Gruber and Commissioner of Taxation
[2005] AATA 1305
•23 December 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 1305
ADMINISTRATIVE APPEALS TRIBUNAL )
) No NT2000/487
TAXATION APPEALS DIVISION ) Re ALFRED GRUBER Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr Julian Block, Deputy President Date23 December 2005
PlaceSydney
Decision The Tribunal affirms the decision under review.
[Sgd] Mr Julian Block
Deputy President
CATCHWORDS
TAXATION – film scheme - deduction in respect of monies invested in a film – whether deduction was incurred in the year in which the deductions were claimed – onus on Applicant – consideration of Transaction Documents –effect of Part IVA of the Income Tax Assessment Act 1936 – decision affirmed.
Income Tax Assessment Act 1936; sections 51, 177D, 226, 226Z
Taxation Administration Act 1953; section 14ZZK
Federal Commissioner of Taxation v Cooke [2004] FCAFC 75
Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213
Vincent v Federal Commission of Taxation [2002] ATC 4742
New Zealand Fax Investments Limited v The Federal Commissioner of Taxation (1938) 614 CLR 179
Federal Commissioner of Taxation v James Flood Proprietary Limited (1953) 88 CLR 492
Commissioner of Taxation of the Commonwealth of Australia v Hart and Anor [2004] CLR 216
Commissioner of Taxation v Sleight [2004] FCAFC 24,
Puzey v Federal Commissioner of Taxation [2003] FCAFC 197
Macquarie Finance Limited v Federal Commissioner of Taxation [2005] FCAFC 205
McCormack v FCT (1979) 143 CLR 284 at 303;
FCT v ANZ Savings Bank Ltd (1994) 181 CLR 466;
FCT v Dalco (1990) 168 CLR 614 at 620;
FCT v Munro (1997) 97 ATC 5041.
Gauci v FCT (1975) 135 CLR 81:
REASONS FOR DECISION
23 December 2005 Mr Julian Block, Deputy President
PART A - introduction and general
1. The objection decision under review is the disallowance of the Applicant’s objection against an amended assessment dated 17 March 1999 in respect of the year ended 30 June 1995 (“the relevant year”).
2. The Applicant was self-represented; the Respondent was represented by Ms J Davies SC and Ms D Harding of counsel instructed by the Australian Government Solicitor.
3. The Tribunal had before it the T documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 together with Exhibits as follows:
(a)Exhibit A1: Witness statement by the Applicant dated 20 April 2005;
(b)Exhibit A2: Witness statement by the Applicant (undated) but sent under cover of a fax dated 1 August 2005; the first page of Exhibit A2 under the heading of “Background” reads as follows:
·I made two separate contributions, namely $200 for one unit under the Trust Deed and $40,000 as a film services contractor. Documentation relating to my investment are included in the respondent “T” statements (Refer to T11-240, 241,242 and T12-243). Additional documentation in the form of an Income and Expenditure Statement and a copy of a bank statement are annexed to the witness statement.
·The amount of $40,000 required to make the investment was borrowed from a finance company, Domain Partners.
·Under the Film Services Agreement I received the following film service fees totalling $49,000 received as follows :-
o Year Ended 30th June 1997 $3,400
o Year Ended 30th June 1998 $2,400
o Year Ended 30th June 1999 $3,400
o Year Ended 30th June 2000 $3,400
o Year Ended 30th June 2001 $35,400
·The loan was for a period of five years and the following amounts which represented the shortfall between the interest charged and the guaranteed “film service fees” were paid :-
o Year Ended 30th June 1996 $383
o Year Ended 30th June 1997 $920
o Year Ended 30th June 1998 $920
o Year Ended 30th June 1999 $920
o Year Ended 30th June 2000 $920
o Year Ended 30th June 2001 $920
(c)Exhibit R1: Prospectus entitled “Replacement Prospectus” in respect of a film (the “Film”) originally named “James Dean: An American Legend” and thereafter renamed “James Dean: Forever Young”. That prospectus is referred to in these reasons as the “Second Prospectus”. Although the space for the date on which it was signed by the directors (Tp 45) was not completed, it was signed by Malcolm Olivestone (“Olivestone”) on his own behalf, on behalf of Ian Johnson and on behalf of Anthony Jones as directors of Pacvest Securities Limited; page 1 of the Second Prospectus states that it is a replacement prospectus dated 21 June 1996 and that it will expire on 28 June 1996. The Second Prospectus sets out moreover that it was lodged with the Australian Securities Commission (ASC) on 21 June 1996. The Second Prospectus under the heading of “Important Information” (p 2) states:
“This Replacement Prospectus, is a replacement prospectus for the Prospectus issued on 28 June 1995 by Pacvest Securities Limited ACN 003 190 449 (“the 1995 Prospectus”) and the Supplementary Prospectus issued on 21 December 1995.
Pursuant to the 1995 Prospectus a sum of $11 million was raised. That sum is to be used in the production of the film, now renamed, “James Dean: Forever Young” which is described in this Replacement Prospectus. The 1995 Prospectus dealt with the production and distribution of a film therein entitled “James Dean: An American Legend”. Alan Hauge was the writer of the screenplay and was to be the Director, Co-Producer and Writer. Damian Chapa was to play the lead role. The Production Agent and Distribution Agent was to be GMT Productions Inc. The film had a Production and Distribution Budget to of AUD$145,545,708.20 and Distribution Services Sub-budget of AUD$62,500.00. Alan Hauge had at the time of preparing the 1995 Prospectus obtained the approval and authorisation of the James Dean Foundation for his screenplay. For various reasons, Alan Hauge was unable to produce the film as required under the various agreements the subject of the 1995 Prospectus. The Producer, Fritz Manes, named in the 1995 prospectus has since taken all necessary steps to effect the required changes to the productions.
This replacement Prospectus deals with the production of a film, for cinema release about James Dean. The film has been renamed “James Dean: Forever Young”. Thom Noble has been appointed as Director. Joseph Stinson has written a completely new screenplay. Fritz Manes’ company (JBD Productions Inc.) is the Production Agent and will also be the Distribution Agent. The Production Budget has been revised to AUD$52,458,062.82 and distribution will be funded separately. At the time of publication of this Replacement Prospectus, the film is in pre-production, a casting director has been appointed, but no person has yet been chosen to play the lead role or any supporting roles. In order to maintain commercial flexibility, no approval or authorisation has been sought from the Dean Family for the new film. Good relations however exist between Mr Manes and the controllers of the James Dean Foundation. The material agreements are closely based on the agreements described in the 1995 prospectus and the commercial characteristics of the offer contained in the 1995 prospectus are identical as in the intended purpose for the production of the film.”
(d)Exhibit R2: A document entitled “Annexure 2”; it includes a letter by Edward Russell, Managing Director of Inteq Custodians Limited addressed to Paul Saffron, Director of Eurocapital Securities Limited and enclosing the following documents:
(i)Delegation Agreement dated 19 June 1996;
(ii)Picture Production Agreement dated 19 June 1996;
(iii)Production and Distribution Agreement dated 19 June 1996;
(iv)Management Agreement dated 19 June 1996; and
(v)Film and Services Agreement dated 20 June 1996.
(e)Exhibit R3: Searches by the Respondent in respect of a number of relevant companies.
4. When Exhibits A1 and A2 were tendered, the Respondent objected on the basis that each of them contains quantities of irrelevant matter. The Tribunal accepted the tender of those Exhibits, subject to weight and on the basis that the Respondent was entitled to reserve his rights as to such of its contents as are in the view of the Respondent open to objection.
5. On 31 January 2005 and in accordance with directions given by Deputy President Forgie, the Respondent filed his Statement of Facts and Contentions dated 31 January 2005. It is convenient if only as a starting point to include its content under the heading of “Facts” and contained in clauses 6 to 27 inclusive as follows:
“Facts
6.The applicant is one of a number of subscribers for units and interests under a prospectus for the production of the film entitled “James Dean:- An American Legend”.
7.In 1995 a public prospectus dated 6 June 1995 was prepared and circulated by Eurocapital Ltd inviting potential investors to participate as Film Service Contractors in the production of a major feature film entitled `James Dean:- An American Legend', for international distribution, with secured minimum fee based returns and profit participation. In 1996 a replacement prospectus entitled `James Dean:- Forever Young' was prepared detailing alterations to the Executive Production team.
8.On offer under the prospectus were:
8.1.up to 4,848 units of A$200 each in a trust [a trust fund of A$969,600]; and
8.2.up to 29,090 parcels of Film Services Monies of $5,000 each [A$145,450,000].
Applicants were required to apply for and provide funds for One (1) Unit together with a selected number of parcels of Film Services Monies.
The minimum number of number of parcels of Film Services Monies that could be applied for under the Prospectus was 6 parcels (i.e. the minimum subscription amount was $30,000) and thereafter in multiples of one (p 10 of the Prospectus T document T4).9.The applicant subscribed for one unit under the Trust Deed and 8 parcels of Film Services Monies, for a total sum of $40,000 of Film Services Monies. The applicant’s application for Units and to become a Film Services Contractor in respect of services for the production, delivery and initial international distribution of the Film is dated 30 June 1995 (refer T document T11). The applicant borrowed the $40,000 payable for the Film Services Monies from a finance company.
10.The Film Services Contractors have claimed deductions totalling $23,850,000 under s 51(1) of the Income Tax Assessment Act 1936 (“the Act”) in respect of the amounts they say they paid for their Film Services Monies under the prospectus: together with interest on the loans taken out by them to fund the payment for the units and Film Services Monies they subscribed.
11.A total amount of $23,850,000 was subscribed for as Film Service Contribution Monies under the prospectus. This amount was applied as follows:
a. to management fees/ letters of credit $14,705,926;
b. to Film Service Fees $1,224,900;
c. to trustee fees $570,573;
d. remitted offshore $7,348,601.
12.The prospectus included a “Taxation Matters Opinion” section (page 31 of the Prospectus) prepared by Deloitte Touche Tohmatsu which stated that the funds expended in order to facilitate production and distribution of the Film by the Film Services Contractors
will be deductible under Section 51(1) of the Income Tax Assessment Act 1936 (“the Act”) on the basis that the expenditure is incurred in gaining or producing assessable income, or, alternatively, incurred in carrying on business for that purpose.
13.The applicant claimed the amount of $40,000 as a deduction in the income year ended 30 June 1995.
14.The offer pursuant to the prospectus was described by the Manager, Pacvest Securities Ltd, as “the opportunity to participate in the production delivery and initial international theatrical release (the provision of ‘Film Services’) of a major feature film, intended for international distribution, with both secured minimum fee based returns and fees calculated from profits from the Film. (page 12 of the Prospectus).
15.The prospectus informed that:
15.1.each subscriber, called a “film services contractor” (“contractor”), will be responsible for production, delivery and initial international theatrical release of the Film, in accordance with the Budget;
15.2.The Manager, Pacvest Securities Ltd, the Production Agent, GMT Productions Inc, and Distribution Agent, GMT International Inc, will act as agents to carry out and report on various of the functions on behalf of the film services contractors;
15.3.by providing the Film Services Monies spent in accordance with the Budget, the Film Services Contractors will meet the cost of the Film Services contracted on their behalf;
15.4.In accordance with the Film Services Agreement, copyright in the Film will not belong to the Film Services Contractors. The Film Services Contractors will be paid the FSL Fees (the Film Services Fees and the Film Services Profit Based Fees) in exchange for the production and delivery and initial international theatrical release of the Film.
refer page 12 of the Prospectus.
