Commissioner of Taxation of the Commonwealth of Australia v Ludekens
[2013] FCA 142
•4 March 2013
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation of the Commonwealth of Australia v Ludekens
[2013] FCA 142
Citation: Commissioner of Taxation of the Commonwealth of Australia v Ludekens [2013] FCA 142 Parties: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v ANDREW LUDEKENS and PETER VAN DE STEEG File number: VID 692 of 2011 Judge: MIDDLETON J Date of judgment: 4 March 2013 Corrigendum: 8 March 2013 Catchwords: TAXATION – Taxation Administration Act 1953 (Cth) – Division 290 – Civil penalty regime –Whether entity is a promoter of tax exploitation scheme – Whether entity has implemented a scheme otherwise than in accordance with its product ruling – Time limits on commencement of actions in respect of an entity’s involvement in a tax exploitation scheme
STATUTORY INTERPRETATION – Meaning of ‘markets the scheme or otherwise encourages the growth of the scheme or interest in it’ – Meaning of consideration received ‘in respect of’ marketing or encouragementLegislation: A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Acts Interpretation Act 1901 (Cth)
Evidence Act 1995 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)Cases cited: Australian Education Union v Department of Education and Children’s Services (2012) 285 ALR 27
Brooks v Commissioner of Taxation (2002) 100 FCR 117
Certain Lloyd’s Underwriters Subscribing to Contract No IH00AAQS v Cross (Matter No S417 / 2011) (2012) 293 ALR 412
Commissioner of Taxation v Hart (2004) 217 CLR 216Commissioner of Taxation v McDonald (1987) 15 FCR 172
Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445
Commissioner of Taxation v Peabody (1994) 181 CLR 359
Commissioner of Taxation v Scully (2000) 201 CLR 148
Commissioner of Taxation v Sleight (2004) 136 FCR 211
Commissioner of Taxation v Spotless Services (1996) 186 CLR 404
Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39
Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255
Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410
Henderson v Pioneer Homes Pty Ltd (1980) 29 ALR 597
J & G Knowles and Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402
Nintendo Company Limited v Centronics Systems Pty Limited (1994) 181 CLR 134
Noza Holdings Pty Ltd v Commissioner of Taxation [2011] FCA 46
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Secretary of the Department of Social Security v a’Beckett (1990) 26 FCR 349
Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91
Workers’ Compensation Board (Q) v Technical Products Pty Ltd (1988) 165 CLR 642Date of hearing: 13, 14, 15, 16, 17, 20, 21, 27, 28, 29 August 2012 and 10, 11 September 2012 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 307 Counsel for the Applicant: Ms H Symon SC with Mr P Sest SC and Mr S Ure Solicitor for the Applicant: Australian Government Solicitor Counsel for the First Respondent: Appeared in person from 13 to 29 August 2012 Counsel for the First Respondent: Mr A De Wijn from 10 to 11 September 2012 Solicitor for the First Respondent: Wantrup & Associates Counsel for the Second Respondent: Appeared in person FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation of the Commonwealth of Australia v Ludekens
[2013] FCA 142CORRIGENDUM
1.In paragraph 198, after the words “he should”, the word “not” should be inserted.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton. Associate:
Dated: 8 March 2013
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 692 of 2011
BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
ApplicantAND: ANDREW LUDEKENS
First RespondentPETER VAN DE STEEG
Second Respondent
JUDGE:
MIDDLETON J
DATE OF ORDER:
4 MARCH 2012
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The parties confer and thereafter bring minutes to the Court reflecting the outcome of this proceeding (including costs) by 4:00 pm on 18 March 2013.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 692 of 2011
BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
ApplicantAND: ANDREW LUDEKENS
First RespondentPETER VAN DE STEEG
Second Respondent
JUDGE:
MIDDLETON J
DATE:
4 MARCH 2013
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
INTRODUCTION
This case represents the first time that the Commissioner of Taxation has sought the imposition of civil penalties on alleged scheme promoters under Div 290 of the Taxation Administration Act 1953 (Cth) (the TAA).
This Division – entitled “Promotion and implementation of schemes” – was inserted into the TAA by the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth). The objects of this Division are to deter the promotion of tax avoidance schemes and tax evasion schemes, and to deter the implementation of schemes that have been promoted on the basis of conformity with a product ruling in a way that is materially different from that described in the product ruling (s 290-5).
Prior to the introduction of these provisions, there were no specific civil or administrative penalties attaching to the promotion of tax exploitation schemes. This meant that there was a significant asymmetry in risk exposure in respect of such schemes, as promoters were able to obtain substantial profits therefrom, whilst investors in the schemes were potentially subject to penalties under the TAA. The Regulation Impact Statement contained in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) states at [3.147] that the introduction of this civil penalty regime was expected to:
enhance community confidence in the tax system and produce a more efficient market for investment products, including tax effective investments, by providing for promoters to be at risk of penalties when they expose taxpayers to scheme penalties.
It was further noted that this regime would not impose significant administrative or compliance costs on “legitimate business arrangements”. It was not designed to catch people who – without more – merely provide advice about a scheme (such as accountants or legal practitioners).
The respondents to this proceeding – Dr Andrew Ludekens and Mr Peter Van de Steeg – are each alleged to have promoted and implemented a tax exploitation scheme in contravention of s 290-50 of the TAA. In brief, the Commissioner submitted that, in 2007, the respondents formulated a plan comprised of the following steps (Plan):
(a)To acquire fully financed woodlots in the Gunns Plantations Limited Woodlot Project 2006 (the 2006 Gunns Woodlot Project).
The 2006 Gunns Woodlot Project was a managed investment scheme in which investors were referred to as ‘growers’. Gunns Plantations was the Responsible Entity for the project. Growers incurred fees by entry into agreements under which arrangements were made to establish and maintain trees on each woodlot (over which growers were granted “forestry rights”), and for the ultimate harvest and sale of such trees. The 2006 Gunns Woodlot Project was the subject of a product disclosure statement entitled “Woodlot Project Product Disclosure Statement” dated 14 March 2006 (2006 PDS), and a product ruling issued by the Commissioner, which was entitled “Income Tax: Gunns Plantations Limited Woodlot Project 2006 ‘2007 Growers’” (PR 2006/8).
According to PR 2006/8, a grower who was accepted to participate in the 2006 Gunns Woodlot Project on or before 30 June 2007 was entitled to claim tax deductions for various revenue expenses on a per woodlot basis, having commenced the carrying on of a business of primary production by virtue of entering into various key project agreements.
(b)To meet loan obligations in respect of the acquisition of these woodlots from profits obtained by investing (into a foreign exchange trading business) a fund comprised of the following:
(i)commission received in respect of the acquisition of the woodlots;
(ii)GST refunds to be obtained in respect of the acquisition of the woodlots; and
(iii)funds obtained from offering the woodlots to subsequent investors.
The Commissioner alleged that it was intended that subsequent investors would fund their acquisitions of these woodlots from tax savings obtained by claiming deductions for the financial year ending 30 June 2007 in respect of these acquisitions. This was referred to by the Commissioner as “the Secondary Investment”.
(c)To otherwise retain profits from investing the fund in the foreign exchange trading business.
It was alleged that the respondents carried the Plan into effect, and as a result, contravened one or both of s 290-50(1) and (2). Where more than one promoter of a scheme is identified for the purpose of bringing proceedings under Div 290 of the TAA, each promoter is potentially liable to pay a civil penalty. Accordingly, in this proceeding the Commissioner seeks orders for the payment of civil penalties by both of the respondents in respect of these contraventions of the TAA.
It is appropriate at this stage to make some remarks about the conduct of this proceeding up to and including the hearing in August and September 2012. The second respondent, Mr Van de Steeg, was unrepresented for the entire proceeding, including the hearing. The first respondent, Dr Ludekens, had a solicitor on the record for several months at the commencement of proceedings, and again at the conclusion of the hearing in September 2012 (at which point he was also represented by counsel for the purpose of final submissions). In accordance with their prerogative to do so, neither respondent gave evidence at the hearing.
One regrettable effect of the respondents being unrepresented for the majority of the hearing was that issues that were not ultimately relevant to the matters before this Court for determination were accorded far more attention (particularly during the examination of witnesses) than was strictly merited. However, matters such as this are to be expected to some extent in complex cases involving self-represented litigants. On this note, counsel for the Commissioner are to be commended for not adopting an overly technical approach to objections taken in respect of the respondents’ conduct of their respective cases, and examination of witnesses.
Notwithstanding these matters, at no stage during the hearing did I determine that either respondent was incapable of adequately conducting his case. The Commissioner relied upon written submissions in opening his case against the respondents. In some respects the written submissions went further than the pleaded allegations against the respondents. In the course of the hearing, as the respondents were effectively unrepresented, I directed their attention to these written submissions and the evidence filed and served upon them by the Commissioner. This was done in an attempt to focus the respondents’ attention on the factual matters in contention, and the exact allegations that they needed to defend. Therefore, the trial proceeded on this basis and not by sole reference to the pleadings as formulated by the Commissioner. This was ultimately a fair and appropriate way to proceed in the circumstances. However, as will shortly become apparent, some matters were raised for the first time in the Commissioner’s final submissions, which were filed and served at the conclusion of the hearing (after the close of the Commissioner’s case).
THE RELEVANT LEGISLATION
The main civil penalty provision relied upon by the Commissioner in his case against the respondents is s 290-50, which provides as follows:
Promoter of tax exploitation scheme
(1) An entity must not engage in conduct that results in that or another entity being a promoter of a tax exploitation scheme.Implementing scheme otherwise than in accordance with ruling
(2) An entity must not engage in conduct that results in a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different from that described in the product ruling.Note: A scheme will not have been implemented in a way that is materially different from that described in a product ruling if the tax outcome for participants in the scheme is the same as that described in the ruling.
This section is contained in Subdiv 290-B (“Civil penalties”) of the TAA, which is in turn contained within Div 290. As previously noted, there is not yet any case law on the interpretation and application of these provisions. Accordingly, it is appropriate to commence by setting out the relevant legislative provisions, and making some comments on the interpretation of the key concepts that were in dispute between the parties.
If, on application by the Commissioner under s 290-50, the Court is satisfied that an entity has contravened either of subss (1) or (2), it may order that entity to pay a civil penalty to the Commonwealth (s 290-50(3)). The maximum amount of this penalty is the greater of either 5,000 penalty units for an individual or 25,000 penalty units for a body corporate, or twice the consideration received or receivable (either directly or indirectly) by the entity and its associates in respect of the scheme. Subsections (5) and (6) of this section deal with the principles relevant to the determination of appropriate penalties and the recovery of such penalties respectively. It is not necessary to examine these provisions in any detail in these reasons for judgment, as the hearing in August and September 2012 dealt only with the question of liability – it was agreed that a further hearing on the quantum of penalty to be imposed (if any) would be held at a later date if the Court ultimately determined that the respondents were liable under s 290-50. For the reasons that follow, in this proceeding such further hearing is unnecessary.
In order to apply s 290-50(1) and (2), it is necessary to determine the meaning of the key terms used in Div 290 by reference to other provisions of the TAA and the Income Tax Assessment Act 1997 (Cth) (ITAA97). To this end, s 3AA(2) of the TAA provides that expressions used in Sched 1 of that Act have the same meaning as in the ITAA97. Further, it is acknowledged in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) that the terms and concepts used to define a ‘tax exploitation scheme’ in Div 290 are taken from the anti-avoidance provisions of the Income Tax Assessment Act 1936 (Cth) (ITAA36), the ITAA97, and the TAA (and that such concepts are “well established in case law and administrative practice”).
Section 290-50(1) – “Entity”
Turning first to s 290-50(1), ‘entity’ – a concept which is also used in s 290-50(2) – is relevantly defined in s 960-100 of the ITAA97 as including the following:
(a)an individual;
(b)a body corporate; and
(c)a partnership.
