicated above, the tax shortfalls are not as assessed by the Commissioner.
There does not appear to be any dispute that any penalty would be increased by 20% in all of the years after the 2001 year, pursuant to s 284-220 of sch 1 to the TAA.
The question of remission is one for the exercise of an administrative discretion on the merits, which is not a power consigned to the Court.
RESULTANT ORDERS
It will be necessary to hear from the parties both as to the appropriate form of orders to give effect to these reasons for judgment as well as in respect of costs.
I certify that the preceding four hundred and seventy-nine (479) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Logan. Associate:
Dated: 19 August 2022
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