Brody and Ors and Commissioner of Taxation
[2007] AATA 1764
•14 September 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1764
ADMINISTRATIVE APPEALS TRIBUNAL ) NT2005/191, 278, 539, 540, 541,
)542 and NT2006/75
TAXATION APPEALS DIVISION )
Re Larry BRODY (191, 278)
Marjorie LATIMER (539)
Anthony LATIMER (540)
Ronald EASTON (541)
Kevin FENWICK (542)Marilyn MARSDEN (75)
Applicants
AndCOMMISSIONER OF TAXATION
Respondent
DECISION
TribunalMr Julian Block, Deputy President
Date14 September 2007
PlaceSydney
DecisionIn respect of each of the above applications for review, the relevant objection decision is affirmed.
..................[sgd]............................
Mr Julian Block
Deputy President
CATCHWORDS
TAXATION – Budplan projects – investment in coenzyme Q10 research project – investment in grape research project – investment in tea tree oil project – investment funded by loans – whether expenditure deductible under either limb of section 51(1) of the Income Tax Assessment Act 1936 – importance and relevance of Howland-Rose – consideration in the alternative of Part IVA – penalties
RELEVANT ACT/S
Income Tax Assessment Act 1936: sections 51(1), 177D(b); Part IVA
Taxation Administration Act 1953: section 14ZZK
CITATIONS
Macpherson v Federal Commissioner of Taxation (No 2) 2007 ATC 2087
Howland-Rose & Ors v Commissioner of Taxation (2002) 118 FCR 61
Re Macpherson and Federal Commissioner of Taxation (2007) 65 ATR 702
Federal Commissioner of Taxation v Cooke (2004) 55 ATR 183
Commissioner of Taxation v Lau (1984) 6 FCR 202
Goodman Fielder Wattie Ltd v Commissioner of Taxation (1991) 29 FCR 376
Commissioner of Taxation v Sleight (2004) 136 FCR 211
Vincent v Commissioner of Taxation (2002) 124 FCR 350
Starr v Federal Commissioner of Taxation (2007) 65 ATR 86
REASONS FOR DECISION
14 September 2007 Mr Julian Block, Deputy President PART A - preliminary and general
1. The applicants were participants (collectively referred to as “the participants”, or singularly as relevant, “a participant” or “the participant”) in three Budplan projects (collectively referred to as “the Budplan projects”, “the projects” or singularly as relevant, “the project”). The applicants applied to the Administrative Appeals Tribunal (“the Tribunal”) for a review of the decisions of the respondent disallowing their objections against the refusal of tax deductions claimed in respect to their participation in one or more Budplan projects. The applications were, by consent, heard together during three days commencing on 15 August 2007.
2. The issues for consideration in these applications are:
(a)Whether losses or outgoings incurred by the applicants were allowable deductions pursuant to subsection 51(1) of the Income Tax Assessment Act 1936 (“the Act”); and
(b)If they were allowable deductions pursuant to subsection 51(1), whether Part IVA of the Act operated to disallow the deductions.
3. The three Budplan projects involved were:
(a)Personal Budplan No. 4 (referred to in these reasons as “BP4” or “the Coenzyme Q10 Research Project”);
(b)Budplan “A” Series No. 1 (referred to in these reasons as “BP1” or “the Grape Research Project”); and
(c)Personal Budplan No. 2 (referred to in these reasons as “BP2” or “the Tea Tree Oil Research Project”).
4. The Budplan projects referred to in paragraph 3 above were documented in a manner, which was, in respect of all three of them, very similar in most respects. BP1 (the Grape Research Project) was considered by Senior Member Pascoe in Macpherson v Federal Commissioner of Taxation (No 2) 2007 ATC 2087 (“Macpherson”). The Budplan project considered by Conti J in Howland-Rose & Ors v Commissioner of Taxation (2002) 118 FCR 61 (“Howland-Rose”) was yet another Budplan project; at the same time that latter Budplan project was similar to the projects, and, in particular, remarkably similar to the Tea Tree Oil Research Project.
5. By agreement between the parties, the applications were dealt with in the following manner:
(a)Mr Fenwick’s application in respect of the Coenzyme Q10 Research Project was heard first. Oral evidence was given by him alone. After his evidence had been given, the Tribunal heard submissions by the parties and received from the respondent detailed written submissions.
(b)Following the conclusion of the hearing referred to in subparagraph (a), Mr Latimer gave oral evidence in respect of each of the Grape Research Project and the Tea Tree Oil Research Project, he being a participant in both projects, and on the basis that the decision of the Tribunal in respect of BP1 and BP2 in relation to Mr Latimer would bind all of the other applicants who respectively participated in them or either of them, and regardless of differences in their personal circumstances.
(c)In respect of BP2 the other participants were Messrs Brody and Easton and Mesdames Latimer and Marsden. There is a particular difficulty in respect of Mr Brody in relation to BP2 in that although the documentation before the Tribunal filed on his behalf relates almost entirely, in respect of BP2, to the year ending 30 June 1997 (“the relevant year”), his objection was drawn in respect of the immediately preceding year, being the year ending 30 June 1996. (I refer, in this context, in particular to Mr Brody’s objection, which appears at T12, p.66-67 of the “Individual” T documents referable to him.) This aspect was dealt with on the basis that within one week of 17 August 2005, Mr Fenwick would produce written evidence as to which year is correct. It was, however, understood that this aspect would be of no significance if the Tribunal decided Mr Latimer’s application referable to BP2 against him. However, if it decided Mr Latimer’s application referable to BP2 in his, Mr Latimer’s favour, Mr Brody would be successful in relation to the correct year and to the extent necessary, appropriate adjusting entries would be affected by the respondent. In the result, Mr Latimer has not succeeded in relation to either BP2 or BP1, so that nothing further is relevant or necessary in this context. It is relevant to note that Mr Fenwick did not furnish the written evidence referred to previously in this subparagraph either within the period of one week referred to, or thereafter.
(d)In respect of BP1, the only other participant was Mr Brody.
6. The documentation filed in these applications is remarkably large:
(a)In respect of Mr Fenwick and in relation to BP4, the respondent produced “Individual” T documents under s 37 of the Administrative Appeals Tribunal Act 1975 (“the AAT Act”) containing documents T1 to T8 and where the pages are numbered from 1 to 35. The respondent also produced “generic” T documents relating to BP4 in two volumes containing documents identified as T100 to T118 and where the pages are numbered from 1 to 376. Moreover, the respondent, in addition, produced supplementary T documents relating to BP4 in three volumes containing documents S1 to S20 and where the pages are numbered from 1 to 842. Although section 37 of the AAT Act in its terms obliges the respondent to produce relevant documents, Mr Fenwick nevertheless produced his own set of section 37 documents (again large) and they were entitled “K” documents and were referred to as such in the hearing. Both parties produced statements of facts and contentions.
(b)In respect of all of the other applicants the documentation was similar, there being individual T documents for each applicant and multiple volumes of generic T documents and supplementary T documents relating to each of the other projects, although there was not, in respect of any other applicant, a counterpart to the K documents.
(c)In all cases references in these reasons to the T documents (Individual or generic) or the supplementary T documents are prefaced by “T” or “S” followed firstly by the document T or S number and then, as necessary, the document page number. References to the T documents or S documents should be construed in relation to the applicant or project concerned.
7. Although the documentation produced by Mr Fenwick for himself (and for the other applicants) was extensive, it did not include witness statements, in a conventional sense, and notwithstanding the fact that at a number of directions hearings, the applicants were directed to produce the written statements of all witnesses on whose evidence they respectively intended to rely. It was possible, however, in respect of Mr Fenwick to extract from his statement of facts, issues and contentions an undated declaration and to accept that document as a witness statement; it was marked “Fenwick A1”. The same procedure was necessary for Mr Latimer where an undated extract from his statement of facts, issues and contentions was accepted and marked “Latimer A1” and treated as his witness statement.
8. It was contemplated that when Mr Latimer gave evidence in respect of BP1 and BP2, Mr Fenwick would also give evidence as to the fact that it was he who recommended the participations; however no witness statement in this regard had been produced by him. On the second hearing day, Mr Fenwick produced a statutory declaration dated 15 August 2007 which does include brief statements to that effect together with other matters of little or no relevance. That statutory declaration was marked “Fenwick A2”. In the result, Mr Fenwick did not give oral evidence otherwise than on his own behalf and in respect of his own application.
9. The applicants were all represented by Mr Kevin Fenwick who is himself one of the applicants and is an accountant and financial adviser, and had for many years prior to 1992 been a registered tax agent. As will be noted, and in relation to the other applicants, he recommended the participations in his capacity as their financial advisor. The respondent was represented by Ms Diana Harding of counsel instructed by Mr Dusan Uglesic of the Australian Government Solicitor.
10. In Macpherson, Senior Member Pascoe issued his decision by reference to Howland-Rose and also by reference to another decision involving Ms Macpherson (Re Macphersonand Federal Commissioner of Taxation (2007) 65 ATR 702). Howland-Rose is a very lengthy and comprehensive decision and of particular importance (and binding on this Tribunal) because it is a decision of the Federal Court in relation to a Budplan project similar to the projects which are relevant in this matter, and remarkably similar, in particular, to the Tea Tree Oil Research Project.
11. In Howland-Rose, Conti J had the benefit of evidence given by a considerable number of witnesses, including expert witnesses. This was not so in these applications; in particular there was no evidence by or on behalf of any of the entities associated with the Budplan projects.
12. Although the precise nature of the “Businesses” as defined in the relevant project documents differed, they had one important factor in common and that is that the profitability of the project depended on the success of research to be undertaken by The Australian Tea Tree Oil Research Institute Ltd (“ATTORI”) in the case of the Coenzyme Q10 Research Project and Tea Tree Oil Research Project, and by the Australian Agriculture Research Institute Limited (“AARI”) in the case of the Grape Research Project. In each case, there was a prospectus. In each case Business and Research Management Limited (“BARM”) was the manager. In each case there was loan documentation in respect of a loan by Projects and General Finance Pty Limited (“the Lender”). In two projects, participants entered into a Management Agreement and a Research Agreement through the execution of a power of attorney, while in one project (BP2) these documents were executed directly. (The names given to the relevant documents did differ to some extent but this aspect does not have any effect on this decision and there were variations in respect of the relevant documentation which are also not material for the purposes of these reasons.) In respect to the Grape Research Project there was in addition a Farm Agreement; the Grape Research Project was, moreover, structured in such a manner that the amount to be contributed was not paid in two equal annual instalments; rather the first payment was much larger than the second. BARM and the Lender (and also ATTORI and AARI) are related or associated companies.
13. It would seem that in all cases (subject only to the possible exception in respect of Mr Brody as referred to in paragraph 5(c) above) that the participation was entered into on or about 30 June 1997.
14. In all cases, the prospectus or another related document contained projections as to the returns which would be derived by the participants based on assumptions, in particular the success of the research and its commercialisation. Those projections were drawn so as to reflect fees payable to BARM and, as relevant, ATTORI or AARI. However, the projections invariably omitted any mention of the fact that BARM was also entitled to a royalty of 50 per cent in respect of income derived from the sale of any intellectual property rights arising from the success of the research. Mr Fenwick in closing submissions argued that the omission from the projections of that additional 50 per cent royalty was correct in that the sale of intellectual property rights could and should be distinguished from the sale of product resulting from the successful completion of the research. That contention fails for one simple reason; the definitional provisions contained in the relevant documents make it clear that in all cases the project itself or “Business”, as defined, contemplated the research and the commercialisation of the research, if successful, which in such event might include the realisation of intellectual property rights resulting from that successful completion of the research.
15. In respect of the Budplan projects the documentation before the Tribunal included tax calculations which made it clear that a participant would invariably derive a gain in economic terms. These gains varied according to his or her marginal tax rate and it was, of course, greater where his or her marginal tax rate was higher, but in such manner that there was necessarily a gain even where the relevant marginal tax rate was 35.7 per cent.
16. Each prospectus contained a qualified tax report which made it clear that the respondent might not agree that participants were entitled, in respect of the moneys borrowed, to tax deductions.
17. Another aspect common to all three Budplan projects was that in all cases, participants were given the opportunity of borrowing the whole of the amounts to be contributed by them. In virtually all cases, the participants took advantage of that borrowing facility. This was so in respect of all of the applicants in these applications. Each applicant (subject to the Brody exception referred to in paragraph 5(c) above) entered into a participation in one or two of the Budplan projects on or about 30 June 1997 and borrowed (from the Lender) the whole amount of his or her investment. In respect of the loans, there were variations as regards the terms; there were also variations as to the method of payment of part only of the principal of the loans and the interest payable in connection therewith. Mr Fenwick in relation to BP4 chose the option of paying by monthly instalments over two years. Mr Latimer could not remember which option (where relevant) he had adopted. In all cases, the terms were such that each applicant was obliged to make payments over a period of two years in respect of principal and interest but was not obliged to make any further payments except out of revenue derived from the project. In each case, the loan amount was provided by the Lender through bills of exchange, which (via a round robin arrangement) were endorsed back to the Lender and then cancelled. Put in other words, and in relation to each Budplan project, the only moneys which were available for research, and thus for the relevant project, would seem to be those moneys which were actually contributed by the participants by way of loan repayments. In all cases, the principal payments which he or she was obliged to make amounted in aggregate to considerably less than the principal of the loan. In respect of each project it was contemplated that there might be additional research, but invariably to be funded only out of revenue derived from the project. That the projects were unsuccessful is, on this basis, hardly surprising.
