Grollo Nominees Pty Ltd & Ors v The Commr of Taxation of the Cth of Australia The Commr of Taxation of the Cth of Australia v Grollo Nominees Pty Ltd & Ors v
[1997] FCA 659
•26 MARCH 1997
CATCHWORDS
INCOME TAX - assessable income - income - joint venture for construction project - principles relevant to recognition of profit from long-term construction contracts - relevance of business and accounting practice - income to be brought to account on an annual basis - analysis of complex transactions in relation to the construction project - characterisation of payments received from the project in the hands of each taxpayer - whether income in accordance with ordinary concepts and usage of mankind - relevant considerations.
INCOME TAX - Tax benefit in connection with a Pt IVA scheme - identification of scheme - whether taxpayers entered into the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit - reasonable expectation of inclusion of amount in taxpayer’s assessable income - liability of trustee under Pt IVA.
INCOME TAX - Additional tax - remission of additional tax - whether objection decisions reviewable under Part IVC of the Taxation Administration Act 1953 - relevant considerations.
Income Tax Assessment Act 1936 (Cth); ss.6, 95, 96, 97, 98, 99, 170, 177A, 177C, 177D, 177F, 223, 226, 227,
Taxation Administration Act 1953 (Cth); s.14ZZA, 14ZS,
H.W. Coyle Limited v Commissioner of Inland Revenue (NZ) (1980) 80 ATC 6012
Arthur Murray (NSW) Pty Limited v Federal Commissioner of Taxation (1965) 114 CLR 314
Federal Commissioner of Taxation v Dunn (1989) 85 ALR 244
The Commissioner of Taxes (South Australia) v Executor, Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108
Barratt v Federal Commissioner of Taxation (1992) 36 FCR 222 at 224
Federal Commissioner of Taxation v Citibank Limited (1993) 93 ATC 4691 at 4698-4702
XCO Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia (1971) 124 CLR 343
Brent v The Commissioner of Taxation of the Commonwealth of Australia (1971) 125 CLR 418
Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168
Commissioner of Taxation of the Commonwealth of Australia v Stokes (1996) 141 ALR 653
The Union-Fidelity Trustee Company of Australia Limited v The Commissioner of Taxation (1969) 119 CLR 177
Federal Commissioner of Taxation v Spotless Services Limited (1996) 141 ALR 92 said (at 96)
The Commissioner of Taxation of the Commonwealth of Australia v Peabody (1994) 181 CLR 359
Dunn v Shapowloff [1978] 2 NSWLR 235 at 249
G.P. International Pipecoaters Pty Limited v The Commissioner of Taxation (1990) 170 CLR 124
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Leonard v The Federal Commissioner of Taxation (1919) 26 CLR 175
Rowe v Federal Commissioner of Taxation (1982) 60 FLR 475
Commissioner of Taxation v Galland (1986) 162 CLR 408 at 414
The Bohemians Club v The Acting Federal Commissioner of Taxation (1918) 24 CLR 334
Stevenson v Commissioner of Taxation (1991) 29 FCR 282 at 299
Fletcher v Commissioner of Taxation (1988)19 FCR 442
GROLLO NOMINEES PTY LTD & ORS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. VG 209, 269, 409 and 489 of 1995
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v GROLLO NOMINEES PTY LTD & ORS
No. VG 493, 494, 495 and 496 of 1995
CORAM: SHEPPARD, FOSTER AND WHITLAM JJ
PLACE: MELBOURNE (JUDGMENT DELIVERED IN SYDNEY)
DATE: 26 MARCH 1997
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY )
)
GENERAL DIVISION )
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
No. VG 209, 269, 409 and 489 of 1995
BETWEEN:GROLLO NOMINEES PTY LTD
(As Trustee of the Rino Grollo No. 11 Trust A/C Monica Grollo) and Ors
Applicant
AND:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
AND
No. VG 493, 494, 495 and 496 of 1995
BETWEEN:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Applicant
AND:GROLLO NOMINEES PTY LTD
(As Trustee of the Rino Grollo No. 11 Trust A/C Monica Grollo) and Ors
Respondent
MINUTES OF ORDER
CORAM: SHEPPARD, FOSTER AND WHITLAM JJ
PLACE: MELBOURNE (JUDGMENT DELIVERED IN SYDNEY)
DATE: 18 APRIL 1997
THE COURT ORDERS THAT:
The appeals and cross-appeals be dismissed.
No order as to costs.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY )
)
GENERAL DIVISION )
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
No. VG 209, 269, 409 and 489 of 1995
BETWEEN:GROLLO NOMINEES PTY LTD
(As Trustee of the Rino Grollo No. 11 Trust A/C Monica Grollo) and Ors
Applicant
AND:THE COMMISSIONER OF
TAXATION OF THE
COMMONWEALTH OF
AUSTRALIA
Respondent
AND
No. VG 493, 494, 495 and 496 of 1995
BETWEEN:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Applicant
AND:GROLLO NOMINEES PTY LTD
(As Trustee of the Rino Grollo No. 11 Trust A/C Monica Grollo) and Ors
Respondent
CORAM: SHEPPARD, FOSTER AND WHITLAM JJ
PLACE: SYDNEY
DATE: 18 APRIL 1997
SUPPLEMENTARY REASONS FOR JUDGMENT
THE COURT: On 26 March last we published our reasons for judgment in appeals numbers VG 209, 269, 409 and 489 of 1995 and also in appeals numbers VG 493, 494, 495 and 496 of 1995. We also published separate reasons in matter number VG 460 of 1994. In the second of those judgments we discussed the Commissioner’s powers to compromise disputes and referred to the possibility of mediation of outstanding issues. Since we delivered the reasons for judgment in the various matters a mediation has taken place and has resulted in the settlement of outstanding issues with the consequence that the parties have agreed that each of the appeals and cross-appeals is to be dismissed and that there be no order as to costs.
Accordingly, the Court orders by consent that each of the appeals and cross-appeals be dismissed and that there be no order as to the costs of any party to any of the appeals or cross-appeals.
I certify that this and the preceding page is a true copy of the reasons for judgment herein of the Court.