The note corresponding to s 960-100 states that:
[t]he term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.
‘Partnership’ is defined in s 995-1(1) of the ITAA97 as being:
(a)an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or
(b) a limited partnership.
Section 290-50(1) – “Promoter of a tax exploitation scheme”
‘Promoter’
‘Promoter’ is defined in s 290-60 of the TAA as follows:
(1) An entity is a promoter of a tax exploitation scheme if:
(a)the entity markets the scheme or otherwise encourages the growth of the scheme or interest in it; and
(b)the entity or an associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and
(c)having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement.
(2)However, an entity is not a promoter of a tax exploitation scheme merely because the entity provides advice about the scheme.
The concepts invoked by this definition that were in issue between the parties at the hearing are addressed in the following paragraphs.
Section 290-60(1)(a) - The Entity Markets the Scheme or Otherwise Encourages the Growth of the Scheme or Interest in it
As will be considered in greater detail later in these reasons for judgment, one of the main issues in this proceeding was whether the conduct of the respondents constituted either ‘marketing’ or ‘encouragement of the growth’ of the alleged scheme (or interest in it) as required by s 290-60(1)(a).
Notably, counsel for Dr Ludekens submitted that much of the conduct relied upon by the Commissioner in respect of his client does not fall within either of these descriptions, and instead constitutes activities undertaken in developing and implementing the scheme. Counsel further submitted that in attempting to rely on this conduct for the purpose of satisfying the definition of ‘promoter’ in s 290-60, the Commissioner seeks to “impermissibly interpret the provision in a way that is contrary to the express object of the provision”, as “[d]eveloping and implementing is not promoting”.
Determining this issue requires the Court to first decide whether the phrase “markets the scheme or otherwise encourages the growth of the scheme or interest in it” as it appears in s 290-60 is capable of encompassing conduct of the sort alleged to be relied upon by the Commissioner in respect of the respondents – namely, development and implementation of the relevant scheme.
Such statutory interpretation is to be conducted in accordance with the principles set out in the Acts Interpretation Act 1901 (Cth). Section 15AA of that Act provides that the interpretation of the definition of ‘promoter’ contained in s 290-60 that would best achieve the purpose or object of the TAA (whether or not that purpose or object is expressly stated in that Act) is to be preferred. In carrying out this inquiry, s 15AB of the Acts Interpretation Act 1901 (Cth) provides that the Court is permitted to have reference to extrinsic material (such as explanatory materials) for either of the following purposes:
(a)to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or
(b)to determine the meaning of the provision when:
(i)the provision is ambiguous or obscure; or
(ii)the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable.
Of course, the starting point for this statutory interpretation inquiry is the ordinary and grammatical meaning of the words of the provision in question, having regard to their context and legislative purpose (Australian Education Union v Department of Education and Children’s Services (2012) 285 ALR 27 at 34 [26]). In Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, McHugh, Gummow, Kirby and Hayne JJ noted that (at 384 [78]):
the duty of a court is to give the words of a statutory provision the meaning that the legislature is taken to have intended them to have. Ordinarily, that meaning (the legal meaning) will correspond with the grammatical meaning of the provision. But not always. The context of the words, the consequences of a literal or grammatical construction, the purpose of the statute or the canons of construction may require the words of a legislative provision to be read in a way that does not correspond with the literal or grammatical meaning. In Statutory Interpretation, Mr Francis Bennion points out:
“The distinction between literal and legal meaning lies at the heart of the problem of statutory interpretation. An enactment consists of a verbal formula. Unless defectively worded, this has a grammatical meaning in itself. The unwary reader of this formula (particularly if not a lawyer) may mistakenly conclude that the grammatical meaning is all that is of concern. If that were right, there would be little need for books on statutory interpretation. Indeed, so far as concerns law embodied in statute, there would scarcely be a need for law books of any kind. Unhappily this state of being able to rely on grammatical meaning does not prevail in the realm of statute law; nor is it likely to. In some cases the grammatical meaning, when applied to the facts of the instant case, is ambiguous. Furthermore there needs to be brought to the grammatical meaning of an enactment due consideration of the relevant matters drawn from the context (using that term in its widest sense). Consideration of the enactment in its context may raise factors that pull in different ways. For example the desirability of applying the clear literal meaning may conflict with the fact that this does not remedy the mischief that Parliament intended to deal with.” (footnotes omitted)
[Citations omitted]
The context and purpose of provisions in legislation was also emphasised in Certain Lloyd’s Underwriters Subscribing to Contract No IH00AAQS v Cross (Matter No S417 / 2011) (2012) 293 ALR 412 by French CJ and Hayne J at 418 [24]:
The context and purpose of a provision are important to its proper construction because, as the plurality said in Project Blue Sky, “[t]he primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute”. [Emphasis added.] That is, statutory construction requires deciding what is the legal meaning of the relevant provision “by reference to the language of the instrument viewed as a whole”, and “the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed”.
[Citations omitted]
Similar sentiments were expressed by Crennan and Bell JJ in that case at 431 [70]:
While consideration of extrinsic materials should not displace the clear meaning of the text of a provision, the purpose of a provision may be elucidated by appropriate reference to them. It has often been said that the clear meaning of the text of a statute or a statutory provision is the surest guide to the meaning of “the intention of the legislature”, an expression used metaphorically. Nevertheless, it is uncontroversial that in determining the meaning of the text of a statute or provision a court may take into account the general purpose and policy of a provision and, in particular, the mischief that it is intended to remedy.
[Citations omitted]
Returning then to the legislation in question in this proceeding, ‘promoter’ is expressly defined in s 290-60 by reference to two types of conduct: marketing, and encouraging the growth of or interest in a scheme. These terms are not specifically defined in the legislation.
The ordinary meaning of ‘marketing’ in this context would seem to encompass the actual, active promotion or ‘selling’ of a scheme to the public or one or more investors. To ‘encourage the growth’ of a scheme, or interest in it, is a more general concept. Freed of its legislative context, this phrase might be given a very broad meaning – in theory, it could encompass anything done in relation to a scheme that ultimately results in its growth. However, as previously noted by reference to the authorities extracted above, when interpreting legislation, context is crucial.
Of this phrase, the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) states (at [3.41]):
While the general expression ‘…encouraging the growth of the scheme or interest in it…’ would ordinarily include most forms of marketing, the specific reference to marketing highlights the most common case. The broader phrase makes it clear that the civil penalty regime is not restricted to schemes that are directly marketed in a conventional sense.
These comments suggest that this phrase was intended to encompass the promotion of schemes that are not marketed in a particular, ‘conventional’ way (for example, schemes that are marketed through conduct which might not amount to expressly making offers to investors to participate, but which otherwise encourages participation in a scheme). They do not suggest a clear legislative intention to specifically bring conduct comprising mere development or implementation of a scheme within the ambit of the definition of ‘promoter’ in s 290-60(1).
Such an interpretation gives effect to the express purpose of the legislation in question. Unlike Div 290, the TAA itself has no expressly stated overall purpose or object. The long title of the Act states that it is “[a]n Act to provide for the administration of certain Acts relating to Taxation, and for purposes connected therewith”. The purpose of this Act, therefore, may be imputed to include that which attaches to taxation law more generally – namely, protection of the revenue. However, this is not particularly instructive for the purpose of interpreting s 290-60. Rather, illumination is provided by the stated objects of Div 290, which, it is to be recalled, is entitled “Promotion and implementation of schemes” (emphasis added). As previously noted, the objects of this Division are stated in s 290-5 to be to deter (a) the “promotion” of tax avoidance and tax evasion schemes, and (b) the “implementation” of schemes that have been promoted on the basis of conformity with a product ruling in a materially different way to that described in the ruling. The two subsections invoke different verbs. ‘Promotion’ is not specifically defined in the legislation – perhaps because it may be thought to be defined (admittedly somewhat circularly) by reference to the conduct that characterises an entity as a ‘promoter’ for the purpose of s 290-60, namely, marketing and encouraging the growth of or interest in a scheme. In any event, the fact that the legislature saw fit to legislate specifically in respect of ‘promotion’ in s 290-50(1), and in respect of ‘implementation’ in s 290-50(2), suggests that each subsection is intended to address a distinct type of mischief in respect of schemes. It further suggests that it is not appropriate to read the expression “encourages the growth of the scheme or interest in it” as it appears in s 290-50(1) so broadly that it encompasses the bare implementation or development of a scheme.
This interpretation is further supported by the relevant explanatory materials, to which recourse may properly be had for the purpose of this inquiry. For example, prior to being enacted in its present form, an Exposure Draft of Div 290 was the subject of both confidential and public consultation in 2005. The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) states that two of the most contentious issues during this consultation period were the definitions of ‘promoter’ and ‘tax exploitation scheme’ that govern the scope of s 290-50.
At the time of consultation, the Exposure Draft of Div 290 featured a definition of ‘promoter’ that differs in several important respects from that contained in Div 290 as presently enacted. The Exposure Draft version of s 290-60 provided that an individual is a promoter of a tax exploitation scheme if:
(a)the individual promotes the scheme by implementing it, advancing it or encouraging its growth or interest in it; and
(b)the individual or an associate of the individual receives (directly or indirectly) consideration in respect of the scheme; and
(c)having regard to all relevant matters, including the extent of an individual’s participation in the management of the scheme, it is reasonable to conclude that the individual has had a substantial role in promoting the scheme.
[Emphasis added]
The Exposure Draft Explanatory Material that corresponded to this version of s 290-60 contained the following statements (at pp 6-7; emphasis in original):
For any tax exploitation scheme there may be numerous individuals who market the scheme, however, there would only be one or a few individuals who would be considered promoters for the purposes of the civil penalty provisions. The promoters who are at risk under the civil penalty regime are those who undertake, for consideration, a substantial promotional role in the overall marketing and advancement of a tax exploitation scheme. This would be a question of fact and would be determined having regard to all relevant facts including (but not limited to) the:
•degree of the promoter’s involvement in implementing, advancing, actively marketing or encouraging the growth of or interest in the scheme
•level of consideration received by the individual, directly or indirectly, from the scheme and
•individual’s participation in the scheme management (including factors such as identification of the individual in the scheme’s marketing material).
24. A promoter must have a substantial role in promoting the scheme to be at risk of civil penalty. That is, the promoter’s role would need to be integral to the operation and growth of the scheme, such that without them, the scheme would not have been established and widely promoted. [schedule #, item #, paragraph 290-60(1)(c)]
…
30. There may be more than one promoter of a scheme, for example where several promoters capitalise on a combined, complementary skill set in the overall implementation and advancement of the scheme. More than one promoter may be identified where the scheme is a joint venture or where a scheme ‘changes hands’ during its life. Where a tax exploitation scheme is established and promoted offshore, any Australian entity who plays a substantial role in promoting the scheme in Australia will be at risk.
Coupled with the wording of s 290-60 as it previously existed, these statements indicate that conduct comprising the implementation and development of a scheme was clearly within the ambit of s 290-60 at that time. These statements are not reproduced in the Explanatory Memorandum that accompanies Div 290 as presently enacted. As noted in that Explanatory Memorandum at [3.143], the definition of ‘promoter’ in s 290-60 was amended following the consultation period in 2005:
To address concerns raised in consultation, the definitions were refined as follows:
• design and implementation functions were taken out of the definition of ‘promoter’, leaving the more active promotional functions of marketing and encouragement;
• for the purposes of determining if someone is a promoter, the consideration they receive has been confined to consideration in respect of promotion of the scheme;
• the promoter must have a substantial promotional role and not just a substantial role in relation to a scheme; [and]
• it must be reasonable to conclude at the time of promotion that participants in a scheme have a sole or dominant purpose of obtaining a tax (scheme) benefit for there to be a tax exploitation scheme…[Emphasis in bold-face type added; emphasis denoted by underlining in original]
The deliberate exclusion of design and implementation conduct from the definition of ‘promoter’ prior to it being enacted in its present form supports the conclusion previously reached in respect of the purpose and words of s 290-60 – namely, that without more, such conduct does not constitute marketing or encouragement of the growth of or interest in a scheme. Accordingly, I am satisfied that the phrase “markets the scheme or otherwise encourages the growth of the scheme or interest in it” in this section is to be read as being confined to active promotional functions in the manner just explored. Of course, conduct alleged to fall within the ambit of this definition must be assessed on a case-by-case basis. It may be that activities undertaken by an entity both market and implement a scheme simultaneously. But it is appropriate to confirm at this point that from a statutory interpretation perspective, this is not a limitless phrase that encompasses any type of conduct engaged in by an entity in respect of a scheme.
