Federal Commissioner of Taxation v Ludekens
[2013] FCAFC 100
•29 August 2013
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Ludekens [2013] FCAFC 100
Citation: Commissioner of Taxation v Ludekens [2013] FCAFC 100 Appeal from: Commissioner of Taxation of the Commonwealth of Australia v Ludekens [2013] FCA 142 Parties: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v ANDREW LUDEKENS and PETER VAN DE STEEG File number: VID 264 of 2013 Judges: ALLSOP CJ, GILMOUR AND GORDON JJ Date of judgment: 29 August 2013 Catchwords: TAXATION – Taxation Administration Act 1953 (Cth) – Div 290 – civil penalty regime –whether entity is a promoter of tax exploitation scheme – whether entity has implemented a scheme otherwise than in accordance with its product ruling – time limits on commencement of actions in respect of an entity’s involvement in a tax exploitation scheme
STATUTORY INTERPRETATION – meaning of “scheme benefit” – whether there is requirement of alternative postulate – meaning of “markets the scheme or otherwise encourages the growth of the scheme or interest in it” – meaning of consideration received “in respect of” marketing or encouragement
Legislation: A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Corporations Act 2001 (Cth)
Evidence Act 1995 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No.1 Bill) 2006 (Cth)
Cases cited: Australian Education Union v Department of Education and Children’s Services (2012) 86 ALJR 217
Certain Lloyd’s Underwriters v Cross (2012) 87 ALJR 131
Commissioner of Police v Kennedy [2007] NSWCA 328
Federal Commissioner of Taxation v Consolidated Press Holdings Limited (2001) 207 CLR 235
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216
Forrest v Australian Securities and Investments Commission (2012) 86 ALJR 1183
Sea Shepherd Australia Limited v Commissioner of Taxation [2013] FCAFC 68
SZGIZ v Minister for Immigration and Citizenship [2013] FCAFC 71Shorter Oxford English Dictionary (5th ed, Oxford University Press, 2002)
Date of hearing: 29-31 July 2013 Date of last submissions: 31 July 2013 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 332 Counsel for the Appellant: Mr D Bennett QC with Mr P Sest SC and Mr S Ure Solicitor for the Appellant: Australian Government Solicitor Counsel for the Respondents: Mr G Davies QC with Mr A de Wijn Solicitor for the Respondents: CIE Legal
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 264 of 2013
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
AppellantAND: ANDREW LUDEKENS
First RespondentPETER VAN DE STEEG
Second Respondent
JUDGES:
ALLSOP CJ, GILMOUR AND GORDON JJ
DATE OF ORDER:
29 AUGUST 2013
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.Order 1 of the orders made by the Federal Court on 18 March 2013 be set aside and in lieu thereof:
(a)The Court declares that each respondent engaged in conduct in relation to:
(i)Mr Andrew Smithson and Mrs Jodie Smithson;
(ii)Mr Domenico Velardi and Mrs Elizabeth Velardi; and
(iii)Mrs Daniella Ruffato,
that resulted in each respondent being a promoter of a tax exploitation scheme, namely the Plan described in Attachment A to these Orders (the Plan), in contravention of s 290-50(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) (the TAA).
(b)The Court declares that the first respondent engaged in conduct in relation to:
(i)Mr David Tregambe;
(ii)Dr Robert Love;
(iii)Ms Hayben Richards; and
(iv)Mr Eric Poon,
that resulted in him being a promoter of the Plan in contravention of s 290-50(1) of Sch 1 to the TAA.
(c)The Court declares that the second respondent engaged in conduct in relation to:
(i)Mr Michael Martino;
(ii)Ms Jan Gibson;
(iii)Mr Glenn Crowe; and
(iv)Mr Peter Berlowitz,
that resulted in him being a promoter of the Plan in contravention of s 290-50(1) of Sch 1 to the TAA.
(d)The applicant’s application for a civil penalty in relation to the conduct of each respondent the subject of paragraphs (a), (b) and (c) above otherwise be remitted for hearing by a judge of this Court.
3.No order as to costs.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).
Attachment A – The Plan
(a)To acquire fully financed woodlots in the Gunns Plantations Limited Woodlot Project 2006.
(b)To meet loan obligations in respect of the acquisition of these woodlots from profits obtained by investing (into a foreign exchange trading business) a fund comprised of the following:
(i)commission received in respect of the acquisition of the woodlots;
(ii)GST refunds to be obtained in respect of the acquisition of the woodlots; and
(iii)funds obtained from offering the woodlots to subsequent investors.
(c)To otherwise retain profits from investing the fund in the foreign exchange trading business.
INDEX
A...... INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[1]
B...... RELEVANT LEGISLATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[7]
C...... THE ISSUES ON APPEAL AND THE NOTICE OF CONTENTION........ ........ ...
[15]
D...... THE COMMISSIONER’S CASE........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[18]
E...... THE FACTS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[24]
(1).. The respondents........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[25]
(2).. Persons and entities associated with the respondents........ ........ ........ ........ ........ .
[28]
(3).. Initial Arrangements between Gunns and Dr Ludekens........ ........ ........ ........ ....
[31]
(4).. 2006 Gunns Woodlot Project........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[32]
(a).. Product Disclosure Statement ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[32]
(b).. PR 2006/8........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[33]
(5).. Steps taken by the respondents to secure investors........ ........ ........ ........ ........ .....
[36]
(a).. The Smithsons........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[37]
(b).. The Velardis........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[55]
(c).. Acquisition of woodlots in the 2006 Gunns Woodlot Project and subsequent steps........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[68]
(d).. Approaches to Secondary Investors........ ........ ........ ........ ........ ........ ........ ........ .
[84]
(i)... Mrs Ruffato........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[85]
(ii).. The Ludekens Investors........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[90]
MR TREGAMBE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[90]
DR LOVE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[94]
MS RICHARDS AND MR POON........ ........ ........ ........ ........ ........ ........ ..
[106]
(iii). The Van de Steeg Investors........ ........ ........ ........ ........ ........ ........ ........ .....
[107]
MR MARTINO.......
[107]
MS GIBSON........ ....
[122]
MR CROWE........ ...
[143]
MR BERLOWITZ..
[166]
(e).. ATO dealings and subsequent steps taken by respondents........ ........ ........ .....
[167]
F...... ANALYSIS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[223]
(1).. Appeal Grounds........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[224]
(a).. The proper construction of “scheme benefit” in the context of s 290-65 (the “alternative postulate” point)
[224]
(b).. The question of dominant purpose........ ........ ........ ........ ........ ........ ........ ........ ..
[238]
(c).. The proper construction of “markets the scheme or otherwise encourages the growth of the scheme or interest in it”......... ........ ........ ........ ........ ........ .....
[248]
(i)... Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[248]
(ii).. Conduct of the respondents........ ........ ........ ........ ........ ........ ........ ........ .....
[259]
Mrs Ruffato........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[261]
Ludekens Investors........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[266]
MR TREGAMBE........ ........ ........ ........ ........ ........ ........ ........ .......
[267]
DR LOVE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[268]
MS RICHARDS AND MR POON........ ........ ........ ........ ........ ....
[269]
Van de Steeg Investors........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[271]
MR MARTINO........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[272]
MS GIBSON........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[274]
MR CROWE........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[275]
MR BERLOWITZ........ ........ ........ ........ ........ ........ ........ ........ .....
[276]
(d).. The Smithsons and Velardis and marketing and encouragement........ ........ .
[278]
(e).. The construction of s 290-60(1)(b): Consideration in respect of that marketing or encouragement........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[285]
(i)... Smithsons and Velardis........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[288]
(ii).. Secondary Investors........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[290]
(f)... Section 290-50(2)........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[293]
(i)... The Secondary Investment........ ........ ........ ........ ........ ........ ........ ........ ......
[302]
(ii).. The 2006 Gunns Woodlot Project........ ........ ........ ........ ........ ........ ........ ...
[309]
(g).. Notice of contention........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[324]
G..... CONCLUSION AND ORDERS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[332]
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 264 of 2013
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
AppellantAND: ANDREW LUDEKENS
First RespondentPETER VAN DE STEEG
Second RespondentREASONS FOR JUDGMENT
THE COURT:
A. INTRODUCTION
An entity that engages in conduct that results in that, or another, entity being a promoter of a tax exploitation scheme, or results in a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different from that described in the product ruling, may be subject to a civil penalty: s 290-50(1) and (2) in Sch 1 to the Taxation Administration Act 1953 (Cth) (the TAA).
Each respondent – Dr Andrew Ludekens and Mr Peter Van de Steeg – was engaged in securing investors to invest in a managed investment scheme known as the “Gunns Plantations Limited Woodlot Project 2006” (the 2006 Gunns Woodlot Project). Investment in the 2006 Gunns Woodlot Project was pursuant to a product disclosure statement entitled “Woodlot Project Product Disclosure Statement” dated 14 March 2006 (2006 PDS) issued by Gunns Plantations Limited (Gunns), the responsible entity of the managed investment scheme. The respondents did not issue the 2006 PDS.
The central issues in the appeal concern the respondents’ actions in relation to two groups of investors they approached to invest in the 2006 Gunns Woodlot Project. The first group comprised Mrs Jodie Smithson and Mr Andrew Smithson (the Smithsons) and Mrs Elizabeth Velardi and Mr Domenico Velardi (the Velardis). The second group comprised persons described as “Secondary Investors”. As will become apparent, the involvement, or potential involvement, of each group in the 2006 Gunns Woodlot Project was substantially different. Moreover, although each respondent dealt with the Smithsons and the Velardis, the respondents dealt with different Secondary Investors. Dr Ludekens dealt with Mr David Tregambe, Mr Eric Poon, Dr Robert Love and Ms Hayben Richards (the Ludekens Investors). Mr Van de Steeg dealt with Ms Jan Gibson (subsequently Jan Taylor), Mr Glenn Crowe, Mr Michael Martino and Mr Peter Berlowitz (the Van de Steeg Investors). Both respondents dealt with Mrs Daniella Ruffato. Mrs Ruffato was also a Secondary Investor.
The appellant (the Commissioner) contended that each respondent contravened s 290-50(1) of Sch 1 to the TAA in dealing with the Smithsons and the Velardis and their respective Secondary Investors and, further, that each respondent contravened s 290-50(2) in relation to the Smithsons and the Velardis and/or the Secondary Investors. The primary judge dismissed the proceedings. This is the first time an appeal court has considered Div 290 of Sch 1 to the TAA.
For the reasons that follow, the appeal should be allowed. Each respondent contravened s 290-50(1) of Sch 1 to the TAA in dealing with the Smithsons and the Velardis and their respective Secondary Investors. However, neither respondent contravened s 290-50(2) of Sch 1 to the TAA. The Commissioner’s application for a civil penalty will be remitted for hearing by a judge of this Court.
These reasons for judgment will consider the relevant legislation, describe the six issues on appeal and the one issue raised on the notice of contention, set out the facts and then consider the proper construction of Div 290 and its application to the facts as found.
B. RELEVANT LEGISLATION
The main civil penalty provision, entitled “Civil Penalties”, in s 290-50 in Sch 1 to the TAA provides:
Promoter of tax exploitation scheme
(1)An entity must not engage in conduct that results in that or another entity being a *promoter of a *tax exploitation scheme.
Implementing scheme otherwise than in accordance with ruling
(2)An entity must not engage in conduct that results in a *scheme that has been promoted on the basis of conformity with a *product ruling being implemented in a way that is materially different from that described in the product ruling.
Note: A scheme will not have been implemented in a way that is materially different from that described in a product ruling if the tax outcome for participants in the scheme is the same as that described in the ruling.
…
(Emphasis added.)
Section 290-55(4) of Sch 1 to the TAA provides time limits within which the Commissioner must commence any application under s 290-50. It provides:
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.
“Entity” is defined in s 960-100 of the Income Tax Assessment Act 1997 (Cth) (the ITAA97) as including, inter alia, an individual, a body corporate and a partnership. Each respondent is an “entity” for the purposes of s 290-50.
“Promoter” is defined in s 290-60 in Sch 1 to the TAA as follows:
(1) An entity is a promoter of a *tax exploitation scheme if:
(a)the entity markets the scheme or otherwise encourages the growth of the scheme or interest in it; and
(b)the entity or an *associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and
(c)having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement.
