Bywater Investments Limited and Commissioner of Taxation (Taxation)
[2018] AATA 5028
•20 July 2018
Bywater Investments Limited and Commissioner of Taxation (Taxation) [2018] AATA 5028 (20 July 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2011/1902-1907
Re:Bywater Investments Limited
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s): 2011/1916-1918
Re:Derrin Brothers Properties Limited
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s): 2011/1919-1921
Re:Hua Wang Bank Berhad
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:A G Melick AO SC, Deputy President
Date:20 July 2018
Place:Sydney
The Tribunal orders, pursuant to s 40(1)(c) of the Administrative Appeals Tribunal Act1975 (Cth), that:
(1)the hearing of matters 2011/1902-1907, 2011/1916-1918 and 2011/1919-121 be stayed until after the conclusion of the District Court criminal proceeding R v Vanda Gould 2016/00278181 (the criminal trial); and
(2)the applicants are to notify the Tribunal within 30 days of the conclusion of the criminal trial the result thereof and the nature of any appeal therefrom.
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A G Melick AO SC, Deputy President
CATCHWORDS
PRACTICE & PROCEDURE – application to stay Tribunal proceedings pending conclusion of criminal proceedings involving a witness – substantive proceeding relates to penalties arising under the Taxation Administration Act – relevance of witness’ state of mind to the issues – power to grant section 128 certificate – issue estoppel – prejudice – stay granted
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) s 60(3)
Evidence Act 1995 (Cth) s 128
Taxation Administration Act 1953 (Cth) Sch 1 s 284-75(3)
CASES
Blair v Curran (1939) 62 CLR 464
Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45
Esquire Nominees v Federal Commissioner of Taxation (1973) 129 CLR 177
Hourani and Tax Practitioners Board [2012] AATA 518
Hua Wang Bank Berhad v Commissioner of Taxation [2014] FCA 1392
Hoysted v Federal Commissioner of Taxation (1925) 37 CLR 290Wood v Holden [2005] EWHC 547 (Ch)
REASONS FOR DECISION
A G Melick AO SC, Deputy President
20 July 2018
The applicants seek an adjournment of the proceedings before this Tribunal until the conclusion of a criminal trial involving their former accountant, Vanda Gould, whom they wish to call upon to give evidence in the Tribunal proceedings.
The substantive proceedings before the Tribunal relate to penalties arising under the Taxation Administration Act 1953 (Cth), in particular:
(a)whether the applicants are liable to pay a penalty under s 284-75(3);
(b)the quantum of the assessments of primary tax for the purpose of calculating the penalties;
(c)whether the applicant is liable to pay an administrative penalty at a base penalty rate increased by 20% on the assessed shortfall; and
(d)whether the penalties should be remitted in whole or part.
The primary tax liabilities which give rise to the penalties were the subject of a Federal Court decision: Hua Wang Bank Berhad v Commissioner of Taxation [2014] FCA 1392.
The applicants have applied to stay the substantive hearings before this Tribunal until either:
(a)a verdict is given in the criminal proceedings involving Mr Gould (an intended witness in the Tribunal proceedings); or, in the alternative
(b)an amendment of assessments to give effect to the Federal Court decision set out above are issued by the respondent, and the Tribunal issues a certificate under s 128 of the Evidence Act 1995 (Cth) and s 60(3) of the Administrative Appeals Tribunal Act 1975 (Cth) in respect of all evidence that may be given by Mr Gould in the Tribunal applications numbered 2011/1902-7, 2011/1916-18 and 2011/1919-21, including witness statements.
In relation to paragraph 4(b) above, the respondent correctly submitted that the Tribunal is not empowered to issue an evidentiary certificate under s 128 of the Evidence Act 1995 (Cth) because such a certificate can only be issued by a court: Hourani and Tax Practitioners Board [2012] AATA 518 at [6]-[11]. Even if such a certificate could be issued by the Tribunal then it would only grant use immunity and not a derivative use immunity, which would not fully protect Mr Gould should there be an overlap between issues to be dealt with by the Tribunal and his pending criminal trial.
The applicant requested that the Tribunal’s reasons for decision be anonymised and that pseudonyms be adopted for each of the applicants and Mr Gould. No objection was taken by the respondent to this course but this has created significant and time consuming drafting difficulties.