In so concluding, I am mindful of the cautions delivered by both this Court and the High Court that reference to extrinsic materials does not permit a Court to ignore the actual words of a statute, and that such materials do not serve as warrants for the redrafting of legislation nearer to what is assumed to have been the desire of the legislature (see eg Trevisan v Commissioner of Taxation (1991) 29 FCR 157 at 162). In Australian Education Union (2012) 285 ALR 27 at 35 [28], the High Court noted that “[i]n construing a statute it is not for a court to construct its own idea of a desirable policy, impute it to the legislature, and then characterise it as a statutory purpose”. See also Certain Lloyd’s Underwriters (2012) 293 ALR 412 at 419 [26]. However, this is not to deny that words of seemingly wide interpretation may be limited by the context in which they appear. To this end, I am satisfied that the conclusion reached in respect of the interpretation of the phrase “markets the scheme or otherwise encourages the growth of the scheme or interest in it” is grounded in the statutory context of s 290-60 (as informed by the legislative history of Div 290), and gives effect to the distinction drawn in the Division between the proscription of ‘promotion’ in s 290-50(1), and the proscription of ‘implementation’ (as a separate concept) in s 290-50(2).
Section 290-60(1)(b) – The Entity (or an Associate of the Entity) Receives (Directly or Indirectly) Consideration in Respect of that Marketing or Encouragement
The definition of ‘associate’ is provided by s 318(1) of the ITAA36. That section relevantly provides that an ‘associate’ of a natural person includes:
(a)a partner of the primary entity or a partnership in which the primary entity is a partner; and
(b) a company where:
(i) the company is sufficiently influenced by:
(A) the primary entity; or
(B)another entity that is an associate of the primary entity because of another paragraph of this subsection; or
(C)another company that is an associate of the primary entity because of another application of this paragraph; or
(D)2 or more entities covered by the preceding sub-subparagraphs; or
(ii) a majority voting interest in the company is held by:
(A)the primary entity; or
(B)the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or
(C)the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.
Much was made in the parties’ submissions of the meaning of the term ‘consideration’ as it is used in s 290-60(1)(b), as distinct from its use in other parts of Div 290 and in law more generally.
In his final submissions, the Commissioner alleged that three types of consideration have been received by the respondents that satisfy s 290-60(1)(b). These are:
(a)the payment of commission by Gunns Limited (the parent company of the Gunns group of companies, hereafter referred to as “Gunns” unless the context otherwise requires);
(b)the GST refunds received; and
(c)the promises by investors to pay their tax refunds to the respondents.
In respect of this third category, the Commissioner submitted that ‘consideration’ as it appears in s 290-60(1)(b) may encompass the receipt of non-monetary benefits (such as a promise to perform acts or pay an amount).
The principal point advanced by counsel for Dr Ludekens in response was that, in this case, the Commissioner has not demonstrated the appropriate connection between the consideration allegedly received by the respondents on the one hand, and the marketing or encouragement ‘in respect of’ which that consideration must have been received, on the other. The ability of the Commissioner to rely upon the third category of consideration was also challenged, on the basis of the Commissioner’s failure to raise this category of consideration prior to including it in his final submissions at the conclusion of the hearing. That issue is determined later in these reasons for judgment. At this point, it is appropriate to make some general comments about the proper interpretation of the term ‘consideration’ as it is used in s 290-60.
In Brooks v Commissioner of Taxation (2002) 100 FCR 117, the Full Court of the Federal Court of Australia noted – in the context of considering s 160ZZC(12) of the ITAA36 – that (at 128-129):
[t]he word “consideration” is a technical term in the law of contract. However, like many technical words in a statute, it may be used in either a technical or non-technical sense. The meaning will depend upon the context: cf Commissioner of Taxation (Cth) v Scully (2000) 74 ALJR 504 at 509-510. In Scully it was held that the expression “consideration… for or in respect of” indicated that the use of the word “consideration” was not used in a technical sense. Rather than the technical meaning of a promise given or an act done in exchange for an act or promise by another party, it had, in the context there under consideration (the context was the taxation of eligible termination payments), the meaning of “recompense”. In the context of stamp duty the word has been held to mean that which moves the conveyance which is liable to duty: Archibald Howie Pty Ltd v Commissioner of Stamp Duties (1948) 77 CLR 143 at 152 per Dixon CJ.
For the purpose of Div 290 of the TAA, it is clear that profits received in respect of the marketing or encouragement of a scheme carried out by an alleged promoter constitute ‘consideration’ for the purpose of s 290-60(1)(b). Relevantly, the Explanatory Memorandum states (at [3.44]-[3.45]):
Scheme promoters generally undertake promotional activities to earn higher financial rewards than would be available for providing independent and objective tax advice. Those scheme profits constitute consideration received from the marketing or encouragement of a tax exploitation scheme and help to establish that an entity is a promoter.
Salary, wages and other professional fees that reflect the time and expertise spent advising clients about a scheme are unlikely to constitute consideration in the context of the promoter definition because the consideration must be linked to the promotional activity. However, to avoid creating an incentive for promoters to attempt to characterise scheme profits as something else (such as professional fees for advice), no specific types of remuneration are excluded.
[Emphasis added]
The Explanatory Memorandum states at [3.27]-[3.28] that the concept of ‘consideration’ as it is used in s 290-60(1)(b) is “narrower” than when used in s 290-50(4) and (5) (which relate to the penalties to be imposed on entities found guilty of contravening s 290-50(1) or (2)). The Explanatory Memorandum states:
Consideration in this context [subss 290-50(4) and (5)] refers to the total payment or financial reward derived from a scheme. Direct consideration encompasses, amongst other things, any fee, payment for services rendered, money, property, benefit, reward, compensation or recompense received or receivable that is directly related to the scheme. Indirect consideration includes in-kind payments, payments to third party associates and other payments that are indirectly related to the scheme promotion, even if they are described as something else.
It is important to note that the type of consideration to be taken into account for calculation of the maximum penalty is not constrained by the narrower consideration (related to marketing or encouragement) that is used to determine whether an entity is a promoter (see paragraph 290-60(1)(b) of this Bill).
[Emphasis added]
However, I understand this commentary to relate to the difference between consideration that is received “in respect of” a scheme in general, and consideration that is specifically received in respect of marketing or encouragement of a scheme. I do not understand it to be suggesting that the essential nature of the consideration that is the subject of s 290-60 is in some way different to that invoked by s 290-50(4) and (5).
Further, there is nothing in the context of s 290-60 or in its legislative history which suggests that ‘consideration’ should be given an unduly strict interpretation, such that non-monetary benefits are automatically excluded. This is not a case like Commissioner of Taxation v Scully (2000) 201 CLR 148, where the High Court held that there was no need for a particular reference to ‘consideration’ in the ITAA36 to be read as capturing non-monetary benefits, as this was expressly provided for by neighbouring provisions of that Act (at 166). I accept the submissions of the Commissioner that had the legislature intended to strictly confine the application of s 290-60 to monetary benefits, it could have employed a more definite term to achieve such an end (such as ‘payment’ or ‘amount’). To this end, it is relevant (although by no means conclusive) that other sections of the TAA feature specific language designed to refer specifically to pecuniary amounts (see eg the definition of ‘tax-related liability’ in s 255-1 as “a pecuniary liability to the Commonwealth”; and the reference in s 260-5 to a third party owing “money”). Finally, I consider that a broad reading of ‘consideration’ in this context best achieves the object of the Division, namely, to deter the promotion of tax exploitation schemes.
The next issue is the connection required by s 290-60(1)(b) between the consideration received, and the marketing or encouragement of the growth of (or interest in) the scheme engaged in by the entity in question.
The Exposure Draft wording of s 290-60 simply required that an entity receive consideration “in respect of the scheme”. As previously noted, one of the changes made to the definition of ‘promoter’ following the consultation period was to restrict consideration for the purpose of this definition to that received “in respect of promotion of the scheme” (Explanatory Memorandum at [3.143]; emphasis in original).
Accordingly, in its present form, s 290-60(1)(b) requires consideration to be received (either directly or indirectly) in respect of the marketing or encouragement referred to in s 290-60(1)(a).
The words “in respect of” have been the subject of considerable judicial interpretation in various contexts (see eg Scully (2000) 201 CLR 148 at 171; Henderson v Pioneer Homes Pty Ltd (1980) 29 ALR 597 at 611; and Nintendo Company Limited v Centronics Systems Pty Limited (1994) 181 CLR 134 at 145). It is well accepted that words such as these take their meaning from their context and the purpose or object of the legislation in which they appear (see eg Scully (2000) 201 CLR 148 at 171; Secretary of the Department of Social Security v a’Beckett (1990) 26 FCR 349 at 358; J & G Knowles and Associates Pty Ltd v Commissioner of Taxation (2000) 96 FCR 402 at 408; and Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91).
It is trite to state that the expression denotes some relationship or connection between two things or subject matters. But these words are not limitless. Not just any connection – no matter how tenuous – between two things or subject matters will suffice (unless, of course, the statutory context clearly dictates such a conclusion). In Workers’ Compensation Board (Q) v Technical Products Pty Ltd (1988) 165 CLR 642, Deane, Dawson and Toohey JJ said (at 653-654; cited with approval by the High Court in Scully (2000) 201 CLR 148 at 171):
Undoubtedly the words "in respect of" have a wide meaning, although it is going somewhat too far to say, as did Mann CJ in Trustees Executors & Agency Co. Ltd. v. Reilly [[1941] VLR 110 at p 111], that "they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer". The phrase gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends.
It is difficult to precisely state a test to determine whether the requisite relationship or connection exists between consideration received and the marketing or encouragement engaged in by an alleged promoter for the purpose of s 290-60 (on the difficulty of formulating such tests, see J & G Knowles (2000) 96 FCR 402 at 409).
As previously noted, one of the purposes of Div 290 is to deter the promotion of tax exploitation schemes. The role played by s 290-60 within this Division is to effectively act as a ‘gatekeeper’ provision. By setting out the criteria by which a ‘promoter’ is defined, its purpose is to ensure that only those people who are fairly judged to be ‘promoters’ are subject to the civil penalty provisions of Div 290, which, if enlivened, may give rise to severe consequences. The explanatory materials extracted in these reasons for judgment indicate that this was a concern of the legislature during the drafting process, and apparently underpinned the deliberate restriction in scope of s 290-60 following the community consultation period. Buttressing this conclusion is s 290-60(2), which states that an entity is not a promoter of a tax exploitation scheme merely because they provide advice about a scheme. This sentiment is echoed in [3.49] and [3.50] of the Explanatory Memorandum, which emphasise this point and state that “[t]he civil penalty regime is not intended to inhibit the provision of independent and objective tax advice, including advice regarding tax planning”.
In this context, “in respect of” narrows the scope of the section by requiring a material connection between the consideration received (which may be received either directly or indirectly) and the marketing and encouragement engaged in. Whether such a connection is made out in respect of a particular entity will require a case-by-case analysis. However, I am satisfied that requiring such a degree of connection between the two concepts best gives effect to the legislative purpose and in the context in which the relevant words appear in Div 290.