(2)However, an entity is not a promoter of a *tax exploitation scheme merely because the entity provides advice about the *scheme.
(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.
(Emphasis added.)
“Tax exploitation scheme” is defined in s 290-65 in Sch 1 to the TAA. It has a number of elements:
(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)if the scheme has not been implemented — it is reasonable to conclude that, if an entity (alone or with others) had entered into or carried out the scheme, it would have done so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; and
(b) one of these conditions is satisfied:
(i)if the scheme has been implemented — it is not *reasonably arguable that the scheme benefit is available at law;
(ii)if the scheme has not been implemented — it is not *reasonably arguable that the scheme benefit would be available at law if the scheme were implemented.
Note:The condition in paragraph (b) would not be satisfied if the implementation of the scheme for all participants were in accordance with binding advice given by or on behalf of the Commissioner of Taxation (for example, if that implementation were in accordance with a public ruling under this Act, or all participants had private rulings under this Act and that implementation were in accordance with those rulings).
(2)In deciding whether it is *reasonably arguable that a *scheme benefit would be available at law, take into account any thing that the Commissioner can do under a *taxation law.
(Emphasis added.)
To understand the definition of “tax exploitation scheme” in s 290-65, it is necessary to consider three further definitions – “scheme”, “scheme benefit” and “tax-related liability”.
“Scheme” is defined in s 995(1) of the ITAA97 to mean:
(a) any *arrangement; or
(b)any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
“Scheme benefit” is defined in s 995(1) of the ITAA97 by reference to s 284-150(1) in Sch 1 to the TAA which provides:
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; or
(b) an amount that the Commissioner must pay or credit to the entity under a *taxation law for an accounting period is, or could reasonably be expected to be, more than it would be apart from the scheme or a part of the scheme.
(Emphasis added.)
“Tax-related liability” is defined in s 255-1 in Sch 1 to the TAA to mean:
A tax-related liability is a pecuniary liability to the Commonwealth arising directly under a *taxation law (including a liability the amount of which is not yet due and payable).
Note 1: See section 250-10 for an index of tax-related liabilities.
Note 2: A taxation law, or a provision of it, may be excluded from being applied to this Part. See section 265-65.
It will be necessary to return to consider these provisions.
C. THE ISSUES ON APPEAL AND THE NOTICE OF CONTENTION
The Commissioner raised six issues on the appeal. The issues raise questions of the proper construction of Div 290 and then the application of Div 290, properly construed, to findings of fact that were not challenged.
The issues raised by the Commissioner on the appeal may be summarised as follows:
1.The primary judge’s construction of the definition of “scheme benefit” in s 284-150 for the purposes of s 290-65 (see [247]-[248] of his reasons for judgment (the Reasons)), that the words “less than it would be apart from the scheme or a part of the scheme” required the pleading and proving of what the position would have been concerning the tax-related liability of the relevant entity if the scheme had not been entered into or carried out (the Alternative Postulate), was wrong. For the reasons expressed below, the Commissioner is correct.
2.The primary judge’s conclusion (at [256]-[259] of the Reasons) that, for the purposes of s 290-65(1)(a), it was not shown that it was reasonable to conclude that each respondent entered into or carried out the scheme with the dominant purpose of the entities acquiring woodlots in the 2006 Gunns Woodlot Project and, further or alternatively, the Secondary Investors, getting a scheme benefit from the scheme, was wrong. For the reasons expressed below, the Commissioner is correct.
3.The primary judge’s construction of the definition of “promoter” in s 290-60 ([17]-[35] of the Reasons) was too narrow. For the reasons expressed below, the Commissioner is correct.
4.Even if the primary judge’s construction of s 290-60 were correct, the primary judge should have concluded that the evidence satisfied the narrow definition of “promoter” by reference to the respondents’ conduct in relation to the Smithsons and the Velardis. Part of this controversy arises from the respondents’ submission that the Commissioner failed to rely upon this conduct at the trial in the pleadings, particulars or submissions. The respondents say that the matter should not be permitted to be raised on appeal. For the reasons expressed below, the matter was sufficiently raised before the primary judge to be permitted to be raised on appeal.
5.The primary judge’s construction (at [47]-[54] and [217]-[223] of the Reasons) of the relationship between consideration and marketing or encouragement through the prepositional phrase “in respect of” in s 290-60(1)(b) was too narrow and his conclusion that there was no consideration received by the respondents (except in relation to Mr Van de Steeg vis-à-vis Mr Crowe, Reasons at [227]) in respect of the marketing or encouragement he found to have been undertaken by them was wrong. For the reasons expressed below, the Commissioner is correct.
6.The primary judge’s construction of s 290-50(2) (in [300]-[304] of the Reasons) that it only covered schemes formally covered by a product ruling issued by the Commissioner (and thus did not cover the Secondary Investment) was too narrow. Further, that the primary judge’s conclusion that the 2006 Gunns Woodlot Project was not implemented in a way materially different from that described in PR 2006/8 was wrong (see [284]-[299] and [305]-[306] of the Reasons). For the reasons expressed below, the Commissioner is not correct.
The respondents filed a notice of contention. In that notice, the respondents argued that the primary judge should have held, under s 290-65(1)(b), that it was reasonably arguable that the entities which acquired woodlots in the 2006 Gunns Woodlot Project were entitled to input tax credits in relation to the acquisition of the woodlots and consequently to GST refunds: see [263]-[275] of the Reasons. This argument is directed to one element of the definition of a “tax exploitation scheme”. It will be considered after the six appeal grounds. For the reasons expressed below, the respondents’ notice of contention is rejected.
D. THE COMMISSIONER’S CASE
It is necessary to say something about the way in which this case was conducted at trial and on appeal.
The Commissioner’s case against the respondents lacked a degree of conciseness and precision. To a degree, the case pleaded was not the case advanced at trial. The Commissioner’s opening submissions at trial went further than the pleaded allegations. The trial then proceeded on the basis of the opening submissions and the evidence filed and served by the Commissioner. The Commissioner’s final submissions before the primary judge also raised new issues. In a proceeding seeking a civil penalty, it is important to recognise that a respondent is entitled to a fair trial which includes a clear and tolerably stable body of allegations of contraventions of law. The Commissioner, seeking a civil penalty against each respondent, was obliged to put his case clearly and distinctly: Forrest v Australian Securities and Investments Commission (2012) 86 ALJR 1183 at [25]. It requires a pleading (or other document) which states with sufficient clarity, subject, of course, to proper amendment, the facts said to constitute the cause of action or causes of action supporting the relief sought: Forrest at [27]. In satisfying that task, there may be a need for “facts or characterisations of facts to be pleaded in the alternative”: Forrest at [27]. So much may be accepted. What is not permitted is the “planting [of] a forest of forensic contingencies” or altering the basis of the allegation of the alleged contraventions on a rolling basis.
The difficulties in the present case may be demonstrated by the manner in which the Commissioner sought to identify one element of the cause of action – the “scheme”. At trial, the Commissioner relied upon the “Plan”, a truncated version of the Plan called the “Conduct” and a number of permutations of the Plan and the Conduct. In addition, the Commissioner contended that the Conduct might be viewed as a series of individual schemes in relation to each of the Secondary Investors, each founding a separate contravention of Div 290.
The Plan relied upon by the Commissioner comprised:
(a)to acquire fully financed woodlots in the 2006 Gunns Woodlot Project.
(b)to meet loan obligations in respect of the acquisition of these woodlots from profits obtained by investing (into a foreign exchange trading business) a fund comprised of the following:
(i)commission received in respect of the acquisition of the woodlots;
(ii)GST refunds to be obtained in respect of the acquisition of the woodlots; and
(iii)funds obtained from offering the woodlots to subsequent investors; and
(c)to otherwise retain profits from investing the fund in the foreign exchange trading business.
The Conduct comprised:
(a) the initial acquisition of the woodlots;
(b)the making of offers to the Ludekens and Van de Steeg Investors and Mrs Ruffato; and
(c)the preparation and delivery to investors of partnership financial statements, tax returns and other materials.
During oral submissions on the appeal, the Commissioner was asked to prepare a document which addressed precisely how and why each element of s 290-50(1) of Sch 1 to the TAA was contravened by each respondent. As a result of that exercise, the Commissioner narrowed his case in relation to the allegation that the respondents had breached s 290-50(1) of Sch 1 to the TAA. The Commissioner limited the factual basis of the alleged contravention to the Plan. It should be noted that the Plan does not include any reference to the attainment of income tax refunds by those entities that initially acquired woodlots in the 2006 Gunns Woodlot Project. The Commissioner abandoned any separate reliance upon the Conduct. The appeal has been determined on that basis.
E. THE FACTS
The primary judge’s findings of fact (at [73]-[177]) were not challenged. Before turning to those findings and the evidence adduced in relation to those findings, it is necessary to describe the respondents and the persons and entities associated with them, to describe the initial arrangements Dr Ludekens put in place with Gunns, to describe the 2006 Gunns Woodlot Project, to explain the manner in which the respondents involved the Smithsons and the Velardis and, finally, the manner in which the respondents sought to involve each of the Secondary Investors.
(1) The respondents and their associates
The first respondent, Dr Ludekens, was the sole director of Lotus Capital Group Pty Ltd (Lotus) and Romad Financial Services Pty Ltd, each of which held an Australian Financial Services Licence pursuant to Div 4 of Pt 7.6 of the Corporations Act 2001 (Cth) (the Corporations Act). Lotus was an “associate” of Dr Ludekens: s 995 of the ITAA97 by reference to s 318 of the Income Tax Assessment Act 1936 (Cth) (the ITAA36) and [217(a)] of the Reasons.
The second respondent, Mr Van de Steeg, carried on business as a financial investment adviser and financial services provider. Mr Van de Steeg carried on a business jointly with Mr Jonathan Ezzy through Meloka Pty Ltd (Meloka). Meloka bought equity in a foreign exchange trading business called Australian Forex Trading Agency (AFTA), which was owned and operated by Mr Berlowitz. Mr Van de Steeg raised funds for Meloka to purchase equity in AFTA through investor loans. Messrs Van de Steeg and Ezzy were also owners of Jameter Pty Ltd (Jameter). Mr Van de Steeg and his wife were also directors and shareholders of Ty-Tia Pty Ltd (Ty-Tia). Each of Meloka and Ty-Tia was an “associate” of Mr Van de Steeg: s 995 of the ITAA97 by reference to s 318 of the ITAA36 and [217(a)] and [261] of the Reasons.
Neither respondent gave evidence at trial.
(2) Persons and entities associated with the respondents
As just noted, Mr Ezzy was Mr Van de Steeg’s business partner. It appeared to the primary judge that Mr Ezzy was materially involved in the development and implementation of the Plan. Mr Ezzy was not called to give evidence at trial because he could not be located.
Mr Andrew Crouch was Mr Van de Steeg’s personal accountant from December 2007 to January 2009.
Mrs Elizabeth Velardi worked as a personal assistant for Mr Van de Steeg between May 2006 and January 2010. In this role, Mrs Velardi was the first point of contact for many of Mr Van de Steeg’s clients. Mrs Velardi also undertook work for Mr Van de Steeg’s wife and Mr Ezzy. Shortly before 30 June 2007, Mr Van de Steeg also instructed Mrs Velardi to assist Dr Ludekens with the proposed Gunns investment. The Velardis made some investments with Mr Van de Steeg. Mr Velardi’s involvement in this proceeding principally related to events that transpired on 30 June 2007 involving applications for woodlots in the 2006 Gunns Woodlot Project (described further below).
(3) Initial Arrangements between Gunns and Dr Ludekens
In the first half of 2007, Dr Ludekens attended one of Gunns’ “standard adviser tours to Tasmania”. On 15 May 2007, Dr Ludekens met with Mr Ian Blanden and Mr Les Baker (who were, respectively, the Manager and the Executive Director of Gunns) in Melbourne. Some time later, Gunns offered Dr Ludekens a commission rate of 15% on investments procured by him in Gunns’ managed investment schemes. One of those schemes was the 2006 Gunns Woodlot Project.