BACKGROUND
Most of the relevant facts set out below and adopted by this Tribunal, with some modifications, were well summarised by the applicants in their submissions.
The applicants are all foreign companies and in the 2002–2007 tax years, were engaged in buying and selling shares on the Australian Stock Exchange. The directors of the applicants and all the physical manifestations of the applicants (such as head office and business records) were outside Australia at all relevant times.
In 2010 the respondent raised assessments against the applicants (and two other entities) in which the applicants’ gains from selling Australian shares during the 2000–2007 period were treated as assessable income.
The applicants objected to the 2010 assessments and commenced proceedings in the Federal Court challenging the primary liability imposed by the respondent. These proceedings were ultimately determined by Perram J in Hua Wang Bank Berhad vCommissioner of Taxation [2014] FCA 1392 (the Perram proceeding).
The applicants also commenced the present proceedings before the Tribunal in respect of the penalties on the applicants’ primary liability. These penalties depend on s 284-75(3) of the Taxation Administration Act 1953 (Cth) and are based on the applicants’ alleged failure to provide documents to the respondent that were necessary to accurately determine the applicants’ tax liabilities.
In the Perram proceeding the applicants advanced a number of arguments by way of challenge to their primary liability. These arguments were, inter alia, that:
(a)the applicants had their central management and control outside Australia and were foreign tax residents, and accordingly were exempt from Australian tax by reason of Double Tax Agreements and exemptions in the CGT legislation that apply to foreign tax residents; and
(b)if the applicants were liable to pay tax on the profits made from selling shares, the applicants were entitled to make trading stock elections in respect of the applicants’ shares, causing a significant diminution in the applicants’ tax liability because of losses of market value in various shareholdings held by the applicants.
Justice Perram found against the applicants on the residency issue and concluded the applicants had their central management and control in Australia, centred on Mr Gould. However, his Honour accepted the contention that the applicants were entitled to make trading stock elections for their Australian shares.
An aspect of the forensic contest in the Perram proceeding was the respondent’s allegation that Peter Borgas, a director of two of the present applicants, Derrin Brothers Properties Limited and Bywater Investments Limited, was a façade for Mr Gould.
The allegation was that Mr Borgas simply implemented the instructions of Mr Gould, without independent thought, and for this reason Mr Gould was the central management and control of these entities for tax residency purposes. The respondent also alleged the directors of the other applicant entity, Hua Wang Bank Berhad, simply implemented instructions from Mr Gould in a mechanical fashion and therefore could not be regarded as the central management and control of Hua Wang Bank Berhad.
By contrast the applicants contended that, on the true state of the law, it was enough for the applicants’ directors to be situated overseas and to perform their functions overseas, even if they simply implemented the wishes of Mr Gould. This question about the extent to which a company’s directors need to be actively involved in the decision-making of a company in order to constitute the central management and control of that company was ultimately the subject of a High Court case: Bywater Investments Ltd vCommissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45.
The issues before the court in the Perram proceeding did not include an allegation of fraud.
In late 2016 the Commonwealth Director of Public Prosecutions (CDPP) commenced a prosecution against Mr Gould. In broad terms, the allegation in that prosecution is that, prior to the Perram proceeding, Mr Gould coached Mr Borgas and various others as to the evidence they should give as witnesses and the purpose of this coaching was to create a misleading impression about the role of Mr Borgas and the other appointed directors of the applicants in the management of the applicants.
