Commissioner of Taxation v Rowntree
[2020] FCA 1322
•18 September 2020
Federal Court of Australia
Commissioner of Taxation v Rowntree [2020] FCA 1322
File number: NSD 655 of 2014 Judgment of: RARES J Date of judgment: 18 September 2020 Catchwords: TAXATION – Whether each respondent engaged in conduct that resulted in him or another entity being a promoter of a tax exploitation scheme in each of 4 tax years in contravention of s 290-50(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) – where scheme involved investor paying 15% non-refundable deposit for not presently existing carbon or REDD credits that vendor had no existing source for or obligation to supply in the future – where investor under scheme claimed tax deduction of full price in year of entry into purchase contract – whether each respondent promoter of tax exploitation scheme within meaning of ss 290-60(1) and 290-65 – whether entity had substantial role in respect of marketing or promotion of tax exploitation scheme within meaning of s 290-60(1)(c) – whether investor’s sole or dominant purpose for entering into scheme was to get a scheme benefit that was not reasonably arguably available at law within meaning of ss 284-15, 284-150 and 290-65 – whether schemes involved tax evasion within meaning of s 290-55(6) so that 4 year limitation period did not apply Legislation: Evidence Act 1995 (Cth), ss 50, 140
Income Tax Assessment Act 1936 (Cth) Pt IVA, ss 170, 177D, 177F, 318, 82KZL, 82KZM, 82KZMA
Income Tax Assessment Act 1997 (Cth), ss 8-1, 960-100, 995-1
Partnership Act 1892 (NSW) s 50A
Taxation Administration Act 1953 (Cth) Sch 1, ss 284-15, 284-150, 290-50, 290-55, 290-60, 290-65
Carbon Pollution Reduction Scheme Bill 2009
Explanatory Memorandum for the Carbon Pollution Reduction Scheme Bill 2009 [No 2]
Oxford English Dictionary, online
Macquarie Dictionary, online
Adjunct Professor Gordon S. Cooper AM: “Promoter Penalties” (2006) 4 Journal of Tax Research 117
Diplock K, “The Courts as Legislators” in B Harvey (ed), The Lawyer and Justice (Sweet & Maxwell, 1978)
Cases cited: Academy Cleaning & Security Pty Limited v Deputy Commissioner of Taxation (2017) 106 ATR 184
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345
Chamberlain v The Queen (No 2) (1984) 153 CLR 521
Commissioner of Taxation v Bogiatto [2020] FCA 1139
Denver Chemical Manufacturing Co v Commission of Taxation (NSW) (1949) 79 CLR 296
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492
Federal Commissioner of Taxation v Ludekens (2013) 214 FCR 149
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
GlenfieldEstates Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 671
Jones v Dunkel (1959) 101 CLR 298
Kajewski v Federal Commissioner of Taxation 52 ATR 455
Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361
MagnaAlloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179
Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
R v Hillier (2007) 228 CLR 619
R v Meares (1997) 37 ATR 321
Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1
Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1
Division: General Division Registry: New South Wales National Practice Area: Taxation Number of paragraphs: 368 Date of hearing: 8-12 April 2019 Counsel for the Applicant: Ms K J Deards SC with Mr A d’Arville and Ms N Apkarian Solicitor for the Applicant: Australian Government Solicitor Solicitor for the First Respondent: Mr A Martin of Nicola Velcic & Associates Counsel for the Second Respondent: Mr M Higgins Solicitor for the Second Respondent: Dom Velcic & Co Solicitors Counsel for the Third Respondent: The third respondent did not appear ORDERS
NSD 655 of 2014 BETWEEN: COMMISSIONER OF TAXATION
Applicant
AND: BRUCE ELLIOT ROWNTREE
First Respondent
PETER JAMES DONKIN
Second Respondent
RINALDO (RICK) FRANK ALFRED MANIETTA
Third Respondent
order made by:
RARES J
DATE OF ORDER:
18 September 2020
THE COURT DIRECTS THAT:
1.On or before 2 October 2020, the applicant, after conferring with the respondents, file and serve draft orders:
(a)to give effect to the reasons for judgment published today;
(b)providing for a time table for any further evidence and written submissions necessary for a further hearing on the issue of what penalties or relief should be ordered.
THE COURT ORDERS THAT:
2.The proceeding be listed for a case management hearing on 16 October 2020.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Introduction
[1]
The legislative context
[6]
Background
[10]
The contractual structure, context and implementation of the schemes
[19]
The 2009 tax year
[22]
The 2009 scheme documents
[33]
The 2009 year – summary
[38]
The 2010, 2011 and 2012 scheme documents
[45]
Contracts for the supply of carbon credits
[50]
The expert evidence about the schemes
[57]
The 2010 tax year
[72]
Dr Robson’s 2010 tax year investment
[98]
The 2010 tax year – summary
[106]
The 2011 tax year
[117]
Dr Robson amends his tax returns
[124]
Mr Haralambidis decides to purchase the 2011 ERPAs
[134]
Mr Whitney decides to purchase the 2011 ERPAs
[140]
Other events in June 2011
[159]
The 2011 tax year – summary
[166]
The 2012 tax year
[173]
The 2012 tax year – summary
[204]
Later events
[211]
Summary of total receipts in the 2009, 2010, 2011 and 2012 tax years
[230]
The conduct issue
[232]
Dr Rowntree’s conduct
[232]
Dr Donkin’s conduct
[246]
Was Mr Donkin a promoter in the 2011 and 2012 tax years? – Consideration
[268]
Mr Manietta’s conduct
[274]
The tax exploitation issue
[285]
Dr Rowntree’s and Mr Donkin’s submissions
[287]
Was each of the 2009, 2010, 2011 and 2012 schemes a tax exploitation scheme?
[301]
Was the claim for a deduction in each tax year “reasonably arguable”?
[336]
Conclusion
[352]
The evasion issue
[353]
Conclusion
[367]
REASONS FOR JUDGMENT
RARES J:
Introduction
The Commissioner of Taxation claims against each of the three respondents, Dr Bruce Rowntree, a solicitor, Peter Donkin, a chartered accountant and registered taxation agent, and Rick Manietta, a financial planner, for the imposition of civil penalties under, and declarations of contraventions of, s 290-50 of Sch 1 to the Taxation Administration Act 1953 (Cth) (the TAA).
The Commissioner alleges that each respondent engaged in conduct that resulted in him or another entity (within the meaning of s 960-100 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) being a promoter (except for Mr Donkin in respect of the 2009 year) of tax exploitation schemes involving the sale of interests in carbon or REDD credits in each of the years of income ending 30 June 2009, 2010, 2011 and 2012 (respectively the tax years and the schemes). (REDD is an acronym for “reducing emissions from deforestation and forest degradation”).
Essentially (as I will explain in greater detail later in these reasons), the Commissioner alleges that the respondents promoted each of the REDD schemes to investors for the dominant purpose of enabling each investor to obtain a tax deduction, in the relevant tax year, of the full purchase price payable under an emissions reduction purchase agreement (ERPA) for a number of REDD credits on payment of a 15% deposit in circumstances where it was not reasonably arguable that any such payment or liability to pay was deductible under s 8-1 of the ITAA 1997 or at all.
Because the Commissioner commenced this proceeding against Dr Rowntree and Mr Manietta more than four years after 30 June 2009, the Commissioner can only recover a civil penalty against them in respect of the 2009 scheme if, by force of s 290-55(4) and (6) of Sch 1 to the TAA, that scheme involved tax evasion.
There are five issues in the proceeding, namely:
(1)Did each respondent engage in conduct that resulted in him marketing, or otherwise encouraging the growth of, each scheme (other than Mr Donkin in respect of the 2009 year) (within the meaning of ss 290-50(1) and 290-60(1)(a)) (the conduct issue);
(2)Did that respondent or an associate of his (there is no dispute that the other persons on whose conduct the Commissioner relied was an associate of the relevant respondent) receive consideration in respect of that marketing or encouragement (within the meaning of s 290-60(1)(b)) (the consideration issue);
(3)Having regard to all relevant matters, is it reasonable to conclude that the relevant respondent had had a substantial role in respect of that marketing or encouragement (within the meaning of s 290-60(1)(c)) (the substantial role issue);
(4)Was each of the schemes a tax exploitation scheme in that it is reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme with the sole or dominant purpose of that entity or another entity getting a scheme benefit (relevantly, a tax deduction) from the scheme (within the meaning of ss 284-150(1)(a) and 290-65(1)(a)(i)) (the tax exploitation issue); and
(5)Did the 2009 scheme involve tax evasion (the evasion issue)?
The legislative context
An “entity”, as defined in s 960-100(1) of the ITAA 1997, included an individual, a body corporate and a partnership and “scheme”, as defined in s 995-1(1) of the ITAA 1997, meant any arrangement, or any unilateral or other of the following namely any scheme, plan, proposal, action, course of action, course of conduct. Division 290 of Sch 1 to the TAA was headed “Promotion and implementation of schemes”. The objects of Div 290 included deterring the promotion of tax avoidance and tax evasion schemes (s 290-5(a)). Relevantly, Div 290 contained the following provisions:
290-50 Civil penalties
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.
…
Civil penalty
(3)If the Federal Court of Australia is satisfied, on application by the Commissioner, that an entity has contravened subsection (1) or (2), the Court may order the entity to pay a civil penalty to the Commonwealth.
Amount of penalty
(4) The maximum amount of the penalty is the greater of:
(a)5,000 penalty units (for an individual) or 25,000 penalty units (for a body corporate); and
(b)twice the consideration received or receivable (directly or indirectly) by the entity and *associates of the entity in respect of the *scheme.
Note:See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.
290-60Meaning of promoter
(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.
(3)An employee is not to be taken to have had a substantial role in respect of that marketing or encouragement merely because the employee distributes information or material prepared by another entity.
290-65Meaning of tax exploitation scheme
(1)A *scheme is a tax exploitation scheme if, at the time of the conduct mentioned in subsection 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) …; 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)…
(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.
The definitions of “reasonably arguable” and, so far as presently relevant, “scheme benefit”, for the purposes of s 290-65(1) were contained in ss 284-15 and 284-150(1)(a) as follows:
284-15 When a matter is reasonably arguable
(1)A matter is reasonably arguable 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.
…
(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.