(4) 2006 Gunns Woodlot Project
(a) Product Disclosure Statement
As noted, the 2006 Gunns Woodlot Project was the subject of the 2006 PDS. The 2006 PDS provided that:
1.The 2006 Gunns Woodlot Project was a registered managed investment scheme directed to the cultivation and harvest of trees for timber.
2.Investors (referred to as “Growers”) applied for interests in the 2006 Gunns Woodlot Project known as “woodlots”.
3.An application fee of $6,820 (GST inclusive) was payable for each woodlot. As part of the application process, Growers were offered the opportunity to obtain finance for the cost of the application fees.
4.Upon acceptance of their application, Growers entered into a “Sub-Forestry Right Deed” with Gunns (the responsible entity of the scheme) whereby they would acquire the right to establish, maintain and harvest trees on their woodlot(s) (referred to as a “Forestry Right”).
5.Growers also entered into a “Management Agreement” with Gunns whereby Gunns was appointed to manage the woodlots.
6.Growers were expected to receive returns from the sale of their wood harvested from commercial thinnings and the final harvest 13, 20 or 25 years after plantation (depending on the type of trees chosen by the Growers).
7.No ongoing rent or maintenance fees were payable by Growers during the course of their investment. Those costs – together with an amount of “Sales Commission” payable to Gunns – were to be deducted from the proceeds from the sale of wood at the conclusion of the 2006 Gunns Woodlot Project.
8.Growers could assign their woodlots subject to the conditions set out in the Constitution for the managed investment scheme and the Management Agreement.
9.“[I]nvestment in the Project should be considered long term as Growers will have a purpose of staying in the Project until it is completed”.
10.Investors registered for GST were said to “be entitled to claim an input tax credit for GST paid on any creditable acquisition”.
11.The 2006 Gunns Woodlot Project was the subject of a product ruling issued by the Commissioner entitled “Income Tax: Gunns Plantations Limited Woodlot Project 2006 ‘2007 Growers’” (PR 2006/8). The 2006 PDS included a report from a “taxation adviser” which set out the general effect of PR 2006/8.
12.An offer to participate in the 2006 Gunns Woodlot Project had to be made through the 2006 PDS. Indeed, the Corporations Act prohibited the application form attached to the 2006 PDS (the Application Form) being issued to a person unless that person was given access to the PDS and any supplementary PDS.
(b) PR 2006/8
It is then necessary to consider the terms of PR 2006/8 which applied to the 2006 Gunns Woodlot Project. It stated, inter alia, that:
1.It applied to a certain class of entities and did not apply to other entities. In particular, it provided:
Class of entities
7.The class of entities to whom this Ruling applies is the entities more specifically identified in the Ruling part of this Product Ruling and who enter into the scheme specified below on or after the date this Ruling is made. They will have a purpose of staying in the scheme until it is completed (that is, being a party to the relevant agreements until their term expires), and deriving assessable income from this involvement as set out in the description of the scheme. In this Ruling, these persons are referred to as ‘Growers’.
8. The class of entities to whom this Ruling applies does not include:
• entities who intend to terminate their involvement in the scheme prior to its completion, or who otherwise do not intend to derive assessable income from it;
• entities who participate in the Project through offers made other than through the Product Disclosure Statement;
• entities who finance their participation in the Project through loans other than those loans described at paragraphs 48 to 56 of this product ruling;
• Gunns Plantation Ltd or its associates; and
•entities who are accepted to participate in the Project before 1 July 2006 and after 30 June 2007.
2.It applied to a scheme – defined by reference to the contractual and other documentation constituting the 2006 Gunns Woodlot Project.
3.If the scheme (i.e. the 2006 Gunns Woodlot Project) was not carried out as described in PR 2006/8, the protection afforded by that ruling would be lost. In particular, it provided:
Qualifications
9.The class of entities defined in this Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 15 to 60.
10.If the scheme actually carried out is materially different from the scheme that is described in this Ruling, then:
• this Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and
• this Ruling may be withdrawn or modified.
4.An offer to participate in the 2006 Gunns Woodlot Project had to be made through the 2006 PDS and prospective Growers had to complete an Application Form, a power of attorney contained in the 2006 PDS and pay the “Application Fee” (i.e. $6,820 per woodlot).
5.Growers could not rely on PR 2006/8 in relation to the deductibility of interest incurred in relation to application finance acquired other than under the “Terms Arrangement”, the “Woodlot Finance Package” and the “Finance Application” referred to in PR 2006/8.
6.Subject to PR 2006/8 being carried out in the manner described, for Growers who:
6.1were an individual accepted into the 2006 Gunns Woodlot Project by 30 June 2007 as a “2007 Grower”;
6.2participated in that Project under one of the available “Planting Options”; and
6.3had losses arising from their participation in the Project that would be deferred to a later income year under s 35-10 of the ITAA97,
the Commissioner would exercise the discretion in s 35-55(1)(b) of the ITAA97 to allow those losses to be offset against the Grower’s other assessable income in the income year in which the losses were incurred.
As is apparent, the 2006 Gunns Woodlot Project (read in conjunction with the 2006 PDS and PR 2006/8) required the completion of the Application Form and any Financing Form (if the payment of the Application Fee was to be financed) and then, of course, the payment of the Application Fee. This was said to generate a tax deduction for the payment of the Application Fee.
On 5 June 2007, Mr Blanden’s assistant sent an email to Dr Ludekens with hyperlinks to the 2006 PDS and PR 2006/8.
(5) Steps taken by the respondents to secure investors
As will become apparent, from June 2007, the respondents were engaged in securing investors to invest in the 2006 Gunns Woodlot Project. The steps they took may be generally divided into two groups – the steps they took to secure the acquisition of woodlots in the 2006 Gunns Woodlot Project before 30 June 2007 (involving the Smithsons and the Velardis) and the onsale of those woodlots to the Secondary Investors. Although the conduct may be divided into these two groups, the timing of the conduct did overlap to some extent. The process of approaching the Secondary Investors commenced before 30 June and continued thereafter for some months. For that reason, it is necessary to separately consider the respondents’ conduct in relation to each of the Smithsons, the Velardis and the Secondary Investors.
(a) The Smithsons
The Smithsons became friends with Mr Van de Steeg and his wife in 2005. In 2006, the Smithsons accepted an invitation from Mr Van de Steeg to invest in the Meloka foreign currency trading business. Mrs Smithson worked as a personal assistant to Mr Ezzy from August or September 2006 to late 2009.
In the proceedings before the primary judge, Mr Smithson swore an affidavit that addressed, inter alia, the matters summarised in the following paragraphs which were the foundation of the unchallenged findings of fact by the primary judge.
In June 2007, Mr Van de Steeg rang Mr Smithson to ask for the Smithsons’ support for a business opportunity he and Mr Ezzy wanted to enter. Mr Van de Steeg explained that the foreign currency trading business had been affected by the global financial crisis and that this opportunity would provide the necessary funds to keep the business going. Mr Van de Steeg said that he and Mr Ezzy needed the Smithsons’ support to buy into the investment and that Mr Ezzy would further discuss the matter with them.
Approximately a fortnight before 30 June 2007, Mr Ezzy came to the Smithsons’ home and told them that he and Mr Van de Steeg wanted to purchase $20 million of woodlots from Gunns. Mr Ezzy explained to the Smithsons that Dr Ludekens would be paid a $3 million commission by Gunns for selling the woodlots and that Dr Ludekens had agreed to put the commission straight into Meloka for foreign currency trading. Mr Ezzy also said that they would get a $2 million GST rebate, which would also go into Meloka for foreign currency trading. Mr Ezzy told the Smithsons that the global financial crisis had depressed investing activity, which was putting pressure on him and the respondents to purchase the woodlots before 30 June 2007 so that they could get the $5 million (comprising the commission and the GST rebate) into Meloka. Mr Ezzy told the Smithsons that without the tree deal, he had doubts about the Meloka business going forward.
Mr Ezzy further explained the Gunns investment as follows:
1.He and the respondents could not apply for the full $20 million of woodlots on their own.
2.The Gunns Manager, Mr Blanden, allowed people to have their names on woodlot applications as a “point of contact” only, without being purchasers, and that this was what Messrs Ezzy and Van de Steeg needed the Smithsons to do.
3.The Smithsons were merely to be the names on the applications to get the purchase through by 30 June 2007 – they would not be actual investors. Once the woodlots were on-sold (within six to eight weeks), the Smithsons’ names would be removed. The Smithsons were told that the woodlots were to be on-sold to people known to Dr Ludekens and wealthy investors looking for a tax benefit.
Mr Ezzy promised the Smithsons that he would pay them a gift of $5,000 for assisting in purchasing the woodlots. He also said that Mr Van de Steeg would call Mr Smithson to further discuss the matter.
Mr Smithson subsequently spoke to Mr Van de Steeg on a number of occasions in the week leading up to 30 June 2007. In those conversations, Mr Van de Steeg explained the proposed investment to Mr Smithson in similar terms to Mr Ezzy, but with some elaboration. Mr Van de Steeg assured Mr Smithson that the Smithsons’ names would be removed from the applications as Dr Ludekens had guaranteed that he had doctors waiting to purchase the woodlots. Mr Smithson asked why the Smithsons were needed if Dr Ludekens already had willing investors. Mr Van de Steeg indicated that Dr Ludekens wanted to make more money by on-selling the woodlots after 30 June 2007 and having the purchasers pay him a 25% share of the ultimate harvest return. Mr Van de Steeg emphasised the benefits of the deal to Meloka. He said that by investing $20 million in the trees at least $5 million in cash would be generated for Meloka. He explained that the $5 million would come from Dr Ludekens’ commission of $3 million, a GST refund of $2 million and other tax refunds.
Mr Van de Steeg also told Mr Smithson that of the $20 million of trees to be purchased, $13 million were to be on-sold and that he and the respondents would keep $7 million worth. Mr Smithson asked Mr Van de Steeg how he and Mr Ezzy were going to keep $7 million worth when their names were only to go on two applications of $2 million each. Mr Van de Steeg told Mr Smithson that Dr Ludekens’ name would also be on the applications and that he had asked (or would be asking) the Velardis to use their names on applications in the same way as he was asking the Smithsons. Mr Van de Steeg indicated that if the Smithsons did not help with the woodlot purchase, their investment in Meloka would be at serious risk.
After these conversations, Mr Smithson agreed in principle to help out but wanted to talk to Dr Ludekens first. A meeting was set up for 30 June 2007.
The respondents and Mr Ezzy met with the Smithsons at their house on 30 June 2007. Mr Smithson expressed his concern that the Smithsons’ assets would not be at risk and that they would not be liable for any finance. Dr Ludekens said that Gunns would not allow each of Dr Ludekens, Mr Van de Steeg and Mr Ezzy to have their names on more than two partnerships. Dr Ludekens explained that the Smithsons’ names would only be used as a point of reference so that all the woodlots acquired could be broken down into different partnerships in accordance with Gunns’ requirements. Dr Ludekens said that he had discussed the Smithsons’ involvement with Gunns (including with Mr Blanden), who knew that the Smithsons would only appear on the paperwork as a point of reference. He confirmed that the Smithsons did not need to provide details of their assets as finance had been pre-approved by Gunns for Messrs Van de Steeg and Ezzy. Dr Ludekens assured the Smithsons that their names would be taken off the paperwork in six to eight weeks once he had on-sold the trees to his surgeon friends.
In response to a direct query from Mr Smithson, Dr Ludekens confirmed that the $3 million commission would be paid to Meloka via Lotus. Dr Ludekens explained that the offer was only available until 6 pm on that day and that he needed to get the contracts through that day. Mr Smithson told Messrs Van de Steeg and Ezzy that, to proceed with the arrangement, the Smithsons required a written indemnity against any liability. The Smithsons were promised that they would receive one.
On the basis of the assurances and promises given to them, the Smithsons signed the forms presented to them by the respondents and Mr Ezzy. The Smithsons were not given copies of the documents they signed on that day. After the forms were signed, the respondents and Mr Ezzy left saying they were going to the Velardis’ house as they had also asked them to be points of contact on the woodlot applications. Mr Smithson recalled that, before leaving, Dr Ludekens gave the Smithsons “some colour brochures about Gunns”.