18. As to each project there was, as I have said, no evidence by or on behalf of any of the entites associated with it. It seems that, in fact, the Lender did not make any loans in the sense that it provided moneys, but rather drew bills, which having been accepted, were endorsed back to the Lender and then cancelled. There was thus no evidence before the Tribunal as to the fact that any loan moneys were in fact provided. In relation to each project and for each participation, there was a business establishment fee of $200, a loan fee (where a loan option was taken and this was invariably the case) of $300 and the only other cash provided by the participant comprised his or her monthly loan payments. On this basis, and if the Lender made no loan moneys in fact available for research, the failure of the projects might be thought to have been inevitable. I refer in this context to paragraph 12 of the decision by Senior Member Pascoe in Macpherson as follows:
12.Although not specifically raised on behalf of the respondent, the question of whether Ms Macpherson actually incurred the expenditure needs to be considered. The claim was for farm fees, management fees and research fees allegedly incurred through the agent, BARM. However, the evidence was that, apart from a $300 establishment fee, the applicant paid no money to BARM. She entered into a loan agreement with PGF under which PGF would pay the fee on her behalf. However, it is clear that no actual funds were provided by PGF to the project. There were, in fact no loan. Equally, it is difficult to see that the amount of $4,500 described as interest in advance can be characterised as interest when no funds were ever provided by way of loan. At best, the $4,800 likely finished up as funds contributed to the project as part payment of the fees and, in the subsequent year, the $10,200 described as a payment in reduction of loan principal would have been contributed to the project. It could be argued, that no amount totalling $33,750 was in fact incurred by or on behalf of Ms Macpherson to the project. On this basis, no amount exceeding $4,500 could be seen as having been incurred. How it would be allocated over the three alleged fees is not clear.
19. Conti J in Howland-Rose did not make a finding analogous to that of Senior Member Pascoe in Macpherson, but found that deductions should be denied in respect of the Budplan project with which he was concerned, because the relevant expenditure was incurred at a stage that was too early. In respect of each of Howland-Rose and Macpherson, Conti J and Senior Member Pascoe found that if relevant, Part IVA of the Act would operate to deny the deduction claimed.
20. The manner in which Mr Fenwick chose to present the case for the applicants might fairly be described as unusual. Although directions were given on a number of occasions as to the filing of witness statements, none were provided. Mr Fenwick, however, did provide the K documents and, on behalf of each applicant, statements of facts, issues and contentions. They can be summarised as a somewhat confused mixture of evidence, argument, and a sustained attack on the Australian Taxation Office (“the ATO”). He commenced with an opening address, which consisted to some extent of his evidence. When it was pointed out to him that he should preferably give his evidence from the witness box, he took the oath and did so. His evidence-in-chief consisted of his attestation of the truth of Exhibit Fenwick A1. During cross-examination by Ms Harding, and when it was put to him that his entry into the project was motivated by considerations of tax, he answered that “this was rubbish”. When asked whether he wanted to present any evidence by way of re-examination he said that he wished to cross-examine the Commissioner. In the course of his lengthy and confused closing submissions, he sought to contend that all of the blame was to be attributed to the ATO who had, so he said, failed to honour draft determinations and non-binding rulings. He placed particular emphasis on the fact that ATTORI went into voluntary administration in May 2000 (and, of course, after the relevant research period had expired), and subsequently into liquidation. Later evidence revealed that it went into voluntary administration in accordance with a resolution of its own directors. This arose, according to Mr Fenwick, because the respondent assessed ATTORI for a large amount of taxation on the basis that payments to it were not exempt. He repeatedly contended that actions of the respondent were unfair. He did not deal with case law citations provided by the respondent and in particular, the lengthy references to Howland-Rose and other relevant cases. He contended that the facts in respect of his case were on all fours with those in Federal Commissioner of Taxation v Cooke (2004) 55 ATR 183 (“Cooke”), that Cooke was a decision of the Full Court of the Federal Court and thus to be preferred to that of Conti J in Howland-Rose.
21. He contended also and repeated that it was necessary to have regard to the state of the law at the time when the participations were entered into (1997), and that case law thereafter could not be relevant. He was not prepared to accept that the failure of ATTORI after May 2000 (it having gone into administration on its own resolution) was of little, or no, relevance. Mr Fenwick (and Mr Latimer who also made closing submissions) contended that after all these years they could not be expected to remember details and notwithstanding the fact that it was pointed out to them that it was the applicants who bore the onus pursuant to s 14ZZK of the Taxation Administration Act 1953 (“the TAA”). In the light of the decision in Howland-Rose, it may be that the result would have been the same even if the cases for the applicants had been presented in more orthodox fashion, although it must be said that the failure of any of the other entities involved with the projects to give evidence must of necessity result in an adverse inference; in other words the Tribunal must infer that that evidence would not have assisted the applicants. This is so, in particular, because of the lengthy and comprehensive reasons by Conti J in Howland-Rose which dealt in considerable detail with all of the issues. Although Howland-Rose related in its terms to a different Budplan project, that project is remarkably similar to the projects with which this Tribunal is concerned, and in particular, almost on all fours with the Tea Tree Oil Research Project. The decision in Howland-Rose is, needless to say, binding on this Tribunal and so, for that matter, is the decision in Cooke, but Cooke is distinguishable for reasons set out later in this decision.
22. Detailed submissions in respect of each project were furnished by the respondent and I have drawn on them to some considerable extent for the purposes of these reasons.
PART B - BP4 (the coenzyme Q10 research project)
23. Mr Fenwick was the only applicant who participated in BP4.
24. The respondent’s submissions in respect of BP4 contain a Part B which is a comprehensive and useful description of the project; the Tribunal considers that it is correct, and thus it has been included in full (paragraphs 12 to 37) as follows:
B.The project
12.The respondent refers to the project documents produced by the applicant and, where necessary, the generic s 37 documents lodged by the respondent.
(a)The prospectus
13.The prospectus for the project is dated 16 April 1997 and was amended by supplementary prospectus dated 9 May 1997.
Prospectus, Document 4, page 1
Supplementary prospectus, Document 4, page marked 58
14.It opened with a “Business Overview”:
“By applying for and being accepted into Personal Budplan No. 4 an applicant becomes a business proprietor (“Participant”) in the business of the research, development, production and sale of a diagnostic kit and Coenzyme Q10 products and the license of technology and/or intellectual property in order to improve energy, health and lifestyle (“the Business”).
The Manager holds intellectual property, including product concepts and formulae, which will be licensed to Participants on commencement of the Business and will be utilised to further research, develop and commercialise:
• A diagnostic kit for measuring cellular bioenergy
• Coenzyme Q10 products to improve energy, health and lifestyle
To further develop these formulae and products each Participant’s Business will undertake research and development in these areas. Participants will contract with The Australian Tea Tree Oil Research Institute Ltd (“the Institute”) to carry out the necessary research and development of these products.
The Institute will sub-contract work where appropriate, including to Centre for Molecular Biology and Medicine, Melbourne (“the Centre”). The Centre has pioneered work in regard to the effects of ageing …
Participation in the Business is achieved by completing the Application Form and Power of Attorney enclosed herein which appoints an Attorney to enter the Management and Research Agreements on a Participant’s behalf. The Management Agreement appoints Business And Research Management Limited (“the Manager”) to manage the Business of a Participant and to undertake the commercialisation of the products produced by each Participant’s Business. The Research Agreement appoints the Institute to research and develop products for each Participant’s Business.
Further details are set out in this Prospectus and you are urged to read this document thoroughly and to consult your own advisers or your financial planner if you are unclear on any aspect.”
Prospectus, Document 4, page 2
15.A segment headed “Summary of Participation” set out the payments required in order to participate at the minimum level:
“To participate at the minimum level in Personal Budplan No. 4 each Participant will be required to make a once only payment of $200 to cover Business establishment fees, including the acquisition of rights to existing formulae and product concepts, and to make two payments of $12,500. Each payment is payable yearly in advance, one immediately on executing the Power of Attorney and the second twelve months later, comprising $11,250 for scientific research expenditure and $1,250 as a management fee.
…”.
Prospectus, Document 4, page 3
16.A segment headed “Details of the Business” described the purpose as:
“1. PURPOSE OF PERSONAL BUDPLAN NO. 4
By participating in Personal Budplan No. 4 a Participant will engage in the business of development, for the production and sale, of a diagnostic kit for the purposes of measuring general bio-energy levels in humans, without being specific to any particular organ in the body, and Coenzyme Q10 products to improve general human energy, health and lifestyle, including all necessary scientific research.
It is intended that, subject to the inherent risks, the Business of a Participant will return profits from the sale or license of products to pharmaceutical companies wishing to sell them through established distribution networks.
It is not intended that the Business will market under its own brand name. The Manager will seek existing pharmaceutical companies with established, well recognised brand names to distribute the products to retail level.
Participants will commence business by entering into the Management and Research Agreements via the Power of Attorney and paying $200 (or multiples thereof) to cover Business establishment fees.
...”
Prospectus, Document 4, page 4
17.A section headed “TOTAL EXPENDITURE REQUIRED” set out the payments required for year 1 and year 2:
Research Fee
Management Fee
Per Participation
Year 1
$11,250
$1,250
$12,500
Year 2
$11,250
$1,250
$12,500
Total
$22,500
$2,500
$25,000
and noted that:
“To participate in Personal Budplan No. 4 Participants will make two payments, each payable yearly in advance, one immediately on execution of the Power of Attorney and the second twelve months later. These two payments will be split each year into scientific research expenditure and management fees as detailed in the above table.
A Participant will also be required to make a once only payment of $200 to cover Business establishment fees per participation including the acquisition of the rights to existing formulae and product concepts.
…
No payments are required beyond the first two years as all costs from that time including management fees, manufacturing, marketing and distribution expenses, and ongoing research costs, will be deducted from the revenue earned from product sales and licensing fees, before declaring net revenue earned by the Business of a Participant.”
Prospectus, Document 4, page 4
18.The roles of the project entities were described in the sections headed “MANAGEMENT COSTS” and “THE AUSTRALIAN TEA TREE OIL RESEARCH INSTITUTE LTD” as follows:
“3. MANAGEMENT COSTS
Business And Research Management Limited will act as Manager of the Business. The Institute has also retained its services to administer the affairs of the Institute in respect of the proposals detailed in this prospectus.
...
11. THE AUSTRALIAN TEA TREE OIL RESEARCH INSTITUTE LTD
The Institute has been formed specifically to undertake scientific research in various natural therapeutic substances and has significant expertise in this area. It also has expertise in the fields of formulation of pharmaceutical products, and the regulatory processes and regimes for such products.
In addition the Institute:
• has established a specialist Advisory Board the members of which are recognised and reputable experts relevant to the Business of Participants, and
• will contract other specialist research and development organisations with expertise in areas relevant to the Business.
The Institute will be contracted by Participants to conduct the research and development … and to:
• Determine the likelihood of success of any particular piece of research to enhance or expand the product range.
• Determine research requirements and protocols.
• Source suitable researches and research bodies to conduct the required Research and Development under its supervision.
• Assess the potential for successful commercialisation of any proposed piece of research or product.
...
The Institute has retained the Manager to provide administration services.
The cost of running the Institute will be met from research component contributions. …
…
The Institute has undertaken to perform certain contractual research tasks for stipulated fees. …”
Prospectus, Document 4, pages 4, 5
19.A section headed “INTELLECTUAL PROPERTY” indicated that:
“14. INTELLECTUAL PROPERTY
The intellectual property to be licensed to Participants in Personal Budplan No. 4 includes basic formulations which require further development work for the delivery of Q10 to the body and certain product concepts including that of a partly developed diagnostic kit to measure bioenergy levels in human cells.”
Prospectus, Document 4, page 7
20.A “Marketing Report” referred, under the heading “THE PROPOSED RESEARCH’’, to the proposed research, the focus of which was to be “on determining that a commercial outcome would result from the R&D activities”. It continued:
“Diagnostic kit
…
The development of the diagnostic kit to provide clinicians with a tool for measuring cellular bioenergy would be a major advance in the science of aging. Preliminary research using mammalian tissue has shown that changes in the bioenergy of cells can be measured. This research also indicated that the effects of CoQ10 on bioenergy could be measured.
The diagnostic kit would provide medical practitioners with a measure of bioenergy which could be used for both preventative and curative prescription. A model has been developed by the Centre for Molecular Biology and Medicine, in Melbourne, as an ageing diagnostic and this requires considerable R&D to determine the extent of variation of bioenergy in a selected population. This would allow preventative treatment of ageing to become a normal part of an annual medical check. …
Products to improve energy, health and lifestyle
… At present, CoQ10 is available as pressed tablets, powder filled capsules or oil based gel caps. There appears to be little research on the uptake of CoQ10 and changes of uptake with age. In most pharmaceutical applications the carrier becomes an integral part of the delivery of drugs.