16.The prospectus further informed that in return for providing the Film Services Monies for the production, delivery and initial international distribution of the Film, being the Film Services, each Film Services Contractor would be entitled under the Film Services Agreement to receive, pro rata, the following fees:-
- Film Services Fees - secured minimum fees over a period of 5 years, equivalent to 122.5% of the Film Services Monies provided by the Film Services Contractors; and
- Film Services Profit Based Fees which are determined by the commercial success of the initial international theatrical release of the Film, and which are equal to 10% of net profits as defined in the Film Services Agreement.
17.Certain minimum fees, the Film Services Fees were required to be paid to the Film Services Contractors, including the applicant, (expressed as a percentage of the total amount of Film Services Monies):
End Year 1 8.5%
End Year 2 8.5%
End Year 3 8.5%
End Year 4 8.5%
End Year 5 88.5%
Total: 122.5%
Film Services Ltd was required to provide security for the payment to each Film Services Contractor of the Film Services Fees, such security to be in the form of a letter of credit to be issued by EC Consolidated Capital Ltd.
18.The prospectus identified (at p 13) the principal participation documents to give effect to such arrangements as:
18.1.the Trust Deed (T document T5) between the Manager (Pacvest Securities Ltd) and the Trustee (Inteq Custodians Ltd) and each film service contractor by virtue of the acceptance of the contractor's application under the prospectus. Under the Trust Deed, among other things, the Trust Fund is established;
18.2.the Film Services Agreement (T document T6) entered into between Inteq Custodians Limited as agent for each production contractor and Film Services Ltd. Under the agreement FSL agrees to provide access to the Production Rights of the Film to the Film Services Contractors to provide the Film Services;
18.3.the Management Agreement (T document T9) between Pacvest Securities Ltd (the Manager) and the person or corporation who becomes a party under the Agreement (the Film Services Contract) whereby the Manager is appointed to act as manager and agent, to supervise, carry out and administer on behalf of the Film Services Contractor the performances of its obligations;
18.4.the Production and Distribution Agreement (T document T8) between Pacvest Securities Ltd and GMT Productions, Inc (the Production Agent) and GMT International Inc (the Distribution Agent). Under this agreement provides for the appointment of the Production Agent and the Distribution Agent to perform and fulfil the obligations of the Film Services Contractors to FSL under the Film Services Agreement,
18.5.the Picture Production Agreement (T document T7) between Film Trust One (a voluntary business trust created under the laws of State of California, USA) and FSL. Under the agreement FTO agrees to provide to FSL access to the FTO Rights in the Film so that FSL may undertake the Production Services. Under the agreement FSL agrees to produce the film and deliver the completed film to FTO ;
18.6.the Delegation Agreement (T document T10) between Pacvest Securities Ltd and Eurocapital Securities Ltd. Under this agreement Pacvest Securities Ltd, the Manager, delegates Responsibilities to Eurocapital Securities Ltd (the delegate). The Responsibilities delegated to the delegate from the Manager include the responsibilities and duties of the Manager under the Trust Deed, the Management Agreement and the Production and Distribution Agreement.
19.The prospectus stated that:
19.1.FSL had all necessary rights to produce, distribute and exploit the film, such rights having been obtained by FSL from the holder of the rights, Film Trust One (“FTO”), a US business trust, pursuant to an agreement dated 14 June 1995;
19.2.FTO had provided to FSL the right to carry out the production of the film and FSL agrees to expend the production monies in accordance with the Budget to produce the film. FSL agrees to deliver the final film to FTO It is expressly stated that FSL will not acquire any interest in the copyright of the film created;
19.3.FTO agreed to pay FSL for the provision of the Production Services in the aggregate sum of $178,182,017.50 and payable as follows:-
date for payment
A$ amount
% of film services monies
on 8 July, 1996
12,363,250.00
8.5%
on 7 July, 1997
12,363,250.00
8.5%
on 7 July, 1998
12,363,250.00
8.5%
on 7 July, 1999
12,363,250.00
8.5%
on 7 July 2000
128,727,416.80
88.5%
PLUS
Production Services Profit Based Fees, being calculated from net profits.
20.In the Deloitte Touche Tohmatsu Opinion on Taxation Matters (see page 31 of the Prospectus) the Facts of the transaction are summarised as follows:-
“1.Film Trust One (“FTO”) is authorised to produce a feature length film “James Dean”: an American Legend (“the Film”).
2.The Film is in the early stages of pre-production. The budget of approximately US$104,727,400 is to be spent on production, delivery and international distribution of the Film.
3.FTO, who is the party authorised to have the Film made, has entered into a picture production agreement with Film Services Limited (“FSL”) whereby FSL will be contracted to provide services in connection with the production and distribution of the Film.
4.Copyright in the Film will remain with FTO or its associates at all time, and at no stage will FSL acquire any interest in copyright.
5.FSL will, in turn enter into a film services agreement with various Australian resident participants (the “Film Services Contractors”) who will provide services in connection with the production and distribution of the Film.
6.Film Services Contractors will provide film services monies, for payment into a designated production bank account (the “escrow account”), and these funds will be applied to meeting costs of providing film services in connection with the production and distribution of the Film.
7.Any borrowing by Film Services Contractors to fund their involvement in the film services arrangement will be from arms length parties on commercial terms and conditions.
8.The Film Services Contractors will appoint a Manager to carry out their obligations pursuant to the film services agreement. The Manager is Pacvest Securities Limited (the “Manager”). The Manager will requisition the film services monies in order to fulfil the required management obligations as outlined in the Management Agreement.
9.The Film Services Contractors will be entitled to receive fees equal to:
a)122.5% of their film services contribution monies, payable as fees equal to 8.5% in each of the first four years, with the first fees due for payment on 8 July 1996, and 88.5% in year five; and
b)10% of net profits arising from distribution of the Film.”
21.No documentation has been produced to the respondent that shows or evidences that:
21.1.any amount of the Film Services Monies was spent on the provision of production services, delivery and/or distribution of the Film and no amount in fact was so spent;
21.2.any production services as referred to in the production services agreement were performed by contractors or on their behalf;
21.3.FSL entered into any film services agreement with various or any Australian resident participants (the “Film Services Contractors”) who then provided services in connection with the production and distribution of the Film;
21.4.FTO had the copyright in the Film;
21.5.the Film was produced and completed at any time or prior to 7 July 2000.
22.Instead, the production contribution moneys that were paid to Film Services Ltd were applied by it in acquiring the security it was contractually obligated to provide in respect of the Film Services Fees it was liable to pay to the contractors.
23.The effect of these transactions is that out of the moneys subscribed for “interests” in the production delivery and initial international distribution of the Film was that a total amount of $23,850,000 was subscribed for as Film Service Contribution Moneys under the prospectus and was applied as follows:
23.1.the sum of $14,705,926 to Management fees and letters of Credit;
23.2.the sum of $1,224,900 to FSL as fees;
23.3.the sum of $ 570,573 to the trustee for its own benefit and use;
23.4.the sum of $7,348,601 was remitted off-shore.
24.Nothing further is payable to the contractors. The contractors will never be paid the further fees due to them because:
24.1.were never capable of realisation;
24.2.were a legal impossibility and/or incapable of computation and thereby illusory;
24.3.the agreements are not and never have been enforceable.
25.Further or alternatively, the applicant had no rights and could not have had any rights under the picture production agreement in the financial year ended 30 June 1995.
26.Further or alternatively, the operation of the picture production agreement (T document T7) was conditional upon a number of conditions precedent being satisfied. No documentation has been produced to the respondent to evidence or support that the conditions precedent were fulfilled by the required date or at all.
27.The applicant says that the funds expended by him as a film services contractor are deductible on the basis that the expenditure was incurred in gaining or producing assessable income or incurred in carrying on business for that purpose. He further asserts that he had a genuine belief at the time of entering into the transaction that the film would be successfully completed and that there was the potential for significant commercial returns with minimal risk. Under the prospectus the film services contractors were engaged to provide film services in relation to the making of the film “James Dean: An American Legend”. The film services are defined in the Film Services Agreement to mean “..the production and delivery of the Film to Film Services Ltd and distribution o f the completed Film for FSL, expending thereon the Film Services Monies, undertaken or to be undertaken by the Film Services Contractors pursuant to the provisions of this agreement.” The applicant has contended that his subscription monies of $40,000 were used in the performance of his obligations to provide film services in respect of the making of the film “James Dean: An American Legend”. Instead:
27.1.the applicant never had any rights to provide film services in relation to the making of the film “James Dean: An American Legend”;
27.2.no film services in relation to the making of the film “James Dean: An American Legend” were provided in fact by the applicant or on its behalf; and
27.3.the Film Services Monies were not applied to expenses of providing film services.”
6. The Respondent made it clear from the outset that some of the factual statements contained in his Statement of Facts and Contentions were included because of his obligation to state a position but without admission as to their correctness and without derogating from the onus borne by the Applicant.. In particular, the monetary amounts set out in clause 11 of his Statement of Facts and Contentions as to total amounts subscribed and the manner in which those total amounts were utilised fall into this category. Moreover, the reference in clause 18 of his Statement of Facts and Contentions to the principal participation documents required to give effect to the arrangements set out in the Prospectus was included without admission as to the fact that those documents were duly executed or the dates on which they were executed. The term “Transaction Documents” as used in these reasons means the principal participation documents described in clause 18 of the Respondent’s Statement of Facts and Contentions and also the Prospectus itself; that term as used in these reasons does not include the Supplementary Prospectus (referred to hereafter); it also does not include the Second Prospectus or the documents referred to in Exhibit R2, the Applicant having made it clear that he applied to be a Film Services Contractor under the Prospectus only.
7. The T documents include the Transaction Documents but again without admission by the Respondent as to due execution or date of execution.
8. The Applicant also served a Statement of Facts and Contentions; that document dated 17 November 2004 also contained a section entitled “Facts”; that section is, if only as a matter of balance (and although the description by the Applicant of its contents as ‘Facts’ was not altogether apposite) is included as follows:
“FACTS
1.The funds expended by me, as a film services contractor are deductible on the basis that the expenditure is incurred in gaining or producing assessable income or alternatively incurred in carrying on business for that purpose.
2.I made two separate contributions, namely $200 for one unit under the Trust Deed and $40,000 as a film services contractor.
3.The amount of $40,000 required to make the investment was borrowed from a finance company.
4.I contend that the amounts are deductible in calculating my taxable income, but the Respondent has in fact denied the deductibility of the payments and issued income tax assessments denying the deductibility of the payments.
5.On or about 31st August 1998 I received a Position Paper from the taxation Office that my claim for a deduction would be disallowed and that a Notice of Amended Assessment would be issued.