Approximately four weeks after the meeting on 30 June, Mr Smithson asked Mr Van de Steeg whether Ludekens had on-sold any of the trees so that the Smithsons’ names could be removed. Mr Van de Steeg said that Dr Ludekens was working on purchasers and had some ready to go. In the following weeks, Mr Smithson continued to ask both Messrs Van de Steeg and Ezzy about the progress of on-selling the woodlots and the removal of the Smithsons’ names. Mr Van de Steeg’s general response was that he and Dr Ludekens were working through a couple of issues with Gunns and that there was nothing to worry about.
Mr Smithson also repeatedly asked Mr Van de Steeg when the Smithsons would receive the promised indemnity. Some months after the woodlot applications were signed, the Smithsons were given a single letter, dated 30 June 2007, which stated that they were not financially responsible to service the woodlots and were indemnified “in all capacity”. That letter also asserted that the Smithsons had purchased woodlots in partnership with Messrs Van de Steeg and Ezzy. Mr Smithson told Mr Van de Steeg that the letter was completely inadequate. It was not until March 2009 that Messrs Van de Steeg and Ezzy and the Smithsons signed a “Deed of Variation, Indemnity, Assignment and Release”.
At the time of swearing his affidavit, Mr Smithson was shown copies of the documents he had signed on 30 June 2007. He stated that, other than his signature, the forms had been filled out in handwriting other than his own and that he had not authorised that to be done.
Mrs Smithson’s evidence of her dealings with the respondents and Mr Ezzy was relevantly consistent with that given by her husband. However, she also gave evidence about the following matters.
Mrs Smithson recalled having been initially approached by Mr Ezzy in June 2007 in relation to the Gunns woodlot investment. During their discussion, Mr Ezzy told Mrs Smithson that he and Mr Van de Steeg were going to formulate partnerships to buy trees and that he needed the Smithsons to put their names on some of the partnerships. Mr Ezzy said that the Velardis were also going to be on some of the partnerships in the same way. Mr Ezzy explained that the Smithsons’ names were needed on the partnerships so that they could get a certain amount of trees to maximise their benefit from the deal. Mr Ezzy said the Smithsons’ names would only be on the partnerships to get the deal across the line and would be removed once the trees were on-sold to wealthy investors. Mr Ezzy told Mrs Smithson that the whole deal was being structured and put together to enable Meloka to put a large amount of money very quickly into direct foreign currency trading. Mr Ezzy said that Dr Ludekens was going to contribute his commission to the deal because he was going to be allowed access to direct trading in the foreign currency business at a later stage. Mr Ezzy also indicated that Meloka would obtain GST refunds which would also go into direct foreign currency trading. Mr Ezzy said the he and Mr Van de Steeg needed the Smithsons’ help because, without this deal, the foreign currency trading business was going to struggle. Mrs Smithson was told that the deal had to be put together by 30 June 2007. Mr Ezzy indicated that Mr Van de Steeg would separately broach the matter with Mr Smithson. In relation to the 30 June 2007 meeting (see [47]-[50] above) Mrs Smithson also referred to two copies of a “glossy booklet” left by Dr Ludekens. Mrs Smithson identified those glossy booklets as the 2006 PDS.
In 2011, Mr and Mrs Smithson were each shown two certificates from the Australian Business Register for two “partnerships”. The certificates shown to Mr Smithson referred to two entities: “J P Ezzy & Lotus Capital Pty Ltd & AW Smithson” and “Lotus Capital Pty Ltd & AW Smithson and P Van de Steeg”. The entities referred to in the certificates shown to Mrs Smithson were similarly constituted, with “J L Smithson” appearing in place of “AW Smithson.” Each did not know of the registrations and did not authorise the use of their name. In addition, in relation to each so-called “partnership”, each did not know of, or authorise, the preparation of a Special Purpose Financial Report and unaudited financial statements for the year ended 30 June 2007 (the 2007 financial year) or the preparation and lodgement of the “partnership” taxation return.
(b) The Velardis
In the proceedings before the primary judge, Mrs Velardi affirmed an affidavit that addressed, inter alia, the matters summarised in the following paragraphs which were the foundation of the unchallenged findings of fact by the primary judge.
Mrs Velardi was introduced to Mr Van de Steeg in 2003. Shortly after their meeting, Mrs Velardi and her husband made some investments with Mr Van de Steeg. The Velardis also lent money to Mr Van de Steeg and his wife for use in a property development.
Mr Van de Steeg first mentioned to Mrs Velardi that he was considering an investment in plantation trees with Dr Ludekens in May or June 2007. Mr Van de Steeg indicated that he and Dr Ludekens were going to purchase $20 million of trees from Gunns and subsequently on-sell some of those trees to investors. Mr Van de Steeg explained that Mr Ezzy was also going to be involved and that they were going to use investors’ tax returns to finance the acquisition. Mr Van de Steeg said that they would be using $5 million from the deal for the Meloka business and that money was needed for payments overdue to Mr Berlowitz for Meloka’s equity in AFTA.
Mrs Velardi first met Dr Ludekens at a meeting with Mr Van de Steeg shortly before 30 June 2007. Mrs Velardi recalled Dr Ludekens saying at that meeting that he would receive commission of $3 million on the deal in the first week after 30 June 2007 and that in July 2007, a GST refund of $2 million would be received, followed by investors’ tax refunds.
On 30 June 2007, Mr Van de Steeg rang Mrs Velardi and said that he, Mr Ezzy and Dr Ludekens wanted to meet the Velardis at their house and talk to them about the trees they were acquiring. Mrs Velardi told Mr Van de Steeg that she was not buying any trees. Mr Van de Steeg said that the Velardis did not have to get involved, they just needed to sign some documents because two signatories were needed.
The respondents and Mr Ezzy came to the Velardis’ house later that day. The respondents did most of the talking. They told the Velardis that they were acquiring some trees and it was going to help their business. Mrs Velardi asked Mr Van de Steeg why the Velardis needed to sign the paperwork. Dr Ludekens said it was just a formality; this was how Gunns wanted the applications to be completed.
One of the respondents told the Velardis that their names would only be on the documents for six weeks. Either Mr Van de Steeg or Dr Ludekens said that they were buying $20 million of trees that day and that they were later going to on-sell $7 million of trees to individuals known to Dr Ludekens and investors identified by Messrs Van de Steeg and Ezzy. The respondents told the Velardis that once the trees were on-sold, the new purchasers would replace the Velardis as the point of reference on the Gunns’ contracts. Mr Velardi asked why there were multiple applications each with more than one name. Dr Ludekens said it was a Gunns’ requirement.
Mr Velardi told the respondents that he wanted to make sure that the Velardis would bear no liability if they signed the documents. One of the respondents assured the Velardis that they would not be liable. Dr Ludekens also said that the Velardis would not be applying for finance because their limited assets and income meant they could not apply for millions of dollars worth of trees. Dr Ludekens said that the finance had been pre-approved based on the combined asset base of the respondents and Mr Ezzy. The Velardis were also told by either Dr Ludekens or Mr Van de Steeg that they would be indemnified for any liability on the woodlots.
Having received assurance as to their personal liability, the Velardis signed the single page application forms handed to them by the respondents. Mrs Velardi signed four forms, which were not otherwise filled in when she signed them. After the Velardis had signed, the respondents and Mr Ezzy filled in the forms and then faxed them to Gunns (using the Velardis’ fax machine) at approximately 5.30 pm. Dr Ludekens told the Velardis that he had to get the documents done by a certain time and that someone was waiting by the fax machine at Gunns for the documents. The Velardis were not given copies of the completed application forms on that day.
In 2011, Mrs Velardi was shown copies of the four completed forms bearing her signature. Two of those forms, headed “Woodlot Finance Package”, set out details of assets and liabilities said to be Mrs Velardi’s. Those details were not in Mrs Velardi’s handwriting and had not been completed when she signed the form. The Velardis had previously given Mr Van de Steeg information about their assets and liabilities when discussing other investments. Mrs Velardi gave evidence that she did not know that information had been entered on the forms at 30 June 2007 and that she did not authorise that to be done.
In 2011, Mrs Velardi was shown two certificates from the Australian Business Register for “J P Ezzy & Lotus Capital Group Pty Ltd & L (sic) Velardi” and “Lotus Capital Group Pty Ltd & P Van de Steeg & E Velardi”. Those documents show that those entities were registered for GST with a registration date of 1 July 2007. Mrs Velardi did not know about those registrations and did not authorise the use of her name.
Mr Velardi also provided sworn evidence. His evidence was relevantly consistent with that of Mrs Velardi. Mr Velardi gave evidence that, in the weeks after they signed the Gunns applications, the Velardis repeatedly asked Mr Van de Steeg about the removal of their names from the contractual documents. However, Mr Van de Steeg did not provide a clear answer. Mr Velardi said that it was not until months later that the Velardis received a letter from Mr Van de Steeg which was supposed to be an indemnity signed by him and Mr Ezzy and that it was not until much later, and following further queries from the Velardis, that a “Deed of Variation, Indemnity, Assignment and Release” was executed.
In 2011, Mr Velardi was shown a certificate from the Australian Business Register for a “partnership”, “Lotus Capital Pty Ltd & P Van de Steeg & D N Velardi”. He did not know of the registration and did not authorise the use of his name. Moreover, in relation to the so-called “partnership”, he did not know of, or authorise, the preparation of a Special Purpose Financial Report and unaudited financial statements for the 2007 financial year or the preparation and lodgement of the “partnership” taxation return.
(c) Acquisition of woodlots in the 2006 Gunns Woodlot Project and subsequent steps
On 30 June 2007, 3,250 fully-financed woodlots in the 2006 Gunns Woodlot Project to the value of $22,165,000 were acquired in the following manner:
Woodlot Application No.
(1 - 10)
First Signatory
Second Signatory
Number of woodlots
Cost of application
(incl GST)Loan application amount
1
Van de Steeg
Ludekens
350
$2,387,000
$2,391,179.75
2
Van de Steeg
Ezzy
350
$2,387,000
$2,391,179.75
3
Van de Steeg
D Velardi
350
$2,387,000
$2,391,179.75
4
Van de Steeg
E Velardi
350
$2,387,000
$2,391,179.75
5
Ezzy
Ludekens
350
$2,387,000
$2,391,179.75
6
Van de Steeg
J Smithson
300
$2,046,000
$2,049,583.00
7
Ezzy
A Smithson
300
$2,046,000
$2,049,583.00
8
Ezzy
J Smithson
300
$2,046,000
$2,049,583.00
9
Van de Steeg
A Smithson
300
$2,046,000
$2,049,583.00
10
Ezzy
E Velardi
300
$2,046,000
$2,049,583.00
Totals
3,250
$22,165,000
$22,203,813.75
Also on 30 June 2007, at the direction of Mr Van de Steeg, Mrs Velardi prepared a letter on Meloka letterhead which was signed by the respondents and Mr Ezzy. That letter evidenced an agreement by those parties to forward all commissions, GST and tax refunds from the sale of Gunns trees to Meloka. It stated that the respondents and Mr Ezzy would meet on 2 July 2007 to “work out the process of Meloka Pty Ltd paying off the $20 million of Plantation Trees purchased and an agreement for Andrew Ludekens Trading Account”.
What then followed were two courses of conduct that, to some extent, were necessarily inter-connected – the steps necessary to complete the initial acquisition of the woodlots in the 2006 Gunns Woodlot Project and then the steps necessary to on-sell some of those woodlots to the Secondary Investors.
On 2 July 2007, the respondents met with Mr Ezzy. Mrs Velardi prepared notes of this meeting – entitled “Structure and Funding Terms Agreed to”. The content is important. It identified the steps to be adopted to replace the Smithsons and the Velardis with the Secondary Investors. The note included the following points:
1.New Company to be set up and the directors to be Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens.
2.The new Company & Meloka Pty Ltd will be liable for the $20m of trees purchased and for the interest payments payable monthly until paid in full.
3.Commissions and GST derived from sales of the trees will be paid to the new Company and on-lent to Meloka Pty Ltd.
