Fletcher, R.S. v Commissioner of Taxation

[1988] FCA 580

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JUDGMENT No ... 5..8..!&,..8.8-

CATCHWORDS

TAXATION - Income Tax - Interest payments incurred in respect	. .
of loans raised to purchase annuity	- Review by Administrative

Appeals Tribunal of Commissioner's decisions disallowing taxpayers' objections - Decision by Tribunal to exercise . . ,

discretion vested in Commissioner under	s.l77F(l) of Income
Tax Assessment Act - Whether such decision within power Failure of Tribunal to give to taxpayers notice	-

of possibility

of that decision - Application of Subdivision D of Div.3 of	i
Act - Whether payments deductible under	s.51 of Act.
Income Tax Assessment	Act 1936 ss.51, 166, 167, 177F, 185,
186, 193.

Administrative Appeals Tribunal Act 1975 ss.25(4), 43(1).

NSW G.84 of 1988

REGINALD SIDNEY FLETCHER & ORS V THE COMMISSIONER OF TAXATION

OF THE COMMONWEALTH OF AUSTRALIA

14 October 1988 I

Lockhart, Wilcox and Burchett JJ
Sydney

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IN THE FEDERAL COURT OF AUSTRALIA ) )

NEW SOUTH WALES DISTRICT REGISTRY ) NO. NSW G.84 Of 1988

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GENERAL DIVISION

ON APPEAL FROM THE TAXATION

DIVISION OF	THE	I-
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ADMINISTRATIVE APPEALS TRIBUNAL	,
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BETWEEN:  REGINALD SIDNEY FLETCHER

I First Applicant
CORAL EMILY FLETCHER
Second Applicant
JAMES WARREN DUNLOP
Third Applicant
LILIAN ANN DUNLOP
Fourth Applicant

AND :	THE COMMISSIONER OF
TAXATION OF  THE
COMMONWEALTH OF AUSTRALIA Respondent

CORAM :  LOCKHART, WILCOX and BURCHETT JJ

PLACE: SYDNEY

DATE :  14 OCTOBER 1988

MINUTES OF ORDER

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THE COURT ORDERS THAT:

1.        The appeal be allowed.

2.        The decision of the Administrative Appeals Tribunal made on 23 December 1987 be set aside.

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3 .	The case be remitted to the	Tribunal to be heard and	I
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decided again, with such further evidence as the

Tribunal may see fit to allow, in accordance with the

decision of this Court.

4 .	The respondent pay to the applicants one-half	o
their costs of the appeal.
Note:	Settlement and entry of orders	i dealt with in Order

36 of the Federal Court Rules.	I .:
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IN THE FEDERAL COURT OF AUSTRALIA )

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NEW SOUTH WALES DISTRICT REGISTRY	)	No. NSW G.84 of 1988
GENERAL DIVISION

ON APPEAL FROM THE TAXATION
DIVISION OF THE
ADMINISTRATIVE APPEALS

TRIBUNAL

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BETWEEN: REGINALD SIDNEY FLETCHER . .. :

First Applicant

CORAL EMILY FLETCHER

Second Applicant	I .
JAMES WARREN DUNLOP
Third Applicant	l
LILIAN ANN DUNLOP	! ?
Fourth Applicant

AND:  THE COMMISSIONER OF
TAXATION OF THE
COMMONWEALTH OF AUSTRALIA

Respondent

CORAM :	LOCKHART, WILCOX and BURCHETT JJ
PLACE:	SYDNEY
DATE :	14 OCTOBER 1988

REASONS FOR JUDGMENT
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THE COURT:  This application comes to the Court by way of an

appeal against a decision of the Administrative Appeals Tribunal affirming the disallowance by the Commissioner of

Taxation of objections to 14 assessments of income tax. There

are four applicants: Reginald Sidney Fletcher, his wife Coral

Emily Fletcher, James Warren Dunlop and his wife Lilian Ann

Dunlop. There are some differences regarding the relevant years of income, as between the various applicants, but all	I
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the relevant years are within the period 1982 to 1985 i

inclusive. AS nothing turns upon the identity of any

particular taxation year, it is not necessary to go into the
further detail of that matter. All 14 appeals to the
Administrative Appeals Tribunal were, by consent, heard
together. They all raised the same points of principle in
connection with transactions common to all four applicants.

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The transactions	t
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The relevant facts commence in mid-1982. The four

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applicants were partners in the business of subdividing and

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selling land at Killarney Vale on the central coast	of New
South Wales. Mr Fletcher and Ar Dunlop were both builders and

some lots were sold by the partnership with houses already
constructed upon them. The four applicants shared the

services of Hr B F McGrath, a public accountant then

practising in The Entrance as B F McGrath & Co. Sometime late

in May or early in June 1982 Mr McGrath had a meeting with A T

Fletcher and Mr Dunlop at which he showed them a brochure put	!
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out by a company named Annuity Investments Pty Limited. The

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brochure advertised the availability of what it called "Future

Cash Benefits". Three different investment plans were

offered, spanning terms of 15 years, 20 years and 25 years

respectively. Features common to all three plans were that	I '
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income tax deductions were said to	be available in each of the

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first five years and that moneys were to	be received by the
investor only during the last five years of the plan.	Mr

McGrath explained the brochure, pointing out to the two men

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that tax benefits were available.

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After discussion, the four applicants decided to make

an investment in the annuity scheme. Each applicant borrowed
some money from an independent financier. On 23 June 1982

each couple completed an application to invest $25,000 in the

scheme. The total investment of the four taxpayers therefore

amounted to $50,000. Each of the applications related to the

15 year plan. These applications were addressed to "The

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Managing Partner, Annuity Investments" at an address in

Sydney. Apparently the applications, and bank cheques for the subscription moneys, were sent to that address by	Mr McGrath.
The address was the office of a firm called Crennan	& CO,

which carried on business as "financial and taxation	., . ,
consultants".	,:.

Evidence was given before the Tribunal by Mr Malcolm

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Tucker, an accountant carrying on practice in Wagga Wagga in ;. :'

the firm J A Crow1 and Associates. He said that this firm,

after taking actuarial and legal advice, had created a series

of pro forma documents available to be used as needed in

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particular cases. Upon receipt of the loan applications

signed by the applicants, Mr Robert Watson of Crennan & CO

contacted J A Crowl and Associates. That firm then prepared

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the documents for use in this case. The documents included a
partnership agreement, two loan agreements and an annuity
agreement. The partnership agreement was sent to the
applicants, through Mr HcGrath, for execution. The other

documents were retained by J A Crowl and Associates.

The partnership agreement was in the form of a deed.