Associate
Dated
IN THE FEDERAL COURT OF AUSTRALIA )
)
VICTORIA DISTRICT REGISTRY )
)
GENERAL DIVISION )
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
No. VG 209, 269, 409 and 489 of 1995
BETWEEN:GROLLO NOMINEES PTY LTD
(As Trustee of the Rino Grollo No. 11 Trust A/C Monica Grollo) and Ors
Applicant
AND:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
AND
No. VG 493, 494, 495 and 496 of 1995
BETWEEN:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Applicant
AND:GROLLO NOMINEES PTY LTD
(As Trustee of the Rino Grollo No. 11 Trust A/C Monica Grollo) and Ors
Respondent
CORAM: SHEPPARD, FOSTER AND WHITLAM JJ
PLACE: MELBOURNE (JUDGMENT DELIVERED IN SYDNEY)
DATE: 26 MARCH 1997
REASONS FOR JUDGMENT
THE COURT: The appeals to be considered in these reasons for judgment are appeals from decisions of the Administrative Appeals Tribunal (Olney J, Deputy President). Appeals have been brought by both the taxpayers and the Commissioner. They give rise to a large number of complex issues. Additionally, there is an appeal by some of the taxpayers from the judgment of Olney J, sitting as a judge of this Court, in a connected matter. That appeal is No. VG 460 of 1994. It is dealt with in separate reasons for judgment published at the same time as these reasons. The appeals from the Tribunal lie only upon a question of law. No appeal lies on any question of fact; s.44 of the Administrative Appeals Tribunal Act 1975.
Background
Two of the parties to the appeals are Grollo Nominees Pty Limited and Grofam Pty Limited. They are members of what is referred to as the Grollo Group of companies. The driving force behind this Group is two brothers, Bruno and Rino Grollo. Their father, Luigi Grollo, commenced a concrete paving business in 1948. He employed workers, many of whom were relatives or family friends. Most remained as employees for many years. In the early 1960s Luigi Grollo's firm, L. Grollo & Co., commenced contracting for the construction of both private and public swimming pools and for concrete construction work on large projects. By the late 1960s the firm regularly subcontracted to a number of major building companies, and by the early 1970s it was working on a number of shopping centres and large commercial buildings in and near the City of Melbourne. In each case it acted as subcontractor for the concrete structure. This meant that, with the technological changes occurring in the building industry, the firm was doing the major part of the work on those projects. The success of the Grollo business depended upon a loyal labour force and a reliable and reasonably priced supply of concrete. In 1970 there was a serious strike in the concrete industry. By that time the structure of the business had been changed into a group of companies. The Group bought its own trucks and set up a concrete plant which was later replaced by a permanent plant. It was then, and has since been, in a position to guarantee regular supplies of concrete and to control the price at which it could obtain and supply concrete.
What we have so far said about the history of the Grollo Group and also what follows, have been largely taken from his Honour's reasons for decision. With respect, we are indebted to his Honour for the concise, yet comprehensive, account of the background of the case which is to be found in his reasons.
The next development undertaken by the Group was the building of properties to be held by the Grollo interests as long term investments. His Honour said that, having the capacity to build cheaply and quickly, the Group was able to generate immediate equity in its projects, the equity being the difference between the cost of construction and the value of the building after completion. The Grollo family's objective was to accumulate a substantial portfolio of commercial properties which would provide a secure income with capital growth. The equity thus generated provided a capital base from which to borrow funds to commence new projects.
At different times the business was carried on through various companies within the Group. It was common practice for a new company or trust structure to be the owner of each new project. On occasions a development was carried out by a Grollo company with a joint venture partner. A company, Grofam Pty Limited, was one of the companies that acted as builder for these projects. The minutes of a meeting of Grofam's directors held on 30 October 1980 reveal that Rino Grollo informed the meeting that all construction contracts of the Grollo Group were being undertaken by Grofam. Apart from its own plant and equipment, Grofam had access to the labour force and other skills, equipment and material available from other companies within the Group. None of the companies within the Group made any profit from supplying labour, plant, equipment, concrete or other materials to other Grollo companies. Within the Group, everything was provided at cost.
By mid-1980 the Grollo Group, or rather companies within it, had an option over land on the western side of King Street and land on the north-eastern corner of Collins and King Streets in Melbourne. Land on the south-eastern corner of Collins and King Streets belonged to the National Mutual Life Association which, in late 1980, made it known that it wanted to sell this land. It was obvious that a large development on the National Mutual land could overshadow the nearby sites owned by the Grollo Group and thus detract from their value as sites for major developments. Various proposals were explored between the Grollos and National Mutual. Ultimately, on 24 December 1980, the Group acquired an option to purchase the National Mutual site. The option was extended, by a series of extensions, to 4 December 1981.
The Grollos had the capacity to develop the National Mutual site but could not do so "without a strong financial partner." On 4 December 1981 a company, Porkellis Australia Pty Ltd ("Porkellis"), and Grollo Australia Pty Limited ("Grollo Australia") executed a document entitled "Partnership Deed for Rialto Joint Venture" whereby they agreed to associate themselves in a joint venture to be known as the Rialto Project. Involved was the acquisition, development and holding as an investment of certain properties in Melbourne. The development envisaged the construction of a multi-storey office and hotel complex and the renovation of three historic buildings. The joint venturers agreed to contribute to the cost of the project in equal shares. A company then named Walktrek Limited, which was associated with Porkellis, agreed to finance 75 per cent of the contribution of each joint venturer. During the course of the project Porkellis changed its name to St Martins Victoria Pty Ltd ("St Martins"). Walktrek Limited changed its name to Porkellis Finance UK Ltd.
Grollo Australia was a company incorporated or acquired for the project. It had not previously engaged in any building or construction activities for the Grollo interests. Its only activity was the Rialto Project.
The joint venture deed provided for Grofam to be engaged as the project builder and for the work to be executed by it under contracts which provided for the payment of a fixed lump sum with no rise and fall provision. The sum included an agreed amount for preliminaries, overheads and profit.
By contract dated 2 April 1982, Grofam agreed with the joint venturers to undertake bulk excavation and other works in relation to the project. Subsequently, by a series of letters of instruction dated between 5 August 1982 and 16 May 1983, it was engaged to undertake other aspects of the construction work. His Honour said that progress payments were made to Grofam from the joint venture bank account into which equal contributions had first been made by or on behalf of the joint venturers. As a general statement, that is true, but it will later be seen that the route by which payments were made to Grofam and the route by which payments were made by it to Grollo Australia and to St Martins were somewhat more circuitous than his Honour's statement suggests.
Each round of contributions involved Porkellis Finance UK paying into the joint venture bank account 75 per cent of the progress payment being 37.5 per cent of the payment on behalf of each of the joint venturers. Each joint venturer was obliged to pay 12.5 per cent of the amount required. That statement also requires qualification. It was the expectation of the Grollo brothers that it would not be necessary for any Grollo company actually to pay Grollo Australia's 12.5 per cent share. The Grollos believed that the costs of construction would be such that the amount of Grollo Australia's share would come from the excess of amounts received over the cost of building and that Grollo Australia's obligation to contribute 12.5 per cent of the amount would be satisfied in this way.