This part of the R&D is aimed at providing CoQ10 formulations which will allow a higher level of acceptance in mainstream medicine. …
The development of these products is of medium risk but will allow a more precise application of CoQ10 in reducing the effects of the ageing process on lifestyle.”
Prospectus, Document 4, pages 14-16
21.An investor could apply to participate in the project by completing an Application Form and Power of Attorney (application form).
Prospectus, Document 4, page 57
22.No application form for the applicant has been produced.
23.A debtor’s ledger for the project as at 30 June 1997 lists “Fenwick” as contract number 641997 for one unit, interest of $156.25, principal of $260 and a loan balance of $12,240.
Debtors’ ledger, ST15-375
(b)Loan proposal
24.An investor could “borrow 100% of its first and second years Management and Research fees from” Project and General Finance Pty Limited (Lender).
Loan Proposal Document, par 1, ST3-60
25.A Loan Proposal Document and Loan Deed included an Application Form and Power of Attorney (loan application form) and required, inter alia, that the investor “elect to pay the following Loan Repayment Option and Interest Rates as described in the Schedule to the Loan Deed”.
Loan Proposal Document and Loan Deed, T100-1
26.The Schedule described three options. Under the repayment option 1:
“The Borrower shall pay on the date hereof and thereafter on the first day of each month for 23 months commencing on the 1st day of the month next following the Payment Date:-
(a) $260 for each Participation ... in reduction of the Principal or the Reduced Principal;
(b) $156.25 for each Participation ... in respect of the Interest.
Interest rate 17% pa, reducing for Year 1 to 15%, reducing to 8.57% for Year 2 and thereafter, in consideration of payment within 7 days of due date.”
Loan Proposal Document and Loan Deed, T100-9
27.In a section headed “Taxation and Cashflow Aspects of Years 1 and 2”, the expenditure items required of an investor who took out the loan, under repayment option 1, were:
Your Funds
Borrowed Funds
Deductible over 2 years
Business Establishment Fee
$200
Loan Establishment Fee
$300
$120
Total Expenditure over two years
$25,000
$25,000
Interest over two years
$3,750
$3,750
Principal Reduction over two years
$6,240
Total
$10,490
$25,000
$28,870
Loan Proposal Document and Loan Deed, T100-4
28.No loan application form or Schedule for the applicant has been produced.
(c)Project agreements
29.Having signed up for the project, a Management Agreement and Research Agreement were to be entered into by appointed attorneys. Further, having applied for a loan, a Loan Deed was to be entered into by appointed attorneys.
Management Agreement, Document 3(2)
Research Agreement, Document 3(3)
Prospectus, Document 4, page 53
Loan Deed, Document 3(1)
Loan Proposal Document and Loan Deed, T100-1
Management Agreement
30.The Management Agreement was to be made between an investor as the participant and BARM as the manager.
31.The terms of the Management Agreement included:
(a)by clause 2.1, the participant was to appoint BARM as manager of the Business and the Collaborative Research and Agent. By clause 1.1:
• “Business” was defined as:
“the Participant’s business activities and undertakings of all assets held or owned by the Participant in Personal Budplan No. 4 and includes such actions undertaken to enable the Participant to derive income or an interest in income as part of the business activities comprising:
(i)research, development, production and sale of products designed to improve energy, health and lifestyle, specifically a diagnostic kit and products for general wellbeing based on Coenzyme Q10 and on knowledge of its role and action;
(ii)the purchasing of necessary technology or intellectual property for that purpose;
(iii)the sale, lease or licence of purchased or developed technology or intellectual property;
(iv)the holding of all appropriate technology developed whether from developed or acquired technology;
(v)derivation of income and profits from the above activities”;
• “Collaborate Research” was defined as:
“the Research and Development carried out by the Participants in collaboration with each other”;
• “Research and Development” was defined as:
“research into the properties and applications of Coenzyme Q10 and research and development of a diagnostic kit for measuring general cellular bioenergy in humans and products to improve general energy, health and lifestyle and includes the establishment of research facilities, the engagement of suitably qualified personnel, the sourcing and compilation of various existing technology and research information and creation of databases, the establishment of research protocols, the establishment of projects based on existing uses, quantitative and qualitative analysis, laboratory and clinical trials and all works and processes that flow therefrom, and the development for sale, lease, licence, or use, of the products arising therefrom”;
• “Agent” was defined as:
“acting as the agent of the Participant in accordance with the provisions of this Agreement”;
(b)by clause 3.1, the participant was to agree to undertake the Business and participate in the Business and the Collaborative Research upon the terms and conditions contained in the agreement;
(c)by clause 4.1, the Business was to commence on the date of the agreement and continue indefinitely unless terminated;
(d)by clause 5.1, the participant was to pay to BARM $200 in respect of each Participation to be used by BARM to commence the Business with others. By clause 1.1, “Participation” was defined as “participation to the extent of $25,000 in Personal Budplan No. 4”;
(e)by clauses 5.2 and 5.3 and the definition in clause 1.1. of “Payment Date”, the participant was to pay to BARM $12,500 for each Participation to be disbursed:
(i) $11,250 to The Australian Tea Tree Oil Research Institute Ltd (ATTORI) “by way of a prepaid fee in consideration of [ATTORI] undertaking the Research and Development obligations set out in the Research Agreement”; and
(ii) $1,250 to BARM “by way of a prepaid fee in consideration of [BARM] undertaking the duties and obligations ... in the period of 12 months from the Payment Date”;
(f)by clause 5.4 and the definition in clause 1.1 of “Initial Period”, at the end of twelve months, the participant was to pay to BARM for each Participation a further sum of $12,500 to be disbursed in the same manner except that payment was to be made in respect of the period of twelve months following the Initial Period;
(g)by clause 6.1, in further consideration of acting as the Agent and manager of the Business and the Collaborative Research, BARM was to receive remuneration at the rate of 25% of the Gross Income of the Business. By clause 1.1, “Gross Income” was defined as assessable income.
Research Agreement
32.The Research Agreement was to be made between an investor as the participant, BARM as the manager, ATTORI as the Institute and Australian Rural Group Limited (Trustee) as the trustee.
33.The terms of the Research Agreement included:
(a)by clause 2.1, the participant was to appoint ATTORI to conduct the Research and Development in the manner set out in the agreement. By clause 1.1, “Research and Development” was defined as:
“research and development of the properties and applications of Coenzyme Q10 and research and development of a diagnostic kit for measuring general cellular bioenergy in humans and products to improve general energy, health and lifestyle and includes the establishment of research facilities, the engagement of suitably qualified personnel, the sourcing and compilation of various existing technology and research information and creation of databases, the establishment of research protocols, the establishment of projects based on existing uses, quantitative and qualitative analysis, laboratory and clinical trials and all works and processes that flow therefrom, and the development for sale, lease, licence, or use, of the products arising therefrom”;
(b)by clause 3.1:
(i) in consideration of conducting the Research and Development for a period of twelve months from the Payment Date, ATTORI was to be paid by BARM as Agent $11,250 in respect of each Participation;
(ii) in consideration of conducting the Research and Development for a period of twelve months commencing on the day after the expiration of the Initial Period, BARM was to disburse to ATTORI a further sum of $11,250 in respect of each Participation;
(iii) thereafter, in consideration of ATTORI carrying out ongoing research, BARM was to deduct up to 10% of the Gross Income of the Participant in each calendar year ending 30 June and account for such sum to ATTORI;
(c)by clause 4.1, in consideration of the research fees set out in clause 3 the Institute was to from the Payment Date conduct the Research and Development and engage or cause to be engaged such personnel and facilities as were in its discretion necessary for the completion of the Research and Development;
(d)by clause 5.3, the objective of the Research Development was to create relevant Research Results. By clause 1.1, “Research Results” was defined as:
“all data, research papers, test results, experiments, processes, products and any intellectual property rights which arise out of or come into existence as a consequence of the Research and Development, and includes any commercially exploitable equipment or other items incorporating such intellectual property rights”;
(e)by clauses 6 and 8.1, ATTORI was to appoint BARM to carry out administrative and management functions of ATTORI and in consideration ATTORI was to pay BARM an administration fee totalling:
(i) $1,250 for each Participation for each of the first two years;
(ii) $250 per Participation for the third year;
(iii) for each succeeding year of the Business, at a rate calculated by adjusting $250 per Participation annually by the CPI;
(f)by clause 7.1, the Research Results were to be the property of the Participant and vested in the Trustee;
(g)by clause 7.2, in the event that the Research and Development produced any Research Results which were of commercial value then BARM as the agent and the manager of the Business and the Collaborative Research was to investigate and pursue Commercialisation at its own cost. By clause 1.1, “Commercialisation” was defined as “the utilisation of the Research Results for the production of income or potential income”;
(h)by clause 7.3, in the event of sale of any of the Research Results, BARM was to be entitled to a lump sum royalty to amount to 50% of the gross sale proceeds.
Loan Proposal Document and Loan Deed
34.The Loan Proposal Document indicated that:
(a)by pars 1 and 2, an investor could borrow $25,000 per Participation, or 100% of the first and second years’ management and research fees from the Lender;
(b)by par 3, interest on the loan was to be charged at a rate which, for the first and second years, depended on which of the three repayment options had been chosen and thereafter at the rate of 8.57%;
(c)by par 5:
“provided the Borrower has made the payments of interest and principal in accordance with the provisions of the Schedule, subsequent payments of principal and interest from year 3 onwards are made from the Borrower’s income from his business and the Lender does not have recourse to the Borrower other than from his business earnings”;
(d)by par 9:
“See Loan Repayment Options. Provided the Borrower has made the payments on time, in accordance with the Schedule attached to the Loan Deed, the second tranche of the Loan will be advanced to him.”;
(e)by par 8, a loan application fee of $300 per application, regardless of the size of the loan, was to be paid;
(f)by par 7, the term of the loan was to be 15 years.
35.The Loan Deed provided for the loan to be advanced as follows:
(a)by clause 2.1, the Lender was to advance to the Borrower the Principal sum;
(b)by clause 2.2, the Principal was to be advanced:
(i) $11,250 to ATTORI and $1,250 to BARM in respect of each Participation;
(ii) subject to the borrower having met all obligations under the Loan Deed on the day after the expiration of the Initial Period, a further $11,250 to ATTORI and $1,250 to BARM in respect of each Participation.
36.As to interest:
(a)by clauses 3.1 to 3.3, interest was to be chargeable at a rate which was to be at a lesser rate if paid within seven days of the due date as set out in the Schedule in accordance with the loan repayment option nominated by the Borrower in the loan application form;
(b)by clause 3.4, interest payable in respect of year 3 and following was to be met from the Net Amount. By clause 1.1 and the definitions of “Net Amount” and “Gross Income”, the Net Amount was defined as assessable income reduced by all fees and expenses of the Business and all management fees.
37.As to principal:
(a)by clause 4.1, the Borrower was to make Principal repayments as set out in the Schedule in accordance with the loan repayment option nominated by the Borrower;
(b)by clause 4.2, the Reduced Principal was to be repaid together with interest thereon from the Net Amount. By clause 1.1, “Reduced Principal” was defined as “the Principal less any payments of Principal made pursuant to clause 4 and including any Interest which may be capitalised or remaining unpaid”;
(c)by clause 4.3, such repayments of Principal or Reduced Principal were to be made at the rate of 50% of the Net Amount;
(d)by clause 8.1, the Borrower was to have no other liability for payment of the Reduced Principal or interest thereon other than out of the Net Amount.
25. The prospectus in respect of BP4 (K4, ST4) included:
(a)At page 23 (page 41 at ST102) and in clause 1, a description of the risk factors in the following terms:
1.RESEARCH & DEVELOPMENT RISKS
Funds are typically invested in businesses which include large components of research and development because of potential high returns. Such high returns are possible under participation in this Budplan.
However, the risks are also high and Participants should not begin the Business unless they understand the nature and existence of these risks.
In the opinion of the Manager the Business holds good prospects for success and every endeavour will be made to maximise the returns to a Participant's Business. Success however cannot be guaranteed.
The risks inherent in research and development are as follows:
1.The likelihood of unforeseen obstacles. The very nature of research means that in many cases it can encounter problems which may be insurmountable.
2.Problems may be encountered which take time to solve and the project may not be completed on time.
3.Typically research and development has had a larger than anticipated demand for funding and may not be able to be completed within budget.
4.Limited expertise to draw on. In specialised fields such as research into the optimum formulations of Coenzyme Q10 for therapeutic use, matters which require investigation may be identified for which it is not possible to locate and/or obtain the appropriate expertise.
5.Formulations may not offer real benefits to consumers.
6.Failure of products to withstand long term stability trials.
7.Failure to perform in studies of effectiveness.
8.Failure to achieve domestic and international regulatory approvals.
In addition, given successful development the following risks remain:
1.Alternative products may appear on the market.