It was dated 30 June 1982, although it was apparently signed

by the applicants a few days before that date. The deed

constituted a partnership known as "Annuity Investments

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Partnership No.18", consisting of the four applicants and a

company named Jimal Nominees Pty Limited. The capital of the

partnership was stated to be $50,001; $50,000 contributed by

the applicants -- and in return for which they were each

allocated 5,000 "ordinary units" -- and $1 subscribed by Jimal

I	in return for which it took one "special unit". Subject to a preferential payment out of profits of $1 per annum to Jimal, the four applicants were to bear the profits and losses of the
partnership. The deed made provision for the disposal of
units and for the management of the partnership. It included a provision, c1.21, appointing Jimal as the first managing Partner of the partnership. Clause 23(1) provided that, subject to any direction of a general meeting of the partners
or a regulation of the committee of management, the Managing
Partner "shall have control of the policy and management of the business of the partnership". By c1.23(3) the Managing

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Partner was "empowered to enter into and sign contracts,

arrangements and agreements of any nature whatsoever in I.

connection with and incidental to the business of the !.

partnership". In particular, by c1.23(4), the Managing

i	Partner was empowered to borrow money for the purpose of
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!	carrying on the partnership business and to pledge the partnership assets by way of security.
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The first of the loan agreements was made by Jimal,

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i	on behalf of the partnership and pursuant to the powers
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I	conferred upon it by the Deed of Partnership, with a company

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!	known as Doowarf Nominees Pty Limited. By that deed Doowarf
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i	covenanted to lend to the partnership the sum of $2,000,000.
j	Interest at the rate of 18% per annum was payable annually in

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advance. The capital was to be repaid, along with interest r '

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for each of the then current years, by three instalments due

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i	respectively on 30 June 1994,	30 June 1995 and 30 June	1996.
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I	The agreement was unusual in that	it absolved the borrowers
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i	from any personal liability for payment of either the
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principal sum or interest thereon. Clause '5 relevantly
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(a) In order to secure to the Lender

performance by the Borrower of his

!	obligations under this Agreement, the
!	Borrower hereby agrees to execute and

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I	enter into in favour of the Lender, upon
the Lender's request and at the cost of

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the Lender, a charge and/or other	I
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security (as the Lender may require) over	I
any property or interest in any property
acquired by the Borrower with the	!
principal sum or any part thereof, to

!	secure repayment of the principal sum and
i	interest provided for pursuant to this Agreement.
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I	(b) ...
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(c )	...
(d)	The Lender hereby agrees that in the

event of default by the Borrower any

claim under this Agreement for either

I principal or interest repayments shall be
limited to the value of the security
taken under this Clause and the Lender
shall have no further recourse against
the Borrower in the event of any
deficiency in the security."

The effect of this agreement was to create an obligation to pay to Doowarf interest, in each of the first 12

years, of $360,000.	The interest liability was to reduce in
subsequent years as repayments of principal were made.	But it

was not intended that the partners should themselves find the
money required for payments of interest. That was to come
from two other sources: the second loan agreement and an

annuity agreement.

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The second loan agreement was also made by Jimal on

behalf of the partnership. In this case the lender was a
company called Eromdim Nominees Pty Limited. The Eromdim loan

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agreement provided for that company to advance to the

partnership at 30 June in each of the years 1982 to	1986
inclusive the sum of $190,000 together with the amount of the	!
interest payable to Eromdim under this agreement; that interest being calculated at the rate of 18% per annum and payable in advance. The whole of the principal, together with
interest for the then current years, was repayable	by

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instalments due on 30 June in each of the years 1992, 1993 and !

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1994.   Once again, there was a clause -- in the same terms as

that in the Doowarf agreement -- confining the rights of the

lender to the security.

The annuity agreement was made between Jimal, on

behalf of the partnership, and Annuity Investments Pty

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Limited. It was a simple document whereby, in consideration

of the payment to it of $2,020,000, Annuity Investments agreed

to pay to the partnership the sum of	$170,000 in each of the
first five years following the agreement, the sum of	$600,000
in each of years six to ten and the sum of	$1,119,000 in years

eleven to fifteen; all inclusive. The agreement contained an
undertaking by Annuity Investments to redeem the annuity in
whole or in part at any time after the expiration of 23 months

from the date of the agreement; such redemption to be made

within 21 days from the receipt of a notice of redemption

given by the partnership. The redemption price was set out in

an appendix to the agreement, being $24,000 at the end of year

2 and rising by specified steps to $80,000	at the end of year
10.

Mr Tucker was, at the relevant time, a director of

each of Jimal, Doowarf and Eromdim. Following its

incorporation in April 1982 he had, for	a short time, been
also a director of Annuity Investments. The person acting	as

secretary of each of these companies, Mr Trevor Hattersley,
was an employee of J A Crow1 and Associates. The annuity

agreement and the two loan agreements were each partially

executed in Wagga Wagga before 30 June 1982. On that day M r

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Tucker drove to Canberra with Mr James Crowl, of his	firm. He
there completed the execution	of the documents mentioned

above. He also signed three bills	of exchange which are	I-
relevant to this case.
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The first bill was drawn	o Doowarf by the	.:
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partnership in the sum of $2,000,000. This was intended to be

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a payment in satisfaction of the loan agreement between those

parties. Doowarf accepted this bill. On behalf of the 8 :

partnership, Mr Tucker then endorsed the bill to Annuity	i
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Investments; thus paying the bulk of the annuity purchase price. Annuity Investments then endorsed the bill back to

Doowarf, in satisfaction of	an arrangement between those two	i
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companies whereby Annuity Investments had agreed to lend

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Doowarf $2,000,000 for 15 years at 18% interest.

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The second bill was for $190,000. It was drawn by

the partnership on Eromdim, being for the first payment of
loan moneys under the agreement between those parties.

Eromdim accepted the bill and Mr Tucker, on behalf of the

partnership, then endorsed the bill to	Doowarf, by way of
payment of the first year's interest due to that company.

Doowarf endorsed the bill to Eromdim.

The third bill had a value of $170,000. It was drawn

by the partnership on Annuity Investments, being the first

year's annuity payment. This bill was accepted by Mr Tucker

on behalf of that company and endorsed to Doowarf. In turn Doowarf endorsed the bill back to Annuity Investments.

The net result of all this activity was, therefore, that all three bills ended up in the hands of the original

drawee, so that no payment actually passed under the bills.

The only money which did pass at the end of June 1982

was the $50,000 paid by the applicants. Their cheques were	t
paid into the bank account of Jimal.	Almost immediately

thereafter that company paid out the same sum to a company
called TransCity Holdings Limited, a "money market manager",
where it was held to the account of Annuity Investments. The
Tribunal found that $30,000 was retained by Annuity

Investments as an "Establishment Cost"; leaving a balance of

$20,000 available for actual investment. This	$20,000
constituted the balance of the	sum of $2,020,000 payable by

the partnership to Annuity Investments as consideration for
the grant of the annuity.

Hr Tucker gave evidence that, on 30 June in each of

the years 1983, 1984 and 1985, he carried out similar "round
robins" with bills of exchange, in order to effect the

payments required by the two loan agreements and the annuity

agreement. The evidence includes a document summarizing the effect, in cash terms, of these transactions. That document

is attached to these reasons as Annexure A. It will be seen

that, apart from the $1 contributed by Jimal in 1982, the

scheme provided for inwards and outwards funds to tally	.,
precisely in each year until 1992. During each of the final
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five years funds of about	$34,000 would accrue to the	~
partners.
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The taxation ramifications of the arrangements are set out in a further document tendered to the Tribunal,

Annexure B to these reasons. The abbreviation "UPP" in the

second line is "undeducted purchase price"; the draftsman

having in mind, we are told,	s.26AAA of the Income Tax
Assessment Act 1 9 3 6 .	The interest deduction is claimed at

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7 8 . 6 1 % of the actual interest charges. It will be seen that the document envisages substantial taxation deductions for each of the four applicants during the first five years, small

deductions during the following five years and very large

taxable receipts over the last five years. The taxable	i'
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receipts range from approximately four to seven times the amount of the available cash income. From a practical point

of view, having regard to the incidence of taxation, it will . _

clearly be advantageous to the applicants to terminate the

arrangement prior to 1992 .

Evidence was given by Mr C 3 R Latham, the consulting actuary who advised in connection with the scheme, that	sum
of $20 ,000 invested free of tax at the rate	of 14% per annum
for a period of 1 5 years would provide sufficient income to

permit a payment out of the fund of $ 1 8 , 9 4 5 in each of the

final five years. An investment of $50,000, upon the same

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assumptions, would therefore yield payments of $ 4 7 , 3 6 2 . 5 0 in

each of those years.