On 27 October 1983 the joint venturers entered into a deed entitled, “Deed of Variation of the Partnership Deed for the Rialto Joint Venture”, whereby the provisions of the joint venture deed relating to the engagement of Grofam as the project builder were replaced by provisions whereby the joint venturers acknowledged that they would engage either Grollo Australia or Grofam as the project builder. On the same day a series of building contracts was entered into. Two contracts were executed between the joint venturers and Grofam. The first related to preliminary works for the hotel and the second to preliminary works for the car parks and offices. The joint venturers also entered into two contracts with Grollo Australia, the first for the hotel structure and the second for the car park and office structure. Under each of the latter contracts Grollo Australia was obliged to cause Grofam to carry out the preliminaries for, and the structure of, the relevant works and to cause Grofam to sub-let the balance of the works.
At the time the building contracts were executed, Grofam had in fact completed the preliminary works covered by the two contracts which it executed and some work had been done by it in respect of the work contracted to be done by Grollo Australia.
On 27 October 1983 Grofam and Grollo Australia each executed under their respective common seals a document addressed to St Martins (formerly Porkellis) in which they purported to confirm that whatever contracts had theretofore been entered into by Grofam in respect of the Rialto Project, those contracts had been entered into at the request and direction of Grollo Australia and all moneys paid to Grofam pursuant to such contracts had been paid at Grollo Australia's direction and received by Grofam on Grollo Australia's behalf. After 27 October 1983, Grollo Australia appointed Grofam as its subcontractor and progress payments were thereafter made by the joint venturers to Grollo Australia. Grollo Australia paid Grofam the cost of executing the works.
The project was completed in August 1988. The total amount paid from the joint venture bank account to Grofam and Grollo Australia for construction work on the project exceeded the actual building costs by an amount in excess of $50 million. His Honour referred to this as "the building surplus". The appeals relate primarily to income tax liabilities said to arise as a consequence of the building surplus derived from the construction of the Rialto Project. Until 27 October 1983 the project builder was, at least to outward appearances, Grofam; thereafter it was Grollo Australia. His Honour said that, at all relevant times, Grofam acted in the capacity as trustee of the Grofam Unit Trust and Grollo Australia acted as trustee of the Rialto Unit Trust.
The Issues
It is the Commissioner's case that the Rialto construction receipts paid to Grofam by the joint venturers for work executed before 27 October 1983 were part of Grofam's assessable income in the respective years of income in which they were received and that the agreements executed on 27 October 1983 and the course of conduct of Grofam and Grollo Australia after that date were a scheme within the meaning of Part IVA of the Income Tax Assessment Act 1936 ("the Act"). His Honour said that the Commissioner had determined, pursuant to subsec. 177F(1) of the Act, that the Rialto construction receipts paid to Grollo Australia after 27 October 1983 were to be included in the assessable income of Grofam for the respective years of income in which they were received. The assessments issued by the Commissioner have been issued on this basis. The Commissioner also issued assessments on an alternative basis, namely, that the Rialto construction payments received by Grollo Australia after 27 October 1983 were assessable income derived by Grollo Australia.
Hereafter we refer to the Grollo Group of companies or to the Grollo interests, when referring to them collectively, as "the appellants". We shall do this whether we are dealing with the Grollo appeals or the Commissioner's appeals. We refer to the Commissioner of Taxation as "the Commissioner".
The appellants contend that no part of the Rialto building surplus formed part of the net income of either Grofam or Grollo Australia. They say that, prior to 27 October 1983, Grofam had an arrangement with Grollo Australia whereby any building surplus belonged to Grollo Australia. It was said that Grofam was building at cost for that company. In the alternative, the appellants rely upon the notice given on 27 October 1983 under the common seals of Grofam and Grollo Australia to St Martins as establishing an agency between Grofam and Grollo Australia. The appellants also say that in 1983 it was too early in the project for any profit to have emerged. Insofar as Grollo Australia might have become entitled to any of the building surplus, the appellants say that such surplus was not income because it was not income according to the ordinary concepts and usages of mankind but rather represented a reduction in the cost to Grollo Australia of its equity in the Rialto Project. The appellants also say that the Commissioner's determinations pursuant to subsec. 177F(1) of the Act are not maintainable. There are also issues about additional tax and the validity of an amended assessment issued to one of the Grollo family, Leanne Grollo.
The Federal Court Appeal - Background
Before we make a more precise statement concerning the issues between the parties in the appeals from the Tribunal, it is necessary to say something of the appeal in matter No. VG 460 of 1994, i.e. the Federal Court matter. Again, the account of those proceedings which we are about to give comes from his Honour's reasons for judgment. During the period 1989 to 1992 the Commissioner conducted an audit of the income tax affairs of the Grollo companies in the course of which disputes arose as to whether any, and if so what, taxable profit or income was derived by any, and if so which, of those companies from the construction of the Rialto building in Melbourne. There were also issues arising out of other transactions and in consequence of the nature of the financial affairs of the various companies and individuals.
In 1992 there were negotiations between the parties with a view to resolving these disputes. On 30 June 1993 some of the Grollo parties instituted proceedings in the Federal Court seeking a declaration that the Commissioner and the Grollo companies had concluded an enforceable settlement of the disputes. This assertion was denied by the Commissioner. But on 22 September 1993, prior to the hearing of the 1993 proceedings, the appellants and the Commissioner executed an agreement described as terms of settlement in respect of the 1993 proceedings and the disputes.
By the terms of settlement the parties agreed that, in full settlement of all issues other than the Rialto issues and another immaterial issue, the appellants would pay to the Commissioner $27.5 million, that the Commissioner would issue assessments in respect of the non-Rialto issues for a total amount not exceeding $27.5 million, that the payment by the appellants of the $27.5 million would be in full and final discharge of all liability under the non-Rialto assessments. The appellants were to forego certain carried forward losses specified in the terms of settlement.
It was also agreed that the Commissioner would issue and serve assessments in respect of the Rialto issues for a total sum (including additional tax and other penalties) not exceeding $39 million, being $19 million primary tax and $20 million penalties. It was agreed that the Commissioner could issue and serve alternative assessments and that, except as expressly provided to the contrary in the terms of settlement, all such assessments, i.e. the Rialto assessments, would be raised in accordance with the provisions of the Act and be subject to the ordinary objection and referral or appeal provisions of Part IVC of the Taxation Administration Act 1953.
We deal with the questions which arise for decision in the Federal Court appeal (No. VG 460 of 1994) in the separate reasons published in that matter. We mention the matter at this stage because it forms part of the background to the appeals from the Tribunal.
