Braham v ACN 101 482 580 Pty Ltd
[2017] VSC 340
•15 June 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROFESSIONAL LIABILITY LIST
S CI 2012 03622
| SIMON BRAHAM | Plaintiff |
| v | |
| ACN 101 482 580 PTY LTD AND ORS (according to the attached schedule) | Defendants |
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JUDGE: | Lansdowne AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 15 and 18 May 2017 |
DATE OF JUDGMENT: | 15 June 2017 |
CASE MAY BE CITED AS: | Braham v ACN 101 482 580 Pty Ltd and ors |
MEDIUM NEUTRAL CITATION: | [2017] VSC 340 |
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PRACTICE AND PROCEDURE – Discovery – Plaintiff seeks damages for allegedly negligent advice relating to an investment in the 2006 tax year – Application by defendant for discovery of plaintiff’s taxation returns for the following ten years – Whether relevant – Held to be relevant to the plaintiff’s counterfactual given that relevant loan agreements had terms of ten years – Supreme Court (General Civil Procedure) Rules2015 r 29.01.1.
PRACTICE AND PROCEDURE – Whether prior leave or consent is required to redact for relevance – Held no – Octagon Inc v Hewitt & anor (No 2) [2011] VSC 373 applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P G Cawthorn QC | Rigby Cooke Lawyers |
| For the First Defendant | Dr A Hanak | Minter Ellison Lawyers |
TABLE OF CONTENTS
Introduction and summary............................................................................................................... 1
Plaintiff’s claim................................................................................................................................... 2
Issues and submissions..................................................................................................................... 7
Taxation returns already discovered......................................................................................... 8
Scope of discovery........................................................................................................................ 8
Submissions on relevance............................................................................................................ 9
Plaintiff’s Counterfactual.................................................................................................... 9
Causation of loss................................................................................................................ 11
Plaintiff’s submissions...................................................................................................... 11
Discussion and conclusion on relevance..................................................................................... 12
Redaction........................................................................................................................................... 16
Orders................................................................................................................................................. 17
HER HONOUR:
Introduction and summary
In broad compass, the plaintiff’s claim against the first defendant in this proceeding is for loss said to have been suffered as a result of negligent advice and/or misleading and deceptive conduct. The first defendant is an incorporated legal practice, now in liquidation. The advice in question related to an investment made for the 2006 tax year in a managed investment scheme of wood lot plantations then carried out by Great Southern Plantations Ltd, later Great Southern Ltd (in these reasons described as ‘Great Southern’).
These reasons concern a summons filed by the first defendant on 5 May 2017 which seeks further discovery by the plaintiff. The summons was heard over two days, 15 and 18 May 2017. By the commencement of the oral hearing, only three of the very many categories of documents sought by the summons remained in dispute. The documents which the first defendant seeks and the plaintiff opposes are those sought by paragraphs 1(d) to (f) inclusive of the summons which are as follows:
(d) original and amended (if applicable) personal taxation returns for the plaintiff for the financial years ended 30 June 2007, 30 June 2008, 30 June 2009 and 2016;
(e) original unamended copies of the plaintiff’s personal taxation return for the years ending 30 June 2010, 2011, 2012, 2013, 2014 and 2015; and
(f) un-redacted copies of the plaintiff’s amended personal taxation returns for the years ending 30 June 2010, 2011, 2012, 2013, 2014 and 2015.
Put simply, the first defendant seeks the plaintiff’s full tax returns (original and any amended) for the ten years following 2006, in addition to the returns already discovered (to which I will return later). The plaintiff resists the application, on the basis that the returns are not, except to the extent already discovered, relevant. There was also argument about the extent of the current redaction.
For the reasons that I now give, I consider that the whole of the returns (original and if amended, amended) for the ten years from 2006 are relevant and discoverable at least because they may adversely affect the plaintiff’s case, or support the first defendant’s case. In other words, I consider that the documents fall within the scope of discovery required by r 29.01.1(3) of the Supreme Court (General Civil Procedure) Rules2015 (‘the Rules’). The documents may in fact also support the plaintiff’s case, but as the plaintiff resists the application I will assume that the plaintiff has no current intention to rely on them.
I will order that the returns be discovered and produced, and will ask the parties to prepare orders to that effect, taking account of the other aspects of the summons and any consequential impact on the preparation for the trial listed for February 2018.
To explain my reasons for this conclusion, it is helpful to set out at some length the plaintiff’s case and the submissions.
