Ciprian and Ors and Commissioner of Taxation

[2002] AATA 746

DECISION AND REASONS FOR DECISION [2002] AATA 746

ADMINISTRATIVE APPEALS TRIBUNAL      )           NT1999/685-686

) NO. NT1999/687-688

TAXATION APPEALS DIVISION )          NT1999/689-690      
           Re      John Ciprian Dianne Ciprian Harry De Jonge        
  Applicants
           And    Commissioner Of Taxation       
  Respondent

DECISION

Tribunal       Mr Julian Block, Deputy President           

Date30 August 2002 

PlaceSydney

Decision      Except that the penalties imposed under section 226X(b)(i) of the Income Tax Assessment Act 1936 are remitted, the objection decisions under review are affirmed.

[SGD] Mr Julian Block
  Deputy President
CATCHWORDS
Taxation – jewellery business - valuation of trading stock – writing down of trading stock – whether valuation system competent and proper – whether opening stock in first relevant year should be increased – whether additional ground of objection necessary – penalties under sections 226J and 226X of the Income Tax Assessment Act 1936
LEGISLATION
Income Tax Assessment Act 1936 - sections 28, 29, 31, 226J, 226X
Income Tax Assessment Act 1997
Taxation Laws Amendment (Self Assessment) Bill 1992 - Explanatory Memorandum
CASE LAW
Pontifex Jewellers (Wholesale) Pty Limited v FC of T 2000 ATC 4642
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Liversidge v Sir John Anderson [1942] AC 206
Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210
J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421
Commissioner of Taxation v Citibank Ltd and Others (1993) 44 FCR 434
14 CTBR Case 10
(1951) 1 TBRD case 106
(1956) 7 TRBD case G33
Kirkpatrick v Commissioner of Inland Revenue  [1962] 13 NZLR 49
Commercial Union Australia Mortgage Insurance Company Limited v Commissioner of Taxation (1996) 69 FCR 331: (1996) 96 ATC 4854
Henderson v Federal Commissioner of Taxation (Cth) (1970) 119 CLR 612
Australasian Jam Company Proprietary Limited v Federal Commissioner of Taxation (1953) 88 CLR 23
Bob Jane T-Marts Pty Ltd v Commissioner of Taxation   (1999) 99 ATC 4437

REASONS FOR DECISION

Mr Julian Block

Deputy President

1. (a)       The objection decisions which are under review in this matter are decisions by the Respondent disallowing objections dated 11 January 1999 against notices of amended assessment issued on 5 January 1999 in respect of the year ended 30 June 1996 (referred to as the "1996 year") and the year ending 30 June 1997 (referred to as the "1997 year").  The 1996 year and the 1997 year are collectively referred to as the "relevant years".

   (b)In respect of the three Applicants (collectively the "Applicants"), the applications were heard together having regard to the fact that the issues are the same in respect of all three of them.  The Applicants were at all relevant times the only partners in Jade Wholesalers ("Jade").  They were also and at all relevant times the only shareholders in and directors of Allay Pty Ltd ("Allay").  At all relevant times, Allay carried on business as a retail jeweller through two jewellery stores in Albany, Western Australia, and a third retail jewellery store in Katanning, Western Australia.

2. (a)       Dr H R Sorensen of Counsel instructed by Dibbs Barker Gosling (previously Barker Gosling) solicitors appeared for the Applicants, while Messrs D B McGovern and I Young of Counsel instructed by Mr Matthew Walsh of the Australian Government Solicitor appeared for the Respondent.

   (b) The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. In respect of each of the Applicants, the T documents are for all practical purposes the same. References in these reasons should be construed as references to the T documents in respect of John Ciprian, who is one of the Applicants.
   (c)       The Tribunal also had before it a large number of exhibits; on the last hearing day, the Respondent furnished the Tribunal with a schedule detailing the exhibits; that schedule is annexed marked A.  Annexure A has been amplified to include exhibits R15 and R16 and being a recent exchange (in June 2002) of correspondence between the representatives of the parties.  That exchange of correspondence can be summarised in the following manner; having received the Applicants' written submissions the Respondent's solicitor wrote to the Applicants' solicitors drawing attention to the fact that a contention by the Applicants concerning opening stock for the 1996 year had not been raised in the objections referable to that year; the Respondent contended that that contention could not be raised without an amendment to those objections.  The Applicants, through their solicitors, contended that their objections encompassed that contention, and stated that the Applicants did not intend to apply for an amendment to their 1996 year objections.  Annexure A does not include a document (and being a questionnaire by the Valuation Centre of Australia dated 8 December 1997), which was marked for identification purposes only.  I should also note, for the sake of completeness that the reference in annexure A to exhibit A17 has been corrected so as to reflect the fact that that letter was addressed to Mr Gibson.

3. (a)       This matter was originally listed for hearing in November 2000; it was postponed that time and then re-listed before me in the first half of 2001.

   (b)       The matter was again postponed (for reasons not here relevant) and eventually commenced in July 2001.

   (c)       The first hearing took place on the following days in July 2001; 3, 4, 5, 6, 12, 13, 16, 17 and 18.
   (d)       The matter was then re-listed for further hearings later in 2001; it was postponed because the Applicants could not proceed without funding; at a subsequent directions hearing the Tribunal was advised that funding had been obtained and the matter was re-listed for resumed hearings in January and February 2002.
   (e)       The relevant dates in January and February 2002 on which hearings were held are 30 and 31 in January 2002 and 1, 4, 5, 6, 7, 11, 12 and 13 in February 2002.
   (f)        It was agreed, when the hearings ended in February 2002, that the parties would furnish written submissions setting out their contentions in relation inter alia  to the voluminous documentation and evidence before the Tribunal, and that following written submissions the Tribunal would reconvene for three days in order to hear oral submissions.  The time periods allowed in the original timetable proved to be insufficient, and written submissions were received later than had been anticipated.  This resulted in yet another postponement; oral submissions were made in the result at hearings on 29 July 2002 and 1 August 2002 and 2 August 2002.

4. (a)       I have previously referred to the list of exhibits which were tendered; in fact some of those exhibits proved in the result to be of minor relevance.  Oral evidence was given by some, but not all, of those persons on whose behalf witness statements were tendered.  In respect of Juneth Spouse (exhibit A9) it was agreed that she need not appear for cross-examination and that her statement could be accepted on the basis that it was agreed that she effected the entries referred to in that statement on instructions from the Applicants.

   (b)      The witness statements and other exhibits tendered were in aggregate of enormous length.  The witness statement in respect of Boris Kosutic (exhibit R5) must (at least so far as I am concerned) constitute some sort of record; apart from the statement itself, it includes annexures consisting of fifteen large box files; each box file in turn contains many hundreds of pages of documents and including spread-sheets containing minute detail.  The Tribunal notes that it proved necessary to set aside a specific conference room in which to house all of the documents, and in particular for the purpose of writing this decision.

   (c)       It is not necessary for me to refer to the large folders of documents produced in answer to summonses and which were not in the result tendered.

5. (a)       It was made clear to me from the outset that the case to be heard by me should be regarded as a test case,  in that the decision in this matter would affect many other jewellery businesses. (I note that I have been informed by a presiding member in Western Australia that there are matters in that state listed before him, which have been put on hold pending this decision; that presiding member has been in touch with me from time to time to inquire as to progress in this matter.)

   (b) The written submissions received by me from the parties proved to be of great assistance. This was particularly so in the case of the submissions by the Respondent, more particularly because they dealt in detail with the very lengthy evidence given before the Tribunal. Given that this is a test case and that it may be significant to many other taxpayers, an appeal is a real possibility. I have accordingly decided that for this reason (but not only this reason) it is desirable for me to attach the written submissions, but as annexures. However, and particularly in relation to the Respondent's Outline of Submissions (annexure D) I have found it convenient to cross-refer to parts of it; in some cases and purely in order to endeavour to ensure that the body of this decision can be read (for the most part) without reference to annexures, I have included clauses extracted from annexure D in the body of the decision. In the case of one witness and for reasons set out later, I have decided that it is sufficient for me to cross-refer to written submissions. This is so also in relation to the history of certain tax legislation of which section 29 of the Income Tax Assessment Act 1936 (the "1936 Act") forms a part.
   (c)       The Applicants' Submissions (Revised) dated 30 April 2002 are annexed as annexure B.  I intend, as the Respondent did, to follow the Applicants' system in respect of the transcript and which is contained in clause 60 of annexure B.  This arises from the fact that the transcript for 3 July 2001 commences at page 1.  So does the transcript for the 4 July 2001 but the pages in respect of that date and the remaining hearings in July 2001 were then numbered sequentially.  Similarly the transcript for January and February 2002 commenced with page one and were then numbered sequentially thereafter.  Accordingly "TA" refers to the transcript for 3 July 2001; "TB" refers to the transcript for all other hearing days in July 2001; "TC" refers to the transcript for all of the hearing days in January and February 2002.

   It may be noted that annexure B is in fact a revised version of an earlier submission; it is not necessary for me to include the earlier version because it was replaced by annexure B.

   (d)      The Applicants also tendered a document dated 20 May 2002 entitled "Addendum To Applicants' Submissions" and it is annexed marked C.  I draw attention in particular to clause 17 and 18 of annexure C which contain a list of amendments, amplifications and deletions.  Annexure C in this respect should be considered (to the extent necessary) in conjunction with similar information contained in annexure A.  It is to be noted though that there did not appear to be any issues between the parties as to the extent of amendments to or deletions from witness statements.
   (e)      The Respondent's Outline of Submissions dated 23 July 2002 is annexed as annexure D.  As I have indicated, I found annexure D particularly helpful in relation to its analysis of the evidence.  Having considered the annexures and in particular annexure D in relation to the transcripts I found  that references contained in those submissions to transcripts were accurate.
   (f)       On the last hearing day the Respondent furnished me with a document entitled "Respondent's Supplementary Submissions" which deals in particular with Mr Kosutic's evidence; that document is annexed as annexure E.
   (g)      Similarly on the last hearing day the Respondent furnished me with a document entitled "Summary of Results Analysis", prepared by Mr Kosutic and which constitutes in effect a summary of his findings as given in evidence before me.  That document is annexed as annexure F.
   (h)      I should perhaps note that both parties informed me of minor errors in their written submissions; those errors have been corrected in the manner specified. In particular minor corrections as directed by Dr Sorensen were made in respect of annexure B.  Annexure D appears in the form of the corrected version supplied by the Respondent.

6. (a)       As has already been noted, this case generated an astonishingly large quantity of oral and written evidence.

   (b)      Evidence was given at considerable length by each of Professor Walker and Mr S McClintock of Pricewaterhouse Coopers.  That evidence related in particular to accounting concepts and the relevance of those accounting concepts to statutory provisions which are relevant in this case.  However, and in the result their evidence proved to be of marginal (if any) significance; their evidence was not dealt with in any great detail in the written submissions.  Neither party referred (otherwise than very briefly and in passing) to that evidence in their closing oral submissions.  It is for this reason that this decision does not deal, (otherwise than briefly), with that evidence.
   (c)       Notwithstanding the huge quantity of evidence before me this case turns in the result, and in the main, on one important question of fact.  Jade's stock-in-trade was written down for income tax purposes in respect of each of the relevant years in accordance with valuations by Mr Terry Mitchell.  As matters transpired the question of most significance before me, and which occupied much time in evidence before me, was as to whether Mr Mitchell's valuation methodology (referred to in these reasons as the "Mitchell system") was properly or soundly based.
   (d)      Questions of law were raised and argued and are dealt with in this decision.  There is also a relevant question as to whether penalties were correctly imposed.  But this case, as matters transpired, proved to be, in the main, one of fact rather than one of law.
   (e)      There is one other (minor) matter of a preliminary nature.  At a very early stage of this matter and long before I had seen any papers I presided at a directions hearing in order to set a timetable for the filing of statements, submissions and other documents.  (At that stage the presiding member does not have a member's file of relevant documents).  I asked in casual fashion what the matter was about and was told that it concerned the valuation of trading stock.  I, in turn mentioned that I had previously decided a case involving the valuation of trading stock and that as I recollected that matter, there could be quite complex legal issues dealt with at some length in a learned article by Professor Marks.  On the strength of that entirely casual and "off-the-cuff" remark the Applicants approached the Respondent for funding; that request was (correctly) denied; this case does not raise any matters of important legal principle.

7. In this clause 7, I set out a brief introduction; it could usefully be considered in conjunction with clauses 1 to 21 (inclusive) of annexure D, which do not appear to me to be in dispute.