‘Tax exploitation scheme’
Divining the meaning of the expression “tax exploitation scheme” as used in Div 290 is a multi-stage inquiry. First, the definition of ‘scheme’ is found in s 995-1(1) of the ITAA97, which defines it as any arrangement (which is itself defined in that section as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings), or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
As acknowledged by the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) at [3.62], this wording substantially mirrors the definition of ‘scheme’ contained in Pt IVA of the ITAA36 (“Schemes to reduce income tax”), which case law acknowledges is very broad: see eg Noza Holdings Pty Ltd v Commissioner of Taxation [2011] FCA 46 at [277] (this decision was appealed in Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445, but the primary judge’s findings on Pt IVA were not the subject of appeal), citing Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39 at [202]–[217]; Commissioner of Taxation v Hart (2004) 217 CLR 216 at [9], [43], [85] and 260–1 [87]; Commissioner of Taxation v Spotless Services (1996) 186 CLR 404 at 425 and Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 378.
Section 290-65 further provides that a scheme is a ‘tax exploitation scheme’ if, at the time of the conduct that is mentioned in s 290-50(1):
(a) one of these conditions is satisfied:
(i)if the scheme has been implemented—it is reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme;
(ii)if the scheme has not been implemented—it is reasonable to conclude that, if an entity (alone or with others) had entered into or carried out the scheme, it would have done so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; and
(b) one of these conditions is satisfied:
(i)if the scheme has been implemented—it is not reasonably arguable that the scheme benefit is available at law;
(ii)if the scheme has not been implemented—it is not reasonably arguable that the scheme benefit would be available at law if the scheme were implemented.
Note: The condition in paragraph (b) would not be satisfied if the implementation of the scheme for all participants were in accordance with binding advice given by or on behalf of the Commissioner of Taxation (for example, if that implementation were in accordance with a public ruling under this Act, or all participants had private rulings under this Act and that implementation were in accordance with those rulings).
(2) In deciding whether it is reasonably arguable that a scheme benefit would be available at law, take into account any thing that the Commissioner can do under a taxation law.
Example: The Commissioner may cancel a tax benefit obtained by a taxpayer in connection with a scheme under section 177F of the Income Tax Assessment Act 1936.
Pursuant to s 284-150 of the TAA, an entity gets a ‘scheme benefit’ from a scheme if one of the following criteria is satisfied:
(a)a tax-related liability of the entity for an accounting period is, or could reasonably be expected to be, less than it would be apart from the scheme or a part of the scheme; or
(b)an amount that the Commissioner must pay or credit to the entity under a taxation law for an accounting period is, or could reasonably be expected to be, more than it would be apart from the scheme or a part of the scheme.
“Tax-related liability” as referred to in s 284-150 is defined in s 255-1 of the TAA as a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable). Section 250-10 sets out a list of tax-related liabilities (which includes income tax: s 250-10(2)). “Taxation law” is in turn defined in s 995-1(1) of the ITAA97 as:
(a)an Act of which the Commissioner has the general administration (including a part of an Act to the extent to which the Commissioner has the general administration of the Act); or
(b)legislative instruments made under such an Act (including such a part of an Act); or
(c) the Tax Agent Services Act 2009 or regulations made under that Act.
As for the next element of the definition of ‘tax exploitation scheme’, according to s 284-15(1) it will be ‘reasonably arguable’ that a scheme benefit is available at law if it would be concluded in the circumstances (having regard to relevant authorities) that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect. Subsections (2) and (3) of that provision further provide that:
(2)To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with law.
(3)Without limiting subsection (1), these authorities are relevant:
(a)a taxation law;
(b)material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901;
(c)a decision of a court (whether or not an Australian court), the AAT or a Board of Review;
(d)a public ruling.
As noted at [3.65] of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth):
[a] promoter’s liability to penalty is independent of any action that may be taken against scheme participants. The test of whether it is reasonably arguable that a scheme benefit is available at law is applied when the promoter’s conduct takes place, and not with the benefit of hindsight once the review and appeal rights for scheme participants have been exhausted.
Section 290-50(2) – “Implementing scheme otherwise than in accordance with ruling”
A number of the concepts invoked by s 290-50(2) – namely, ‘entity’ and ‘scheme’ – have already been considered in the context of s 290-50(1). However, a number of further definitions must also be considered for the purpose of interpreting and applying this subsection.
‘Product ruling’ means a public ruling under the TAA that states that it is a product ruling (s 995-1(1) of the ITAA97). Pursuant to s 358-5 of the TAA, a ‘public ruling’ is a published, written ruling made by the Commissioner on the way in which he considers a relevant provision applies (or would apply) to any of the entities listed in s 358-5(1) of the TAA, that also states that it is a public ruling.
Section 290-55(4)-(6) – Time Limits
This brings us to the “exceptions” contained in s 290-55. Some of the exceptions set out therein pertain to circumstances in which the Court must not order an entity to pay a civil penalty. For the reasons previously explained, these exceptions are not relevant at this stage of the proceeding. However, some of the exceptions purport to prevent the Commissioner from bringing any application at all under s 290-50 against an entity in respect of its conduct. In particular, subss (4) and (5) impose the following time limitations:
(4) The Commissioner must not make an application under section 290-50 in relation to an entity’s involvement in a tax exploitation scheme more than 4 years after the entity last engaged in conduct that resulted in the entity or another entity being a promoter of the tax exploitation scheme.
(5) The Commissioner must not make an application under section 290-50 in relation to an entity’s involvement in a scheme that has been promoted on the basis of conformity with a product ruling more than 4 years after the entity last engaged in conduct in relation to implementation of the scheme.
Subsection (6) states that these limitations do not apply to a scheme involving tax evasion. It was not suggested that the schemes that are the subject of this proceeding satisfy this criterion.
Of these subsections, the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) states (at [3.11]) that an entity is not liable for a penalty if more than four years have elapsed since the entity last engaged in the relevant conduct. It further provides (at [3.35]) that:
[t]he Commissioner must generally begin civil penalty proceedings within four years of the entity’s involvement in the conduct proscribed in the penalty provisions. This time limit reflects the amendment period for taxpayers involved in tax avoidance schemes.
[Schedule 3, item 1, subsections 290-55(4) and (5)][Emphasis in original]
The Commissioner filed his application against the respondents in this matter on 27 June 2011. It was submitted by counsel for Dr Ludekens that by virtue of the operation of s 290-55(4) and (5), the Commissioner may now only rely on conduct occurring after 27 June 2007. However, I do not think that the operation of s 290-50(4) and (5) can be stated so simply. Rather, in this case, the Commissioner alleges a continuum of conduct engaged in by the respondents from early 2007 onwards. Conduct may be proscribed by s 290-50 even if the time for prosecuting such conduct has elapsed under s 290-55. Accordingly, as long as the Commissioner can show that the respondents engaged in conduct that contravenes s 290-50 after 27 June 2007 (being the date four years before this proceeding was issued against the respondents), then all related conduct that occurred prior to this date may also be relied upon. Conversely, if the Commissioner is unable to discharge this burden of proof, then he may not rely on conduct preceding 27 June 2007 in his case against the respondents. It is not simply a question of the Commissioner only being able to rely upon conduct occurring after 27 June 2007, with all related conduct occurring prior to that date being automatically discounted.
The implications of this conclusion are considered further below, in the context of an analysis of the facts sought to be relied upon by the Commissioner. Before engaging in this analysis, however, it is appropriate that I make mention of the witnesses who gave evidence in this proceeding.
WITNESSES
As previously noted, the respondents each elected not to give evidence themselves at the hearing. Nor did either of them seek to call any evidence on their own behalf.
The witnesses who gave evidence on behalf of the Commissioner at the hearing were as follows:
(a)Mrs Elizabeth Velardi, who affirmed an affidavit dated 5 December 2011. Between May 2006 and January 2010, Mrs Velardi worked as a personal assistant primarily for Mr Van de Steeg (but the evidence before me suggests that she also did work for Mr Van de Steeg’s wife; Mr Van de Steeg’s business partner, Mr Jonathan Ezzy; and – as is the subject of further comment below – Dr Ludekens).
In this role, her general duties included being the first point of contact for many of Mr Van de Steeg’s clients; collating and compiling materials for Mr Van de Steeg; sending out correspondence at Mr Van de Steeg’s request; and maintaining an electronic calendar to keep track of his appointments. As the alleged scheme progressed, Mrs Velardi was instructed to assist Dr Ludekens, and undertook such tasks as preparing material on the instructions of, and for approval by, Mr Van de Steeg and/or Dr Ludekens; sending such material to clients; obtaining client and other signatures on relevant forms; and corresponding with the Australian Taxation Office (ATO).
Mrs Velardi was cross-examined extensively by both respondents at the hearing.
(b)Mr Andrew Crouch, who affirmed an amended affidavit dated 7 December 2011. Mr Crouch began working for Mr Van de Steeg as his personal accountant in December 2007. He ceased working for Mr Van de Steeg in January 2009. Mr Crouch was cross-examined by both respondents at the hearing.
(c)Mr Domenico Velardi, who swore an affidavit dated 5 December 2011. Mr Velardi –a hairdresser by occupation – is the husband of Mrs Velardi. Over time, the Velardis made some investments with Mr Van de Steeg, but Mr Velardi’s involvement in this proceeding principally related to the events that transpired on 30 June 2007 involving the applications for Gunns woodlots (described further below). Mr Velardi was cross-examined by both respondents at the hearing.
(d)Mr Michael Martino, who swore an amended affidavit dated 2 December 2011. At the time of the hearing, Mr Martino was a maintenance supervisor with Ford Motor Company. He met Mr Van de Steeg in 2007, and made some investments with him. Mr Martino gave evidence that he expressed interest (but did not ultimately invest) in the Secondary Investment offered to him by Mr Van de Steeg in 2007. Mr Martino was cross-examined by Mr Van de Steeg at the hearing.
(e)Mrs Jodie Smithson, who affirmed an amended affidavit dated 3 December 2011. Mrs Smithson and her husband, Andrew, became friends with Mr Van de Steeg and his wife in 2005. They invested in a foreign exchange trading business with Mr Van de Steeg in 2006. Mrs Smithson worked as a personal assistant to Mr Ezzy from August or September 2006 to late 2009. Mrs Smithson was cross-examined by both respondents at the hearing.
(f)Mr Kirk Webster, who swore an affidavit dated 2 December 2011. Mr Webster is an accountant employed by Terrence Jasper and Associates Pty Ltd, a firm of accountants of which Mr Terry Jasper is the principal. Under Mr Jasper’s supervision, Mr Webster performed accountancy work for Mr Martino. In this capacity, Mr Webster was consulted by Mr Martino about the Secondary Investment proposed by Mr Van de Steeg. Mr Webster was cross-examined by Mr Van de Steeg at the hearing.
(g)Ms Jan Gibson (formerly Jan Taylor), who affirmed an affidavit dated 6 December 2011. Ms Gibson – an information technology project manager – invested some money in various ventures with Mr Van de Steeg. Ms Gibson gave evidence that she and her husband at the time expressed interest (but did not ultimately invest) in the Secondary Investment proposed by Mr Van de Steeg. Ms Gibson was cross-examined by Mr Van de Steeg at the hearing.
(h)Ms Leanne Taylor, who affirmed an affidavit dated 1 December 2011. At the relevant time, Ms Taylor was a bookkeeper employed by Trew Results Pty Ltd (a firm of accountants and tax agents of which Mr Darren Trew was a director), and Mr Glenn Crowe was a client of this firm. Ms Taylor did not give evidence in person at the hearing.
(i)Mr David Tregambe, who affirmed an affidavit dated 5 December 2011. At the time of affirming his affidavit, Mr Tregambe was a sales director, and had known Dr Ludekens socially for approximately seven or eight years. Mr Tregambe invested some money with Dr Ludekens during that time. Mr Tregambe gave evidence that he met with Dr Ludekens in the first half of 2007 to discuss “an investment in timber plantations”. Despite agreeing to participate in the Secondary Investment it ultimately did not proceed, as the deductions claimed by Mr Tregambe were disallowed by the ATO. Mr Tregambe was cross-examined by both respondents at the hearing.
