Green and Commissioner of Taxation
[2008] AATA 1116
•15 December 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 1116
ADMINISTRATIVE APPEALS TRIBUNAL )
) No WT2004/225
TAXATION APPEALS DIVISION ) Re CRAIG ERIC GREEN Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr S E Frost, Member Date15 December 2008
PlacePerth
Decision The objection decision is varied so as to reduce Mr Green’s taxable income for the year ended 30 June 1997 by $12,000.
………….....[sgd]..................
Mr S E Frost
Member
CATCHWORDS
TAXATION – income tax – deductions – “tax effective” scheme – Part IVA – amended assessment made more than four years, but less than six years, after the original assessment – Commissioner disallows deductions under s 51(1) but in the alternative makes a determination under Part IVA – whether deductions “allowable” – taxpayer seeks to abandon claim that expenditure is deductible – burden of proof – whether taxpayer can succeed in his claim “by default” – amendment of grounds of objection – use to be made of lead cases previously determined by the Tribunal – objection allowed in part – objection decision varied
Income Tax Assessment Act 1936 – s 51(1), 170, 177G(1), Part IVA
Taxation Administration Act 1953 – s 14ZZK, 14ZY
Vincent v Commissioner of Taxation (2002) 124 FCR 350; [2002] FCAFC 291
Burrows and Commissioner of Taxation [2007] AATA 1467
Miniello and Commissioner of Taxation [2007] AATA 1470
Richards and Commissioner of Taxation [2007] AATA 1471
Secretary, Department of Social Security v Hodgson (1992) 108 ALR 322; [1992] FCA 338
Commissioner of Taxation v Hornibrook (2006) 156 FCR 313; [2006] FCAFC 170
Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation [2005] FCAFC 244
Commissioner of Taxation v Hornibrook (2006) 61 ATR 573; [2006] FCA 9
McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284
Sargent v ASL Developments [1974] HCA 40; (1974) 131 CLR 634
Puzey v Commissioner of Taxation [2003] FCAFC 197; (2003) 131 FCR 244
Commissioner of Taxation v Sleight [2004] FCAFC 94; (2004) 136 FCR 211
Commissioner of Taxation v Cooke [2004] FCAFC 75; (2004) 55 ATR 183
REASONS FOR DECISION
15 December 2008 Mr S E Frost, Member Introduction and Background
1. In the 1997 income year, some 1,430 licences were sold to participants in what was thought to be a “tax effective” scheme, known as the Oracle International Project (“the Project”). Craig Green purchased seven licences in the Project. He claimed deductions totalling $292,000 in relation to the Project. Those deductions were eventually disallowed by the Commissioner. The Commissioner’s reasoning on the disallowance was that Mr Green’s expenditure was not deductible under s 51(1) of the Income Tax Assessment Act 1936 (“the Act”) or, alternatively, if it was deductible, then Part IVA of the Act (the general anti-avoidance provisions) operated to disallow the deduction.
2. It seems that the Commissioner’s reasoning failed to appreciate that, by the time the action was being taken to disallow the deduction and to make an amended assessment, more than four years had passed since the making of the original assessment. The significance of this is that, in relation to the 1997 income year, the general rule in s 170 of the Act was that assessments could not be amended outside the four-year timeframe. An exception to this general rule was provided by s 177G(1) of the Act, which allowed six years, rather than four, for the amendment of an assessment “for the purposes of giving effect to subsection 177F(1)” – in other words, to give effect to a Part IVA determination. (The circumstances in which a Part IVA determination might be made are set out in [8] below.)
3. Mr Green evidently instructed his tax agents to prepare an objection against the amended assessment. The objection, signed by Mr Green and dated 20 August 2003, urged the Commissioner to reduce Mr Green’s taxable income by the $292,000 which had been added as a consequence of the disallowance of the deduction. There were 28 grounds upon which the taxpayer relied. The very first ground was that:
The Said Sums are allowable deductions under the provisions of section 8-1 of the Income Tax Assessment Act 1997 (the “ITAA97”).
4. (It is common ground that the reference to s 8-1 of the 1997 Act should have been a reference instead to s 51(1) of the 1936 Act.)