4.The trees will be on-sold to customers. Once the customers have purchased the trees, their tax refunds will be invested within the new Company and the new Company will then on-lend this to Meloka Pty Ltd. The only obligation of Meloka Pty Ltd and the new Company is to pay off the principal and interest component of the trees on behalf of the customer. The tax refund is non refundable to the customer on the proviso that, the trees that they have purchased has [sic] been paid off in full, by the new Company and Meloka Pty Ltd.
5.The on-sale of the trees must equate to a minimum of $6m in tax refunds which will come through the new Company from customers and then on-lent to Meloka Pty Ltd.
6.Once the new Company on-sells the trees, if the tax refunds are approximately 45c in the dollar, only $13m worth of trees need to be on-sold to get tax refunds totalling $6m from customers. This will leave $7m worth of trees in the new Company of which Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens have equal shareholdings. If $13m is sold and the total tax refunds equate to less than $6m, more trees need to be sold until the total amount of $6m derived from customer tax refunds is achieved.
...
8.The money raised by the sale of the trees by the new Company will be $3m by the 6th July 2007, $2m by 30th July 2007 and then $6m over the course of July to December 2007.
9.All parties being Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens agree that a total of $8m will come in by the end of July 2007 which will be a combination of the following:
· Commissions paid and the GST rebate on $20m of trees purchased,
· Sale of other trees by Andrew Ludekens bringing in $500,000 of which [sic] will be invested with Meloka Pty Ltd on behalf of Andrew Ludekens and,
· Other sales made by Peter and Jonathan & Andrew Ludekens.
It is also agreed that:
·30% of the additional $6m still to come in from tax refunds from the customers and that $2m will be lent to a trading account that Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens own.
·The $2m is to be loaned from Meloka Pty Ltd to the trading account and is repayable once the account reaches $8m or 3yrs, whichever comes first.
·100% of all profits from this account will be owned by Andrew Ludekens or one of his associated companies. We will allow this account to compound up to AU$20m and once reached all profits must be drawn as they are derived.
10.Out of the initial $3m which is the commission component and the $2m which the GST rebate [sic], $500,000 of this amount will be put into a bank account which will be used to capitalise and pay the interest on the $20m at 10% p.a. for the first 3 months. An additional $500,000 will go into a trading account owned by Peter Van de Steeg and Jonathan Ezzy and also an additional $2.5m will be put into this trading account totalling $3m that will pay the interest component payable monthly on the outstanding balance being initially $20m until paid in full.
...
13.Peter Van de Steeg, Jonathan Ezzy and Andrew Ludekens all agree to work together for the next 6 months to on-sell the $13m worth of trees (or more if required) as quickly as possible so that we can acquire the $6m in tax refunds.
(Emphasis added.)
On 5 July 2007, Mrs Velardi emailed Dr Ludekens the tax file numbers of Messrs Van de Steeg and Ezzy, the Velardis and the Smithsons.
On 6 July 2007, the respondents met with Mr Ezzy again. At Mr Van de Steeg’s direction, Mrs Velardi prepared notes for circulation at that meeting. Those notes were substantially based on the notes of the 2 July 2007 meeting. On 9 July 2007, Mrs Velardi emailed Dr Ludekens a copy of the notes of meeting from 6 July 2007, which were substantially the same as the 2 July 2007 notes of meeting entitled “Structure and Funding Terms Agreed to”. Those notes contained a number of tracked changes made by Mrs Velardi at Mr Van de Steeg’s direction. Also on that day, Mrs Velardi emailed Dr Ludekens a further document that had been dictated to her by Mr Van de Steeg entitled “Partnership and Client Management Agreement”. Both emails were copied to Mr Ezzy on Mr Van de Steeg’s instructions.
On 11 July 2007, there was a meeting between the respondents. On the same day, Mr Van de Steeg asked Mrs Velardi to mark-up a number of further changes to both the “Structure and Funding Terms Agreed to” and the “Partnership and Client Management Agreement” documents.
On 12 July 2007, Lotus received $3,654,156 from Gunns as commission for the woodlots acquired. Of this amount, $3,324,750 related to the woodlots acquired on 30 June 2007: see [69] above. The remainder of the commission received related to the acquisition of woodlots that are not relevant to this proceeding. On 16 July 2007, Lotus paid $3 million to Meloka. Meloka then distributed these funds in the following manner:
1.$1.4 million was paid to Korlea Pty Ltd (Korlea), a company associated with Mr Berlowitz, for the units in Mr Berlowitz’s AFTA business that Meloka was acquiring;
2.$250,000 was paid to Mr Van de Steeg;
3.$200,000 was paid to Mr Ezzy;
4.$90,000 was paid to Arnah Pty Ltd (Arnah), which – at the relevant time – was the trustee of the Ezzy Family Trust;
5.$850,000 was paid to Jameter; and
6.the balance of the $3 million was paid to various creditors of Meloka.
On 17 July 2007, the respondents met again. At Mr Van de Steeg’s instruction, Mrs Velardi prepared minutes of that meeting which comprised two documents entitled “Lotus and Meloka Trees Agreement” and “Partnership and Client Management Agreement”. The minutes also referred to a “client relationship agreement”. Mr Van de Steeg told Mrs Velardi that was to be an agreement about who would have the right to market the woodlots investment to certain clients. At a subsequent meeting Mrs Velardi attended with the respondents, Dr Ludekens said that he would not approach Mr Van de Steeg’s clients without Mr Van de Steeg’s approval.
On 20 July 2007, Dr Ludekens emailed Mrs Velardi a number of draft loan and partnership agreements. The purpose of those drafts was to assist Mr Graham Lederman, Mr Van de Steeg’s solicitor (of the law firm Ledermans), to prepare similar documents for the Plan.
Dr Ludekens then lodged Australian Business Number and GST registrations for 10 entities purporting to be partnerships. Each entity was registered in the name of three “partners”, being the two signatories to each woodlot application (as set out in the table at [69] above) and Lotus.
On 27 July 2007, Dr Ludekens emailed Mr Van de Steeg the text of an email, along with hyperlinks to the 2006 PDS and PR 2006/8. This email is important. The email was in the following terms:
As Promised, here is a snapshot of the investment opportunity. I have attached some links for you if you require more in-depth information. The following example illustrates the basic details:
Part 1
- An investor with a high taxable income applies for, say, $100,00 [sic] of GPL woodlots today. We organise 100% finance for the investor. There is no payment made by the investor.
- The investor claims a 100% tax deduction on the cost of the woodlots when lodging this year’s tax return. The return needs to be lodged in a timely manner.
- the ATO will send the investor a tax Refund (because of the woodlot deduction claimed), or if the investor has not yet paid tax to the ATO, then instead the investor sets aside the amount to be repaid.Part 2
- The investor then invests the Refund amount with Lotus.
- Lotus repays the principal and interest on the woodlot loan on behalf of the investor for the duration of the loan.
- At harvest the investor retains the entire proceeds of the woodlots, less a profit share to Lotus.That is it.
Lotus will accept investments from:
- individuals on a marginal tax rate of 30% and above (ie: over $25,000 assessable income)
- companies on a 30% company tax rate
- individuals with Capital Gains, paying 25% tax.Additional detail:
1. I have attached a cashflow calculator so you can project the returns at harvest. If using the calculator, on the finance page leave it as “no finance”.
2. GPL Woodlot 2006 Product Ruling from the ATO - GPL Woodlot 2006 Product Disclosure Statement - in original.)The text of the email was subsequently sent by Mr Van de Steeg to some of the Secondary Investors and had previously been sent by Dr Ludekens to Dr Love: see [97] below.
On 1 August 2007, there was a further meeting between the respondents. Mrs Velardi was asked by Mr Van de Steeg to update the notes from the previous meeting (17 July 2007).
On 2 August 2007, Dr Ludekens lodged Business Activity Statements for each of the entities purporting to be partnerships (except for the entity registered in the name of the respondents and Lotus, the Business Activity Statement for which was lodged on 14 August 2007). A GST refund was claimed in each Business Activity Statement for input tax credits relating to the acquisition of the woodlots.
In or about mid August 2007, the GST Compliance Verification Centre (a branch of the Australian Taxation Office (the ATO) “placed a stopper” on the GST refunds claimed by the purported partnerships.
On 20 August 2007, a letter was sent to Messrs Van de Steeg and Ezzy (copied to Mrs Velardi) by Ledermans, enclosing revised versions of the partnership and loan agreements for review and comment. It does not appear that these documents were ever finalised or formally executed.
(d) Approaches to Secondary Investors
In the proceedings before the primary judge, a number of Secondary Investors (namely, Mrs Ruffato, Ms Gibson, Dr Love and Messrs Tregambe, Martino and Crowe) gave affidavit evidence that addressed, inter alia, the matters summarised in the following paragraphs which were the foundation of the unchallenged findings of fact by the primary judge.
(i) Mrs Ruffato
In or about June 2007, Mr Van de Steeg rang Mrs Ruffato to discuss the Secondary Investment. During this conversation, Mr Van de Steeg suggested that Mrs Ruffato meet with Dr Ludekens, who “really knew about this investment”. Mr Van de Steeg told Mrs Ruffato that the investment involved the purchase of plantation trees, was all legitimate and was an opportunity to make some tax savings. On this basis, Mrs Ruffato agreed to meet with Dr Ludekens and later received a call from Dr Ludekens to set up a meeting.
On 14 June 2007, Mrs Ruffato sent an email to Dr Ludekens to confirm a meeting scheduled for 18 June 2007. This meeting was postponed a number of times. It was ultimately held in August 2007.
In August 2007, Dr Ludekens offered Mrs Ruffato and her husband the Secondary Investment during a meeting at the Ruffatos’ home. Dr Ludekens showed them the 2006 PDS. Mrs Ruffato understood from this meeting with Dr Ludekens that the proposed investment involved owning trees, lodging an income tax return for that investment, getting a refund and then paying that refund to Dr Ludekens, which he would then invest. Once the trees were fully grown, Mrs Ruffato understood the investors would receive profits from the harvest. Dr Ludekens told her that the tax aspects of the investment had been approved by the ATO and were legal, and that he wanted her and her husband “to sign something there and then to participate in the investment”. She told him that they would need to think about it.
On 23 August 2007, an email was sent from the address “[email protected]” to Mrs Ruffato, thanking her for her time and setting out some further information regarding the Secondary Investment (including hyperlinks to the 2006 PDS and PR 2006/8). Mr Van de Steeg was the author of this email: see [80] above.
Mrs Ruffato subsequently told Mr Van de Steeg that she and her husband were not interested in proceeding with the investment.
(ii) The Ludekens Investors
Mr Tregambe
Mr Tregambe had known Dr Ludekens socially for approximately seven or eight years and had invested some money with Dr Ludekens. Some time in the first half of 2007, Dr Ludekens met with Mr Tregambe and offered him the trees investment through Gunns. Dr Ludekens told Mr Tregambe that:
1.As an investor, he would purchase allotments of trees, the quantity of which would be determined by his annual income.
2.The investment would be structured in a way that maximised his tax refund and the tax refund would then be used to invest in the trees.
3.The returns from the investment would not come until ten years after the initial investment.
4.The investment would be made through Gunns which would allow Mr Tregambe to obtain a deduction for the investment and a tax refund.
5.There would be a loan obtained to buy the trees and the money received as a tax refund would be used to service the loan.
Mr Tregambe decided to go through with the purchase of the trees. Dr Ludekens told Mr Tregambe that he was putting together a partnership and asked him to sign a partnership document. Mr Tregambe did so. Mr Tregambe understood that Dr Ludekens had already purchased some trees and that he would “buy into” some of the trees already purchased. The partnership document named Mr Poon, Ms Richards and Dr Love whom Mr Tregambe had never met and did not know. At no time did Mr Tregambe and Dr Ludekens discuss the role of the partners. Mr Tregambe did not expect to have any say in the running of the partnership. As he understood it, his responsibility for his part of the partnership was a $108,000 allotment.
On 13 November 2007, Dr Ludekens emailed Mr Tregambe a copy of partnership financial statements and a tax return and requested that he forward these documents to his tax agent for the preparation of his 2007 tax return. Dr Ludekens also asked that he print, sign and return the Partners’ Declaration page as soon as possible. Mr Tregambe forwarded these documents to his accountant on 14 November 2007 and later authorised his accountant to lodge his 2007 tax return which claimed a deduction for the partnership loss in respect of the woodlot investment. That deduction was later disallowed.