(j)Mr Andrew Smithson, who swore an affidavit dated 3 December 2011. Mr Smithson (along with his wife, Mrs Smithson) invested money with Mr Van de Steeg prior to Mrs Smithson commencing employment as Mr Ezzy’s personal assistant in 2006. The Smithsons were also involved in the events of 30 June 2007 involving the Gunns woodlot applications. Mr Smithson was cross-examined by both respondents at the hearing.
(k)Mr Ian Blanden, who affirmed an affidavit dated 5 December 2011. In 2007, Mr Blanden was the manager of Gunns Plantations, a member of the Gunns group of companies which is based in Tasmania and, at the relevant time, conducted business principally in the forest products industry. Mr Blanden was cross-examined by both respondents at the hearing.
(l)Mrs Daniella Ruffato, who swore an affidavit dated 6 December 2011. At the relevant time, Mrs Ruffato was a program manager for the Asia Pacific and Japanese region with Hewlett Packard. She and her husband made a number of investments with Mr Van de Steeg over time. Mrs Ruffato gave evidence that at the insistence of Mr Van de Steeg, she and her husband met with Dr Ludekens in August 2007 to discuss the Secondary Investment, but they did not ultimately proceed with it. Mrs Ruffato was cross-examined by both respondents at the hearing.
(m)Mr Glenn Crowe, who affirmed an affidavit dated 2 December 2011. A roof plumber by profession, Mr Crowe and his wife first met and invested with Mr Van de Steeg in 2006. Mr Crowe gave evidence that he agreed to participate in the Secondary Investment, which was explained to him by Mr Van de Steeg during a meeting in or about October 2007. Mr Crowe lodged an amended tax return as instructed and obtained a tax refund on the basis of the deductions claimed, which was then paid to Meloka Pty Ltd (Meloka), a company associated with Mr Van de Steeg through which a foreign exchange trading business was conducted. The Commissioner claimed that Mr Crowe’s claimed deduction was subsequently disallowed, leaving him with a tax debt. By contrast, Mr Crowe gave evidence that some time between March and June 2008, Mr Van de Steeg called him and told him to amend his tax return again, this time to remove the partnership loss previously claimed. Mr Crowe did so, and was subsequently issued with a tax bill by the ATO on the basis of this amended assessment. Mr Crowe was cross-examined by both respondents at the hearing.
(n)Mr Martin Cash, who affirmed an affidavit dated 6 December 2011. Mr Cash is an accountant who, at the relevant time, was employed by Coghlan Partners Pty Ltd (referred to by parties in this proceeding as “Coghlans”). Dr Ludekens was a client of Coghlans at the relevant time, and Mr Cash did work for Dr Ludekens under the supervision of Mr Aldo De Luca, a principal of Coghlans. Mr Cash did not give evidence in person at the hearing.
(o)Mr Simon Turner, who affirmed an affidavit dated 7 December 2011. Mr Turner is a Commonwealth public servant working in the ATO. Mr Turner did not give evidence in person at the hearing.
(p)Mr Michael Hawa, who affirmed an amended affidavit dated 6 December 2011. Mr Hawa is a Commonwealth public servant working in the ATO, who, at the relevant time, was a senior auditor within the GST Complex Audit branch of that organisation. Mr Hawa was cross-examined by both respondents.
(q)Mr Adrian Dilger, who affirmed an affidavit dated 6 December 2011. Mr Dilger is an accountant who was, at the relevant time, employed by Coghlans and worked mainly for Mr De Luca. Among other things, Mr Dilger completed work for Dr Ludekens in respect of the GST refunds audit commenced by the ATO in 2007. Mr Dilger was cross-examined by both respondents.
(r)Dr Robert Love, who swore an amended affidavit dated 28 November 2011. Dr Love gave evidence that he was introduced to Dr Ludekens in early 2007, and first spoke with Dr Ludekens about the Secondary Investment in June 2007. Dr Love agreed to invest in respect of both the 2006 and 2007 income years. Ultimately the investment did not proceed, as the ATO disallowed the tax deductions claimed in Dr Love’s tax returns for the relevant years. Dr Love was cross-examined by Dr Ludekens.
I accept each of the witnesses called by the Commissioner as credible, and I have relied on their evidence in determining the Commissioner’s case against the respondents. As is perhaps to be expected in a case of this nature, a number of the witnesses clearly bore some animosity towards one or both of the respondents. However, there were no instances in which I determined that a witness’s testimony was in some way compromised or deserving of lesser weight because of this fact. All comported themselves professionally whilst attending Court and giving evidence. The evidence of the witnesses was consistent with the documentation relied upon by the Commissioner, and was logically probative.
There were a number of participants in the events that are the subject of this proceeding who were not called to give evidence. Accordingly, the Court has before it no statement from these witnesses for the purpose of determining the issues that are the subject of this proceeding. These witnesses were Ms Hayben Richards, Mr Eric Poon (both of whom were alleged by the Commissioner to be part of the group referred to as the ‘Ludekens Investors’), Mr Peter Berlowitz (alleged by the Commissioner to be part of the group referred to as the ‘Van de Steeg Investors’) and Mr Ezzy. In respect of the first three, no reason was given for their absence. In respect of Mr Ezzy – who, by all accounts, appears to have been materially involved in the development and implementation of the alleged scheme – it was said that he was unable to be found.
FACTS RELIED UPON BY THE COMMISSIONER
Chronology of key events
Accompanying the Commissioner’s final submissions in this proceeding was a chronology setting out key events. It is appropriate to substantially reproduce that chronology here, supplemented by those aspects of the evidence given by witnesses at the hearing that were expressly relied upon by the Commissioner in his final submissions. I have accepted the facts set out hereunder as true and correct, except where otherwise stated.
In the first half of 2007, Dr Ludekens attended one of the “standard adviser tours to Tasmania” run by Gunns. On 15 May 2007, Dr Ludekens met with Mr Blanden and Mr Les Baker (Executive Director of Gunns Plantations) in Melbourne. Some time after this meeting, Gunns offered Dr Ludekens a commission rate of 15% on investments procured by him in Gunns’ managed investment schemes.
According to Mr Tregambe, some time around the first half of 2007 Dr Ludekens met with him and offered him the Secondary Investment. Mr Tregambe understood from this conversation that the investment would involve the following steps:
(a)As an investor, he would purchase allotments of trees, the quantity of which would be determined by his annual income.
(b)A loan would be obtained to purchase the trees.
(c)He would claim a deduction for this investment, and the resulting tax refund would be used to service the loan.
On 5 June 2007, Mr Blanden’s assistant sent an email to Dr Ludekens that included hyperlinks to the 2006 PDS and PR 2006/8. Mr Blanden gave evidence at the hearing that prior to 30 June 2007, Gunns was aware that “there were going to be applications submitted of a substantial nature… circa $20 million”.
Also at or around this time, Mr Van de Steeg rang Mrs Ruffato to discuss the Secondary Investment. During this conversation, Mr Van de Steeg suggested that Mrs Ruffato meet with Dr Ludekens, who “really knew about this investment”. Mrs Ruffato gave evidence that Mr Van de Steeg told her at this time that the investment involved the purchase of plantation trees, was all legitimate and was an opportunity to make some tax savings. On this basis, Mrs Ruffato agreed to meet with Dr Ludekens, and later received a call from Dr Ludekens to set up a meeting time.
On 13 June 2007, Dr Ludekens offered Dr Love the Secondary Investment during a telephone discussion. Dr Love gave evidence that during this conversation, Dr Ludekens assured him that the investment he was proposing had an appropriate product ruling. Dr Love also gave evidence that at this time, Dr Ludekens offered him interests in woodlots for the 2006 income year. It was conceded by the Commissioner during the hearing that this evidence is tendency evidence for the purpose of s 97 of the Evidence Act 1995 (Cth). For such evidence to be admissible, reasonable notice in writing is required to be given to all other parties in a matter by the party seeking to adduce the evidence (s 97(1)(a)). Section 97(1)(b) further requires that the Court must be satisfied that the evidence will have significant probative value (either by itself, or having regard to the other evidence adduced or to be adduced by the party seeking to adduce that tendency evidence). In this case, the Commissioner failed to give notice in the proper form but relied instead on the affidavit of Dr Love which was served in December 2011. In the circumstances, I would dispense with the relevant notice requirements under s 100 of the Evidence Act 1995 (Cth). I consider that the evidence in question has significant probative value, being contemporaneous and similar conduct, and should therefore be admitted.
On 14 June 2007, Dr Ludekens sent an email to Dr Love that summarised the Secondary Investment, and included hyperlinks to the 2006 PDS and PR 2006/8. Dr Love gave evidence that from his telephone conversation with Dr Ludekens and this email, he understood that the investment would involve the following steps:
(a)As an investor, he would nominate an amount of money to put towards the acquisition of woodlots in a Gunns managed investment scheme.
(b)A loan would be obtained to finance the acquisition of the woodlots.
(c)In his tax return, he would claim the amount paid in respect of the woodlots as a deduction.
(d)He would pay the resulting tax refund to Dr Ludekens or Dr Ludekens’ company, Lotus Capital Group Pty Ltd (Lotus), who would then use the refund to pay the principal and interest on the loan.
(e)After 10 years, there would be a payout of the proceeds of an initial cropping of the trees. After 25 years, there would be a final payout.
Also on 14 June 2007, Mrs Ruffato sent an email to Dr Ludekens to confirm a meeting scheduled for 18 June 2007. As will shortly become apparent, this meeting was postponed a number of times (and was ultimately held in August 2007).
In or about the period 20 to 29 June 2007, Messrs Van de Steeg and Ezzy discussed a proposal with the Smithsons, whereby each of the Smithsons would sign documentation in relation to the proposed acquisition of woodlots in the 2006 Gunns Woodlot Project. Mrs Smithson gave evidence that Mr Van de Steeg explained that their names would only be on the documents to “get the deal across the line”, and that the woodlots would then be on-sold and the Smithsons’ names would be removed. This process would take “four to six weeks at the very most”. Mrs Smithson also gave evidence of a conversation she had with Mr Ezzy at this time, during which he told her that without the Gunns investment, Meloka (the foreign exchange trading business in which the Smithsons had invested money) was “going to struggle”. Mr Ezzy offered the Smithsons a “gift” of $5,000 each for signing the documents relating to the proposed Gunns investment.
Also at or around this time (and in any event, not long before 30 June 2007), Mr Van de Steeg informed Mrs Velardi that as part of her duties as his personal assistant, she would be required to assist Dr Ludekens with the proposed Gunns investment. At or around this time, a meeting was held between Messrs Van de Steeg and Ezzy, Dr Ludekens and Mrs Velardi at a Richmond café.
On 29 June 2007, there was a meeting between Messrs Van de Steeg and Ezzy and Dr Ludekens. The notes of this meeting show that elements of the Plan were discussed. The purchase of $20m trees was contemplated, as were various strategies to finance this venture.
On 30 June 2007, Dr Ludekens and Messrs Van de Steeg and Ezzy attended the homes of both the Smithsons and the Velardis. At this time, both the Smithsons and the Velardis agreed to be signatories to the Gunns woodlot and finance applications on the express conditions that their names would only appear on the documents temporarily and they would not be liable for any payments. It was explained to them by the respondents and Mr Ezzy that the use of their names was merely a formality; the woodlots were to be on-sold to wealthy investors who would use the investment to reduce their tax liabilities. The Smithsons and the Velardis gave evidence that they were expressly assured by the respondents and Mr Ezzy that by signing the documents in the manner requested, their assets would not be at risk. They were also promised a written indemnity.