2.Anticipated returns may not occur.
3.Market development may be slower than anticipated, or markets for the products produced may not occur.
4.Projected prices for products may not be achieved.
(b)At page 26 of the prospectus (page 45 of ST4) cash flow illustrations for a minimum participation of $25,200 are outlined, a copy of this page is annexed to these reasons and marked Attachment A.
(c)The loan proposal document (S3), at page 3, outlined the taxation and cash flow aspects for years 1 and 2 for Participants as follows:
Subject to acceptance of the Loan Application and payment of a loan application fee of $300 per application, a Participant may borrow 100% of the first and second years [sic] management fee and research expenditure amounting to $25,000 per Participation.
A Business Establishment Fee of $200 per Participation (and $100 per Half Participation if applicable), payable under Personal Budplan No. 4 Prospectus must be paid separately to the Trustee - Australian Rural Group Limited.
The figures below are based on the minimum level of participation and at marginal taxation rates of 35.7%, 44.7% and 48.7%, including the Medicare levy.
Taxation savings are not guaranteed and are given for illustrative purposes only. Please seek your own advice and refer to the Tax Opinion contained in the Personal Budplan No. 4 Prospectus to determine if you qualify for a taxation concession to the extent indicated.
Business Expenditure Items Based on a Single Participation
Assumes Loan Option 1
Your
FundsBorrowed
FundsDeductible
over 2 yearsBusiness Establishment Fee $200 Loan Establishment Fee $300 $120 Total Expenditure over two years $25,000 $25,000 Interest over two years $3,750 $3,750 Principal Reduction over two years $6,240 Total $10,490 $25,000 $28,870 Personal Income Tax Scale Income Rate including Medicare Levy $20,701 - $38,000 35.7¢ (for each dollar over $20,700) $38,00I - $50,000 44.7¢ (for each dollar over $38,000) $50,00I and over 48.7¢ (for each dollar over $50.000) TABLE 1 Monthly Cash Flow Position (excluding initial one off payment of $500) Marginal Tax Rate Your Funds Tax Saving Surplus 35.70% $416.25 $429 $13 44.70% $416.25 $538 $121 48.70% $416.25 $586 $170 TABLE 2 First Year’s Cash Flow Position (excluding initial one off payment of $500) Marginal Tax Rate Your Funds Tax Saving Surplus 35.70% $4,995 $5,153 $158 44.70% $4,995 $6,452 $1,457 48.70% $4,995 $7,030 $2,035 TABLE 3 Two Years Cash Flow Position (excluding initial one off payment of $500) Marginal Tax Rate Your Funds Tax Saving Surplus 35.7% $9,990 $10,307 $317 44.7% $9,990 $12,905 $2,915 48.7% $9,990 $14,060 $4,070
PART C - BP1 (the grape research project)
26. BP1 in which Mr Latimer and Mr Brody participated differs to some extent from BP4 in that it provided, in addition, for a document described as the Farm Agreement. The researcher in respect of BP1 was AARI and not ATTORI.
27. In respect of BP1, the description contained in Part B of the respondent’s submissions (clauses 15 to 40 inclusive) is also correct and is included as follows:
B. The project
15.The respondent refers to the generic s 37 documents for the project lodged by the respondent.
(a) Application form
16.The prospectus dated 10 March 1997 for the project included an Application Form and Power of Attorney (application form). An investor signed up for the project by completing the application form for one or more participations.
Prospectus, T100-1, 3, 64
Application form, T100-65
17. By the application form, an investor:
(a)applied “to participate in Budplan “A” Series No. 1 to the extent nominated”;
(b)appointed “certain people to do specified things on your behalf, and in your name, under a Power of Attorney” including to execute a “Farm Agreement, Management Agreement and Research Agreement on your behalf”;
(c)acknowledged having “read and understood the Prospectus and attached legal documents”.
(b) The project
18.The prospectus opened with a “Business Overview”:
“By applying for, and being accepted into Budplan “A” Series No. 1, an applicant becomes a business proprietor in a business of the genetic research and development and sale of the cultivars and rootstock of new table grape varieties with desirable traits and qualities, and the holding, licensing, or sale, of all necessary scientific research.
With increasing pressure in the world for more efficient production of foodstuffs, and the addressing of important questions of quantity, quality, efficient uses of the means of production, and the like, research and development in agriculture and horticulture becomes of prime importance to those areas of Australian commerce. Only by staying “ahead of the field” in the production of new and better varieties, or at least keeping pace with the world in this area, will Australia remain a large player in world commodity markets.
The Manager will hold plant breeders rights for new varieties on behalf of the participants, and will proceed to commercialise any patented varieties or enhanced varieties with attributes resulting from the research.
Australian Agriculture Research Institute Limited has the necessary skills in the areas covered by this prospectus ...
Many world standard innovations are credited to Australian ingenuity, and from its earliest history new ideas and techniques have assisted Australia establish worlds best practices in many fields. This prospectus aims to put Australia in the forefront of table grape genetics.
As there will inevitably be “spin offs” from the genetic research, and new areas for research may become apparent, the areas of research set out in clause 2 Details of the Business are not exclusive.
As well, applicants will become farmers involved in the business of growing table grapes on 100 hectares of land on “Jabiru,” approximately 220klm north of Alice Springs.
...
Participants will contract with Australian Land and Cattle Company Pty Limited for the right to use a portion of the land owners land for the growing of table grapes, Business and Research Management Limited for the provision of management services for their business, and to undertake commercialisation of the varieties produced by that business, and with Australian Agriculture Research Institute Limited for the provision of scientific research in the genetic development of new varieties of grapes for the business.
Participation in this business is achieved by completing the Application Form and Power of Attorney attached hereto which appoints an Attorney to enter the Farm Agreement, Management Agreement, and Research Agreement, on your behalf.
More particular details of the business and the structure of this Budplan are set out in this Prospectus and you are urged to read this document thoroughly and to seek the advice of your own advisers or your financial planner if you are unclear of any aspect.”
Prospectus, T100-4
19.A segment headed “Summary of Participation” set out the payments required in order to participate at the minimum level:
“To participate at the minimum level in the Budplan “A” Series No. 1 a participant will be required to make the following payments;
1. a once only payment of $200 to cover business establishment expenses;
2. $22,500 on establishment of the business comprising a $4,500 farm fee, a management fee of $1,800 and scientific research expenditure of $16,200;
3. $2,500 on the anniversary of the commencement of the project covering the year 2 farm fee of $500, management fee of $200 and scientific research expenditure of $1,800.
…”.
Prospectus, T100-5
20.A segment headed “Details of the Business” described the purpose as:
“1. PURPOSE OF BUDPLAN “A” SERIES NO. 1
By participating in Budplan “A” Series No. 1 a participant engages in the business of development for growing, sale, and licensing of the intellectual property of specified table grape varieties, or enhanced varieties, including the carrying out of all necessary scientific research and the growing for sale of table grapes.
It is intended that, subject to the inherent risks, which are set out later in this Prospectus, a participant’s business will return profits from the sale or licensing of the relative intellectual property to growers wishing to grow the varieties, or to agents who may sub-licence the use of the varieties, regional joint ventures or strategic alliances. Participants will also be in the business of growing table grapes for sale.
An applicant will commence business by entering into a Farm Agreement, a Management Agreement, and a Research Agreement via the enclosed Power of Attorney, and paying $200 (or multiples thereof) to cover business establishment expenses.
A participant’s efforts will be combined with others to maximise returns and the scope of a participant’s business activities.”
Prospectus, T100-6
21.The objective was described as:
“2. NEW VARIETIES OF TABLE GRAPES
In the main the objective of a participants business will be to develop new varieties of table grapes for registration of plant breeders rights.
Research and development will be aimed at incorporating all or some of the following attributes into various existing varieties:
· Variations in flavour and sweetness
· Variations in colour
· Disease and pest resistance
· Achievement of optimum shape, texture, and structure in both bunch and fruit
· Accelerating growth rate
· Adapting growth to fill “market windows”
· Achieving optimum vine configuration for the environment
· Adaptation to climate
· Optimising grape lifespan in different climates
· Optimising storage life
· Maximising water usage efficiency
· Optimising vigour”.
Prospectus, T100-6
22.A section headed “TOTAL EXPENDITURE REQUIRED” set out the payments required for year 1 and year 2 in tabular form:
Farm Fee
Management Fee
Research Fee
Per Participation
Year 1
$4,500
$1,800
$16,200
$22,500
Year 2
$500
$200
$1,800
$2,500
and noted that a participant will also be required to make a once only payment of $200 for Business Establishment Fees. It continued:
“To participate in Budplan “A” Series No. 1 a participant will make two payments, payable yearly in advance. These payments will be split into a farm fee, management fee and scientific research expenditure as detailed in the above table.
No further payments are required from a participant beyond the first two years as all costs from that time, including management fees and farm fees, marketing and distribution expenses and ongoing research costs, will be deducted from the revenue earned from sales before declaring net income earned by a participants business.”
Prospectus, T100-6
23.The roles of the project entities were described in the sections headed “MANAGEMENT COSTS”, “AUSTRALIAN AGRICULTURE RESEARCH INSTITUTE LIMITED” and “LEASE” as follows:
“4. MANAGEMENT COSTS
Business and Research Management Limited will act as Manager of a participant’s business.
The Australian Agriculture Research Institute Limited has also retained the services of Business and Research Management Limited to administer its affairs in respect of the proposals details in this Prospectus.
...
12. AUSTRALIAN AGRICULTURE RESEARCH INSTITUTE LIMITED
Australian Agriculture Research Institute Limited has been formed specifically to undertake scientific agricultural research.
The Institute will be contracted by the Participants to:
· Research and engineer new varieties or enhanced varieties of table grapes within the research areas stated above ...
· Determine the likelihood of success of any particular piece of research to enhance or expand varieties.
· Determine research requirements and protocols.
· Source suitable researches and research bodies to conduct the required research and development under the supervision of the Institute.
· Assess the potential for successful commercialisation of any proposed piece of research or new variety.
...
14. LEASE
Freehold title to the property on which the growing of grapes is to be carried out is held by Australian Land and Cattle Company Pty Limited, which will lease it to the Trustee for the term of the farming portion of the project (15 years). The Trustee will hold this lease on trust for each participant.
The lease to the Trustee will be recorded on title, which means that any other dealings in the land by the owner will recognise the prior right of the participants.
The Trustee will grant a sub-lease of the land back to the landowner. This will not prejudice the Participant’s tenure to the land and is undertaken to facilitate the granting of licences to participants.
By entering a Farm Agreement a participant is granted a licence by the landowner to farm an identified part of the project land, carrying 38 grape vines.”
Prospectus, T100-6-8
24.A “Marketing and Technical Consultant’s Report” described, under the heading “Expected Research & Development Outcomes”, what the research and development was expected to achieve and continued, under the heading “Commercialising Research & Development”:
“The expected primary product of the R&D activities is a range of seedless table grape varieties. Secondary products would be new rootstock varieties and technology in growing, harvesting, post harvest handling and organic farming. Variety commercialisation has several options. It would probably be done through the development of regional joint ventures or strategic alliances in the major grape growing areas of the world. These business structures would be responsible for the establishment of automated micropropagation of the varieties which would be distributed through existing channels for grapes. The technology for automated propagation exists and is used in commercial operations.
At the farm end, growers would have the options of grafting new varieties onto existing rootstock or planting grafted plants which would combine new rootstock with new varieties.
A number of assumptions, based primarily on market trends and consumer requirements, have been made for the economic analysis, potential market and investment returns:
. patentable transgenic/stenospermocarpic seedless varieties of table grapes will be developed.
. patentable transgenic rootstock varieties will be developed.
. the market for table grapes will continue to grow and have increasing demand for new varieties. The current estimated value of table grapes at retail level is $A12 billion and will double within ten years.
. the current area of production is estimated at 800,000 ha with an average plant density of 1,500/ha giving a population of 1.2 billion plants which will increase to about 2 billion plants in ten years.
. new varieties will displace existing seeded varieties and will reduce production of traditional varieties.
. grafting of new varieties will be made onto 50% of existing rootstock and new plantings will be onto new rootstock developed from R&D.
. competitors will develop a number of alternatives.
. the percentage market share has been estimated from the growth of coloured grapes created by changing consumer demands and the fact that very few research centres are devoted to creating new varieties.
. rootstock market share has been estimated from the effects rootstock have on seedless grape production and this project would be developing compatible rootstock for new varieties. There appears to be only two international centres which are actively pursuing rootstock for table grapes.
...”
Prospectus, T100-21,22
25.“The Research and Development Programme” described the objectives of the research programme as:
“to breed new varieties and establish and efficient and reliable system for production and marketing of table grapes”;
and set out a research programme. Under the heading “Priorities for the Research and Development Programme”, the highest priority was identified as:
“The components of the above research programme with the highest priority are those aimed specifically at producing new varieties. The extent of the research programme would be tailored to the available funds depending on the level of subscription to this programme. The research and development programme will need to maintain the flexibility to respond quickly to changing markets and to be able to adopt new technologies as they emerge.”