   (a)      At all relevant times the Applicants were the only partners in Jade and also the only shareholders in and directors of Allay; (the subsequent introduction of another party or parties is not relevant for the purposes of this decision).
   (b)      It was a common practice amongst retail jewellers (and for that matter many other retail businesses) to utilise a "captive" wholesaler.  In respect of the Applicants, Jade was the captive wholesaler; it purchased stock from third party suppliers and manufacturers at arm's length; it then placed that stock on consignment with Allay; when Allay sold an item of stock by retail that sale triggered a sale between Jade and Allay.
   (c)       The advantage of the captive wholesaler arrangement was that it postponed until the last possible moment the taxing point in respect of sales tax which was imposed on the last wholesale sale.
   (d)      The Mitchell system, which involved substantial stock write-downs offered, (in addition to income tax advantages) significant sales tax advantages because it reduced the amounts on which sales tax was paid.  There was mention during the hearings of a sales tax case concerning the Applicants which was (and as I understood Mrs Ciprian on this point, reluctantly) settled.
   (e)      Once sales tax was replaced by GST (Goods and Services Tax), the efficacy of utilising captive wholesalers largely disappeared.  Indeed, Mr Gerrard who gave evidence on behalf of the Applicants said that it was at this time that his use of a captive wholesaler ended.
   (f)       The Respondent accepted the use of captive wholesalers in this manner for sales tax purposes subject to what were referred to as the "safe harbour" rules.  In general terms the Respondent was satisfied if the charge by the wholesaler to the retailer was cost plus six per cent.  A more detailed explanation of the "safe harbour" system can be found in clause 9 of annexure D.
   (g)      Mr Peter Gibson was at all relevant times the principal of Australian Sales Tax Consultants, which as the name suggests advised on sales tax.  Mr Gibson played an important part in the events which gave rise to this case.
   (h)      It was at all times clear that as between the three Applicants, administration was the province of Mrs Dianne Ciprian who is one of the Applicants and is referred to in these reasons as "Mrs Ciprian".  Mrs Ciprian has a number of relevant qualifications which are set out in clause 2 of her affidavit which is exhibit A1, dated 28 April 2000 and reading as follows:

   "2.       I have the following qualifications:

   ·     Bachelor of Science degree from the University of Western Australia.

   ·     Graduate Diploma of Education from the University of Western Australia.

   ·     The Teachers Higher Certificate from the Education Department Western Australia.

   ·     Registered Valuers Certificate from the Jewellers Association of Australia.

   ·     Diamond Grading Certificate from the Gemmological Association of Australia.

   ·     Synthetic & Immitation Gemstone Certificate from the Gemmological Association of Australia.

   ·     Workplace Assessor Certificate from Regional Training Services.

   ·     Microsoft Word Certificate from the Department of TAFE (Great Southern Regional College)."

It may be noted that her major subject for her Bachelor of Science degree was mathematics.  As a subsequent affidavit revealed, she taught mathematics for some years and was for a year the acting head of Mathematics at a high school in Albany.  The activities of Mr Harry De Jonge were conducted outside the area of administration and so that his evidence was largely irrelevant to this case.  This is so, but to a lesser extent also in respect of Mr John Ciprian, who although experienced in jewellery generally, left matters of administration and accounting to his wife, Mrs Ciprian.

(i)        On 20 January 1993 Mrs Ciprian wrote to Mr Gibson inquiring as to whether stock could be written down for tax purposes.  That letter reads as follows:

"Dear Peter,
As advised for showcase it is possible to depreciate old stock for tax calcs.  Can you please advise us of    (i) the formula (if there is one!)

(ii) the method?"

(j)        Mr Gibson sought valuation advice from Mr Terry Mitchell of The Valuation Centre of Australia.  Mr Mitchell provided a stock assessment on 22 February 1993.  That stock assessment which appears as annexure DC04 to Mrs Ciprian's affidavit dated 28 April 2000 (exhibit A1) reads as follows:

"  STOCK ASSESSMENT

DEPARTMENT        DESCRIPTION        COST  ADJUSTED COST    

1. Dia rings over $500     27,788.56       12,783.00       

1. Dia rings under $500  6,852.32        2,604.00        

2. Dia & col over $500    17,626.56       8,108.00        

3. Dia & col under $500  9,662.85        3,672.00        

4. Etern rings over $500 11,586.19       5,330.00        

5. Etern rings under $500         2,694.10        1,239.00        

6. Wedders        4,426.70        2,213.00        

7. Lds gold drs rings      11,854.38       5,927.00        

8. Lds sil drs rings         1,589.04        636.00

9. Gts drs rng     6,411.28        3,206.00        

10. Seiko   2,742.78        1,097.00        

11. Pulsar  1,235.80        494.00

12. Citizen 1,751.28        700.00

13. Classique       688.08 275.00

14. Other   6,140.61        2,456.00        

15. Gold jew        13,267.17       6,634.00        

16. Sil jew  1,160.03        580.00

17. Fashion jew     56.78   23.00  

18. All opal jewellery        7,118.75        3,559.00        

19. All pearl jewellery       12,877.57       12,877.00       

20. Earrings        11,714.97       5,860.00        

21. Gold chain      14,285.53       7,143.00        

22. Silver chain     595.90 238.00

23. Charms & ingots        3,314.98        1,657.00        

24. Bracelets & bangles    17,426.94       8,713.00        

25. Watch straps  772.69 386.00

26. Clocks & barometers  10,231.85       4,093.00        

27. Leather & mesh        1,139.98        570.00

28. Pens & Lighters        462.28 231.00

29. Crystal 5,214.92        2,607.00        

30. Silverplate      7,719.49        3,860.00        

31. Chain & figurines       15,284.29       7,642.00        

32. Pewter 870.71 435.00

33. Misc gifts        1,443.74        722.00

34. Trophies        361.26 181.00

35. Loose stones & metal 1,189.85        1,189.00        

36. Repairs         18.87   18.00  
              $239,579.08    $119,958.00   

    NOTE: Valuation based upon information supplied.  Goods not personally seen nor tested. (emphasis added)"

It is perhaps relevant to note that Mr Mitchell did not recommend any stock write-down in respect of, inter alia, pearls (category 21).
           (k)       It is convenient at this stage to note that stock was categorised for the Applicants in forty separate categories; I include clause 5 of annexure D which reads as follows:

"5.Jade purchases quantities of goods for ultimate sale by the three retail stores owned and operated by Allay.  The goods fall within 40 separate categories including, inter alia, diamond rings greater than $500 (category 1), diamond rings less than $500 (category 2), eternity rings greater than $500 (category 5), eternity rings less than $500 (category 6), wedders (category 7), watches Seiko, Pulsar, Citizen, Classique (categories 12-15), gold jewellery (category 17), silver jewellery (category 18), fashion jewellery (category 19), opal jewellery (category 20), pearl jewellery (category 21), earrings (category 22), gold chains (category 23), charms and ingots (category 25), bracelets and bangles (category 27), clocks and barometers (category 29), leather (wallets) (category 30), crystal (category 32), silverplate (category 33), pewter (category 34), China and figurines (category 35), miscellaneous gifts (category 37), trophies (category 38), loose stones and metal (category 39), repairs (category 40) (see generally BK 90, 91 and 92 at folder 13 to the witness statement of Boris Kosutic)."

(l)        In November 1993 Mr Gibson wrote to his clients, and including the Applicants, advising them that the Respondent "will not accept the sale of aged stock on or after 1 November 1993 at the revalued amount… It remains our opinion that an independent valuation is the most appropriate mechanism to establish the true arms length value of aged stock."
           (m)     Notwithstanding the provisions of the preceding sub-clause Mr Gibson on 21 November 1994 wrote a letter entitled "Its Time! Stock Revaluation".  That letter is dealt with in clause 456 of annexure D which reads:

"456.The first paragraph of the letter referred to the previous valuation on 5 February 1993 and continued as follows "As it has been some time you should now repeat the exercise.  Similarly, if you stopped revaluing stock late last year you should consider restarting as there are considerable advantages".  Those advantages includes, for example, that watches were now being written down at 12 months of age and stock over three years old was now being reduced by up to 90%."

(n)      The Applicants elected to accept Mr Gibson's recommendation.  This lead to the issue of a "Stock Re-assessment" dated 20 June 1995 by Mr Mitchell which appears at pages 73 and 74 of exhibit A1, and which reads as follows:

"  STOCK RE-ASSESSMENT

The following percentage write downs should apply to the computer printout.

DEPT NO.      PRE MAY 1993         MAY 92 – NOVEMBER 93    

1. 61       54       

2. 62       62       

3. 61       54       

4. 62       62       

5. 62       54       

6. 62       62       

7. 68       50       

8. 80       50       

9. 92       60       

10. 80       50       

11. 80       60       

12. 80       60       

13. 80       60       

14. 80       -         

15. 80       60       

16. 80       50       

17. 92       60       

18. 90       -         

19. 50       50       

20. NC      NC      

21. 80       50       

22. 72       50       

23. 92       60       

24. 80       50       

25. 75       50       

26. 90       50       

27. 80       60       

28. 90       50       

29. 75       50       

30. 50       50       

31. 90       50       

32. 90       50       

33. 50       50       

34. 80       50       

35. 90       50       

36. NC      NC      

37. NC      NC      

    The following is the watch analysis:

DEPARTMENT        COST  ADJUSTED VALUE   % MARK DOWN       

1. 638.87 447.21 30%    

2. 678.13 474.69 30%    

3. 1022.19         715.53 30%    

4. 224.38 157.07 30%    

5. 2798.43         1958.90         30%    
             5362.00         3753.40  

   NOTE:Valuation based upon information supplied. 

   Goods not personally seen nor tested (emphasis added)."

1. It was common cause that the reference in the stock re-assessment to "pre May 1993" was mistaken and should be read as a reference "pre May 1992".  It will again be noted that pearls (category 21) were not written down.

   It should be noted also that the write-downs recommended were substantial and that in effect the Mitchell system differentiated between stock which was 18 months old and stock which was 36 months old.  The recommended write-down percentage for stock aged 18 months is set out in the right hand column whereas the higher percentage in respect of stock aged 36 months appears in the middle column.  (The right-hand column percentages are in accord with the figures in annexure DC04 to exhibit A1).  It will be noted also that in respect of watches, a further recommendation was made and so that they could be written down by 30 per cent after 12 months.  The 12 month, 18 month and 36 month anniversaries of purchase (in relation to Jade's stock-in-trade) are referred to in these reasons as "milestones".

2. Mr Gibson's evidence was that he was remunerated on the basis that he received a percentage of amounts written down; put in other words his fees increased as the write-down increased.  Mr Mitchell's evidence was that he received a fee for service in accordance with his normal charging procedure; (the actual amounts paid to Mr Mitchell for his services were not in evidence before me).  It should be noted though Mr Mitchell performed a valuation service of this nature (on instructions from Mr Gibson) for numerous jewellery businesses; the actual figure as referred to in the evidence varied but was apparently at least 40 valuations and probably more.  By contrast, Mr Bill Sechos who performed the same service on instructions from Mr Gibson did so on one occasion only.

3. The Mitchell system was  effected by Mr Mitchell in accordance with the following broad principles;

   (a)      He did not ever see or view the stock, notwithstanding the provisions of the standard test as to the methodology to be used by valuators in preparing jewellery valuations (referred to in the hearings as the "Silver Book"). The following excerpt from TC 47 to 48 is illustrative of this point:

   "Mr McGovern:         As a registered valuer you are required to follow valuation guidelines and to comply with ethical standards, are you not?

   Mr Mitchell:               Yes , that is correct.

   Mr McGovern:          Those guidelines are principally the standards in the Australian Jewellery Valuers Council Manual?

   Mr Mitchell:               Yes.
   Mr McGovern:          That's commonly referred to as the Silver Book, is that right?
   Mr Mitchell:               Yes .

   Mr McGovern:          For the purposes of valuation you are also authorised to use the NCJV price guide?

   Mr Mitchell:               Yes.

   Mr McGovern:          But the price guide is applicable only to items of jewellery that contain  gold or silver, is that not right?

   Mr Mitchell:               Yes . Well, I am sorry , of course it does do pearls and things like that.

   Mr McGovern:          Pearls as well, I am sorry, thank you. The recognised approach of a registered valuer to the valuation of jewellery is to arrive at a retail replacement value for the item, is it not?

   Mr Mitchell:               That is correct.

   Mr McGovern:          In order to embark upon that process it is necessary to conduct a physical examination of the item to be valued, is it not?

   Mr Mitchell:               That is correct.

   Mr McGovern:         The age of the item being valued is not addressed at all in ascertaining  the retail replacement value, is it?

   Mr Mitchell:               Not unless it is actually an antique."

   (b)      The mere fact that a stock item reached a milestone resulted automatically in a write-down by the recommended percentage; the fact that that item was one of a large or larger number the remainder or some of the remainder having been sold, made no difference at all.  Nor was there any qualification as to the fact that the same item might be (and indeed was) bought again before or after the relevant milestone.
   (c)       The Mitchell system did not have regard to demographics and geographical location; the same percentages applied regardless of the type of customers of the jeweller and the area in which the business was located.
   (d)      Mr Mitchell in his evidence said that he based his stock valuation methods on two fundamental principles in relation to the Applicants; in the first place he assumed that Jade and Allay were parties at arm's length and not associated with each other and in the second place that where an item was not sold within the prescribed period, it could be resold only as scrap and thus back up the distribution chain to the precious metals or precious stone dealer from which it had been bought by Jade in the first place. (Leaving aside the fact that the evidence before the Tribunal revealed that this did not ever happen, it could only have been of relevance to some only of the relevant categories, and more particularly because many of the relevant categories do not relate to precious metals or precious stones).