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Annuity Investments Partnership No.18 submitted an >

income tax return for the year ended	30 June 1982. That
return showed income of	$170,000, being the annuity received,

and expenditure of	$494,667, being interest paid of	$360,000
and undeducted purchase price of	$134,667.	The result was a

net loss of $324,667. In their personal returns each of the

applicants claimed, as a deduction, one quarter of this amount. In each case these claims were rejected. In each

case, objections were lodged, but disallowed. Although the

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relevant monetary sums differed a little, the same course of

events occurred in the subsequent relevant	years; thus giving
rise to the	14 appeals to the Tribunal.

The Tribunal's reasons

The principal reasons for decision in the Tribunal were those given by the Deputy President,	Mr C J Bannon QC.
Mr B J McMahon, Senior Member, expressed agreement "with	the

conclusions he" (Mr Bannon) "has reached and with the decision

he proposes". However, Mr McMahon did not state that	he
agreed with the reasons of Mr Bannon, and he added additional

reasons of his own. It is not clear whether or not Mr McMahon

intended that his concurrence in Mr	Bannon's conclusions
should be understood	as also constituting a concurrence in his
findings of fact.	As we will elaborate, this circumstance

causes some difficulties.

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Section 42 of the Adminrstrative Appeals Tribunal Act 1975 provides that a question of I .

law arising in a proceeding

before the Tribunal at which a presidential member is	.-
presiding shall be decided in accordance with the opinion of

I	the	presiding	member.	But a	presiding	member	enjoys	no
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pre-eminence in relation to the facts. In a case where a

board of the Tribunal is constituted by two members, the
concurrence of both members is necessary for an effective

finding of fact.

After dealing in some detail with the documentary evidence and with part of the oral evidence, the learned	I
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Deputy President referred to the actuary's evidence	as to the
benefits of a straight	out investment of $20,000 and went on:

"The question then remains,	what was the
elaborate round robin scheme	of bills of

exchange and associated annuity, partnership

and loan agreements, intended to achieve which

an ordinary investment with a	b nk would not
achieve, apart from some far off possibilities	t
in capital accumulation which	were not fully

revealed to the taxpayers. The obvious answer

is tax deductions for the first five years.

While the round robin mechanism	was not
revealed to the taxpayers, the brochure	...
made it plain that by entering into the
scheme, large deductions from taxable income

were obtainable. ...

While it is clear that the country

accountant's highly artificial scheme	was
expressly designed to achieve large tax deductions in the first five y ars, it does not necessarily follow that this was also the	L
purpose of the taxpayers."	. ,
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After referring to other submissions, NK Bannon dealt

with a submission put	o the Tribunal	on behalf of the
Commissioner:

"Further it was said that on any view of the

evidence the taxpayers never contemplated

having to repay such debts, or having to

include in their assessable income such large

amounts as the scheme projected for its later

years. This appears to be correct. Although

partners are liable for the d bts incurred by

each other in the partnership business, the
members of" (the partnership) "had been
assured in the brochure ... that 'as the annuity value will always exceed any loan

value for the entire term, there cannot be any

further recourse on an investor for further

payments'.	The round robin nature of the
scheme with its creation of periods	of

i	partnership loss and partnership profits	!.
through paper transactions appears to indicate

that the profits at the end of the rainbow are

a mirage, together with the paper debts.
There is no indication on the evidence of any
fund provided by (Annuity Investments) to meet

the projected profits."

At a later stage of his reasons, dealing with the

question whether the case fell within	Part IVA of the Income
Tax Assessment Act, the Deputy President	set out some further
findings of fact regarding purpose:

"Turning now to the provisions of Part IVA of

the Act, this appears to be a case in which 5 .

the taxpayers entered into the annuity schemes !

with the dominant purpose within the meaning

of s.l77A(5) of the Act, for the purpose of

obtaining a tax benefit in connection with	the
scheme and that the scheme falls within	s.177D
of the Act.

The taxpayers' accountant" (Mr McGrath) "said

of the taxpayers: 'From memory they were not
particularly wrapped in insurance company

schemes'. He said he knew nothing about

capital of" (Annuity Investments) "except what
was in the brochure, ... (and it said nothing)." (Me Dunlop's) "account . . . that

the" (Dunlops) "were only interested in the

superannuation cannot be accepted in the light

of his knowledge of the tax benefits ... and

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his failure to inquire about" (Annuity

Investments) "and his claimed dislike of

bear examination. He had been subdividing and	insurance type Superannuation ... does not
selling land and it seems hard to accept that
he was unaware of a possible tax liability. A
slmilar position obtains with" (Mr Fletcher).
negotiated to fall within the financial year ... "The speed with which the agreements were
land sales having occurred, suggest the real ended 30 June 1982 ... and the coincidence of
reason was a tax reason.
It is not acceptable that two builders who have moved into land development, and their accountant, would not concern themselves with
the financial viability of an unknown company,
as against the safety of investing with a
large life assurance company, if superannuation was the real motivation.
Not only does it seem that the dominant purpose of the taxpayers was to obtain the
deductions for interest payments, but it seems
perfectly clear that this was the principal
purpose involved in" (Annuity Investments) "propounding the scheme. This is apparent from the way the annuity scheme is structured
and from the instructions given by the
accountant to" (Mr Latham). "Section 177D
takes into account not only the purposes of
the taxpayers, but also the purpose of a
person referred to in s.l77D(b)(vi), or of
persons who enter into or carry out the
scheme. The accountant's intentions can be
predicated to" (Annuity Investments) "of which
he was a director taking an active role in
management. Having regard to each of the matters set out in s.l77D(b), the conclusion should be drawn that the annuity scheme falls within the section. There appears to be no
reason why the whole of the tax benefit
obtained should not be treated as cancelled
pursuant to s.l77F(l) of the Act.
It appears the proper answer to the taxpayers' objections is that the agreement with"
(Annuity Investments) and the other
agreements to implement the scheme, and the
annuity scheme itself, were carried out with
the dominant purpose of enabling the taxpayers
.	to obtain tax benefits within the meaning of
s.177D of the Act. In any event, the
taxpayers have failed to overcome the onus of

showing the assessments are incorrect."

The case for the applicants, before the Tribunal, was

a simple one.	The applicants said that the disputed amounts
were deductible by them pursuant to s.51	of the Income Tax
Assessment Act as being outgoings incurred in gaining	or
producing assessable income, or necessarily incurred in	. .
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carrying on a business for the purpose of gaining or producing
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such income. The Commissioner contested this claim. He also

raised other arguments: that the transactions were shams,
fiscal nullity, and that the interest payments were outgoings

incurred under a "tax avoidance scheme", within the meaning of

s.82KH(1) of the Act, and were therefore made non-deductible

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by s.82KL. No submission was put to the Tribunal on behalf of the Commissioner to the effect that Part IVA of the Act	r
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applied to the transactions.

AS appears from the passage from his reasons set out

above, the Deputy President disposed of the appeals, in the Commissioner's favour, by resort to Part IVA. He rejected the argument that the transactions were shams. Having regard to the decision of this Court in Oakey Abattoirs Pty Limited v

Commissioner of Taxation (1984)	84 ATC 4718, M r Bannon merely
noted the submission regarding fiscal nullity. Although the

Deputy President referred to the argument relating to	s.51 of	. .
the Act, he linked that matter to ss.82KH	and 82KL.	Taking

the view that the interest payments were not "eligible

relevant expenditure" within the meaning of s.82KH(lF), the

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Deputy President rejected the submission under	s.82KL.
Although he did not expressly say	so, the Deputy President

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I	seems to have regarded that rejectlon as dealing also with the
i	commissioner's argument that s.51 did not apply. M r Bannon l '

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I	did	not	herwise	d al	with	s.51.
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As we have said, Mr NcMahon agreed with the

conclusions of the Deputy President. But, in his separate observations, he indicated a view that, in any event, the

interest payments were not deductible under s.51.