5. There followed in the notice of objection a range of other grounds, many of them making factual assertions about the taxpayer’s activities or actions during the relevant income year, about the expenditure itself, or about the reasons for the expenditure. The twenty-seventh ground was that:
Alternatively, if the deduction is not allowable then because the amended assessments have been raised more than four years after the date of the original assessment, the amended assessments are invalid or excessive or of no effect.
6. The objection was disallowed in full. Mr Green has applied to the Tribunal for review of the objection decision.
7. The Taxation Administration Act 1953 (“the Administration Act”) provides relevantly as follows, in s 14ZZK:
On an application for review of a reviewable objection decision:
(a)the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b)the applicant has the burden of proving that:
(i)if the taxation decision concerned is an assessment (other than a franking assessment)—the assessment is excessive; …
Summary of Part IVA
8. Part IVA of the Act applies to certain “schemes” that have been entered into or carried out by taxpayers, but only if, among other things, the taxpayer has obtained a tax benefit in connection with the scheme: s 177D(a) of the Act. One of the circumstances in which a taxpayer will have obtained a tax benefit is where a deduction is allowable to the taxpayer but it would not have been allowable if the scheme had not been entered into: s 177C(1)(b) of the Act. The question posed by that provision is whether a deduction is “allowable”, rather than “allowed”. If, although the deduction has been “allowed”, it is not truly “allowable”, then there can be no tax benefit: Vincent v Commissioner of Taxation (2002) 124 FCR 350; [2002] FCAFC 291.
Previous consideration of the Project by the Tribunal
9. A set of so-called lead cases in relation to the Project, dealing with the question whether three participants in the Project were entitled to deductions against their assessable income, was heard by the Tribunal, constituted by Senior Member Sweidan, in 2007. In those cases the Tribunal decided that the expenditure incurred by the taxpayers was deductible under s 51(1) of the Act, but that Part IVA of the Act operated to disallow the deductions except to the extent of the cash payments that the taxpayers made: Burrows and Commissioner of Taxation [2007] AATA 1467; Miniello and Commissioner of Taxation [2007] AATA 1470; Richards and Commissioner of Taxation [2007] AATA 1471.
The current proceedings
10. There is an interesting twist in this case. That is that, because of the time limits imposed upon the Commissioner’s ability to amend an assessment, both the taxpayer and the Commissioner are taking positions that appear to be against their respective interests.
11. It has been in the interests of the taxpayer to assert that his expenditure is not allowable as a deduction. He originally sought to do that by abandoning the claim that he made in his tax return (and also the first ground of the objection that he made against the amended assessment) that the expenditure was allowable as a deduction, and suggesting that he offer no evidence at all in relation to his purchase of the seven Oracle licences. This seems to have been done in the hope that in the absence of any evidence to support a finding of deductibility, the Commissioner would be deprived of the opportunity to assert that a tax benefit had been obtained, the Part IVA determination would lose its foundation, and the amended assessment would necessarily be found to be excessive: see Vincent v Commissioner of Taxation (2002) 124 FCR 350; [2002] FCAFC 291.
12. Faced with that potential outcome, the Commissioner has been forced to argue in favour of the allowability of a deduction – distinctly unfamiliar territory for the Commissioner – so as to establish a proper foundation for the tax benefit and, consequently, for the Part IVA determination.
13. On the first hearing day, Mr Ross, who “spoke on Mr Green’s behalf”, said this (Transcript, page 1):
As I understand it the respondent issued an amended assessment on the basis that the deduction claimed by Mr Green is not allowable under the provisions of section 51(1) of the Income Tax Assessment Act. If the deduction is not allowable under section 51(1), then the provisions of Part IVA do not apply. Mr Green has not challenged the Commissioner’s decision on the deduction not being allowable. He accepts that the deduction is not allowable under section 51(1), and he has not appealed to this Tribunal for the Commissioner’s decision on deductibility to be reviewed.