…
284‑150 Scheme benefits and scheme shortfall amounts
(1) An entity gets a scheme benefit from a *scheme if:
(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;
(emphasis in original)
Allsop CJ, Gilmour and Gordon JJ held in Federal Commissioner of Taxation v Ludekens (2013) 214 FCR 149 at 191 [227]-[228], 193 [237], [240] that, in a case like the present, s 290-65(1) is concerned with the purpose with which an entity entered into or carried out a scheme and s 290-50(1) requires an analysis of whether “it is reasonable to conclude” that the entity entered into or carried out the scheme at the time of the conduct complained of (being marketing or otherwise encouraging the growth of the scheme or an interest in it) with the sole or dominant purpose of it, or another entity, getting a scheme benefit from the scheme. They said (214 FCR at 191-192 [228], [231]) that a scheme benefit, relevantly, could be the obtaining of a lesser tax related liability, or a tax-related liability that could reasonably be expected to be less “than it would be apart from the scheme or a part of the scheme” and:
In this context, the words “apart from the scheme or a part of the scheme” in s 284-150(1)(a) and (b) do not dictate this. In the context of assessing (through the framework of what is reasonable to conclude) the purpose of an entity, the focus is upon what the entity was proposing to do and why. The focus is not upon any hypothesised events, circumstances or decision requiring you to remove from the proposed future what was done, and positing what might have been done.
(emphasis added)
Thus, the issue is whether, at the time of the marketing or encouraging, it may reasonably be concluded that one entity entered into or carried out the scheme with the sole or dominant purpose that that entity or another entity (who or which is not relevantly a promoter but can be an investor in the scheme) would get a tax benefit.
Background
Dr Rowntree holds a doctorate of juridical science, wrote his thesis in international taxation, and holds degrees of bachelor of laws and master of taxation as well as a diploma of financial planning. His associates within the meaning of s 318(2)(f) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) in the schemes were a Malaysian corporation, Voluntary Credits Ltd (which was called BR Redd Ltd prior to 17 January 2010), Voluntary Credits Pty Ltd (VCPL), Bonnell Rowntree Pty Ltd (BRPL) and Bonnell Rowntree Taxation Advisers Pty Ltd (BRTAPL). By force of s 318(2)(f) of the ITAA 1936, each of those entities was an associate of each of the others. Dr Rowntree’s colleague in the latter two law practices was David Bonnell.
Mr Donkin’s accounting practice entity, Strategic Accounting Advisers Pty Ltd, as trustee of the Strategic Accounting Advisers Trust, was his associate.
Both Dr Rowntree and Mr Manietta are undischarged bankrupts.
On 27 October 2014, Mr Manietta’s solicitor filed a notice of acting in this proceeding. On 8 May 2017, Mr Manietta’s debtor’s petition was accepted and he became bankrupt. On 17 November 2017, I ordered that the Commissioner serve outlines of evidence of the lay witnesses and his expert’s affidavit by 29 March 2018, the respondents file and serve their defences by 27 April 2018 and that service on Mr Manietta be effected by serving his trustee in bankruptcy and him at his residential address as recorded as at 17 November 2017 in the Commonwealth electoral roll. The last order was in anticipation of Mr Manietta’s solicitor filing (as he did on 28 November 2017) a notice of ceasing to act.
The Commissioner attempted to serve his evidence and an amended statement of claim on Mr Manietta at the apartment recorded on his electoral roll address in Paddington, a suburb of Sydney, on 29 March 2018, but was unsuccessful in obtaining access to the property. The Commissioner served Mr Manietta’s trustee with that evidence on that day and subsequently, the Commissioner’s solicitors have sent emails to both Mr Manietta and his trustee, although only the trustee responded to acknowledge receipt.
On 16 July 2018, my associate emailed the parties, including Mr Manietta with the entered orders I had made at a case management hearing on 6 July 2018 which included the order fixing the hearing to commence on 8 April 2019. Mr Manietta did not appear at the hearing, including after being called outside the courtroom at the beginning of the trial.
In those circumstances, Mr Manietta has not filed any defence and I have made the findings of fact that affect him on the basis (as with all my other findings of fact) that I am satisfied of those facts on the balance of probabilities, having regard to the matters specified in s 140 of the Evidence Act 1995 (Cth).
Each of Mr Manietta and Ti Amo Strategies Pty Ltd was a partner in Ti Amo Strategies Partnership LP (Ti Amo). Those two entities had their offices in the same building as BRPL and BRTAPL in Glebe, a Sydney suburb. Ti Amo Strategies held all the issued ordinary shares in, and Mr Manietta was the sole director and secretary of, Super Smart Strategies Pty Ltd. Accordingly, each of Ti Amo, Ti Amo Strategies (by force of s 318(1)(b) and (4) of the ITAA 1936) and Super Smart (by reason of his control pursuant to s 318(1)(e)(i)(A) and (6)(b)) was an associate of Mr Manietta.
The Commissioner argued that Ti Amo was an associate of Super Smart because Ti Amo Strategies, first, held a majority voting interest in Super Smart (s 318(2)(d)(ii)(A)) and, secondly, was a partner of Ti Amo (s 318(2)(a)). Ti Amo Strategies held all of the issued ordinary shares in Super Smart and Anthem Rand Ltd held all of the issued G class shares (being the only other issued shares) in Super Smart. Anthem was a company limited by guarantee and Mr Manietta was its director from 16 October 2006, and, from 20 October 2009, his wife and Kirk Lloyd became its other directors. If the G class shares held any voting rights in Super Smart that could affect the composition of its board of directors or its constitution (other than in respect of class rights), I infer that Mr and Mrs Manietta controlled those shares. If, as I infer is more probable than not, only the ordinary shares in Super Smart conferred voting rights that could affect the composition of its board or its constitution, TI Amo Strategies did hold a majority voting interest in Super Smart and was a partner in Ti Amo. Accordingly, whatever voting rights may have attracted to the G class shares in Super Smart, Ti Amo was an associate of Super Smart.
The contractual structure, context and implementation of the schemes
In essence, the Commissioner has advanced a circumstantial case of a varying nature against each of the respondents about the nature and extent of his involvement in the scheme in each of the 2009, 2010, 2011, and 2012 tax years. As with all circumstantial cases, it is important to evaluate the effect of the evidence as a whole and not piecemeal: R v Hillier (2007) 228 CLR 619 at 638 [48] per Gummow, Hayne and Crennan JJ. In such cases, it is “the united force of all the circumstances put together” that a tribunal of fact must consider in deciding whether or not an inference should be drawn: Hillier 228 CLR at 638 [48] citing Chamberlain v The Queen (No 2) (1984) 153 CLR 521 at 535 per Gibbs CJ and Mason J. I have applied this approach in drawing inferences about the respondents’ conduct where there was no direct evidence as to particular acts, omissions or states of mind.
I admitted a summary of the contractual documents that the Commissioner prepared in accordance with s 50 of the Evidence Act. The contractual documents for each of the schemes were materially identical except for the names of the parties, the prices, the number of contract lots (defined in each 2009 ERPA as “Emissions Units equal to 5000 tonnes of sequestered carbon”) the subject of the transactions, number of tonnes in a contract lot, and some minor matters.
The Commissioner called three investors who gave evidence at the hearing, being Dr Nicholas Robson, an anaesthetist, Peter Haralambidis, a director of freight forwarding and logistics businesses and Shannan Whitney, a real estate agency principal. Relevantly, the way in which the schemes operated in each of the tax years is reflected in the following analysis of the documents executed by Dr Robson, that were part of the 2009 scheme. I will refer below to the other participants or investors who acquired contract lots under each of the schemes generically as the investor, unless it is necessary to refer to a particular person or entity by name. One investor, Smart Dental Pty Ltd, entered into ERPAs and options in each of the 2009, 2010, 2011 and 2012 tax years. It was a client of Mr Manietta.
The 2009 tax year
In an undated one page brief, Mr Bonnell briefed Ian Young of counsel to advise on whether the full purchase price payable under a draft contract between BR Redd and an Australian business (the purchaser) would be deductible by the purchaser in the year of income in which a contract in the form of the draft was made. On 10 March 2009, the Commonwealth Government published a draft Carbon Pollution Reduction Scheme Bill 2009 for public comment (see the Explanatory Memorandum for the Carbon Pollution Reduction Scheme Bill 2009 [No 2]) at 10). The brief referred to the Bill, noting that it was yet to be enacted, and instructed counsel that the documentation that BR Redd would provide the purchaser (presumably under a delivery notice) would enable the purchaser to register the carbon credits under the Bill.
On 26 May 2009, Mr Young provided a memorandum of advice in response to the undated brief in which he opined that it was “more than reasonably arguable that the full purchase price [payable under cl 3.1 of the draft] is “incurred” in the year the contract is entered into” within the meaning of the first limb of s 8-1 of the ITAA 1997. He also opined that under the second limb of s 8-1:
26.In this case, it is appropriate for a businessman, conducting his business to make the decision whether it is in the interests of his business to represent to his customers and the public generally, that his business is a clean and green business.
27.It is no more remarkable than, for example, a business including as part of its logo “proud sponsor of the Australian Olympic team”.
As soon as Dr Rowntree and Mr Bonnell received counsel’s opinion, they set about using it in what Dr Rowntree described, accurately, in the heading of an email dated 26 May 2009 that he sent to a solicitor in BRTAPL, Stephen Elias, as “Marketing Letter”, together with a copy of “the stuff I usually send out” that he subsequently sent Mr Elias on 28 May 2009. The “stuff” consisted of a BR Redd brochure (that appeared to have been professionally produced) at the foot of which Dr Rowntree’s name appeared next to BR Redd, an application form for an ERPA and an image of a BR Redd logo that could be added to a letterhead. The 2009 version of the marketing letter was on BRTAPL’s letterhead. It stated that one way to implement energy efficiency reforms to reduce “our carbon footprint” was “to acquire carbon credits to offset the carbon emissions from our businesses”. The letter explained that sourcing “appropriate carbon credits” was difficult and:
For this reason we have entered into a strategic alliance with BR Redd Limited ("BR Redd"). BR Redd provides businesses with carbon credits to allow them to show their customers that doing business with them is friendly to the environment. BR Redd sources its carbon credits from projects that reduce emissions from deforestation and forest degradation in developing countries.
The carbon credits purchased by BR Redd will not only ensure that carbon is sequestered in forests in Papua New Guinea, the Solomon Islands and Indonesia but will also ensure that the traditional owners of these forests will profit from the preservation of these forests.
Businesses will be able to purchase carbon credits from BR Redd and promote themselves to their clients as being "green" businesses. They will also be able to discharge their obligation to conduct their business in an ethical way.
The contracts which have been prepared by BR Redd provide for the sale of carbon credits through REDD schemes - REDD stands for Reducing Emissions from Deforestation and Degradation".
The contract provides for a price of A$28.00 per tonne of carbon with a minimum purchase of 5,000 tonnes. The purchase price is paid in two instalments, the first on executions of the agreement of 15% (or $21,000.00 for a minimum purchase) and the balance on completion of the REDD projects.
The buyer is protected in this brand new market by providing a floor for the price of the credits. If the price for the credits falls such that the buyer could [buy] similar credits for less than $23.80 per tonne then the buyer can force Carbon Strategic Pte Limited to acquire the credits from them at a price of $23.80 a tonne. Carbon Strategic is the company from whom BR Redd has contracted to acquire the credits.