The power of the Tribunal to exercise discretion under

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s.l77F(l)

Part IVA was inserted into the Income Tax Assessment

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-	Act in 1981, applying	-- in place of	5 . 2 6 0 of the Act	-- to	l i i
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transactions entered into on or after 27 May 1981. So it had

potential application to the subject transactions. In the

words of its title, Part IVA deals with "schemes to reduce

income tax".	The term "scheme" is defined by s.177A( 1) as
meaning:

"(a)	any agreement, arrangement,
understanding, promise or undertaking,
whether express or implied and whether or

not enforceable, or intended to be	.:
enforceable, by legal proceedings; and
(b) any	scheme, plan, proposal, action,
course of action or course of	conduct."

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Section 177C explains what is meant in Part IV by the term
"obtaining a tax benefit". It is enough to say that the term

includes a deduction being allowable which would not have been

allowable in the absence of the scheme. Section 177D sets out

criteria for determining whether a particular scheme is one to

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which Part IVA applies. Section 177F gives	to the
Commissioner a discretion to cancel a tax benefit obtained	by
a taxpayer in connection with a scheme to which the Part

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I applies. That section relevantly reads:

"177F(1) Where a tax benefit has been obtained, or

would but for this section be obtained, by a taxpayer in
connection with a scheme to which this Part applies, the

Commissioner may --

(a) ... i

(b) in the case of a tax benefit that is referable to a deduction or a part of a 1.

deduction being allowable to the taxpayer	L .!
in relation to a year of income	--
determine that the whole	or a part of the

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deduction or of the part of the

deduction, as the case may be, shall not

be allowable to the taxpayer in relation

to that year of income,

and, where the Commissioner makes such a determination,

I he shall take such action as he considers necessary to
give effect to that determination.

(2) ...

(3) Where the Commissioner has made a

determination under sub-section (1) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any

taxpayer (in this sub-section referred to	as the
'relevant taxpayer') --

(a) if, in the opinion of the Commissioner --

(i) there has been included, or would	but for this sub-section be
included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and

(ii)it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income,

determine that that amount or that part

of that amount, as the case may	be,
should not have been included	or shall

not be included, as the case may be, in

the assessable income of the relevant

taxpayer of that year of income; or

(b) if, in the opinion of the Commissioner --

(i) an amount would have been allowed or

would be allowable to the relevant

taxpayer as a deduction in relation

to a year of income if the scheme

had not been entered into or carried
out, being an amount that was not

allowed or would not, but for this	'_ /
I .
sub-section, be allowable, as the
case may be, as a deduction	to the

relevant taxpayer in relation to

that year of income; and ..

( i r ) it is fair and reasonable that that

amount or a part of that amount
should be allowable as a deduction
to the relevant taxpayer in relation

to that year of income,

.I

determine that that amount or that part,

as the case may be, should have been

!

allowed or shall be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that

year of income,

and the Commissioner shall take such action as he
considers necessary to give effect to any such

determination.

(4) Where the Commissioner makes a determination

under sub-section (3) by virtue of which an amount is

allowed as a deduction to a taxpayer in relation to a

year of income, that amount shall be deemed to be so
allowed as a deduction	by virtue of such provision of

this Act as the Commissioner determines.

(5) Where, at any time, a taxpayer considers that

the Commissioner ought to make a determination under

i	sub-section (3) in relation to the taxpayer in relation
I	to a year of income, the taxpayer may post to or lodge with the Commissioner a request in writing for the making by the Commissioner of a determination under that sub-section.

(6) The Commissioner shall consider the request

and serve on the taxpayer, by post	or otherwise, a
written notice of his decision on the	request.

!

19.

(7) If the taxpayer is dissatlsfled with the

Commissioner's decision on the request, the taxpayer may, within 60 days after service on the taxpayer of notice of the decision of the Commissioner, post to or lodge with the Commissioner an objection in writing against the decision stating fully and in detail the grounds on which the taxpayer relies.

(8) The provisions of Division 2 of Part V (other

than section 185) apply in relation to an objection made under sub-section (7) in like manner as those provisions

apply in relation to	an objection against an
assessment."
[There was a minor amendment	to s.l77F(7) -- dealing with the
manner of lodgment of objections	-- in 1986. Apart from that

i

change, the current provisions are those in force at all

relevant times.]

We have already set out the passage in the reasons of !

the Deputy President dealing with the application-to the appeals of s.177D. It will be recalled that the Deputy

!
!

president made a finding	"that the annuity scheme falls within	!
t
the section", that is	s.177D.	The Deputy President then went

i.,

on to say that there "appears to be no reason	why the whole of
the tax benefit obtained should	not be treated as cancelled

pursuant to s.l77F(l) of the Act". In other words, the Deputy

President purported to exercise the discretion which is
conferred upon the Commissioner under	s.l77F(l) and to
disallow the claim made by each	of the applicants to deduct
from his or her taxable income one quarter	of the partnership

loss. By reason of flr Mcflahon's concurrence, this became the decision of the Tribunal; so that each of the appeals to the Tribunal was dismissed.

l

'. .

Counsel for the applicants contend that the Tribunal

was not entitled to take that course. They cite two reasons.

Firstly, they say that he task of the Tribunal was to review

the decisions of the Commissioner disallowing the applicants' .,

I

objections to his various assessments. They point out that >.

s.25(4) of the Administrative Appeals Tribunal Act 1975 gives

to the. Tribunal the "power to review any decision in respect

of which application is made to it under any enactment".

Counsel recognize that s.43(1) of that Act provides that "for

the purpose of reviewing a decision, the Tribunal may exercise

all the powers and discretions that are conferred by any	i
relevant enactment on the person who made the decision". But they submit that this provision is limited in its application

!

to powers relevant to the making of the decision under review.

Although counsel concede that, in reviewing the decision	to
disallow an objection, the Tribunal	is empowered to exercise
any discretion available	to the Commissioner in relation to

his decision upon the objection, they contend that s.43(1) does not empower-the Tribunal to exercise a discretion

conferred upon the Commissioner for a different purpose or at

an earlier point of time; namely, at the time of assessment.

I '

Secondly, counsel for the applicants point out that

!

!	the Commissioner himself did not purport	to exercise a	I ,'
, .

discretion under s.l77F(l) in relation to these assessments. I ,

I

In no case did the reasons for disallowlng the objection,	as
set out in the Commissioner's statement under 5.37 of the
Administrative Appeals Tribunal Act, contain any reference	to

s.177F; or to any other provision in Part IVA. No reference

I	.
l

21.

z	-
was made to this	Part during the oral hearing before the

i

Tribunal or in the written submissions supplied to the

l

Tribunal on behalf of the Commissioner. under these

circumstances, say counsel, their clients were accorded no

opportunity to be heard upon the question whether Part IV

applied to the transactions; the finding of the Tribunal

L
!.'

against their clients upon that ground therefore constitutes a	k
contravention of the requirements of natural justice and	an
error of law.

Counsel for the Commissioner concede that no time did their client make a determination against any of the

applicants under s.l77F(l). They further concede that no

I	T
' J

submission was made to the Tribunal in connection with Part

IVA. Notwithstanding those concessions, counsel dispute that it was erroneous in point of law for the Tribunal to decide

the appeals by reference to that Part.