14. Mr Ross’ statement reflected what was set out in paragraph (viii) of Mr Green's “witness statement” dated 29 May 2007 (Exh A1), as follows:
…
·the Respondent has concluded that the Oracle deduction is not allowable;
·I have not appealed and do not appeal the Respondent’s conclusion;
·the issue of deductibility is therefore not before the Tribunal for determination;
…
15. Some, at least, of what Mr Ross said ([13] above) must be rejected. The decision of which Mr Green has sought review by the Tribunal is the Commissioner’s objection decision. The objection decision (s 14ZY(2) of the Administration Act) was a decision to disallow Mr Green’s objection. It is that decision as a whole that is before the Tribunal, and it is not open to the taxpayer, or to the Commissioner, to restrict the Tribunal in the exercise of its powers in the way that Mr Ross suggested.
16. As Hill J said in Secretary, Department of Social Security v Hodgson (1992) 108 ALR 322; [1992] FCA 338, at 330 [26]:
Where [the Tribunal’s] jurisdiction is enlivened by an application to review an administrative decision it exists to do again, within the limits of the review, that which the decision maker was entrusted to do.
17. Here, “that which the decision maker (that is, the Commissioner) was entrusted to do” was to decide whether to allow Mr Green’s objection, either wholly or in part, or to disallow it: s 14ZY(1) of the Administration Act. He decided to disallow it. The Tribunal’s jurisdiction, enlivened by Mr Green’s application, exists “to do again” what was entrusted to the Commissioner – in other words, to decide to allow the objection, either wholly or in part, or to disallow it. Hill J’s qualification, inherent in the words “within the limits of the review”, means nothing more than that the Tribunal’s exercise of the powers and discretions of the Commissioner must be undertaken “for the purpose of reviewing [the decision under review]”, in accordance with s 43 of the Administrative Appeals Act 1975 (see Commissioner of Taxation v Hornibrook (2006) 156 FCR 313; [2006] FCAFC 170, especially Gyles J’s reference at FCR 320 [18] to the Full Court decision in Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation [2005] FCAFC 244, also referred to by Edmonds J at first instance in Commissioner of Taxation v Hornibrook (2006) 61 ATR 573; [2006] FCA 9 at 579 [21]).
18. It is also necessary to correct the apparent misunderstanding that is evident in Mr Green’s witness statement. It is not correct to characterise the Commissioner’s action at the objection decision stage as a “conclusion” that there is no deduction allowable. At that stage the Commissioner has not “concluded” anything – he has simply formed a view that no deduction is allowable. If the view is correct, then there is no deduction, but if it is wrong, then the deduction is allowable. The view itself, however, does not provide a definitive answer to the question, and the expression of the view does not provide a “conclusion” to the issue.
19. Ms Price, for the Commissioner, characterised Mr Ross’ manoeuvre at [13] as a “concession” on the taxpayer’s part. Whether or not it is appropriate to characterise it that way, I determined that the issue of deductibility could not simply be avoided. But that is not the end of the matter. It simply leads to the question foreshadowed in [11].
Can the taxpayer discharge his burden under s 14ZZK(b)(i) of the Administration Act by tendering no evidence on the question of deductibility?
20. The short answer to this question must be: No. A taxpayer who provides no evidence on an element that is critical to the Tribunal’s review of the Commissioner’s objection decision has “proved” nothing in relation to that element. If it were to follow that, by failing to provide evidence in relation to the question of deductibility, the taxpayer could benefit by having the assessment declared “excessive” – as it were by default – then surely he would be circumventing the rule in s 14ZZK(b)(i).
21. For this reason, and in reliance on McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284, and in particular the comments of Gibbs J at 303, I took the view that, in order to have the objection decision set aside or varied, the taxpayer needed to establish affirmatively either:
(a) that his expenditure was not allowable as a deduction; or
(b) that Part IVA did not apply.
22. That led to my allowing Mr Green to apply for leave to amend his grounds of objection to include a ground to the effect that his expenditure was not deductible. Such a ground is, of course, directly at odds with what was originally the first ground included in his notice of objection, as set out in [3] above. Nevertheless, and despite resistance from the Commissioner, I allowed the taxpayer to proceed with his case in reliance on this new ground.
Has the taxpayer established that the expenditure was not allowable as a deduction?
23. In practical terms, and given the test-case nature of the Burrows, Miniello and Richards matters, Mr Green needs to satisfy the Tribunal that there is a material distinction between those cases (which I will refer to as “the lead cases”) and his.