Under the agreement BR Redd has three years to comply with its obligations to deliver the carbon credits.
Contracts which substantiate BR Redd's ability to deliver Redd Credits are available to be sighted but cannot be copied as they are commercial in confidence.
BR Redd has obtained a barrister's opinion that the acquisition of these credits as part of a business strategy by the buyer is a deductible expense of the buyer to the full extent of the purchase price in the year in which the contract is executed. The contracts are not subject to GST as they are entered into in Malaysia and do not involve the provision of a taxable supply. Obviously each buyer entering into the contract should seek their own legal advice on the terms of the contract and the commercial and taxation consequences of entering into the agreement.
I believe that this could be an opportunity for you to promote your business and I would like to meet up with you to discuss this. I will contact you to schedule a meeting. Additional information on BR Redd and the projects can be obtained from their website ( added)
By 27 May 2009, Mr Elias was using the marketing letter to contact clients. And, by 19 June 2009, Mr Elias identified to Dr Rowntree that the material he sent on behalf of BRTAPL was a “marketing kit (incl application form)” and a brochure headed “Your Choice – Your Brand – Global Impact” that bore the BR Redd logo.
In the meantime, in what he thought was about March or April 2009 (but I find was May 2009 based on the fact that Mr Young’s opinion was dated 26 May 2009), Dr Robson, on the suggestion of his sister, consulted Michelle Dodd, of Conluceo Consulting Pty Ltd, about investing in carbon credits. She had acted in the past as a family adviser and lawyer for other members of his family. He understood that Ms Dodd had expertise in tax law. Dr Robson attended at Ms Dodd’s Glebe office where she outlined the taxation implications of investing in a carbon credit project. She explained that if he paid an initial sum for the investment, he would be able to deduct “upfront” the total purchase price, and that the balance of the price was payable “further down the track”. She told him that “there was a barrister’s opinion about…the legitimacy of the instalment and that was underpinning the tax deductibility of it and the project more generally”. The only evidence of a barrister’s opinion of that description is Mr Young’s of 26 May 2009. During the meeting, Dr Robson learnt of the BR Redd website and subsequently looked at it and other information about carbon abatement schemes. As he observed in evidence, this was a “very topical matter at that point in time”. Dr Robson also looked at the curriculum vitae of Dr Rowntree and, possibly, Mr Bonnell either on BR Redd’s or BRTAPL’s websites.
Dr Robson considered, from his investigations, that Dr Rowntree and Mr Bonnell “were pivotal to the whole activity” in which he was interested. He decided to make his investment because:
it appealed because of the environmental dimension. It also, obviously, had…a generous tax deduction associated with it. And I felt, really, in the general climate at the time that it was a reasonable thing to invest in… at a point in the future when the projects were mature then there would hopefully be a market for carbon credits and if the carbon credits could be sold for more than I had effectively paid, there would be a taxable income that would be dealt with on its merits at the time…it would generate a tax liability.
(emphasis added)
On 4 June 2009, Mr Bonnell wrote to Dr Robson enclosing drafts for execution of an ERPA (the 2009 ERPA) and an emissions reduction put option (the 2009 option) between Dr Robson and a Singaporean company, Carbon Strategic Pte Ltd. I will describe the documents used in the 2009 scheme below at [33]–[36]. The 2009 ERPA described Dr Robson as buyer, with Voluntary Credits (then called BR Redd), as seller, for the purchase of two contract lots, in which each lot comprised “Emission Units equal to 5000 tonnes of sequestered carbon” (i.e. he agreed to purchase 10,000 emission units). The letter requested Dr Robson to pay the AUD42,000 deposit to Carbon Strategic’s Hong Kong bank account. I find that Dr Robson did make that deposit.
On 12 June 2009, Dr Robson executed the two contracts.
On 29 June 2009, Mr Bonnell executed Dr Robson’s 2009 ERPA, on behalf of BR Redd, and Jeffrey Flood, a director of Carbon Strategic, executed Dr Robson’s 2009 option. Ms Dodd returned copies of the executed contracts to Dr Robson with a note that read “These documents are for filing with your 2008/2009 Tax Papers”. Also on 29 June 2009, Smart Dental, entered into an ERPA for one contract lot.
On 9 July 2009, Dr Rowntree wrote a letter on BR Redd letterhead to Dr Robson congratulating him on the purchase of the REDD credits. The letter:
·advised Dr Robson that he was “now eligible to use the resources of [BR Redd] to assist in marketing your business” and continued:
We have designed a number of logos which advertise the fact that your business is now “carbon reduced”. These logos are available to be downloaded from our website.
·stated the following, before adding suggested wording for its recipients to include in their tender documents:
Many of you have advised that your agreements to purchase REDD credits will facilitate you being awarded government contracts. We will be working towards preparing detailed materials for inclusion in government tenders which will be forwarded upon request.
Self-evidently, the logos and draft tender wording had no commercial relationship to Dr Robson’s practice of his profession as an anaesthetist and, unsurprisingly, he never used the logos for his practice.
The 2009 scheme documents
The 2009 ERPA consisted of five pages. It recited that the seller (BR Redd):
·had entered into an agreement to acquire emission units from Carbon Strategic which, in turn, had entered into contracts to develop projects in the Independent State of Papua New Guinea, Indonesia and the Solomon Islands, that would yield REDD credits sufficient to meet the seller’s requirements under the 2009 ERPA; and
·had contracted to acquire REDD credits on Carbon Strategic completing the projects.
The 2009 ERPA provided that:
·the purchase price for one contract lot was $140,000 and was payable in two instalments;
·the buyer had to pay the first instalment of 15% (i.e. $21,000) on execution of the 2009 ERPA;
·the buyer had to pay the second instalment (being the balance of purchase price of $23.80 per tonne) within 10 banking days of receiving from the seller a delivery notice giving the buyer 20 banking days’ notice of delivery. After receiving the second instalment, the seller would complete delivery; and
·if it had not received a delivery notice within 3 years after execution of the 2009 ERPA, the buyer could terminate that agreement but would not be entitled to repayment of any part of the purchase price paid prior to the date of termination.
Some of the investors in the 2009 tax year also entered into the 2009 option. For example, Dr Robson’s 2009 option provided that:
·Carbon Strategic acknowledged that Dr Robson had paid it the option fee of 2% of the purchase price of his two contract lots in his 2009 ERPA (i.e. $5,600);
·in consideration of the payment of the option fee, Dr Robson could require Carbon Strategic to buy all of his contract lots for $23 per tonne (i.e. $230,000); and
·settlement of the exercised option would occur simultaneously with settlement of the ERPA.
The net effect of the 2009 ERPA and 2009 option was that an investor would pay, first, BR Redd Voluntary Credits a non-refundable deposit of 15% of the total price of the contract lot(s) it was purchasing and, secondly, Carbon Strategic a further 2% (in total $23,800 per contract lot) after which the investor would claim a tax deduction equivalent to 100% of the purchase price in the 2009 tax year. If BR Redd / Voluntary Credits gave the investor a delivery notice in the future, the investor could exercise the 2009 option requiring Carbon Strategic to acquire the investor’s contract lot(s) and pay BR Redd / Voluntary Credits all but $0.80 per tonne of the second instalment. That would leave the investor with a liability of $4,000 per contract lot to pay to Voluntary Credits.
In addition, some investors in each of the scheme years also entered into an intellectual property license agreement with Voluntary Credits. The licence agreement provided that, in consideration of a $1 licence fee, Voluntary Credits granted the investor a non-exclusive licence to use, what the licence defined as, “the Technology referred to in Item 1”, being about 12 logos featuring various configurations of the words “forest friendly carbon reduced” against a variety of backgrounds, each displaying a depiction of a frog.
The 2009 year – summary
In the 2009 year, Voluntary Credits sold a total of 74 contract lots. Voluntary Credits received consideration totalling $720,414.92 comprised of the following:
Source Amount received by Voluntary Credits Commission retained No of contract lots Ti Amo $552,994(a) $280,243.25 40 Carbon Strategic $125,432.92(b) $490,000 29 Bonnell Rowntree $41,988(c) 2 NOTES (a) Ti Amo remitted $14,000 of each $21,000 deposit and retained $7,000 as commission on each contract lot except one which it purchased for $7,000. The difference of $243.25 is likely to be due to bank fees and is not material.
(b) Carbon Strategic received $609,000, being 29 deposits noted on the 2009 client list that did not have a referrer noted as Mr Manietta, Bonnell Rowntree or Mr Elias. Carbon Strategic retained $490,000.
(c) No commission paid.
Some investors, such as Dr Robson, bought more than one contract lot. Ms Dodd sold 21 contract lots and Mr Elias sold at least three for which each received recognition as a ‘referrer’ in the client list that Dr Rowntree created in a spreadsheet for the 2009 tax year. Dr Rowntree also created a client list for each of the 2010 and 2012 scheme years, but there was no evidence of one for 2011.
The payments Voluntary Credits received from Carbon Strategic comprised $119,000, being the difference between $609,000, as the total of deposits of $21,000 for each contract lot that it had received directly from 29 investors, and a payment of $490,000 that Voluntary Credits paid as an “option fee” to Carbon Strategic as recorded in Voluntary Credits’ financial statements for the year ended 31 December 2009. None of these 29 investors appeared on the 2009 client list against a record that any of Bonnell Rowntree, Mr Elias or Mr Manietta (or anyone else) was the referrer.
The “option fee” of $490,000 is equivalent to a commission of $7,000 for each of 70 contract lots but the Commissioner did not contend that this sum should be treated as part of the consideration that either Dr Rowntree or Mr Manietta (or their associates) received in the 2009 year, and can be put to one side.
The balance of $6,450.92 that Carbon Strategic paid to Voluntary Credits is not explained in the evidence. The Commissioner contended that this sum may have related to one or two contracts for persons whose names appeared in the 2009 client list as three contracts with the notation “N/A” in the running total column and which were not counted in the computer printout as part of the total. (The three N/A entries were for Ms Dodd’s company, Conluceo, Mr Elias’ company, EA Financial LP, and Ti Amo Strategies). Dr Rowntree argued that there was no, or no sufficient, evidence to support an inference that the $6,450.92 was part of the consideration he or Mr Manietta received directly or through his associates.
$6,450 is three times $2,150. The latter amount is equivalent to 10% of the deposit value of one contract lot. I infer that the $6,450.92 represented a commission or other receipt of Voluntary Credits, or an associate of Dr Rowntree, in respect of the 2009 scheme for the three contract lots that had the notation “N/A” in the “referrer” column in the 2009 client list.