In relation to power, counsel for the Commissioner refer to Re Grolier Enterprises and Australian Postal

i

Commission (1977) 1 ALD 10, Drake v Minister for Immigration

and Ethnic Affairs (1979) 46 FLR 409 and Re Control

Investments Pty Limited and Australian Broadcasting Tribunal

(No.2) (1981) 3 ALD 88. However, those cases contain no

discussion as to whether the powers given by s.43(1) enable the exercise of a discretion vested in the decision-maker at a time earlier than the time of exercise of the decision under

review; although it is relevant to note that, in Control
Investments at p.92, Davies J referred to s.43 as being a

i

2 2 .

:

provision which "extends the authority of the Tribunal so that

I

it may more adequately exercise its function of reviewing on

the merits the subject decision".

As a matter of principle, it must be correct, as

submitted on behalf of applicants, that the powers and

discretions referred to by s.43(1) are the powers and

discretions vested in the original decision-maker for the purposes of making the decision under review. They do not

I

include any powers and discretions which may be vested in the

decision-maker for some other purpose. If authority	be needed
for this conclusion it is	to be found in Repatriation

Commission v O'Brien (1985) 155 CLR 422 at p.429. See also

Secretary, Department of Social Security v Riley (1987)	13 ALD
608.

However, we do not think that it follows that, in the

present case, the Tribunal lacked jurisdiction to exercise the

discretion conferred upon the Commissioner by s.l77F(l).	It
is necessary to examine closely the relevant statutory
provisions. Section 166 of the Income Tax Assessment Act

empowers the Commissioner, from the taxpayer's	return and from
any other information in his possession, to "make an	:
assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon". There is no doubt that, in taking that step, the Commissioner is entitled, in a
proper case, to exercise the discretion conferred upon him	by

s.l77F(l). That latter sub-section specifically provides for including particular sums "in the assessable income of the

. - ..

I . 2 3 . I , , -

I taxpayer" and that a "deduction ... shall not be allowable to

I .I

the taxpayer". Section 185 provides for the making of an

I	I'
I

! objection by a "taxpayer dissatisfied with any assessment".

Thereafter, by virtue of s.186, the Commissioner incurs a duty

to consider the objection, to disallow it or to allow it

either wholly or in part, and to notify the taxpayer of his

..

decision. In considering the objection, the question for the	I .
, . I .
Commissioner is the correctness of the original decision, that question being considered in the light of the terms of the objection but taking account of all the information then available to the Commissioner regarding the amount of the taxable income of the taxpayer and the amount of the tax
payable thereon. It may well happen,	for example, that,

i

between the date of the original assessment and the date of	,.
determination of an objection, new information comes to the commissioner or that there is some change in the relevant law.
Subject to the limitations imposed by	s.170 of the Act, these

,

are matters properly to be taken into consideration by the

Commissioner, in any case, in determining whether	to issue an
amended assessment.	As the issue of an amended assessment is
a possible result of the consideration	by the Commissioner of

an objection to an assessment, it must be appropriate for the

Commissioner to take account of such matters in determining an objection to an assessment.

It follows that, in determining an objection to an assessment, the Commissioner is entitled to make a

determination under s.177F	of the Act; and thereafter to give
effect to that determination	by an appropriate decision under
s.186.

i

24.

I

l
;;

:

By force of s.43 of the Administrative Appeals ::

Tribunal	Act,	the Tribunal has all the powers and discretions	,
that are conferred	by 5.186 of the Income Tax Assessment	Act	l.
!

upon the Commissioner. In exercising those powers and

discretions the Tribunal was bound to consider the facts as 1 :

they	were	proved	in	evidence	before	the	Tribunal,	making	the	!,
I.
i '

decision which, upon that evidence and at that time, was the r~

correct or preferable decision to be made in considering the i

objection. The Tribunal was not confined either to the

material	which	was	before	the	Commissioner,	as	primary	I. ::
I

decision-maker, or the events which had occurred up to that

i

time: see Drake at p.419, Nevistic v Minister for Immigration

I ,

l :

and Ethnic Affairs (1981) 34 ALR 639, Commonwealth v Ford	,.
1.
(1986) 65 ALR 323 at p.328, Freeman v Secretary, Department of	:.1
Social Security (Davies J, 18 August 1988, not reported).	r '
!'~

Once it is understood that, in exercising his powers	! ,
1'
I _ I

under s.186, the Commissioner would have been free to exercise

!

a discretion under s.177F of the Income Tax Assessment Act, it

i '

follows that, in reviewing the Commissioner's decision under

!.

s.186, the Tribunal is free to exercise that same discretion 3 .

if, upon the material then before	it, it seems proper to take	. I
that course.

In coming to that conclusion, we appreciate that

I I

s.l77F(3)-(8)	provides a regime whereunder the Commissioner	!
:. L '
may make compensating adjustments in respect to any	t xpayer.	, i
; .I
c .
That taxpayer may	be a person different from the taxpayer in	L
i .

connection with whose affairs a determination has been made f

! .	r	25.
'	.	I

under s.l77F(l).	In a case where the requisite adjustment is
to an assessment which is before	the Tribunal at the time of

I
I

the exercise by it of its discretion under s.l77F(l), we see

!

no difficulty about the Tribunal making the adjustment. The

I

Tribunal would only be doing what	the Commissioner could
himself do in connection with that assessment	a the time of

I	considering	the	objection.	In a	case	where	the	requisite
I

adjustment needs to be made to an assessment not before the

Tribunal -- either because it relates to some other taxpayer

or to some other year of income	-- the Tribunal could not
itself make an adjustment under s.l77F(3).	But we see no
difficulty about the Commissioner following	up the decision of

the Tribunal by making the appropriate adjustment, in the same
way as he would do if he himself had made the original

s.l77F(l) determination.

Upon the view just expressed, the current position similar to that which applied during the period in which the	is
jurisdiction to review taxation determinations	was vested in
Boards of Review constituted under the provisions	f Div.1 of
Pt.V of the Income Tax Assessment Act.	Those provisions were

repealed in 1986, at the time when jurisdiction in taxation	t..
matters was conferred upon the Administrative	Appeals

;

Tribunal. Section 193(1), which was also repealed at that I . ~'

time, formerly provided that, for the purposes	of reviewing
decisions of the Commissioner under the	Act "the Board shall

... have all the powers and functions of the Commissioner in

making assessments, determinations and decisions under this

Act, and such assessments, determinations and decisions of the

I '

I

26.

I	Board, and its decision upon review, shall for all purposes (except for the purpose of objections thereto and review
thereof and appeals therefrom) be deemed to be assessments, ! ,

r .

determinations or decisions of the Commissioner".

, -

I '

In our opinion the Tribunal did not	err in law in	, ..
'. I

holding, in the present case, that it had jurisdiction to
determine under s.177F that the deductions claimed by the
applicants should not be allowable in the relevant year of

income.

Procedural fairness

we turn to the second question arising in connection

with Pt.IVA:  whether, in making a determination under

s.l77F(l), the Tribunal denied the applicants natural justice;

or, to use the modern terminology, procedural fairness.

In Mobil Oil Australia Pty Limited v Commissioner of

Taxation (1963) 113 CLR 475 at p.502 Kitto J discussed whether

:-.

the Boards of Review were legally bound to conform to the

principles of natural justice in making a determination of I

taxable income under s.136 of the Income Tax Assessment Act.

In so doing his Honour said:

"It is beyond question that in the ordinary

kind of case a Board of Review is not under

such an obligation, for its function is merely	I	'
to do over again (within the limits of the taxpayer's objection) what the Commissioner

I did in making the assessment -- not to give a

decision affecting the	taxpayer's legal
situation, but to work	out, as a step in

administration, what it considers that

situation to be.	The Board is 'in the same
position a5 the commissioner himself',	as the

i Privy Councll sald in Shell Co. of Australia
Ltd. v Federal Commissioner of Taxation [l9311

!

