Howland-Rose v Commissioner of Taxation

[2002] FCA 246

FEDERAL COURT OF AUSTRALIA

Howland-Rose v Commissioner of Taxation [2002] FCA 246

INCOME TAX – prospectus issued for prescribed interests – whole of funds subscribed for prescribed interests lent to participants by promoters – “round-robin” effected by bills of exchange negotiated between related promoter companies (involving lender and researcher) without bank account entries – part of loans (25%) repayable by participants over two years with interest – thereafter balance unpaid of loans (75%) and interest non-recourse, except to extent of profitable returns derived by participants – immediate purpose of funds subscribed for research and development in Australia and overseas to be undertaken over ensuing two years – thereafter financial returns forecast by prospectus from sale and distribution of manufactured products in Australia and overseas arising from that research and development – research and development in fact never finalised at least to stage of regulatory product approval and commencement of manufacture – whether 100% of funds subscribed and interest thereon for initial two yearly period deductible pursuant to subs 51(1) of Income Tax Assessment Act 1936 (as amended) – alternatively whether deductibility to be derived pursuant to Pt IVA of the Act – alternatively whether deductibility subject to ten year provisions of s 82KZM of the Act – evidentiary issues as to operation of subs 51(1) of the Act in circumstances where prospects of derivation of assessable income remote or “extremely” remote from the outset – whether “round-robin” of bills of exchange effective.

Taxation Administration Act 1953 (Cth) s 1422(a)(ii)
Income Tax Assessment Act 1936 (Cth) subs 51(1), subs 67, s 82KZM and Part IVA, s 177A, s 177C, s 177D, s 221D
Therapeutic Goods Administration Act 1989 (Cth)

Parsons Income Taxation in Australia 1985

AAT Case V137 (1988) 88 ATC 865 distinguished
Brajkovich v Federal Commissioner of Taxation (1989) 89 ATC 5227 distinguished
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305 considered
Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd [2000] FCA 1463 considered
Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 considered
Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 referred to
Federal Commissioner of Taxation v Radnor (1991) 91 ATC 4689 referred to
Thomas v Commissioner of Taxation (1972) 46 ALJR 397 referred to
Walker v Federal Commissioner of Taxation (1983) 70 FLR 354 considered
Federal Commissioner of Taxation v Walker (1984) 2 FCR 283 considered
Federal Commissioner of Taxation v Lau (1984) 6 FCR 202 considered
Federal Commissioner of Taxation v Emmakell Pty Ltd (1988) 22 FCR 157 distinguished
Federal Commissioner of Taxation v Brand (1995) 95 ATC 4633 distinguished
Sun Newspapers Ltd & Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 cited
Goodman Fielder Wattie Ltd v Federal Commissioner of Taxation (1991) 29 FCR 376 followed
Federal Commissioner of Taxation v Osborne (1990) 26 FCR 63 referred to
Griffin Coal Mining Co Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4870 referred to
Federal Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305 considered
J & R O’Cain v Inland Revenue Commissioners (1922) 12 TC 303 cited
Hope v Bathurst City Council (1980) 144 CLR 1 cited
John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 referred to
Esso Australia Resources Ltd v Commissioner of Taxation (1998) 84 FCR 541 referred to
Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 referred to
Southern Estates Pty Ltd v Federal Commissioner of Taxation (1967) 117 CLR 481 referred to
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 cited
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 approved
Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd (MacPherson JA, Thomas and de Jersey JJ, 9 December 1999, unreported)
Moreau v Federal Commissioner of Taxation (1926) 39 CLR 65 referred to
Federal Commissioner of Taxation v Spotless Services Limited (1995) 62 FCR 244 considered
Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 followed
Federal Commissioner of Taxation v Consolidated Press Holdings Limited (2001) 2001 ATC 4343 followed
Hart v Commissioner of Taxation [2001] FCA 1547 followed
Commissioner of Inland Revenue v BNZ Investments Limited (2001) 20 NZTC 17,103 distinguished

Metal Manufactures Ltd v Federal Commissioner of Taxation (1999) 99 ATC 5229 referred to
Federal Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150 considered

FIONA HOWLAND-ROSE & ORS v COMMISSIONER OF TAXATION

N101-104 OF 2000

CONTI
18 MARCH 2002
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 101-104 of 2000

BETWEEN:	FIONA HOWLAND-ROSE, MICHAEL JOHN HARVEY, JEFFREY JOSEPH BRAYSICH & ANTHONY PETER DAVIDSON APPLICANTS
AND:	COMMISSIONER OF TAXATION RESPONDENT
JUDGE:	CONTI J
DATE OF ORDER:	18 MARCH 2002
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The assessments of the Commissioner in relation to each of the Applicants be upheld, and that the Applications therefore be dismissed.