An outline of the prosecution case is in the Australian Federal Police’s (AFP) statement of facts (SOF) attached to the witness statement of Andrew Christopher, which was filed for the purpose of this interlocutory application. The prosecution case, by reference to the allegations in the paragraphs of the SOF, is as follows:
(i)that Mr Gould controls the following entities (e.g. SOF [3], [4], [14], [20])
(a)Bywater Investments Ltd (Bywater)
(b)Hua Wang Bank Berhad (HWBB)
(c)Chemical Trustee Ltd (Chemical Trustee)
(d)Southgate Investment Funds Ltd (Southgate)
(e)Derrin Brothers Properties Ltd (Derrin);
(ii)that Mr Gould is the owner of Bywater, HWBB, and Derrin through his control and ownership of JA Investments Limited (JA) and MH Investments (MH), which are the ‘parent’ companies of Bywater, HWBB, and Derrin (SOF [4], [19]);
(iii)that the office holders of the companies followed Mr Gould’s directions in conducting the companies’ business (SOF [4]);
(iv)that Mr Gould directed Mr Peter Borgas in the operation of Bywater, and Derrin and instructed Mr Borgas to conduct share trades and other financial transactions on Gould’s behalf (SOF [5], [7], [9]);
(v)that JA and MH are the two ultimate Cayman Island ‘parent companies’ of ‘the offshore company structure’ controlled and owned by Mr Gould which uses services provided by Mr Borgas (SOF [10]);
(vi)that the members of JA and MH held their shares as nominee for the Appointer, and deal with the shares and vote according to the wishes of the Appointer, who is and always has been Mr Gould (SOF [11] - [12], [25], [105]);
(vii)that Mr Gould instructed Mr Borgas and other witnesses in the evidence they were expected to give so as to misrepresent the true circumstances relating to the control of the companies (SOF [17]);
(viii)that Mr Gould attempted to pervert justice by coaching Mr Borgas on the evidence he was expected to give to maintain the impression that Mr Gould was not in control of ‘the companies’ (SOF [21], [94)]);
(ix)that Mr Gould instructed Mr Borgas and others to carry out his directions in relation to the operation of the ‘offshore companies’ and used these persons to disguise his true control and ownership of these companies (SOF [25],[26], [42],[50]); and
(x)that Mr Gould is responsible for all commercial transactions for ‘the group companies’ and Mr Borgas’ role is to give effect to Mr Gould’s instructions without any independent influence (SOF [60]).
Some of the more notable allegations set out above are subparagraphs (iv), (viii) and (ix). In particular, the specific allegation that Mr Gould used Mr Borgas to ‘disguise’ Mr Gould’s ownership and control of the applicants so that they could plausibly claim to have their central management and control outside Australia and to be foreign tax residents.
PROCEEDINGS BEFORE THE TRIBUNAL
Some of the matters contended by the applicants are set out at paragraphs 22-27 below.
In these proceedings, the respondent filed a separate statement of facts, issues and contentions (SFIC) relating to each of the applicants. In those SFICs, the respondent advanced allegations which are almost identical to those in the criminal prosecution. In these proceedings, the respondent contends the applicants knew they were foreign tax residents by reason of the control exercised by Mr Gould from Australia and that the applicants took intentional steps to disguise this fact.
As an example, the SFIC filed by the respondent in relation to Derrin Brothers contains various allegations. At paragraph [51] the respondent contends ‘… the Applicant should have been in no doubt that it was an Australian resident for tax purposes.’ Further, at paragraphs [53] – [54], the respondent contends:
Further, if the Applicant truly held the view that it was not an Australian resident on the facts, it would not have gone to such extreme lengths to disguise the relevant facts from the Commissioner.
. . .
Some of the documents and matters that the Applicant attempted to hide from or did not properly disclose to the Commissioner include:
a) The fact that the ultimate corporate controllers of the Applicant, JA and MH, were controlled by Mr Gould through nominee agreements. In that regard, Perram J said ‘JA investments’ register gave the impression that Mr Borgas was the owner but this was simply part of Mr Gould’s elaborate deceit.
b) The fact that Mr Borgas acted at the direction of Mr Gould.
Essentially the same allegations are advanced by the respondent in the SFIC filed in relation to Bywater Investments Limited (see, inter alia, paragraphs [44], [46] and [47]) and Hua Wang Bank Berhad (see paragraphs [50], [52], [53] and [55]).
The respondent’s various SFICs show that in the proceedings before this Tribunal (as distinct from the Perram proceeding) there will be a live question about whether the applicants’ conduct was deliberately fraudulent, and whether there was a culpable omission to pay Australian tax on the part of the applicants.
The applicants’ solicitor has deposed that the applicants want Mr Gould to give evidence as a witness in the Tribunal proceedings. Mr Gould was the applicants’ tax agent and advisor. On his own version of events, Mr Gould was very closely involved in the running of the applicants.
On the respondent’s version of events, Mr Gould was the key decision-maker for the applicants. He would be a central witness because of the testimony he would give about the reasonableness of the applicants’ belief that they were foreign tax residents, and about whether they were intended to (and did) function as a disguise to facilitate evasion of tax on the buying and selling of Australian shares. These are the same topics canvassed in the AFP’s SOF.