6.On or about 17th March 1999, seven months after receiving the Position Paper, the Respondent issued a Notice of Amended Assessment to me for the year ended 30th June 1995 and assess additional tax by way of penalty.
7.On or about 14th April 1999, I lodged a Notice of Objection in respect of the Notice of Assessment issued to me for the year ended 30th June 1995.
8.On or about 24th October 2000, almost two years after I lodged my objection, the Respondent disallowed by objection.”
9. The term “Prospectus” as used in these reasons means the prospectus which is document T4 (T pp 12-67) and which was dated 26 June 1995; (it will be recalled that the Second Prospectus refers to the prospectus as having been issued on 28 June 1995).
10. The term “Profit Fee” means the profit based fee referred to in clauses 12.06 and 12.07 of the Picture Production Agreement (T pp 172-173) reading as follows:
“12.06FTO shall pay the Profit-Based Fees 30 days after the end of each quarter, being 10% of the Profit Participation earned by FTO during that quarter.
12.07The amounts, dates and method of payment of the Profit Participation shall be as follows and in accordance with the following principal terms and conditions:
A.Net Profits shall be defined as all Gross Receipts received by FTO from all sources and all media world-wide from the distribution, licensing and sale of, and merchandising arising from, the Film; after deducting, in order:
1.Distribution Fees, at levels, per media/territory, reasonably acceptable within the international film industry.
2.Distribution Expenses, including Prints & Advertising Costs.
3.Negative Cost of the Film; which, for purposes of this Agreement, unless otherwise mutually agreed between FTO and FSL, shall no exceed US$30,000,000.00
4.Interest on Negative Cost.
5.Specified deferments or residuals, and specified gross participations.
B.Thereafter, the remaining balance of Gross Receipts, (Net Profits), shall be divided, in perpetuity, as follows:
1.To FTO: 90%
2.To FSL: 10%
C.Gross Receipts shall be defined as any and all receipts derived by FTO from all exploitations of the Film, including from the following major areas:
1. Theatrical distribution and rights.
2.Television distribution and rights, including network, syndication, cable (both basic and pay) and pay-per-view).
3.Videocassette and disc distribution and rights, for rental or hire or direct sale.
4. Non-theatrical distribution and rights.
5. Merchandising.
6. Publishing and other Ancillary rights.
7. Music rights.
Where the terms of this Agreement are not sufficiently comprehensive to unambiguously and completely set out every fact or factor that will define the Profit Participation, there shall be imported into this Agreement such provisions reasonably standard and acceptable in the international film industry as to such matters as statements and payments, treatment of affiliates, rights of examination and contest, general provisions and definitions.”
11. . It may be noted that a dispute under the Picture Production Agreement is, in accordance with clause 16.06 of that agreement, to be resolved in accordance with the rules of the American Arbitration Association in Los Angeles, California.
12. The provisions as to Profit Fee appear in slightly different form in the Film Services Agreement; it is not necessary for me to set out that amended form, since the clause is cast in much the same terms as that contained in the Picture Production Agreement; however and in relation to the Film Services Agreement disputes are to be resolved by arbitration in the state of Victoria.
13. The term Budget means the budget for the Film set out in the Picture Production Agreement amounting to $145,454,718.20.
14. Clause 18 of the Respondent’s Statement of Facts and Contentions should not necessarily be construed in such manner that the relevant Transaction Documents were executed (assuming they were all duly executed) in the order in which they are listed in that clause 18.
15. I intend in these reasons to use the abbreviations contained in clause 18 of the Respondent’s Statement of Facts and Contentions. It should be noted that all companies which are denoted as “Ltd” in that clause 18 are Australian companies whereas all companies which are denoted as “Inc” in that clause 18 are Californian corporations. In relation to clause 18(2) of the Respondent’s Statement of Facts and Contentions the term “FSL” refers to Film Services Limited. The term “Film Services Contractor” refers to each person, such as the Applicant, who invested in the Film and subscribed “Film Services Monies”. The term “Film” refers to the Film as described in the Prospectus and also the Second Prospectus and notwithstanding its change of name. The term “Deloittes” refers to Deloitte Touche Tohmatsu who furnished a tax opinion included in the Prospectus; the term “Accountants” refers to “Harper Wootton” who furnished an auditors report included in the Prospectus. The terms “Manager” and “promoter” (controlled apparently by Olivestone) are used synonymously.
16. I intend in Parts B, C and D of this decision to deal with the Applicant’s evidence; he was the only person who gave oral evidence. Part E will contain an overview of the Transaction Documents and also references to certain provisions contained in the Transaction Documents which were not specifically referred to in evidence.
17. The hearing commenced with a summary of issues by Ms Davies. I had (previously) indicated in a telephone directions hearing that I generally ask the Respondent’s representative to commence with such a summary where an Applicant is self-represented but only where the Applicant approves and bearing in mind that the Applicant has the right to present his case first. In this case and at the commencement of the hearing, the Applicant specifically asked for such an opening statement by Ms Davies. During the course of her opening statement Ms Davies indicated that the issues are:
(a)Whether the Applicant has discharged the onus of proof borne by him pursuant to s 14ZZK of the Taxation Administration Act 1953 on the basis that the evidence contained in Exhibits A1 and A2 does not suffice for this purpose;
(b)If the Applicant has discharged the onus of proof, whether he is entitled to a deduction in respect of the relevant year in an amount of $40,000 claimed under s 51 of the Income Tax Assessment Act 1936 (“ITAA”);
(c)If the Applicant is entitled to a deduction under s 51 of ITAA whether Part IVA of ITAA operates to disallow it; and
(d)Whether the penalties assessed against the Applicant are appropriate. It may be noted in this context that penalties were assessed at 50 per cent but reduced to 5 per cent.
18. It is relevant to note that the Applicant made no reference to penalties in his objection; at the suggestion of Ms Davies, the Applicant’s objection was treated as amended so as to include a reference to penalties.
19. Although settlement offers made to the numerous participants in the Film were not within my province, the Applicant referred to this area on so many occasions (and in addition this aspect was the cause of a number of directions hearings before the hearing) that it is desirable that some brief mention be made of it. I first came into this matter in replacement of another Deputy President, at a telephone directions hearing, which was also the return day of a summons to produce issued by the Applicant and in which the Applicant sought, in broad terms, details of any and all dealings by the Respondent with other investors in the Film. The Respondent objected to the production of any such documents both on grounds of relevance and also because to disclose that information would breach his duty of confidentiality to other tax payers. I declined to grant any order in respect of the summons to produce. On two further occasions, the Applicant sought to issue a summons to produce in similar terms. The first of them was dealt with in a telephone directions hearing and the second was dealt with through a letter by the Tribunal in which the Tribunal offered to issue the summons as to a part only. In the result, the Applicant addressed a letter to the Tribunal dated 24 November 2005 in terms best described as unfortunate. Since he withdrew the allegations contained in them and (somewhat belatedly) at the hearing apologised for making them, I determined that I should overlook it. It would appear having regard to a statement made by the Applicant at the hearing that settlement terms were offered to taxpayers who invested in the Film but that the terms offered to taxpayers such as the Applicant were less generous on the basis that he is a sophisticated investor. Suffice it to say that no settlement was concluded as between the parties and so that this aspect is of little if any relevance.
20. This Part A can be concluded on the basis that it is common cause that the Applicant invested $200 in the acquisition of a unit in the Trust Fund (and in respect of which no deduction was sought) and $40,000 through the provision as a Film Services Contractor of Film Services Monies in that amount, the whole of such latter amount having been borrowed from a lender; a deduction of that amount of $40,000 was sought in the relevant year.
PART B - the evidence of the applicant: evidence in chief
21. The Applicant is a chartered accountant; prior to the hearing he filed two witness statements (Exhibits A1 and A2); he also filed a Statement of Facts and Contentions and written submissions. A consideration of all of those documents indicates that they contain large quantities of irrelevant matter; put in general terms, they also indicate that the distinction between evidence and submissions is not at all clear to the Applicant.
22. The Applicant commenced by saying that he has over a number of years been involved in numerous investments of various kinds and in particular has been heavily involved in the film industry. He said that he has invested some $300,000 in six films which included what he described as 10BA films and films in respect of which rulings were obtained. He said that he had lost $100,000 in films where supposedly there was no risk involved. He said in relation to Part IVA that there were other schemes more acceptable to the Respondent in which he could have invested; he referred in particular to afforestation investments and negatively geared investments.
23. The Applicant said that in his accounting practise he was frequently approached by promoters. A prospectus in respect of which Olivestone’s company was the promoter was presented to him in 1995. The Applicant considered the prospectus and in particular the auditor’s report by the Accountants and the tax opinion by Deloittes. He noted that he had been the investigating accountant on various occasions and knew of the work involved and how much time the work would have taken. He said that he was influenced by the fact that there was such an auditor’s report and the fact that the Prospectus had been approved by ASIC. He was also influenced by the fact that a tax opinion was furnished by Deloittes; he said that he had been an employee of Deloittes and knew their system and their general competence.
24. The Applicant said at this early stage of his evidence that a return of $122 on an investment of $100 was a good return. He obtained a loan of $40,000 from Domain Partners (“the lender”). He said that he did not normally worry about the identity of the loan provider especially, as was the case in this instance, the lender required no security other than the Film copyright.
25. The Applicant said, in answer to a question as to what security the lender wanted, that he did not know because he did not have a copy of the loan agreement. He was given a loan of $40,000 where no personal guarantees were required and “they didn’t require me to put up my house. They obviously had security over the Film itself”. He went on to say that the additional attraction was that the investment did not require a large outlay: “the interest was I think 9%”. He noted that the investment required an amount of $40,000 all of which was borrowed plus the other amount of $200. This was, he said, a good investment. (The Tribunal notes in this context that the Applicant who is himself an accountant cannot have been unaware of the fact that the lender was fully secured by letter of credit; the Tribunal does not accept that the Applicant ever believed that the lender somehow obtained security over the Film or the Film copyright, nor indeed is there any reason why the lender would have wanted or needed any such security).
26. The Applicant said that he had the Prospectus which had been checked over by Deloittes and “I am getting $122 for $100 which was lent to me and this was a very attractive investment”.
27. The Applicant said that he accepted the Prospectus at face value; he also said that he was strongly influenced by the fact that Deloittes had opined that “everything was in order having been through the documents”.
28. When asked when he received the Prospectus he said that although the Respondent thought that he received it in June 1995 he thought that he received it in April, May or June 1995.
29. The Applicant said that he has eight children and that he was always looking for business opportunities designed to secure their future. He said that he bought businesses. He was involved inter alia in a photographic business and in holiday apartments in Cairns which he had bought without seeing them. He said that he and his wife have five accountancy practises. He viewed the Film as a good business opportunity. He said also that he was told that the Respondent had reviewed the Film and that the Respondent had approved it in that he allowed variation applications referable to it.
30. The Applicant then said (as he was to say many times thereafter) that he did not go through the Transaction Documents. He considered the Prospectus. He went on to say “I am right – I will prevail. I have never had problems with the ATO. I have been subject to audit but I have never been found to have done anything wrong”.