The Assessments in Question
On 27 September 1993, the Commissioner, purporting to act pursuant to the terms of settlement, issued two sets of assessments. The first set comprised 17 assessments. They were described in argument as the "Grollo Australia assessments". The second set of assessments comprised 282 assessments in respect of the period from 1 July 1982 to 30 June 1988. These were referred to in argument as the "Grofam assessments". We shall refer to them similarly.
Under the Grofam assessments, the Commissioner included in the net income of the Grofam Unit Trust amounts of profits said to have been derived by Grofam as trustee of the Grofam Unit Trust from the construction of the Rialto building for the period 1 July 1982 to 27 October 1983. In addition, the Commissioner, as mentioned, made determinations under subsec. 177F(1) of the Act that specified amounts that were referable to tax benefits said to have been obtained by Grofam in connection with a scheme within the meaning of Part IVA of the Act relating to the construction of the Rialto building. The determinations were, in substance, that the amounts be included in the assessable income of Grofam for the period 27 October 1983 to 30 June 1984 and for each of the years ended 30 June 1985 to 30 June 1988 inclusive. Consequential adjustments and certain other adjustments were made to the income and losses of the beneficiaries of the Grofam Unit Trust and its successive trusts and beneficiaries. The Grofam assessments comprised 140 assessments in respect of the year ended 30 June 1983. These were issued pursuant to s.98 of the Act against Grollo Nominees Pty Limited in its capacity as trustee of the Bruno Grollo Nos 11-30 Trusts and the Rino Grollo Nos 11-30 Trusts on account of each of the infant beneficiaries of each of those trusts. A further 140 assessments were issued in respect of the year ended 30 June 1984. These were issued pursuant to s.98 of the Act against Grollo Nominees Pty Limited in its capacity as trustee of the Bruno Grollo Nos 11-30 Trusts and the Rino Grollo Nos 11-30 Trusts on account of each of the infant beneficiaries of each of those trusts. Additionally, assessments were issued against two companies, Grollo Finance Pty Limited and Collins Street Constructions Pty Limited, in respect of the year ended 30 June 1988. Although determinations were made under subsec. 177F(1) of the Act for the 1985, 1986 and 1987 years of income, no Grofam assessments were issued for those years because, by reason of losses incurred in relation to matters other than the construction of the Rialto building, no taxable income was derived by the relevant trusts or companies in those years of income.
The taxpayers under these various assessments, i.e. for the most part the beneficiaries under the Trusts, applied to the Tribunal for review of the Commissioner's decisions to disallow objections lodged in respect of the assessments.
The Issues - a More Precise Statement
Counsel for the appellants stated the issues arising in relation to the Grofam assessments as follows:
(a)whether Grofam in its capacity as trustee of the Grofam Unit Trust derived income or profit from the construction of the Rialto building during the year ended 30 June 1983 and during the period from 1 July 1983 to 27 October 1983;
(b)whether the assessments that were issued pursuant to Part IVA of the Act were excessive. In particular were the determinations under subsec. 177F(1) validly made in respect of the period from 27 October 1983 to 30 June 1984 and for each of the years ended 30 June 1985 to 1988 inclusive;
(c)whether liability to additional tax was imposed under s.226 of the Act for the year ended 30 June 1983, s.223 of the Act for the year ended 30 June 1984 and s.226 in respect of the assessments made under Part IVA. If so, were decisions to remit part of the additional tax correctly made;
(d)whether the amounts of primary tax under the assessments for the 1983 and 1984 years of income were correctly calculated in accordance with Schedules 6 and 12 of the Income Tax (Rates) Act 1982 ("the Rates Act");
(e)whether the Commissioner in making the assessments was entitled under the terms of settlement to make adjustments to income and losses returned by members of the Grollo Group of companies in respect of issues other than the issue as to whether any and, if so, what income or profit was derived by any and, if so, which member of the Grollo Group from the construction of the Rialto building. If the Commissioner was so entitled, there is the further question whether the taxpayers were entitled to object against any such assessments.
The principal contentions of the appellants were stated to be as follows:
(a)The Tribunal erred in law in finding that Grofam derived an excess of assessable income over deductible outgoings from the construction of the Rialto building during the year ended 30 June 1983 and during the period from 1 July 1983 to 27 October 1983. This contention was said to relate to appeals Nos VG 209, 269 and 409 of 1995.
(b)The Tribunal erred in law in holding that determinations were validly made under subsec. 177F(1) of the Act in respect of the period from 27 October 1983 to 30 June 1984 and each of the years ended 30 June 1985 to 1988 inclusive and that the assessments for the years ended 30 June 1984 and 30 June 1988 that were based upon those determinations were excessive. This matter arises in appeals No. VG 409 and 489 of 1995.
(c)The Tribunal erred in law in finding that the primary tax was correctly calculated under Schedule 12 of the Rates Act for the 1984 year of income. This contention arises in appeal no. VG 409 of 1995.
(d)The Tribunal erred in law in confirming the amounts of additional tax assessed under the assessments in respect of taxable income arising during the year ended 30 June 1983 and the period 1 July 1983 to 27 October 1983. This contention was said to arise in all appeals.
The Period up to 27 October 1983
We propose to proceed by first considering the matters in para. (a) of these contentions. We shall then deal successively with the other contentions. Sometimes the appeals brought by the Commissioner raise matters connected with matters arising in the appellants’ appeals. In such cases we shall deal with all questions in relation to that particular aspect of the matter. As necessary we shall deal with the Commissioner’s appeals after we have completed our consideration of the appellants’ appeals.
The first matter to be dealt with is whether Grofam derived an excess of assessable income over deductible outgoings from the construction of the Rialto building during the year ended 30 June 1983 and the period 1 July 1983 to 27 October 1983. His Honour concluded that it did. In order to resolve this issue, a number of particular questions need to be considered. These are:
(a)Whether the Tribunal erred in law in holding that on the findings of fact it made there was no at-cost arrangement between Grofam and Grollo Australia in respect of the construction work carried out prior to 27 October 1983.
(b)Whether the Tribunal made an error of law in construing the notice and the Grollo Australia contracts that were executed on 27 October 1983. This raises the question whether the Tribunal was correct in deciding that the notice given on 27 October 1983 could not affect the incidence of taxation.
(c)Whether the Tribunal erred in law in holding that it was not too early for Grofam to have derived income or a profit from the construction work in the year ended 30 June 1983. Wrapped up in this question is whether the Tribunal was correct in approaching the matter by applying what was described in the evidence as the basic method of accounting rather than another method of accounting described in argument as the emerging profit basis. We shall explain these expressions, and also the expression "estimated profits basis", when we come to deal with this question.