In 2011, Mr Tregambe was shown a “partnership” tax return for a partnership in the name of “Lotus Capital Group Pty Ltd, A Ludekens and P Van de Steeg”. It was the same document sent to him on 13 November 2007 which he forwarded to his accountant. Mr Tregambe’s name appeared in the partnership return lodged with the ATO on a page headed “statement of distribution of net Australian income or loss”. The “share of income” figure alongside his name was -108,542. Mr Tregambe did not recall seeing this document in 2007. Dr Ludekens did not discuss lodging the partnership return with Mr Tregambe and Mr Tregambe did not authorise him or anyone to lodge it on his behalf.
Dr Love
Dr Love was introduced to Dr Ludekens in early 2007. On 13 June 2007, Dr Ludekens offered Dr Love the Secondary Investment during a telephone discussion. During that conversation, Dr Ludekens assured him that the investment he was proposing had an appropriate product ruling. Dr Ludekens offered him interests in woodlots for the 2006 financial year as well as the 2007 financial year. This evidence was tendered as tendency evidence under s 97 of the Evidence Act 1995 (Cth).
Dr Love’s evidence was that initially he did not understand how he could invest in the 2006 income year as it had already passed. Further he did not understand that a previous tax return could be amended or how he could be offered woodlots from a prior year in which he had received no losses. Dr Ludekens advised Dr Love that there was a tax ruling, that it was legitimate and that he could amend his tax return for the 2006 income year and receive a refund, which Dr Love could then forward to Dr Ludekens to invest. At no time during that conversation did Dr Ludekens mention that Dr Love would be entering into a partnership.
On 14 June 2007, Dr Ludekens sent an email to Dr Love that summarised the Secondary Investment and included hyperlinks to the 2006 PDS and PR 2006/8. It was in the same form as that set out at [80] above.
From his telephone conversation with Dr Ludekens and the email, Dr Love understood that the investment would involve the following steps:
1.As an investor, he would nominate an amount of money to put towards the acquisition of woodlots in a Gunns managed investment scheme.
2.A loan would be obtained to finance the acquisition of the woodlots.
3.In his tax return, he would claim the amount paid for the woodlots as a deduction.
4.He would pay the resulting tax refund to Dr Ludekens or Lotus, who would then use the refund to pay the principal and interest on the loan.
5.After 10 years, there would be a payout of the proceeds of an initial cropping of the trees. After 25 years, there would be a final payout.
Dr Love raised a concern with Dr Ludekens that, as he understood the terms of the investment, the investment was not guaranteed and that if Dr Ludekens or Lotus become insolvent, Dr Love personally would be responsible for the entire amount of the loan. Dr Love accepted Dr Ludekens’ verbal guarantee that any shortfall would be covered by him personally.
As a result of the information provided to him by Dr Ludekens, Dr Love decided to invest $200,000 in each of the 2006 and 2007 financial years. Dr Ludekens advised Dr Love that because his assessable income was much higher in those years he could nominate up to that amount. Dr Love considered that he had identified any risks, foresaw no loss and in the worst case believed that he would receive a modest return in 10 and 25 years with no cost to him in the interim.
On 2 August 2007, Dr Ludekens emailed a 2006 partnership tax return and the tax invoice relating to that partnership’s woodlot investment to Dr Love for the purpose of forwarding to his accountant. It is unclear from the evidence when Dr Love’s tax return for the 2006 financial year was lodged.
On 27 September 2007, Dr Love sent Dr Ludekens an email enquiring about the relevant documents for his investment in the 2007 financial year. Dr Love requested Dr Ludekens provide the necessary documents to his accountants so that his tax return could be prepared.
On 28 September 2007, Dr Love met with Dr Ludekens in the foyer of his accountant’s building. Dr Ludekens asked Dr Love about his other financial interests, his level of debt and other investments, stating that “by law, he needed to know some background.” Dr Ludekens requested Dr Love to sign a form headed “Statement of General Advice” which he signed. A copy was not provided to Dr Love.
On 17 October 2007, Dr Love sent a further email to Dr Ludekens enquiring about the relevant documents for his investment in the 2007 financial year to enable him to lodge his tax return. On 13 November 2007, Dr Love received an email from Dr Ludekens which attached a set of financial statements in relation to a partnership and a partnership tax return. Dr Love reviewed the documents. He had not met or heard of the other named partners on the partnership financial statements with the exception of Dr Ludekens. Dr Love forwarded the email to his accountants.
On 19 March 2008, Dr Love’s accountant filed his amended tax return for the 2006 income year and his tax return for the 2007 financial year. On 9 April 2008, a Notice of Assessment was issued in relation to the 2006 financial year. The tax deduction for the 2006 woodlot investment was disallowed. Dr Love said that he spoke to Dr Ludekens after learning that the deduction had been disallowed. Dr Ludekens told him that there had been an error with the paperwork but that there was no error with the investment or the partnership.
On 2 May 2008, a Notice of Assessment was issued in relation to the 2007 financial year. The tax deduction for the 2007 woodlot investment was disallowed. Dr Love did not pay Dr Ludekens any money in relation to the 2006 or the 2007 investments as there was no tax refund or tax saving to forward to Dr Ludekens.
Ms Richards and Mr Poon
Neither Ms Richards nor Mr Poon was called to give evidence at trial. The case put by the Commissioner at trial did not particularise when Dr Ludekens proposed the relevant scheme to Ms Richards, but it was alleged that Dr Ludekens discussed the Secondary Investment with Mr Poon at social occasions in the first half of 2007. The Commissioner submitted that the primary judge should infer that Dr Ludekens marketed the Secondary Investment to Ms Richards and Mr Poon, as each signed partnership materials prepared for that investment. The primary judge found it appropriate to draw that inference.
(iii) The Van de Steeg Investors
Mr Martino
In early 2007, Mr Van de Steeg met with Mr Martino through their respective children’s sporting activities. Mr Van de Steeg subsequently attended Mr Martino’s home to discuss investment opportunities. In early May 2007, Mr Martino invested in Meloka.
Sometime after this, Mr Van de Steeg approached Mr Martino about investing in plantation trees.
Mr Martino stated that Mr Van de Steeg told him that part of the investment involved obtaining a tax refund after it had been lodged and that the tax refund would then be given to either himself or Dr Ludekens. Mr Van de Steeg told him that Dr Ludekens was a businessman running the tree plantation investment with him. Mr Martino never met Dr Ludekens.
At this time, Mr Van de Steeg gave Mr Martino a copy of the 2006 PDS and explained the investment to him as follows:
1.Mr Van de Steeg had bought or was going to buy a considerable amount of plantation trees through Gunns.
2.Investors would buy trees as a partnership. The partners were not identified.
3.Mr Martino could get a tax return of approximately $50,000 from an investment of approximately $120,000.
4.The trees were a long term investment (around 13 or so years) and that once the trees were matured and harvested, he would get a return in excess of $200,000.
5.Investors would get a tax refund from the trees investment and would have to make a one off payment from their tax refund to Mr Van de Steeg or Dr Ludekens.
6.Investors would only have to pay the amount of their tax refund to participate in the investment – they would not have to find the money elsewhere, or borrow it.
Mr Martino asked Mr Van de Steeg to meet with his accountants in order to explain the investment. On 13 September 2007, Mr Van de Steeg met with one of Mr Martino’s accountants, Mr Kirk Webster, to explain the Secondary Investment. At this time, Mr Van de Steeg told him that he had acquired $10 million worth of Gunns woodlots and that he was going to on-sell $3 million of the woodlots “to a few friends via partnership agreements”. Mr Van de Steeg explained that upon making a payment to the partnership, Mr Martino would be entitled to an immediate deduction, as the partnership agreement was signed on 30 June 2007. On this basis, Mr Martino would then receive a tax refund, which was to be paid to Mr Van de Steeg as part of the arrangement.
None of these findings were challenged. Accordingly, for the same reasons as Mr Tregambe and Dr Love, Dr Ludekens marketed and encouraged the growth of, or interest in, the Plan to Ms Richards and Mr Poon.
Van de Steeg Investors
There were four investors – Mr Martino, Ms Gibson, Mr Crowe and Mr Berlowitz.
Mr Martino
Mr Van de Steeg marketed and encouraged the growth of, or interest in, the Plan to Mr Martino: see [109]-[115] above. The marketing was comprised of the steps described in [109]-[113] above. As with Mrs Ruffato (see [88] above), a template of the email sent by Mr Van de Steeg to Mr Martino’s accountant (referred to in [113] above) was provided to him by Dr Ludekens on 27 July 2007: see [80] above. In providing that template, Dr Ludekens assisted Mr Van de Steeg to procure the involvement of Mr Martino thereby encouraging the growth of, or interest in, the Plan.
The later steps taken by Mr Van de Steeg (see [114]-[115] above) encouraged the growth of, or interest in, the Plan. These steps included providing the partnership financial statements and tax returns to Mr Martino’s accountant. As with the Ludekens Investors, the partnership financial statements and tax returns were necessary for the Plan; those steps encouraged interest in the Plan thereby increasing the size of, and number of participants in, the Plan.
Ms Gibson
Mr Van de Steeg marketed and encouraged the growth of, or interest in, the Plan to Ms Gibson: see [124]-[139] above. The marketing was comprised of the steps described in [124]-[130] above. The later steps (see [131]-[139] above) encouraged the growth of, or interest in, the Plan. These steps included providing the Partners’ Declaration, the partnership financial statements and the tax returns to Ms Gibson. As with the Ludekens Investors, the Partners’ Declaration, the partnership financial statements and the tax returns were necessary for the Plan; those steps encouraged interest in the Plan thereby increasing the size of, and number of participants in, the Plan.
Mr Crowe
Mr Van de Steeg marketed and encouraged the growth of, or interest in, the Plan to Mr Crowe: see [144]-[151] above. The marketing was comprised of the steps described in [144]-[145] above. The later steps (see [146]-[151] above) encouraged the growth of, or interest in, the Plan. These steps included providing the Partners’ Declaration, the partnership financial statements and the tax returns to Mr Crowe. As with the Ludekens Investors, the Partners’ Declaration, the partnership financial statements and tax returns were necessary for the Plan; those steps encouraged interest in the Plan thereby increasing the size of, and number of participants in, the Plan.
Mr Berlowitz
The primary judge addressed Mr Berlowitz in the following terms (at [212] of the Reasons):
In respect of Mr Berlowitz, the Commissioner seeks that similar inferences be drawn as for Ms Richards and Mr Poon in respect of Dr Ludekens – namely, that Mr Van de Steeg must have marketed the Secondary Investment to Mr Berlowitz, as he signed partnership materials prepared for investors in the Secondary Investment. The partnership application signed by Mr Berlowitz is dated 16 May 2007. However, as previously noted, Mrs Velardi gave evidence that this document was created in late 2007. This is another situation where, as Mr Van de Steeg did not give or lead evidence on the issue, I am prepared to draw the inference sought.
None of these findings were challenged. Accordingly, for the same reasons applicable to Dr Ludekens’ conduct in respect of Ms Richards and Mr Poon, Mr Van de Steeg marketed and encouraged the growth of, or interest in, the Plan to Mr Berlowitz.
(d) The Smithsons and Velardis and marketing and encouragement
The Commissioner complained about the failure of the primary judge to make a finding about the conduct of the respondents concerning the Smithsons and the Velardis.
The Further Amended Statement of Claim clearly pleaded (at [17], [29] and [30]) the marketing or encouragement of the growth of, or interest in, the scheme by procuring the Smithsons’ and Velardis’ participation.
The respondents submitted that the matter was not put to the primary judge in final submissions, and that he was entitled not to deal with it.
The Commissioner below made clear in his submissions that the procurement of the Smithsons and the Velardis was part of the way the woodlots were purchased. The matter was dealt with comprehensively in the evidence. In [71] of the Commissioner’s final submissions, under the heading “Promoter: each respondent had a substantial role in respect of the marketing or encouragement of the growth of the scheme or interest in it”, the following was put:
The respondents took the necessary first step – the acquisition of the Woodlots183 – enlisting the assistance of the Smithsons and Velardis to do so. Both Ludekens and Van De Steeg made representations to the Smithsons and Velardis which encouraged them to execute applications for the Woodlots and loan documents184.