31. The Applicant went on to say that the fact that the Respondent reduced the penalty tax charged from 50 per cent to 5 per cent was indicative of the fact that Part IVA of the ITAA could not apply.
32. At this stage the Applicant embarked on a series of statements which were submissions and not evidence. He referred at length to the judgment in Federal Commissioner of Taxation v Cooke [2004] FCAFC 75; in his view that case was on all fours with his case. He said also that he was not in the relevant year a maximum rate tax payer (and he referred in this context to his return for the relevant year). He referred again to the role played by ASIC in relation to the Prospectus. He said significantly that the Respondent’s contention that there was no risk involved was incorrect. “There are always risks. If I didn’t pay interest action would have been taken. Nine percent was paid and there was an 8 per cent return”. He again noted that negative gearing was permissible.
PART C - the applicant’s evidence: cross examination
33. The Applicant was referred to the tax opinion by Deloittes which commences on Tp 44. He said that he read and understood it. When asked whether he noted that it contained qualifications he said “they are all qualified”.
34. The Applicant was referred to the Deloittes opinion under the heading of “Timing of Deductions” which appears at Tp 46 reading as follows:
“Timing of Deductions
Deductions should be available to Film Services Contractors at the time the film services contributions are incurred. This will be at the time where the Manager calls for the payment of film services monies pursuant to the Management Agreement provided that:
i)Film Services Contractor has irrecoverably committed the funds to the escrow account; and
ii)the contracted services are provided within 13 months (were such services to be provided over a longer period the deduction would be available on a pro-rata basis).
We have been advised that the Manager will call for the payment of film services monies on or before 30 June 1995 in respect of Film Services Contractors then existing. This call will be subject to the minimum subscription being achieved, and the presentation by the Manager to the Trustee of a Requisition for Payment (as outlined in clause 13.05 of the Trust Deed). Subject to these conditions and the requirements stipulated in the immediately preceding paragraph above both being met, the film services contributions made prior to 30 June 1995 should be incurred in the year ended 30 June 1995.
Film Service Contractors who contribute film services monies after 30 June 1995 should be entitled to claim a deduction in the following year (year ended 30 June 1996), provided that all the abovementioned conditions are met.”
The Applicant said that he understood the import of the Deloittes’ opinion in this regard.
35. The Applicant was next referred to the Deloittes opinion in respect of Part IVA which appears at Tp 47 and reading as follows:
“Part IVA of the Act
The general anti-avoidance provisions have application where, broadly, a transaction or scheme is entered into with the dominant purpose of obtaining a tax benefit. The individual circumstances of each contractor would therefore require consideration in terms of “the purpose test”.
However, from the information available to us, we consider that the Film proposal represents a substantial business venture with the potential for significant returns. On this basis participants should not be entering the transactions in question with the sole or main purpose of obtaining a tax deduction. In these circumstances the Anti-Avoidance Provisions should not be applicable. Ultimately however each prospective contractor will have to individually assess their potential Part IVA exposure.”
Again the Applicant said that he understood the import of the Deloittes opinion.
36. The Applicant was next referred to aspects of the Prospectus contained at Tpp 49-51. He said that he didn’t read the Prospectus. He said that “in a normal situation I talk to people”. He agreed that the Deloittes opinion related only to matters of taxation. He was asked whether his evidence was that he sought advice as to other matters and his answer was “No”.
37. The Applicant said when asked whether he read the Prospectus as to risk of participation; his answer was “I can’t recall”.
38. The Applicant said, when asked whether the taxation consequences were important, “No; the return was important”.
39. It was put to the Applicant that he had read the tax opinion but did not recall the risk section. He answered that “I talk to people. I know Deloittes and the auditors. They would examine all the details”. He said also that Deloittes would not have put its name to the Prospectus unless they were happy with it.
40. The Applicant said that the lender was found for him by the promoter. The interest rate was nine per cent which was above the return.
41. The Applicant was then asked as to his understanding of the Profit Fee. He said that the promoter told him that the return was 122 per cent and there was also the possibility of a further 10 per cent profit return. He went on to say that without the additional 10 per cent profit return 122 per cent was a good rate of return and that the profit return (the Profit Fee) might or might not eventuate.
42. The Applicant agreed that he would be paying nine per cent in interest and that he would be receiving 8 per cent per annum for four years and 88 per cent in the fifth year. (He was speaking in approximate terms in that the actual rates were 8.5% and 88.5%; similarly references to 122% were in fact references to 122.5%)
43. The Applicant was then asked whether he made enquiries as to the Profit Fee. He said that Deloittes made enquiries. When he was asked whether he considered the definition contained in the Picture Production Agreement, he said “I would have looked at the time at the possibility of the 10 per cent” but when asked whether he considered the Picture Production Agreement he said “I would have been told; I didn’t look at the actual agreement. I based this on what I was told by the promoter”.
44. The Applicant was referred to the last page of Exhibit A2; that last page is a statement of income and expenditure in respect of the Applicant and in relation to the Film for the year ended 30 June 1997. It reflects Film Services Fees of $3,400 and interest paid of $4,320.04. The Applicant was asked whether he received the fees of $3,400. He said that he did not and that he presumed that they were received by the lender, Domain Partners. He said the fees went direct to Domain Partners because “I believe it was the arrangement”.
45. The Applicant said that he received various brief reports about the Film; they were not in his possession. After reading those reports, he threw them away.
46. The Applicant said that he did not know whether the Film was made; he was satisfied so long as he received his 122 per cent. When asked how he knew that it failed and was never made, he said that he was so informed by the Respondent in 2001.
47. When asked the source of the amount of $3,400, the Applicant answered “I assumed the Film had been sold and the monies were coming in from television stations. I assumed that revenue was derived from the Film”.
48. When it was put to him that he did not know what the source was, he said that he assumed that the Film was the source.
49. The Applicant was referred to Tpp 83-84 (both pages of the Trust Deed) and asked to consider clause 12.06 of the Trust Deed. Having done so it was put to him that he could not say that the amount of $3,400 was derived from Authorised Investments made by the Trustee and his answer was “No”.
50. It was then put to the Applicant that there might have been investments of the monies. He answered “all this situation – this round robin arrangement came out in 2001. I was not aware of it in 1995. It did not occur to me that the payment was made by the letter of credit issuer”.
51. The Applicant was next referred to his application to become a Film Services Contractor (T pp 240-241) and which is not dated, and to the document which follows that application at Tp 242 and which is a Deposit Receipt in respect of a deposit of $19,600 made on 30 June 1995 to a Commonwealth Bank of Australia account in the name of “Inteq Custodians – James Dean Film Services”. He said that he had no knowledge of the Deposit Receipt.
52. The Applicant admitted that he had no document which would show when his application to become a Film Services Contractor was accepted.
53. As to a unit certificate in respect of the Trust, he said that he had none and that it was not normal to get a unit certificate. He went on to say that the money didn’t come from him and “all I put in was $200”.
54. The Applicant was asked whether the application might have been made after June 1995. He answered that it must have been made in April, May or June 1995.
55. When again asked when he received the Prospectus he said that it would have been about April 1995 because “that’s when a lot of investments happened”. The Applicant was then referred to Tp 13 which indicates that the Prospectus was dated 26 June 1995 and it was put to him that he could not have received it before that date. His answer was “That would be right”. (The Tribunal here notes that if the Prospectus was in fact issued on 28 June 1995 the Applicant would not have seen it until at earliest that date).
56. It was again put to the Applicant that it was extremely possible that the application was made after June 1995. He said that this was not possible. When asked the basis for that belief, his answer was “One of the secondary considerations is the tax benefit”. When it was put to him that he wanted the tax benefit in 1995 his answer was “I was told that it was before 30 June 1995, but it’s only a tax deferral”.
57. In the afternoon of the first hearing day the cross examination continued. The Applicant was referred to Tp 26 (a page from the Prospectus) and its content under the heading of “The Principal Participation Documents” as follows:
“The Principal Participation Documents
Once an application to become a Film Services Contractor under this Prospectus has been accepted, each Film Services Contractor becomes a party to the following:
(a)the Trust Deed between the Manager and the trustee under which, among other things, the Trust Fund is established;
(b)the Film Services Agreement;
(c)the Management Agreement with the Manager to act as manager and agent;
(d)the Production and Distribution Agreement;
Other documents forming part of the Principal Participation Documents are:
·the Picture Production Agreement
·the Delegation Agreement
A more detailed description of these documents appears in the Principal Participation Documents section of this Prospectus.”
It was put to the Applicant that from his reading of the Prospectus he knew that he would be a party to the agreements referred to. He answered that he could not say that he read the Prospectus in full but “I accept what you say”.
58. The Applicant was again referred to his application to become a Film Services Contractor (Tpp 240-241); it was put to the Applicant that he knew that with the acceptance of his application he would be a party to the agreements in question and he agreed that this was so.
59. The Applicant said that he did not read the agreements before he made the application. He said that he made investments in many film schemes. He said that there were two attracting features in respect of the Film; the first was the opinion by Deloittes and the second was that the guaranteed fee offset the interest and thus gave him a good return.
60. The Applicant then added by way of amendment of his previous evidence that there was a third reason and that was the possibility of the 10 per cent Profit Fee.
61. When asked about the subject of the Film (James Dean) he answered that he knew the James Dean story and had seen the James Dean films.
62. The Applicant was then asked to consider clause 12.09 of the Film Services Agreement which appears at Tpp 145-146 and which is similar in its terms to the same provision contained in the Picture Production Agreement. The Applicant said that the clause in question did not contain enough detail or information to enable a calculation or determination as to whether or not there was a profit or loss.
63. The Applicant was again asked about reports as to the progress of the Film. He said that there were reports from time to time; there were problems when one actor was jailed for drug abuse. However, the Manager did not tell him that the Film failed completely. He said that he accepted that he was receiving his minimum fees and that this was sufficient.
64. Tp 38 is a page from the Prospectus; it reads under the heading “Minimum Subscription and Closing” as follows:
“Minimum Subscription and Closing
The minimum amount of Film Services Monies that must be raised under this Prospectus in order to proceed is A$2,000,000. In the event that Minimum Subscription is not reached by 30 September, 1995 all monies must, within 7 days of that date, be refunded by the Trustee to Applicants without deduction (other than Bank and government charges).
This issue is not underwritten. However, FSL has agreed that, if the amount raised pursuant to this Prospectus reaches or exceeds the above minimum amount of A$2,000,000 but is less than the Budget Total, then, under the provisions of the Film Services Agreement, it will procure the payment of the balance required to ensure that the obligations of the Film Services Contractors are completed.
As the Budget for the Film is primarily expressed in United States dollars (US$) and the money to be raised under this Prospectus is in Australian dollars (A$), the raising of monies under this Prospectus will have been completed when the US$ Budget Total has been raised.
FSL will hedge to avoid any risk of over-subscription caused by unexpected changes in the US$/AUD$ rate towards the completion of receiving Applications for Interests under this Prospectus.”
The Applicant agreed after being pressed that he did not know when the Minimum Subscription was received.