Prospectus, T100-23, 24
26.A debtor’s ledger for the project as at 30 June 1997 listed “Latimer” as contract number 801233 for five units, interest of $1,250, principal of $2,916.65 and a loan balance of $109,583.35.
Debtors’ ledger, ST21-467
(c) Loan proposal
27.An investor could borrow to fund the investor’s participation in the project. There were at least three forms of the Loan Proposal Document and Loan Deed and options with respect to interest and principal for the first two years.
Loan Proposal Document and Loan Deed, ST3-65, ST4-78, ST5-95
28.An investor could apply to “borrow 100% of its first and second years Farm, Management and Research expenditure” of $25,000 from Project and General Finance Pty Limited (Lender).
Loan Proposal Document, par 1
29.By a Loan Application Form and Power of Attorney (loan application form) included with the Loan Proposal Document, an investor:
(a)applied “for a loan from Project and General Finance Pty Limited to fund your participation in Budplan “A” Series No. 1”;
(b)directed “the Lender to apply the proceeds of the loan to be advanced to you in payment of such participation”;
(c)appointed certain people as “attorneys for the purposes of executing the Loan Deed on your behalf”.
Loan application form, ST3-74
30.The Loan Proposal Document, in a section headed “Loan Repayments and Payments of Interest”, set out the “Expenditure Items” where an investor took the loan. Under the first form of the Loan Proposal Document the items were:
Business Establishment Fee
$200
Loan Establishment Fee
$300
Interest due 30 June 1997
$3,000
Principal due on or before 1 October 1997
$6,800
$10,300
Interest due 30 June 1998 (Loaned to a participant)
$1,560
and it was noted that:
“Provided all payments of interest and principal due 30 June 1997 and 1 October 1997 have been made [the interest due 30 June 1998] will be loaned to a participant.”
Loan Proposal Document, ST3-67
(d) Project agreements
31.Having signed up for the project, a Management Agreement, Farm Agreement and Research Agreement were to be entered into by the appointed attorneys.
Management Agreement, T100-55
Farm Agreement, T100-52
Research Agreement, T100-60
32.Further, having applied for a loan, a Loan Deed was to be entered into by the appointed attorneys. The Respondent refers to the first form of the Loan Proposal Document and Loan Deed.
Loan Proposal Document and Loan Deed, ST3-65
Management Agreement
33.The Management Agreement was to be made between an investor as the participant and BARM as the manager.
34.The terms of the Management Agreement included:
(a)by clause 2.1, the participant was to appoint BARM as manager of the Business and the Collaborative Research and Agent. By clause 1.1:
. “Business” was defined as:
“the Participant’s business activities and undertakings of all assets held or owned by the Participant in Budplan “A” Series No. 1 and includes such actions undertaken to enable the Participant to derive income or an interest in income as part of the business activities comprising:
(i)development of new strains or enhancing existing strains of table grapes including all necessary research and development in developing such strains;
(ii)the purchasing of necessary technology or intellectual property for that purpose;
(iii)the sale, lease or license of purchased or developed technology or intellectual property;
(iv)the production and sale of table grapes and new and enhanced strains of table grapes, cultivars and rootstock;
(v)derivation of income and profits from the above activities”;
. “Collaborate Research” was defined as:
“the Research and Development carried out by the Participants in collaboration with each other”;
. “Research and Development” was defined as:
“research into the properties and structures of the plant and fruit of table grapes and the development of new varieties or enhanced varieties in keeping with certain aims and parameters more particularly set out in the Research Agreement and includes the establishment of research facilities, the engagement of suitably qualified personnel, the sourcing and compilation of various existing technology and research information and creation of databases, the establishment of research protocols, the establishment of projects based on existing uses, quantitative and qualitative analysis, laboratory trials and all works and processes that flow therefrom, and the development for sale, lease, licence, or use, of the varieties arising therefrom”;
. “Agent” was defined as:
“acting as the agent of the Participant in accordance with the provisions of this Agreement”;
(b)by clause 4.1, the Business was to commence on 30 June 1997, the farming business was to continue for 15 years and the Research and Development and the remainder of the Business were to continue indefinitely;
(c)by clause 5.1, the participant was to pay to BARM $200 in respect of each Participation. By clause 1.1, “Participation” was defined as “participation to the extent of $25,000 in Budplan “A” Series No. 1”;
(d)by clauses 5.2 and 5.3, the participant was to pay to BARM $18,000 for each Participation to be disbursed:
(i) $16,200 to Australian Agriculture Research Institute Limited (AARI) “by way of a prepaid fee in consideration of [AARI] undertaking the Research and Development obligations set out in the Research Agreement”; and
(ii) $1,800 to BARM “by way of a prepaid fee in consideration of [BARM] undertaking the duties and obligations ... in the period of 13 months from 30 June 1997”;
(e)by clause 5.4 and the definition in clause 1.1 of “Initial Period”, at the end of the first year, the participant was to pay to BARM for each Participation:
(i) $1,800 to AARI; and
(ii) $200 to BARM;
(f)by clause 6.1, in further consideration of acting as Agent and manager of the Business and the Collaborative Research, BARM was to receive remuneration at the rate of 20% of the Gross Income of the Business as and when such Gross Income was received. By clause 1.1, “Gross Income” was defined as assessable income;
(g)by clause 6.2, BARM was to deduct 5% of the Gross Income as and when received and account to the Land Owner for it as set out in the Farm Agreement.
Farm Agreement
35.The Farm Agreement was to be made between an investor as the participant, Australian Land and Cattle Company Pty Limited (Land Owner) as the land owner and Australian Rural Group Limited (Trustee) as the trustee.
36.The terms of the Farm Agreement included:
(a)by clause 2.1, the Land Owner was to grant to the participant the right to farm 38 table grape vines on the Farm. By clause 1.1, “Farm” was defined as “the site forming part of the Project Land” and “Project Land” by reference to certain pieces or parcels of land owned by the Land Owner (see also recital C);
(b)by clause 2.2, the term of the right was to commence on 30 June 1997 and end on 30 June 2012;
(c)by clause 4.1, in consideration of the grant of the rights the participant was to pay to the Land Owner a pre-paid farm fee per Farm for the first two years of $4,500 for year 1 and $500 for year 2;
(d)by clauses 4.1 and 4.2, thereafter the farm fee was to be calculated on the basis of 5% of Gross Income of the Business and paid from the Gross Income of the Business. If in any year the Gross Income was not sufficient to pay the farm fees for that year, such fees were to be paid from the participant’s Gross Income in subsequent years;
(e)by clause 5, the Land Owner was, inter alia, to provide to the participant an area of Project Land suitable and prepared for the growing of grapes and the establishment of vines and trellising and watering thereof and supply to the participant germinated rootstock in a healthy condition;
(f)by clause 6, the participant was to receive germinated rootstock, grow them out into harvestable vines, maintain the vines and vine placements according to principles of good husbandry, harvest grapes for sale, and generally maintain the Farm and conduct the business of farming grapes in an efficient manner according to good farming practice.
Research Agreement
37.The Research Agreement was to be made between an investor as the participant, BARM as the manager, AARI as the Institute and the Trustee as the trustee.
38.The terms of the Research Agreement included:
(a)by clause 2.1, the participant was to appoint AARI to conduct Research and Development in the manner set out in the agreement. By clause 1.1, “Research and Development” was defined as:
“research into the properties and structures of the plant and fruit of table grapes and the development of new varieties or enhanced varieties in keeping with aims and parameters more particularly set out in this Research Agreement and includes the establishment of research facilities, engagement of suitably qualified personnel, sourcing and compilation of various existing technology and research information, creation of databases, establishment of research protocols, establishment of projects based on existing uses, laboratory trials and all works and processes that flow therefrom”;
(b)by clause 3.1:
(i) in consideration of conducting the Research and Development for the first year, AARI was to be paid by the Agent (defined in clause 1.1 as BARM acting as agent for the participant) $16,200 in respect of each Participation;
(ii) in consideration of conducting the Research and Development for the second year plus one month, AARI was to be paid by BARM $1,800 in respect of each Participation;
(iii) thereafter, in consideration of AARI carrying out ongoing research, BARM was to deduct 10% of the Gross Income of the Participant in each calendar year and account for such sum to AARI;
(c)by clause 5.3, the objective was to create relevant Research Results. By clause 1.1, “Research Results” was defined as:
“all data, research papers, test results, experiments, processes, and any intellectual property rights which arise out of or come into existence as a consequence of the Research and Development”;
(d)by clauses 6 and 8.1, AARI was to appoint BARM to carry out administrative and management functions of AARI and in consideration AARI was to pay BARM an administration fee totalling:
(i) $1,250 for each Participation for each of the first two years;
(ii) $250 per Participation for the third year;
(iii) for each succeeding year of the Business, at a rate calculated by adjusting $250 per Participation annually by the CPI;
(e)by clause 7.1, the Research Results were to be the property of the participant and vested in the Trustee as agent for the Participant;
(f)by clause 7.2, in the event that the Research and Development produced any Research Results which were of commercial value then BARM as the agent and the manager of the Business and the Collaborative Research was to investigate and pursue Commercialisation at its own cost. By clause 1.1, “Commercialisation” was defined as “the utilisation of the Research Results for the production of income or potential income”;
(g)by clause 7.3, in the event of sale of any of the Research Results, BARM was to be entitled to a lump sum royalty to amount to 50% of the gross sale proceeds.
Loan Proposal Document and Loan Deed
39.The Loan Proposal Document indicated that:
(a)by pars 1 and 2, an investor could borrow $25,000 per Participation, or 100% of the first and second years’ farm fees, management fees and research expenditure;
(b)by par 3, an investor could pay interest in advance, at a reduced rate, in the amounts of:
(i) $3,000 per Participation for the first year;
(ii) $1,560 per Participation for the second year, which amount was to be loaned to the investor;
(iii) for subsequent years, at the rate of 8.57%;
(c)by par 5:
“provided the Borrower has made the payments of interest and principal due on 30/6/97 and 1/10/97 respectively by the due dates, subsequent payments of principal and interest are made from the Borrowers income from his business and the Lender does not have recourse to the Borrower other than from his business earnings”;
(d)by par 9:
“The Borrower must make an interest payment of $3,000 per Participation … on execution of the Loan Deed. A principal reduction of $6,800 per Participation … is due on or before 1 October, 1997.
Provided you have made these payments on time, the interest due on 30/6/98 will be loaned to you and further interest and principal payments will be made from the earnings of your Budplan Participation;
(e)by par 8, a loan application fee of $300 per application, regardless of the size of the loan, was to be paid;
(f)by par 7, the term of the loan was to be 15 years.
40. The Loan Deed provided, inter alia, for the loan to be advanced as follows:
(a)by clause 2.1, the Lender was to advance to the borrower the Principal sum;
(b)by clause 2.2, the Principal was to be advanced:
(i) $4,500 to the Land Owner, $1,800 to BARM and $16,200 to AARI in respect of each Participation;
(ii) subject to the borrower having met all obligations under the Loan Deed on 30 June 1998, a further $500 to the Land Owner, $200 to BARM and $1,800 to AARI.
28. In accordance with the Farm Agreement an investor received the right to farm 38 table grape vines on each farm. No location was specified for the farm or farms (Mr Latimer in his evidence made it clear that he did not know where the farm was).
29. As was the case with BP4, there were cash flow projections and also information as to the tax advantages in economic terms to be gained; the Tribunal does not think it necessary to include them in these reasons. (For much the same reasons the Tribunal does not think it necessary to include the cash flow projections and tax advantages applicable to BP2 dealt with in the next succeeding Part.)
30. BP1 is the project that was dealt with by Senior Member Pascoe in Macpherson.
PART D - BP2 (the tea tree oil research Project)
31. The participants in this project were Mr Latimer, Mr Easton, Mrs Latimer, Ms Marsden and Mr Brody, and is, of the three projects with which the Tribunal is concerned, the most similar to the Budplan project considered by Conti J in Howland-Rose.
32. Once again, Part B of the respondent’s submissions contains a description (which is accurate) and which is included (clauses 15 to 37 inclusive) as follows:
B. The project
15.The respondent refers to the generic s 37 documents lodged by the respondent.
(a) The prospectus
16.The prospectus was dated 3 June 1996 and expired on 3 June 1997. No other prospectus for the project has been produced.
Prospectus, ST5-94
17. It opened with a “Business Overview”:
“By applying for and being accepted into the Personal Budplan No 2 an applicant becomes a business proprietor in a business of development for potential manufacture and sale of specified tea tree oil based products including all necessary research.
The project will hold an option over product concepts in product areas as follows:
· TINEA AND OTHER FOOT PROBLEMS
· DANDRUFF
· CANDIDA
On commencement of the project this option will be exercised immediately and a business to commercialise these product concepts will begin.
To further develop the concepts the project will undertake research and development into the uses of tea tree oil in the selected product categories set out above.
Participants will contract with The Australian Tea Tree Oil Research Institute Ltd to undertake the necessary scientific research including enhancing existing product concepts and to develop new products.