Plaintiff’s claim
The plaintiff’s claim is pleaded in his Further Amended Statement of Claim dated 12 September 2016 and filed one day later (‘FASOC’). He gives further particulars of his loss, and what he should have been advised and would have done had he been so properly advised (his ‘Counterfactual’), in his Plaintiff’s Further and Particulars of Loss and Damage [sic] dated 5 May 2017 (‘FBP’).
The plaintiff asserts that, on the basis of the advice he was given by the first defendant, he invested for the 2006 tax year in an agribusiness managed investment scheme conducted by Great Southern through a partnership structure, rather than individually, but on the basis that the Product Ruling given in 2004 by the Australian Taxation Office (‘Product Ruling’ and ‘ATO’ respectively) would nevertheless apply to his investment.[1]
[1]FASOC at [12] and [14].
As pleaded by the plaintiff,[2] the Product Ruling allowed purchasers of an interest in woodlots (called ‘Growers’) to obtain a tax benefit in the year in which they paid the ‘Establishment Services Fee’ necessary to obtain the interest, notwithstanding that they were not to receive any income or other return on this investment until eventual harvest of the wood crop. The Product Ruling required strict compliance with its terms, and only applied where the Grower intended to stay in the scheme until its completion i.e. intended to be a party to the necessary agreements until their term expired, and also intended to obtain assessable income from the arrangement.
[2]At FASOC [7].
The Product Disclosure Statement for investment in the woodlots required Growers to pay an Establishment Services Fee of $3,300 per woodlot (inclusive of GST) to participate in the scheme. It allowed Growers to fully finance this fee by obtaining a loan from a Great Southern subsidiary, Great Southern Finance Pty Ltd (‘GSF’).[3] Growers were to be granted a land interest in their woodlots, but the intent of the scheme appears to have been that Growers were to have no further involvement in the management of the woodlots, and were not required to make any further financial investment (except perhaps annual insurance fees) until eventual harvest. At that point management fees for the growing period and other sums would be deducted from the proceeds of the harvest before payment to them.
[3]FASCOC at [6], and [8]. The Product Disclosure Statement is exhibited as GJC-1 to the affidavit of the first defendant’s solicitor Gregory John Carfoot sworn 5 May 2017, and confirms these aspects of the plaintiff’s pleaded case.
The plaintiff pleads that he was also advised by the first defendant that loan repayments to GSF could be met by an income stream generated from repayment of a loan by the partnership to a company called Moneela Pty Ltd (‘Moneela’). The plaintiff pleads that Moneela invited investors in agribusiness managed investment schemes to make their agribusiness investment in combination with an investment in Moneela, in the form of a loan which Moneela would then use to trade in commodities. The profit from this commodity trading would then be used by Moneela to make repayments of interest and/or principal to the lender Grower, who could use these funds to make payments on the finances he or she had obtained to invest in the agribusiness investment.[4]
[4]FASCOC at [11] and [12].
The plaintiff pleads that following this advice a partnership of which he was a member purchased an interest in 500 woodlots, thereby incurring an Establishment Services Fee of $1.5M. This Fee was fully funded by a loan taken out by the partnership from GSF for a term of 10 years with an interest only period of 3 years.[5] The partnership claimed a partnership loss in 2006 of that $1.5M. The plaintiff claimed a tax deduction for the 2006 tax year in his return filed October 2006 of $1,245.000, being his proportion of the Establishment Services Fee, represented by his 83% interest in the partnership. On a self-assessment basis the plaintiff was initially allowed the deduction and received on 2 November 2006 a tax refund of $531,466, reflecting a reduction in his tax for that year of $595,535.[6] The plaintiff made his capital contribution to the partnership of $595,534, pleaded to be an 83% interest, only on 8 November 2006 i.e. after he received his tax refund of almost that amount.
[5]FASOC at [33].
[6]FASCOC at [44] and [45].
The plaintiff pleads that the partnership thereafter lent $700,000 i.e. most of the capital contributions it had obtained from the partners (totally $717,926) to Moneela. The first defendant exhibits a loan agreement which Mr Carfoot deposes was discovered by the plaintiff.[7] Curiously, the borrower identified in the agreement is not the company Moneela, but an individual, ‘Raj Sharma t/as Moneela’. The agreement provides in Schedule B for two advances of principal, $700,000 on 1 November 2006 and $180,000 on 1 November 2009; a minimum term of ten years from 1 September 2006; and, in Schedule A, for required repayments from 1 September 2006 to 1 June 2016, in the sum of $14,521.15 pcm to 1 June 2009, and thereafter $26,000 pcm.[8]
[7]Described in Mr Carfoot’s affidavit sworn 5 May 2017 at [33] as Exhibit GJC-16 but identified on its face as Exhibit GJC-15.