A.C. 275, at p.298; (1930) 44 C.L.R. 530, at

p.545. It is 'only another executive body in

an administrative hierarchy':

Federal Commissioner of Taxation

C.L.R. 206, per Rich and Dixon JJ."

I '

However, the law relating to procedural fairness has evolved considerably since 1963, to the point where Mason I ' I

J

was able to say, in Kioa v West (1985) 159 CLR 550 at p.584:

"The law has now developed to a point where it

may be accepted that there is a common law
duty to act fairly, in the sense of according
procedural fairness, in the making of
administrative decisions which affect rights,
interests and legitimate expectations, subject
only to the clear manifestation of a contrary

statutory intention."

Mason J went on, at p.585, to speak of the expression

"procedural fairness" as conveying "the notion of a flexible

obligation to adopt fair procedures which are appropriate and

adapted to the circumstances of the particular	case".
We see no reason to doubt that the obligation procedural fairness, understood in the sense explained	f
by

I

I.'.

Mason J, applies to the proceedings of the Administrative	,
Appeals Tribunal, in a taxation case as much as in any other

case. The duty of the Tribunal can be likened to that of a . 1.

court. In Drake, Bowen CJ and Deane J, at p.419, commented

that, in its proceedings, the Tribunal "is obliged to act

judicially, that is to say, with judicial fairness and

detachment."	The duty of a court has been discussed in two
recent decisions of the High Court.	The first case, Stead v

State Government Insurance Commission (1986) 161 CLR 141, was

l

' t one in which the trial judge had stopped counsel addressing

I I

upon a particular issue only, eventually, to find against his

i

1 submission upon that issue. At p.145 the Court said:

"The general principle applicable in the

present circumstances	was well expressed by
the English Court	of Appeal (Denning, Romer
and Parker L.JJ.1	in Jones v National Coal

Board [l9571 2 QB 55, at p.67, in these terms:

'There is one thing to which everyone

in this country is entitled, and

that is a fair trial at which he can

put his case properly before the
judge. ... No cause is lost until the judge has found it so; and he

cannot find it without a fair trial,
nor can we affirm it.'

That general principle is, however, subject to an important qualification which Bollen J. plainly had in mind in identifying the

practical question as being:  Would further

information possibly have made any difference?

That qualification is that an appellate court

will not order a new trial if it would
inevitably result in the making of the same

order as that made by the primary judge at the

first trial.	An order for a new trial in such
a case would	be a futility.

I

For this reason not every departure from the

rules of natural justice at a trial will entitle the aggrieved party to a new trial.

BY way of illustration, if all that happened

at a trial was that a party	was denied the
opportunity of making submissions	on a
question of law, when, in the opinion	of the
appellate court, the question	of law must

clearly be answered unfavourably to the

aggrieved party, it would	be futile to order a
new trial.	"

! i;

In The Queen v Lewis (1988) 62 ALJR 340 a complaint

was made by the Crown that it had been denied natural justice	r
by the Northern Territory Court	of Criminal Appeal. One of

the grounds of the complaint was that the Court had decided

the respondent's appeal upon a ground which was not agitated

' S

I'

before it and in relation to which the Crown had been given no

I
I

I	opportunity to be heard. The High Court upheld this ground,
i	holding that the Court of Criminal Appeal had allowed the respondent's appeal upon a substituted ground of appeal upon
which the Crown had no opportunity to present submissions. At I .
p.342 the Court said:

"It is no answer to say that the Crown had had

an opportunity to address submissions with

respect to the 'totality' of the	evidence	I
! C

because that word was used in the respondent's L .

grounds of appeal in relation to the conduct	!
of the trial and was to be seen	as having

particular reference to the manner in which

his defence had been conducted. Once it be i

conceded, as in our view it must be, that the

Crown counsel was denied an opportunity to make a general summation of the evidence with a view to demonstrating that notwithstanding

the submissions advanced for the respondent

the verdict was neither unsafe nor

unsatisfactory, then it must follow that the

proceedings were marked by a serious
irregularity in procedure whereby the Crown

was denied natural justice."

As we have already mentioned, in the present case it ..

is conceded that at no time prior to, or during, the hearing

before the Tribunal was any reference made to Part IVA of the

Act.	Although the objections to the various assessments
submitted by Mr McGrath on behalf of the applicants had
included, as one of 18 grounds of objection,	an assertion that
Part IVA of the Act did not apply to the transaction,	the

Commissioner at no time indicated any intention to rely upon

this Part.	Nor did the members of the Tribunal give any
indication to the applicants that the Tribunal might determine	..

I * -"

i

the appeals by reference to that Part; as they were entitled

to do notwithstanding that the Commissioner himself had not
raised Part IVA.

It is not clear to us that the applicants would have ! .

adduced additional evidence in order to resist a case made	L ’
under Part IVA. Indeed	it is not easy to see what additional
evidence could usefully have been led.	But, because the

matter was not raised, the applicants and their advisers had
no opportunity to consider this question. We are not in a

position to conclude that there was no possibility that

material evidence could have been led. Moreover, as both

Stead and Lewis demonstrate, the question whether procedural fairness has been denied does not depend upon the question whether material evidence has been lost. The opportunity of

making relevant submissions is an important ingredient of a

fair trial. This statement is true in all cases;

notwithstanding that there may be cases in which the grant of

a new trial is unnecessary or futile.

I..
I

The discretion committed to the Commissioner, and on

appeal to the Tribunal, under s.l77F(l) arises only after
facts are found which correspond with the conclusions set out

in s.177D.	By reason of the course which was taken, the
applicants had no opportunity to put submissions to the
Tribunal as to whether such findings should be	made.

Moreover, even when appropriate factual findings are made, S -

liability under Part IVA does not automatically arise. It is

; ,”

incumbent upon the Commissioner or, on review, the Tribunal to	I
consider whether, as a matter of discretion, a determination
under s.l77F(l) ought to be made.	Unless the exercise of

discretion is affected by demonstrable error of law, a person

i

i

against whom the Tribunal exercises the dlscretlon granted by

' I	I	s.l77F(l) is exercised	has	no	redress.	It is, therefore,	of
i	fundamental	importance	that	such	a person	have	afair

opportunity of putting to the Tribunal any available arguments

i

i	against that exercise. Necessarily, this involves notice to
l	~	the person of the possibility of the Tribunal applying Part
!	IVA .

In our opinion the course taken in the present case

involved a denial to the applicants	of procedural fairness.
Prima facie the matter ought to	be remitted to the Tribunal
for further consideration at	a hearing at which all parties

will have a proper opportunity to address the possible

application to the case of	the provisions of Part IVA of the
Act.
The notice of contention

However, counsel for the respondent contend that, in

the special circumstances of this case, that course ought not

L -

. .

to be taken.	They argue that, upon the findings made by the	I '
I'

Tribunal, the respondent was, in any event, entitled to

I succeed; so that a remission to the Tribunal would be futile.

By a notice of contention they raise again the four grounds

argued before the Tribunal.

l In relation to the first two grounds, that the

transactions were shams and fiscal nullity, it is sufficient

for us to say that we see no legal error in what	was said by
the Deputy President, and adopted by M r McMahon.

. .

As we have already said, the Deputy President held

that the interest payments were not "eligible relevant

expenditure" within the meaning of	s.82KH(lF), so that s.82L
had no application. It will assist the understanding of	Mr
Bannon's	reasoning if we refer to the relevant statutory

provisions.