The solicitor in Mr Gould’s criminal case has deposed that Mr Gould intends to resist any summons requiring him to give evidence as a witness in this Tribunal proceeding prior to his criminal trial. The basis for the opposition would be the self-incrimination privilege. If Mr Gould is compulsorily required to give evidence (over his opposition), he would take the self-incrimination privilege wherever possible in response to specific questions.
I have had considerable difficulty trying to ascertain precisely the allegations to be advanced against Mr Gould in the criminal trial and comparing them with the voluminous material outlining the allegations and evidence preceding the Perram findings. Part of the problem with the above-mentioned comparisons was caused by extensive redactions in the AFP SOF attached to the witness statement of Mr Christopher.
The respondent submitted that there should be no stay pending the criminal proceedings against Mr Gould because there was no evidence that Mr Gould could give that would be relevant to the issue in the Tribunal proceedings and accordingly Mr Gould would not be required as a witness in those proceedings.
The respondent’s submissions also included the following:
(a)the first issue identified by the applicants is whether they are liable to a penalty under s 284–75(3) of schedule 1 to the Taxation Administration Act 1953 (Cth) because they failed to give a document to the Commissioner that was necessary for an accurate determination of the applicants’ liabilities;
(b)this would require a legal analysis of the High Court’s decision in Esquire Nominees v Federal Commissioner of Taxation (1973) 129 CLR 177 (Esquire Nominees). Although the applicants’ seem to be proposing that Mr Gould give expert evidence, this would not be permissible as the reasonableness of a legal position taken is a question of law to be determined by the Tribunal and, in any event, Mr Gould would not be an appropriate expert given his involvement in this case.
However, I consider that relevant evidence could be Mr Gould’s belief as to the state of the law. An analysis of the case law suggests that prior to the Perram judgment and the High Court judgment there was a possible argument based on Esquire Nominees that it was sufficient for a director to be an Australian resident despite the fact the company was controlled from overseas.
The High Court distinguished Esquire Nominees, endorsed some of the comments of Gibbs J in that case and declined to follow or distinguished some English authorities, including Wood v Holden [2005] EWHC 547 (Ch). It also appears that the issue of central management and control of companies by overseas directors has not been considered by the High Court since Esquire Nominees.
I consider an issue for the Tribunal upon the hearing of this matter will be whether the belief that the applicants’ may have held was subjectively or objectively reasonable is a relevant factor to take into account in relation to penalties. I indicated to the parties that I was unaware of any relevant law on this particular point and both parties indicated that they were in the same position.
Accordingly, in light of the above, I cannot rule out the possibility that the Tribunal may consider Mr Gould's state of mind and advice and/or actions based upon it relevant to the resolution of this aspect of the matters before it.
The respondent also noted that another issue identified by the applicants was the quantum of their tax-related liability for the purpose of calculating any penalty imposed. The applicants’ contended that if they failed to provide documents necessary to determine a component of their overall taxable income for any relevant years then the penalty should only be imposed in respect of that component of taxable income. The respondent submitted that this was an issue to be determined by an examination of documentary evidence in consideration of the law and once again any evidence Mr Gould could give would be irrelevant.
The respondent conceded that regard must be had as to whether the responses fully answered the questions asked and reflect the true state of affairs relevant to the applicants’ income tax liability. That required the identification of what in fact was the true state of affairs relevant to that income tax liability and that state of affairs involved Mr Gould’s ultimate ownership and role in the operation of the applicants. The respondent asserted that those were matters of fact determined by Perram J and were not disturbed on appeal. As the same parties are involved, it was submitted that the applicants will be prevented by issue estoppel from re-litigating the role of Mr Gould with respect to the applicants as found in the Perram proceeding.
The respondents also asserted issue estoppel in the remaining matters to be determined by the Tribunal because they have already been determined in the Perram proceeding. They referred to Blair vCurran (1939) 62 CLR 464 in which I consider the passages most relevant to this matter to be part of the judgment of Dixon J at pp 531–532:
A judicial determination directly involving an issue of fact or of law disposes once and for all of the issue, so it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion, whether that conclusion is that a money sum be recovered or that the doing of an act be commanded or be restrained or that rights be declared … …
Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded.