65. The Applicant was next referred to Tp 100 (a page from the Trust Deed) and in particular to clause 25.01 reading as follows:
“25.00 CERTIFICATES AND REGISTERS
25.01 The Trustee hereby covenants with the manger and with each Film Services Contractor as a separate covenant that it will, within 2 months after allotment of any Units under the Prospectus issue to each Film Services Contractor a Certificate in the form set out in Schedule One hereto, subject to such modification as the Manager may, with the consent of the Trustee, prescribe”.
The Applicant said that he did not recall a certificate.
66. The Applicant was next referred to T p 101 also a page from the Trust Deed and to clause 25.04 reading as follows:
“25.04The Manager hereby covenants with the trustee and with each Film Services Contractor as a separate covenant that:
(a)subject to any exemption from the requirement to make such covenant granted by the Commission, it will keep an up-to-date Register of Film Services Contractors for the Film Production at its registered office or principal place of business in Australia, and subject to the provisions of clause 25.07 make the Register available for inspection without charge to Film Services Contractors at all times when the registered office or principal place of business of the Manger is open for business to the public;
(b)no later than 2 months after any change in the Register, a copy of the entries made in the Register will be forwarded to the Trustee and the Manager shall also furnish the Trustee with a copy of the Register within 3 days of the receipt by the Manager of a request for the same;
(c)There shall be entered in the Register:
(i)the names and addressed of each Film Services Contractor;
(ii)the number of Units and Interests and the distinctive numbers of the Certificates held by each Film Services Contractor;
(iii)the date on which the name of the Film Services Contractor was entered in the Register in respect of such Units and Interest;
(iv)the number allocated to the Units and Interests and Management Agreement;
(v)the date on which any person ceased to be a Film Services Contractor; and
(vi)any other information as considered by the Manager to be necessary and agreed to in writing by the Trustee, or as required by the Trustee.”
The Applicant said that he had never sighted a register and did not know whether it was kept, and despite clause 25.07 of the Trust Deed which entitled him to inspect the register, he did not ever do so or know that he was entitled to do so.
67. The Applicant was then referred to the Film Services Agreement which appears at Tp 132 and following pages. He agreed that it does not indicate that it was executed or its date of execution. He agreed that he had no knowledge of whether it was in fact executed.
68. In relation to the Film Services Agreement, clause 2.01 (Tpp 137-138) reads as follows:
“2.00 CONDITIONS
2.01FSL shall each perform the Conditions as soon as possible after the Commencement Date, but in any event by 30 June 1995. If any of the Conditions is not fully and properly satisfied by 30 June 1995, then either party may terminate this Agreement and this Agreement shall then be wholly at an end and no rights or obligations whatsoever shall survive in relation to the production and distribution of the Film or otherwise.”
Clause 2.01 of the Film Services Agreement requires a consideration of the term “Conditions” defined (Tp 135 and following) as follows:
“Conditions” means:
(a)FSL having certified to the Trustee, that FSL is, or is in a position to be at all relevant times, the holder or licensee of the Production Rights;
(b)FSL certifying that all applicable contractual arrangements are in place, or will be in place at the relevant times, for the production and delivery and distribution of the Film; including, particularly, an appropriate film completion bond or completion guarantee, and appropriate film production and distribution insurances; and
(c)FSL certifying to the trustee that it has procured, or has the capability of procuring, the Film Services Fees Security;
“Copyright” …
69. The Applicant was asked whether he knew whether clause 2.01 had been complied with by 30 June 1995 and he answered in the negative.
70. The Applicant was next referred to Tp 140 (a page of the Film Services Agreement) and to clause 6.02 which reads as follows:
“6.00PROVISION OF FILM SERVICES BY THE FILM SERVICES CONTRACTORS
6.01…
6.02Ultimate control of creative, financial, technical and distributive aspects of the Film shall remain under the discretion of FSL and, to this end, the Film Services Contractors shall provide or cause to be provided whatever information concerning the production and distribution of the Film and the provision of the Film Services is reasonably requested from time to time by FSL from the Film Services Contractors. The Film Services Contractors shall comply or cause to be complied with all reasonable directions given to the Film Services Contractors by FSL in relation to the production and distribution of the Film to the extent that those directions related to the provision of the Film Services and the expenditure of the Film Services Monies.”
The Applicant said that there was never any request for information.
71. Clause 6.04 of the Film Services Agreement (T pp 140-141) was next referred to; it reads as follows:
“6.04During the whole period of the provision of the Film Services for the Film, the Film Services Contractors shall set up and maintain, or shall cause to be set up and maintained, proper and accurate books of account fully covering the expenditure of the Film Services Monies in providing the Film Services for the Film. Such books of account shall be made available for regular inspection by FSL at any reasonable time and a true copy of such books of account shall, when final (and audited, if so requested by FSL), form part of the delivery and initial distribution materials in respect of the Film.”
The Applicant said that he had never as a Film Services Contractor kept any books of account.
72. Clause 6.06 of the Film Services Agreement appears at Tp 141; it reads as follows:
“6.06During the whole period of the provision of the Film Services for the Film, the Film Services Contractors shall, as and when and in the form requested by FSL, provide or cause to be provided to FSL reports on the progress of providing the Film Services.”
The Applicant said that no such request was ever made.
73. Clause 9.01 of the Film Services Agreement (T p 142) reads as follows:
“9.00 DELIVERY OF THE FILM
9.01The Film Services Contractors hereby agree to provide the Film Services, and both parties hereby agree to use their best endeavours to comply with their respective duties and obligations under this Agreement with respect to the timely production of the Film, so that the completed Film shall be physically delivered to or at the direction of FSL at the time and in the manner and in accordance with the provisions set out in Schedule Five and, in any event, delivered not later than 12 months after the Commencement Date of this Agreement.”
The Applicant was asked whether any film was ever delivered. He answered “I have no idea”.
74. As regards clause 12.03 of the Film Services Agreement (T p 144) the Applicant was asked if he was aware of whether the Film Services Fees Securities were ever delivered and he said “No, I relied entirely on the Manager”.
75. Clauses 13.01 and 13.05 of the Trust Deed (Tpp 84-85) read as follows:
“13.00 ESCROW ACCOUNT
13.01The Trustee will hold the monies standing to the credit of each Film Services Contractor in the Escrow Account as agent for that Film Services Contractor, subject to the provisions of this Deed.
13.02 …
13.03 …
13.04 …
13.05Conditional upon any Minimum Subscription under the Prospectus having been obtained, and subject to the covenants on the part of the Trustee contained in clause 29.01, the Manager may from time to time or at any time direct the Trustee as the agent for each Film Services Contractor to pay monies from the Escrow Account to or at the direction of the Manager pursuant to the provisions of this clause until all of the Film Services Monies in relation to the Film Production have been so paid, or at any time direct the Trustee to so pay the whole of the Film Services Monies in relation to the Film Production. Prior to the Trustee making any payment of Film Services Monies to or at the direction of the Manager pursuant to this clause, the Manager shall present to the Trustee a Requisition for Payment specifying the Film Production and the items in the Budget for which such payment is required and such other information as the Trustee may reasonably require.”
The Applicant was asked whether he knew of any such requisition by the Manager; he answered in the negative and similarly in the negative as to whether he ever saw any such requisition.
76. The Applicant said that he believed that his monies were going into the Film because he was receiving Film income and because he relied on the Manager. He again said that he was receiving Film income which must have been coming from the Film. He said that he believed that the guaranteed minimum return arose from the fact that the Film was sold prior to its distribution. He went on to say “Things are often sold prior to completion of anything. This is the futures market”.
77. When his attention was drawn to the fact that there was nothing in the Prospectus as to the sale of the Film as a prerequisite to the minimum fees being paid, he said “I don’t know. I didn’t read the whole of it”.
78. The Production and Distribution Agreement (Tpp 193-207) is undated and does not indicate that it was executed. The Applicant did not know whether and when it was executed.
79. Clause 9.02 of the Production and Distribution Agreement (T p 200) reads as follows:
“9.00 ACCOUNTS AND REPORTS
9.01 …
9.02The Production Agent and the Distribution Agent shall, throughout the duration of this Agreement, provide the Manager with regular written reports concerning the production, delivery and distribution of the Film and the provision of the Film Services. Indicatively, such reports will be so supplied to the Manger on a not less than monthly basis and, without in any way limiting the generality of the foregoing, such reports may include cast and crew contracting details, scripting changes, Budget reallocations, location and studio arrangements, daily shooting schedules, weekly cost reports and accounts, marketing and distribution arrangements, and other normal film industry information arising through and concerning the productions, delivery and distribution of the Film.”
The Applicant was asked whether any such reports were provided by the Production Agent and the Distribution Agent (both Californian companies). He said he did not know whether the one page reports “came from these people or not”.
80. Clause 3.02 of the Management Agreement (T p 215) reads as follows:
3.00 FILM SERVICES MONIES
3.01 …
3.02Pursuant to clause 3.01, and in satisfaction of the purposes therein, the Manager is hereby irrevocably authorised by the Film Services Contractor from time to time to call upon the Trustee to make one or more payments of Film Services Monies, out the Escrow Account to or into the Production Account.
The Applicant was asked whether any of such payments were made and his answer was that they were not.
81. The Picture Production Agreement commences at Tp 162. It does bear evidence of execution by the parties but it does not bear any date. The Applicant did not know when it was executed.
82. Clause 2.01 of the Picture Production Agreement (Tp 165) reads as follows:
“2.00 CONDITIONS
2.01Each of the parties shall perform those of the Conditions for which it is responsible as soon as possible after the Operative Date, but in any event by 20 June 19995. If any of the Conditions is not fully and properly satisfied by 20 June 1995, then the party not in default may terminate this Agreement and this Agreement shall then be wholly at an end and no rights or obligations whatsoever shall survive in relation to the production and distribution of the Film or otherwise.”
That clause must be read in conjunction with the definition of “Conditions” (T p 163) as follows:
““Conditions” means the following conditions:
(a)FTO having provided confirmation satisfactory to FSL, that FTO is, or is in a position to be during all relevant times, the holder, lawful accessor or licensee of the FTO Rights;
(b)FSL having confirmed to FTO that it will provide the Production Services, and is making arrangements for the payment of the Production Monies into a Film Production Account;
(c)FTO and FSL having mutually confirmed that all applicable contractual arrangements are in place, or will be in place for the production and delivery and distribution of the Film; including, particularly, an appropriate film completion bond or completion guarantee, and appropriate film production and distribution insurances; and
(d)FTO having confirmed to FSL that it has made arrangements for the provision of Fees Securities satisfactory to FSL for the payment of the Production Services Fess referred to in Part 12.00.”
The Applicant was asked whether he knew whether the Conditions were performed. He answered “No. I assumed that they were”.
83. The Applicant was referred to Tp 243, which is an account referable in part to the Applicant. The opening entry provides that the total is $40,000; 80 per cent is $32,000 and 20 per cent is $8,000. The Applicant said that he had no idea what it referred to. When asked whether it was possible that he had borrowed $32,000 he said “I thought I borrowed $40,000”.