The Institute will develop “Product Packages” incorporating the formulae and concepts of the project using Main Camp Tea Tree Oil. These “Product Packages” will include product formulae, product samples, stability, safety information and efficacy data, labelling and packaging specifications to the highest international standards. Several “packages” will be produced for each potential use in order to maximise resulting income. These “Product Packages” will be used to develop the projects’ private label products in bulk or in packaged form for sale with the resultant income, after payment of expenses, returned to the business proprietors comprising the Personal Budplan No 2.
Research and Development is generally regarded as vital to the future lifeblood of the Australian economy and the Australian Government recognises this by the provision of taxation and other incentives. Many world standard innovations are credited to Australian ingenuity. From our earliest history new ideas and techniques have assisted Australia establish World’s Best Practices in many fields from agriculture to high technology.
Main Camp Tea Tree Oil is produced in Australia under ISO 9002 Quality Assurance standards using Australian developed technology.
Participation in this business is achieved by entering into the Management and Research Agreements. The Management Agreement appoints Business and Research Management Limited to manage your business and to undertake commercialisation of the products produced by your business. The Research Agreement facilitates the research and development of tea tree oil based products for your business.
Further details are set out in this Prospectus and you are urged to read this document thoroughly and to see the advice of your own advisers or your financial planner if you are unclear on any aspect.”
Prospectus, ST5-95
18.A segment headed “Summary of Participation” set out the payments required in order to participate at the minimum level:
“To participate at the minimum level in the Personal Budplan No 2 you will be required to make a once only payment of $200 to cover business establishment expenses including acquisition of various product concepts and to make payments of $1,000 each payable monthly in advance (or $12,000 payable yearly in advance) comprising $900 for scientific research expenditure and $100 management fee.
…
No further payments beyond 24 months are required by you as all additional Management Fees can only be deducted from the proceeds of product sales.”
Prospectus, ST5-96
19.A segment headed “Details of the Business” described the purpose as:
“1. PURPOSE OF THE PROJECT
By participating in Personal Budplan No 2 you will engage in the business of development for potential manufacture and sale of specified tea tree oil based products including all necessary scientific research.
It is intended that, subject to the inherent risks, your business will return profits from the sale of products or fees from licensing “Product Packages” developed by the project.
It is not intended that your business will market under any particular brand name. The Manager will seek existing marketing companies with established, well recognised brand names and either licence product packages to them or contract for products to be manufactured under the marketing companies own brands.
You will commence business by entering into Management and Research Agreements and contributing $200 (or multiples thereof) to the project to cover business establishment expenses and purchase of the initial product concepts. Your efforts will be combined with others in the project to maximise returns and the scope of your business activities.”
Prospectus, ST5-97
20. The product packages were described as:
“2. PRODUCT PACKAGES
Product Packages will comprise the data required to manufacture, package, label, register and market a number of products in the following product categories:
· TINEA AND OTHER FOOT PROBLEMS
· DANDRUFF
· CANDIDA
Multiples of each Product Package may be produced with varying formulae and target price categories so as to appeal to the full spectrum of the market. The common feature of each Product Package will be the use of Main Camp Tea Tree Oil.
The Research Institute will be contracted to research, develop and construct these Product Packages to facilitate the contract manufacture of bulk or private label product and the marketing of these products by predominantly large well known international companies under their own brands.
The Manager will be responsible to the project to manage this business process and to arrange manufacture and sale of products. In arranging the manufacture and sale of the products the Manager will act as agent for your business.”
Prospectus, ST5-97
21.A section headed “TOTAL EXPENDITURE REQUIRED” set out the payments required, for a minimum participation, for the first two years, and showed two options:
R&D
Management Fee
Total
OPTION 1
$1,000 per month for 24 months
900
100
1,000 per month
OPTION 2
$12,000 per year for 2 years
10,800
1,200
12,000 per year
and noted that:
“To participate in the Personal Budplan No 2 you will need to pay a minimum amount of $1,000 per month for 24 months payable in advance, comprising a contractual payment to the Institute for scientific research of $900 per month and a management fee to the Manager of $100 per month.
Alternatively, you may make two annual payments of $12,000 payable in advance. These two payments will be split each year into scientific research expenditure of $10,800 and management fee of $1,200.
...
No payments are required from you beyond 24 months as all costs from that time including Management and Administration Fees will be deducted from the revenue earned from product sales before declaring a net revenue earned by your business.”
Prospectus, ST5-97
22.The roles of the project entities were described in the sections headed “MANAGEMENT COSTS” and “THE AUSTRALIAN TEA TREE OIL RESEARCH INSTITUTE LTD”:
“4. MANAGEMENT COSTS
Business and Research Management Limited will act as Manager of your business. The Australian Tea Tree Oil Research Institute Ltd has also retained the services of Business and Research Management Limited to administer the affairs of the Institute.
...
13. THE AUSTRALIAN TEA TREE OIL RESEARCH INSTITUTE LTD
The Australian Tea Tree Oil Research Institute Ltd has been formed specifically to undertake scientific research.
· Enhance existing product concepts and develop them into “Product Packages”.
· Research new products and “Product Packages” within the research areas stated above.
· Determine the likelihood of success of any particular piece of research to enhance or expand the product range.
· Determine research requirements and protocols.
· Source suitable researchers and research bodies to conduct the required research and development under the supervision of the Institute.
· Assess the potential for successful commercialisation of any proposed piece of research or “Product Package”.
…”
Prospectus, ST5-98
23.A section headed “RESEARCH APPROACH” described the objective as:
“The objective of your business is to research and develop new products and to bring the products to world markets in the shortest possible time. The Research Institute will serve to facilitate this approach.
The new product projects may require any or all of the following:
· Research on the mode of action of tea tree oil relevant to the specific areas set out in this Prospectus
· Research on optimising the properties of tea tree oil in these areas
· Formulation
· Process development – trial batches, production scale batches and process validation
· Development of product specification – analytical method development and validation
· Packaging development
· Stability trials
· Safety studies
· Preservative studies
· Efficacy studies
· Clinical trials
To achieve this, the best available resources will be utilised which in the opinion of the Manager and the Institute can achieve the required results in a timely manner. This may include universities, hospitals, government or semi-government institutions or private consultants, laboratories and clinicians.”
Prospectus, ST5-99
24.A “Marketing and Technical Consultant’s Report” described, under the heading “Commercialising Research and Development”:
“Commercialising Research and Development
Commercialising the results of R & D may be done through a number of options. These may include international licensing arrangements and technology transfer, supply of bulk formulations from Australian production or supply of final product from Australian production. In reality there may well be a combination of options to achieve market coverage.
...”
Prospectus, ST5-107
25.“The Research and Development Programme” described the heading the goals of the research and development as:
“1. The Goals of the Research and Development
The goals of the Research and Development are to develop a range of products utilising Main Camp tea tree oil as the active ingredient backed by credible research data to substantiate efficacy claims and safety of use. The specific areas of research targeted are:
· Tinea and other Foot Problems
· Dandruff
· Candida”
Prospectus, ST5-109
26.A debtor’s ledger for the project as at 30 June 1997 listed “Latimer”:
(a)as contract number 621725 for one unit, interest of $1,050, principal of $1,750 and a current loan balance of $10,250;
Debtors’ ledger, ST17-391
(b)as contract number 621724 for six units, interest of $6,300, principal of $10,500 and a current loan balance of $61,500.
Debtors’ ledger, ST17-369
(b) Loan proposal
27.An investor could apply to borrow “100% of its Total Expenditure” of $24,000 from Project and General Finance Pty Limited (Lender).
Loan Proposal Document and Agreement, pars 1, 2, ST4-77, 85
28.The Loan Proposal Document, in a section headed “Taxation and Cashflow Aspects of Years 1 and 2”, set out the “Expenditure Items” where an investor took the loan as:
Your Funds
Borrowed
Funds
Deductible
over 2 years
Business Establishment Fee
200
Loan Application Fee
300
120
Scientific and Research Expenditure and Management Fee over two years
24,000
24,000
Interest over two years
3,600
3,600
Principal Reduction over two years
6,000
Total
10,100
24,000
27,720
Loan Proposal Document, ST4-79
(c) Project agreements
29.An investor signed up for the project by completing the Management Agreement and Research Agreement attached to the prospectus. Also, by the Loan Proposal Document and Agreement, the investor could borrow from the Lender.
Prospectus, ST5-148
Management Agreement, ST5-136
Research Agreement, ST5-142
Loan Proposal Document and Agreement, ST4-76
Management Agreement
30.The Management Agreement was to be made between an investor as the participant and BARM as the manager.
31.The terms of the Management Agreement included:
(a)by clauses 2.1 and 2.2, the participant appointed BARM as manager of the Business and the Collaborative Research and Agent. By clause 1.1:
. “Business” was defined as:
“the following activities undertaken by the Participant:
(i)the production and sale of products and Research Results based on tea tree oil including (but not limited to) formulae, packaging and labelling;
(ii)product development including the research and development of products;
(iii)the purchasing of necessary technology for the purposes outlined … above;
(iv)the sale of purchased or developed technology to enhance such business and its future prospects or, in the basis that a suitable return is obtained, by the sale at an earlier than envisaged time;
(v)the holding of all appropriate technology developed whether from developed or acquired or from purchased technology;
(vi)derivation of income and profits from the above activities including where appropriate future royalty income; and
(vii)derivation of income from certain Research Results including Product Packages and Research and Development”;
. “Research Results” was not defined;
. “Product Packages” was defined as:
“formulae and concepts using Main Camp Tea Tree Oil and includes product formulae, product samples, stability and safety information and efficacy data, scientific and technical labelling and packaging specifications;
. “Research and Development” was defined as:
“research into the properties and applications of tea tree oil and development of processes and products specifically for use in tinea and other foot problems, dandruff and candida applications and includes the establishment of research facilities, the engagement of suitably qualified personnel, the sourcing and compilation of various existing technology and research information and creation of databases, the establishment of research protocols, the establishment of projects based on existing uses, quantitative and qualitative analysis of extracted substances, laboratory and clinical trials and all works and processes that flow therefrom”;
. “Collaborate Research” was defined as:
“the Research and Development carried out by the Participants in collaboration with each other”;
. “Agent” was defined as:
“acting as the Participant’s agent in accordance with the provisions of this Agreement”;
(b)by clause 4.1, the Business was to commence on the date of the agreement and continue indefinitely and the Collaborative Research was to commence on 30 June 1996;
(c)by clause 5.1, the participant was to pay to BARM $200 (for a minimum investment) which was to be used by BARM to commence the Business;
(d)by clause 5.2, the participant was to pay to BARM $1,000 on the Payment Date and thereafter on the first day of each succeeding month for 23 months (or a total of $24,000) to be disbursed:
(i) monthly payments of $900 (or a total of $21,600) to The Australian Tea Tree Oil Research Institute Ltd (ATTORI) “for research fees in consideration of [ATTORI] undertaking the Research and Development obligations set out in the Research Agreement”; and
(ii) monthly payments of $100 (or a total of $2,400) to BARM “for management fees in consideration of [BARM] undertaking the duties and obligations” set out in the agreement.
By clause 1.1, “Payment Date” was defined as “the first day of the calendar month after the date of the Participant becoming bound hereto by execution of this Agreement, or shall mean 30th June in the case of the Participant becoming bound during the month of June”;
(e)alternatively, by clauses 5.3 to 5.5, the Participant was to pay to BARM no later than the Payment Date $12,000 to be disbursed:
(i) $10,800 to ATTORI; and
(ii) $1,200 to BARM,
and on the day after expiration of the Initial Period a further sum of $12,000. By clause 1.1, “Initial Period” was defined as “twelve months from the Payment Date hereof expiring on the day before the first anniversary of the date hereof”;
(f)by clause 6.1, in further consideration of acting as Agent and manager of the Business and the Collaborative Research, BARM was to receive remuneration at the rate of 25% of the Gross Income of the Business. By clause 1.1, “Gross Income” was defined as assessable income.
Research Agreement
32.The Research Agreement was to be made between an investor as the participant, BARM as the manager, ATTORI as the Institute and Australian Rural Group Limited (Trustee) as the trustee.
33.The terms of the Research Agreement included:
(a)by clause 2.1, the participant was to engage ATTORI to conduct the Research and Development in the manner set out in the agreement;
(b)by clause 3.1 in consideration of conducting the Research and Development ATTORI was to be paid the research fees set out in clauses 3.2 to 3.4;
(c)by clauses 3.2 to 3.4, no later than the Payment Date, BARM as Agent for the participant and manager of the Collaborative Research, was to disburse $900 per month or $10,800 in two parts (or a total of $21,600) to ATTORI “in consideration of [ATTORI] undertaking the Research and Development”;
(d)by clause 5.3, the objective was to create relevant Research Results including Product Packages;
(e)by clauses 6 and 8.1, ATTORI was to appoint BARM to carry out the administrative and management functions of ATTORI and in consideration ATTORI was to pay BARM an administration fee totalling:
(i) $1,250 for each participant for each of the first two years;
(ii) for the next succeeding year of Collaborative Research, $250 per participation;
(iii) for each succeeding year at a rate calculated by adjusting $250 annually by the CPI;
(f)by clause 7.1, the Research Results were to be the property of the participant and vested in the Trustee;
(g)by clause 7.2, in the event that the Research and Development produced any Research Results which were of commercial value then BARM as the agent and the manager for the participants was to investigate and pursue Commercialisation at its own cost. By clause 1.1, “Commercialisation” was defined as “the utilisation of the Research Results for the production of income or potential income”;
(h)by clause 7.3, in the event of sale of any of the Research Results, BARM was to be entitled to a lump sum royalty to amount to 50% of the gross sale proceeds.