Division 3 of the Income Tax Assessment Act deals with deductions from taxable income. Subdivision D

(ss.82KH-82RL) is headed "Losses and Outgoings Incurred under

..

Certain Tax Avoidance Schemes". The Subdivision appears to be	..
intended to create an exception to the entitlement of

I taxpayers to deduct from their taxable income expenditure
which, in the absence of the Subdivision, would be deductible
from that income. Regrettably, in pursuit of that objective,
the Parliament has found it necessary to enact provisions of

:
I ,

a length and obscurity which are noteworthy even	by the	I
i'

Byzantine standards of this Act.

Section 82KH 1s a lengthy interpretation section. In

sub-s.(l) the term "relevant expenditure" is defined as

meaning, in relation to a taxpayer, expenditure, or a loss or
outgoing, falling within one or more of the 20 paragraphs in

the definition. These paragraphs include (d) and (W), as

< '

follows:

: -

"(d) a loss or outgoing incurred by the ' .

taxpayer in respect of interest to the	I
extent to which	a deduction would, apart

from section 82KL, be allowable to the taxpayer under section 51 in respect of the loss or outgoing;

...

(W) a loss or outgoing (other than a loss or

outgoing referred to in sub-section

5 2 A ( 1 ) or to which a preceding paragraph

of this definition applies) incurred by

the taxpayer to the extent to which a
deduction would, apart from section 0 2 K L ,
be allowable to the taxpayer under
section 51 in respect of the loss or

outgoing;"

The term "tax avoidance agreement" is also defined,

as follows:

"'tax avoidance agreement' means an agreement

that was entered into or carried out for the
purpose, or for purposes that included the
purpose, of securing that a person who, if the
agreement had not been entered into or carried
out, would have been liable to pay income tax
in respect of a year of income would not be
liable to pay income tax in respect of that
year of income or would be liable to pay less
income tax in respect of that year of income
than that person would have been liable to pay
if the agreement had not been entered into or

carried out;"

Sub-section (1F) of s.02Kl-l defines the term "eligible

relevant expenditure":

"(1F) For the purposes of this Subdivision, an

amount of relevant expenditure incurred by a taxpayer

shall be taken to be an amount of eligible relevant

expenditure if--

(a) that amount of relevant expenditure was
incurred after 24 September 1978 by
reason of, as a result of or as part of a
tax avoidance agreement entered into
after that date;

I

I, .

(b) by reason of, as a result of or as part

of the tax avoidance agreement the
taxpayer has obtained, in relation to

that relevant expenditure being incurred,

a benefit or benefits in addition to--

! (i) in a case to which sub-paragraph

i ( i i ) does not apply--

l

( A ) the benefit in respect of which

the relevant expenditure was

incurred; and

(B) any benefit that resulted

directly or indirectly from the

benefit in respect	of which the
relevant expenditure was	' .
incurred and'is a benefit that,	i

i	in the opinion of the
Commissioner, might reasonably
be expected to have resulted if I '
the benefit in respect of which ! '
the relevant expenditure was incurred had been obtained otherwise than by reason of, as
a result of or as part of a tax avoidance agreement; or

(ii) in a case where the relevant

expenditure is relevant expenditure

to which paragraph (W) of the ,

definition of 'relevant expenditure'
in sub-section (1) applies -- any
benefit that resulted directly or

indirectly from the incurring of the

relevant expenditure and is a

benefit that, in the opinion of the

Commissioner, might reasonably be

expected to have resulted if the relevant expenditure had been

incurred otherwise than by reason

of, as a result of or as part of a
tax avoidance agreement; and

8 .

(c) in a case where	the relevant expenditure
is relevant expenditure to which	i ?
paragraph (S), (v) or ( W ) of the	I '
definition of 'relevant expenditure' in

! sub-section (1) applies -- that amount of

relevant expenditure was incurred by

reason of, as a result of or as part of a
tax avoidance agreement entered into
before 28 May 1981."

Sub-section (1G) provides that the reference, in

sub-s.(lF), to the benefit in respect of which relevant
expenditure was incurred by a taxpayer shall be read, in the
case of relevant expenditure incurred by the taxpayer in
respect of interest, as "the availability to the taxpayer of

I 35.

- 1

. I

the money borrowed by the taxpayer." It appears, therefore,

I

I that particular expenditure, incurred in respect of interest,

is "eligible relevant expenditure" if:

(a) it was incurred after 24 September 1978

by reason of, or as a result of or as

part of, a tax avoidance agreement

entered into after that date; and ? .
(b)	it provided a benefit to the taxpayer

travelling beyond the availability of the

money borrowed by the taxpayer and any

concomitant benefit that might be

expected to occur, in the absence of a

tax avoidance agreement.

Section 82KL is the critical provision in Subdivision D. Sub-section (1) provides:

"(l) Where the sum of the amount or value of the

additional benefit in relation to an amount of eligible

relevant expenditure incurred by a taxpayer and the
expected tax saving in relation to that amount	of

eligible relevant expenditure is equal to or greater

than the amount of the eligible relevant expenditure,

notwithstanding any other provisions of this Act but

subject to this section, a tax benefit is not and shall
be deemed never to have been, allowable in respect of
any part of that amount of eligible relevant

expenditure."

It is not necessary to refer to the remainder of the section,	I --
which deals with specific cases and procedural matters. It is	..
enough to note the principle enshrined in	sub-s.(l), which has
the effect of requiring the sum of the amount	or value of the

. . , 36.

( -

. l

additional benefit and the expected tax saving in relation to

I

the eligible relevant expenditure to be measured against the

I amount of eligible relevant expenditure. If those benefits

I exceed the eligible r levant expenditure, that expenditure

ceases to be an allowable deduction.

L '

Me Bannon dealt with the issue arising under Subdivision D in the following manner:

"It was submitted that the taxpayers were not entitled to deductions pursuant to s.51 of the

Income Tax Assessment Act, 1936 (Cth.) ('the

Act') because of the provisions of Subdivision D of~Division 3 of the Act. The definition of 'relevant expenditure' in s.82KH(1) includes

expenditures coming within s.51 and it would seem s.82KH(l)(d) would specifically apply, and in any event, ~.82KH(l)(w) would bring the

deductions claimed within the definition.
Again the scheme for the annuities agreement
clearly falls within the definition of 'tax
avoidance agreement' in s.82KH(1). Learned

Counsel then argued that an additional benefit

pursuant to ~.82KH(lF)(b)	of the Act arose by
reason of s.82KH(lJ) in that interest was payable under a tax avoidance agreement	' .I
, .
satisfying sub-section (a) thereof, a debt
became owing by the taxpayers within the terms	i
of sub-section (b)(i) thereof and that
,

sub-section (c) was satisfied because it may ! :

reasonably be expected that either by reason
of or as part of the tax avoidance agreement

'D' and/or 'E' would release the partnership

from the debt	and/or debts.
Further it was said that on any view of the

evidence the taxpayers never contemplated
having to repay such debts, or having to
include in their assessable income such large

amounts as the scheme projected for its later

years. This appears to be correct. Although

partners are liable for the debts incurred by

each other in the partnership business, the I

:	members of" (the partnership) "had been	L .
assured in the brochure ... that 'as the	L
annuity value will always exceed any loan
value for the entire term, there cannot be any
further recourse on an investor for further	...

payments'. The round robin nature of the

scheme with its creation of periods of l _ ,

partnership loss and partnership profits

I

I

I.   31.

:  l

!
:.