2.        No order as to the costs of the proceedings be made.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 101-104 OF 2000

BETWEEN:	FIONA HOWLAND-ROSE, MICHAEL JOHN HARVEY, JEFFREY JOSEPH BRAYSICH & ANTHONY PETER DAVIDSON APPLICANTS
AND:	COMMISSIONER OF TAXATION RESPONDENT
JUDGE:	CONTI J
DATE:	18 MARCH 2002
PLACE:	SYDNEY

REASONS FOR JUDGMENT

Preliminary observations

1. The Applicants comprise four of the 2371 members of the “Budplan Personal Syndicate” (“BPS”) who each subscribed for a prescribed interest (as defined in Part 1.2 of Division 1 of the Corporations Law) pursuant to a Prospectus dated 5 December 1995 issued by the following corporations:

   Business and Research Management Limited (“BARM”)

   Project & General Finance Pty Limited (“PGF”)

   The Australian Tea Tree Oil Research Institute Limited (“ATTORI”)

   The Applicants fulfilled informally the role of representative members of the BPS for the purpose of the present proceedings. The subject applications to the Court have been made pursuant to s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth) (“the Act”). In each case, the Applicants’ disputed tax objections related to amended assessments. The prescribed interest acquired by each Applicant was referred to in the Prospectus as a “syndicate participation”. The context to the proceedings was the familiar process of raising funds from members of the public for the purpose of producing products having an agricultural base, in this instance tea tree oil (“TTO”).

2. The issues falling for ultimate resolution in the proceedings are first, whether the Applicants are entitled to deductibility for income tax purposes in respect of the major proportion of the funds which they subscribed for their respective so-called syndicate participations, pursuant to subs 51(1) of the Income Tax Assessment Act 1936 (Cth) (as amended) (“ITAA”), and if so, whether such entitlement should be nevertheless denied by reason of the operation of Part IVA of the ITAA. The fiscal years of deductibility for three of the Applicants would have been 1995-6 and 1996-7, and in the case of the fourth Applicant 1996-7 and 1997-8.

3. The hearing of the proceedings extended over 19 days. All witnesses, expert and otherwise, provided affidavit evidence, in advance of cross-examination. Such affidavit evidence was detailed and lengthy, and accompanied by documentary exhibits, many of substantial length. I was provided with comprehensive submissions in writing both in chief and in reply, being submissions which were followed by lengthy oral addresses. The proceedings are in the nature of a test case, there being 2371 participants in the BPS, and a number of Budplan Syndicates apparently of similar structure, and the Respondent Commissioner agreed beforehand to meet the legal costs and expenses of the Applicants for that purpose. Hence the parties mutually agreed that no order for costs should be made in relation to the present proceedings at first instance, irrespective of the outcome. The assistance which I received from all legal representatives involved, both in address and in written submissions, was substantial and of a high order professionally. The work of counsel and solicitors engaged in this litigation was competently and thoroughly prepared and presented.

4. It has been a formidable task to endeavour on the one hand to keep these Reasons for Judgment within manageable limits, yet on the other hand to appropriately reflect the substantial body of testimony of witnesses, written and oral, the documentary exhibits, and the closing submissions of Counsel. The one documentary exhibit which must necessarily be reproduced or described in detail for ease of subsequent reference is the Prospectus. This 67 page document provides the most accurate picture of the nature and detail of the BPS scheme, and thus of the objective purposes of the participants.

   Genesis of the Prospectus

5. The chief architect of the BPS was Glendon Michael Stotter, the Chairman of Directors of BARM. From March 1992 to October 1995, Mr Stotter was involved in the establishment of the Main Camp Tea Tree Oil Projects Nos 1-4, which had raised funds from the public pursuant to registered prospectuses, for the purpose of establishing tea tree plantations on property at Main Camp near Casino in northern New South Wales. The development of that property was described by Mr Stotter as successful.

6. Early in 1995, Mr Stotter formed the opinion that the next phase of advancing the TTO industry in Australia, by creating markets for TTO products, required the development of value added products using TTO produced at Main Camp, in particular in the fields of therapeutics and cosmetics. Mr Stotter caused to be retained Alan Twomey, who holds a doctorate of philosophy in chemistry, and who had been Director of Marketing, and subsequently Chief Executive, of Parke Davis Pty Ltd over the period from 1974 to 1995. Mr Stotter appreciated that further research was required in order for such value added products to be the subject of regulatory approvals in Australia and in overseas countries representing the major potential markets, if financial success was to be achieved. Mr Stotter appraised the TTO produced by the Main Camp growing operations as ideally suited to the development of value added products because it was of a superior grade, a thesis for which he was supported by Donald Charles Priest, a graduate in Science (Biochemistry) from the University of New South Wales with over 25 years experience in the pharmaceutical, cosmetic and personal care industries.