(d)Assuming questions (a), (b) and (c) are answered favourably to the Commissioner, whether the Tribunal erred in law in holding that Grofam, in the year ended 30 June 1984, was not entitled to claim as deductions amounts equal to the income or profit derived by it from the construction work prior to 27 October 1983.
In order to deal with these matters, it is necessary to refer to some evidence and to consider the conclusions reached by his Honour in relation to the various matters. The account of the evidence comes substantially from his Honour’s reasons. The starting point for their consideration is the deed, described as the Joint Venture deed, which was executed on 4 December 1981. The parties to the deed were Porkellis, Grollo Australia and Messrs Luigi, Bruno and Rino Grollo and their respective wives. The last six parties were guarantors.
In substance the joint venture deed provided for the joint venture partners, Porkellis and Grollo Australia, to contribute equally to the cost of the acquisition of the Rialto site and of the development of that site by constructing two tower buildings, a carpark, plaza and ancillary facilities as well as renovating and "recycling" three historic buildings. The business of the joint venture was confined to the implementation of that project. The deed provided for "all proper expenditures, costs and expenses of whatever nature relating to the project" to be shared equally by the joint venturers and for each joint venturer to pay to the joint venture bank account its share of all amounts required. As his Honour said, the joint venturers agreed to engage Grofam as project builder.
In his reasons, his Honour set out Clause 7 of the deed prior to its being varied by a later deed dated 27 October 1983 the same day as the notice earlier referred to. We shall refer to the variation in a moment but it would seem that it did not have any effect on the relationship between the parties up to 27 October 1983 when it was signed. Significantly cl.7 provided that separate and individual building contracts should be prepared and executed for each of seven stages of the project, namely, bulk excavation, structure and protection of certain factory buildings which apparently adjoined the site, foundations, carpark and plaza slab, towers and plaza finishes, hotel and the factory tavern fitout. Each building contract was to be in the form of an appropriate agreement and conditions of building agreement but to take the form of a deed amended as necessary to make it consistent with and to give effect to an agreement earlier reached between the joint venturers specified in subparas (c) to (f) of Clause 7.1 of the joint venture deed. Clause 7.1(c) was as follows:
"Grofam shall under each Building Contract itself provide and perform the Preliminaries for a fixed lump sum (which shall include a fixed amount for overheads and profit) with no rise and fall as hereafter provided and there shall be no rise or fall provision relating thereto."
With para. (c) needs to be read para. (d) which was as follows:
"Grofam shall under each Building Contract itself provide, and perform the works in relation to, the Structures for a fixed lump sum (which shall include a fixed amount for overheads and profit) with no rise and fall, such fixed lump sum to be in accordance with the following provisions..."
The emphasis is added.
There then followed a number of paragraphs. Amongst other things it was provided that in the first instance tenders should only be called from Grofam. If such tender for a stage by Grofam was, in the reasonable opinion of the Project and Property Manager in accordance with the budget, the joint venturers would accept such tender and Grollo Australia would procure Grofam to enter into a building contract with the joint venturers in accordance with the provisions of the joint venture deed in respect of such tender for such stage. There was a provision which applied in the event that the Project and Property Manager thought that the tender by Grofam was not reasonable in which case tenders could be invited from other builders.
Clause 7.1(f) contained a number of provisions dealing with the contents of building contracts entered into by Grofam. Amongst these provisions it was provided in subpara. (iv) that the contract should make provision that there should be no "mark up" or additional margin or profit to Grofam on any variations including any variation to subcontracts on any administrative charges.
Clause 7.2 provided for the consequences of default by Grollo Australia under certain subparagraphs of Clause 4. It is unnecessary to refer to the detail of these. However, it is relevant to refer to other parts of Clause 4. Clause 4.1 provided that all proper expenditures, costs and expenses of whatsoever nature relating to the project should be shared equally by the joint venturers. Clause 4.2 provided that all income derived by the joint venture should belong to the joint venturers in equal parts.
Clause 2 defined the project. It comprised a number of elements the principal of which were:
(a)Grollo Australia and Porkellis would enter into a contract with National Mutual under which they would be purchasers as tenants in common in equal shares of the National Mutual land.
(b)The joint venturers would enter into a contract for the acquisition of that land and certain other land referred to in the clause and each contribute 50 per cent of the moneys payable under each contract.
(c)The joint venturers would construct on the land so acquired certain buildings comprising two tower buildings, a carpark, plaza and ancillary facilities and would renovate and "recycle" three historic buildings situated on the land.
(d)The buildings were to be constructed generally in accordance with certain drawings with specifications, copies of which had been signed by the joint venturers.
(e)The construction was to proceed generally in accordance with a program outlined in the feasibility study which was identified by the parties.
His Honour said that, because the project had not been completely defined and building contracts had not been prepared at the time the joint venture deed was executed, it was necessary initially for works to be authorised less formally than the joint venture deed envisaged. Excavation of the site commenced in April 1982 pursuant to the contract signed on 2 April 1982 known as the "Bulk Excavation Contract". The parties to the bulk excavation contract were the joint venturers and Grofam.
Although it is clear enough from what has been said, it needs to be emphasised here that Grofam was not a party to the joint venture agreement. But under the joint venture agreement Grollo Australia was obliged to procure Grofam to carry out the building work on the project. As earlier mentioned, Grollo Australia was a new company within the Grollo Group. It was the corporate vehicle which the Grollos employed to undertake the project. Grofam, on the other hand, had undertaken a number of projects some of which appear to have been still in the course of completion at the time Grofam undertook the Rialto Project.
A further matter that needs to be noticed at this point is that the Grollo Group at all times included a company which acted as banker for the Group. This company was known at various times as L. Grollo Nominees Pty Limited or L. Grollo Sales Pty Limited. All moneys passing from one company in the Group to another were channelled through the banker. Thus surplus moneys earned by Grofam intended for Grollo Australia were paid first of all to the banker which in turn passed them on to Grollo Australia. That was a comparatively simple transaction at least in the 1983 year of income when a sum of $3.5 million earmarked for Grollo Australia flowed directly through the banker to that company. It is not necessary to go into the matter in depth, but an examination of the transactions between the companies would, we think, reveal a complex situation of moneys passing to companies engaged in building work so that expenses incurred by them could be paid and moneys flowing to the banker from such companies which were surplus to needs. In some cases the moneys remained with the banker; in others they were passed on to yet other companies in the Group.