4. I deal in this clause 11 with the relationship between Jade and Allay and certain other ancillary matters. 

   (a)      It is relevant in particular that Jade had no offices or staff; it was run entirely from the premises of Allay.  Apart from the fact that it had its own bank account, it could be regarded for all practical purposes as a "post box" entity.
   (b)      Jade for all intents and purposes had one customer only and that was Allay.  There was one other sale to House of Fraser in the 1997 year and none at all in the 1996 year.  I refer in this context to clause 7 of annexure D which reads as follows:

   "7.Jade sold its goods to Allay almost exclusively.  The one exception was de minimus.  Notwithstanding the assertion in Mrs Ciprian's affidavit that Jade "sells predominately to Allay [however], it can, and it has previously made sales to other retail and wholesale entities" in fact, there were no such sales at all in 1996 (TB page 57.5) and one sale only to the House of Fraser occurred in the 1997 year (TB page 58.2; 58.4 and 58.9-60.1)."

(c)Jade did (as I have previously said) for some reason conduct its own bank account.  Again as set out previously in these reasons, sales as between Jade and Allay occurred only as and when Allay sold at retail; this then triggered a sale between Jade and Allay but at the written down value and as will have been noted, the written down percentage was in many cases substantial.  This had two relevant consequences; in the first place the sale of the written down value resulted in a sharp reduction of the sales tax paid; secondly the fact that the sale took place at so sharp a reduction resulted in Jade incurring ever-increasing losses.  There was evidence before me (which I need not set out in detail) that from 1993 onwards, Jade incurred large losses and so that only a few years later it was no longer solvent.  As to why Jade needed its own bank account given that it was financed in respect of all of its purchases by Allay was not clear.
(d)      There was evidence before me in respect of one year as to an interest charge to Jade but the reason for that interest charge was not clarified. 
(e)      One concomitant of the sales between Jade and Allay at the reduced values was that because of the lower sales tax burden, Allay actually derived larger profits out of sales of the aged stock simply because the overall cost to the economic entity as a whole was reduced because of the sharp reduction in sales tax.
(f)       The evidence of Mr Kosutic was that in relation to Allay, the milestones prescribed by Mr Mitchell were irrelevant, and that stock did sell even though at times after a number of years.  Mr Kosutic in an exhaustive analysis found that the number of items sold below actual cost (that is cost to Jade) was very small. Mr Kosutic's evidence was that of 4,132 items of aged stock sold in the 1997 and 1998 financial years, only 18 were sold at a loss, that is, for an amount less than retail cost.  Mrs Ciprian in her evidence said that the starting point was to ticket an item at what the market would stand (sometimes 300 per cent of cost) and then to discount it as time went on.  Allay conventionally and in the ordinary course of its business, held sales in which it reduced the retail ticket prices.  But the fact that an item was discounted in a sale did not mean that it did not thereafter sell at the retail ticket price.  The evidence before me established that although some aged items were discounted below retail ticket price many of them achieved retail ticket price, and the discounts were in any event such that it was in a very few cases only that aged stock items did not achieve at least cost.
(g)      Jade and Allay were of course two separate legal entities.  However, and for economic purposes they could and should be regarded as one economic entity. 
(h)      Was Mr Mitchell, as he contended, unaware of the fact that Jade and Allay constituted one economic entity?  It is not easy to accept that he did not know of the practice whereby retail businesses used captive wholesalers given that he received numerous instructions from Mr Gibson.  Mr Kosutic in his analysis found that in a survey of ten businesses in which Mr Mitchell furnished valuations on instructions from Mr Gibson, and although the categories were often numbered differently, the write-down percentages across the board and regardless of location or demographics, were approximately the same.

(i)        The relationship between Mr Gibson and Mr Mitchell was clearly an enduring one.  Mr Gibson instructed Mr Mitchell in relation to numerous (at least 40) valuations.  Given the fact that Mr Gibson was remunerated by results it may be possible to infer that Mr Gibson expected results from Mr Mitchell in the form of write-downs.  It does not seem very likely that when Mr Mitchell would have received a stream of instructions from Mr Gibson if he had valued in such manner that Mr Gibson received no remuneration whatever because there were no write-downs.  Nor does Mr Mitchell's task appear to have been a very onerous one given that he saw no need to inspect the stock and that his valuations across the board (having regard to the business survey by Mr Kosutic) were constant.

1. I turn in this clause 12 (and also clause 13) to deal with the evidence of Mr Mitchell.

   (a)      In his original affidavit dated 26 April 2000 (exhibit A5) Mr Mitchell specified that the market with which he had been concerned was the market in which a wholesaler sells to another arm's length wholesaler.  In his affidavit dated 6 June 2001 (exhibit A15) he sought to amend clauses 39 and 60 of exhibit A5 by amending the reference to "another arms length wholesaler" so as to refer to its "another arms length retailer".  It would seem that from the outset there was confusion in Mr Mitchell's mind as to the market which was relevant for his purpose.
   (b)      I note in general terms that I had originally thought that it might be desirable, and perhaps even necessary, when referring to oral evidence before me, to include numerous extracts from the transcript.  I have decided on reflection that to do so is unnecessary and would indeed have the effect of lengthening an already lengthy decision; it is for this reason that this decision incorporates only two transcript extracts, one referable to Mr Mitchell and the other to Mr Kosutic.  In dealing with Mr Mitchell's evidence, I propose to confine myself to some of the more important or prominent points.  A detailed analysis of Mr Mitchell's evidence is contained in clauses 222 (and following) of annexure D.  It should be noted that the Tribunal accepts that that analysis is apposite in relation to the evidence given by Mr Mitchell in the hearing. 
   (c)       Mr Mitchell's evidence as regard pearls was particularly contradictory.  As set out previously in these reasons, his recommendations to the Applicants in 1993 and 1995 did not call for any write-down for pearls (TB 634 and 635).  However, he was confronted with an analysis which indicated a reduction in values.  He was asked whether there had been a drastic decline in the pearl market since 1995 and he answered in the manner specified in clause 253 of annexure D which reads as follows:

   "253.Mr Mitchell, of course, twice asserted that in the case of pearls there was in fact no write down (TC page 634.31 and 635.25).  He was then confronted with his own analysis writing down pearls 50% after 18 months and the same percentage again after 36 months (TC page 635.18-636.7).  He allowed himself to be drawn to a point of ridicule when he agreed with the suggestion "do you say there was some rapid decline in the pearl market since 1995" to which he answered, "yes I'm afraid there has, yes, there has" (TB page 637.11-637.12)."

   It may be noted that in clause 42 of exhibit A5 Mr Mitchell said:

   "42.Since 1995 pricing levels in the wholesale jewellery industry have been generally static.  Changes in pricing levels has occurred at the retail level and have involved a reduction in the retail selling price.  Wholesale pricing levels are the same as they were in 1995 and as such the percentage mark downs being applied to particular lines of stock in 1995 continue to be relevant and applicable today."

   (d)      Still on the subject of pearls, Mr Mitchell agreed that to value pearls it is necessary to know about size, lustre and match, all of which require visual examination (TB 634 and 635).  That evidence was in conflict with other evidence by him to the effect that it was perfectly in order for him to value stock (which included pearl and diamond jewellery) by references to stock sheets without visual examination. The Tribunal notes that Mr Mitchell had in fact provided a stock assessment in February 1993 and a stock re-assessment in June 1995 for the Applicants without any testing or visual inspection.
              (e)      Mr Mitchell said that his valuations were based on surveys although it was never clear (and he was himself very uncertain) about whether he was referring to surveys in the wholesale or in the retail markets (TC 23).  Despite a notice to produce he was unable to produce any records of any surveys of any nature made by him (TC 29 and TC 20).
              (f)       Clause 29 of exhibit A5 reads as follows:

   "29."The information obtained through our market research process was collated and considered with the figures released by the NCJV and the results consolidated into a two-page summary table which was used to calculate the write-downs.  Annexed hereto and marked TM08 is a copy of that table."

Annexed to exhibit A5 is annexure TM08 which is alleged to have been the table used to calculate the write-downs in February 1993 and June 1995 (TB 602). (TM08 is explained in verbal terms in exhibit A17).

1. (a)       Mr Mitchell's evidence was that annexure TM08 to exhibit A5 was a contemporaneous record of the methodology used to calculate the discount percentages of all categories of stock.  That contention was categorically impossible; annexure TM08 refers to break-up values for some categories only.  It cannot possibly apply to the numerous categories (figurines, wallets, etc.) which cannot be broken up and sold back up the distribution chain.  Not only was the statement untruthful but the Tribunal does not accept that Mr Mitchell ever seriously believed that jewellers (such as the Applicants) break up jewellery in order to sell the stones or the precious metal content back to the original suppliers. (It should be noted that the Applicants did not operate in the "top end" of the jewellery market; sales of very valuable or very costly items were the exception rather than the rule.)

   (b)      Clause 29 of exhibit A5 clearly suggests that exhibit TM08 was prepared contemporaneously with the write-downs in 1993 and 1995.   Mr Mitchell agreed that this was not so; (TB 603) Mr Mitchell then said that TM08 must have been prepared contemporaneously with the preparation of his affidavit exhibit A5  that is in the year 2000.  It was then put to him that annexure TM08 is identical to annexure D to his affidavit in the Pontifex proceedings (Pontifex Jewellers (Wholesale) Pty Limited v FC of T 2000 ATC 4642 at page 4648 clause 16 that "…on occasion, old stock, did sell for full original retail price, but this was not usual, …  In general I am satisfied the retail sales could only have be effected at very substantial reductions.")  Mr Mitchell again asserted that it was prepared in 2000 (TB 605).

   It was at this stage that it was put to Mr Mitchell that annexure TM08 must have been prepared at an earlier date; annexure TM08 contains an arithmetical error which is identical to an error appearing in annexure D to his affidavit in the Pontifex proceedings and the two annexures are clearly identical.  It was suggested to him that he had used the figures extracted from the Jewellery Association Publication of June 1997.  Finally and reluctantly he conceded that annexure TM08 must have been compiled in June 1997 (TB 668, TB 670, TC 27, TC 28).

   (c)       There is only one possible conclusion and that is that annexure TM08 was in no way contemporaneous with the write-downs in 1993 and 1995.  Mr Mitchell did not remember any contemporaneous records in respect of the valuations made in those years.  The manner in which he shifted ground on this important and relevant aspect must cause the Tribunal to have serious doubts as to his credibility.
   (d)      When hearings resumed in January 2002, Mr Mitchell was asked whether he would have effected valuations in the same way if he had known that Jade was a captive wholesaler to Allay and his answer was "if they were one entity, sir, no" (TC 21).
   (e)      He contended that he was instructed to value on the basis that Jade and Allay were at arm's length (TC14 and TC15).  He said that if had known that Jade and Allay were associated he would have treated the two entities as one rather than as two.  To him they would have been a "whole different ball game" (TC9).  This was so in particular because the need of a the wholesaler to dispose of stock at a discount of 70 to 80 per cent of the retail price without incurring a loss did not arise (TC11).  Mr Mitchell's evidence before the Tribunal was dotted with apologies and withdrawals referred to in some detail in clauses 222 and following of annexure D.
   (f)       The admissions by Mr Mitchell as to false assumptions came in January 2002.  Mr McGovern suggested in argument that Mr Mitchell was glad to be given a way out after he had fared badly in cross-examination in the hearings in July 2001.  The Tribunal considers that there may be merit in that contention. (The difficulty for the Applicants is that all of their contentions as to the Mitchell system are founded upon assumptions acknowledged to have been incorrectly made.  Once the foundations were found to be fallacious, the Mitchell system could not stand).
   (g)      Mr Mitchell had great difficulty when giving evidence as to the alleged "integral nexus".  Clauses 269, 270 and 271 of annexure D accurately record:

   "269.Mr Mitchell referred in paragraph 59(b)(ii) to the concept of "integral nexus".  He then said that the first that he knew of integral nexus was when he read the affidavit (TC page 55.17).  In fact when he was first confronted with the words "integral nexus" when they appeared in his affidavit in the statement "there's an integral nexus between retail selling price and the wholesale where goods are sold on consignment" he was asked "what do you say the nexus is" he answered (somewhat plaintively) "dear".  After a stammering utterance he then (not for the first or last time) said "I would have to refer back to – I do apologise, I am a bite vague there" (TB page 611.10 – TB 611.17)

   270.It quickly emerged that he didn't have a clue what integral nexus meant (TB page 612-613.10) and it is as plain as a pike staff that this whole concept is something that infiltrated the affidavit.  This is somewhat dramatically demonstrated when he was questioned about paragraph 59(b)(ii) and (iii) which forced him to admit that paragraph 59(b) was diametrically opposed to what he had been saying "a moment or two ago".  When asked to face up to it, Mr Mitchell said "it would appear to be" (TC page 616.24)

   271.In terms of Mr Mitchell's expertise as a valuer, it was put to him that "integral nexus" it was not a concept that was "relevant or referred to in valuation" to which Mr Mitchell replied "No, sir" (TC page 56.13)."