[8]This summary is not intended to be an exhaustive or determinative statement of the provisions of the agreement. In particular, the term as defined in clause 2 may differ from the term as identified in Schedule B.
The plaintiff pleads that Moneela made repayments (of unspecified amount) to the partnership, or to GFS on behalf of the partnership, until some point (unspecified) ‘between 2008 and 2009’ at which point it defaulted on its loan from the partnership, and the partnership in turn defaulted on its loan from GSF.[9] The plaintiff pleads[10] that Moneela has not made any loan repayments to the partnership or to GSF on behalf of the partnership since 2008 (query how this paragraph sits with the earlier pleading of its default) and was deregistered on 27 September 2010. The plaintiff has discovered a loan statement for the GSF loan to the partnership which states that it is for the period 1 July 2006 to 30 June 2009, although the date of the last transaction there recorded is 25 September 2008.[11] The statement shows interest accruing monthly from 1 July 2006 to 1 September 2008 and payments made (although not by whom), the last of which was on 25 September 2007. There is also a journal credit on 25 September 2008. The debit balance as at 30 June 2009 is stated as $1,614,037.48 i.e. an increased amount compared to the original advance of $1,515,250 (comprising the Establishment Services Fee of $1.5M and fees of $15,250)[12] as at 1 July 2006.
[9]FASOC at [47]–[53].
[10]FASOC at [55].
[11]Affidavit of Gregory John Carfoot sworn 5 May 2017 at [29] and Exhibit GJC-15 (mistakenly identified on the Exhibit as GJC-16).
[12]Item 4 of the Schedule to the loan agreement between the partnership and GSF, being GJC-3 to Mr Carfoot’s affidavit of 5 May 2017.
On 16 May 2009 Great Southern and some of its subsidiaries, including GSF, were placed into administration and receivers and managers were subsequently appointed by a group of secured creditors.[13] Critically, it is not pleaded that the administration or receivership terminated the obligations on Growers under their loan agreements with GSF, and the first defendant’s oral submissions before me were put on the uncontradicted basis that they did not. This accords with what would have been the result had the challenge by a large number of Growers to the financing agreements[14] for their investments in Great Southern in the Great Southern class action gone to judgment. The class action was heard at trial before Croft J from October 2012 to October 2013. The proceeding settled just before judgment was delivered. Croft J subsequently approved the settlement, noting, amongst other things, that the plaintiffs and group members would be in a significantly better position under the settlement than they would have been had judgment been delivered, because he would have upheld the financing agreements.[15]
[13]FASOC at [54]. The first defendant does not admit this in its Amended Defence dated 19 October 2016, but there did not appear to be any dispute about it in the hearing before me.
[14]I do not know whether or not these were in the same terms as the partnership’s loan agreement.
[15]Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (receivers and managers appointed)(in liq) [2014] VSC 516, in particular at [143].
While it is not specifically pleaded in this way, the inference is open from the FASOC that the source of the plaintiff’s capital contribution to the partnership, which was his only actual monetary payment, was principally the tax refund he had received on the basis of his proportion of the Establishment Services Fee. This is how the Commissioner for Taxation apparently viewed the matter, and is also how the solicitor for the plaintiff characterises the arrangement in his affidavit in opposition to the summons.[16] The intention of the arrangement appears to have been that the partnership or its members would not be required to make any other payment from its or their own resources, because the loan from GSF would be repaid by repayment of the loan to Moneela.
[16]Affidavit of Demian Walton sworn 17 May 2017 at [4].
On 18 March 2010 the plaintiff was notified by the Commissioner of Taxation that the proportion of the partnership loss he had claimed for the 2006 year may not be tax deductible. On 8 September 2010, the plaintiff was notified that the Commissioner intended to audit his finances. Shortly thereafter, the plaintiff’s accountant made a voluntary disclosure and on 22 October 2010 the Commissioner disallowed the deduction. On 27 October 2010 the Commissioner issued an amended assessment for the 2006 year which denied the deduction, and imposed penalties and interest. The plaintiff objected to the disallowance on 24 December 2010. His objection was largely disallowed on 7 July 2011. On 5 September 2011, the plaintiff applied to the Administrative Appeals Tribunal for review of the Commissioner’s decision.[17] Those proceedings were ultimately settled between the Commissioner and the plaintiff by a deed dated 16 September 2013 which provided that the deduction be disallowed but penalties and interest be remitted.[18]
[17]FASOC at [57]-[65].