Loan Proposal Document and Agreement
34.The Loan Proposal Document indicated:
(a)by items 1 and 2, an investor could borrow $24,000 in two tranches or 100% of its Total Expenditure;
(b)by item 5, an investor was to make 24 principal reduction repayments on a monthly basis of $250 (or a total of $6,000). Thereafter the principal would be repaid only from the earnings of the investor’s participation;
(c)by item 6, an investor was to pay interest in advance for the first two years. If the investor met all principal and interest payments, interest payments for the third year and beyond were payable only from the investor’s participation;
(d)by item 7, there was an application fee of $300 for each loan application;
(e)by item 4, the term of the loan was 25 years.
35.The Loan Agreement provided, inter alia, for the loan to be advanced as follows:
(a)by clause 2.1, the Lender was to advance to the borrower the Principal Sum;
(b)by clause 2.2, the Principal Sum was to be advanced:
(i) no later than the Payment Date, in the sum set out in the loan application as required for the payment for the Initial Period of $10,800 to ATTORI and $1,200 to BARM;
(ii) subject to the borrower having met all obligations under the Loan Agreement on the day after the expiration of the Initial Period, a further $10,800 to ATTORI and $1,200 to BARM.
36.As to interest:
(a)by clause 3.1, interest was to be chargeable;
(b)by clause 3.1.1, on the Payment Date interest was to be calculated and charged in advance at the rate of 17% per annum on the Principal Sum;
(c)by clause 3.1.2, in consideration of the borrower paying interest and Principal payments monthly on the Payment date and on the first day of each month thereafter, the Lender agreed to accept interest at the rate of 15% per annum;
143I would therefore hold that if I am wrong in my opinion as to the absence of entitlement of the Applicants to deductibility relevantly pursuant to s 51(1), each of them should be in any event denied deductibility by reason of an adverse application of Pt IVA of the ITAA.
74. Mr Fenwick in a lengthy and confused reply contended:
(a)That the respondent was not following a number of draft rulings and determinations and had generally behaved in a manner which was not correct;
(b)That his situation was analogous to that of the taxpayers in Cooke’s case;
(c)That Cooke should be preferred to Howland-Rose because it was a judgment of the Full Federal Court;
(d)That in any event, the entire collapse of the project was due to fault on the part of the ATO and that this was so in particular in respect of the collapse of ATTORI. (The fact that this occurred after the relevant year and also the subsequent year did not appear to him to be significant.)
PART G - the evidence of mr latimer
75. Mr Latimer gave evidence in relation to the other two projects (BP1 and BP2) on the basis that the decision in respect of his case would bind all of the other applicants in those projects notwithstanding any difference in the particular circumstances of the other applicants.
76. As was the case with Mr Fenwick, Mr Latimer did not produce a witness statement, but an extract from his statement of facts, issues and contentions was accepted as such and marked Latimer A1. It is in this context that a statutory declaration by Mr Fenwick, outlining the role he played as an investment adviser, dated 15 August 2007 was accepted and marked Fenwick A2, although in the result he did not give oral evidence otherwise than on his behalf.
77. As set out previously in these reasons, BP1 is the scheme referred to in Macpherson while BP2 is very much like the Project considered in Howland-Rose.
78. In his evidence in chief, Mr Latimer said that Exhibit Latimer A1 was correct; (he said also that it was executed on 21 February 2007, being the date on which it was date stamped in the Tribunal). Exhibit Latimer A1 reads as follows:
I, ANTHONY LATIMER, state that:
1.As I had insufficient funds for my retirement and I was desirous of having an income stream in my retirement, I appointed Kevin W Fenwick (KWF) as my financial planning and tax advisor, to advise me on my retirement needs. KWF recommended Budplan as an excellent commercial investment which, under the prospectus, would give me an income stream over 15+ years. KWF stated that he had personally investigated the project directors and considered tax law. He also declared that he had invested in Budplan personally for his own retirement needs.
2.I requested a Personal Budplan No 2 Prospectus (Refer K Doc 4) which purpose was for manufacture and sale of specified tea tree oil based products, and Budplan A Prospectus (Refer K Doc 8) which was a business for the generic research, development and sale of cultivars and rootstock of new table grape varieties. Being 49 years and 8 months at the time, I wanted to ensure I lived a long life and enjoyed my planned retirement at 60 years of age. I was excited about the prospect of investing in personal Budplan No 2 and Budplan A to benefit from holding intellectual property, and also to receive an income stream in my planned retirement. I considered this investment to be an excellent commercial investment and this was my overriding objective to invest. This gave me an added bonus as I did not have sufficient superannuation retirement benefits.
3.Prior to and after investing in Budplan, I was not related either financially or family-wise to the directors of Budplan, Monpro Pty Ltd or any associate of Budplan or Monpro, including Saxby Morgan Pty Ltd, nor the Saxby Bridge Group of companies.
4.I was an investor in Personal Budplan No 2 and Budplan A as a “Participant” and confirm that I was a party to the Personal Budplan No 2 and Budplan A Management Agreements between Business and Research Management Limited, ACN 070 946 664. (Refer K Doc 3AL (1).)
5.I also by agreement made 30 June 1997 between myself as participant and:
Budplan No 2: Business and Research Management Limited, ACN 070 946 664 (“Manager”) and the Australian Tea Tree Oil Research Institute Ltd ACN 071 814 607 (“Institute”) and Australian Rural Group Limited, ACN 002 635 501 (“Trustee”). (Refer K Doc 3AL (2).)
Budplan A: Business and Research Management Limited, ACN 070 946 664 (“Manager”) and Australian Agriculture Research Institute Limited ACN 077 046 621 (“Institute”), and Australian Rural Group Limited, ACN 002 635 501 (“Trustee”). (Refer K Doc 3AL (2) and K Doc 8.)
6.I entered into a loan agreement by way of a Loan Deed dated 29 June 1997 between myself as borrower and Project and General Finance Pty Limited, ACN 064 110 667 (“Lender”) and Business and Research Management Limited, ACN 070 946 664 (“Manager”), for the purpose of participating in Personal Budplan No 2 and Budplan A. (Refer K Doc 3AL (3) and K Doc 3AL (1).)
7.All relevant and available taxation law, precedents, tax determinations, etc can only be relied upon at the time of entering into an investment.
8.Future changes in taxation cannot be considered after the date of entry into the investment.
9.My overriding objective in investing in Personal Budplan No 2 and Budplan A was because I truly believed that the investment was an excellent commercial investment after giving due consideration to the following:
9.1.1The cash flow illustration on Page 30 of the Personal Budplan Prospectus showed net earnings of $189,270 for Budplan No 2 and $205,414 for Budplan A, over a 15 year period, which was projected at 60% of the projected returns, before tax. (Refer K Doc 4 and 8.)
9.1.2As at 30 June 1996 my withdrawal balance of my superannuation fund stood at $???? before the payment of taxation on withdrawal. (Refer Annexure 1.)
9.1.3I did not want to claim a Government pension on my retirement, consequently I was actively seeking ways that I could increase my superannuation retirement which I was planning on or at age 60 years.
9.1.4Personal Budplan No 2 and Budplan A was, I considered, an excellent investment as it would produce an income stream before tax of approximately:
Budplan No 2: $11,315 in year 5 and from year 6 $17,144 per year until year 15. Budplan A: $12,750 in year 5 and from year 6 approximately $18,000 per year until year 15.
9.1.5The investment came with options of financing which at the time suited my cash flow requirements. I chose Option 1 Loan Repayment - monthly principal and interest. I repaid monthly principal and interest payments over 24 months of the loan.
9.1.6By my retirement date after repayment of principal and interest on the balance of my loan, I would be receiving:
Budplan No 2 per unit: $17,144 before tax (as per the cash flow illustrations on Page 4 of the Project and General Finance Pty Limited loan proposal - Refer K Doc 9)
Budplan A per unit: $18,657 before tax (as per the cash flow illustrations on Page 5 of the Project and General Finance Pty Limited loan proposal - Refer K Doc 10.)
10.I was advised of numerous tax opinions, tax law, tax determinations, etc. and sought advice before entering into this investment, including, but not limited to:
10.1 FC of Taxation Lau (1984) 16 ATR55, 84 ATC 4929. (Refer K Doc 1.)
10.2 Taxation Ruling IT2195. (Refer K Doc 1.)
10.3 FC of Taxation v Brand 95 ATC4633
10.4 Fletcher and Ors v FC of Taxation 91 ATC4950
10.5 Ronpibon TIN NL v FCT (1949) 78 CLR47
10.6 Goodman Fielder Wattie Limited v FC91 ATC4438
10.7 IT360
11.I was advised of the A TO's draft ruling TR97/D17 which stated at paragraph 19 that “the ruling should not be applied retrospectively.”
“It will not apply to an income year before the 1997-98 income year in which a taxpayer, relying on Taxation Rulings IT360 or IT2195, would have lesser liability to income tax than if this ruling applied.” (Refer K Doc 5.)
11.1IT2195 being crucially relevant for supporting my investment purposes, states as follows:
“In Lau's case, 84 A TC 4929, a taxpayer who took part in an afforestation scheme was allowed to deduct the costs of management fees prepaid for 21 years as part of the expenses of carrying on a business under Section 51. Most of the fees prepaid were lent to the taxpayer by a company associated with the promoters of the scheme.
The Commissioner accepts that a taxpayer who participates in an afforestation scheme and who has entered into an agreement on terms consistent with arm's length dealings between independent parties has carried on a business even though there is provision in the agreement for non-recourse financing of part of his expenditure and for his escape from further liability upon his default or default by other parties to the agreement.
The taxpayer will be accepted as having incurred the expenditure in carrying on the business to the extent that it is paid out of his own resources, including funds borrowed from arm's length sources. These sources may include the promoter or its associates.
Deductions for expenditure incurred in round-robin arrangements will not be allowed where it is not intended to maintain the scheme beyond the initial years, the participants are allowed to withdraw from the scheme when tax deductions have been obtained or the promoters have undertaken to reverse the transactions if tax deductions are not allowed. A sham or non-arm's length transaction is involved or the expenditure recoupment or general anti-avoidance provisions apply, or the scheme is a long-term arrangement and there is intentional default by management company within a short time.”
12.Having entered into a Management Agreement and Research Agreement to conduct my business, I was totally satisfied as to the “carrying on of a business” criteria as laid down in the ITAA 1936 Sec 51 (1) under the First and Second Limbs.
13.The package inclusion of a tax deduction for management fees and research fees was a “bonus” and not a dominant purpose in my investment.
14.The Bill Facility Agreement:
Personal Budplan No 2 - I refer to Para 36-47 of the Respondent's Statement of Facts and Contentions (NT2005/540) dated 5 May 2006. I categorically state that I have no knowledge nor understanding of Para 36-47 inclusive and point out that this is the first time I have seen such “facts”. This “mechanism” was never mentioned to me and I had no idea that such a mechanism was in operation, however, I believe that it is a commercial legal mechanism.
Budplan A: I refer to Para 48-63 of the Respondent's Statement of Facts and Contentions (NT2005/540) dated 5 May 2006. I categorically state that I have no knowledge nor understanding of Para 48-63 inclusive and point out that this is the first time I have seen such “facts”. This “mechanism” was never mentioned to me and I had no idea that such a mechanism was in operation, however, I believe that it is a commercial legal mechanism.
15.In Firth v FCT 2001 ATC4615, 2002 ATC4346, Mr Justice Hely in the Firth case in the Federal Court, found that it was within the law for an investor to take out a limited recourse loan to minimise exposure to business risk.
As Budplan had a limited recourse loan, it follows that an investor is within the law to take out such recourse loan, as ruled by Justice Hely.
79. In oral evidence Mr Latimer said that he left England for South Africa in 1976 and then in turn moved to Australia in 1986 at a time when he could not bring much money out of South Africa. He was 37 when he arrived in Australia. In Australia he worked firstly in Melbourne and then in Brisbane, in general terms, in senior positions for construction companies. In 1994 or 1995, he moved to Sydney where he took up employment with Baulderstone Hornibrook.
80. Mr Latimer said that he needed more superannuation and that he invested in BP1 and BP2 in July 1997, and then amended that evidence so as to refer to June 1997, 30 June 1997 being the date of the relevant documents.
81. Mr Latimer said that he read the prospectus for both projects. He also read the Farm Agreement, the Loan Agreement and the Management Agreement for BP1 and the Loan Agreement and the Management Agreement for BP2.