7. Based on dialogue which he had conducted with major pharmaceutical companies, Mr Stotter concluded that the pharmaceutical industry was not interested in undertaking the research necessary to produce such value added projects. That view was shared by Harvey Craig Bell, who held a doctorate of philosophy from the University of Sydney, and who had been Senior Formulator-Laboratory Manager of ICI Pharmaceuticals, and subsequently Research and Development Manager of Reckitt and Colman Pharmaceuticals Australia. For its part, Main Camp Marketing Pty Ltd had undertaken some research and development work in relation to value added therapeutic products using TTO, but had insufficient funds available to do so adequately.

8. The foregoing considerations led Mr Stotter, in mid 1995, to undertake the establishment of financial vehicles to formulate TTO based products by way of so-called product packages, the venture to be funded by members of the public, as had occurred in relation to the Main Camp TTO growing projects. The result was the fund raising proposals contained in the subject Prospectus, and the contemporary Budplan Company Syndicate Prospectus, and later Budplan prospectuses, which are not the subject of these proceedings.

   Content of the Prospectus

9. As indicated above, subscribers to the Prospectus were to constitute the members of the BPS. The BPS was not established as a partnership, the Prospectus envisaging that each participant would conduct his or her own business, albeit in association with each other member of the BPS, who would conduct his or her own business. No issue has been raised as to whether under the general law, as distinct from ITAA definition, the members of the BPS constituted a partnership, with consequences as to illegality of association because of the large number of partners involved. The front cover of the Prospectus described participation in the BPS as “speculative”, and stated that “independent financial advice should be sought” by prospective participants. In the events which happened, licensed dealers conducted educational programmes with the aid of the registered Prospectus. The opening “Business Overview” segment of the Prospectus contained the following information:

   “By applying for and being accepted into the Budplan Personal Syndicate an applicant becomes a business proprietor in a business of development for potential manufacture and sale of specified tea tree oil based products including all necessary research.

   The Syndicate holds an option over product formulae and product concepts in the product areas listed below. On commencement of the Syndicate this option will be exercised immediately and a business to commercialise and further develop these product formulae and concepts will begin.

   To further develop the formulations and concepts the Syndicate will undertake research and development into the uses of tea tree oil in the selected product categories set out below.

   The Budplan Personal Syndicate is one of two syndicates being formed concurrently with the view that these two syndicates will individually carry on business, part of which will comprise undertaking the development for potential manufacture and sale of specified products and markets with the business profits being returned to the Syndicates’ Participants in proportion to their contributions.

   Both Syndicates will contract with The Australian Tea Tree Oil Research Institute Ltd to undertake the necessary scientific research including enhancing existing product formulae and product concepts and to develop new products.

   The Institute will develop “Product Packages” incorporating the formulae and concepts of the Syndicate using Main Camp Premium Pharmaceutical Grade Tea Tree Oil. These “Product Packages” will include product formulae, product samples, stability, safety information and efficacy data, labelling and packaging specifications to the highest international standards. Several “Packages” will be produced for each potential use in order to maximise resulting income. These “Product Packages” will be used to develop the Syndicates’ private label products in bulk or in packaged form for sale with the resultant income, after payment of expenses, returned to the business proprietors comprising the Budplan Personal Syndicate and the Budplan Company Syndicate, in proportion to their business expenditure.

   Research and Development is generally regarded as the future lifeblood of the Australian economy. The Australian Government recognises this by the provision of taxation and other incentives. Australians are very innovative by nature and many world standard innovations are credited to Australian ingenuity. From our earliest history new ideas and techniques have assisted Australia to establish World’s Best Practices in many fields from agriculture to high technology.

   Main Camp Premium Pharmaceutical Grade Tea Tree Oil is produced in Australia under ISO 9002 Quality Assurance standards using Australian developed technology. The Main Camp Tea Tree Oil Group owns the world’s largest tea tree plantation and is considered the leader in its field.

   A number of potential uses for Main Camp Premium Pharmaceutical Grade Tea Tree Oil have been identified from past research and published literature. Three of these potential uses have been singled out for further research and development work with a view to enhancing existing work and commercialising the results of this work on world markets.