In the period between the execution of the joint venture deed on 4 December 1981 and the execution of the variation deed on 27 October 1983, the bulk excavation contract was the only formal contract entered into between the joint venturers and Grofam. Work was, however, carried out pursuant to a series of letters of appointment addressed by the joint venturers to Grofam and accepted by it. The first two such letters were dated 5 August 1982. In one case the letter expressed acceptance of Grofam's tender for the supply of necessary plant, equipment, material and labour to install caissons according to certain drawings for a fixed contract sum of approximately $4 million. The second letter related to two other aspects of the project involving fixed price contract sums of approximately $160,000 and $385,000 respectively. A further such letter dated 13 September 1982 dealt with the acceptance of a tender relating to part of the hotel structure for a fixed price of $2.9 million. A similar letter instructed Grofam to proceed with certain work on the carpark structure for a fixed sum of $1.75 million. Letters written in relation to part of the hotel structure and the carpark each contained a statement to the effect that, when the terms of the head contract had been agreed, the work included in the letters would be incorporated into the hotel contract. Obviously enough, the understanding in relation to the earlier letters of appointment was the same. There were further letters of this kind to the detail of which we do not refer.
Building contracts were finally entered into between the joint venturers and Grofam on 27 October 1983. By that time all the work covered by the two contracts executed by Grofam on that day had been completed. On the same day two further contracts were executed by the joint venturers and Grollo Australia. Some of the work encompassed by the latter contracts had already been done by Grofam pursuant to the various letters of instruction. His Honour said that the exact extent of the work completed by Grofam before 27 October 1983 was not precisely identified in the evidence nor was the amount of money paid or payable to Grofam for work done before that date specifically referred to, but a schedule of cash payments was prepared by a Mr James, who had been employed by a firm of accountants, Touche Ross & Co., as a senior tax consultant between 1982 and 1985. He became a partner in 1985 but resigned from the firm in 1992. His involvement with the Rialto Project commenced in 1982. His Honour said that the schedule prepared by Mr James provided some insight into the state of affairs as at 27 October 1983. According to the schedule, a total of $57.5 million was paid to Grofam from the joint venture bank account in the period between 21 May 1982 and 11 November 1983. In the period between 14 December 1983 and 16 November 1987 the joint venturers paid Grollo Australia $191.5 million. The total of all amounts paid to Grofam and Grollo Australia from the joint venture account was approximately $249 million.
The building contracts executed on 27 October 1983 by Grofam were for preliminary works on the hotel and carpark and offices. The total amount involved was $8.5 million. This work, if not then complete, was almost so. The purpose of Grofam's executing these contracts seems to have been designed to attempt to bring a measure of formality and consistency into the building arrangements which had been lacking up to that time. The building contracts executed by Grollo Australia were for the hotel structure ($39 million) and carpark and offices structure ($198 million) a total of $237 million. It would appear that this was work which, for the most part, was still to be done.
His Honour said that none of the building contracts executed on 27 October 1983 covered the work provided for in the bulk excavation contract. His Honour said that he was unable to say whether or not any other work actually done by Grofam before 27 October 1983 was covered by one or other of the four contracts. He said that the total of all amounts payable to Grofam and Grollo Australia by the joint venture for work covered by the four building contracts was $245.5 million.
His Honour then drew some conclusions about amounts which had been received by Grofam and Grollo Australia and about the difference between the overpayment to Grofam which he found to have been made and an underpayment to Grollo Australia which he also found to have occurred. From these conclusions his Honour inferred that Grofam carried out work to the value of $3.5 million which was not covered by any of the four building contracts executed on 27 October 1983 and, further, that prior to 27 October 1983, Grofam carried out work to the value of $45.5 million which was subsequently included in the contracts signed by Grollo Australia on 27 October 1983.
In addition to the building contracts executed on 27 October 1983 to which reference has been made, two other contracts were executed. The first of these was a variation deed which had the effect of making some variations to the joint venture agreement. Significantly, Clause 7.1, as varied, opened with the words:
"The Joint Venturers acknowledge that they will engage either Grollo or Grofam as project builder (Grollo or Grofam as the case may be being herein referred to as the 'Project Builder') on terms and conditions to be agreed with the Project Builder but including the following..."
The balance of the subparagraph was substantially in the same form as the corresponding provision in the original joint venture deed.
Also on 27 October 1983 there was executed under the common seals of Grollo Australia and Grofam the notice to St Martins to which reference was earlier made. The document is as follows:
"TO:ST. MARTINS VICTORIA PTY. LIMITED
RE:Rialto Project
Grollo Australia Pty. Ltd. ('Grollo') and Grofam Pty. Ltd. ('Grofam') hereby confirm the following:
Whatever contracts have heretofore been entered into in respect of the above Project by Grofam have been so entered into at the request and direction of Grollo; and
All moneys paid pursuant to the contracts mentioned in 1 above to Grofam have been so paid on Grollo's direction and received by Grofam on Grollo's behalf.
DATED the 27th day of October 1983.
THE COMMON SEAL OF GROLLO )
AUSTRALIA PTY. LTD. was )
hereunto affixed in accord- ) L.S.
ance with its Articles of )
Association in the presence )
of :
[Sgd] Bruno Grollo Director
[Sgd] R. Grollo Secretary
THE COMMON SEAL of GROFAM )
PTY. LTD. was hereunto )
affixed in accordance with ) L.S.
its Articles of Association )
in the presence of: )
[Sgd] Bruno Grollo Director
[Sgd] R. Grollo Secretary"
In due course it will be necessary to consider questions arising in relation to this notice. There are questions concerning its meaning and intended operation and also its effect, particularly its effect, if any, upon the operation of the Act.
In December 1983 agreements were prepared which were intended to effect the appointment by Grollo Australia of Grofam as "sub-builder for the Project." The documents are undated but they were executed by both Grollo Australia and Grofam. Mr Bruno Grollo said that he believed that the documents were signed in December 1983. They were recorded in the minutes of the two companies on 17 April 1984. As his Honour said, nothing turned upon the exact date when the documents were executed. Each agreement referred to the separate building contracts entered into by Grollo Australia on 27 October 1983. Each recited that, until 27 October 1983, which was described as the "Changeover Date", Grofam was engaged by Grollo Australia and St Martins (previously Porkellis) as the builder of the hotel structure known as the Rialto Project and that on and from the changeover date the joint venturers had appointed Grollo Australia as builder in substitution for Grofam in accordance with the terms and conditions of a head contract dated 17 October 1983. The agreement provided that, with effect from the changeover date, Grollo Australia appointed Grofam as sub-builder in relation to the work on terms generally in accordance with the relevant terms and conditions of the head contract and upon such other terms agreed upon between Grollo and Grofam. The agreements were executed under the common seals of the two companies.