24. Following the hearing, counsel for Mr Green provided written submissions to the effect that the taxpayer had indeed distinguished the lead cases from his. Those submissions included the following at paragraphs 18 to 22:
18. Upon the weight and preponderance of the evidence before the Tribunal it is clear that the Applicant’s payment of the $70,600.25 was capital expense and not a payment which could be categorised as truly deductible.
19. Even if the Applicant’s payment of $70,600.25 is a deductible expense, the Respondent has disallowed the amount of $292,000.00 and there is no basis for the contention that any additional amount of $221,399.75 was expended or incurred as an expense by the Applicant. Consequently, the Respondent’s amended assessment is excessive and must be set aside.
20. The decision in Burrow’s case (sic) sets out the length and breadth of the nature of the business contemplated through the participation in an ‘Oracle International Project’. Save for the payment of a portion of the money the Applicant has none of the indicia or threshold qualifications of participant in such a project as would entitle him to an allowable deduction.
21. Notwithstanding the decision in the Burrow’s case (sic), the Tribunal must make a decision upon the facts of this case as it stands and the Burrows decision does not establish the facts of the Applicant’s investment.
22. The evidence confirms that the payment of the $70,600.25 was a capital investment and not deductible.
Paragraphs 18 and 22 of the Applicant’s Written Submissions – Capital expense
25. The amount of $70,600.25 is the amount Mr Green paid by cheque on 25 June 1997 “for the purchase of seven (7) investments with Oracle”: Witness statement dated 6 December 2007, referred to by Mr Green in oral evidence (Transcript, 12 June 2008, page 12). It is the level of cash that he paid for entry into the overall “scheme” – see below for further details.
Paragraph 19 of the Applicant’s Written Submissions – No amount, or no additional amount, expended or incurred as an expense
26. The amount of $292,000, originally claimed as a deduction, is referred to in Mr Green’s notice of objection as the total of the “Said Sums”, made up as follows (“Licen[c]e” is defined in the notice of objection as meaning “Licence in the Oracle 1998” (sic)):
(a) $960 per Licence – $6,720 in total – for “licence fees incurred in respect of the Taxpayer’s operation of a licensed business”;
(b) $2,465 per Licence – $17,255 in total – for “training fees incurred in respect of the Taxpayer’s operation of a licensed business”;
(c) $15,500 per Licence – $108,500 in total – for “management fees incurred in respect of the Taxpayer’s operation of a licensed business”;
(d) $19,500 per Licence – $136,500 in total – for “marketing fees incurred in respect of the Taxpayer’s operation of a licensed business”;
(e) $1,575 per Licence – $11,025 in total – for “pre-paid interest incurred in respect of the Taxpayer’s operation of a licensed business”; and
(f) $12,000 for “short term finance charges on borrowings incurred in respect of the Taxpayer’s operation of a licensed business”.
27. The amounts per licence set out at [26] (a) to (e) are exactly the same as the amounts involved in the lead cases: Burrows and Richards at [4], Miniello at [3].
28. Ms Price, for the Commissioner, asked Mr Green some questions about his income tax return for the 1997 year (Transcript, 12 June 2008, page 24):
You can see halfway, about halfway down the page, there’s an item 11. Net income loss from business and non-primary production label C?‑‑‑Mm.
An amount of 292,000/L is shown there. Right. You accept that’s the Oracle deduction claim?‑‑‑No, I don’t. I don’t know what it is.
You don’t know what it is?‑‑‑No.
29. Let me pause there. Mr Green does not know what the $292,000 deduction claim is. This is despite the fact that the amount claimed was of such magnitude that it reduced his taxable income (other than capital gains) for 1997 to NIL. It is despite the fact that he said in his notice of objection that the deduction related to amounts “incurred in respect of [his] operation of a licensed business”. It is despite the fact that his notice of objection indicated that the licensed business related to the Oracle Project. This is a deduction claim the disallowance of which led to an amended assessment requiring him to pay over $240,000 in tax and penalties, and a further amount of interest which stood at over $125,000 in June 2003. He objected against the amended assessment, the Commissioner decided the objection against him, and he applied to the Tribunal for a review of that decision. The claiming of a deduction of $292,000 was the trigger for a series of events which eventually led to Mr Green’s application to the Tribunal. And yet his oral evidence is that he does not know what the deduction claim represents.