84. Tp 258 is a letter dated 28 October 1998 by the Applicant to the Respondent. The Applicant acknowledged his signature to it. The following page (Tp 259) is the schedule referred to in that letter. It indicates that in respect of the year ended 30 June 1996, the Applicant paid interest of $383 and derived no Film Services Fees. However, in respect of the year ended 30 June 1997, the Applicant paid interest of $4,320 and derived Film Services Fees of $3,400.
The Applicant agreed that the interest reflected was interest on the loan. When it was pointed out that if $4,320 is interest on $40,000 the rate must be not nine per cent but above 10 per cent. He said “I thought it was nine per cent”.
85. The Applicant was asked why the interest was so low for the year ended June 1996. He said that he did not know. When asked whether the loan might not have been obtained later than 30 June 1995, he answered “I don’t know. It may be a set off amount”.
86. The Applicant agreed that there was no interest charge for the 1995 year (and which is of course the relevant year) and said that “This just shows how attractive the investment was”.
87. The Applicant was asked to refer to the directions by Deputy President Forgie made on 2 December 2004 in which he was required to discover all relevant documents. He agreed that he discovered no documents other than those attached to his witness statements. He denied that he would have destroyed any such statement. When asked about the loan agreement, he said that he could not locate it.
88. The Applicant was asked whether after October 1998 (when the Respondent began its investigations) there were any further reports; he said that he did not know. He was also asked whether there were any further statements (i.e., other than those which appear at the last page of Exhibit A2); he said that there were not. This answer resulted in a question as to whether the only Film Services Fee was the amount of $3,400 reflected in that statement. He answered that that statement was just a sample and there may have been others.
89. It was put to the Applicant that he had said that the only statements were those attached to Exhibit A2. The Applicant answered that he could produce others and that the statement produced was a sample and then “I may have others – I would have others”.
90. When asked whether he was telling the Tribunal that he kept some back, he said “I gave some; there are others; they are in storage and they are all exactly the same”.
91. The Applicant said that he had not seen the Second Prospectus (Exhibit R1) or any of the new and replacement agreements (Exhibit R2).
92. It was put to the Applicant that he was indifferent as to the risks of production in respect of the Film. He said that he received the loan, that the loan security was the Film and that he did not have to give a personal guarantee or any other assets. However he agreed that he (or to be precise the lender) was secured by the letter of credit.
93. The Applicant was referred to Tp 50, a page of the Prospectus, under the heading of “Completion and Delivery” and reading as follows:
“COMPLETION AND DELIVERY
The Film may not be completed and delivered and subject to initial international theatrical release within thirteen months from 30 June, 1995, or at all.”
The Applicant said that he was aware of that provision.
94. Ms Davies then put a number of propositions to the Applicant, the most significant of which was that his interest was in the tax deduction. He denied that this was so.
PART D - the applicant’s evidence: re-examination
95. The Applicant’s re-examination (by himself) took place on the second hearing day. To a considerable extent, the evidence given by the Applicant constituted submissions.
96. The Applicant said that he was sure that he paid the amount of $40,000 in June 1995. He said that he was sure of this because he claimed it in his tax return.
97. In response to a question as to why none of the other parties to the transaction would be called to give evidence, the Applicant said that they were not contactable. He said that Olivestone left Australia some years ago.
98. The Applicant mentioned other films in which he invested. He referred in particular to Harbourside in which he invested in 1997.
99. At this stage the Applicant altered tack to a considerable extent. The Profit Fee of so little consequence on the preceding day became important. The Applicant said (for the first time) that Olivestone showed him schedules setting out why and how the Profit Fee could be substantial. However the Applicant did not receive or have copies of any such schedules.
100. The Applicant said that the promoters such as Olivestone were very active in the last quarter of the financial year. They threatened that investors will “miss out” and he said “Maybe there are tax benefits. For this reason this occurs in April, May or June”.
101. The Applicant said that he himself was at that time an accountant to three listed companies and moreover an investigating accountant. He said that at this stage he works from home and thus must rely on managers. He went on to say that the Respondent had not proved that this manager did not carry out his duties.
102. Given that the evidence in re-examination went further than that arising from cross examination the Respondent was given leave to ask further questions in cross examination. The Applicant was asked to refer to Tp 63, a page of the Prospectus, and which in its terms commences with the words “Applications must be received by 31 December 1995 (unless this date is extended)”. The Respondent also drew attention to page 3 of Exhibit R1 which indicated that $11,000,000 had been subscribed by the date of the Second Prospectus; it will be remembered that the Second Prospectus is dated in 1996. However the Applicant did not agree that his application might have been made or the amount of $40000 paid after the end of the relevant year.
103. At this stage Exhibit R3 was tendered. It establishes that there was a connection between Film Services Limited and EC Consolidated Capital Limited in that it had a shareholder in common. In addition, Film Services Limited and Eurocentral Securities Limited had three directors in common and Film Services Limited, EC Consolidated Limited and Eurocentral Securities Limited had one director in common.
104. Attention was drawn to the Applicant’s tax return for the relevant year (Tpp 227-250). It indicated gross income of $180,354 and net income (after the deduction of the $40,000 loan) of $31,262. The Applicant said that other deductions arose from negatively geared investments.
105. It may be noted that the Applicant, despite his evidence on the previous day as to having other documents, was unable to produce any. He said that having regard to the time which had elapsed, he had not been able to find any other records.
PART E - the transaction documents
106. In addition to provisions in the Transaction Documents dealt with specifically and previously in these reasons, there are some other provisions which deserve mention.
107. It is unnecessary for me to deal in great deal with the fact that the Transaction Documents are in some respects difficult to interpret; in particular and by way of example, there is some confusion as to the accounts into which monies were held or into which they were to be paid. The Trust Deed defines “Escrow Account” but there is no reference in that Deed to the Production Account which is defined in the Film Services Agreement in very broad terms (T p 137) as follows:
“Production Account” means such bank account or accounts (with such signatory or signatories) as may be mutually agreed between FSL and the initial Film Services Contractors, and into which the Film Services Monies are paid after registration of the Prospectus.”
It is conceivable that these two accounts are one and the same. .
108. Clause 5.02 of the Trust Deed (T p 79) reads as follows:
“5.00 BARE TRUST, PENDING ACCEPTANCE
5.01 …
5.02Any amounts paid by any Applicants in accordance with clause 4.02 must be placed by the Trustee in a special bank account established in the name of the Trustee and kept solely for the purpose of depositing application monies in relation to the Prospectus.”
109. The term “Minimum Subscription” in turn is described in the Prospectus as being an amount of $2,000,000.
The amount paid by the Applicant as Film Services Monies was held on bare trust for the Applicant until the Minimum Subscription was achieved. (There was no evidence before the Tribunal as to when the Minimum Subscription was achieved; the Second Prospectus would suggest that it is likely that it was obtained after June 1995 and probably in the period ending September 1995.)
110. Clause 13.00 of the Trust Deed (T pp 84-85) reads as follows:
13.00ESCROW ACCOUNT
13.01The Trustee will hold the monies standing to the credit of each Film Services Contractor in the Escrow Account as agent for that Film Services Contractor, subject to the provisions of this Deed.
13.02Monies so held by the Trustee as agent for a Film Services Contractor may be pooled in any one or more bank accounts with monies held on behalf of other Film Services Contractors in relation to the Film Production following by the words “Escrow Account” or such other appropriate name as is nominated by the Manager.
13.03Subject to clauses 7.08 and 8.03, upon the entry hereunder by each Film Services Contractor into a Management Agreement, the Trustee in its capacity as agent for each several Film Services Contractor shall pay or transfer to the Manager, from the Escrow Account on behalf of each Film Services Contractor, his Prescribed Proportion of the Manager’s Fee as specified in the Management Agreement and the Prospectus.
13.04Pending the application of Film Services Monies under this Deed, the bank account or accounts in which the Trustee deposits monies standing in any Escrow Account shall not be interest earning.
13.05Conditional upon any Minimum Subscription under the Prospectus having been obtained, and subject to the covenants on the part of the Trustee contained in clause 29.01, the manager may from time to time or at any time direct the Trustee as the agent for each Film Services Contractor to pay monies from the Escrow Account to or at the direction of the Manger pursuant to the provisions of this clause until all of the Film Services Monies in relation to the Film Production have been so paid, or at any time direct the Trustee to so pay the whole of the Film Services Monies in relation to the Film Production. Prior to the Trustee making any payment of Film Services Monies to or at the direction of the Manager pursuant to this clause, the Manager shall present to the Trustee a Requisition for Payment specifying the Film Production and the items in the Budget for which such payment is required and such other information as the Trustee may reasonably require.
13.06Each Film Services Contractor hereby irrevocably and unconditionally directs the Trustee, as his agent, to pay the Film Services Contractor’s Prescribed Proportion of the monies directed by the Manager pursuant to clause 13.05.
13.07In the case of each such payment to or at the direction of the Manager, the Manager will provide to the Trustee a receipt in writing signed by an officer of the Manager duly authorised in that behalf which receipt shall be a good and valid discharge to the Trustee in respect thereof.
13.08Monies paid from the Escrow Account in accordance with clause 13.05 shall be used only for the purposes set out in the Film Services Agreement, the Prospectus and the Management Agreement, and not otherwise.
It follows then that until Film Services Monies were requisitioned in respect of Film Production, that even after the Minimum Subscription was obtained those monies were held by the Trustee as agent for the Applicant. (There was no evidence before the Tribunal as to any amounts being paid in respect of Film Production.)
111. Clause 4 of the Production and Distribution Agreement (T pp 197-198) entitled “Recommendations and Opinions” reads as follows:
4.00RECOMMENDATIONS AND OPINIONS
4.01Throughout the duration of the Production and Distribution arrangements as constituted under this Agreement, the Manager shall have the right to make recommendations and express opinions regarding the provision of the Film Services by the Production Agent and the Distribution Agent on behalf of the Film Services Contractors. On the communication by the Manager to the Production Agent or the Distribution Agent of any such recommendation or opinion, the Production Agent or the Distribution Agent shall give it due professional consideration and thereafter shall:
(a)take the recommendation or opinion into account in whole or in part in the provision of the Film Services and the performance of its functions generally under this Agreement; or
(b)decide, on reasonable film industry parameters, to disregard the recommendation or opinion in whole or in part and, to the extent that it so proposes to disregard the recommendation or opinion, it shall advise the Manager of its reasons for so deciding.
It will be noted that the Manager had the right in relation to the Film and on behalf of the Film Services Contractors to make recommendations as regards the Film but in respect of those recommendations the Production Agent and the Distribution Agent (both Californian corporations) were obliged only to take them into account but could “on reasonable film parameters” disregard them.