I note that there was some dispute at the hearing whether the Velardis were paid $5,000 apiece as the Smithsons were, as a gift for signing the application forms. Mrs Velardi maintained under cross-examination that no such payment was ever received, a fact which was contested by Dr Ludekens. It is ultimately unnecessary for me to decide this point, as I consider that it is not relevant to the question of the respondents’ liability in this proceeding. However, for the avoidance of doubt, I note that I do not consider Mrs Velardi’s credit to have suffered as a result of the repeated attacks made upon it by Dr Ludekens in this context. The same can be said about matters such as Mr Van de Steeg’s challenge to Mrs Velardi’s evidence that this conversation about her and her husband’s involvement with the woodlot investment occurred on 30 June 2007 (rather than several weeks prior to this, as alleged by Mr Van de Steeg). Ultimately, nothing turns on this issue, and Mrs Velardi was not shaken in her testimony about these matters.
The Smithsons and the Velardis gave evidence that on 30 June 2007, they simply signed the documents put in front of them, and did not complete the sections of the application forms relating to assets and liabilities. At that time, they were not given copies of the documents they signed. They each gave evidence that the application forms tendered as evidence in this proceeding contain handwriting other than their own. For example, Mr Smithson gave evidence that apart from his signature, the documents contain a number of false statements written in handwriting that does not belong to him, regarding matters such as his income, profession and home address. Further, neither of the Smithsons recalled seeing anyone sign the application forms as a witness to their signatures, yet Dr Ludekens’ signature appears in this capacity on the forms tendered in evidence. In addition, the Smithsons and the Velardis gave evidence that they did not authorise the preparation or use of Australian Business Register partnership registrations, partnership GST registrations, financial statements or tax returns that were subsequently prepared in their names. Further, they did not know about the existence of these documents until they were shown (or otherwise obtained copies) in 2010 and 2011. Similar evidence was given by other witnesses.
Also on 30 June 2007, at the direction of Mr Van de Steeg, Mrs Velardi typed up a letter that was then printed on Meloka letterhead and signed by each of the respondents and Mr Ezzy. The letter – which was dated 30 June – evidenced an agreement by these parties to forward all commissions, GST and client tax rebates arising from the sale of Gunns trees to Meloka. It stated that the respondents and Mr Ezzy would meet on 2 July 2007 to “work out the process of Meloka Pty Ltd paying off the $20 million of Plantation Trees purchased and an agreement for Andrew Ludekens Trading Account”. Mrs Velardi maintained under cross-examination by both respondents that this document was created on 30 June 2007. Given that there is nothing in evidence that contradicts Mrs Velardi’s position on this issue, I accept her evidence.
Pursuant to these events, on 30 June 2007, 3,250 fully-financed woodlots in the 2006 Gunns Woodlot Project to the value of $22,165,000 were acquired in the following manner:
Woodlot Application No.
(1 - 10)
First Signatory
Second Signatory
Number of woodlots
Cost of application
(incl GST)Loan application amount
1
Van De Steeg
Ludekens
350
$2,387,000
$2,391,179.75
2
Van De Steeg
Ezzy
350
$2,387,000
$2,391,179.75
3
Van De Steeg
D Velardi
350
$2,387,000
$2,391,179.75
4
Van De Steeg
E Velardi
350
$2,387,000
$2,391,179.75
5
Ezzy
Ludekens
350
$2,387,000
$2,391,179.75
6
Van De Steeg
J Smithson
300
$2,046,000
$2,049,583.00
7
Ezzy
A Smithson
300
$2,046,000
$2,049,583.00
8
Ezzy
J Smithson
300
$2,046,000
$2,049,583.00
9
Van De Steeg
A Smithson
300
$2,046,000
$2,049,583.00
10
Ezzy
E Velardi
300
$2,046,000
$2,049,583.00
Totals
3,250
$22,165,000
$22,203,813.75
On 2 July 2007, as foreshadowed in the letter prepared and signed on 30 June, the respondents met with Mr Ezzy. At this meeting, the Plan was discussed in detail. Typed notes of this meeting – entitled “Structure and Funding Terms Agreed to” – were prepared by Mrs Velardi. Relevantly, these notes contain the following points:
1. New Company to be set up and the directors to be Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens.
2. The new Company & Meloka Pty Ltd will be liable for the $20m of trees purchased and for the interest payments payable monthly until paid in full.
3. Commissions and GST derived from sales of the trees will be paid to the new Company and on-lent to Meloka Pty Ltd.
4. The trees will be on-sold to customers. Once the customers have purchased the trees, their tax refunds will be invested within the new Company and the new Company will then on-lend this to Meloka Pty Ltd. The only obligation of Meloka Pty Ltd and the new Company is to pay off the principal and interest component of the trees on behalf of the customer. The tax refund is non refundable to the customer on the proviso that, the trees that they have purchased has [sic] been paid off in full, by the new Company and Meloka Pty Ltd.
5. The on-sale of the trees must equate to a minimum of $6m in tax refunds which will come through the new Company from customers and then on-lent to Meloka Pty Ltd.
6. Once the new Company on-sells the trees, if the tax refunds are approximately 45c in the dollar, only $13m worth of trees need to be on-sold to get tax refunds totalling $6m from customers. This will leave $7m worth of trees in the new Company of which Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens have equal shareholdings. If $13m is sold and the total tax refunds equate to less than $6m, more trees need to be sold until the total amount of $6m derived from customer tax refunds is achieved.
…8. The money raised by the sale of the trees by the new Company will be $3m by the 6th July 2007, $2m by 30th July 2007 and then $6m over the course of July to December 2007.
9. All parties being Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens agree that a total of $8m will come in by the end of July 2007 which will be a combination of the following:
·Commissions paid and the GST rebate on $20m of trees purchased,
·Sale of other trees by Andrew Ludekens bringing in $500,000 of which [sic] will be invested with Meloka Pty Ltd on behalf of Andrew Ludekens and,
·Other sales made by Peter and Jonathan & Andrew Ludekens.
It is also agreed that:
·30% of the additional $6m still to come in from tax refunds from the customers and that $2m will be lent to a trading account that Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens own.
·The $2m is to be loaned from Meloka Pty Ltd to the trading account and is repayable once the account reaches $8m or 3yrs, whichever comes first.
·100% of all profits from this account will be owned by Andrew Ludekens or one of his associated companies. We will allow this account to compound up to AU$20m and once reached all profits must be drawn as they are derived.
10. Out of the initial $3m which is the commission component and the $2m which the GST rebate [sic], $500,000 of this amount will be put into a bank account which will be used to capitalise and pay the interest on the $20m at 10% p.a. for the first 3 months. An additional $500,000 will go into a trading account owned by Peter Van de Steeg and Jonathan Ezzy and also an additional $2.5m will be put into this trading account totalling $3m that will pay the interest component payable monthly on the outstanding balance being initially $20m until paid in full.
…13. Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens all agree to work together for the next 6 months to on-sell the $13m worth of trees (or more if required) as quickly as possible so that we can acquire the $6m in tax refunds.
On 5 July 2007, Mrs Velardi emailed Dr Ludekens the tax file numbers of Messrs Van de Steeg and Ezzy, along with those of the Velardis and Smithsons.
On 6 July 2007 there was a further meeting between the respondents and Mr Ezzy. At Mr Van de Steeg’s direction, Mrs Velardi prepared notes for circulation at that meeting. These notes were substantially based on the notes of the 2 July 2007 meeting.
On 9 July 2007, Mrs Velardi emailed Dr Ludekens a copy of the notes of meeting from 6 July 2007, which were substantially the same as the 2 July 2007 notes of meeting entitled “Structure and Funding Terms Agreed to”. These notes – which were erroneously dated 6 June 2007 – contain a number of tracked changes made by Mrs Velardi at Mr Van de Steeg’s direction. Also on this day, Mrs Velardi emailed Dr Ludekens a further document that she gave evidence had been dictated to her by Mr Van de Steeg, entitled “Partnership and Client Management Agreement”. Both of these emails were copied to Mr Ezzy.
On 11 July 2007 there was a meeting between Mr Van de Steeg and Dr Ludekens. On this same day, Mr Van de Steeg asked Mrs Velardi to make a number of further marked-up changes to both the “Structure and Funding Terms Agreed to” and the “Partnership and Client Management Agreement” documents.
On 12 July 2007, Lotus received commission of $3,654,156 from Gunns in respect of the woodlots acquired. Of this amount, $3,324,750 relates to the woodlots acquired pursuant to the Plan (the remainder of the commission received relates to the acquisition of woodlots that are not the subject of this proceeding).
On 16 July 2007, Lotus paid $3m to Meloka. Meloka then distributed these funds in the following manner:
(a)$1.4m was paid to Korlea Pty Ltd (Korlea), a company associated with Mr Berlowitz. Mr Crouch gave evidence that this payment was for the units in the Advanced Forex Trading Agency business of Mr Berlowitz’s that Meloka was acquiring.
(b)$250,000 was paid to Mr Van de Steeg (Mr Crouch gave evidence that to the best of his recollection, this would have been recorded as a loan from Meloka to Mr Van de Steeg).
(c)$200,000 was paid to Mr Ezzy (again, to the best of Mr Crouch’s recollection, this would have been recorded as a loan from Meloka to Mr Ezzy).
(d)$90,000 was paid to Arnah Pty Ltd, which – at the relevant time – was the trustee of the Ezzy Family Trust (Arnah). Mr Crouch could not recall whether this payment was recorded as a loan or a return of capital to Arnah.
(e)$850,000 was paid to Jameter Pty Ltd, which – at the relevant time – was a company owned by Mr Van de Steeg and Mr Ezzy (Jameter). To the best of Mr Crouch’s recollection, he thought this payment would have been recorded as a loan to Jameter.
(f)The balance of the $3m was paid to various creditors of Meloka.
The second element of the definition of ‘tax exploitation scheme’ in s 290-65 is that it is not reasonably arguable that the scheme benefit in question is available at law. Again, in light of the foregoing conclusions (particularly the conclusion that no scheme benefit has been established by the Commissioner in this case), it is strictly unnecessary to consider this requirement. However, I make the following brief comments.
The Commissioner submitted that it was not reasonably arguable, at the time of the conduct referred to in s 290-65, that:
1.a reduced income tax liability or increased tax refund was available at law to persons making the Secondary Investment; and
2.relevantly to the Plan, GST refunds relating to input tax credits arising on acquisition of the woodlots were available to the entities which made the acquisitions.
The Explanatory Memorandum cautions that “[t]he test of whether it is reasonably arguable that a scheme benefit is available at law is applied when the promoter’s conduct takes place, and not with the benefit of hindsight once the review and appeal rights for scheme participants have been exhausted”.
In support of his argument that it was not reasonably arguable that the reduced income tax liabilities and increased income tax refunds were available at law to the investors in the Secondary Investment, the Commissioner relied on that part of PR 2006/8 that governs the application of the product ruling to various entities.
Paragraph 61 states that PR 2006/8 applies only to “a Grower who is accepted to participate in the Project on or before 30 June 2007 as a ‘2007 Grower’ and who has executed a Management Agreement and either an Agreement to Grant a Sub-Forestry Right or a Sub-Forestry Right Deed on or before that date”.
It further states at [68] that “[a] Grower who is accepted to participate in the Project on or before 30 June 2007 may claim tax deductions, on a per Woodlot basis, under section 8-1 of the ITAA 1997” for various revenue expenses identified in that paragraph. Paragraph 63 notes that a Grower is not eligible to claim any tax deductions until the Grower’s application to enter the Project is accepted and the Project has commenced.
The Commissioner submitted that the investors in the Secondary Investment were not accepted to participate in the 2006 Gunns Woodlot Project prior to 30 June 2007 (or in fact, at any time). To this end, the Commissioner pointed to the fact that these investors never signed the agreements that are the subject of PR 2006/8, incurred fees relating to this project or commenced the carrying on of a business of primary production. Accordingly, they were not entitled to claim deductions in the 2007 income year. The Commissioner submitted that as a result, it was not reasonably arguable at the relevant time that the purported scheme benefits (being the reduced income tax liabilities, and increased income tax refunds) were available at law to the investors in the Secondary Investment.