Apart from the names of the entities associated with him or his companies relating to the 39 contract lots sold in the 2009 tax year recorded in the financial documents, including the 2009 client list, there was no direct evidence of Mr Manietta’s (or his associates’) conduct in that year. However, having regard to the evidence and findings that I have made in respect of the 2010, 2011 and 2012 tax years about Mr Manietta’s conduct, I have inferred that this conduct must have been substantially the same in the 2009 tax year as that in which the evidence disclosed that he (and his associates) engaged in those 3 subsequent years to generate sales in 2009 of the 39 contract lots to third party investors: Hillier 228 CLR at 638 [48].
The 2010, 2011 and 2012 scheme documents
As I have noted, the 2010, 2011 and 2012 ERPAs, options and licence agreements were essentially similar to their 2009 counterparts. However, the pricings of the contract lots and first instalment (and consequentially, the second instalment) varied and were as follows:
Year Total price for contract lot Price per tonne First instalment Option fee Option price per tonne Balance due after option per lot 2010 $140,000
(5,000 tonnes per lot)$28 $20,000 $1,000 $24 0 2011 $132,000 (6,000 tonnes per lot) $22 $19,800 $200 $18.70 0 2012 $138,000 (6,000 tonnes per lot) $23 $20,700 $100 $19.55 0
As appears from the table above, the number of emission units in the contract lots for the 2011 and 2012 years increased to 6,000 tonnes of sequestered carbon and the prices and option fees for the 2010, 2011 and 2012 years varied. However, unlike the position in the 2009 year, if the investor signed the relevant option in 2010, 2011 or 2012, then, if the option were ever exercised, nothing would be payable on completion.
Moreover, the recitals in the 2010, 2011 and 2012 ERPAs made no mention of what contracts Voluntary Credits may have had to source its ability to deliver the emission units the subject of the agreement.
The 2010 and 2011 ERPAs referred to the Bill and defined “Emissions Units” as having the same meaning as in each of the Bill or any regulations made under it, when it was enacted, and any international rules referred to in the Bill or any legislation of another nation providing for the registration of and trading in carbon credits. However, each still defined “contract lots” as meaning “Emissions Units equal to 5,000 [or 6,000] tonnes of sequestered carbon”. Each of those ERPAs also defined:
·“REDD credits” without using that term in any substantive provision; and
·“Delivery Notice” as meaning a notice under which Voluntary Credits as seller, could give the buyer notice that it was ready to post to the buyer “The documentation that shall allow the crediting of the Buyer’s Registry Account” with the number of emissions units it had agreed to buy and sufficient documentation to enable the buyer to verify compliance with the applicable rules for such registration.
The 2012 ERPAs changed the definition of “Applicable Rules” to mean any law passed by a sovereign nation providing for the registration of and trading in carbon credits, and removed any reference to the Bill.
Contracts for the supply of carbon credits
There was limited evidence that BR Redd / Voluntary Credits had in place some potential sources from which it could possibly supply carbon credits in the future. One instance was a contract dated 26 March 2008 between Carbon Strategic and a Papua New Guinea company, Binamel Land Group Incorporated (the Binamel contract). A second instance was a contract dated 2 February 2009 between Carbon Strategic and the provincial governments in Indonesian West Papua (the West Papua contract).
The Binamel contract contained recitals that:
·Binamel was contracting with the authority of nine incorporated land groups which had customary rights over a total of millions of hectares in Papua New Guinea; and
·subject to the obtaining of all necessary permits from the government of Papua New Guinea, Carbon Strategic would provide services to Binamel that would involve all steps necessary to commercialise, and then engage in marketing, REDD projects for Binamel.
The Binamel contract provided that:
·the incorporated land groups had customary rights over more than 200,000 hectares of rainforest that, but for the Binamel contract, would be available for logging activities; and
·Binamel had appointed Carbon Strategic to carry out the above services in consideration of which Binamel would pay Carbon Strategic service fees, being 10% of the total amount of gross revenue generated by the trading of carbon credits.
The West Papua contract contained recitals that
·the governmental bodies represented landholders within their regions; and
·Carbon Strategic would be appointed as the exclusive consultant, agent and contractor to provide and arrange for defined services, namely to enable accreditation and qualification of the number of tonnes of stored carbon on the customary lands of the landholders, and would supervise and manage the trade of carbon and biodiversity credits.
The West Papua contract provided that:
·it would only operate after the defined “effective date” (being upon the grant of all Indonesian government or other approvals necessary for the West Papua contract to be legally enforceable) (There was no evidence of what those approvals were or if they ever had been granted); and
·Carbon Strategic was entitled to a service fee of 10% of the gross revenue generated in any such trade.
Both the Binamel and West Papua contracts provided that, among other services, Carbon Strategic had to identify all legislation affecting the landholder’s lands, assess the potential amounts of carbon and biodiversity credits, manage, implement and commercialise each project, including building a case for the approval of REDD credits on behalf of the customary landholders to demonstrate the validity of the project for “the International Accrediting Body”, facilitate scientific investigation of the available credits, project market, manage and, ultimately, commercialise and trade carbon and biodiversity credits.
Thus, if Carbon Strategic were able to get either of the two proposed projects to the point where it could trade carbon credits, it could have been in a position to sell those carbon credits to BR Redd / Voluntary Credits. But, there was no evidence of any contract for this to occur at all, let alone within a timeframe to enable Voluntary Credits to be in a position to serve a delivery notice on an investor under the 2009 or any later ERPA.
The expert evidence about the schemes
Robert Fowler gave expert evidence for the Commissioner. He was highly experienced in carbon markets and their commercial operation. He began working in the carbon and greenhouse gas industry in 2002 and was a member of committees of Standards Australia during most of the period between 2003 and 2010. He worked as a methodology expert for bodies within the United Nations Framework Convention on Climate Change during 2004 to 2009, including on a registration and issuance, accreditation, appraisals and reviews of projects. He also worked as an international carbon broker acting on transactions during 2006 to 2008 that covered approximately 100 million tonnes of emissions reductions under various forms of ERPAs. He advised the Australian Government’s National Greenhouse & Energy Reporting System during 2008 to 2009 on developing best practices for regulatory and compliance frameworks. He led the preparation of a report for the Australian Government in 2008 on the international carbon markets, including the development of consensus volume and price forecasts, market drivers and modelling of supply and demand in the Clean Development Mechanism. He also did work during 2010 to 2012 for the Latin American Development Bank, Morgan Stanley Australia, the Australian and Japanese Governments and the Verified Carbon Standard Committee on streamlined approaches for setting baselines and assessing additionality. He was the representative for Australia and New Zealand to the International Emissions Trading Association during 2011 to 2014. I found Mr Fowler to be a cogent and reliable witness.
Mr Fowler reviewed each of the ERPAs and options that Smart Dental had entered in each of the 2009, 2010, 2011 and 2012 tax years. He noted, correctly, that the 2009 ERPA and 2009 option contained several typographical errors. Mr Fowler explained that they were not documents of the sophistication, detail or clarity that professional traders in those markets at the time would have regarded as usual and necessary. While some of the minor errors were corrected in the corresponding ERPAs and options for the 2010, 2011 and 2012 tax years, the substantive deficiencies or problems in the documentation remained throughout.
For example, the 2010, 2011 and 2012 ERPAs provided that on completion, the investor would pay the second instalment in exchange for Voluntary Credits’ promise after the funds cleared to post (from Malaysia) documentation enabling the investor to be “in effective possession and control” of the contract lot(s) acquired.
Mr Fowler identified the following examples of the substantive deficiencies or problems in each of the versions of the ERPAs and options. First, the contracts (the ERPA and option) were made by Australian investors with two foreign companies, one Malaysian, the other Singaporean, but neither contract had a dispute resolution clause. Thus, if the investor ever wished to enforce his, her or its rights against the other party or parties, there was no right to utilise international arbitration and neither foreign company nor the investor had submitted to the jurisdiction of the courts of the jurisdiction in which the other party to the contract was resident or located. Secondly, at the time of the entry into the 2009 ERPA and the 2009 option, the subject matter, being the REDD or carbon credits as emission units comprising the contract lots, did not exist. Hence, BR Redd / Voluntary Credits could not serve a delivery notice in the foreseeable future. Nor did the documents identify any contract (beyond vague descriptions of the projects in various countries) under which Voluntary Credits was entitled to acquire the property in the carbon credits that it had agreed to sell to the investor.
Thirdly, as Mr Fowler explained, the industry standard unit of measurement (including for REDD credits) was expressed in tonnes of carbon dioxide equivalent (tCO2e). One tonne of solid carbon is equivalent to 3.7 tonnes of carbon dioxide. He said that the definition in the 2009 ERPA of a “Unit”, as a tonne of carbon sequestered by the projects, was not one with which he was familiar with in June 2009. There was no hint in the evidence of any market in which an investor could readily dispose of or utilise a contract lot, the subject matter of the ERPA, if the investor wanted to use the purchased emission units.
Mr Fowler said that, in his experience, there were two markets, a primary and secondary market. In the primary market, the carbon credits traded do not yet exist, whereas in the secondary market, they do exist as entries in a registry.
The primary market for carbon credits existed for a project developer or owner to contract on a forward basis, before any carbon credit was issued into an account in the scheme’s registry. Mr Fowler said that transactions in the primary market related to a single project or clearly identified group of projects for carbon credits. An intending purchaser, ordinarily, would require considerable information about each proposed project, including the stage it had reached, as it might progress toward being able to deliver credits into a registry account, and the risks to which the buyer would be exposed while the project proceeded. As a project neared being able to be registered, the risk of non-delivery to a buyer diminished and, accordingly, the value or market price would rise closer to the prices in the secondary market for similar carbon credits. Mr Fowler said that “primary market transactions are characterised by a strong focus on risk management, use of milestones or conditions precedent, and alternative delivery mechanisms if the estimated volumes of carbon credits ae not realised by the project”.
Of course, none of the scheme ERPAs reflected those considerations. Rather, they reflected prices higher than the average weighted volume prices in the secondary market, without exhibiting any substantive focus on certainty of delivery. That is not surprising, since none of the investors who bought the scheme ERPAs had any commercial, or even apparent commercial, need to acquire or hold carbon credits. This feature is also consistent with how the investors appear to have been approached to invest in the ERPAs as I will explain below.