Agreement or Common Understanding that Grofam would carry out Work at Cost
Against that background it is now possible to come to the question whether the Commissioner was correct in assessing Grofam for the income earned on the Project up to 27 October 1983 i.e. during the year of income ended 30 June 1983 and during the period 1 July to 27 October 1983 which fell within the income tax year ended 30 June 1984. His Honour said that, in the submission of counsel for the appellants, the arrangement between Grollo Australia and Grofam was evidenced by a number of matters, namely:
(a)The invariable practice of the Grollo Group as at 4 December 1981 when the joint venture deed was executed was that entities within the Group building for other Grollo entities did so at cost. Reliance was placed upon the evidence of Mr Bruno and Mr Rino Grollo and also the accountant Mr Dowding as to past practice in respect of other property developments in which the Group had been involved.
(b)A conversation between Bruno and Rino Grollo shortly prior to 4 December 1981 in which, in the context of a discussion as to how the construction of the Rialto Project would be carried out, Bruno Grollo said words to the effect that it would be done in the way it had always been done within the Group, namely at cost; to this Rino Grollo agreed.
(c)At a meeting on 14 September 1982 attended by the two Grollos, Mr Dowding and a Mr Sankey, when the question of Grofam's potential profit arising from the Rialto contract was raised, Bruno Grollo expressed the view that there was no profit as all they were doing was putting up a building for a much lower cost than would otherwise be the case. Mr Sankey was the finance director of the Grollo Group from March 1982. Previously he had been a bank manager.
(d)A statement made in August 1983 in an application by Grofam as trustee for the Grofam Unit Trust for a PPS deduction exemption certificate. The abbreviation PPS stands for prescribed payments system. The statement said that, from 1 July 1983, the trustee, i.e. Grofam, had ceased to carry on construction work for the public. Instead it had confined its activities to construction on behalf of entities having, or at least partly having, ownership. Work in respect of all projects commenced from 1 July 1983 would therefore be provided at cost. The letter said that it was submitted that for the income year ending 30 June 1984 and for subsequent years, the trust estate would derive no net income. The changed role of the trustee was such that there would be no profit making purpose. It was said that it was "now a 'non-profit' organisation".
(e)A statement made by Mr Rino Grollo to Mr Nelson, a solicitor, on 5 August 1983 to the effect that Grofam was not making a profit.
(f)Evidence of the two Grollos to the effect that they regarded the building work carried out by Grofam as being the means whereby Grollo Australia would meet its joint venture equity obligations. It was said that the view held by the Grollos was inconsistent with there being an intention that Grofam would carry out the construction for a profit at the expense of Grollo Australia.
(g)There was a cash flow generated by the construction work that was used by Grollo Australia to meet its obligations to pay cash into the joint venture account.
(h)The provision to Grofam at cost of the building and other resources of other entities within the Grollo Group.
(i)The asserted implausibility of the notion that Bruno and Rino Grollo would intend that Grofam derive a profit from Grollo Australia.
(j)The readiness of the Grollos to execute the 27 October 1983 notice which was said to give formal expression to what they regarded as the substance and truth of the position.
Not all these matters were relied upon before us in these appeals. We mention them as background to what his Honour eventually said about them. This has a bearing on his Honour's view of the credibility of the witnesses called in the appellants' case.
His Honour said that, to a large extent, proof of the applicants', i.e. appellants' assertion that in the period to 27 October 1983 Grofam was building at cost for Grollo Australia was dependent upon the credit of the two Grollos and Mr Dowding. His Honour said, "To the extent that the evidence of those 3 witnesses is relied upon in support of the applicants' proposition I reject it as lacking credit." His Honour then set out his reasons for that conclusion.
We do not find it necessary to go to his Honour's reasons. There could be no challenge to a conclusion such as his Honour reached in an appeal which is restricted to an appeal on questions of law. The important fact is that, to the extent that the matters relied upon depended upon the evidence of the Grollos and Mr Dowding, his Honour rejected it because he did not believe it.
It is important, however, to note that, not only, as his Honour said, was there no mention made of an at cost arrangement between the two parties; the evidence established that the Grollos and Mr Dowding anticipated that, if the form of the documentation caused a tax problem, steps (not then identified) would have to be taken to resolve the problem. As his Honour said, the Rialto Project was not just another project in which one Grollo company would be building at cost for another. Mr Dowding was aware that there was a possibility that Grofam could derive a cash surplus. This was because the joint venture agreement provided for fixed price contracts, something that was not a feature in other projects undertaken by the Grollo Group either on their own behalf or as a joint venture partner.
At this point it is necessary to mention two letters written by Touche Ross & Co. The first was dated 30 March 1983 and was addressed to a Mr Crawford of St Martins. The letter appears to have been intended to be an indication to St Martins that changes in the arrangement which then existed were wanted and to assure him that there would be no disadvantage to the St Martins' interests as a consequence of what was proposed. The letter referred to previous discussions regarding the tax effect on the Grollo Group of the existing joint venture arrangements. After some preliminary remarks, there was set out a proposal for the restructuring of the arrangements which was said to achieve the "desired objectives" for the Grollo Group without in any way affecting the interests of Porkellis (i.e. St Martins) or its associated companies. The proposed arrangement involved the joint venture parties and Grofam agreeing that Grollo Australia be appointed project building manager; Grollo Australia was to manage and control the construction undertaken by Grofam as its builder; Porkellis (St Martins) would pay Grollo Australia one half of the agreed construction costs; and Grollo Australia would pay to Grofam the cost of constructing the building. It was said that the essential difference between this arrangement and the existing arrangement was that Grollo Australia did not pay Grofam the profit Grofam would be entitled to under the existing arrangement. The letter said that the proposed variation related only to the uncompleted work on the hotel and office contracts. Work already completed would not be affected. The existing contracts between the joint venturers and Grofam, so far as they related to uncompleted work, would be assigned by the joint venturers to Grollo Australia and the joint venture agreement would be amended. St Martins was asked to consider the proposition put to it in the letter.
The second letter was dated 19 August 1983. It was signed by Mr Dowding and addressed to Mr Rino Grollo. The letter opened with the setting out of two alternative proposals whereby a retention arrangement was to be incorporated into the payments made by Grofam to the joint venture. It was said that the purpose of such an arrangement was to postpone the derivation of the taxable profit Grofam was to receive in relation to the construction of the Rialto Project. Mr Dowding said, "It should be pointed out that the proposal is not designed to diminish Grofam's tax, but merely to postpone the derivation of the agreed profit figure." Later the letter said, "Currently, the agreements provide that Grofam is to be reimbursed its expenses and agreed profit, on production of architect's certificate. As such, Grofam will be liable to tax on the agreed profit on a profit emerging basis, as and when the payments are made." The emphasis is added.