In response, counsel for Dr Ludekens sought to differentiate between the investors who committed to the Secondary Investment prior to the end of the 2007 income year, and those who did not. In respect of the former class of investors (which was said to be the only class of investors relevant to the case against Dr Ludekens), it was submitted that it was reasonably arguable that a tax deduction was available, notwithstanding that these investors did not sign the Gunns Woodlot project application form and other documents required under PR 2006/8. Submissions to this end included the assertion that an investor could have been a member of a partnership for which the signatories on the application form acted as nominees or agents. Alternatively, there could have been a partnership in the general law sense of persons carrying on a business with a view to profit (or in receipt of ordinary income and statutory income jointly), in which case the benefits and obligations of investing in the 2006 Gunns Woodlot Project would have rested with those partners, rather than with the nominees or agents who physically signed the applications. It was further alleged that investors might have agreed to purchase the woodlots from the original applicants and take over responsibility for the loans from Gunns Finance, which would be followed by assignment of the woodlots to those investors (with the consent of Gunns).
In respect of the GST refunds, the Commissioner submitted that s 11-20 of the GST Act provides that “you” (defined as “entities generally: see s 195-1 of that Act) “are entitled to the input tax credit for any creditable acquisition you make”. However, an entity is only entitled to input tax credits for acquisitions made in carrying out an enterprise: see ss 11-5, 11-15 and 11-20 of the GST Act. The definition of “entity” includes a partnership. As previously set out, ‘partnership’ is in turn defined in s 995-1 of the ITAA97 as:
(a)an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or
(b) a limited partnership.
The Commissioner submitted that the entities acquiring the woodlots were not entitled to GST refunds because:
(a)the signatories to the woodlot applications were not in fact partners, despite being treated as such by the respondents in their applications to the ATO for GST refunds; and
(b)even if found to be ‘entities’ for the purpose of the GST Act, the purported partnerships were not carrying out an enterprise for the purpose of that Act.
Counsel for Dr Ludekens made submissions in response on two bases. The first was that after suspending payment of the GST refunds in order to conduct an audit that ran for approximately five months, the Commissioner in fact paid the GST refunds in or about January 2008 (a fact which, it was submitted, implies that the refunds were available at law; and is incongruous with the Commissioner’s present position).
Secondly, it was submitted that the Commissioner’s analysis of the concepts of ‘entity’ and ‘enterprise’ was flawed. First, in that the signatories to the woodlot applications (and in whose names the purported partnership entities were registered) could be considered to be a partnership in the form of “an association of persons… in receipt of ordinary income or statutory income jointly”, as they jointly owned income-producing property (Commissioner of Taxation v McDonald (1987) 15 FCR 172 at 182-183 was cited in support of this proposition). Secondly, in that rather than the appropriate definition of ‘enterprise’ being “an activity, or series of activities, done in the form of a business” as alleged by the Commissioner under s 9-20(1)(a) of the GST Act, a more appropriate choice of definition was that contained in s 9-20(1)(b) – being “an activity, or series of activities, done in the form of an adventure or concern in the nature of trade”.
Without needing to ultimately determine this issue for the reasons I have previously given, it seems to me that in the circumstances, the Commissioner has shown that it was not reasonably arguable that the scheme benefits were available at law. But of course, this does not surmount the Commissioner’s failure to make out the other aspects of the definition of ‘tax exploitation scheme’ in his case against the respondents, and hence does not affect my ultimate conclusion in this proceeding.
An entity must not engage in conduct that results in another entity being a promoter
It is appropriate at this stage, before turning to consider the Commissioner’s case against each of the respondents under s 290-50(2), to briefly make mention of the Commissioner’s assertion in his final submissions that the respondents may be liable under s 290-50(1) on account of each having engaged in conduct that resulted in the other being a promoter of a tax exploitation scheme.
The Commissioner did not make any substantive submissions in support of this point. It was not specifically pleaded in the Further Amended Statement of Claim. Nor was it articulated by counsel for the Commissioner during the opening address at the hearing. Accordingly, and for the avoidance of doubt, I do not consider that the Commissioner can be permitted to rely, at this stage of the proceeding, on these allegations. However, I make the following observations.
Of this aspect of s 290-50(1), the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) states (at [3.20]-[3.21]):
the proscription states that an entity must not engage in conduct that would result in another entity being a promoter of a tax exploitation scheme. This proscription does not apply to conduct that is merely peripheral to the conduct that makes the second entity a promoter. There needs to be a degree of active engagement by an entity in causing another entity to be a promoter. The conduct of the entity must result in the second entity satisfying each of the elements of the term ‘promoter’ in subsection 290-60(1). For example, as corporations and other nonindividual entities usually require individuals to act for them, those individuals must not take decisions that result in the entity being a promoter of a tax exploitation scheme. For example, a managing director of a company or partner in a partnership could trigger the provision by taking decisions that result in the company or partnership being a promoter of a tax exploitation scheme.
This approach is important as an individual may operate through another entity in promoting a tax exploitation scheme. Subsection 290-50(1) therefore enables the Commissioner to take action against the individual in these cases. This ensures that individual promoters cannot use a business structure with minimal assets to avoid liability for the penalty. The mechanism also enables the Commissioner to apply for a penalty against a key person promoting a tax exploitation scheme from within a larger entity. However the intention is not to make employees who merely carry out actions as lawfully directed by their arms’ length employer responsible for the employer’s actions.
Despite the fact that the key example invoked in the Explanatory Memorandum is that of individuals acting through corporate entities, it is not suggested that this aspect of s 290-50(1) is confined to such situations. But in order to successfully make such an argument, the Commissioner would need to demonstrate that the conduct of one respondent has “resulted in” the other being a promoter – words which would seem to require a direct causal link between the two. It is questionable whether such a link could be established in this case. However, as this was not an argument formally pressed by the Commissioner, it is not necessary for me to ultimately determine this issue.
Section 290-50(2) – “Implementing scheme otherwise than in accordance with ruling”
Quite independent from the allegations made under s 290-50(1), the Commissioner submitted that the respondents contravened s 290-50(2) by engaging in conduct that resulted in a scheme that was promoted on the basis of conformity with a product ruling being implemented in a materially different way from that described in that ruling.
The Commissioner’s submissions in respect of s 290-50(2) can be summarised as follows:
(a)the 2006 Gunns Woodlot Project and/or the Secondary Investment were promoted on the basis of conformity with PR 2006/8;
(b)the tax outcome for participants in the Secondary Investment was materially different from the tax outcome described in PR 2006/8; and
(c)accordingly, by the steps each respondent took to carry the Secondary Investment into effect, each engaged in conduct that resulted in the scheme that was promoted on the basis of conformity with PR 2006/8 (whether that be the 2006 Gunns Woodlot Project, or the Secondary Investment) being implemented in a materially different way from that described in PR 2006/8.
It was also submitted that a further breach of s 290-50(2) was committed in respect of the acquisition of the Gunns woodlots using the signatures of the Smithsons and the Velardis.
I accept for the purpose of this analysis that both the 2006 Gunns Woodlot Project and the Secondary Investment may constitute a ‘scheme’ for the purpose of this provision.I will address the submissions relating to the 2006 Gunns Woodlot Project, the Secondary Investment in turn, and the acquisition of woodlots using the signatures of the Smithsons and the Velardis.
The 2006 Gunns Woodlot Project
In order to succeed under s 290-50(2) in respect of the 2006 Gunns Woodlot Project, the Commissioner is required to demonstrate that one or both of the respondents engaged in conduct that resulted in the 2006 Gunns Woodlot Project (being a scheme that has been promoted on the basis of conformity with a product ruling, namely, PR 2006/8) being implemented in a way that is materially different from that described in PR 2006/8.
It will be recalled that the note to s 290-50(2) provides that a scheme is not implemented in a materially different way from that described in a product ruling if the tax outcome for participants in the scheme is the same as that described in the ruling.
As a preliminary matter, I accept for the purpose of this analysis that PR 2006/8 satisfies the definition of “product ruling” provided by s 995-1 of the ITAA97. Entitled “Income Tax: Gunns Plantations Limited Woodlot Project 2006 ‘2007 Growers’”, it was made on and applied prospectively from 8 March 2009. I am also prepared to accept that Gunns promoted the 2006 Gunns Woodlot Project by reference to this ruling and the 2006 PDS, which bore a logo on its front cover in the form of a seal with the words “Australian Taxation Office Product Ruling No. 2006/7 – 2006/8” on it. The text of the 2006 PDS also made reference to PR 2006/8 – for example, it advised prospective investors that the project had been issued with PR 2006/8, and referred them to the Gunns website for a copy of that ruling. Further, amongst the risks associated with participating in the 2006 Gunns Woodlot Project listed in the 2006 PDS is the possibility of disallowance of tax deductions “in the event that the Project is not operated in accordance with the product ruling”. There is no indication in s 290-50(2) that the entity accused of implementing the scheme in a materially different way must also be the one that promoted the scheme on the basis of conformity with a product ruling. Accordingly, I accept that the 2006 Gunns Woodlot Project was promoted by Gunns on the basis of conformity with PR 2006/8. So much was conceded by counsel for Dr Ludekens in his submissions.
The real difficulty for the Commissioner arises in respect of the requirement that the respondents’ conduct resulted in the implementation of the 2006 Gunns Woodlot Project in a way that is materially different from that described in PR 2006/8.
In the Commissioner’s final submissions, it was asserted that “[t]he tax outcome for participants in the Secondary Investment was different from the tax outcome described in the Product Ruling”. I accept the Commissioner’s submissions on this point. As previously accepted in the context of considering the requirement under s 290-65, the investors in the Secondary Investment were not “accepted to participate” in the 2006 Gunns Woodlot Project before 30 June 2007 (or at any time) as required by PR 2006/8. This is principally attributable to their failure to pay application fees and sign key agreements governing the operation of the 2006 Gunns Woodlot Project as required by both the 2006 PDS and PR 2006/8. Accordingly, these investors were not carrying on a business of primary production at the relevant time, and correspondingly were not entitled to claim tax deductions in respect of their participation in the Secondary Investment. However, such a conclusion does not inexorably lead to a finding that the respondents “implemented” the 2006 Gunns Woodlot Project in a way that is materially different from that described in PR 2006/8.
No definition of ‘implemented’ is provided by the income tax legislation. ‘To implement’ is defined in the Macquarie Dictionary (2009, 5th ed) as “to put (a plan, proposal, etc) into effect”. ‘Implemented’ in this context is therefore a different concept to ‘promoting’ (being the chief concept invoked by s 290-50(1)). This is supported by the following statements that appeared in the Explanatory Material circulated for discussion in 2005 (which are not reproduced in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth)):
Who is a scheme implementer?
33. The provisions identify two types of individuals to which the measures may apply – promoters and scheme implementers. A promoter is responsible for the promotion of a tax exploitation scheme (see paragraphs 22 to 32). A scheme implementer, however, is at risk of penalty for the implementation of a scheme inconsistently with its product, or other binding ruling, resulting in a different tax outcome for investors. [schedule #, item #, subsection 290-50(2)]
34. A scheme implementer has an instrumental role in the operation of the scheme. They are responsible for making the supervisory or managerial decisions that put a scheme into operation or significantly influence the running of the scheme. Scheme implementers are likely to be individuals in a position to make executive decisions about the operation of the scheme.
35. Implementation would not extend to the actual carrying out of specific tasks related to the running of the scheme. For this reason, someone who is employed or contracted to carry out such tasks would not be a scheme implementer.