Mr Fowler gave unchallenged evidence that during the period between June 2009 and June 2012:
·There was no Australian legislation that established a market or permitted the use of REDD credits to meet compliance obligations;
·There was, however, a reasonably consistent process for the creation and registration of REDD credits under the Verified Carbon Standard and the Climate Community and Biodiversity Allowance but no consistent or standardised process for the trading of those REDD credits;
·If an entity wished to reduce its carbon footprint, it had to receive carbon credits that it held either before its own corresponding emissions occurred or promptly after the level of those emissions was established or confirmed;
·The 2009 ERPA was a primary market transaction because, first, the projects with which the ERPA was associated were not then registered anywhere in the world with any scheme and, secondly, had no carbon credits that had been issued into any registry account;
·Moreover, such a transaction involved “a much higher level of risk of non-delivery of the credits [the subject of the ERPA] compared to a secondary market transaction”;
·The price of the REDD credits in the 2009 ERPA was “very high compared to both primary and secondary market carbon credit transactions in the voluntary carbon market at that time” and was inconsistent with the level of risk associated with the 2009 ERPA;
·The commercial value of the 2009 ERPA was undermined by the lack of detail about the projects from which the REDD credits were to be sourced, the time for any, or any terms about, delivery of those credits or the right of the investor to receive any substitute or compensation if the projects did not result in any registered or registrable carbon credits;
·The 2009 ERPA provided very little information about the projects whence the REDD credits under it were to be created whereas, all primary market ERPAs contained or referred to significant detail about those projects because they are the basis for the carbon credits transaction it documents;
·Payment prior to delivery, including of a 15% deposit, was “very unusual”, although on occasion it happened in projects sponsored by development banks, agencies or national governments or where large commercial buyers sought to secure access to cheap pre-compliance emission units or where an instalment became due on achievement of a specific project milestone; and
·The 2010, 2011 and 2012 ERPAs contained even less information about the REDD projects than the 2009 ERPA.
Mr Fowler demonstrated that the prices in each of the ERPAs for the scheme years were uncommercially high. If the unit prices in them were for tonnes of carbon dioxide equivalent (tCO2e), then the average volume weighted market prices for REDD credits as compared with the equivalent ERPA prices were as follows:
Year Average volume weighted market price per tCO2e ERPA prices 2009 USD2.90 AUD28.00 2010 USD5.00 AUD24.00 2011 USD12.00 AUD18.70 2012 USD7.50 – 8.00 AUD19.55
The 2011 ERPA price may appear to be near a market price, allowing for currency conversion rates. However, the nature of the product that Voluntary Credits was selling was speculative. That is, Voluntary Credits was offering to supply a product that did not exist at the time that any of the ERPAs were made in each scheme year and which might never exist. None of the scheme ERPAs provided any certainty as to the country in which the REDD credits might be created or sourced or registered in a governmental or industry scheme so that it would be immediately tradeable. The investor was contracting to pay a 15% non-refundable deposit, or first instalment, for a product that may never come into existence.
Mr Fowler opined that none of the 2009, 2010, 2011 or 2012 ERPAs was suitable for the purpose of enabling the investor to acquire carbon credits for use to retire carbon credits or to offset its carbon footprint or carbon emissions. He explained that this was because of, first, the lack of certainty on delivery timing or volume, secondly, the absence of a project development document (ie: a contract under which the carbon credits would be created), thirdly, the absence of a basis on which to assess the risk of non-delivery as against the price paid per unit, fourthly, the very high price per unit as compared with much lower risk alternative transactions that were available in the markets at the relevant times and, fifthly, the investor could not make any offsetting claims unless and until BR Redd / Voluntary Credits gave a delivery notice.
In addition Mr Fowler opined that the 2009 option was “very unusual” as compared with arrangements for carbon credits in June 2009. He said, correctly in my opinion, that the 2009 option was drafted as a stop-loss rather than a hedging instrument with the objective of limiting the overall expenditure of an investor to only the 15% deposit in the event that the investor received a delivery notice, thus triggering the obligation to pay the balance of the purchase price. Mr Fowler said that the effect of the investor exercising the 2009 option, would be to return the carbon credits to the vendor. However, while that was so for the 2010, 2011 and 2012 options, the 2009 option was not between the investor and the vendor (BR Redd), under the 2009 ERPA, but with Carbon Strategic. Nonetheless, the essential point that Mr Fowler made in his analysis of the effect of the 2009 option (which in my opinion, applied equally to the 2010, 2011 and 2012 options) was that, if the investor exercised it, the investor would have no carbon credits available to it but would have paid a substantial sum under the 2009 (and later ERPAs) to BR Redd / Voluntary Credits, being the 15% deposit, without achieving any reduction in its carbon footprint.
Mr Fowler explained that during the period between June 2009 and June 2012, persons who wanted to obtain carbon credits or carbon offsets had a variety of retail sources available, including three businesses trading under the names Climate Friendly, Australian Carbon Traders and Carbon Trade Exchange. Each of those retail sources offered simple arrangements to acquire and retire existing carbon credits from a wide variety of projects in various locations. Those businesses offered a purchaser the ability to acquire the precise number of carbon credits needed to offset the purchaser’s emissions, or as much of those emissions as it wished to offset.
Mr Fowler reasoned that, because of the ready availability in the spot market of bespoke amounts of carbon credits in June 2009 and thereafter, from at least those Australian carbon credit trading businesses, there was no commercial need for a retail purchaser to enter into a primary market transaction of the kind offered in the 2009 (and later) ERPAs. He said that during the period between June 2009 and June 2012, businesses in the class of persons who became investors in the 2009, 2010, 2011 and 2012 ERPAs, such as small businesses and individuals, could purchase carbon credits using simple, standard form Australian Financial Markets Association contracts or through retail platforms and could take immediate delivery of whatever carbon credits that they wished or needed to acquire.
The 2010 tax year
Dr Rowntree was not troubled by the poor drafting of the 2009 ERPA and option. His insouciance is demonstrated by the following. On 26 June 2009, David Le of Flowers Group (one of the entities marketing the 2009 scheme) forwarded to Dr Rowntree an email from Jason Wenderoth headed “Concerns” that acutely enquired about the mechanics of the 2009 ERPA and option. Mr Wenderoth wrote:
Nowhere does the Purchase Agreement stipulate the relationship between REDD Credits and ‘contract lots’ or ‘tonnes of sequestered carbon’. This makes it hard to determine what you will be entitled to down the track. It also sets up a terminological inconsistency with the Put Option, which only refers to REDD Credits and not ‘contract lots’ or 'tonnes of sequestered carbon'. Further, it's not clear what the nature of REDD Credits is nor how they will become ‘tradeable' (eg as securities on a stock exchange?).
There are several other drafting anomalies in the documents, eg 'Termination Date' is not defined in the Put Option Agreement, and the Purchase Agreement still includes references to "Emission Units'.
(emphasis added)
Dr Rowntree responded to Mr Le later on 26 June 2009 saying that he had read Mr Wenderoth’s concerns and did not think that there was any point in calling him. The Flowers Group appears to have comprised, at least, based on the sources of funds identified in the s 50 summary of documents relating to consideration received by the respondents and their associates (the consideration summary) Flowers Accounting Solutions Pty Ltd, Flowers Financial Management Pty Ltd, Flowers Financial Group Pty Ltd and SVPMA Pty Ltd. Dr Rowntree wrote that Mr Wenderoth could wait until the final version was “settled by our barristers in July/August”.
Next, on 24 August 2009, Paul Miller of Deutsch Miller, solicitors, emailed Dr Rowntree and Mr Bonnell with drafts of, among others, a revised version of the 2009 ERPA. Mr Miller pointed out that the draft ERPA did:
not specify which Projects need to be completed before BR Redd is obliged to send to the Buyer a Delivery Notice. This clause acts as a condition precedent to the Buyer receiving a Delivery Notice, which is out of its control. Please consider being more specific in relation to which Projects need to be completed as I am concerned that this clause could make the agreement void for uncertainty.
(emphasis added)
Despite, or perhaps because of, Mr Miller’s warning, the 2010, 2011 and 2012 ERPAs had no reference to any projects by reference to which Voluntary Credits (or as it was called in 2009, BR Redd) could serve a delivery notice on the purchaser.
Next, on 25 August 2009, Mr Manietta (on Ti Amo Strategies letterhead) wrote to an investor, The Mark Colin Co Pty Ltd, which had purchased two contract lots in the 2009 year, advising it that the “Green Frog” carbon credit logo was now available. He advised his client that by September 2009, the BR Redd website would have a downloadable marketing and media pack including a draft press release and a suggested tendering clause. This was similar to Dr Rowntree’s 9 July 2009 letter to Dr Robson (see [31] above).
In August 2009, Dr Rowntree and Mr Bonnell participated in a workshop with IMPACT Communications Australia Pty Ltd to develop key messages for a media campaign to be conducted on behalf of BR Redd up to 31 January 2010. The campaign was to promote BR Redd in the lead up to the United Nations Climate Summit that was to take place in Copenhagen between 6 to 18 December 2009.
In a letter to Dr Rowntree dated 1 September 2009, IMPACT set out the activities that it would undertake in that campaign for a fee of $58,075. These activities included media training for Dr Rowntree and Mr Bonnell, the preparation of drafts of a “green kit” for clients, a media kit, interviews with Mr Flood (of Carbon Strategic, a media release, pitch/case studies and a poll to survey clients as well as weekly and monthly reporting.
IMPACT prepared a key messages report soon after its engagement that referred to the “Voluntary Credits Pty Ltd Communications Campaign” (even though BR Redd only changed its name on 17 January 2010). The key messages report identified that the initial “direct targets” of the campaign were “owners and managers of small to medium enterprises”. The campaign would focus on Voluntary Credits’ market for carbon credits and “enable [it] to utilise media coverage gained to generate more business, test the media’s reaction to the REDD market and build the confidence of David Bonnell and Bruce Rowntree as media spokespeople” (emphasis added). The key messages report stated:
Key Messages
A 'key message' is a claim supported by a fact or example. The key messages below were developed during a workshop between IMPACT and Voluntary Credits Pty Ltd (Bruce Rowntree and David Bonnell) in August 2009. They are divided into two categories; company/ Voluntary Credits Pty Ltd messages and general REDD messages. Spokespeople should use key messages appropriate to the media wherever possible.
Note, all media materials should refer to Voluntary Credits Pty Ltd as a distinct business that sits separately from the parent company, BR Advisers. This will allow spokespeople to distance themselves from the 'tax reduction' component of the REDD product.
(emphasis in original)
Mr Manietta engaged in marketing activities during the lead up to the Copenhagen summit. On 30 September 2009, he wrote a long letter (on Ti Amo Strategies’ letterhead) to Hall Chadwick, a well-known firm of accounts, suggesting an alliance between them and Super Smart. He suggested that the activities of the alliance could include, in the tax planning area, using Ti Amo Strategies’ strategic alliance with BR Redd for the sale of carbon credits. Mr Manietta largely copied from Dr Rowntree’s marketing letter (see [24] above) when explaining this aspect to Hall Chadwick, including using the paragraph that referred to the barrister’s opinion. There is no evidence of any further contact with Hall Chadwick.