The letter went on to discuss the two alternative suggestions made to achieve the goal mentioned at the beginning of the letter. It expressed an opinion in favour of one rather than the other. None of this is important for present purposes. What is important is that in August 1983, Mr Dowding, who was the close adviser to the Grollo Group on tax and other matters, was expressing to Mr Rino Grollo his view - not suggested by Mr Grollo to be at all contentious - that Grofam was to receive the profit and an acknowledgment that the agreements as they then were provided that Grofam was to be reimbursed its expenses and agreed profit on the production of an architect's certificate. The statement further acknowledged that Grofam would be liable to tax on the agreed profit although on a profit emerging basis. It will be necessary in due course, when considering other submissions, to identify what is meant by the expression "profit emerging basis" and to determine whether or not Mr Dowding was correct in the view he there expressed in relation to it. But that is by the way at the moment.
This is not an appeal on a question of fact. We have mentioned the letters only to emphasise that, within the Grollo camp, as late as August 1983, i.e. two months before the changes brought about by the documents executed on 27 October 1983, it was recognised that Grofam was liable for tax on the income it had earned and was earning up to that time.
Subject to one further matter with which it is necessary to deal in relation to this aspect of the case, we would reject the submissions which were made by counsel for the appellants that his Honour was in error in not upholding the submission that there was an arrangement between Grollo Australia and Grofam that in fact Grofam would build at cost and not itself be entitled to any profit.
The way that the matter was put in written submissions lodged on behalf of the appellants was to say that, at material times, there was an arrangement that operated between Grollo Australia and Grofam that Grofam would perform the Rialto building works at cost and that any surplus from the joint venture payments would belong to Grollo Australia. Particular matters which were relied upon were as follows:
(a)The Tribunal misdirected itself as to the legal effect of the documents that were executed on 4 December 1981, including the joint venture deed, to Clause 7 of which detailed reference has been made, and failed to take into account as relevant considerations the conduct of St Martins, Grollo Australia and Grofam in respect of the agreements embodied in those documents and the negotiations and other agreements that were entered into after 4 December 1981 up to and including 27 October 1983.
(b)The Tribunal misdirected itself as to the legal effect of the common intention of those who controlled Grofam and Grollo Australia, i.e. Messrs Bruno and Rino Grollo, concerning the relationship between those companies in relation to the construction of the Rialto building, and/or failed to take into account as a relevant consideration that common intention.
(c)The Tribunal failed to accept that the common assumption that Grollo Australia and Grofam that as between them the state of affairs was that Grofam was building for Grollo Australia at cost, if acted on by them both, could give rise to legal relations between them defined by that common assumption.
We shall deal separately with the submission based on there having been a common assumption.
In para. 75 of its decision, the Tribunal said that neither the records of Grollo Australia nor those of Grofam disclosed any decision, agreement or arrangement made by or between the companies to the effect of the at cost arrangement asserted by the appellants in relation to the Rialto Project. Nor was there any contemporary record of any kind evidencing or referring to such an agreement or arrangement. The Tribunal went on to refer to the assumption upon which the appellants place separate reliance. As we say we shall come to this in a moment.
Having looked at the various documents and undertaken a general consideration of the relevant evidence, we can only say that we do not find any error in the conclusion reached by the Tribunal in that part of para. 75 of its decision to which we have referred. Furthermore, the joint venture deed executed on 4 December 1981 plainly provided for profit to be received by Grofam. For instance, Clause 7.1(c) provided that Grofam should, under each building contract, itself provide and perform the "Preliminaries" for a fixed lump sum which was to include a fixed amount for overheads and for profit. Clause 7.1(d) was expressed in similar language as was Clause 7.1(d)(i). Reference may also be made to Clause 7.1(f)(iv) which provided that each building contract should make provision that there should be "no mark up or additional margin of profit" to Grofam on any variations.
Nevertheless, we should briefly indicate that there were some matters of contention which would have had to be resolved had there been a different conclusion in relation to the additional tax. In the submission of the Commissioner there were two questions. The first was whether the omission of any Rialto construction profit from the net income of Grollo Australia as trustee of that trust amounted to fraud or evasion under the section. We have resolved that issue adversely to the Commissioner. The consequence is that we are of opinion that his submissions must fail. But the second question posed by the Commissioner was whether, assuming fraud or evasion by companies in the Grollo Group and their officers, could that fraud or evasion be imputed to Ms Grollo for the purposes of the section. There was no suggestion that Ms Grollo herself was personally involved in any fraudulent conduct. Counsel for the Commissioner developed submissions intended to persuade the Court that Ms Grollo was responsible in law for the fraud or evasion of the companies and the officers referred to. In their submissions, counsel for Ms Grollo disputed that proposition. In essence they submitted that in no sense could it be said that the conduct of Grollo Australia and its directors, in making and lodging the 1986 return of the Rialto Unit Trust, was conduct on behalf of or to be imputed to Ms Grollo. Counsel said that Grollo Australia was not the agent or delegate of Ms Grollo. She did not have the power to direct them as to the way in which they should carry out their duties as trustees.
In the view that we take of the matter, it is unnecessary to decide the question which the Commissioner's submissions pose. For that reason we do not express a view about it. The problem can await a case in which it more directly arises for decision.
The Question Arising under the Income Tax (Rates) Act 1982 "The Rates Act"
This issue related to the assessment for the year ended 30 June 1984 of Grollo Nominees Pty Ltd as trustee for the Rino Grollo No. 11 Trust on account of Monica Grollo. At the relevant time she was an infant. This aspect of the case was settled during the hearing of the appeals. Accordingly, we say nothing further about it.
Conclusion
That completes the treatment of all matters which arose for consideration during the appeals except that concerning the construction of the terms of settlement. We have dealt with that matter in a separate judgment which will be published at the same time as these reasons are published.
The matter will be stood over for a short time to enable the parties and their legal representatives to consider what we have said. When the matter is again in the list, counsel are directed to bring in short minutes of order to give effect to our various conclusions. If there are any outstanding matters upon which they wish to make submissions, those submissions should be delivered in writing before the next hearing. Written submissions should not exceed 12 A4 pages in length.
I certify that this and the one hundred and eighty-eight (188) preceding pages are a true copy of the reasons for judgment herein of the Court.
Associate
Dated
APPEARANCES
Counsel for the Appellants: Mr B.J. Shaw QC
(The Grollo Interests) Mr G.J. Davies
Solicitors for the Appellants: Arnold Block Leibler
Counsel for the Respondent: Mr P.R. Hayes QC
(The Commissioner of Taxation) Mr C.M. Maxwell
Mr T.P. Murphy
Solicitors for the Respondent: Australian Government Solicitor
Date of Hearing: 2-6 October 1995
Place of Hearing: Melbourne
Date of Judgment: 26 March 1997
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