112. When one considers the Transaction Documents as a whole it becomes increasingly apparent that much of its content was, and was no doubt designed to be, illusory. Put in very simple terms a Californian corporation has or can obtain the right to make a film. That film has nothing whatever to do with Australia. In particular, its subject matter is not related to Australia and not one of the persons engaged or to be engaged in the making of the film, is Australian. Nevertheless, production rights of a kind are given by that Californian corporation to an Australian corporation, and not one which on the face of it has any experience or expertise in the production of films, and on the basis that the Australian corporation will not have or become entitled to any copyright in the Film. The Australian corporation then with other Australian entities raises considerable sums from Film Services Contractors through the Prospectus. Under the Film Services Agreement, the Film Services Contractors are entitled to 10 per cent of net profits. This is so even though the Minimum Subscription is $2,000,000 which is very small compared with the Budget amount. In any event the Profit Fee is cast in terms which ensure that a calculation of profit or loss cannot be made. It is to be noted by way of example that Distribution Fees are to be deducted “at levels per media/territory reasonably acceptable within the international film industry”. One might ask what is meant by “the international film industry”. Another example arises from the reference to Interest on Negative Cost where no rate of interest is specified. The last paragraph of the Profit Fee purports (but not effectively) to cover gaps by importing provisions “reasonably standard in the international film industry” The same problem of obscurity arises. The Respondent’s contentions that a provision cast in such vague terms are not capable of enforcement are in my view correct. It is not surprising that the Film Service Contractors were granted 10% of Net Profit even though their aggregate contributions was very probably much less than 10% of Budget if the Profit Fee is understood on the basis that there is no danger of it having to be paid or even claimed.
113. Although the Transaction Documents contain a number of provisions as to duties and obligations of the Film Services Contractors in respect of the production of the Film, it is also clear that there is no intention that they will do anything of the kind, because under the Production and Distribution Agreement the obligations of the Film Services Contractors are passed back to the Production Agent and the Distribution Agent (both of whom are Californian corporations and presumably connected with the original grantor of the original rights). The Film Services Contractors have a right to make suggestions and recommendations which need not be followed. There was no evidence that any such recommendations or suggestions were ever made. Put in succinct terms, Australia is the site for one function only and that is the raising of monies. If clause 11 of the Respondent’s Statement of Facts and Contentions is correct (and there was no evidence before the Tribunal as to whether the amounts set out are accurate) a very large proportion of the money raised was utilised in respect of fees and costs and the letters of credit. The probabilities strongly favour the proposition that the letter of credit issuer who is associated with the lender will issue the requisite letters of credit if and only if it receives at the outset sufficient monies to enable it, with interest to be derived thereafter, to discharge its obligations under the letters of credit.
114. The Respondent did not contend that the Transaction Documents constitute a sham and no doubt correctly, because some legal rights were created. To describe much of the content as akin to a charade would however not be inaccurate.
115. The evidence before the Tribunal would suggest that there was little if any interest in the progress of the Film. In fact, it was never produced at all. It is likely that production stopped long before 2001 when the Applicant learned for the first time that the Film had been abandoned, not from the Manager but from the Respondent. Reports if there were any were, so he said, short and he threw them away.
PART F - the first issue: the onus on the applicant
116. The Applicant said in Exhibit A1 that he intended to rely upon:
·documents submitted by the Respondent referred to as the “T” documents;
·A sample copy of the Statement of Income and expenditure for the year ended 30 June 1997 issued by Eurocapital Securities Limited;
·A copy of a bank statement for the month of February 1996 showing payment of the interest on monies used to finance the investment;
·Notice of Objection against the assessment;
·the Respondent’s Statement of Facts and Contentions;
·the Applicant’s Statement of Facts, Issues and Contentions; and
·the Applicant’s witness statements.
117. Clauses 9, 10, 11 and 12 of the Respondent’s Submissions (and the Tribunal considers that they are correct) read as follows:
“The burden of proof
9To discharge the burden of proof, the taxpayer must establish, affirmatively, on the balance of probabilities, that the taxable income and penalty assessed for the 95 year is greater than the taxable income and penalty which ought to have been assessed: see, for example, McCormack v FCT (1979) 143 CLR 284 at 303; FCT v ANZ Savings Bank Ltd (1994) 181 CLR 466 at 479; FCT v Dalco (1990) 168 CLR 614 at 620; FCT v Munro 97 ATC 5041. There is no onus on the respondent to show that the amended assessment was properly made: Gauci v FCT (1975) 135 CLR 81 per Mason J at p 89:
“The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b)[1] for it is a consequence of that provision that unless the [taxpayer] shows by evidence that the assessment is incorrect, it will prevail.” (underlining added)
10In this case, this means that for the taxpayer to discharge the burden of proof, the taxpayer must prove positively the facts necessary to make out his case that the deduction claim did meet the criteria for deductibility under s 51(1), that Part IVA did not operate to disallow the deduction claim if otherwise allowable, and that the criteria for the imposition of penalty under s 226L, alternatively s 226, of the ITAA did not exist.
11The Tribunal can only base its decision upon material that is logically probative of the existence of facts that emerge from the evidence before it. In the absence of evidence, the Tribunal is not able to infer facts in favour of the taxpayer: McCormack v FCT at 303. An inference will only be reasonably open if there is probative evidence to support it: see, for example, Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 at 356; 359-360; FCT v Munro.
12The taxpayer is on notice that the respondent puts him to proof of all of the facts upon which the taxpayer seeks to rely to establish that the amended assessment is excessive: see par 2, respondent’s Statement of Facts Issues and Contentions. The taxpayer has been informed as to the nature of the burden which lies upon him: see respondent’s letter dated 26 May 2005. The respondent is entitled to rely upon any deficiency in proof to uphold the amended assessment: FCT v Dalco at 4093.”
[1] This is the predecessor section to s 14ZZK(b)
118. It will be apparent having regard to the preceding provisions of these reasons that the Applicant has entirely failed to discharge the onus upon him and indeed it cannot be said that he made any serious effort to do so.
119. It is clear enough that the Applicant was not in the relevant year engaged in the provision of Film Production Services. It would have been possible, at least in theory, for him to have been so engaged through an agent appointed for that purpose but there is no evidence that the Manager or anyone else was in fact so engaged.
120. The Applicant was certain that the amount of $40,000 was paid in by the lender by the end of the relevant year although he could produce no evidence to that effect. He denied any knowledge of the Deposit Receipt referred to previously in these reasons and which in any event reflected an amount of less than half of $40,000. He was sure that it was paid in that year because he made a claim for a deduction in his tax return for the relevant year.
121. The Applicant’s evidence as to the Prospectus cannot be accepted. If he was furnished with a Prospectus this could not have occurred before its date ( 26 June 1995), and in all probability not before 28 June 1995, which was according to the Second Prospectus the date of issue of the Prospectus.
122. Exhibit A2 suggests that the amount was paid later than the end of June 1995. This is so given that in the 1996 year, the Applicant paid interest of $383.35 and received no Film Service Fees. It will be remembered that the transaction was structured on the basis that the amount of $40,000 was borrowed, secured by payments of 8.5 per cent for and at the end of each of the ensuing four years and 88.5 per cent for and at the end of the fifth year. The first year could not have been the year ending June 1996 since he received no Film Service Fee and paid minimal interest. The Applicant said in submissions that there must have been an initial tax free period. That statement was, putting it kindly, disingenuous in the extreme and was of course untruthful. It also does not accord with his own witness statement exhibit A2.
123. The Applicant did not call any evidence by the Manager, the Trustee or any of the other companies involved in the transaction. He did not produce any evidence as to when the Minimum Subscription was achieved. He did not produce any evidence as to execution of the Transaction Documents or the date of their execution. He knew nothing whatever of progress of the Film and was apparently not interested. The provisions of the Transaction Documents to which I have referred indicate that if the Prospectus was dated 26 June 1995 and issued on 28 June 1995, it is not conceivable that he incurred any obligation such that he was entitled to a deduction in the relevant year.
124. I again refer to the Minimum Subscription provision. Until the Minimum Subscription was achieved the monies were held (assuming that they were paid before 30 June 1995 which was not in any event established) on bare trust for the Applicant. The Second Prospectus specifies that the Minimum Subscription was achieved by 30 September 1995. If the Minimum Subscription had been achieved earlier it is likely that the Second Prospectus would have so stated.
125. There was no clear evidence that the Film Services Agreement was executed. Unless it was executed (and the conditions contained in it were fulfilled) by 30 June 1995, there were no relevant rights which could be acquired in the relevant year through the Transaction Documents, and this being so there could not be a valid deduction claim in the relevant year..
126. As I have said the Prospectus was dated 26 June 1995 and apparently issued on 28 June 1995. If the amount of $40,000 was paid by 30 June 1995 and if the Minimum Subscription was achieved by that date, although it is far more likely that the Minimum Subscription was achieved some three months later, then nevertheless, the relevant monies would have been held by the Trustee as agent for the Applicant until paid out under duly constituted requisitions related to the production of the Film. For the Applicant to claim that he is entitled to a deduction because he claimed a deduction in his return is demonstrably untenable.
127. The Applicant has entirely failed to discharge the onus of establishing that he was entitled to a deduction of $40,000 in respect of the relevant year. It is not necessary for me to deal further or in greater detail with the Applicant’s evidence much of which was unsatisfactory.
PART G - deductibility under section 51 of itaa
128. Having found that the Applicant failed to discharge the onus, this part is included for the sake of completeness only and in case I erred in my finding as to the fact that the Applicant failed to discharge the onus.
129. In respect of a deduction under s 51(1) of ITAA, it is clear that the determination must be made objectively and not subjectively. See Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213.
130. To this end it is necessary to have regard to the Transaction Documents pursuant to which the outgoing was incurred. See in this regard Vincent v Federal Commission of Taxation [2002] ATC 4742; clause 67 of the judgment in Vincent reads as follows:
“67.There may be an issue which arises in a particular case as to whether the answer to the question what the outgoing is really for depends solely upon the contractual rights and obligations which the taxpayer acquires for the outlay under consideration or whether it is necessary to go outside the contractual rights and obligations acquired to find the true character of the outgoing: FC of T v South Australian Battery Makers Pty Ltd 78 ATC 4412 at 4419; (1977-1978) 140 CLR 645 per Gibbs ACJ. This was not an issue in the Broken Hill case. Nor is it here, although it may be necessary in interpreting the Management and Lease agreement to consider the context in which it was entered into which context includes the promotional booklet. The question of what the payment made by Ms Vincent was for and the related question of what the advantage was which she sought to obtain can, in that context, be answered here by reference to the agreements which she entered into, and especially the Management Agreement.”
131. A liability is incurred only when there is a presently existing liability to make that payment. See New Zealand Fax Investments Limited v The Federal Commissioner of Taxation (1938) 614 CLR 179.
132. See also Federal Commissioner of Taxation v James Flood Proprietary Limited (1953) 88 CLR 492 at page 507, where the first part of the first full paragraph of that page reads as follows:
“To repeat what has been said before in relation to an analogous provision in the Act of 1922-1934: “To come within that provision there must be a loss or outgoing actually incurred. ‘Incurred’ does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected”.
133. There was no evidence before the Tribunal that an indebtedness of $40,000 in respect of Film Services was incurred in the relevant year. It is possible that an application to become a Film Services Contractor was made in the relevant year but there was no evidence that that application was accepted in the relevant year or that any production costs were incurred, or even more to the point, requisitioned in the relevant year;
134. As set out previously, the monies subscribed were held on bare trust until the Minimum Subscription was achieved. The evidence indicates that the Minimum Subscription was achieved by 30 September 1995 and not 30 June 1995.