On 19 October 2009, one of Super Smart’s employees emailed Mr Donkin with four draft letters for his comment. This followed a meeting between Mr Manietta and Mr Donkin. The draft letters were a letter of introduction for Strategic from Mr Donkin, and three letters from Mr Manietta to, first, persons who had purchased contract lots in the 2009 year, secondly, persons who had been approached to purchase contract lots in the 2009 year but had not done so and, thirdly, new prospects. As counsel for Mr Donkin noted, there was no evidence that Mr Donkin ever used Mr Manietta’s draft letter of introduction to Strategic. The other three draft letters, with suitable adaptations, largely replicated Dr Rowntree’s marketing letter, including the reference to the barrister’s opinion.
Mr Bonnell visited Vietnam between 7 to 12 December 2009 to discuss with various government officials associated with national parks how they might cooperate to create REDD credits. He noted that the Vietnamese Government was “very keen to promote REDD programs” and that the issue of climate change was prominent in its thinking. Mr Bonnell concluded that those with whom he had dealt “seemed to understand the REDD concept very well” and that “no credits would be tradeable until 2013 and later”.
On 17 January 2010, BR Redd changed its name to Voluntary Credits.
On 25 January 2010, Mr Manietta emailed Dr Rowntree asking him to bring “your latest marketing kit for CC’s [carbon credits] with you for lunch”.
On 29 January 2010, Dr Rowntree sent Mr Bonnell an email that stated of Mr Young, on whose opinion the marketing letter was based:
Never ever let Ian young [sic] near a client.
These clients/ friends are teeing me up meetings with a number of people and Ian points out all the risks and tells them that the commisioner [sic] would probably disallow the deductions and he wouldn't care about the politics in the same way as he did for psi.
Clients are now wondering what the f[…] they have signed up for – and they haven't paid yet.
(emphasis added)
This email demonstrated that Dr Rowntree knew that at least a significant number, if not all, persons within the class to whom he was marketing investment in the ERPAs were not persons about whom Mr Young had opined in his 26 May 2009 opinion as “a businessman, conducting his business” who could or would represent to the public “that his business is a clean and green business” (see [23] above). Thus Dr Rowntree knew that Mr Young did not agree with the use of his opinion as stating that, generally, regardless of the business of the particular investor, an investment in an ERPA would be “a deductible expense of the buyer to the full extent of the purchase price in the year in which the contract was executed”. Despite that knowledge, Dr Rowntree persisted in using, or rather misusing, Mr Young’s opinion indiscriminately in his marketing of the 2010, 2011 and 2012 ERPAs.
So, on 2 February 2010, Dr Rowntree emailed Mr Le and Rodney Walt attaching “the material I am sending to people at the moment”, being a letter on VCPL’s letterhead in substantively the same terms as the marketing letter set out at [24] above (but with Voluntary Credit’s name substituted for BR Redd’s and a slightly different description of the way in which the option worked). Although the letter was on VCPL’s letterhead it said (without explaining that they were different companies) that “Voluntary Credits Limited” had been set up to provide businesses with carbon credits to allow them to show their customers that doing business with them is friendly to the environment. Dr Rowntree noted in the 2010 client list: “BR [Bonnell Rowntree] and Rodney [Walt] and David [he] will share profit when selling these REDD up to $28/tonne (being the difference between $28 and $5). I infer that Mr Walt was also associated with the Flowers Group which sold 34 contract lots in the 2010 tax year. At the end of the 2010 client list there was a commission structure that recorded $2250 “through Flowers” or $1125 “Not Flowers” for every contract lot that Mr Le or Mr Walt sold.
On 5 April 2010 Mr Bonnell wrote an email to Philippa Reid, who appeared to be a new employee of, or a consultant to, BRTAPL about what needed to be done to progress her “[t]aking on the marketing role” including training her to “sell carbon credits”. He said that he and Dr Rowntree proposed a bonus scheme for her of $3500 for every contract lot that Voluntary Credits sold “attributable to your efforts.”
On 23 April 2010 Dr Robson emailed Ms Dodd enquiring about whether he could “invest in carbon credits in the 2010 tax year, whether she was aware of any issues from the standpoint of the Commissioner and the query that his accountant had raised, as to how the deduction for the 2009 tax year was to be claimed. Ms Dodd replied later that day saying that “the full amount of the contract price is the amount deductible even thou [sic] you have only paid the initial deposit” and “should be claimed as an operating expense of your medical business” under s 8-1 of the ITAA 1997. She attached “the current materials similar to last year”.
On 25 May 2010 Ms Reid and Mr Bonnell exchanged emails. She reported arranging the sale of 2 contract lots to one purchaser and enquired:
On a random note, and please excuse my ignorance, but why is NAB [scil: National Australia Bank] able to advertise their home loans by saying "why not get a home loan with possible tax benefits?" but we can't say something like "why not offset carbon emissions with possible tax benefits?".
It would make life a lot easier...
Mr Bonnell replied that he needed “to explain the subtleties of the NAB vs Us in person” and then added:
I think you should start investigating tv advertising, for which we need an advertising agent. I have in mind the slots that are sold on Sunday morning for the business shows. We could use art and code's slide show for a 30 second spot, depending on cost.
We can also look at direct marketing with an advertising agency as well. So let’s see if we can find one.
(emphasis added)
In June 2010, Dr Rowntree and his associates pursued the marketing of contract lots apace. For example, Mr Elias sent the marketing letter, a flyer and an application form to one client investor on 1 June 2010, who bought a contract lot. On 7 June 2010 Brad Turner of WL Browne & Associates emailed Dr Rowntree discussing 11 clients who might be possible investors, including WL Browne itself. Mr Turner said that one of those clients “will have some solid profits and may be able to use in multiple entities” and another had a lot of negatively geared rental properties “and may not get full benefit”. As those comments suggested, the discrimen for selecting the possible investors was their anticipated tax position, rather than any concern about the way in which their business might be able to utilise carbon credits for business (as opposed to fiscal) purposes.
On 21 June 2010, Dr Rowntree asked Frank Curran if he had “any clients who want to do carbon credits we are just about at 30 June”. Mr Curran replied “what sort of tax prospects do they really need for this to work” to which Dr Rowntree responded “140k +” (i.e. $140,000 or more). Once again, that discussion focused on the tax position of a client. As Mr Curran’s query demonstrated, the client’s commercial need for carbon credits (other than their perceived fiscal benefits) was not of any apparent concern.
Mr Manietta and, to a much lesser extent on the evidence, Mr Donkin, were busy too at this time. On 21 June 2010 Eunice Zhou of Super Smart and Mr Manietta exchanged emails with a client, Min Jin Song, about what Ms Zhou described as “the Carbon Credit package”. Ms Song responded again with a keen eye focused on the fiscal consequences:
was wondering if you would be able to ask Rick [Manietta] if it was definitely applicable for me that if I used the carbon credits I would have to pay minimal tax after viewing my 2010 - 2011 income estimates. I just did not want to get them unless it was of great benefit for my situation.
(emphasis added)
Mr Manietta emailed asking her to call him that night. At 7.24pm on 21 June 2010 Ms Song emailed Mr Manietta with the completed forms concluding with her thanks “for taking care of us with such late notice”.
On 23 June 2010 Mr Donkin emailed Mr Manietta and his colleague, Rebecca Frankham, with an application from Smart Dental for one contract lot. Ms Frankham emailed that application to Dr Rowntree about 2 hours later advising him that 5 or 6 more applications were going to be received later that day or the next.
On 30 June 2010, Dr Rowntree, on Voluntary Credits’ letterhead, wrote to Smart Dental congratulating it on purchasing a contract lot and attaching an executed 2010 ERPA and option. The letter informed Smart Dental that it could use Voluntary Credits’ “resources…to assist in marketing your business” and that Voluntary Credits would be in contact in the next month to provide a licence agreement to use “carbon reduced” logos to “advertise that your business is now ‘carbon reduced’”. Dr Rowntree wrote, in what might be considered as a lack of a personal touch in a letter to a suburban dental practice, that “many of you had advised that your agreement to purchase REDD Credits will facilitate you being awarded government contracts.” He suggested that the letter’s recipient include in its tender documents that it had entered into a contract “for the purchase of 5,000 tonnes of carbon credits…at great expense to the company resulting in an outlay of $140,000.”
Dr Robson’s 2010 tax year investment
On 21 June 2010, Dr Robson paid $42,000 to acquire 2 contract lots and executed a 2010 ERPA and 2010 option. There was no evidence as to if, or how, the $1000 option fee came to be paid but I accept Dr Robson’s evidence that he entered into the 2010 option. However, he did not claim a tax deduction for the 2010 tax year in respect of that payment because, as he said in evidence “I had run into problems with” the ATO about his claim for deductions in his 2009 tax return.
On 24 June 2010, Dr Robson’s accountant had emailed the ATO with information about the income and expenses declared in his 2009 tax return.
On 29 June 2010, an officer of the ATO wrote an email to Dr Robson accountants, following a telephone discussion, asking for a copy of either the contract or a form showing details of his investment the subject of the claim for a deduction based on his outlay in respect of the 2009 ERPA in his 2009 tax return.
The ATO email referred to the need for an investor claiming a deduction of “expenditure for establishing trees” to give the Commissioner a notice in writing no later than 5 months after the end of the financial year. Dr Robson’s accountant asked him and Ms Dodd to provide the information that the ATO sought.
On 29 June 2010 Ms Dodd responded asking about what trees the ATO had referred to and Dr Robson wrote back that he, also, had no idea, but would look at his papers. I infer that Ms Dodd and Mr Bonnell discussed how to respond and, at about 9pm on 29 June 2010, Ms Dodd emailed Dr Robson asking him not to provide his accountant or the ATO with “carbon credit contracts…until further notice” because “we need to know exactly what the tax office is referring to before we hand over any information”.
The cat was now among the pigeons as become clear from Ms Dodd’s email to Dr Robson of 1 July 2010 where she wrote:
BR Redd and Bonnell Rowntree are requesting extra time before lodging any carbon credits documents with the ATO.
unfortunately Bruce Rowntree is in Vietnam now completing current year investments and is not due to return to Oz until 20 July…
I appreciate that this time delay is not what either you or I originally expected but the investment vendors are considering their ato defence strategy and have requested both our patience at this stage.
I do apologise for this unexpected turn of events Nick but at this point it is out of my hands.
(emphasis added)
Dr Robson responded later on 1 July 2010 saying that he presumed that Ms Dodd’s confidence in “the legislative framework underpinning the investment remains strong” and that “I was certainly not expecting it to trip the switch for a tax audit”. Dr Robson also said that all his tax liabilities were paid in full. Ms Dodd asked Mr Bonnell how to respond and on 2 July 2010 he advised her:
You can tell Nick something like:
"The deduction you have claimed for purchasing carbon credits does not rely on any specific section of the law. It is governed by ordinary principles of what is and is not deductible and when that deduction can be claimed. When you interpret these sections there is always room for the ATO to take a position that is different to the views taken by taxpayers.