30. That oral testimony is inconsistent with Mr Green’s description, in his Statement of Facts, Issues and Contentions (specifically paragraph 1.3), of his claiming of a $292,000 deduction in his 1997 tax return, made up of the same elements as had been listed in his notice of objection – see [26] above. It also did not sit well with the following, which was included at paragraph 1.9 of the same Statement of Facts, Issues and Contentions:
The Applicant invested in the Oracle Licence in reliance upon the Respondent’s general administrative practice of allowing deductions for these investments and in reliance upon information from Oracle International together with a Tax Opinion provided by Robert K O’Connor QC that deductions are properly allowable.
31. Unfortunately, there were other aspects of what happened in 1997 that Mr Green could not recall when he gave his oral evidence. For example, while he could, by relying on his witness statement, confirm the amount he had paid – $70,600.25 (Transcript, 12 June 2008, page 12) – and while he could recall that the gave the cheque (or perhaps cheques) to his accountant, he could not recall to whom he had made out the cheque or cheques (page 12). His counsel, Mr Johnston, asked him some more questions (pages 13-14):
All right. What did you get from your accountant in return for the cheque?‑‑‑Nothing.
Nothing?‑‑‑Nothing.
No contract, no documentation?‑‑‑Nothing that I can recall.
Was it explained to you that there were obligations and liabilities with respect to the paying of the money attaching to you?‑‑‑No. No.
All right. Did you meet any person from Oracle before writing the cheque?‑‑‑No.
Did you meet any person from Oracle subsequent – after writing the cheque?‑‑‑No.
Right. Did you conduct any inspection of premises or of goods or of services to be provided to you by Oracle?‑‑‑No.
Did you understand that they had an obligation to provide you with anything?‑‑‑No.
Right. Now, do you recall signing any loan documents?‑‑‑I’m sorry. I don’t recall such documents.
Right. Did you receive any documentation evidencing this investment?‑‑‑No.
So you got nothing?‑‑‑Nothing.
Now, did you ever pay any more than the 70 – I think it’s $70,600?‑‑‑No, not a cent more.
Was there ever any sums of $31,000 paid by you?‑‑‑No.
Did you understand that you had an obligation to pay $31,000?‑‑‑No.
So it was never put to you that by paying $70,000 there was some loan agreement that you were to repay in any shape or form?‑‑‑No.
Right. Did you ever consider that you had any liability to pay any money over and above the 70,000 to Oracle?‑‑‑No.
Did you ever receive any promotional documentation that set out the nature of Oracle’s business to you, the precise nature?‑‑‑No.
Right. Did you have any managerial responsibility with respect to Oracle?‑‑‑No. Nothing at all.
What did you understand that you were going to get from the $70,000?‑‑‑I was making an investment. I’m 51 now and I was planning for my retirement.
Yes. Go on?‑‑‑I just treated it as an investment.
As an investment, $70,000, what did you anticipate getting in return?‑‑‑Well, anything above bank interest would have been fine.
What did your accountant advise you, do you recall, about the $70,000?‑‑‑I can’t be sure on that. The passage of time is too long, but it was a good investment at the time – that’s the way it was treated, as a good investment at the time.
Right. Did you personally ever receive any goods or services from Oracle?‑‑‑No. Not at all.
Did you ever sell or participate in any commercial activity for or on behalf of Oracle?‑‑‑No, not at all.
Do you actually know what the business of Oracle actually is?‑‑‑No.
Did you ever attend any functions or meetings or training seminars with respect to Oracle?‑‑‑No.
What contact did you have with Oracle?‑‑‑None.
So this was an investment made on a one‑off basis. The cheque was given to your accountant. Now in your tax return for 96/97, I believe you disclosed an investment with Oracle?‑‑‑Yes, we [did].
And a deduction of $292,000?‑‑‑Yes.
32. He said that his accountant had no authority to sign the Oracle Licence Execution Sheet at T116-373, and he could not recall signing that document himself (Transcript, 12 June 2008, page 17). He had no recollection of the Two Year Income Guarantee at T117-375 (page 18). He had no recollection of a discussion with his accountant about cash flow projections, or of having seen the opinion of Price Waterhouse Corporate Finance at T124-402 to 404 (page 19).