[18]FBP at [2].
The plaintiff claims that the advice given to him by the first defendant to invest as part of a partnership was negligent. The plaintiff’s FBP identify his claimed loss as being the tax he was required to pay as a result of disallowance of the claimed deduction ($595,535) and the legal and accounting fees and disbursements incurred by him in connection with the audit, the disallowance of the deduction, and his dispute with the Commissioner (‘Disallowance Costs’).
The plaintiff’s FBP also identifies his Counterfactual i.e. what he should have been advised, and what he would have done had he been so advised. He claims that proper advice would have been to invest individually or through a partnership only after obtaining a private ruling from the Commissioner of Taxation that the investment would be tax deductible, and that he would have acted in accordance with that advice.
Issues and submissions
The plaintiff opposes discovery of his full returns to and including 2016 on the basis that they are not relevant, save that if I am against the plaintiff in relation to relevance his counsel concedes that both the original and amended taxation returns are discoverable. If I agree with the plaintiff that the returns are not relevant, or not wholly relevant, there is a further dispute about the degree of the current redaction.
Thus, the dispute resolves into two issues:
(1) whether personal financial information as disclosed in the plaintiff’s personal tax returns for any year other than the year of the investment is relevant; and
(2) to the extent some such information may be relevant, but not all, whether the redaction currently undertaken by the plaintiff in discovered documents is appropriate.
Taxation returns already discovered
The plaintiff discovered in his first affidavit of documents his full taxation return for the 2006 year. He had made an agribusiness investment in the previous tax year, 2005, and also discovered that return. Consent orders made by Justice Macaulay on 20 May 2016 required the plaintiff to discover, amongst other documents, documents evidencing his legal and accounting fees and disbursements and any tax deductions claimed by him in respect of such fees or disbursements. In his Further Supplementary Affidavit of Documents affirmed 11 July 2016 (but not filed until 17 May 2017) the plaintiff discovered, amongst other documents said to be required by those orders, his 2010, 2011, 2012, 2013, 2014 and 2015 amended personal tax returns in redacted form.[19] The first defendant has exhibited those documents as discovered to the affidavit of Mr Carfoot sworn 5 May 2017.[20] In each case, the only financial information not redacted is the deduction claimed for ‘managing tax affairs’ at item D10 and the entry for ‘taxable income or loss’.
[19]The affidavit contains two entries for the 2010 redacted return, being documents numbered 217 and 223, but appear to be from their description the amended return.
[20]Exhibit GJC 13. The 2010 and 2015 returns are not identified on the returns themselves as being amended.
Scope of discovery
For the purposes of this analysis, I will apply the test for the scope of discovery that the plaintiff asserts applies, being r 29.01.1 of the Rules. That rule relevantly provides as follows:
29.01.1 Scope of discovery
(1)Unless the Court otherwise orders, discovery of documents pursuant to this Order is limited to the documents referred to in paragraph (3).
(2) Paragraph (1) applies despite any other rule of law to the contrary.
(3)Without limiting Rules 29.05 and 29.07, for the purposes of this Order, the documents required to be discovered are any of the following documents of which the party giving discovery is, after a reasonable search, aware at the time discovery is given—
(a) documents on which the party relies;
(b) documents that adversely affect the party’s own case;
(c) documents that adversely affect another party’s case;
(d) documents that support another party’s case.
It is to be noted that the scope as set by paragraph (3) is expressed to apply ‘unless the Court otherwise orders’ and so the possibility of a wider ambit is not excluded, and is indeed especially preserved. Further, s 55 of the Civil Procedure Act2010 (Vic) specifically empowers the Court to make any order for discovery that it considers ‘necessary or appropriate’. For the purposes of this application, however, I do not think it necessary to go beyond the scope of discovery as determined by r 29.01.1(3).
Submissions on relevance
The defendant submits that the whole of the plaintiff’s original and amended tax returns for years subsequent to 2006 (up to and including 2016 when prepared and filed) are relevant on two bases:
(1) because they may undermine the plaintiff’s Counterfactual, or support the defendant’s case on the Counterfactual; and/or
(2) they relate to the causation of the losses claimed.