[Emphasis in original]
‘Implementation’ is therefore a broader concept than mere promotion. Accordingly, the emphasis of s 290-50(2) is quite different to that of s 290-50(1). This conclusion is buttressed by a consideration of the operation and purpose of product rulings in general.
It will be recalled that a product ruling is defined (somewhat circularly) by s 995-1(1) of the ITAA97 as a public ruling under the TAA that expressly states itself to be a product ruling. A “public ruling” is a published, written ruling made by the Commissioner on the way in which he considers a relevant provision applies (or would apply) to any of the entities listed in s 358-5(1) of the TAA, that also states itself to be a public ruling (s 358-5 TAA). To this end, PR 2006/8 describes public rulings as being:
an expression of the Commissioner’s opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.
Public rulings are issued by the Commissioner in respect of and on the basis of the schemes specifically described in those rulings. Such rulings provide certainty for potential participants by confirming that the tax benefits set out in the ruling are available, provided that the scheme is carried out in accordance with the information given to the Commissioner and described therein. To this end, PR 2006/8 states:
If the scheme is not carried out as described, participants lose the protection of this Product Ruling. Potential participants may wish to seek assurances from the promoter that the scheme will be carried out as described in this Product Ruling.
…
Terms of use of this Product Ruling
This Product Ruling has been given on the basis that the entity(s) who applied for the Ruling, and their associates, will abide by strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Ruling.
…
Qualifications
The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described…
If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then:
•this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and
• this Ruling may be withdrawn or modified.
PR 2006/8 sets out how the scheme is to be implemented in order for the tax benefits referred to therein to be available to participants. The scheme itself (being the 2006 Gunns Woodlot Project) is specifically defined by reference to and as incorporating a number of documents, such as the draft 2006 PDS, the draft Constitution of the 2006 Gunns Woodlot Project, and a number of agreements to be executed by investors (such as the Forestry Right Deed and the Management Agreement). The scheme is further defined at [18] in PR 2006/8 as a function of a number of “salient features”. These comprise the ‘mechanics’ of the scheme, and include the type of business to be carried on by each participant (being the commercial growing of Eucalyptus globulens (Tasmanian Blue-Gum), Pinus radiata (Radiata Pine) and Eucalytpus nitens (Shining Gum) trees under one of three planting options), the number of hectares to be offered for cultivation, and number of trees per hectare. Further, as previously explored, PR 2006/8 was issued on the basis that it applies only to a defined class of entities, namely:
the entities more specifically identified in the Ruling part of this Product Ruling and who enter into the scheme specified below on or after the date this Ruling is made. They will have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement as set out in the description of the scheme…
The class of entities to whom this Ruling applies does not include:
•entities who intend to terminate their involvement in the scheme prior to its completion, or who otherwise do not intend to derive assessable income from it;
•entities who participate in the Project through offers made other than through the Product Disclosure Statement;
•entities who finance their participation in the Project through loans other than those loans described at paragraphs 48 to 56 of this product ruling;
• Gunns Plantations Ltd or its associates; and
•entities who are accepted to participate in the Project before 1 July 2006 and after 30 June 2007.
…
Application of this Ruling
… [T]his Ruling applies only to a Grower who is accepted to participate in the Project on or before 30 June 2007 as a ‘2007 Grower’ and who has executed a Management Agreement and either an Agreement to Grant a Sub-Forestry Right or a Sub-Forestry Right Deed on or before that date.
The Grower’s participation in the Project must constitute the carrying on of a business of primary production.
A Grower is not eligible to claim any tax deductions until the Grower’s application to enter the Project is accepted and the Project has commenced.
The foregoing indicates that the fundamental purpose of s 290-50(2) is to protect the integrity of the product ruling system, such that taxpayers are able to rely upon a product ruling when making investment decisions in respect of the scheme to which that ruling specifically relates. To this end, the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) states:
3.68 If a scheme with a product ruling is not implemented in conformity with its ruling, with potential tax consequences for investors, then a penalty may apply under the second civil penalty provision.
[Schedule 3, item 1, subsection 290-50(2)]What is a product ruling?
3.69 A product ruling is a form of public ruling issued by the Commissioner. Product rulings were introduced in 1998 to rule on the availability of tax benefits from particular investment products. The Commissioner has published information about how and when a product ruling is issued.
3.70 Scheme promoters or implementers can apply for a product ruling. The Commissioner can then issue a product ruling confirming that a tax benefit is available at law provided the scheme is implemented in the manner described to the Commissioner in the ruling application.
3.71 Where a scheme is implemented in a materially different way to that described in its product ruling, there is a risk that investors may lose the protection of the ruling and may have scheme benefits disallowed, and be charged penalties and interest. The second civil penalty provision ensures that the entity responsible for the scheme not being implemented in conformity with its product ruling is at risk of penalty.
[Emphasis in original]
Accordingly, it is critical to distinguish between the effect that conduct has on the scheme as described in the relevant product ruling, and its effect on participants in an investment involving the scheme.
A scheme can be implemented in exactly the way that is described in a product ruling, notwithstanding that some of participants are not covered by that product ruling. The fact that persons who do not fall within the scope of PR 2006/8 (such as those amongst the Ludekens and Van de Steeg Investors and Mrs Ruffato who ultimately participated in the Secondary Investment) purport to participate in the 2006 Gunns Woodlot Project does not mean that the scheme itself has been implemented in a way that is materially different to that described in PR 2006/8. Without more, all that has happened is that the scheme has been implemented exactly as described in PR 2006/8 (for example, the woodlots have been planted and allocated according to the terms set out in that document), but some participants do not fall within the scope of (and hence are not entitled to take advantage of the tax benefits described in) that product ruling.
This conclusion finds support in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth), which provides the following example of the implementation of a scheme in a way that is not materially different from that described in the relevant product ruling:
An example of a non-material difference would be where a plantation scheme installs a drip system for watering seedlings instead of micro-sprayers, on advice from experts that this would result in more efficient irrigation of the plantation. If such a departure from the implementation plan set out in the product ruling application does not impact on the commercial viability of the scheme or on the tax consequences for investors, then it would not constitute a material difference.
[Schedule 3, item 1, subsection 290-50(2), note][Emphasis added]
The reference in s 290-50(2) to the ‘implementation’ of a scheme therefore pertains to the way in which the scheme as a whole is actually carried out, as described in detail in the corresponding product ruling (and on the basis of which the Commissioner has issued the product ruling). In this proceeding, no evidence was led to the effect that the 2006 Gunns Woodlot Project as a whole was not, in fact, implemented in accordance with PR 2006/8.
Therefore, at its highest, this part of the Commissioner’s case under s 290-50(2) amounts to no more than a contention that the Ludekens and Van de Steeg investors and Mrs Ruffato either did not participate in the 2006 Gunns Woodlot Project at all, or did so but were not covered by PR 2006/8. Without more, this is not sufficient to enliven s 290-50(2). Accordingly, the Commissioner’s case against the respondents under s 290-50(2) in respect of the 2006 Gunns Woodlot Project must fail.
The Secondary Investment
The Commissioner also put his case under s 290-50(2) on the basis that the Secondary Investment was a ‘scheme’ that was promoted on the basis of conformity with PR 2006/8, and was implemented in a way that was materially different from that described therein. To this end, the Commissioner relied upon evidence that one or more of the Ludekens and Van de Steeg Investors and Mrs Ruffato were told by one or both of the respondents that the Secondary Investment complied with PR 2006/8.
Despite being prepared to accept this evidence, I find that the Commissioner still fails in his arguments under s 290-50(2) in respect of the Secondary Investment. This is because the Secondary Investment – which was not, and was never intended to be, covered by PR 2006/8 – is not a ‘scheme’ to which s 290-50(2) properly applies. As should be apparent from the foregoing analysis, this subsection applies to schemes that are formally covered by a product ruling issued by the Commissioner. Therefore, the Secondary Investment – which does not have, and has never had, an applicable product ruling – does not fit within the scope of this provision.
Support for this interpretation derives from the terms of the legislation itself, as well as its corresponding explanatory materials. The heading accompanying s 290-50(2) is “Implementing scheme otherwise than in accordance with ruling”, suggesting that the mischief to be addressed by this provision is schemes that are implemented otherwise in accordance with their corresponding product rulings. To this end, the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) contains the following references to a scheme and “its ruling” (emphasis added):
(a)Heading on p 94: “Implementation of a scheme otherwise than in accordance with its ruling”;
(b)[3.68]: “If a scheme with a product ruling is not implemented in conformity with its ruling…”;
(c)[3.71]: “Where a scheme is implemented in a materially different way to that described in its product ruling…”;
(d)[3.108]: “An additional objective is to enhance the integrity of the product ruling system by deterring implementation of a scheme in a materially different manner to that described in its product ruling where doing so may have potential tax consequences for investors”; and
(e)[3.145]: “Clarity has also been provided in the new law about the concept of ‘materially different’ which is important for the second penalty provision of implementing a scheme not in conformity to its product ruling”.
If s 290-50(2) was intended to prevent the mere promotion of schemes on the basis that they are covered by a product ruling when in fact they are not, the legislature could have expressly provided for this. Further, I accept the submissions of counsel for Dr Ludekens to the effect that if this was the intended purpose of the provision, the requirement that the scheme also be implemented in a materially different way from that described in a product ruling would seem to be superfluous and unnecessary. In any event, s 290-50(1) (coupled with existing consumer protection legislation prohibiting misleading and deceptive conduct) would appear to be adequate to prevent such conduct.
Accordingly, the principal problem for the Commissioner in this case is that the Secondary Investment does not have, and never has had, a corresponding product ruling. It does not, therefore, fall within the scope of s 290-50(2). For these reasons, the Commissioner’s case on this ground must also fail.
The Velardis and the Smithsons
Finally, I have previously alluded to the fact that the Commissioner alleged a further breach of s 290-50(2) in respect of the Gunns woodlots acquired pursuant to the signatures of the Smithsons and the Velardis. To this end, the Commissioner submitted that the tax outcome of that acquisition was “different from the tax outcome described in the Product Ruling for participants in the Gunns Woodlot project”, as the Smithsons and Velardis signed the woodlot applications on the respondents’ assurances that this would be a temporary matter – they would not be liable for any repayments, and their names would be removed upon the on-sale of the woodlots to wealthy investors seeking to reduce their tax liabilities. The Commissioner submitted that in the circumstances, the Smithsons and Velardis had no intention of either remaining in the 2006 Gunns Woodlot Project until it was completed, or deriving assessable income therefrom (as required by PR 2006/8 for the purpose of legitimately claiming tax deductions). It was submitted that accordingly, the respondents engaged in further conduct that resulted in the 2006 Gunns Woodlot Project being implemented in a way that is materially different from that described in PR 2006/8.
This argument is rejected for similar reasons to those set out above. First, the ‘scheme’ relied upon by the Commissioner for the purpose of this argument was the acquisition of Gunns woodlots (described by the Commissioner in his final submissions as the “initial step in implementing the Plan and the Secondary Investment”). Like the Secondary Investment, in and of itself this is not a ‘scheme’ to which s 290-50(2) applies – it does not have, and has never had, a product ruling. Further, the mere fact that the Smithsons and the Velardis were not protected by or able to enjoy the tax consequences enumerated in PR 2006/8 is not evidence that the ‘scheme’ has been implemented in a materially different way from that described in PR 2006/8 for the purpose of s 290-50(2). As previously concluded, there was no evidence before me that the 2006 Gunns Woodlot Project was not implemented in accordance with PR 2006/8. Accordingly, this argument also fails.
CONCLUSION
For the foregoing reasons, the case against the respondents must be dismissed. I will order that the parties confer and thereafter bring minutes to the Court reflecting the outcome of this proceeding (including costs) by 4:00 pm on 18 March 2013. If the parties cannot agree as to a form of proposed orders, then appropriate directions can be made to determine the dispute between the parties.
I certify that the preceding three hundred and seven (307) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton. Associate:
Dated: 4 March 2013
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