Footnote 183 referred to [4] of the submissions which set out fully, in tabular form, the ten applications, seven of which the Smithsons and Velardis were a party to: see [69] above. Footnote 184 was a reference to the evidence of Mrs Smithson, Mr Smithson, Mrs Velardi and Mr Velardi. The matter was raised before the primary judge and should have been dealt with.
This position was maintained on appeal. Ground 8 of the Commissioner’s Notice of Appeal stated that the primary judge should have found that the respondents marketed the scheme or otherwise encouraged the growth of or interest in the scheme to the following further extent:
[the respondents’] contact with Mr and Mrs Smithson and Mr and Mrs Velardi in June 2007 and encouraging their participation in the scheme by allowing the first and second respondents to use their names on seven of the ten applications for woodlots in the Gunns Woodlot Project.
However, the Commissioner’s written submissions filed in the appeal were limited to the contention that each respondent encouraged the growth of the scheme by their conduct. The Commissioner did not submit that the primary judge should have found that the respondents marketed the scheme to the Smithsons and the Velardis or otherwise encouraged interest in the scheme. The appeal has been determined on that basis.
On any view of the proper construction of s 290-60(1)(a), each respondent encouraged and procured the Smithsons and Velardis to sign documents in order to increase the financial dimensions of the Plan: see [40]-[54] above in relation to the Smithsons and [58]-[67] above in relation to the Velardis. This was, at the very least, encouraging the growth of the scheme. That conduct took place both before and after 27 June 2007 (being the date four years before the proceeding was issued against the respondents). However, for the reasons above, all related conduct that occurred prior to 27 June 2007 may also be relied upon.
(e) The construction of s 290-60(1)(b): Consideration in respect of that marketing or encouragement
The fifth issue in the appeal concerned the primary judge’s construction (at [217]-[227] of the Reasons) of the relationship between consideration and marketing or encouragement through the prepositional phrase “in respect of” in s 290-60(1)(b). The Commissioner submitted that the construction adopted by the primary judge was too narrow and his conclusion that there was no consideration received by the respondents in respect of the marketing or encouragement he found to have been undertaken by them (except as to Mr Van de Steeg’s conduct in relation to Mr Crowe: see [292] below) was wrong. For the reasons expressed below, we agree.
The legislative history of s 290-60(1)(b) has already been mentioned. In the 2005 Exposure Draft, the phrase “consideration in respect of the scheme” was used. It was changed to “consideration in respect of that marketing or encouragement”. That change, however, does not warrant the restriction of the necessary relationship between the consideration and the marketing or encouragement to be effectively “for” and not “in respect of”. A narrowing of language did occur. The relationship was no longer between the scheme and the consideration, but the marketing or encouragement that did take place and the consideration. The latter had to be in respect of the former.
Here, four elements of consideration were relied upon: the commission from Gunns, the GST refunds in respect of the acquisition of the woodlots, the promises by the Secondary Investors to give their tax refunds to the respondents and Mr Crowe’s payment of his tax refund.
(i) Smithsons and Velardis
The commission received by the respondents from Gunns (see [26], [27] and [76] above) had a clear relationship to the procurement of the Smithsons and the Velardis into the Plan. These persons were parties to seven of the ten applications: see [69] above. The amount of the commission was referable to the number of woodlots purchased, which was increased by the Smithsons’ and Velardis’ participation. Likewise, the GST refunds had the same close connection to the procurement of the Smithsons’ and the Velardis’ participation. Therefore the commission and the GST refunds were clearly in respect of the marketing and encouragement of the respondents based on their conduct in procuring the Smithsons and Velardis to participate in the Plan by being parties to the applications.
The respondents submitted that the Commissioner should not be entitled to rely on the GST refunds as consideration in respect of the Smithsons and the Velardis. The respondents’ complaint was that the GST refunds did not satisfy s 290-60(1)(b) and were raised for the first time on appeal. We have rejected the first contention. The GST refunds did satisfy s 290-60(1)(b): see [288] above. In relation to the second aspect – that the GST refunds were raised for the first time on appeal – the respondents’ complaint was that at trial the Commissioner’s case was that the whole amount of the GST refunds was the relevant consideration and not some portion of the GST refunds referable to the woodlots acquired using the names of the Smithsons and Velardis. The issue of the GST refunds was pleaded by the Commissioner in the Further Amended Statement of Claim, was referred to by the Commissioner in his outline of submissions filed before trial (at [80]) and in the final submissions provided to the primary judge (at [80]). The respondents’ complaint is rejected.
(ii) Secondary Investors
What then was the position in relation to the Secondary Investors? The primary judge found no relevant connection between the commission and GST refunds and the marketing and encouragement by the respondents in respect of the Secondary Investors. The commissions and the GST were said by him (at [220] of the Reasons) to be received regardless of any “marketing or encouragement”. We cannot agree. The Plan was an integrated whole. The number of woodlots purchased (and the commission and GST refunds received therefrom) bore a relationship to the marketing and encouragement of the growth or interest in the Plan by the procurement of the Secondary Investors. The Secondary Investors, and their tax refunds, were necessary to fund the foreign exchange business. The notes of 2 July 2007 (see [72] above) make it clear that $20 million in woodlots could only be purchased if $13 million of woodlots were sold down to the Secondary Investors. True it is that the Secondary Investors would come in after the purchase of the woodlots, but there is no call in the examination of the operation of the Plan and the relationship of the parts within it to divide it strictly by time to require contemporaneity in the relationship borne by the words “in respect of”. There was a sufficient and clear connection and relationship between the commission received from Gunns and the GST refunds from the acquisition of the woodlots for such consideration to be in respect of the activity directed to the procurement of the Secondary Investors, that is, marketing or encouragement of the growth of or interest in the Plan.
The primary judge refused to permit the Commissioner to rely upon the promises by the Secondary Investors to pay over their tax refunds to the respondents. The absence of reliance upon these matters in the pleading and the running of the case is set out at [221]-[223] of the Reasons. His Honour was of the view that to permit the point to be run at the heel of the hunt would have been procedurally unfair, in the light, in particular, of the real possibility that cross-examination could have been directed to the issue. That conclusion by the primary judge has not been shown to be wrong. It can be accepted that the receipt by the respondents of the refunds was always in the Commissioner’s case as to the nature and operation of the Plan. Nevertheless, no case was made until addresses that the promises to pay were consideration for the purposes of s 290-60(1)(b). In the conduct of a civil penalty hearing, it is essential that the material allegations and the particulars related to them be stated with clarity at the earliest opportunity. Of course, amendment is possible. A judge hearing a penalty case will necessarily be astute, as his Honour was, as to the possibility of unfairness by late changes to or elaboration of the case by the prosecutor after evidence has closed. The primary judge was imbued with the detail and flow of a ten day case. His Honour’s view that there would have been unfairness in allowing the point to be run in final address should be respected. It has not been shown to be wrong.
However, as noted by the primary judge (at [227] of the Reasons), the position in respect of Mr Crowe is different. Mr Crowe was the only Secondary Investor to have received an income tax refund: see [152] above. The primary judge found (at [227] of the Reasons) that this amount was “consideration directly received by Mr Van de Steeg’s associate, Meloka, in respect of Mr Van de Steeg’s marketing of the relevant scheme to Mr Crowe”. Accordingly, the second limb of the definition of “promoter” under s 290-60 is also satisfied in respect of Mr Van de Steeg.
(f) Section 290-50(2)
The sixth issue concerns the primary judge’s construction of s 290-50(2): [280]-[306] of the Reasons.
Section 290-50(2) entitled “Implementing scheme otherwise than in accordance with ruling” provides:
An entity must not engage in conduct that results in a *scheme that has been promoted on the basis of conformity with a *product ruling being implemented in a way that is materially different from that described in the product ruling.
Note: A scheme will not have been implemented in a way that is materially different from that described in a product ruling if the tax outcome for participants in the scheme is the same as that described in the ruling
(Emphasis added.)
The Explanatory Memorandum summarised s 290-50(2) as follows:
If a scheme with a product ruling is not implemented in conformity with its ruling, with potential tax consequences for investors, then a penalty may apply under the second civil penalty provision.
The primary judge found that s 290-50(2) applies to “schemes that are formally covered by a product ruling issued by the Commissioner”: at [301] of the Reasons. His Honour’s view was that the scheme being implemented must be the same as the scheme the subject of the product ruling. Thus the Commissioner was required to lead evidence of the implementation of the scheme ruled upon (at [298]-[299] of the Reasons) and it was not sufficient to show a contravention that particular investors were not covered by the product ruling: at [299] and [303] of the Reasons.
The Commissioner challenged this construction. He contended that the whole assumption of s 290-50(2) is that what is implemented is different from the scheme described in the product ruling, and that the effect of the primary judge’s construction is to treat the words “scheme that has been promoted on the basis of conformity with a product ruling” as though they read “scheme that is the subject of a product ruling”.
The Commissioner’s argument points, contextually, to the definition of “scheme” as being capable of comprehending an expansive range of conduct, which may be implemented or not: s 995-1 of the ITAA97. By contrast, a scheme is identified with great precision in a product ruling: see, e.g. PR 2006/8 at [15].
The Commissioner submitted that the object of s 290-50(2) is to deter conduct which risks denying investors the protection of the product ruling (s 290-5(b) and Explanatory Memorandum at [3.71]) and that it is of the essence of the conduct proscribed by s 290-50(2) that what is implemented differs from the scheme ruled upon.
The construction arrived at by the primary judge is one the Commissioner contends defeats the intended operation of the provision because a scheme that is implemented in a materially different way from that described in the product ruling will axiomatically not be the scheme described in the product ruling. Accordingly, the Commissioner submitted that to attract the operation of s 290-50(2), the scheme implemented need not be the scheme ruled upon, it need only be a scheme that has been promoted on the basis of conformity with the product ruling: what must be shown is conduct that results in that scheme being implemented in a way which is materially different from that described in the product ruling.
The Commissioner submitted that the respondents contravened s 290-50(2) in two different ways. The first depends on characterising the Secondary Investment as the scheme for the purposes of that provision while the second has the 2006 Gunns Woodlot Project in that role.
(i) The Secondary Investment
The Commissioner contends that:
1. the Secondary Investment was a scheme;
2.the respondents had promoted the Secondary Investment on the basis of conformity with a product ruling by representing variously to the Ludekens Investors and the Van de Steeg Investors that the tax consequences described in PR 2006/8 were available to participants in the Secondary Investment; and
3.by the steps the respondents had taken to carry into effect the Secondary Investment, the scheme was implemented in a way which is materially different from that described in PR 2006/8.
The primary judge accepted the evidence, relied upon by the Commissioner, that the respondents promoted the Secondary Investment to the Ludekens and Van de Steeg Investors on the basis that it was an investment in the 2006 Gunns Woodlot Project and entitled them to the tax deductions supported by PR 2006/8: see [300]-[301] of the Reasons. That evidence the Commissioner argued was sufficient to establish that the Secondary Investment was promoted on the basis of conformity with PR 2006/8. The Commissioner submitted that the respondents’ conduct resulted in the Secondary Investment being implemented. The primary judge accepted that the tax outcome for participants in the Secondary Investment was different from the tax outcome described in PR 2006/8: Reasons at [288]. Taken together, the Commissioner submitted that a contravention of s 290-50(2) was made out.
The Secondary Investment was not the subject of a product ruling. The primary judge was correct in finding that s 290-50(2) operates only in relation to a scheme that has a product ruling. The relevant scheme was the 2006 Gunns Woodlot Project and the relevant product ruling was PR 2006/8. The Secondary Investment was never a scheme that was the subject of a product ruling. There was no contravention of s 290-50(2) in this first way contended for by the Commissioner. The extrinsic material, to which the primary judge referred at [302] of his Reasons, supports this construction.