Plaintiff’s Counterfactual
In his FBP the plaintiff does not elaborate the manner in which he would have invested privately, had he been properly advised. The first defendant says that for the purposes of discovery it is entitled to assume that the plaintiff would have invested privately in the same manner that the partnership did. The first defendant relies on exchanges with, and comments by, His Honour Justice Macaulay in a recent directions hearing to support this approach.[21] I have set out the plaintiff’s case as to what in fact occurred in relation to investment by the partnership above. Applying that to the first limb of the Counterfactual (invest as an individual) that hypothetical investment would have had the following features of relevance to this application:[22]
[21]The transcript of that directions hearing (‘T’) is exhibited as GJC-5 to Mr Carfoot’s affidavit sworn 5 May 2017. It does not include the judge’s reasons for adjourning the trial. The first defendant relies in particular on T 18 from line 20, T 28 from line 1 and T 45 from line 19 to T46.
[22]There are other features of the actual transactions that were relied upon by the Commissioner of Taxation as reasons to disallow the deduction, which may also apply to the hypothetical investment.
(1) The plaintiff would have incurred an Establishment Services Fee of $1,245,000 for the purchase of an interest in 83% of 500 woodlots.
(2) He would have fully funded the Fee by taking out a loan from GSF. The term of the loan taken out by the partnership was ten years. The interest was to accrue at 11.5 per cent (or 14.5 per cent if overdue) and was to commence accruing at 1 July 2006. The last repayment of interest was due on 30 June 2016.[23] The loan taken out by the plaintiff would have had these same features.
[23]GJC-3 to the affidavit of Gregory John Carfoot sworn 5 May 2017.
(3) The plaintiff would have claimed a loss of the Establishment Services Fee, which would have been allowed as a deduction, resulting in a tax refund of the same amount that he in fact received as a result of claiming his share of the partnership loss.
(4) He would then have lent this tax refund personally, rather than via the partnership, to Moneela on the same terms as the loan agreement between Moneela and the partnership. It appears that the actual loan agreement was intended to have a minimum term of ten years from 1 September 2006, and so arguably the hypothetical loan agreement between the plaintiff personally and Moneela would have had the same duration.
(5) Moneela would have made payments to him, or directly to GSF, equivalent to his obligation to make payments to GSF but only for the period that Moneela in fact made these payments to or on behalf of the partnership.
(6) Despite the collapse of the agribusiness managed investment scheme in 2009, the plaintiff’s obligation to repay GSF would have continued, at least for the term of the loan agreement.
(7) I would add that it is also arguable that the plaintiff would have had to demonstrate to the Commissioner his intention to commit to the arrangement for the full term of the various agreements to obtain the immediate deduction for the Establishment Services Fee.
The defendant says that it is entitled to test the plaintiff’s Counterfactual with at least elements (1)-(6) by examination of the plaintiff’s actual financial position as disclosed in his original and any amended tax returns for the years of the hypothetical loan to him personally from GSF being 2007 to 2016.
Causation of loss
The other basis on which the first defendant says that the tax returns for years after 2006 are relevant is that they relate to the plaintiff’s own pleaded case that the Commissioner had concerns that the 2006 investment was tax avoidance. The plaintiff pleads at paragraph 66(f) of the FASOC that:
Further, the Commissioner contended that the loan agreement with Moneela was part of a scheme under s 177D of the ITAA 36 and therefore the Commissioner was right to deny the Plaintiff’s deduction under Part IV and find that the collateral agreement with Moneela resulted displaced the application of the Product Ruling to the investment.
The first defendant says that the full returns are discoverable because they may adversely affect the plaintiff’s case that it was utilisation of the partnership, as opposed to characterisation of the arrangement as a tax avoidance scheme, that caused the deduction to be disallowed. The first defendant says the tax returns for years subsequent to 2006 are relevant because the Commissioner would have been entitled to rely on them in making this contention.
Plaintiff’s submissions
The plaintiff resists the application broadly on the basis that his tax returns are only relevant for the year in which the deduction was claimed, 2006, and for the years in which he claimed as a tax deduction his Disallowance Costs, being the 2010-2015 tax years. At the time of hearing, the plaintiff had not submitted his 2016 return. The plaintiff concedes that if the Court is against him as to the relevance of the returns, both the original and amended tax returns are discoverable.