through paper transactions appears to indicate	._
that the profits at the end of the rainbow are
a mirage, together with the paper debts.
There is no indication on the evidence of any
fund provided by" (Annuity Investments) "to
meet the projected profits.	, -
However, in order to come within s.82KH(lF) of the Act it is necessary for the taxpayer to obtain a benefit or benefits under ~.82KH(lF)(b)(l) which is in addition to the benefit in respect of which the relevant
expenditure was incurred. If	Counsel's

argument is correct, neither the debt would be
enforced, nor would the annuity be paid,
therefore there would be no ostensible

benefit, i.e. annuity payments, in respect of

which the relevant expenditure was incurred to	..
which the tax benefits would be additional. Under ~.82KH(lF)(b)(ii) it does not seem possible to predicate that the first five years of interest deductions would have been available if the relevant expenditure had been
incurred otherwise than by reason	of, as a

result of or as part of a tax avoidance

agreement. The note at para.23-010 p.14504 of

the Vo1.3 Australian Federal Tax Reporter

(CCH) appears to be correct where it says:

'Subdivision D of Div.3 (ss.82KH to 82KL)

also contains provisions which may

operate to deny deductions otherwise

allowable under s.51. That Subdivision

applies to deny a deduction where the loss or outgoing in question has been incurred under tax avoidance schemes

designed to gain the benefit of the
deduction without actually incurring any
real detriment in terms of expenditure

incurred.'

In the present cases the taxpayers did incur

real detriment in terms of expenditure incurred. They paid out $50,000. Therefore it appears that they do not come within

Subdivision D of Div.3 of the Act."

We prefer not to debate the correctness of the CCH note cited by the Deputy President, although we point out that

the authors	of this note refer to "any -	real detriment in terms	i:
I '

of expenditure incurred'!, thus suggesting that they were

I

. _ 38.

. ' l L -

:  I

(rightly) addressing the true, as distinct from apparent or

i

1. theoretical, position of the taxpayer. The better course is

to attempt to apply the legislation itself to the facts of the

case. Once it be found, as the Deputy President did find, that each of the subject interest payments was "relevant

expenditure" made under a "tax avoidance agreement" -- and

there being no doubt that all material events occurred after

2 4 September 1978 -- the first question is whether para.(b) of

s.82KH(lF) is satisfied. Insofar as the expenditure falls

within para.(d) of the definition of "relevant expenditure"
this question is to be answered by reference to sub-para.(i)
of the paragraph. The taxpayers obtained the benefit referred

to in sub-sub-para.(A), that is the availability of the money

borrowed. The question, then, is whether they also obtained an additional benefit other than one which, in the opinion of

I'

the Tribunal (standing in the shoes of the Commissioner),

might reasonably be expected to have resulted if that / -

availability had been obtained otherwise than by reason of, or as a result of, the tax avoidance agreement. In our opinion,

it would have been open to the Tribunal to hold that there was

such a benefit, namely the immunity from personal liability	to
repay the borrowed moneys and the capacity to bring all of the
transactions to an end before any	net taxable income was

I-

? .

earned; the loan transaction therefore offering extraordinary

taxation benefits.

In our respectful opinion the Deputy President

misdirected himself in asking whether the applicants incurred
any detriment in entering the transaction. This was not the

.'

i	relevant question.	It is not inconsistent w ~ t h	the
I

I	application of s.82KL to a particular transaction that such	a
i	transaction may have involved	a payment of money or some other

element which, considered alone, is detrimental to the

i

i taxpayer. The question which needed to be addressed was the

application of para.(b)(i)(B), as outlined above. We add

that, if the matter be considered under pa a.(w) of the '.

definition of "relevant expenditure", the last	question which
we have mentioned still arises.

i

i :

For the reasons outlined, it seems to us that it

would have been open to the Tribunal to find that the interest

payments fell within the definition	f "eligible relevant
expenditure".	As Mr Bannon appreciated, the question would

then arise as to the application of s.82KL. Nothing has been

said by the Tribunal upon that matter.

It is not possible for us finally to dispose of the claim made by the Commissioner in reliance	upon Subdivision D.
Having regard to such findings of fact	as have been made it is

not possible, as a matter of law, to exclude that claim. But

neither is it possible to uphold that claim. The necessary
findings of fact, both under	s.82KH(1F) and s.82KL, have yet

to be made. If the case is remitted to the Tribunal, this is

I	a matter which may be further addressed and the requisite
findings made.
The remaining point taken by the Commissioner in his notice of contention relates to s.51. As we have said, the
Commissioner disputes that, upon ordinary principles, the

i ' interest payments are deductible under s.51. Mr HcMahon

accepted the commissioner's argument in relation to this

:

aspect of the case. M r Bannon did not, but this appears to be

,.

because he regarded it as intertwined with the question of the	I '
application of Subdivision D.	With respect, this approach was
erroneous. If the payments are not deductible under	s.51,

that is the end of the matter. The taxpayers' appeals must

fail.	The possible application of Subdivision D does not
arise.

There are findings in Mr Bannon's decision which .. .~

suggest that, if he had correctly addressed the question of the application of s.51, Hr Bannon may have shared the view

expressed by Mr McMahon. We have in mind, in relation to the

objective facts, the passage in Mr Bannon's reasons in which he asked himself the purpose of "the elaborate round robin. scheme of bills of exchange and associated annuity,

partnership and loan agreements" and his reply "tax deductions
for the first five years". This, he thought, was the express

purpose which the "highly artificial scheme" was designed to

achieve.	As
to subjective purpose, the Deputy President accepted as a fact that "the taxpayers never contemplated

having to repay such debts, or having to include in their

assessable income such large amounts as the scheme projected

for its later years". He referred to the income to be derived I -.

under the scheme as "a mirage", plainly accepting that the	L '
applicants contemplated taking steps	-- as they easily could

-- to terminate the annuity before any substantial income was

earned; at which time, ironically, the annuity would become , '

unprofitable to them.

' d

::

41.

However, the findings made by Mr Bannon were made in

the context of a consideration of the question whether the

transactions fell within Part IVA. The Deputy President was

not addressing the questions which arise under s.51.	Those
questions must also be remitted to the Tribunal.
Orders

,"

In the result we propose to allow the appeal, to set

aside the decision of the Tribunal and to remit the case to
the Tribunal for further hearing. Section 44(5) of the
Administrative Appeals Tribunal Act gives to the Court a

I .

discretion upon the question whether there shall

be fresh

evidence at that hearing. We prefer to leave this matter to
the discretion of the Tribunal, to be exercised after hearing
the submissions of the parties. It is not obvious to us that
any useful further evidence would be available but this
impression may be erroneous. Particularly if any additional

evidence is relevant to Part IVA, it would seem appropriate to

I

permit it to be adduced.

As to costs, the applicants have been successful in

persuading the Court to set aside the decision of the Tribunal

dismissing their appeals to that body. Whatever may be the

ultimate outcome of the case, they are prima facie entitled to

recover their costs in this Court. However, the Commissioner

! :

has also been successful, in challenging the adverse decisions

of the Tribunal in relation to Subdivision D and s.51. These

I '

42.

i

I	matters of contention occupied	a significant proportion	of the
I

hearing time. Under the circumstances we think that justice

I would be done if we ordered the Commissioner to pay to the

I. .:

I applicants one half of their costs of this appeal. ..

I certify this and the forty-one (41)

preceding pages to be a true copy of

the Reasons for Judgment	of the Court.
Associate:	R 'eh.
Date:	14 October 1988

Counsel for the Applicants: Mr A J Myers QC with

Mr B R Pape

Solicitors for the Applicants:  J W walker .S D K L Raphael !

I	Counsel for the Respondent:	Mr J M N Rolfe QC with
Mr D B McGovern

Solicitors for the Respondent: Australian Government Solicitor

i	hearing:	Date(s)	of	2 and 3 June 1988
!
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