A similar ratio to the effect that a factual finding was binding only if the finding was fundamental to the decision appears at p 303 of Hoysted v Federal Commissioner of Taxation (1925) 37 CLR 290.
As previously noted, the question of fraud was not part of the Perram proceeding and the respondent does not intend to suggest fraudulent behaviour but rather that there was a deliberate setting up of structure to disguise the true state of affairs. This is a matter the respondent submitted was determined in the Perram proceeding and not displaced upon appeal.
At paragraph 27 of Bywater Investments Ltd v Federal Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45, the High Court noted:
Critical findings at first instance
In summary, therefore, Perram J found as follows:
(1) Chemical Trustee's real business was conducted from Sydney by Gould. Borgas' role was "fake". The evidence that Gould ran every aspect of Chemical Trustee's business was overwhelming, notwithstanding that Gould had gone to great lengths to conceal that fact. The place of central management and control of Chemical Trustee was in Sydney, with Gould, and nowhere else.
(2) The same applied to Derrin.
(3) The same applied to Bywater, subject only to the slight and relevantly inconsequential difference that Bywater was incorporated in the Bahamas and did not purport to hold any directors' meetings.
(4) Gould owned HWB. His elaborate but ultimately unsuccessful attempts to make it appear otherwise suggested the presence of dishonesty. Every decision of consequence was made by Gould in Sydney. There was no occasion for the directors of HWB to exercise any judgment and in fact they did not. The real business of HWB was conducted by Gould from Sydney, where its central management and control was located.
That summary supports the respondent’s contentions as to issue estoppel in all aspects except the effect of any reasonable belief on the part of Mr Gould as the effect of the structures put in place upon the issue of central management and control.
As noted above in these reasons, this issue is not clear cut and it is not for me to attempt to usurp the determination as to the effect of such a belief by the Tribunal constituted to deal with the substantive hearing of these proceedings.
Also the fundamental finding of fact by Perram J was that Mr Gould controlled the applicants whose overseas directors did not give sufficient independent consideration to their running but it was not necessary to explore the reason why Mr Gould sought to disguise the extent of his control.
Accordingly, applying the test as set out in Blair v Curran (1939) 62 CLR 464 referred to above, I am not able to find that the applicants are estopped from leading evidence as to Mr Gould’s belief as to the effect of the applicants’ management structures.
BALANCING CONSIDERATIONS
In reaching a final determination I consider, inter alia, the following matters to be relevant:
(a)the uncertainty as to whether or not a belief reasonably but incorrectly held as to a state of affairs is relevant to the question of penalty;
(b)the fact that I have found that issue estoppel does not apply to all issues;
(c)the inability to determine with any precision the extent of any overlay between evidence to be given before the Tribunal and matters to be raised upon the criminal trial;
(d)the unpredictable nature of criminal trials and the inability to determine to what extent Mr Gould's criminal defence would be compromised if forced to give evidence before the Tribunal;
(e)the inability of the Tribunal to issue a certificate under s 128 of the Evidence Act1995 (Cth); and
(f)that the respondent has fairly conceded that the prejudice caused by an adjournment would be delay and increasing legal costs but noting that this matter has been continuing since 2011 and there are freezing orders in place to prevent the dissipation of assets.
I consider the most appropriate result of a consideration of the above matters is to grant the stay. Accordingly, I order that these matters before the Tribunal be stayed until after the conclusion of Mr Gould's criminal trial. I further order that the applicants notify the Tribunal within 30 days of the conclusion of that criminal trial the result thereof and the nature of any appeal therefrom.
As noted above in paragraph 6, there was a request that the names of the applicants and Mr Gould not be used in this decision. I have had great difficulty and spent too much time trying to draft a decision using pseudonyms because the very mention of proceedings appears to me to run the risk of identifying the relevant parties. Accordingly, I order that this decision not be published until further order of the Tribunal and invite the parties to make any application they consider appropriate in relation to the possible editing of this decision.
I certify that the preceding 48 (forty -eight) paragraphs are a true copy of the reasons for the decision herein of A G Melick AO SC, Deputy President
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Associate
Dated: 20 July 2018
Date(s) of hearing: 21 November 2017 Counsel for the Applicants: Mr J Hyde Page Solicitors for the Applicants: Norton Rose Fulbright Counsel for the Respondent: Dr J Jaques Solicitors for the Respondent: Australian Government Solicitor
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