The delay is due to the fact that Bruce is away in Vietnam at the moment and then off for a short holiday. Vietnam is where we buy the REDD credits and he is meeting senior members of the Vietnamese government to inform them of what we are doing here in Australia to promote the REDD scheme. We need Bruce's input prior to responding to the ATO.
The fact that there is a short delay will not cause you any prejudice with the ATO, especially as they rushed your response due to an officer leaving on maternity leave."
(emphasis added)
On 3 July 2010 Ms Dodd emailed Dr Robson. She confirmed that her confidence in the deductibility of the expense was still as strong as before and then repeated substantially Mr Bonnell’s draft response.
The 2010 tax year – summary
During the 2010 tax year according to the 2010 client list there were sales of 102 contract lots. Voluntary Credits received a total of $1,402,500 comprised of the following:
Source Amount received by Voluntary Credits Commission retained by Ti Amo LP and Strategic No of contract lots Voluntary Credits $196,000 (a)
$174,750 (b)N/A 12
10Ti Amo LP $455,000 $238,000 33 (d) Flowers Group $476,000 WL Browne $56,000 Ms Dodd/Conluceo Consulting $130,750 Mr Elias $25,750 Strategic $63,000 $26,296 (c) 4 NOTES (a) this sum was agreed
(b) this sum was disputed
(c) this sum was admitted
(d) Ti Amo bought one contract lot itself for $14,000
The amount of $174,750 referred to in note (b) in the above table was part of the total of $176,750 that VCPL received into its Bank of Queensland account between 1 June 2010 and 9 July 2010. It comprised two deposits of $21,000 each, and deposits of $58,000, $27,750 and $49,000. The 2010 client list recorded sales of 10 contract lots for a total of $174,750 to 10 named investors that the Commissioner could not match to other records of Voluntary Credits. Those 10 sales appeared to result in a net receipt for each sale to Voluntary Credits of:
·$21,000 each for 4 clients of WL Browne and to one of $4,750 for a sale to WL Browne itself as purchaser
·$14,000 each for two where Voluntary Credits was the referrer;
·$21,000 for one where Strategic was the referrer; and
·$18,500 each where “Grevlar” was the referrer.
There was no apparent nexus or connection between the loss or outgoing of the full purchase price for an ERPA, or the 15% deposit, “in” the gaining or production of any of the investor’s assessable income or “in” carrying on a business for the purpose of gaining or producing assessable income within the meaning of either limb of s 8-1 of the ITAA 1997.
It is not necessary to decide whether the Commissioner would have exercised his power under s 177F(1)(b) in Pt IVA of the ITAA 1936, not to allow the whole or any part of the purchase price to be deducted from an investor’s assessable income in the tax year of entry into the relevant ERPA. That is because of my findings that no part of the purchase price of any of the 2009, 2010, 2011 or 2012 ERPAs was deductible under s 8-1 of the ITAA 1997.
However, I should state, briefly, why I would have found that it was not reasonably arguable that, had the full purchase price or deposit been deductible under s 8-1 of the ITAA 1997, nonetheless, the Commissioner would have decided, in the exercise of his discretion under s 177F(1)(b) of the ITAA 1936, that any such deduction did not comprise a tax benefit that had been, or but for s 177F would have been, obtained by the relevant investor in connection with a scheme. This issue arises, ordinarily, in a challenge by a taxpayer to an assessment where the taxpayer bears the onus of establishing that the assessment is excessive because there is no tax benefit in connection with the scheme.
The question is whether it is objectively discernible that, having regard to a global assessment of the matters in s 177D(2), it is reasonably arguable that the Commissioner would have determined under s 177F(1)(b) not to disallow the whole or any part of a tax benefit that the investor obtained in connection with the relevant scheme: that is, it could be concluded that none of the investors, or the respondents, who entered into or carried out the scheme or any part of it, did so for the dominant (including the objectively discernible) purpose of enabling the investor to obtain a tax benefit in connection with the scheme: see Academy 106 ATR at 207-211 [117]-[136] where I summarised the authorities and analysed the 2009 scheme under Pt IVA.
The consequence of each investor entering into the relevant ERPA and, hence the scheme in the relevant tax year, was the significant tax saving (of about twice the amount of the actual outlay of the 15% deposit) generated by the deduction of the full purchase price from his, her or its assessable income. There was no evidence that any of the investors considered any course of action involving the purchase of carbon credits elsewhere or the entry into any other transaction for the purpose of gaining or providing assessable income. The communications in evidence between Dr Rowntree, Mr Donkin or Mr Manietta (and their associates) with one or both of the others or with an investor focused on the tax benefit for the investor.
I am satisfied that the alternative postulate of what each investor would have done had he, she or it not entered into the relevant ERPA, is that the investor would not have, first, entered into any other investment or transaction and, secondly, claimed the deduction: cf Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at 243-244 [66] per Gummow and Hayne JJ and, see too, per Gleeson CJ and McHugh J at 228 [18]. The artifice of the scheme is exposed by its achievement of the tax saving of about twice the investor’s outlay in the year in which the deduction is claimed when the investor acquired no enforceable right in, or capacity to require delivery of, any carbon credits. Moreover, there was an expectation that the investor would not be required, as a matter of practical reality, to make or finance the payment of the 85% balance of the purchase price. That was because the investor could terminate the relevant ERPA if Voluntary Credits did not issue a delivery notice within three years, and some, but not all investors had the benefit of a stop loss based on the purchase of the relevant option. The price of each contract lot was not a realistic market price.
The inference that I draw is that none of the investors ever intended to use the REDD or carbon credits in gaining or producing assessable income or even expected to receive a delivery notice requiring the investor to pay the balance of the purchase price: Hillier 228 CLR at 638 [48]. The overwhelming objective purpose of an investor when deciding to enter into each relevant ERPA and pay the 15% non-refundable deposit was the obtaining of the substantial tax benefit, reflected in the tax deduction that the investor would claim, despite having acquired no enforceable right in, or to obtain the value of, the REDD or carbon credits. That consequence is also reflected in the facts that most investors purchased, and each of Dr Rowntree, Mr Donkin (except for the 2009 tax year) and Mr Manietta and his associates promoted the sale of, ERPAs at or near the end of each relevant tax year, together with size of the commissions that Voluntary Credits paid to associates of each of Mr Donkin and Mr Manietta for each sale by him. The total commissions represented a substantial proportion of between 10% and 33% of the deposits.
I also reject the argument that, in effect, each of the schemes was so badly conceived that no one in Dr Rowntree’s or Mr Donkin’s position could have considered that the claim to deduct the full purchase price or the deposit was “reasonably arguable”. Professor Cooper’s doublethinking approach cannot stand with the analysis of the Full Court in Ludekens 214 FCR at 191-195 [226]-[247], 211-212 [324]-[331].
Relevantly, the Parliament enacted s 290-65(1) and (2) in Sch 1 of the TAA in order to achieve the express purpose in s 290-5(a) of deterring tax avoidance and tax evasion schemes. Lord Diplock, writing extrajudicially, said (Diplock K, “The Courts as Legislators” in B Harvey (ed), The Lawyer and Justice (Sweet & Maxwell, 1978) at 274), that “if … the Courts can identify the target of Parliamentary legislation their proper function is to see that it is hit: not merely to record that it has been missed”. In Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381–382 [69]–[70] McHugh, Gummow, Kirby and Hayne JJ said:
The 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 (See Taylor v Public Service Board (NSW) (1976) 137 CLR 208 at 213, per Barwick CJ.). The meaning of the provision must be determined "by reference to the language of the instrument viewed as a whole" (Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 320, per Mason and Wilson JJ. See also South West WaterAuthority v Rumble's [1985] AC 609 at 617, per Lord Scannan, "in the context of the legislation read as a whole".). In Commissioner for Railways (NSW) v Agalianos ((1955) 92 CLR 390 at 397), Dixon CJ pointed out that "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". Thus, the process of construction must always begin by examining the context of the provision that is being construed (Toronto Suburban Railway Co v Toronto Corporation [I915] AC 590 at 597;Minister for Lands (NSW) v Jeremias (1917) 23 CLR 322 at 332; K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd (1985) 157 CLR 309 at 312, per Gibbs CJ; at 315, per Mason J; at 321, per Deane J).
A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals (Ross v The Queen (1979) 141 CLR 432 at 440, per Gibbs J).Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions (See Australian Alliance Assurance Co Ltd v Attorney-General (Q) [19161 St R Qd 135 at 161, per Cooper CJ; Minister for Resources v Dover Fisheries Pty Ltd (1993) 43 FCR 565 at 574, per Gummow J). Reconciling conflicting provisions will often require the court "to determine which is the leading provision and which the subordinate provision, and which must give way to the other" (Institute of Patent Agents v Lockwood [18941 AC 347 at 360, per Lord Herschell LC). Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme.
(emphasis added)
Here, first, the condition in s 290-65(1)(a)(i) requires an objective evaluation of the purpose of a person or entity who or which entered into or carried out the scheme. If the Court ascertains, objectively (ie “it is reasonable to conclude”) that the sole or dominant purpose was so that the person or another entity would get a tax benefit, it must then address the second condition in s 290-65(1)(b)(i) and (2), namely whether it is not reasonably arguable that the scheme benefit is available at law.
Once again, the section operates on the reasonable arguability of a position that is objective, not subjective. A person may, and usually will, enter into or carry out a scheme for the dominant purpose of getting a tax benefit from it, thinking that it will work as intended. The fact that an objective analysis concludes that the scheme was structured on a mistaken premise, namely that it would work, cannot entail, as Dr Rowntree and Professor Cooper argued, that because of the mistake and despite the dominant purpose, it was not a tax exploitation scheme at all, because it was doomed (or likely) to fail.
In my opinion, Dr Rowntree had the dominant purpose that the structure of the 2009, 2010, 2011 and 2012 ERPAs would enable each of the investors to claim the full purchase price as a deduction in the tax year in which the investor entered into it, on the basis of Mr Young’s opinion. Having regard to his professed expertise, Dr Rowntree must have known that it was not reasonably open to a professional lawyer, accountant or financial planner to use Mr Young’s opinion to support any investor, to whom he and his associates marketed or promoted investment in the ERPAs, claiming a tax deduction for either the full purchase price or the deposit. That is why Dr Rowntree crafted the marketing letter, and other references to Mr Young’s opinion, with the qualification that any investor should seek their own legal advice about the ERPA, its commercial and tax consequences (see eg at [24] above). However, as he recognised in his 29 January 2010 email to Mr Bonnell, the last thing Dr Rowntree wanted was for an investor to heed the qualification, lest, as occurred when Mr Young himself gave investors oral advice, the manifest unsuitability of the 2009 (and later) ERPAs for the target market of professionals, like Dr Robson, with no carbon footprint would be explained to them.