33. He did not produce a cheque butt or any other documentation in relation to the Oracle Project. He also did not call his accountant as a witness.
34. Ms Price took Mr Green to T123-383, the “Checklist for Agents”. (There is no reason to suppose that Mr Green would have previously seen this type of document, since it was specifically designed as an instruction sheet for agents. I think it likely, however, that Mr Green’s accountant was either an Oracle agent, or a conduit to such an agent.) The Checklist says:
To ensure the rapid processing of your clients (sic) application and the resultant payment of your commission, please ensure that:-
Oracle Agreements: Two (2) copies of the Oracle Agreements document, both signed by the client at page No. 42 (Oracle Licence Execution Sheet). We will return one (1) copy to client after stamping.
NBAn individual applicants (sic) signature must be witnessed.
A company application must be signed under Seal.
Stamp Duty: Advise client that cost of stamp duty is the clients (sic) responsibility and is $87.75 (sic) for each Licence and (if applicable) $22.00 for each Short Term Loan of $8,000.00.
Payment:Cheque payable to “Oracle InfoCom Management Pty Ltd – Clearing Account” and forwarded with the Oracle Agreements in the amount of:
- Per Licence $10,085.75 (includes Stamp Duty)
…
35. Despite Mr Green’s poor recollection, there is a clear link between Mr Green’s payment of $70,600.25 ($10,085.75 x 7), the Oracle Project, and the deduction claim that he made on his tax return.
36. Mr Green’s name is shown in the Oracle International Licensee Register next to the seven Licence Numbers 0969 to 0975: T16-13. In relation to each licence, an amount of $10,000.00 is shown as the “Licence Amount” and an amount of $85.75 is shown as “Stamp Duty Pd”. The total per licence is $10,085.75, the same as the figure noted on the Checklist for Agents and also the same as the figure in two of the lead cases: Burrows at [10], Miniello at [16]. The total for Mr Green’s seven licences is $70,600.25: see [25]. This is the amount he says he handed over to his accountant.
37. Clearly, that amount found its way to Oracle. At T15-4 is a Schedule headed “Oracle Infocom Management Pty Ltd ATF The OI Management Trust” with Mr Green’s name appearing next to Licence Nos 03-969 to 03-975. In various columns across the page are shown, in relation to each licence number, the following amounts, each of them expressed in the negative:
Interest -$1,575
Annual M/Fee -$15,500
Mktg Fee -$19,500
Annual Lic Fee -$960
Training Fee -$2,465
38. Those amounts match the five components of the “Said Sums” listed at [26](a) to (e), and they total $40,000 for each licence.
39. Also included in the Schedule at T15-4 is, in relation to each licence, a negative amount of $1,500 labelled as “Initial Lic. Fee”. For each licence there is an entry labelled “Licence Amt” with the positive amount of $10,000, and a further entry labelled “LRL” (representing, it seems, Limited Recourse Loan) with the positive amount of $31,500 in relation to each licence number. The amount of $31,500 is defined in the Oracle Loan Agreement (T116-370) as the “Advance”.
40. I find, on the basis of the Checklist for Agents (T123-383), the Licensee Register at T16-13 and the Schedule at T15-4, that Mr Green signed one or more, and up to seven, Oracle Licence Execution Sheets. I find that, as a result, he became a party to the Oracle Licence Agreement (T116-354 to 363) and the Oracle Management and Marketing Agreement (T116-364 to 368). I find, on the basis of the Licensee Register at T16-13, that he was accepted as the licensee of seven Oracle licences. I find, on the basis of the Schedule at T15-4, that he committed himself to the limited recourse loan documented in the Oracle Loan Agreement (T116-369 to 372). It follows from these findings that through the payment of $70,000 cash, plus stamp duty, he “incurred” the expense of $280,000 (that is, $40,000 x 7) in the 1997 income year.
41. As far as the remainder of the claimed deduction is concerned (that is, $292,000 less $280,000, or $12,000), it was described at different times as “short term finance charges on borrowings” (notice of objection – [26] above) and as “Consultancy Fees paid to Kerry McAuliffe” (Applicant’s Statement of Facts, Issues and Contentions, paragraph 1.3).