Discussion and conclusion on relevance
In my view, the first defendant has shown by its analysis of the first limb of the plaintiff’s Counterfactual that the plaintiff’s financial position from the 2007 tax year to and including the 2016 tax year is relevant. This is for two reasons. First, the Counterfactual assumes a loan from GSF which required monthly repayments for the ten years 2007 to 2016. Whether or not the plaintiff would have been able to make those repayments from his own resources after Moneela would have defaulted on this hypothetical scenario (as it did in fact on the loan from the partnership), and how that would have impacted on his financial position generally given tax considerations, is relevant to the viability of the Counterfactual and the quantum of loss, if his Counterfactual is viable. Secondly, the Counterfactual assumes a loan by the plaintiff to Moneela, which was repaid for a period. How that income would have affected his financial position generally is also relevant to his loss.
I do not consider, however, that the supposed relevance by reason of the Commissioner’s pleaded assertion of tax avoidance is made out. This is for two reasons. First, that connection assumes that the Commissioner would have been entitled to rely on subsequent returns in reaching a conclusion about the 2006 claimed deduction. The first defendant took me to s 177D(2)(a) of the Income Tax Assessment Act1936 (Cth) and some commentary on the section as reported by Westlaw AU, in support of this proposition. The section relevantly provides:
177D Schemes to which this Part applies
Scheme for purpose of obtaining a tax benefit
(1)This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) 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:
(a)enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or
(b)enabling the relevant taxpayer and another taxpayer (or other taxpayers) each 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 or is the other taxpayer or one of the other taxpayers.
Have regard to certain matters
(2)For the purpose of subsection (1), have regard to the following matters:
(a)the manner in which the scheme was entered into or carried out;
(b) the form and substance of the scheme;
(c)the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(d)the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(e)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(f)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(g)any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;
(h)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).
Note:Section 960‑255 of the Income Tax Assessment Act 1997 may be relevant to determining family relationships for the purposes of paragraphs (f) and (h).
The commentary to which the first defendant took me relates to the decision of the High Court reported as FCT v Spotless Services Ltd.[24]The first defendant did not take me directly to the decision. The relevant effect of the commentary is that the High Court held that the length of the period in which a scheme was carried out is a consideration that throws further light on the manner in which it was carried out.
[24](1996) 34 ATR 183.
Notwithstanding the terms of s 177D(2)(a), and the reported commentary on it, counsel for the plaintiff submits that the Commissioner would not have been entitled to have regard to later income tax returns, or would not have done so, in the factual circumstances of this case.
Given that the point is disputed, the limited nature of the argument on the point, and the fact that the judicial remarks reported in the commentary are not specifically directed to the relevance of later tax returns, I do not accept the first defendant’s contention that the Commissioner could have, let alone would have, relied on later tax returns in advancing the contention that the 2006 arrangements constituted a scheme to avoid tax. Without that conclusion, the necessary connection between subsequent returns and tax avoidance is not established for the purpose of this application.
Secondly, although the plaintiff pleads that the Commissioner relied on the tax avoidance provisions for the AAT proceeding, the evidence submitted by the first defendant does not support that the Commissioner had regard to later tax returns in making this assertion, except possibly the plaintiff’s 2007 return. The Commissioner’s reasons for rejecting the plaintiff’s objection dated 7 July 2011 and the Commissioner’s Statement of Facts, Issues and Contentions for the AAT proceeding dated 17 April 2013 (‘Commissioner’s Statement’) are exhibited to the affidavit of Mr Carfoot sworn 18 May 2017.[25] They make reference to the Commissioner’s reasons for asserting that the investment was a tax avoidance scheme, but make no express reference to any later return as a basis for this conclusion, and indeed largely confine the reasons to examination of the aspects of the scheme from June 2006 to 2007.
[25]As Exhibits GJC-18 and GJC-23 respectively.
The only reference in these statements of the Commissioner’s position to a tax year later than 2006 is in the Commissioner’s Statement[26] and is a reference to the taxable income the plaintiff otherwise would have had for the 2007 tax year. That may in fact be an error, and given the context the intended reference may have been to the 2006 tax year. The plaintiff concedes that he had a dispute with the Commissioner in relation to his participation in a (different) managed investment scheme in 2007, and that he also sought review in the AAT of the Commissioner’s disallowance of his objection in relation to that dispute. His solicitor deposes that the two proceedings were distinct, however, although for a time conducted in tandem, and there is nothing before me to show that that is incorrect.