135. The Applicant said that he did not receive a unit certificate because unit certificates are not generally issued. That statement cannot be accepted both because of the provisions of the Trust Deed and also because as a general proposition it is not true.
136. As to the second limb of s 51(1) of ITAA there was no evidence that at 30 June 1995 the Applicant or any person acting as his agent was engaged in the production of films or in the provision of Film Services.
137. The tax payer relied on the judgment in Cooke’s case on so many occasions that it is desirable that I refer to it. The Applicant’s attitude was that the facts in his case are so much akin to those in Cooke’s case that he should succeed because the tax payers in Cooke’s case succeeded.
138. In my view Cooke’s case is clearly distinguishable on its facts. I refer in the first instance to clause 32 of the judgment in Cooke reading as follows:
“The Commissioner submitted to the primary judge that the expenditures of the respondents had only a colourable connection to the production of income from AHP No 1, and that the advantage which they both sought to achieve by the payments in questions, once viewed objectively, was an immediately operative tax advantage, and not the potential for future assessable income. In support of that submissions, the Commissioner contended below that the project was no, never was, and was never going to be horticulturally or economically viable, and that each respondent had adopted a somewhat careless attitude to the contractual arrangements into which he was required to enter, their purpose in so doing being substantially tax driven. The primary judge referred however to the existence of the income projections, albeit based on assumptions contained in the prospectus, and pointed out that a grower who elected to take up the guaranteed return option, thereby giving up portion of a potentially large return, would still have made a substantial profit on his or her investment, based on that election. The primary judge adopted, in that context, the observations of a full Federal Court in FCT v Emmakell Pty Ltd (1990) 22 FCR 157 at 162; 21 ATR 346 at 351; 90 ATC 4319 at 4325 per Wilcox, Burchett and Ryan JJ, that ‘the characterisation of a payment does not depend on its effectiveness, either economically (in the sense that it really earned a profit), or legally (in the sense that its contractual setting was valid in law)’, being views similar to those earlier expressed in FCT v Lau (1984) 6 FCR 202 at 219; 16 ATR 55 at 71; 84 ATC 4929 at 4942 per Beaumont J (with whom Jenkinson J agreed).”
Put in other words the tax payers in Cooke elected to take the safer of two options, and only one of them. In this case, the Applicant when he first gave evidence did not mention the 10 per cent profit fee at all. His evidence was that he was motivated by the fact that for $100 he received $122 back. It was only at a later stage that he changed tack in order to contend that the 10 per cent Profit Fee was a relevant consideration and in addition to the minimum fee secured by letter of credit. . The Applicant referred on more than one occasion of his need to provide for his eight children presumably in order to bring himself within Cooke’s case and where the tax payers gave evidence to the effect that they were seeking to provide for their retirement.
139. In Cooke the Federal Court said in clause 34 the following:
“The primary judge accepted as truthful the evidence of the respondents to the effect that although income tax deductibility was an important issue for them, that was not their only concern, or event their dominant interest, in participating in AHP No 1. The evidence of neither of them on those matters, in her Honour’s view, was shaken in the course of cross-examination. Each impresser her as giving a truthful and straightforward account of the circumstances leading up to his investment in AHP No 1, and of his motive for undertaking the investment. The primary judge recorded her acceptance also of the evidence of each of the respondents that ‘in a busy life as a solicitor they had made insufficient provision for their retirement’. She thought it was ‘entirely feasible’, at their stage in life, that they would be looking for the provision of ‘some form of post-retirement income’, and moreover, that ‘clearly an investment that had a tax advantage would be more attractive’. She further considered that given the income increase experienced by each respondent in respect of the then current fiscal year, each being without sufficient liquid resources to fund either the prospective income tax liability or investment in AHP No 1, borrowing money for an investment that provided immediate tax relief may have been ‘the only possible means of making such an investment’. in so finding, the primary judge distinguished the contrived circumstances in Ure v FCT (1981) 11 ATR 484; 50 FLR 219; 81 ATC 4100, which concerned the borrowing by a taxpayer of money at commercial rates of interest of up to 12.5% interest, and the on-lending at non-arms length of the proceeds of that borrowing at 1% interest, the rationale thereof being described by Deane and Sheppard JJ (at ATR 495; FLR 233; ATC 4110) as the subordination of the object of earning assessable income in the form of interest to private and domestic considerations. Conversely, the primary judge thought that the transactions here involved’ made no sense’, to adopt the well-known expression used by the High Court in FCT v Spotless Services Ltd (1996) 186 CLR 404 at 422; 34 ATR 183 at 192; 96 ATC 5201 at 5210, without the income tax deductibility incentive.”
It is relevant that in Cooke the Court found that the tax payers were honest and truthful. I make no such finding in this case; on the contrary and as I have demonstrated the Applicant frequently changed his evidence or coloured it as the circumstances seemed to him to require him to do so.
140. The Applicant said on more than one occasion at least at first that for $100 he was getting back $122, an attractive return. He also said that after all the transaction was only a deferral and moreover, that he was not even a top marginal rate taxpayer. The evidence indicates in the clearest possible terms that the Applicant is tax conscious and seeks to reduce tax. In the relevant year he would have been in the top bracket but for reductions through negative gearing and of course the deduction of $40,000.
141. The Applicant referred to the concept of $122 for $100 as if he had outlaid $100. That was not in fact the case. He borrowed $100 in order to get back $122 all of which went back to his lender pursuant to the letter of credit arrangement and so that in fact he outlaid nothing (other than the $200 unit cost) and received nothing back. On an objective basis, the amount of $40,000 was borrowed (if “borrowed” is apposite) precisely in order to obtain the tax deduction which, albeit a deferral, clearly had a value. The Applicant’s later contention that he was motivated by the Profit Fee cannot be accepted more particularly having regard to the fact that he admitted that it could not be quantified. (It may be noted that even if the Profit Fee were capable of being quantified and it was not, it is hard to imagine how pursuant to the Transaction Documents it could have been recovered). On a theoretical basis, a Film Services Contractor would claim under the Film Services Agreement (subject to its terms) against FSL. FSL in turn would in theory claim under the Picture Production Agreement. In both cases success would depend on there being profits and the profits clause having a meaning such that it could be enforced. In each case any dispute would have required resolution by arbitration in one case in Victoria and in the other case in California. As I have noted the Applicant in his evidence accepted that the clause was not possible to interpret and indeed in my view it was never intended that it would be enforceable. It was in other words nothing more or less than window-dressing.
PART H - part iva of itaa
142. This part also is enclosed in the interests of completeness and in case I have erred in respect of preceding parts, since it applies only if the Applicant can be said to have discharged his onus and if he was entitled to a deduction and where in both cases I have found against him.
143. Section 177D(b) of ITAA reads as follows:
INCOME TAX ASSESSMENT ACT 1936 - SECT 177D
Schemes to which Part applies
This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:
(a)…
(b)having regard to:
(i)the manner in which the scheme was entered into or carried out;
(ii)the form and substance of the scheme;
(iii)the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv)the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii)any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);
(c)…
144. As to subsection (i) the scheme was carried out in a manner which did not require the Applicant in relation to the Film to do anything at all. The Film was incidental to the scheme and any other film would have done just as well. The transaction involved the borrowing of $40,000 from a lender who was repaid through a prearranged letter of credit. The Applicant in relation to that amount paid out nothing and received and expected to receive nothing.
145. As to subsection (ii) I have found that the Transaction Documents were in important respects nothing more than a charade. They served as a vehicle which may have resulted in some money flowing through to the actual maker of the Film but far more appears to have been retained in costs. Leaving aside the Respondent Commissioner, every party to the transaction obtained a profit or benefit of some kind and in some cases, it would seem, one which was substantial. Each Australian company involved in the transaction apparently derived fees and in the case of the Manager apparently fees which were very substantial indeed; the Californian companies obtained apparently some minimum flow of funds and their attitude might well have been that anything was better than nothing; the Applicant and his fellow investors in the Film obtained the tax deductions, especially and as I have said, the Profit Fee provisions were illusory only. On this basis whatever the American corporations received was pure profit since they would never have to pay out any Profit Fee.
146. In relation to subsection (iii) the scheme was carried out according to the Applicant’s evidence in the last few days of June 1995. His evidence was that it was carried out at an earlier time but that evidence is demonstrably untrue. His evidence that promoters pressured persons to take investments of this kind and where there was competition given the multiplicity of schemes of this nature is not credible.
147. In relation to subsection (iv) the hypothesis is (but it is only a hypothesis because of my finding in the preceding part) that a deduction would but for the part have been obtained.
148. In relation to subsection (v) the Applicant obtained a tax advantage and without risk having regard to the letter of credit arrangement. He would have received a deduction of $40,000 in the relevant year and in the succeeding years would have received deductions to the extent that interest exceeded the minimum fee paid through the letter of credit arrangement.
149. As to subsection (vi) the other Australian parties to the Transaction Documents all apparently derived substantial fees and benefits but there was no evidence as to the precise amounts so derived. If the Respondent’s Statement of Facts and Contentions is in this respect accurate the benefits were particularly large in relation to the Manager who was the promoter.
150. I do not think that subsections (vii) and (viii) are of particular relevance.
151. The judgment of the High Court in Commissioner of Taxation of the Commonwealth of Australia v Hart and Anor [2004] CLR 216 makes it clear that in relation to a Part IVA determination one must have regard on an objective basis to the factors enumerated in s 177D(b). I was referred to numerous other cases and including Commissioner of Taxation v Sleight [2004] FCAFC 24, Puzey v Federal Commissioner of Taxation [2003] FCAFC 197 and Macquarie Finance Limited v Federal Commissioner of Taxation [2005] FCAFC 205 but I need not deal with them other than by way of this brief reference. On an objective basis it is my view that the sole purpose was tax avoidance; there was in fact no other purpose.
PART I - penalty
152. Easily the most disingenuous remark (among many) by the Applicant was that the fact that the Respondent reduced the penalty to five per cent must mean that the Respondent was in the wrong.
153. The penalty rate was originally assessed under s 226 at 50 per cent. However, the Respondent allowed a reduction of 80 per cent under s 226Z because of the Applicant’s voluntary disclosure. This would have taken the penalty to 10 per cent. As to why the Respondent further reduced the rate of penalty to 5 per cent is not clear to me. Ms Davies said that this was so because the rate of penalty offered to other investors’ was 5 per cent; this may be so but the Applicant did not accept the offer made to him. It follows that in my view the penalty rate applied was unduly generous. I do not think it appropriate to reduce it.
PART J - Conclusion
154. The objection decision under review must be affirmed.
I certify that the 154 preceding paragraphs are a true copy of the reasons for the decision herein of DEPUTY PRESIDENT BLOCK
Signed: A. Krilis Associate
Date/s of Hearing 12 & 13 December 2005
Date of Decision 23 December 2005
Representative for the Applicant Self
Counsel for the Respondent Ms J Davies SC, Ms D Harding
Solicitor for the Respondent Australian Government Solicitor
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