(h)      Dr Sorensen asked me to regard Mr Mitchell as a good valuator but as a poor witness.  I do not agree; he was quite remarkably self-possessed before and even (although perhaps to a lesser extent) after his evidence was found to be so fundamentally flawed and indeed in important respects untruthful. 

(i)        In general terms, the Mitchell system was, as the evidence revealed, fundamentally flawed and unsound. If it was indeed based on market surveys that evidence would and should have been available; there was no such evidence. The Tribunal considers it significant that a stock item should be written down in value simply because it passed a given milestone; there must be a difference between an item which is the last of a number the remainder having been sold and an item in respect of which only one was ever bought. It was suggested during the course of the hearings, that the fact that, in relation to a given item, there was one remaining out of an original larger number, could be so because the sales of the remainder saturated the available market. Such a suggestion is contradicted by the evidence of Mr Kosutic that aged stock items were often bought again by the Applicants either before or after the relevant milestones. The Tribunal considers also that demographics and location must be relevant.  A jewellery store in Albany should surely be regarded as being significantly different from a jewellery store in the eastern suburbs of Sydney (and Double Bay was mentioned in evidence as an example).  The types and values (and prices) of items available for sale are likely, apart from other considerations, to differ to some extent.  But the Kosutic survey of ten stores in different locations indicated that the write-down percentages (in accordance with Mr Mitchell's valuations) were very nearly the same throughout. It is unnecessary for me to go into further detail as to the unsatisfactory nature of Mr Mitchell's evidence before me. In January 2002, he in effect disavowed the Mitchell system on the basis that he had formulated it in accordance with basic and fundamental principles which were wrong.  On this basis alone, the whole of the Applicants' case as to the fact that they had valued closing stock in accordance with its market selling value, based as it was on the Mitchell system, became equally flawed and unsound, and of course could not stand.

1. I turn next to deal with the Applicants' contentions that the Respondent deprived them of one of their rights under section 31(1) of the 1936 Act. It is convenient at this point to set out sections 28, 29, 31 of the Income Tax Assessment Act 1936 as follows:

   "Section 28
   Trading Stock to be taken into account

   (1A) This section does not apply to the 1997-98 year of income or a later year of income.

   Note: Subdivision 70-C (Accounting for trading stock you hold at the start or end of the income year) of the Income Tax Assessment Act 1997 applies to those years of income.

   (1) Where a taxpayer carries on any business, the value, ascertained under this subdivision, of all trading stock on hand at the beginning of the year of income, and of all trading stock on hand at the end of that year shall be taken into account in ascertaining whether or not the taxpayer has a taxable income.

   (2) Where the value of all trading stock on hand at the end of the year of income exceeds the value of all trading stock on hand at the beginning of that year, the assessable income of the taxpayer shall include the amount of the excess.

   (3) Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction.

Section 29
Value at beginning of year of income

(1) The value of live stock and of each article of other trading stock to be taken into account at the beginning of the year of income shall be its value as ascertained under this or the previous Act at the end of the year immediately preceding the year of income.

(2) This section does not apply to the valuation of live stock or other trading stock at the beginning of the 1997-98 year of income or at the beginning of a later year of income.

Note: Section 70-40 (Value of trading stock at start of income year) of the Income Tax Assessment Act 1997 applies to the valuation of trading stock at the beginning of those years of income. Section 70-40 (Value of trading stock at the start of the 1997-98 income year) of the Income Tax (Transitional Provisions) Act 1997 is also relevant.

Section 31
Value at end of year of income

(1A) This section does not apply to the valuation of trading stock at the end of the 1997-98 year of income or at the end of a later year of income.

Note: Section 70-45 (Value of trading stock at end of income year) of the Income Tax Assessment Act 1997 deals with the valuation of trading stock at the end of those years of income. Section 70-70 (Valuing interests in FIFs) of that Act provides special rules for valuing interests in FIFs for those years of income.

(1) Subject to this section, the value of each article of trading stock (not being live stock) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced.

(2) Where the Commissioner is satisfied, in relation to any trading stock of a taxpayer, that, by reason of obsolescence of, or any other special circumstances relating to, the trading stock, the value of the trading stock to be taken into account at the end of the year of income should be an amount, being less than the amount that is the lowest value that could be applicable under subsection (1), determined by the Commissioner to be the fair and reasonable value of the trading stock having regard to:

(a) the quantity of the trading stock on hand at the end of the year of income;

(b)the quantity of the trading stock sold, exchanged or used in manufacture by the taxpayer after the end of the year of income and the prospects of sale, exchange or use in manufacture of further quantities of that trading stock;

(c) the quantity of trading stock of the same kind sold, exchanged or used in manufacture by the taxpayer during the year of income and preceding years of income; and

(d)      such other matters as the Commissioner considers relevant;

the value of the trading stock to be so taken into account shall, notwithstanding any exercise of the option of the taxpayer under that subsection, be the value so determined by the Commissioner.

(3) Subsection (2) does not apply in relation to a taxpayer unless, by written notice signed by or on behalf of the taxpayer and lodged with the Commissioner on or before the last day for the furnishing of the return of income of the taxpayer for the year of income, or within such further time as the Commissioner allows, the taxpayer notifies the Commissioner that he wishes that subsection to apply.

(4) Subject to the following provisions of this section, the value to be taken into account at the end of the 1991-92 year of income, and at the end of each later year of income, of an article of trading stock that consists of an interest in a FIF is to be its cost price.

(5) Subject to subsection (6), if the taxpayer elects that this subsection is to apply to the taxpayer in relation to all the taxpayer's interests in FIFs, the value to be taken into account at the end of the year of income of every article of trading stock that is an interest in a FIF is to be its market value.

(6) Subsection (5) does not apply to the taxpayer unless the election is made before the taxpayer furnishes a return in respect of income of the first year of income in which any notional accounting period of a FIF in which the taxpayer has an interest ends but, if the election is so made, that subsection applies to the taxpayer in respect of that first year of income and in respect of all later years of income.

(7) If:

(a) subsection (4) would, apart from this subsection, apply to the taxpayer in respect of the 1991-92 year of income; and

(b) an article of trading stock was on hand at the beginning of that year of income; and

(c) the value of that article of trading stock that was taken into account at the beginning of that year of income was greater or less than its cost price;

then:

(d) subsection (4) does not apply in relation to that article of trading stock; and

(e) the value of that article of trading stock that is to be taken into account at the end of that year of income, or at the end of any later year of income to which subsection (5) does not apply, is the value referred to in paragraph (c) of this subsection.

(8)      In this section:

FIF has the same meaning as in Part XI.
notional accounting period, in relation to a FIF, has the same meaning as in Part XI."

(a)      The Applicants base their arguments firstly on a statement by the Respondent appearing at page 11 of document T2 of the T documents reading as follows:
"In this case the auditor has adjusted the partnership's closing value for trading stock up to its cost price.  The partnership is not entitled to write down its trading stock under any of the other valuation methods available to it.  Details of other valuation methods, and reasons why the partnership is not permitted to use them to writedown its trading stock, are discussed below." 

(b)      In the second place the Applicants base their contentions on an exchange between Dr Sorensen and Mr Kosutic (at TC 410) which is set out in clause 63 of annexure D as follows:

"63.The second piece of evidence particularized by the Applicants occurs in the cross examination of Mr. Kosutic on 6 February 2002 at transcript page 410 lines 25 to 35.  In context, the passage from the Commissioner's section 37 statement, as set out above, was read to Mr. Kosutic and the following exchange occurred:

Dr Sorensen:  'First of all, is this a document that you prepared?
Mr. Kosutic:               No, not that I know of.'

Dr Sorenson:  'When it refers to auditor, in this case "the auditor has adjusted", do you take that as a reference to yourself?'

Mr. Kosutic:               'Yes

Dr Sorenson:  'Do you agree with which ever tax officer wrote this, as a summary of what you did, do you agree with what he or she has said there?'  (Emphasis added)

Mr. Kosutic:               'Yes' "

(c)      If one examines document T2 as a whole without having regard to one phrase while disregarding the others, one can readily see that the decision-maker did not remove the right of the Applicants to value stock at market selling value where that right was exercised in a proper and bona fide manner.  See generally T2 pages 10 to 14 and (as just one example) the second last clause on page 14 of T2 which reads as follows:
"The general thrust of the advice prepared by Steven Wearne of Borough Mazars dated 3 February 1994 is not in dispute.  It is accepted that market selling value of an item of stock can be ascertained as a result of a genuine independent valuation of that item.  It is stressed that at paragraph 2 of that advice Mr Wearne notes that the request for advice concerns the proposal that the wholesale entity (the partnership) obtain independent market valuations (emphasis added) of certain of the goods.  Mr Wearne indicated in his advice that the Commissioner would be likely to accept such valuations for income tax purposes.  However, in this case, as already discussed at length, the writedown values obtained by the partnership are not genuine independent market valuations, they are merely stock assessments based on a non-existent market.  In other words the facts of this case are very different to the circumstances considered by Mr Wearne in the preparation of his opinion."

Put in other words the statement referred to in sub-clause (a) has been taken out of context.

(d)      Similarly to seek to rely on one exchange between Dr Sorensen and Mr Kosutic is again to take one piece of evidence out of context.  It is clear from his evidence as a whole that the Respondent did not at any time seek to deny the Applicants their right to elect to value stock at market selling value.  It is clear on the contrary that the Respondent came to the conclusion that the manner in which the Applicants sought to value their stock (at alleged market selling value) was in no way made in a manner which was bona fide or proper or correct.

(e)       As to Mr Kosutic's evidence, the Tribunal agrees that with clause 88 of annexure D which reads as follows:

"88.The cross examination of Mr Kosutic goes no further than asking him "as a summary of what you did, do you agree" that you adjusted partnership closing value for trading stock up to its cost price.  As a shorthand, or summary statement of the practical effect of the adjustment, then that is correct."

(f) It follows then that the Tribunal concludes that the decision-maker was altogether correct. The Tribunal finds then that there is no basis for the contention by the Applicants that the Respondent denied them a right vested in them pursuant to section 31(1) of the 1936 Act.

1. (a)       The Respondent correctly contends that the onus is on the Applicants to establish that the amended assessments were excessive (Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621). It should be noted that the whole of the Applicants' case as to the write-downs depended on the correctness of the Mitchell system. In January 2002 Mr Mitchell conceded that it was framed on the basis of assumptions which were incorrect. In the light of those admissions, the Applicants were clearly in serious difficulties. The evidence of each of Messrs Gerrard and Sechos depended on the integrity of the Mitchell system which they had supported. I refer to clause to 278 of annexure D reading as follows:

   "278.The evidence of each of Mr Gerard and Mr Sechos depends for its intellectual underpinnings on the integrity of the process undertaken by Mr Mitchell.  If Mr Mitchell's process is irretrievably flawed then the evidence of Mr Gerard and Mr Sechos is similarly affected and not worth the proverbial hill of beans."

   (b)       It is in these circumstances that Dr Sorensen found himself obliged to argue a "course of conduct" line of argument described by Mr McGovern as the "Alice in Wonderland" argument, I deal with it later in these reasons.
   (c)       I am not clear as to the relevance of Mr Gerrard's evidence.  He is involved in the jewellery business; however his is an exclusive business at the top-end of the market in the central business district of Sydney and where he sees customers only by appointment.  This was not always so, but it has been so, for some considerable time.  His support of the Mitchell system was misguided, and based perhaps on an incomplete understanding as to what had been done by Mr Mitchell.
   (d)       Mr Sechos is a valuator who, on instructions from Mr Gibson performed one write-down valuation (TC 173).  He was asked in cross-examination to present his working papers; he produced his file after the luncheon adjournment.  It emerged that he had been to Brisbane to prepare a valuation.  He said that he done so in consequence of a random sampling only of some stocks.  However, his valuation as furnished to Nelson Parkhill indicated that a careful examination of all the stock had been made.  It was put to him that that indication was a gross misrepresentation.  His answer was that "you can say so but I am sure they knew what was going on".  It was put to him that he had committed a despicable act and his answer (surprisingly) was "thank you".
    (e)     I do not think it is necessary for me to deal with the evidence of those witnesses for the Respondent to the effect that inspection is generally a pre-requisite to a stock valuation of jewellery.

   (f)     Strictly speaking then it is unnecessary for me to deal with the altogether monumental evidence of Mr Kosutic, an employee of the Respondent, who undertook a survey of the documentation available to him in order to calculate what happened to aged stock in the hands of Allay.  The Applicants objected to Mr Kosutic's evidence both on the grounds of competence and on the grounds of relevance.  Each of those objections was quite simply ludicrous.

   (g)       Mr Kosutic in effect performed a statistical spread-sheet analysis in exhaustive (and perhaps exhausting) detail.  The Respondent plainly considered that in the light of what had occurred in the Pontifex proceedings, he should be prepared to demonstrate that aged jewellery stock should not be written-down in the manner contended for by the Applicants.  When Mr Mitchell's evidence proved to be so defective, the evidence of Mr Kosutic became in some respects in the nature of "overkill".  It is significant in the view of the Tribunal that Mr Kosutic's huge statement had been in the hands of the Applicants since January 2001.  It cried out for a rebuttal; that none was available is in the highest degree significant.