[26]At [67].
It follows that at most the evidence shows that in respect of the 2006 dispute the Commissioner had regard to the plaintiff’s 2007 tax return, as well as the facts surrounding the investment in 2006 and 2007. In the absence of a more specific reliance by the Commissioner on the plaintiff’s 2007 return, I do not consider that sufficient to render relevant the 2007 return, let alone later returns. Mr Carfoot also exhibits transcripts of interviews with the plaintiff by officers of the ATO, and the first defendant submits that these transcripts show regard was had by the ATO to tax years other than 2006. Even if that was so for the purpose of the ATO enquiry, I consider the statements of the Commissioner’s concluded position, initially on the objection and later for the AAT proceeding, to be the better guide as to relevance.
For completeness I note that the first defendant also relied on Class Ruling CR 2016/19 issued by the ATO to support its submissions on relevance. That Ruling relates to the tax treatment of benefits received by Growers in failed agribusiness managed investment schemes following court approved sales of Growers’ rights. There is no pleading by either party that the plaintiff received, or is entitled to receive, any such benefit, or would have been so entitled had he invested individually, and no evidence on the point. Counsel for the plaintiff also said from the bar table that there was never, in fact, any harvest for the purposes of the 2006 investment.[27] In these circumstances, I do not consider that the Ruling adds to the first defendant’s contentions on relevance.
[27]The first defendant did not dispute this in argument, but there is no evidence on it before me.
Redaction
Given the conclusion that I have reached on relevance, it is not necessary to consider if the current level of redaction in the 2010-2015 returns that have been discovered is appropriate. This is because I do not consider that any financial information in these returns, and those further returns now required to be discovered, can be said to be irrelevant. It is the whole of the plaintiff’s financial position in those years that is relevant.
Had it been necessary to consider the extent of the current redaction of the returns already discovered, I would have noted that the redaction is very extensive, and I would have accepted the contention of the first defendant that it is so extensive that it renders the tax returns that have been discovered for 2010 to 2015 unintelligible. As noted, the returns as discovered contain only two items that have not been redacted, being the plaintiff’s claim to cost of managing his tax affairs and the item next to the column Total Income or Loss. In the latter case, the redacted return does not indicate whether it is a claimed income or a claimed loss. I note that Mr Walton, solicitor for the plaintiff, deposes that those entries should be read as income [28], but in my view redaction should not be so extensive that a document requires external explanation to be intelligible.
[28]Affidavit of Demian Walton sworn 17 May 2017 at [12].
As well as argument on the extent of the current redaction, the parties initially put competing submissions on the procedural question as to whether the plaintiff was permitted to redact for relevance or sensitivity (as opposed to privilege) without leave of the Court or consent, neither of which had here been obtained. As that dispute did occupy some time and expense for the parties I express my brief conclusions on it, although they are overtaken by my conclusion on relevance. In short, I accept the plaintiff’s submission that even if it is the position in New South Wales and, possibly, the Federal Court that prior leave is required for redaction for relevance, that is not the position in this Court. Nevertheless, where redaction is challenged, as it was here, the onus is on the redacting party to justify it, and the oath of the party seeking to redact is not conclusive in that enquiry.[29]
[29]Octagon Inc v Hewitt & anor (No 2) [2011] VSC 373 (per John Dixon J).
Orders
I will ask the parties to prepare orders for the discovery in full of the plaintiff’s personal income tax returns for the years 2007 to 2015, and in due course 2016, in both their original and, if applicable, amended form as filed, and otherwise in relation to the non-contested aspects of the summons. There was agreement in argument that access to the full returns could be restricted to the first defendant’s legal representatives and expert, and so that limitation may be included in the orders if required.
If possible, these orders should also include an agreed order as to the costs of the summons. If that is not possible, I will hear the parties on costs. The parties should also consider any timetabling issues that arise in relation to preparation for trial, although it may be more appropriate for orders in that regard to be made by Justice Macaulay.
SCHEDULE OF PARTIES
SIMON BRAHAM Plaintiff - and - ACN 101 482 580 PTY LTD (ACN 101 482 580) First Defendant ROMAD FINANCIAL SERVICES Second Defendant RORY MCCLEOD DEUTSCH Third Defendant DR ANDREW LUDEKENS Fourth Defendant
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