42. While I comfortably conclude from the evidence that Mr Green incurred the expenditure of $280,000, there is no reliable evidence that he ever incurred the additional $12,000, or, if he did, what it was for. Unlike the $280,000, the Oracle documentation does not refer to the $12,000. I conclude, on that basis, that the additional $12,000 was not incurred by Mr Green during the 1997 income year.
Paragraphs 20 and 21 of the Applicant’s Written Submissions – Is the expense allowable as a deduction?
43. The findings of fact that I have made are not materially different from those that Senior Member Sweidan made in the lead cases.
44. While two of the taxpayers in the lead cases were able to provide certain documents to support their factual claims (Burrows at [11], Richards at [10]), the third, Mr Miniello, did not. Nor did Mr Green. Nevertheless, as is clear from the findings I have made, all of them were participants in the same Project. The Information Memorandum (T124) outlined what participants could expect from their involvement in the Project, and although Mr Green claimed to know nothing more than that his “investment” in Oracle “was a good investment at the time – that’s the way it was treated, as a good investment at the time” (see [31] above), there can be no doubt that it was “treated as a good investment” because of what the Information Memorandum outlined to potential participants.
45. At the pre-hearing stage, Mr Green said that he had relied on “information from Oracle International” – [30] above. That is more likely to have been an accurate statement than the suggestion in his oral testimony ([31] above) that he had not done so. I find that the information that he relied on was the Information Memorandum that was issued by Oracle International. It is not necessary for me to set out in detail what was included in that Memorandum; it is sufficient that I note the Key Data Summary referred to in the lead cases: Burrows at [18], Miniello at [13] and Richards at [16].
46. Unlike the lead cases, there is no evidence that Mr Green undertook any background research into the Project (Burrows at [9](a), Miniello at [8](a), Richards at [9](a)), or whether he formed the view that the projected returns were reasonable (Miniello at [8](b), Richards at [9](b)). However, those factors were not critical to Senior Member Sweidan’s eventual findings that the taxpayers’ expenditure was deductible under s 51(1) of the Act.
47. In summary, Mr Green has provided me with no relevant distinction between his circumstances and those of the taxpayers in the lead cases. I find that the amount of $280,000 that Mr Green incurred in the 1997 income year is allowable as a deduction under s 51(1) of the Act. It is therefore the case that, in terms of s 177C(1)(b) of the Act:
… a deduction [is] allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out …
48. In other words, Mr Green obtained a “tax benefit”. The amount of the “tax benefit” is $280,000: s 177C(1)(d) of the Act.
Has the taxpayer established that Part IVA did not apply?
49. Since Mr Green did not seek to undermine the Part IVA determination except in relation to the question of his obtaining a “tax benefit”, he has failed to establish that Part IVA did not apply.
The Commissioner’s approach to this case
50. On behalf of Mr Green, much was made of the fact that the Commissioner’s approach to this case was on two alternative, inconsistent, bases. In particular, it was submitted that it was not open to the Commissioner to argue both that the expense was not allowable as a deduction, and also that the taxpayer had obtained a tax benefit, knowing full well that if the expenditure was not deductible, then there could be no tax benefit. In written submissions, it was put this way (paragraph 9, Applicant’s submissions dated 4 July 2008):
The Respondent in this case has unequivocally made an election to maintain that the deduction as claimed is disallowable. Further to this the Respondent has in the full knowledge of the inconsistency of its position maintained and proceeded to argue that the deduction was not allowable [see Sargent v ASL Developments [1974] HCA 40; (1974) 131 CLR 634 Stephen J at para 21 to 26]. The Respondent is not entitled to approbate and reprobate with respect to the statutory powers set out in the Act. More particularly the Respondent cannot maintain that the deduction was not allowable and proceed upon the basis of the statutory authority of Part IVA when the time for adjudication of the question [of] the allowability of the deduction has passed.