   (h)      Once the Mitchell system was discredited and since the "Alice in Wonderland" argument (referred to later in these reasons) is demonstrably silly, the Applicants had as regards their stock write-down claims, no hope of discharging the onus.  It is important to note that the whole write-down system depended for its integrity on the Mitchell system, which as has been shown, was flawed and disavowed by its creator.

   (i)        It is in these circumstances that I could have found that it was unnecessary for me to consider Mr. Kosutic's evidence and that the Applicants had failed pursuant to their own case to discharge the onus, in relation to their contentions as regards the market selling value of closing stock. I have however in any event considered his evidence, although I do not think it necessary to deal with it in these reasons, in any detail.
   (j)        Mr Kosutic's evidence was in the view of the Tribunal eminently fair and reasonable and given moreover in a convincing manner.  Dr Sorensen's cross-examination did not reveal any faults or defects or mistakes.  The Tribunal accepts the Respondent was eminently correct in T2 when he came to the conclusion that the trading stock was not worth less than cost.  Not only were the milestone events identified by Mr Mitchell irrelevant but on the contrary Mr Kosutic's evidence indicated that aged stock sold at a profit to  the business entity as a whole years after purchase; the average period involved was 7.43 years.  Moreover, the number of aged stock items sold below actual cost was minute.  And this accords with Mrs Ciprian's evidence (as referred to at clause 374 of annexure D) as to sales below cost and in which she said "Not unless we absolutely had to otherwise the door would be shut" (TB 218 and 219).

   (k)       In relation to Mr Kosutic's evidence and to the extent that it is necessary or relevant for me to do so, I note that I accept this evidence both as to relevance and competence.  The Tribunal accepts moreover that his evidence is accurately referred to in annexure D and in particular in clauses 315 (and following).
   (l)        The Respondent has (correctly) identified six logically separate arguments or propositions by the Applicants.  Clause 51 of annexure D is repeated in the body of these reasons as follows:

   "The Applicants' contentions

   51.      The Applicants' written submissions advance six logically separate propositions or arguments as follows:

   (i)The Commissioner has no statutory power to "proceed to assess relying on an option other than that elected by the taxpayer".  Thus it is asserted that the Commissioner made an adjustment to "cost" where the taxpayer has elected "market selling value" and it is not open to the Commissioner to deny the Applicants their choice of "market selling value" and prescribe "cost" instead: submissions paragraphs 4, and 12 to 21.  The Commissioner's response to this submission appears at paragraph 53 and following, below.

   (ii)The 1996 and 1997 returns for Jade were correct and the value of Aged Stock on hand as returned was, as a matter of fact, its market selling value: submissions paragraphs 23 to 37.  The Commissioner's response to this submission appears at paragraph 222 and following, below. 

   (iii)Neither Expert accounting evidence nor the accounting standards are relevant to the determination of "market selling value": submissions paragraphs 24, 25 and 58.  The Commissioner's response to this submission appears at paragraph 98 and following, below.

   (iv)The Commissioner should be required to notionally adjust the value of opening Aged Stock on hand on 1 July 1995 to cost: submissions paragraphs 38 to 42.  The Commissioner's response to this submission appears at paragraph 109 and following, below. 

   (v)No basis exits for the imposition of penalties, or alternatively such penalties are excessive and should be further remitted: submissions paragraphs 43 to 57.  The Commissioner's response to this submission appears at paragraph 426 and following, below.

   (vi)The evidence of Mr. Kosutic is neither relevant nor has a proper foundation been made out as to his qualifications or experience to attempt to give that evidence: submissions paragraph 59.  The Commissioner's response to this submission appears at paragraph 281 and following, below."

1. (a)       Dealing with the first of the Applicants' contentions I have already found that the Applicants were not denied a right or option to value stock at market selling value.  On the contrary, the Applicants sought to rely on the Mitchell system found to be fundamentally wrong and unsound.

   (b)       It is in this context (and in relation to the Applicants' second contention) that Dr Sorensen in his closing argument contended that over a period of years (from 1993 onwards) Jade sold stock to Allay at its the written down value prescribed by the Mitchell system (although in fact and set out in subclause (c) below, the Applicants wrote down stock beyond the percentages recommended by Mr Mitchell) and that this then by established practice was in fact the market selling value.
   (c)       In fact, the evidence revealed that Mrs Ciprian in keying in the necessary entries in 1995 made two "mistakes".  It will be remembered that the 1995 Mitchell system called for different percentages at the 18 month and 36 month milestones; in fact Mrs Ciprian even in respect of stock aged 18 months keyed in the 36 months (or higher) write-down percentage.  That was the first error and Dr Sorensen accepted that on the basis of that error the figures of the Applicants would in any event require adjustment accordingly.  There was a second and equally egregious error; in respect of watches where in effect there were three milestones, watches aged 12 months were written down by the 36 months (or the highest) percentage.
   (d)       The inherent unsoundness of Dr Sorensen's argument in this context as to a "course of conduct" market selling value was illustrated by the fact that on this basis (and if taken to its logical conclusion) a sale of each and every item of stock at $1.00 would suffice.  In effect, the Applicants were contending that the market selling value was what they said it was.  It struck me that this line of reasoning (if "reasoning" is apt in this context) was akin to the manner in which the authorities re-wrote history in Orwell's "1984".  Mr McGovern however put paid to that line of argument by a reference to Liversidge v Sir John Anderson [1942] AC 206 where Lord Atkin said at 245:

   "I know of only one authority which might justify the suggested method of construction: "'When I use a word,' "Humpty Dumpty said in rather a scornful tone, 'it "'means just what I choose it to mean, neither more nor "'less.'  'The question is,' said Alice, 'whether you can "'make words mean so many different things.'  'The question "'is,' said Humpty Dumpty, 'which is to be master – that's "'all.'"  ("Through the Looking Glass," c. vi.)  After all this long discussion the question is whether the words "If a "man has" can mean "If a man thinks he has."  I am of opinion that they cannot, and that the case should be decided accordingly."

   (e)      It follows then that there is no basis whatever for this "course of conduct" line of argument. (It was referred to throughout by reference to "Alice in Wonderland" although the correct book reference is "Through the Looking Glass").

2. (a)       It is unnecessary for me to deal with the Applicants' third contention, but for completeness I confine myself to a few remarks.

   (b)The Respondent cited Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210 at page 228 and J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421.

   (c)The Respondent also referred me to the decision of the Federal Court in  Commissioner of Taxation v Citibank  Ltd and Others (1993) 44 FCR 434 at pages 443 to 448 and to the passage cited at page 444.8 reading as follows:

   "Accounting evidence may also assist to elucidate the meaning of a commercial expression used in the Act and thereby to aid in determining an issue of characterisation. Thus accounting evidence was relevant in determining whether cars on floor plan constituted "trading stock" (citation omitted) and likewise a case could be conceived where accounting evidence could be relevant in determining whether a particular item of property was "plant" for the purposes of s 54 of the Act. So too it might be relevant in determining whether a particular receipt was on capital account (citation omitted)."

   (d)      Lastly in this context the Respondent referred me to a passage from a paper  by Justice Hill presented to the Taxation Institute of Australia in 1997.  The passage is referred to in clause 106 of annexure D as follows:
   "'Trading Stock.
   The closer the taxation law comes to taxing trading profits the greater it might be expected that it would have regard to accounting concepts. 
   The very expression "trading stock" if requiring elucidation, is an expression used by businessmen and traders.  Perhaps the reference to "trading" in the expression makes the point that the expression could have no meaning outside the area of trade.  Evidence of the meaning of expression can thus be adduced and received as is illustrated by the decision in FC of T v Sutton Motors (Chullora) Wholesale Pty Ltd. 
   Where the issue is whether the work in progress is to be included in the trading account as trading stock, accounting evidence will be relevant.  So, too, where the Tax Act permits trading stock to be valued at "cost price" accounting evidence will be accepted as to how that cost price is to be calculated:  Phillip Morris Ltd v FC of T.  There will be difficulty where the two conflicting views of direct versus absorption costing each has its own adherents.  Duple Motor Bodies Limited v Inland Revenue Commissioners.  Where the trading stock division specifies market value that too will be a matter for expert evidence.'  (Emphasis added)"

   (e)      Dr Sorensen criticised the passage from the paper by Justice Hill on the basis that it refers to market value whereas market selling value is a different statutory concept.  He pointed out that the former concept appears in the 1936 Act far more often than does the latter.  My own view is that the views of Justice Hill are potentially apposite to either expression.

   (f)       Mr McGovern cited case authority to the effect that there may be no difference between market selling value and market value and I think there is much to be said for this proposition.  I agree of course with the decision in Citibank (supra) in that accounting evidence may assist in the interpretation of a commercial expression used in the Act. But it is unnecessary for me to deal with this aspect further. In this case, the Applicants did not by any stretch of the imagination make an election in favour of market selling value; on the contrary they purported to follow the Mitchell system (and did not follow it correctly and where the mistakes favoured them) and in circumstances where they must have known having regard to its manifest artificiality, that it was altogether unsound.

3. In respect of the Applicants' fourth contention:

   (a)      In essence the Applicants seek to contend that if for the 1996 year (but not the 1997 year) the Respondent is entitled to reassess closing stock in such manner that it is equivalent to cost he must do the same in respect of opening stock at the beginning of that year that is on 1 July 1995.
   (b)      The Respondent contended that this constituted an entirely new ground of objection never raised either in the objections or any documents subsequently filed (and including the Applicants' Statement of Issues and the Applicants' Statement of Facts and Contentions) and was raised for the first time in the Applicants' Submissions furnished after all of the oral evidence had been heard.  Certainly this point was not raised by Dr Sorensen in opening, or at any time during the oral evidence.  In particular, it was not put by him to any of the witnesses for the Respondent.
   (c)       The Applicants contended that this ground of objection is encompassed by clause 1(a) of the objection by  example Mr Ciprian for the 1996 year and see T11 page 64 which reads as follows:

   "1(a)The amount included in the taxable income by the amended assessment as being the taxpayer's share of the net income of the Jade Wholesalers (the "partnership") (TFN 68 298 794) should be reduced to a loss of $2864 or some amount less than $52934."

   (d)       Dr Sorensen contended that in any event the matter was in effect before me and that I should consider it accordingly.  I did not understand him to be  making a formal application for an amendment; indeed exhibits R15 and R16 established that the Applicants declined to do so.  Dr Sorensen said that he did not consider it necessary to do so.
   (e)         Dr Sorensen said (tellingly) that the point first occurred to him when he was considering the oral evidence which had been given for the purpose of his clients' closing submissions when the discrepancy between the 1996 and 1997 amended assessments struck him as being significant.
   (f)          The Respondent contends that I should not consider the matter at all for the reasons set out in clauses 115 to 143 inclusive of annexure D. 
   (g)         It is my view that it is my function to make the correct and preferable decision, standing in the shoes of the Respondent, but only in relation to the material before me.  Put in other words and as a matter of jurisdiction it is not proper for me without an amendment to the objections to consider an entirely new ground.  As I have said, Dr Sorensen did not apply for an amendment on the basis that clause 1(a) is wide enough to encompass this additional ground.  It is my view that clause 1(a) is nothing more than an ambit claim which does not even remotely encompass this additional ground.
   (h)         I might add that I accept also that if there had been an application (and there was not), it would not have been fair or reasonable for me to allow it since to do so would have caused substantial prejudice to the Respondent for the reasons set out in clauses 139 to 143 inclusive of annexure D which are repeated as follows:

   "139.If the issue and contention had been raised in the notice of contention or, for that matter, in opening address then the Commissioner would have presented a different case to the Tribunal. 

   140.Thus, for example certified copies of the notices of assessment under section 177 of the 1936 Act for the years of income from 1991 to 1995 inclusive may have been tendered to the Tribunal.  Evidence may have been led as to whether the Applicants, or any of them, objected to their assessments in any of the years of income from 1991 to 1995 in respect of the particular, namely, the value of opening and closing stock in each year of income.

   141.Evidence may also have been led by the Commissioner as to the precise date upon which the Commissioner became aware that the closing stock figure at 30 June 1995 contained write downs in respect of Aged Stock.

   142.In particular expert accounting evidence would have been lead from Mr. McClintock as to the appropriateness of having a difference in amount between the value of closing stock for one year and opening stock for the next year.  That is matter on which expert accounting evidence could and should have been adduced. 

   143.Because the Applicants did not raise the issue until the written submissions dated 30 April 2002, and because they did not properly make application for an amendment to their objections, the Commissioner is prejudiced because he would have run his case differently, and because he is denied the opportunity to adduce expert evidence directly on point." 

   I note in the context that it is clear that the costs incurred in particular by the Respondent have been high.  Leaving aside the large number of hearing days, there were numerous days vacated.  Moreover, the Respondent incurred large costs in order to prepare the Kosutic evidence; his cost of preparing submissions was also high.  To expect the Respondent to be party to a reopened case in order to consider the implications of what was no more than an afterthought would have been grossly unfair.