The expression in s 290-50(2), “on the basis of conformity with a product ruling”, presupposes that there is conformity between the scheme that is promoted and the relevant product ruling. The conduct prohibited by s 290-50(2) does not concern “promotion” but rather “implementation”. “Promotion” whether by “marketing” or “encouraging”, is the subject of s 290-50(1). Section 290-50(2) proscribes conduct in relation to the implementation of a scheme where it is properly promoted as complying with a product ruling. By contrast, s 290-50(1) proscribes conduct the gravamen of which is not the manner of implementation but rather the manner of marketing or encouraging the growth of, or interest in, a scheme.
The purpose of the provision is to preserve the integrity and reliability of the product ruling system by ensuring that those that implement schemes that are subject to product rulings do so in a way that ensures the participants can rely on the relevant rulings.
It is not axiomatic that the scheme implemented will always be different to that described in the product ruling. The section contemplates that one scheme can be implemented in a number of materially different ways. The provision does not refer to implementing a scheme different to that which is the subject of the product ruling. Rather, it refers to implementing the scheme which is subject to the product ruling in a different way.
As the primary judge found, the Secondary Investment was promoted to the Ludekens and Van de Steeg Investors as an investment in the 2006 Gunns Woodlot Project and in conformity with PR 2006/8: see Reasons at [300] and [301]. In fact it was not in conformity with PR 2006/8. Such conduct, as the primary judge correctly observed, is itself the subject of separate statutory proscription under s 290-50(1) and other consumer protection legislation prohibiting misleading and deceptive conduct: see Reasons at [303].
(ii) The 2006 Gunns Woodlot Project
The Commissioner’s second contention is that the respondents’ conduct resulted in the 2006 Gunns Woodlot Project, which was promoted by Gunns as the responsible entity on the basis of conformity with PR 2006/8, being implemented in a way which was materially different from that described in PR 2006/8. It was not disputed that the 2006 Gunns Woodlot Project was a scheme covered by PR 2006/8 and promoted by Gunns on the basis of conformity with that product ruling: see Reasons at [286]. However, the Commissioner submitted that the primary judge wrongly found that there was no evidence that the 2006 Gunns Woodlot Project was implemented in a way that is materially different from that described in the product ruling: see Reasons at [298].
“Implemented” is not defined. As the primary judge observed (at [289]-[290] of the Reasons):
‘To implement’ is defined in the Macquarie Dictionary (2009, 5th ed) as “to put (a plan, proposal, etc) into effect”. ‘Implemented’ in this context is therefore a different concept to ‘promoting’ (being the chief concept invoked by s 290-50(1)). This is supported by the following statements that appeared in the Explanatory Material circulated for discussion in 2005 (which are not reproduced in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth)):
Who is a scheme implementer?
33. The provisions identify two types of individuals to which the measures may apply – promoters and scheme implementers. A promoter is responsible for the promotion of a tax exploitation scheme (see paragraphs 22 to 32). A scheme implementer, however, is at risk of penalty for the implementation of a scheme inconsistently with its product, or other binding ruling, resulting in a different tax outcome for investors. [schedule #, item #, subsection 290-50(2)]
34. A scheme implementer has an instrumental role in the operation of the scheme. They are responsible for making the supervisory or managerial decisions that put a scheme into operation or significantly influence the running of the scheme. Scheme implementers are likely to be individuals in a position to make executive decisions about the operation of the scheme.
35. Implementation would not extend to the actual carrying out of specific tasks related to the running of the scheme. For this reason, someone who is employed or contracted to carry out such tasks would not be a scheme implementer.
[Emphasis in original.]
‘Implementation’ is therefore a broader concept than mere promotion. Accordingly, the emphasis of s 290-50(2) is quite different to that of s 290-50(1). …
The ordinary meaning of “implement” is relevantly to “put (a decision or plan) into effect”: Shorter Oxford English Dictionary.
The Commissioner submitted that a scheme is implemented by the steps taken by each party to it and that a managed investment scheme is implemented, in part, by multiple parties entering into binding legal relations. He also submitted that implementation of the scheme is not the sole province of the responsible entity and that “conduct that results in a scheme … being implemented” comprehends conduct by persons who are not necessarily parties to the scheme.
Accordingly, the Commissioner put the following submissions. The respondents caused the 2006 Gunns Woodlot Project to be implemented in a way that is materially different from that described in PR 2006/8 by persuading the Smithsons and the Velardis to sign applications for woodlots in the 2006 Gunns Woodlot Project where it was never intended that they would become bound by the obligations created pursuant to the woodlot applications they signed. Rather, the woodlots were to be on-sold to wealthy individuals who would be able to reduce their tax liability as a result: see Reasons at [84] and [189(d)]. The Smithsons and Velardis had no intention of establishing, maintaining or carrying on a business of afforestation or incurring any outgoing connected with activities by which they would gain or produce assessable income. The respondents’ conduct thereby resulted in the 2006 Gunns Woodlot Project being implemented in a way that is materially different from that described in PR 2006/8.
The respondents accepted that the Smithsons and the Velardis were not within the “class of entities’ to whom PR 2006/8 applied because they did not “have a purpose of staying in the scheme until it is completed … and deriving assessable income from this involvement”. However, it does not follow that when an entity that is not within the class of entities to whom the product ruling applies enters into the scheme that this causes the scheme to be “implemented in a way that is materially different from that described in the product ruling”.
A distinction requires to be drawn between the scheme and the participants in the scheme to which a product ruling applies. A product ruling is a type of public ruling, which is defined in s 358-5 of Sch 1 to the TAA:
(1)The Commissioner may make a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to:
(a)entities generally or a class of entities; or
(b)entities generally, or a class of entities, in relation to a class of *schemes; or
(c)entities generally, or a class of entities, in relation to a particular scheme.
…
(3) Such a ruling is a public ruling if it:
(a) is published; and
(b) states that it is a public ruling.
…
A product ruling by the Commissioner is an example of a ruling under para (1)(c) namely, “a written ruling on the way … a relevant provision applies to … a class of entities in relation to a particular scheme”.
The provision contemplates that a product ruling need not apply to all entities that might enter into a particular scheme but may be confined to a class of entities. Accordingly, it is important to consider the content of the product ruling and the entities described in it, both expressly and implicitly. PR 2006/8 applies only to a class of entities defined in [7]-[8] of the ruling. This does not preclude other entities from entering into the scheme. The opposite is the case. The provision implicitly recognises that other entities can enter into the scheme in which case the ruling has no application to them. Importantly, that other entities enter into the scheme does not alter the scheme or mean that it has been implemented in a way different to that set out in the ruling.
Indeed, implementation of the scheme which involves entities to whom the ruling does not apply is implicitly recognised by PR 2006/8. The distinction between the class of entities and the scheme is recognised in the ruling itself. Paragraphs 7-8 define the class of entities while [15]-[16] define the scheme. At [15] a list of documents that comprise the scheme is set out and at [16] it is noted that:
… there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Grower or any associate of a Grower, will be a party to, which are a part of the scheme.
The subsequent paragraphs then contain a summary of the effect of those agreements.
There was no evidence that any of the documents entered into by Growers were in any way different to those listed in [15] and thus there is no evidence that the scheme was implemented in any way differently to that described in PR 2006/8.
The participation of the Smithsons and Velardis in the 2006 Gunns Woodlot Project in the way that they did has the effect that they cannot rely on the ruling. Their participation does not affect the scheme or the tax consequences for those participants that are within the class of entities to whom the ruling applies.
Other exclusions are to be found. Paragraph 7 of PR 2006/8 excludes from the class of entities “entities who finance their participation in the Project through loans other than those loans described at paragraphs 48 to 56 of this product ruling”. Paragraph 48 makes it clear that Growers can borrow from an independent lender. If a particular participant does so, the consequence is that he or she cannot rely on the ruling but it does not mean that the scheme has been implemented in a different way.
It is not to the point to submit, as the Commissioner does, that a wide range of conduct can result in the product ruling ceasing to bind the Commissioner and produce a materially different tax outcome.
Section 290-50(2A) does not assist the Commissioner. The sections referred to in that provision relieve taxpayers from provisions denying deductions for entering into a forestry managed investment scheme where the interest in the scheme is disposed of within four years. However, such relief applies only where the disposal occurs “because of circumstances outside the taxpayer’s control”. That is not this case. The Smithsons and Velardis entered into the 2006 Gunns Woodlot Project intending to dispose of their investment in the short term.
(g) Notice of contention
The primary judge found that the third element of a “tax exploitation scheme”, being the requirement in s 290-65(1)(b), was satisfied. Section 290-65(1)(b) required that:
(b) one of these conditions is satisfied:
(i)if the scheme has been implemented — it is not *reasonably arguable that the scheme benefit is available at law;
(ii)if the scheme has not been implemented — it is not reasonably arguable that the scheme benefit would be available at law if the scheme were implemented.
The Commissioner submitted that it was not reasonably arguable that the scheme benefits were available at law. In particular, he submitted that it was not reasonably arguable that the allowance of income tax deductions claimed by investors from their participation in the Secondary Investment and the GST refunds upon claims for input tax credits by the woodlot applicants were available at law. The respondents did not contend that it was reasonably arguable that the income tax deductions claimed by investors from their participation in the Secondary Investment were available at law. However, the respondents did contend that it was reasonably arguable that the entities which acquired woodlots in the 2006 Gunns Woodlot Project were entitled to input tax credits in relation to the acquisition of the woodlots and consequently to GST refunds. This latter argument was the subject of a notice of contention filed by the respondents.
It is necessary to start with the relevant provisions of the A New Tax System (Goods and Services Tax) Act 1999 (Cth). Entitlements to input tax credits arise on creditable acquisitions: s 7-1(2). Section 11-5 provides that you make a “creditable acquisition” if¸ inter alia, “you acquire anything solely or partly for a *creditable purpose” and you are registered. “Creditable purpose” is relevantly defined in s 11-15 as follows:
(1)You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.
“Enterprise” is defined in s 9-20(1) as:
… an activity, or series of activities, done:
(a) in the form of a *business; or
(b) in the form of an adventure or concern in the nature of trade; or
…
However, s 9-20(2) indicates that:
... enterprise does not include an activity, or series of activities, done:
…
(c)by … a *partnership (all or most of the members of which are individuals), without a reasonable expectation of profit or gain.
An “entity” makes a claim that it is entitled to input tax credits that satisfy those definitions: s 7-5 read with s 17-15. The “entity” must be registered: s 7-10 read with s 23-1. Here, the entities which were registered and making the claim for input tax credits were the so-called “partnerships”: see [79], [82], and [193]-[194] above.
There is no dispute that the so-called “partnerships” were registered. But is that itself sufficient to justify a finding that it was reasonably arguable that a scheme benefit (the GST refunds) was available at law? The answer is no. To make a claim for an input tax credit, the entity making the claim in the circumstances of this proceeding, must acquire the woodlot (the thing in s 11-15(1)) in carrying on that entity’s enterprise. That is, it must acquire the woodlot in carrying on a business or an adventure or concern in the nature of trade.
Here, it cannot be said that any of the so-called “partnerships” acquired the woodlots in carrying on a business or an adventure or concern in the nature of trade. The Smithsons and the Velardis, although named as partners, had no intention of the “partnership” of which they were a “member” carrying on a business or an adventure or concern in the nature of trade. They merely permitted their names to be put on the documentation to allow the respondents and Mr Ezzy to acquire the woodlots from Gunns: see [47] and [62] above. Put another way, they did not have a reasonable expectation of profit or gain: s 9-20(2)(c). In those circumstances, it is difficult to conceive of the existence of a partnership, let alone a partnership that is in the form of a business or an adventure or concern in the nature of trade. Whatever was the legal status of these so-called “partnerships”, none of them satisfied the essential elements of s 11-15 read with s 9-20. Accordingly, it is not reasonably arguable that the scheme benefit (the input tax credits and consequently the GST refunds) was available at law.
G. CONCLUSION AND ORDERS
Each of the respondents contravened s 290-50(1) of Sch 1 to the TAA in dealing with the Smithsons and the Velardis and in dealing with their respective Secondary Investors. Neither respondent contravened s 290-50(2) in relation to the Smithsons and the Velardis or the Secondary Investors. The Court will make appropriate declarations and otherwise remit the question of penalty for hearing by a judge of this Court.
I certify that the preceding three hundred and thirty-two (332) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop and Justices Gilmour and Gordon. Associate:
Dated: 29 August 2013
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Taxation Law
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