82. Mr Latimer said that he knew that he would not be personally involved and knew that the relevant functions would be carried out by others. He said that the returns seemed to be “fairly good”.
83. Mr Latimer said that he did not get independent advice but acted on advice from Mr Fenwick who was his financial adviser. Mr Fenwick recommended the investments to him and a number of others (half a dozen) who were Mr Fenwick’s clients and who were similar in age to him, Mr Latimer. He knew about the fees which would be payable and he also knew that Mr Fenwick’s company would receive a commission, although he did not know how much the commission would be.
84. Mr Latimer was asked whether he completed a “confidential data projection sheet” regarding his financial position. He replied that he and Mr Fenwick reached agreement as to how he should organise his financial future.
85. It may be noted that Ms Harding objected (properly) to many of the questions asked in examination-in-chief on the basis that they were leading.
86. The remainder of this Part G relates in the main to the cross-examination of Mr Latimer.
87. It was put to Mr Latimer that in the relevant year he claimed $169,765 in respect of BP1 and $22,500 in respect of BP2; he agreed that this was so.
88. Mr Latimer was asked in relation to the amount of $169,765 for BP1, what amount comprised management fees and what amount comprised research fees; he said that he did not know. He said, further, that he did not recall what other components were involved. When asked as to the amount of $22,500 claimed for BP2 and what it comprised, he said that it was “probably a similar thing”.
89. Mr Latimer agreed that in his personal tax return for the relevant year, he reflected earnings of $53,434 from Barclay Mowlem Construction Ltd, $89,033 from Baulderstone Management Service and an ETP of $74,745. He agreed also that he claimed deductions of $22,500 and $169,765 in respect of the two Budplan projects and he also claimed a loss on a negatively geared rental property in an amount of $10,547. His total net income was accordingly $14,400 and his taxable income, $13,651. As a result he received a tax refund of over $40,000 (T p.15). However, his total net income as reassessed was $205,916 (T6 p.18).
90. Mr Latimer then proceeded to answer a number of questions with answers to the effect that “I can’t recall” or “I don’t think this is the case” or “I don’t recall the fees”. The following extract in respect of some of those answers only to the relevant questions is taken from my notes:
Do you recall the management agreement and the fees payable under it? No.
Do you recall how the Project was funded? There was a loan.
Was there a period for the loan and interest of two years? I can’t recall.
Do you recall whether fees were payable only out of sales proceeds? I don’t think this was the case.
As regards the Project involving a farm, you referred to the farm agreement; what was it for? It was for trees; I don’t recall fees.
Do you recall a loan agreement? I think it was a majority of the value of the tax rebate
Do you recall what amount of interest was paid? No I don’t.
Do you recall what was paid for principal? No.
As to BP2 there was a management agreement; do you recall the fees? No.
Do you recall how fees were to be paid? No.
Do you recall how much you could borrow? No.
Do you recall how much was interest? No.
Do you recall how much was principal? No.
91. Mr Latimer’s lack of knowledge of, or even interest in, a number of material matters was explained on the basis that many years have passed since the investments were made. As to whether he had been made aware of the onus on him under the TAA is difficult to assess. He did not even know how many units were taken by him in respect of BP1 and could never explain how the $169,765 claim was arrived at. Although he was sure that in both cases the amounts required were borrowed and in full, he did not know there were borrowing options or which borrowing options had been adopted.
92. Mr Latimer was then asked whether he considered himself to be a conservative investor. He answered to the effect that he wasn’t. His property investments he regarded as “fairly risk-free”. He agreed that the investments in BP1 and BP2 were “high risk, high return” but denied that they were speculative.
93. A number of questions were put to Mr Latimer as to the absence of the additional 50 per cent fee for BARM out of revenue which was not included in respect of the projections. He said that he was not aware of it.
94. It was then put to Mr Latimer that his deductions were, taking into account the tax benefits (of which he was aware) far in excess of the actual cash contributed in the relevant year (and this latter amount was never in fact established) and asked him whether he did not think that there had to be something amiss in relation to an investment which could never produce anything other than a gain. His answer, about which he was totally adamant, was that there was in fact no gain because he has paid (under protest) the tax levied on reassessment. It was not possible to persuade him as to the fallacy necessarily involved in that reply.
95. Mr Latimer said that the project failed, and that this was so because of the ATO’s actions. (He was presumably referring to the failure in May 2000 of ATTORI but there was no evidence before the Tribunal as to anything similar occurring in respect of AARI.)
96. Mr Latimer agreed that the transactions were structured so that he could not in economic terms sustain a loss. But then on re-examination he said that he paid out more money than he received.
PART H - oral submissions in respect of BP1 and BP2
97. Specifically as regards BP1 Ms Harding drew attention to the fact that the researcher was AARI not ATTORI. She noted that Mr Latimer did not know where the farm was.
98. Again as regards BP1, Ms Harding noted that it differed from the other projects in that participants also obtained licenses to utilise parts of farms; she referred in this context to the rather involved system of lease followed by sublease but without identification of any specific part of the land involved.
99. Ms Harding then went on to note that in respect of BP1 there were in fact three forms of loan proposal and loan deed and pointed out that Mr Latimer did not know which option he did take and that there was no evidence as to this aspect or in particular how the amount of $169,765 claimed was arrived at. Put in other words, there was no evidence as to the number of farms involved.
100. In Exhibit Latimer A1 at clause 9.1.5, Mr Latimer said he had chosen option 1; however he did not specify which of the possible variations was selected.
101. Ms Harding went on to contend that Mr Latimer had not discharged his onus in respect to the amount of his claim.
102. As to subsection 51(1) and Part IVA of the Act Ms Harding noted that all of her submissions, as set out previously in these reasons, would again apply. It was in this context that Ms Harding referred specifically to clause 12 of the decision in Macpherson in which Senior Member Pascoe raised doubts as to whether there was a loan at all (cited at paragraph 18 of these reasons).
103. Mr Fenwick replied in terms similar to, but not as lengthy, as his previous reply. Mr Latimer also spoke briefly. Mr Fenwick, in fact, in relation to Part IVA of the Act, contended that there was not even a scheme.
PART I - findings
104. The evidence of Mr Fenwick was not, in a number of important respects, satisfactory or credible. In particular, the Tribunal cannot accept that he sought to fund his retirement out of an investment of so speculative a nature. This explanation for his participation in the project may well have arisen because the taxpayers who were successful in Cooke justified their investment in this way. His attacks on the ATO were both unfortunate and without foundation.
105. The evidence of Mr Latimer, in the same context, is equally unacceptable coupled with a further problem that he could not, in relation to fundamental aspects, furnish relevant evidence necessary to discharge the onus on him.
106. In respect of BP1, Senior Member Pascoe’s doubts, stated in Macpherson, as to whether there was a loan have substance, and similarly his view as to the fact that payments were of a capital nature also have substance, but whether or not this is so, all of the applicants must fail in their claim for deductions under subsection 51(1) of the Act for the reasons set out in Howland-Rose which has been cited at length earlier in this decision.
107. As Conti J did in Howland-Rose, I deal with Part IVA, albeit in brief terms, in case my findings as to deductibility are incorrect. If this be so, Part IVA of the Act must apply to deny the deductions claimed. Having regard to the tests contained in section 177D(b) of the Act and regarded objectively, each applicant cannot have had any expectation of any benefit of any kind other than the tax benefit. Investments such as these can never be viewed as investments in the normal course, and this is so even apart from the manner in which the projects were structured such that success was highly unlikely, if not impossible. I again refer in this context to the reasons given by Conti J in Howland-Rose and cited earlier in this decision. It is to be noted in this particular context that (subject to the Brody exception referred to in paragraph 5(c)), each investment was made on or about the last day of the relevant year and that it was structured so that the tax benefit always exceeded the actual amount expended.
108. It follows, of course, that in relation to Mr Brody, it does not matter whether he invested in BP2, in the relevant year or the preceding year. In either event, he is not entitled to the deduction sought and insofar as he claimed the deduction in the relevant year, he cannot succeed.
109. The position as regards penalties is also somewhat odd. Penalties were originally assessed at a much higher rate, but subsequently were reduced to five per cent, which constituted in my view, a quite extraordinarily generous concession. Some of the applicants objected against the penalty and some did not. Mr Fenwick was one who did not, according to the objection before the Tribunal, although he nevertheless contended that he did object to the penalty imposed. A recent judgment of French J in Starr v Federal Commissioner of Taxation (2007) 65 ATR 86 indicates that at least so far as penalty is concerned the subjective intentions of the taxpayer are relevant. In respect of these applications, I have come to the conclusion that the intentions of the applicants, whether subjective or otherwise, related purely, and only, to the tax benefits to be derived. In my view, a penalty of five per cent was, in each case, and whether or not there was an objection, decidedly generous and there is no basis whatsoever for any further reduction.
110. At the risk of labouring the point, I emphasise that Howland-Rose dealt with a Budplan project similar to the projects under consideration in this case. In all of the projects a nominal amount ($200 per participation) was paid by way of entry or establishment fee. In all cases the amount to be contributed was borrowed on the basis that a part only of the principal had to be repaid on a periodic basis but so that the balance was non-recourse. Where a loan alternative was selected, as was invariably the case, a loan fee of $300 was payable. In all cases there was a related party loan but where there was no evidence that any actual money changed hands. In all cases the project was set up according to its constituent documents in order to fund research, and in particular in relation to the Coenzyme Q10 Project, of a decidedly esoteric nature. In all cases there would be a return if, and only if, the research was carried out and was successful to such extent that it could be commercialised. In respect of all three projects there was no evidence as to any research having been undertaken. Howland-Rose must be decisive so far as this Tribunal is concerned, and moreover in relation to all three projects. As I have indicated Cooke is distinguishable on its facts. It may be noted that each of the three projects was described in no uncertain terms as speculative so that a claim that they were entered into to fund superannuation needs cannot be accepted.
111. In all of these applications, (and subject only to the Brody exception referred to previously) the applicants objected to amended assessments for the relevant year; in all cases the objections were disallowed and the applicants sought review by this Tribunal. As I have noted Mr Fenwick undertook to furnish the Tribunal with evidence in order to resolve the Brody exception but did not do so.
112. For the reasons set out in this decision each of the objection decisions under review must be affirmed.
I certify that the 112 preceding paragraphs are a true copy of the reasons for the decision herein of Mr Julian Block, Deputy President
Signed: .................[sgd]................................................................
AssociateDates of Hearing 15-17 August 2007
Date of Decision 14 September 2007
Appearance for the Applicants Mr K W. Fenwick
Counsel for the Respondent Ms D Harding
Solicitor for the Respondent Mr Dusan Uglesic, Australian Government Solicitor
[Referred to herein at para 25(b) above]
…
CASH FLOW ILLUSTRATIONS FOR A MINIMUM PARTICIPATION LEVEL OF $25,200
Assumptions: Year Ending June 30th No CPI taken into account for forecast earnings Participation payment Year 1 $A12,700 Year 2 $A12,500 Marketing Report Projected Returns $A197.10m Number of Participations 4,000 Projected Returns per Participation $A49,275 Discount of Projected Returns 60.00% Discounted Projected Returns per Participation $A29,565 Phase in of Projected Returns Year 1 0.00% Year 2 0.00% Year 3 3.00% Year 4 15.00% Year 5 33.00% Year 6 66.00% Year 7+ 100.00% Cashflow illustrations rounded to the nearest dollar. Total calculations may differ due to roundings within this table. Year Number 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total Income (A$) Phased In Projected Returns Per Participation 0 0 1,478 7,391 16,261 32,522 49,275 49,275 49,275 49,275 49,275 49,275 49,275 49,275 49,275 501,127 Earnings at 60% Projected Returns 0 0 887 4,435 9,756 19,513 29,565 29,565 29,565 29,565 29,565 29,565 29,565 29,565 29,565 300,676 Less 10% Additional R&D Contribution 0 0 89 443 976 1,951 2,957 2,957 2,957 2,957 2,957 2,957 2,957 2,957 2,957 30,068 Less 25% Manager’s Fee 2 0 0 222 1,109 2,439 4,878 7,391 7,391 7,391 7,391 7,391 7,391 7,391 7,391 7,391 75,169 Net Earnings 0 0 577 2,883 6,342 12,683 19,217 19,217 19,217 19,217 19,217 19,217 19,217 19,217 19,217 270,608 Return on Investment (%) 0.0 0.0 2.3 11.4 25.2 50.3 76.3 76.3 76.3 76.3 76.3 76.3 76.3 76.3 76.3 51.7 IRR for 15 yr investment
-12,700
-12,500
577
2,883
6,342
12,683
19,217
19,217
19,217
19,217
19,217
19,217
19,217
19,217
19,217
30.52%
Notes: 1 The Business does not cease at fifteen years but will continue indefinitely.
2 Calculated on gross income.
erratum
In the table of Cashflow illustrations above, under the heading “Net Earnings” the figure “270,608” in the “Total” column is deleted and replaced with “195,439”.
All other figures, including “Return on Investment” and Internal Rate of Return (“IRR”), are unchanged.
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