   (i)        I was asked at the hearing to consider whether if such an application (for an amendment of the objection) had been made, and if it had been granted, or in the alternative, if it were encompassed by clause 1(a) of the objections I would (making all of these notional assumptions) have found for the Applicants so as to require the Respondent to increase the opening stock for the 1996 year up to cost.

1. (a) The Respondent has (in clauses 145 to 231 of annexure D) dealt at some length and in considerable (and indeed commendable) detail with the Applicant's fourth contention. In particular annexure D can be referred to for a history for all of the relevant legislation and including section 29 of the 1936 Act and both the preceding legislation and the succeeding legislation and being in the latter case the Income Tax Assessment Act 1997 ("the 1997 Act").

   (b) In 1924 the precursor to section 29 of the 1936 Act appeared for the first time. I refer in this context to clauses 149 to 155 of annexure D; I include clause 155 only reading as follows:

   "155.    The following comment is made in the Report-

   'The main principle expressed in this Division is that every trader, at the end of every income year, should bring in the value of his trading stock on hand, and that he shall have the option of bringing it in at its cost price, or the market selling price, or at its replacement price.  In the following year trading stock should be brought in at the same figure as that given for the previous year.'  (Emphasis added)"

   (c)       In relation to the 1936 Act I again refer to clauses 156 to 159 of annexure D.  Dr Sorensen contended that words "Its value as ascertained under the Act" differ from the wording contained in both the predecessor provision and also the successor provision (in the Income Tax Assessment Act 1997) and that accordingly the value of opening stock must also be that "ascertained".  Mr McGovern contended (in my view correctly) that the term "ascertained" is in effect a reference to "assessed".
   (d) It is perfectly true that the 1997 Act Explanatory Memorandum provides in relation to section 70-40 of the 1997 Act (and see clause 160 of annexure D) that an amendment of the wording (when compared with section 29 of the 1936 Act) was to be made having regard to "some Board of Review decisions";  the relevant passage from the Explanatory Memorandum appears in clause 161 of annexure D as follows:

   "161.'Section 29 of the 1936 Act says that an items opening value is the value ascertained under the Act at the end of the previous year. There are some Board of Review decisions concluding that those words mean that the opening value must be what the previous years closing value should have been. If the previous years assessment cannot be amended because of time limits, its closing value will be different from the next years opening value.  This will produce either a windfall gain or an unexpected loss for the taxpayer.

   The rewrite avoids the possible problem.  If one years closing value is amended, then the next years opening value will change to reflect that amendment.  If the closing value cannot be amended, the next years opening value will still be what was recorded as the closing value.  Subsection 70-40(2) supports this by ensuring that an items opening value is nil if the items closing value in the previous year was not taken into account at all.'  (Emphasis added)"

I agree with Mr McGovern's contention that the problem is referred to as possible only and I also agree with his contention that the rewrite was made as a matter of abundant caution only.

(e)       Dr Sorensen relied on the decision of Mr Cotes in 14 CTBR Case 10 which was decided some fifty years ago; he referred also to two further old Board of Review cases namely (1951) 1 TBRD case 106 and (1956) 7 TRBD case G33.  I refer in this context to clauses 40 and 41 of annexure B reading as follows:

"40.The Commissioner's 1996 adjustment calculation set out in Ex A1 p.98 (TDoc 7 at 56) (a net adjustment calculation) shows that no adjustment was made for the Opening Stock as returned, that is, no account was taken of the difference between market selling value as returned and cost price - as was done in the 1997 adjustment. The failure to make that adjustment renders the 1996 calculation excessive: see 14 CTBR Case 10; see too (1951) 1 TBRD Case 106 at p.451-452, (1956) 7 TBRD Case G33 at p.191.

41.In Case 10, the Board decided that the value of the stock on hand at the beginning of the year of income must be a value ascertained in accordance with the provisions of s.31 and that the fact that the assessment of the immediately preceding year of income was not amended to give effect to a value adjusted in this manner was immaterial. In this connection, Mr R A Cotes (Member) said, at para 11 p.110-111-

"It was argued at the hearing that unless and until the assessment for 'the 1937 year' was amended, it was not possible for the Commissioner to substitute an altered stock figure as at the beginning of 'the 1938 year' for the purpose of making an amended assessment. In my view, s.29 presupposes that, in determining the stock value at the beginning of a year for the purpose of making an assessment of the taxable income for that year, the value of stock at the end of the previous year would have been correctly ascertained in accordance with the provisions of s.31. It is possible, of course, to make varying calculations of the aggregate value of stock on hand at any date, all of which would comply with the requirements of s.31; and, in my opinion, the true purpose of s.29 is to ensure that the particular aggregate value of stock at the close of any income year, determined in accordance with the provisions of s.31, is to be the value of stock adopted at the beginning of the following year. If, therefore, the value of stock at 31 August 1937 was incorrectly shown in the return for the year ending at that date, and it is possible to determine a substituted value in accordance with the provisions of the Act, that substituted value is the one to be taken to account in ascertaining the amount to be included in or deducted from the assessable income of the year ended 31 August 1938, irrespective of whether or not the assessment of the previous year is amended.""

I agree of course that Case 10 favours Dr Sorensen's contention.

(f)        Mr McGovern referred me in particular to the decision (in New Zealand) of Kirkpatrick v Commissioner of Inland Revenue [1962] 13 NZLR 49 see in particular clauses 197 to 207 of annexure D reading as follows:

"197.In the Commissioner's submission, the decision in Kirkpatrick v CIR (1962) 13 NZLR 49 is indistinguishable and directly on point.  It is the decision relied upon in Gunn's commentary for the proposition that the opening value "must correspond" with the value on hand at the end of the preceding year. 

198.In that case the taxpayer, a sheepfarmer, adopted the simple expedient of representing to the Revenue that he had no unsold wool on hand at the end of each income year.  Income was understated because part of his profit was represented in stock on hand.  He had adopted the practice for ten years or more. 

199.The subterfuge was discovered on his death in 1958 and the Revenue issued assessments back to the 1948 income year commencing on 1 April 1947.  It seems the relevant New Zealand Act permitted amendment for ten years.

200.The question raised was, what was the value of his stock on hand (unsold wool) at the beginning of the 1948 year of income.  The taxpayer's return for the 1947 year showed the value of closing stock on 31/3/1947 as "Nil".  The taxpayer's 1948 return showed the opening value of stock as "Nil".  However, the actual wool on hand at 31 March 1947/1 April 1947 was known, as a fact, to be £1842.  The value of wool on hand at the end of the 1948 year was £2,505.  The Revenue's assessing action for 1948 was to include the value of closing stock at £2,505 as income and subtract "Nil" as the opening stock as per the 1947 and 1948 returns (closing and opening values respectively). 

1. The Borough's advice is expressly qualified by reference to the sale in the taxpayers own selling market and not some other market, for example, a fire sale or an export market.  It is also predicated on some specific items only being discounted and that no loss is disclosed at the wholesale level. 

2. The Mitchell valuation is, of course, based upon a sale in markets that the Applicants do not trade in, namely, a sale back to wholesalers and a sale for scrap.  The Applicants knew, or must be taken to have known, that they did not sell in those markets and that they could not satisfy the caveat.  This is particularly so, given the "not" was emphasized in the Borough's letter i.e. "and not some other market".

3. Mr. Harrison understood the expression taxpayers own selling market to mean the wholesale selling market in which the Applicants operated (TB page 152.7). 

4. Mr. Harrison also agreed that if 37 out of 40 stock items were reduced then perhaps "that doesn't tie in with that spirit" of the Borough's advise that the goods represented "only certain stock lines" (TB 154.2). 

5. Mr. Harrison also understood that Borough's assumed that the wholesale percentage write-down would not result in an overall loss for taxation purposes being incurred at the wholesale level (TB 154.2).  Mr Harrison was aware that the occurrence of such a loss at the wholesale level was precisely what happened in the Applicants' case (TB 154.3). 

6. Accordingly, Mr. Harrison was actually aware of, and understood the implications of the three caveats in the Borough's advice, namely, the taxpayer's own market, certain items only written down, and there be no tax loss at the wholesale level. 

7. On 21 November 1994 Australian Sales Tax Consultants wrote their letter entitled "IT'S TIME! STOCK REVALUATION". 

8. The first paragraph of the letter referred to the previous valuation on 5 February 1993 and continued as follows "As it has been some time you should now repeat the exercise.  Similarly, if you stopped revaluing stock late last year you should consider restarting as there are considerable advantages".  Those advantages included, for example, that watches were now being written down at 12 months of age and stock over three years old was now being reduced by up to 90%. 

9. Going on from the receipt of that letter of 21 November 1994 the Applicants have made a conscious decision to proceed with a further stock revaluation to secure "the considerable advantages" and such stock assessment was received on 23 June 1995 (DC10 page 41). 

10. Not only did the Applicants proceed with the further stock revaluation but, in the implementation, of that further stock revaluation the Applicants accelerated to the maximum write down at the earliest date.  The accelerated write down is explained above at paragraphs 296 and following.   

11. Objectively viewed the Applicants, conduct can be described as the headlong pursuit of the tax deduction irrespective of their own knowledge of the sales performance of their Aged Stock and their own knowledge that they did not sell back to their wholesale suppliers or, much less, sell their Aged Stock into a scrap market.  Further, their accountant was aware of the caveats contained in the Borough's advise and that the Applicants fell squarely within each of the caveats. 

12. The Applicants' conduct in claiming the deduction shows an intentional calculated disregard of what were the proper requirements of a market selling value under section 31(1) of the 1936 Act.

13. The Applicants' purported view that the wholesale write-down percentages arrived at by Mr. Mitchell were appropriate valuations is, in all the circumstances, frivolous or unfounded within Taxation Ruling 94/4 paragraph 23. 

14. Accordingly, additional tax by way of penalty is properly imposed under section 226J of the 1936 Act.

15. By section 226X further additional tax applies if the taxpayer took steps to prevent or hinder the Commissioner from becoming aware of the tax shortfall.  In this context hinder means to obstruct or to obscure. 

16. On 29 January 1998 (DC15 page 52) the Commissioner advised that the practice of devaluing Aged Stock generally held within an interposed wholesale company prior to sale to the associated retail company is not acceptable to the Commissioner and not in accordance with subsection 31(1) of the 1936 Act.  The letter advised:

    "This office does not consider that the written down value of the stock on hand in the wholesale jewellers' books of account satisfied the above provisions.  Therefore, if you have used the written down value for the calculation of your income, you are required to review your valuation for stock on hand as at 30 June 1996.  Should you find that there has been an error or omission made in your calculation, you are requested to advise this office in writing by 27 February 1998.  The disclosure of any errors or omissions should include the name and file number under which your business lodges a taxation return, and the amount of any adjustment(s) required.  Also, please include a brief explanation of why the error was made." 

17. The letter concluded with a note that voluntary disclosures made at this time would result in the reduction of penalties to a rate significantly lower than would otherwise be imposed. 

18. That letter produced a response from the Applicants on 20 February 1998, which reads in full as follows:

    "Re: your letter of 29th Jan 1998.  I am satisfied that no error nor omission was made in our calculation of income with regard to our stock on hand as at 30th June 1996."

19. As a matter of fact the letter of 20th February 1998 (DC16 page 59) did obstruct the Commissioner and cause the Commissioner to form the view, at least initially, that the Applicants were not using wholesale percentage write downs at all (TC 387.1, 387.10 and 387.34). 

20. Under cross-examination Mrs Ciprian was asked:  "So you knew full well as a result of receiving that letter of 29 January 1998 that you were not permitted on the Commissioner's view of things to continue to use the stock write down system?".  Mrs Ciprian replied:  "I knew that the Commissioner did not approve of that system" (TB 263.1). 

21. The response by the Applicants was accepted by Mr. Kosutic and he was, in that respect, actually misled by the reply (TC 390.29). 

22. Mr. Kosutic then noticed something that he thought was odd in that he received a number of replies which were worded in sort of or in a similar or identical manner to that of the Applicants (TC page 387.17).  The Applicants' case was picked at random and selected for audit to ascertain what the reply actually meant (TC page 387.19). 

23. In the circumstances the Commissioner was, as a fact, misled, obstructed, delayed and hindered from ascertaining the correct position regarding the Applicants' use of wholesale percentage write downs. 

24. The origin of the Applicants' letter of 20 February 1998 is somewhat obscure.  Mr. Harrison has no recall of drafting or assisting in the drafting of the letter (TB 148.5 to TB 148.9). 

25. Mr. Gibson in cross-examination conceded that he may have suggested to Mrs. Ciprian that she could respond to the ATO letter in the manner that she did (TB 486.23).  In re-examination Mr. Gibson has said he has no recollection of actually assisting Mrs. Ciprian and that he was unlikely that he did so assist, because he didn't advise in relation to income tax matters (TB page 488.20). 

26. Accordingly, no professional adviser has any recollection of assisting in the preparation of the reply. 

27. Mr. Harrison in his evidence understood that the Commissioner's letter of 29 January 1998 signalled a serious change in attitude on the part of the Commissioner (TB page 140.7).  Mr. Harrison clearly understood, based on 15 years experience as a chartered accountant, that if a voluntary disclosure was made in response, penalties would be reduced below the level otherwise imposed (TB page 140.9).  In a nutshell Mr. Harrison knew and understood that in January 1998 "the Commissioner didn't think that it [the write-down methodology] was 'okay'" (TB page 141.6).