In addition, Dr Rowntree knew, or ought to have known, that it was not reasonably arguable, within the meaning of s 284-15, for an investor to make a claim to deduct the full purchase price on entry into the relevant ERPA when the investor had paid a non-refundable 15% deposit. That deposit conferred no enforceable rights to any existing property or to obtain any REDD or carbon credits and might never do so under the ERPAs, because BR Redd / Voluntary Credits might never be in a position to acquire any that could become the subject of a delivery notice. So much appeared from Dr Rowntree’s reluctance to engage with the email he received on 26 June 2009 from Mr Wenderoth that pointed out these problems (see [72]–[73]).
Accordingly, I am satisfied that it was not reasonably arguable that the tax benefit would be available at law. That is because, even if I were wrong in my findings that no part of the deposit or purchase price was deductible under s 8-1 of the ITAA 1997, the Commissioner would have exercised his power under s 177F(1)(b) of the ITAA 1936 not to allow any part of a deduction claimed in respect of any payment to enter into any of the ERPAs.
Conclusion
For these reasons, I am satisfied that each of the schemes was a tax exploitation scheme.
The evasion issue
Dr Rowntree and Mr Manietta can only be liable to a civil penalty under s 290-50 in Sch 1 of the TAA as a promoter of the 2009 scheme if it involved tax evasion within the meaning of s 290-50: see too Bogiatto [2020] FCA 1139 at [79]–[82]. That is because the Commissioner did not bring this proceeding within the four year period provided in s 290-55(4).
Relevantly, s 290-55(4) and (6) in Sch 1 of the TAA provided:
Time limitation
(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.
…
(6) However, the limitation in subsection (4) or (5) does not apply to a *scheme involving tax evasion.
The expression “tax evasion” is not defined. The object of Div 290 in s 290-(5)(a) is “to deter the promotion of tax avoidance schemes and tax evasion schemes”. The Parliament intended to distinguish between avoidance and evasion of tax.
Item 5 of s 170(1) of the ITAA 1936 confers an exceptional power on the Commissioner to amend a notice of assessment at any time if he is “of the opinion that there has been fraud or evasion”. In Denver Chemical Manufacturing Co v Commission of Taxation (NSW) (1949) 79 CLR 296 at 313 Dixon J (with whose reasoning McTiernan and Webb JJ agreed; and see too per Williams J at 317-318) said that “evasion”:
means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.
In the present case the Board concluded that the appellant intentionally omitted the income from the return and that there was no credible explanation before them why he did so. They thought that the conduct of the taxpayer answered the description of an avoidance of tax by evasion.
(emphasis added)
In Bogiatto [2020] FCA 1139 at [80], Thawley J cited what Gleeson CJ (with whom Sully and Bruce JJ agreed) in R v Meares (1997) 37 ATR 321 at 323 to emphasise the distinction between tax avoidance and tax evasion. Gleeson CJ said there:
Although on occasion, it suits people for argumentative purposes, to blur the difference, or pretend that there is no difference, between tax avoidance and tax evasion, the difference between the two is simple and clear. Tax avoidance involves using, or attempting to use, lawful means to reduce tax obligations. Tax evasion involves using unlawful means to escape payment of tax. Tax avoidance is lawful and tax evasion is unlawful. Although some people may feel entitled to disregard that difference, no lawyer can treat it as unimportant or irrelevant. It is sometimes said that the difference is difficult to recognise in practice. I would suggest that in most cases there is a simple test that can be applied. If the parties to a scheme believe that its possibility of success is entirely dependent upon the authorities never finding out the true facts, it is likely to be a scheme of tax evasion, not tax avoidance.
(emphasis added)
In Kajewski v Federal Commissioner of Taxation 52 ATR 455 at 484-485 [114], Drummond J held that if an agent of a taxpayer, such as a tax agent or accountant, engaged in fraudulent conduct that was unknown to the taxpayer, the conduct itself could provide a sufficient basis for the Commissioner to exercise his power to amend an assessment under the analogue of what is now item 5 in s 170 of the ITAA 1936.
Here, s 290-55(6) in Sch 1 of the TAA provides an exception to the four year limitation period in s 290-55(4), “to a scheme involving tax evasion”. The exception in s 290-55(6) applies to a scheme involving tax evasion, as opposed to the entity the subject of an application under s 290-50. The ordinary and natural meaning of s 290-55(6) is that, if any part of the scheme in question involves tax evasion, the limitation period will not apply to an entity’s involvement in that scheme in respect of conduct of that, or another, entity being a promoter of the scheme.
Dr Rowntree argued that he did nothing blameworthy in relation to the 2009 tax year so as to warrant a finding that the scheme in that year involved tax evasion. He contended that he did not withhold, or urge anyone else to withhold, any information from the Commissioner. He asserted in his written submissions that he had “facilitated” one investor to obtain a private ruling. However, there was no evidence of any private ruling or what that unnamed investor did or who he she or it was. I find that there was no application for a private ruling before 30 June 2009 or at any time in relation to any of the 2009, 2010, 2011 or 2012 schemes. In his letter to Dr Robson of October 2010, Mr Bonnell referred to Voluntary Credits’ intention to run a test case in the Administrative Appeals Tribunal if the ATO disallowed an investor’s claim for a deduction (see [130] above), but there is no evidence that even this occurred. The only test case concerning the deductibility of payments made under an ERPA to which the parties referred in the hearing was Academy 106 ATR 184. That proceeding was only filed in this Court in 2014.
Dr Rowntree’s marketing dilemma, that he identified to the NAA agency (“there is little BR can say when advertising to its target audience” (see [120])) which Ms Reid had identified earlier on 25 May 2010 in her query to Mr Bonnell (see [90]), highlighted Mr Bonnell’s and Dr Rowntree’s consciousness that the 2009 and later year schemes were problematic. Critically, when the ATO began querying Dr Robson’s 2009 tax return in June 2010, Mr Bonnell told Ms Dodd to tell Dr Robson that BR Redd and Bonnell Rowntree “are requiring extra time before lodging any carbon credits documents with the ATO” and that “the investment vendors are considering their ATO defence strategy and have requested both our patients at this stage”. ([103])
In other words, BR Redd, Mr Bonnell and the “investment vendors” (who included Dr Rowntree) requested Dr Robson to withhold from the ATO the contractual documents, being the 2009 ERPA and option, on which he had claimed the 100% deduction of the purchase price and his 2009 tax return. That request was based on the “investment vendors” needing time to develop “an ATO defence strategy”. The evidence was bereft of any information about what was the “ATO defence strategy” of the “investment vendors”. The suggestion that the “investment vendors” needed a strategy before being prepared to allow the Commissioner or the ATO to look at the terms of the 2009 ERPA and option, betrayed a consciousness that the Commissioner should not have that information “lest [he] should consider the taxpayer [or the purchaser of the investment] liable to a greater extent than the taxpayer [or each of the “investment vendors”] is prepared to concede”: DenverChemical 79 CLR at 313. As Gleeson CJ said in Meares 37 ATR at 323, if the parties to a scheme believed the possibility of success entirely depended on the authorities never finding out the true facts, “it is likely to be a scheme of tax evasion”.
Subsequently Dr Robson received no more information of substance from the “investment vendors”. Mr Bonnell’s email to Ms Dodd of 2 July 2010 [104] and his letter of late October 2010, [130] obfuscated the absence of any underlying contract that could have enabled Voluntary Credits to issue a delivery notice to Dr Robson (or any other investor) under the 2009 ERPA (or any other ERPA). And, when Dr Robson met and complained to Mr Bonnell on 24 September 2010, Mr Bonnell promised to refund the amount he had paid for the 2009 ERPA and option.
Ultimately, Dr Rowntree’s email to Ms Dodd on 28 October 2010 [128], in which he said that he personally would pay the refund out of his home loan account, is notable for its failure to say how a deduction was somehow supportable, in light of the ATO’s interest in Dr Robson’s by then withdrawn claims for deductions. Clearly by late October 2010, the “investment vendors” had not been able to provide any substantiation to support the 2009 scheme benefit that sought to achieve a deduction of the full purchase price of each contract lot in the 2009 tax year. The disingenuous self-righteousness in Dr Rowntree’s assertion in that email, that the scheme had “not been marketed from us on the basis of tax – not a little – nil”, demonstrated how conscious he was that the Commissioner would have a sound and reasonable basis to say that Dr Rowntree (and his associates), indeed, had marketed the scheme on the basis of tax, as the evidence makes pellucid.
In my opinion, Dr Rowntree’s and the “investment vendors”’ use of the asserted tax deductibility of the full purchase price of the 2009 ERPA and Mr Bonnell’s request on behalf of the “investment vendors” to Dr Robson, conveyed through Ms Dodd, to withhold the 2009 ERPA and option from the ATO while the “investment vendors” considered their “ATO defence strategy” were each a blameworthy act. That conduct sought to create the consequence that the investors would claim those deductions that were not reasonably open to be claimed, and to keep the ATO in the dark, in order to assist in the avoidance of tax. BR, Mr Bonnell, BR Redd and Dr Rowntree engaged in that conduct to induce Dr Robson not to give the ATO the documents (being the 2009 ERPA and 2009 option) and other material he had to support his claim to deduct the full purchase price of the contract lots lest that would make the Commissioner aware of the 2009 scheme and cause the claim to be disallowed. I infer that was because Dr Rowntree and his associates feared that the 2009 scheme would be exposed to the Commissioner as a tax evasion scheme. That conduct was tax evasion: Kajewski 52 ATR at 484–485 [114], Meares 37 ATR at 323.
Accordingly, I am comfortably satisfied that the 2009 ERPA scheme, involving the marketing and promotion of sales of the 2009 ERPA and 2009 option with the asserted deductibility of the full purchase price, was a scheme involving tax evasion within the meaning of s 290-55(6).
Conclusion
For these reasons, I am of opinion that the Commissioner has established that each of Dr Rowntree and Mr Manietta was a promoter of each of the 2009, 2010, 2011 and 2012 schemes and that Mr Donkin was a promoter of the 2011 and 2012 schemes. The Commissioner has also established that the 2009 scheme involved tax evasion as, indeed did each of the 2010, 2011 and 2012 schemes for the same reasons. Each respondent is liable to the Commissioner’s claim for the imposition on him of penalties for that conduct.
I will direct that the Commissioner confer with the respondents and bring in draft declarations to reflect my findings and procedural directions necessary to prepare for a hearing at which the parties can address the issue of penalties.
I certify that the preceding three hundred and sixty-eight (368) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Rares. Associate:
Dated: 18 September 2020
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