51. In response, the Commissioner submitted (paragraphs 6 and 7, Respondent’s submissions in reply, 11 August 2008):
6. … It is well established that in support of an assessment the Commissioner can propound for the application of alternative provisions of the taxation law. In connection with the application of Part IVA he may often do so to ensure firstly that the general substantive provisions of the taxation law are given effect as intended, and then should it be necessary, that Part IVA operates to ensure no tax avoidance occurs through the application of the general provisions of the taxation law.
7. There are a number of cases where the Commissioner has taken this approach in the context of section 51(1) and Part IVA [For examples see, Puzey v Commissioner of Taxation (2003) 131 FCR 244, Commissioner of Taxation v Sleight (2004) 136 FCR 211, Vincent v Commissioner of Taxation (2002) 124 FCR 350, Commissioner of Taxation v Cooke (2004) 55 ATR 183 and Burrows and Commissioner of Taxation [2007] AATA 1467]. In such cases Part IVA does not require that the Commissioner first form the opinion or elect, that a deduction is allowable before making a Part IVA determination. What Part IVA requires for its application is that there is a deduction which is allowable to a taxpayer that would not have been allowable if the scheme had not been entered into or carried out [Puzey 131 FCR at 267 [94]-[95] and Vincent 124 FCR at 372-373 [94]-[95]].
52. The Commissioner’s submission, in my view, accurately sets out the law. In particular, as explained in Puzey v Commissioner of Taxation [2003] FCAFC 197; (2003) 131 FCR 244 at [94], the question whether the taxpayer has obtained a tax benefit is determined not by reference to whether the Commissioner thinks that the deduction claimed is allowable, but rather whether it is, objectively, allowable.
53. The point was pressed further, at paragraph 4 of the Applicant’s submissions filed on 7 October 2008:
… Consequently, in order to make a valid amendment to the applicant’s 1997 tax assessment the Commissioner had to make a determination of whether the deduction was allowable or not. If the deduction was not allowable the Commissioner could do nothing. It was only if the deduction was allowable that the Commissioner could then advance to determining if the provisions of Part IVA could apply to disallow the otherwise allowable deduction. To reiterate, the alternative of disallowing the deduction under the provisions of section 51(1) of the Act was not available to the Commissioner. However, the Commissioner refused to recognise then and still refuses to recognise now that his first alternative had been removed by the passage of time and consequently before he could make a valid amendment to the applicant’s tax assessment he had to determine whether the deduction was allowable or not allowable. The Commissioner failed to make a critical determination without which he could not proceed further. … (emphasis added)
54. The language of this submission is similar to that used elsewhere in the taxpayer’s case, but some of it is as misconceived as that dealt with in [18] above. The first highlighted sentence – “If the deduction was not allowable the Commissioner could do nothing” – is correct (see Vincent), but it follows from the incorrect assertion (repeated in the second highlighted clause) that the Commissioner “had to make a determination of whether the deduction was allowable or not”. There is no requirement that the Commissioner make such a determination, or even form an opinion as to deductibility: Puzey at [94].
Conclusion
55. Mr Green has failed to establish that the amended assessment was excessive, except in relation to $12,000 of the $292,000 claimed as a deduction.
Additional tax (Penalty)
56. Although the question of additional tax, or penalty, was raised on objection, there was no mention of it during the hearing. It was not mentioned in the Applicant’s Statement of Facts, Issues and Contentions filed prior to the hearing. It was not mentioned in the Applicant’s Written Submissions filed on 7 July 2008 and it was not mentioned in the Applicant’s Reply, dated 7 October 2008, to the Respondent’s Written Submissions filed on 11 August 2008.
57. In those circumstances the additional tax imposed at the time of the amended assessment will remain undisturbed, except for any reduction as a consequence of the conclusion I have expressed in [55] above.
Decision
58. The objection decision is varied so as to allow Mr Green’s objection in part, such that his taxable income is reduced by $12,000.
I certify that the 58 preceding paragraphs are a true copy of the reasons for the decision herein of Mr S E Frost, Member
Signed: ................[sgd]............................................................
Mr T Aviram, AssociateDate/s of Hearing 9 July 2007, 12 June 2008
Final Submissions Received 21 October 2008
Date of Decision 15 December 2008
Counsel for the Applicant Mr D Johnston
Counsel for the Respondent Ms L B Price
Solicitor for the Respondent Australian Government Solicitor
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