28. Mr. Harrison has no recall of any professional input into the reply of 20th February 1998.  He agreed that as a careful, cautious and prudent chartered accountant he would not have responded to the Commissioner in the terms of Mrs. Ciprian's letter (TB page 149.3 to 149.5). 

29. Mr. Harrison agreed that a much more suitable response to the Commissioner's letter would have been in terms of "Receipt is acknowledged of your letter, my client disagrees with your assertion that the practice is unacceptable, nonetheless without admission here are the relevant figures that you have requested.  My clients' rights to object are expressly preserved and I seek the Commissioner's confirmation that my client will qualify for the penalty remission" (TB pages 149.5 to 149.7).  Mr Harrison agreed that that would have been "one possible response" and would have been "a suitable response". 

30. Mr. Harrison also agreed that Mrs. Cirprian's letter dated 7 April 1998 (DC18 page 63) which included the words "Please find enclosed a supplementary return which we are willing to lodge on a without prejudice basis.  We do not admit any liability and reserve the right to request a refund in the event that the technical issue is favourably resolved" was an altogether more careful and cautious response than the letter of 20 February 1998 (TB 150.3). 

31. The letter of 20 February 1998 was startling in its coyness and was an exercise in excessive, pedantic literalism. 

32. That is, the Applicant's assert they properly responded to the Commissioner, and answered precisely what the Commissioner had asked: that is, we have checked the arithmetic accuracy of our returns and there is no mathematical error or omission made in the calculation of our income regarding our stock in trade. 

33. Objectively viewed, the letter was an exercise in obfuscation, and, as a fact, hindered and delayed the Commissioner from ascertaining the true position. Section 226X(b)(i) is satisfied in that additional tax equal to an additional 20% of the section 226J penalty is properly imposed.

Dated:  23 July 2002

David McGovern

Ian Young

Counsel for the Respondent

COMMISSIONER OF TAXATION
OF THE COMMONWEALTH OF AUSTRALIA

ATS

CIPRIAN

RESPONDENT'S SUPPLEMENTARY SUBMISSIONS

1. At paragraphs 281 and following of the Commissioner's original submissions it is contented that the evidence of Mr Kosutic was both relevant and admissible.  This was put on the basis that, for example, Mr Kosutic had undertaken an inspection, identification and sorting of primary evidentiary material that was properly before the Tribunal and was, in any event the Applicants' own documentation. 

1. Specific support for the admissibility of Mr Kosutic's evidence is provided by the decision in Potts v Miller (1940) 64 CLR 282 at pages 302.7 to 303.9 per Dixon J who relied upon the earlier decision in Myer v Sefton (1817) 171 E.R. 644. In that case evidence was proposed to be adduced from a witness who had examined the books and accounts of a bankrupt and, on the basis of that inspection, the witness was to give evidence of what the value of the property in question was.

1. At page 302.9 Dixon J said "From the very nature of the case, such an enquiry could not be made in Court, and therefore evidence on such a point must be given by someone who had had the means of enquiry, and who could state the result.  With respect to the source from which the knowledge of the witness was drawn, in the present instant, a commission of bankrupt had issued, and the documents from which the result was obtained, had been rendered by the bankrupt." 

1. Similarly, in this case, the sort of enquiry and analysis undertaken by Mr. Kosutic, though available to the Tribunal if it had the hearing time, could not realistically be made by the Tribunal itself and, evidence was admissible from an appropriate person who had the means of enquiry and, could state the result, and, the primary source material was identified. 

1. Dixon J continued and noted that cases had arisen from time to time where under special circumstances accounts between master and servant, tradesman and shopkeeper, and banker and customer had been admitted as evidence in the cause.  His Honour continued "When such an occasion arises and the books are allowed in evidence or their production is not insisted upon, an accountant's statement of the result of his examination is receivable as the evidence of a person of skill (citation omitted).  Little English authority will be found explaining the grounds upon which the books of account kept according to an established system in organised business are receivable in evidence as proof, not of the occurrence some particular fact recorded or indicated by a specific entry or narration, but of the financial progress or result of business operations conducted on a large scale.  Common sense has prevailed and such materials are used in practice without objection." 

1. The Applicants assert in paragraphs 3 and 4 of their addendum that "ageing" affects the value of such stock and that Aged Stock in the mass produced jewellery industry is difficult to sell.  However, the analysis by Mr. Kosutic examined all Aged Stock items sold in the 1997 and 1998 financial years.  That analysis discloses one indisputable fact, namely, that approximately 50% of all Aged Stock items sold for full retail ticket price and only 18 items out of approximately 4,200 Aged Stock sold for less than retail cost.

1. The Applicants criticised Mr Kosutic for reliance upon photocopies and that there were two missing pages in his version of the stock reports.  So much is readily conceded but, with respect, the criticism is nitpicking and de minimis.  Contrary to paragraph 14(iii) of the addendum Mr Kosutic did seek an explanation from the Applicants as to the meaning of their stock prints:  see paragraphs 49 to 102 of Mr. Kosutic's statement of 10 January 2001. 

1. Some implied criticism of Mr Kosutic is raised by the Applicants in that he was not aware that Aged Stock was sold by Jade to Allay at the written down value only (addendum paragraph 14(iii)).  Again, with respect, the sales prints for Jade to Allay were not available, were not produced to Mr Kosutic, and were not produced to this Tribunal notwithstanding a formal call for such documents:  see Commissioner's submissions (at paragraph 293). 

1. The Applicants (addendum paragraph 14(v)) point to entries recording a retail cost of one cent and the sale of stock that did not appear to be on hand at 30 June 1996.  The question of stock items not on hand is dealt with at paragraphs 354 and 355 of the Commissioner's submissions.  In respect of both items the Applicants have not produced one shred of evidence to suggest the effect is other than minimal. 

1. The Applicants at paragraph 14(vi) point to service costs for fitting watch bands and resizing rings.  But again, the Applicants have not adduced one iota of evidence to establish that these suggested costs of fitting a watch band and resizing a ring were anything other than peppercorn in nature.  More so given that they have had the benefit of Mr Kosutic's analysis since January 2001. 

1. The Applicants are critical that no account is taken of those items that were either not written down or, alternatively, the subject of a full 100% write down.  In simple terms a zero percent write down meant that Mr Mitchell did not discount those items, for example, pearls.  On the other hand a 100% write down shows the items were, in fact, given away usually under the description of miscellaneous gift.  In any event, such gifts were again, insignificant in nature.  There were 11 such gifts in 1997 (folio 3268-3269) and 13 in 1998 (see folio 3382-3383). 

1. Most significantly the Applicants assert in paragraph 14(ix) that only 19% of Aged Stock is sold at full ticket price and that 81% is sold at a discount.  However, that assertion is wrong. 

1. The evidence relied upon is the mere assertion of Mr Gibson.  Mr Kosutic analysed all sales of Aged Stock.  Self serving assertion cannot prevail over clinical exhaustive logic. 

1. Moreover, in cross examination Mr Gibson was asked "You don't have any material that you bring forth to challenge the accuracy of the material though, do you?"  Mr Gibson's answer speaks volumes:  "I don't have any material.  No I don't have anything that challenges the accuracy of what he did".  (TB page 487.24)

1. The expert evidence of Mr. McClintock was adduced at a time and on the assumption that primary reliance would be placed by the Applicants upon the evidence of Mr Mitchell.  In view of the case presented by the Applicants in closing address much of the expert evidence relating to the preparation of accounts and accounting standards is now of lesser significance. 

1. However, as Mr McClintock's evidence makes clear, he brings to the Tribunal a wealth of practical experience of preparing accounts and, in particular, whether the accounts are "true and fair and the directors or others [can] sign off as well, as being as true and fair" (TC 517.28). 

1. As Mr McClintock has explained the accountant's concept of "net realisable value" is related to the tax concept of "market selling value" in section 31(1). That is to say net realisable value is a net concept and selling expenses such as commissions, freight costs, transport costs are subtracted in the calculation of net realisable value but not for the purposes of ascertaining a market value or a market selling value (TC 520.16). Accordingly, market selling value is likely to be higher than net realisable value (TC 520.25).

1. Accordingly, the process by which Mr McClintock ascertains net realisable value has some relevance to the ascertainment of a market selling value for the purposes of section 31(1).

1. What the evidence of Mr McClintock makes clear is that, for the purposes of presenting the accounts so as to show a true and fair view of the stock on hand, whilst in the first year a report from an expert as to the market selling value of stock on hand might be accepted without question, in the second year, Mr McClintock would consider "Whether or not the expert had made any assumptions in valuation and consider whether or not that expert could be normally expected to come up with the right answer." (TC 521.5). 

1. The problem that Mr McClintock would be confronted with in the second year is that he would have evidence that Allay has been selling the stock at considerably higher values than it has been buying the Aged Stock at, and having regard to the relationship between Allay and Jade, that Allay's selling value is considerably higher than the market value given to the Aged Stock by Jade (TC 521.10). 

1. More particularly "Jade is selling its stock at such a low value to Allay on the basis of the valuations that have been prepared and that it could make more money by selling it to other retailers or to other markets and that would leave me as an auditor to question whether or not the valuation was actually correct and notwithstanding I'm not an expert in jewellery valuation it's a common sense questioning." (TC 522.5) 

1. Mr McClintock gave evidence concerning the very situation raised in submissions of a sale by Jade to Allay at a token peppercorn $1 and that Jade's market was Allay and Allay alone.  Mr McClintock replied as follows:  "I was just going to say in that context, deputy president, you could argue that the market is simply Allay and that's the market price but where would that end? I mean does that mean if Allay is prepared to offer a $1 then that's the market value under section 31? Shouldn't it be the market value if Jade was selling to Allay or into the market place selling to Allay or other retailers. That would in my mind constitute what I would look at in considering net realisable value for the purposes of the accounts." (TC 522.25)

1. In Mr McClintock's view in arriving at the net realisable value (which gives a true and fair view) by the deduction of any selling costs from market selling value for tax purposes, he would have regard to "the ultimate margin that was realised by Allay" (TC 523.10). 

1. This is because Allay is earning a super normal profit, that is Jade bears the disproportionate risk of obsolescence and Jade is precluded from charging to Allay a proper market price and Jade has as a consequence a history of losses and is actually losing money in selling its stock to Allay (TC 529.30-TC530.19).

1. Inevitably Jade has, as a consequence of such losses, reached the point of having a net deficiency of assets and cannot continue without continued financial support by the Applicants or Allay.  Contrary to the position in Pontifex 2000 ATC 4642 at page 4,647 paragraph 13, in this case there is actual evidence of Jade operating at a substantial loss and ultimately, having a net deficiency of assets.

1. In Mr McClintock's opinion a market value "cannot be determined in the context of trade between two related parties where one party is unfairly treated by the other" (TC 527.17).  A true market value, or a market selling value for tax purposes, would need to be considered in the context of a wider market "because if Jade had a mind of its own why would it sell to Allay such that Allay earns the higher margins and why wouldn't it sell to a third party where that third party would be accepting lower margins" (TC 527.20). 

1. In other words, a true and fair view of Jade's market selling value would be the value it could be sold to another retailer who did not abrogate to itself the right to earn super normal profits at Jade's expense. 

1. Mr. McClintock's evidence is compelling.  In practical terms his evidence speaks volumes.  Professor Walker, on the other hand, had no practical appreciation of Jade's operations, he had, for example, not availed himself of the opportunity of reading Jade and Allay's accounts, was not aware that Jade bore no costs and most significantly, not aware that Jade was in a loss position.  His evidence cannot be preferred to Mr. McClintock in that regard.

David McGovern

Ian Young

Counsel for the Respondent

SUMMARY OF RESULTS ANALYSIS

CIP/ALB/KAT AGED SALES 97 & 98

• This is a full 100% list of every aged stock item that sold over a two year period.  This is not a sample; it is an objective list rather than a valuation that is subjective.

AGED SALES NO STOCK RECORD 97 & 98 - ALL STORES

• 97 Year. This is a list of items that were purchased before 30 June 1996 that were sold after 30 June 1996 but did not appear on the list for closing stock as at 30 June 1996.

• Same applies to 98 year.

• There appears to be a body of stock that is not recorded in the closing stock prints.

• Because we've only detected the items that sold there are probably other items still on hand which are not included in the total closing stock.

• Most of this stock appears to be purchased in the late 1980's.

• This seems to show that closing stock has been understated by approximately $3,000 in 1997 and $4,000 in 1998.

REPLACEMENT AGED STOCK 97 & 98 - ALL STORES

• This is a list of aged stock that sold and then replaced.

• This is not a complete list because of the limited information we worked from.  For an item to appear on this list it needed to be aged when sold, then needed to be replaced after sale and then remain unsold before the end of the financial year.

• In 1997 stock costing $1,618.13 was replaced for $1,487.30.  This stock was actually sold for $3,958.20.  Of the 22 items that were replaced 14 cost equal to or greater than the original wholesale cost price.

• In 1998 stock costing $3,686.10 was replaced for $3,586.69.  This stock was actually sold for $10,056.70.  Of the 60 items that were replaced 37 cost equal to or greater than the original wholesale cost price.

RESULTS ANALYSIS 1

• This analysis shows:

(a) the number and percentages of items that sold for full retail price
(b) compares the average retail discount percentage to the wholesale writedown percentage
(c) it also compares the wholesale writedown percentage calculated by using dollar values to the retail discount percentage allowed calculated by using dollar values.

• Of the 1922 items sold 962 sold for the full retail price with 960 selling for some retail discount.  This is over 50% of aged stock sold for the full price in the 1997 year.

• In percentage terms aged stock was written down by an average of 72% over the three stores whilst the retail discount allowed was 18%.

• Using dollar terms and comparing cost with WDV we find that aged stock was written down by 66% over the three stores whilst the retail discount was 27%.

• Stock costing $124,329.81  was written down to $41,954.82.  This stock sold for $290,646.29 and had an original ticket price of $396,603.31.

• Mitchell's first affidavit at TM07 contains the NCJV Price Guide that contains recommended valuation mark up factors.  The mark up is no greater than 3 and down to 1.9 on the most expensive items.

• Aged stock originally costing $124,329.81 sold for $290,646.29, this is a mark up of 2.3.

• Aged stock originally costing $124,329.81 had a ticket price of $396,603.31, this is an original mark up of 3.2 overall.

• The stock with a WDV of $41,954.82 is actually sold for $290,646.29, this is a mark up of some 6.9.

(Aged items sold totals are different for dollar terms because 24 items where sales prints were missing have been excised - the differences are between results analysis 1 and 1 workings).

RESULTS ANALYSIS 1 WORKINGS

• Simply the monthly totals for the various columns from the main spreadsheets.  These totals have been used to construct Results Analysis 1.

RESULTS ANALYSIS 2

• This is a summary where the retail percentage discount is equal to or greater than Mitchell's wholesale writedown percentage.

• There were 178 items out of 1,922 that sold for a retail discount that was equal to or greater than the wholesale discount.

• The average age of these items was 7.4 years rather than 18 months or 3 years where Mitchell's valuations are argued to begin to apply.

• The retail cost of this stock was $17,457.83 whilst the retail selling price was $24,079.82.

RESULTS ANALYSIS 2 WORKINGS

• This is an itemised list of the 178 items sold for a retail discount percentage that was equal to or greater than the wholesale writedown percentage (includes all three stores).

RESULTS ANALYSIS 3

• This shows that 1,274 aged items were sold in non sales months, 863 of these selling for the full retail price (68% for full retail price).

• Only 32% sold for some retail discount.

• Average wholesale writedown percentage for all these items was 73%.

• The average retail discount percentage for all these items was 9%.

• Trading stock is valued as at 30 June.  June is not a sales month in any store.

• Indicates that aged stock is returning to its full price after the sales months.

RESULTS ANALYSIS 3 WORKINGS

• Simply the monthly totals for the various columns from the main spreadsheets for the non sales months.  These totals have been used to construct Results Analysis 3.

RESULTS ANALYSIS 4

• This shows that 648 aged items were sold in sales months, 99 of these selling for the full retail price (15% for full retail price).

• 85% sold for some retail discount.

• Average wholesale writedown percentage for all these items was 71%.

• The average retail discount percentage for all these items was 34%.

• Trading stock is valued as at 30 June.  June is not a sales month in any store.

RESULTS ANALYSIS 4 WORKINGS

• Simply the monthly totals for the various columns from the main spreadsheets for the sales months.  These totals have been used to construct Results Analysis 4.

RESULTS ANALYSIS 5

• This is a summary of Results Analysis 3 and 4.

• This shows that the retail cost to sales price mark up for aged stock is:

  - Retail cost + 149% in non sales months (2.5 mark up on retail cost)
  - Retail cost + 76% in sales months (1.8 mark up on retail cost)
  - Retail cost + 112% for the whole year (2.1 mark up on retail cost)

• For the wholesale cost to final sales price mark up statistics see Results Analysis 1.

RESULTS ANALYSIS 6

• This analysis shows:

(a) the number and percentages of items that sold for full retail price
(b) compares the average retail discount percentage to the wholesale writedown percentage
(c) it also compares the wholesale writedown percentage calculated by using dollar values to the retail discount percentage allowed calculated by using dollar values.

• Of the 2,210 items sold 1,223 sold for the full retail price with 987 selling for some retail discount.  This is over 55% of aged stock sold for the full price in the 1998 year.

• In percentage terms aged stock was written down by an average of 74% over the three stores whilst the retail discount allowed was 14%.

• Using dollar terms and comparing cost with WDV we find that aged stock was written down by 69% over the three stores whilst the retail discount was 21%.

• Stock costing $115,446.88 was written down to $35,419.81.  This stock sold for $303,647.14 and had an original ticket price of $382,701.24.

• Mitchell's first affidavit at TM07 contains the NCJV Price Guide that contains recommended valuation mark up factors.  The mark up is no greater than 3 and down to 1.9 on the most expensive items.

• Aged stock originally costing $115,446.88 sold for $303,647.14, this is a mark up of 2.6.

• Aged stock originally costing $115,446.88 had a ticket price of $382,701.24 this is an original mark up of 3.3 overall.

• The stock with a WDV of $35,419.81 is actually sold for $303,647.14, this is a mark up of some 8.6.

RESULTS ANALYSIS 6 WORKINGS

• Simply the monthly totals for the various columns from the main spreadsheets.  These totals have been used to construct Results Analysis 6.

RESULTS ANALYSIS 7

• This is a summary where the retail percentage discount is equal to or greater than Mitchell's wholesale writedown percentage.

• There were 82 items out of 2,210 that sold for a retail discount which was equal to or greater than the wholesale discount.

• The average age of these items was 7.3 years rather than 18 months or 3 years where Mitchell's valuations are argued to begin to apply.

• The retail cost of this stock was $5,245.04 whilst the retail selling price was $7,433.54.

RESULTS ANALYSIS 7 WORKINGS

This is an itemised list of the 82 items sold for a retail discount percentage that was equal to or greater than the wholesale writedown percentage (includes all three stores).

RESULTS ANALYSIS 8

• This shows that 1,739 aged items were sold in non sales months, 1,121 of these selling for the full retail price (64% for full retail price).

• Only 36% sold for some retail discount.

• Average wholesale writedown percentage for all these items was 74%.

• The average retail discount percentage for all these items was 9%.

• Trading stock is valued as at 30 June.  June is not a sales month in any store.

• Indicates that aged stock is returning to its full price after the sales months.

RESULTS ANALYSIS 8 WORKINGS

• Simply the monthly totals for the various columns from the main spreadsheets for the non sales months.  These totals have been used to construct Results Analysis 8.

RESULTS ANALYSIS 9

• This shows that 471 aged items were sold in sales months, 102 of these selling for the full retail price (22% for full retail price).

• 78% sold for some retail discount.

• Average wholesale writedown percentage for all these items was 72%.

• The average retail discount percentage for all these items was 31%.

• Trading stock is valued as at 30 June.  June is not a sales month in any store.

RESULTS ANALYSIS 9 WORKINGS

• Simply the monthly totals for the various columns from the main spreadsheets for the sales months.  These totals have been used to construct Results Analysis 9.

RESULTS ANALYSIS 10

• This is a summary of Results Analysis 8 and 9.

• This shows that the retail cost to sales price mark up for aged stock is:

  - Retail cost + 159% in non sales months (2.6 mark up on retail cost)
  - Retail cost + 95% in sales months (2.0 mark up on retail cost)
  - Retail cost + 143% for the whole year (2.4 mark up on retail cost)

• For the wholesale cost to final sales price mark up statistics see Results Analysis 6.

RESULTS ANALYSIS 11

• This is a full list of aged stock that sold for a loss in both the 1997 and 1998 income years.

1997

• In 1997, 13 aged items were sold for a loss.

• The total loss made on these 13 items was $59.41 (cost plus actual sales tax paid compared to actual retail selling price).

• The average loss per item for the 13 items was $4.57.

• The percentage of aged stock sold for a loss was 0.7 of 1%.

• Dollar value of aged stock writedown in tax return was $173,600.

1998

• In 1998, 5 aged items were sold for a loss.

• The total loss made on these 5 items was $22.38 (cost plus actual sales tax paid compared to actual retail selling price).

• The average loss per item for the 5 items was $4.47.

• The percentage of aged stock sold for a loss was 0.2 of 1%.

• Dollar value of aged stock writedown in tax return was $218,936.

Two Year Summary

• Number sold for a loss was 18.

• The total loss made on these 18 items was $81.79 (cost plus actual sales tax paid compared to actual retail selling price).

• The average loss per item for the 18 items was $4.54.

• The percentage of aged stock sold for a loss was 0.4 of 1%.

Does setting up an interposed captive wholesale entity allow a taxpayer to write their own ticket?  If there was no interposed entity and their writedowns were compared according to what is happening above, their proposition would be farcical.  Their total writedown would be $81.79 over the two years compared with their actual writedowns of $173,600 and $218,936.

The question is, does the use of an interposed entity allow them to use imaginary values in an imaginary market in which no jeweller trades?

RESULTS ANALYSIS 12

• This is a break up of the number of aged items that were sold from each of the categories written down.

• Break downs are provided for each year and both years combined along with a percentage analysis for the two year period.

• It shows that over 50% of aged stock is sold from 6 categories specifically:

  Cat 16 other   6.90%
  Cat 22 earrings                  14.55%
  Cat 25 charms                   9.46%
  Cat 27 bracelets                7.77%
  Cat 28 watch straps           6.15%
  Cat 35 china & figs            5.83%
  Total  50.66%

• This shows that aged stock is not distributed equally through all the categories.

RESULTS ANALYSIS 13

• This is an analysis of the number of aged versus new stock on hand for each category for each store for both years.  It compares what proportion of stock on hand is aged.

• As at 30 June 1996, 71.19% (11,132 items) of stock was new and 28.81% (4,505 items) of stock was aged.  However when the "new" store of KAT was excluded the figures reduce to 61.33% and 38.67% respectively.

• As at 30 June 1997, 62.25% (9,331 items) of stock was new and 37.75% (5,659 items) of stock was aged.  However when the "new" store of KAT was excluded the figures reduce to 59.73% and 40.27% respectively.

• It appears that it is a normal occurrence for 40% of stock on hand to be aged in Jade's ordinary course of business.  This appears to be consistent with the rest of the industry based on what I have been told by other jewellers.

• It is normal, in the ordinary course of business, for a jeweller to have both fast and slow moving stock in this industry.  Slow moving stock is not abnormal and an automatic writedown is not justified.  Age is not the only consideration in valuing stock.

RESULTS ANALYSIS 14

• This is an analysis of the total number of all sales including new and aged items.

• The proportion of new stock that is sold for a retail discount is compared to the proportion of aged stock that is sold for a retail discount.

• There is a breakdown for each individual store with a breakdown for each individual month.

• The combined 2 year results reveal the following:

  (a) a total of 32,648 items were sold
  (b) 28,516 of these items were new (87.34%)
  (c) 4,132 of these items were aged (12.66%)
  (d) 6,648 new items sold for some retail discount (23.31%)
  (e) 1,947 aged items sold for some retail discount (47.12%)

• This supports the contention there may be some "ambit" component in the ticketed price as nearly one quarter of all new stock sells for some retail discount - see spreadsheet titled "Retail Discount on New Stock" at BK146.

RESULTS ANALYSIS 15

• This is an analysis which determined the number of aged items which sold for a retail discount of equal to or greater than 50% during the sales months for each store.

• It was completed in response to the applicant's claim that it was common practice to sell a large proportion of aged stock at a retail discount of usually up to 50%.

• It revealed that 1,119 items were sold during the sales months and 478 of these were sold for a retail discount equal to or greater than 50% (43%).  See also results analysis 16 for a full year analysis.

RESULTS ANALYSIS 16

• This is an analysis that determined the number of aged items that sold for a retail discount of equal to or greater than 50% over both entire years.

• It revealed that 4,132 aged items were sold over both years and 640 of these were sold for a retail discount equal to or greater than 50% (15%).

• It appears that it is not a common occurrence to sell aged stock at a retail discount equal to or greater than 50%.

SUMMARY

• In summary of the 4,132 aged items sold over the two years:

  - 2,185 sold for the full retail price (53%);
  - 640 sold for a retail discount which was equal to or greater than 50% (15%);
  - the remaining 1,307 sold for a retail discount which was less than 50% (32%)

• Comparing results analysis 13 & 14 aged stock may comprise approximately 40% of stock on hand at any one time but only 12.66% of sales during a year.

• Stock that is sold for a retail discount is not just restricted to aged stock. In volume more new stock sells for a retail discount than old. 6,648 new items sold for a retail discount (23.31%) compared to 1,947 aged items selling for some retail discount. This strongly indicates that there appears to be an ambit component in the retail price of all jewellery stock.

Boris Kosutic