   These uses are:-

   ·ACNE TREATMENT

   ·HOSPITAL AND ANTISEPTIC PRODUCTS

   ·ORAL HYGIENE

   Participation in this business is achieved by entering into the Principle Deed which has the effect of entry into two agreements. One is the Budplan Personal Syndicate Deed which appoints Business and Research Management Limited to manage your business and to undertake commercialisation of the products produced by your joint venture syndicate. The second agreement facilitates a loan to assist in financing your business if so desired.

   You will also need to complete the simple application form contained in this Prospectus.

   Further details are set out in this Prospectus and you are urged to read this document thoroughly and to seek the advice of your own advisers or your financial planner if you are unclear on any aspect.”

10. It may be observed that the “Business Overview” purported to merge into a single or unified concept the proposed research into and development of TTO “product and packages”, and the manufacture and sale of TTO “private label products in bulk or in packaged form”, being a theme of combined activities emphasised by the Applicants in the presentation of their case based upon subs 51(1) of the Act, and the second limb thereof in particular. Nevertheless the “Business Overview” segment extracted above focused implicitly on the activity of first undertaking the process of research and development, “[t]he Australian Government recognis[ing] this by the provision of taxation and other incentives”.

11. The next segment of the Prospectus was headed “Summary of Participation”, and contained the following:

    “To participate at the minimum level in the Budplan Personal Syndicate you will be required to make a once only payment of $200 to cover business establishment expenses including acquisition of various product formulae and product concepts and to make payments of $1,000 each payable monthly in advance (or $12,000 payable yearly in advance) comprising $900 for scientific research expenditure and $100 management fee. You may increase the amount of your participation by increments of $500 payable monthly in advance (or $6,000 payable yearly in advance) in the same ratios as above.

    No further payments beyond 24 months are required by you as all additional Management Fees will be deducted from the proceeds of product sales.

    Should you wish, you may borrow each of the first and second years expenditures of $12,000 for a total of $24,000, from the Lender-Project & General Finance Pty Limited (plus additional multiples of $6,000 if required), as set out later in this Prospectus.

    To borrow to finance your business you must commit to a once only loan application fee of $300 plus principal and interest payments of $400 monthly in advance per minimum participation (being $250 principal and $150 interest) for a period of the first 24 months and thereafter at a rate equal to not less than 50% of your net earnings from your business until the loan is extinguished.”

    Thereafter followed “Important Notice to Subscribers”, the first paragraph whereof reading as follows:

    “A Trust Deed relating to the interests to which this Prospectus refers dated 5 December 1995, has been lodged with the Australian Securities Commission. The parties to this Trust Deed are Business and Research Management Limited (the Manager), Australian Rural Group Limited (ARG) (the Trustee) and The Australian Tea Tree Oil Research Institute Ltd (the Institute). Each Participant by entering into the Budplan Personal Syndicate Deed becomes a party to the Trust Deed as a Participant. The Trustee has covenanted to protect the Participants’ interests. Both the Manager and the Trustee are bound by covenants contained in the Trust Deed.”

    The Budplan Personal Syndicate Deed is referred to in [28-32] below.

1. The following four pages of the Prospectus comprised a segment headed “Details of the Business”. Some of it was repetitive of what has already been extracted above. The “purpose” of the Syndicate was stated in the following terms, again giving emphasis implicitly to the asserted business character of the BPS activity from the outset for income tax purposes:

   “1.      Purpose of the Syndicate

   By participating in the Budplan Personal Syndicate you will engage in the business of development for potential manufacture and sale of specified tea tree oil based products including all necessary scientific research.
   It is intended that, subject to the inherent risks, your business will return profits from the sale of products manufactured as a result of the ‘Product Packages’ developed by the Syndicate.
   You will commence business by entering into the Budplan Personal Syndicate Deed and contributing $200 (or multiples thereof) to the Syndicate to cover business establishment expenses and purchase of the initial formulae and product concepts. Your efforts will be combined with others in the Syndicate to maximise returns and the scope of your business activities.”

   The concepts of engaging and entering into business in the circumstances above stated are controversial. Thereafter potential investors were informed by this “Details of the Business” segment of the Prospectus of the following matters:

   (i)The intended function of ATTORI, which would be to research and construct the so-called Product Packages to facilitate the contract manufacture of bulk or private label product, and the marketing of those products by predominantly large and well known international companies;

   (ii)The intended function of BARM as “Manager of the Syndicate” to manage “this business process and to arrange manufacture and sale of products”, and also to administer the affairs of ATTORI;

   (iii)The financial participation of applicants in the syndicate participations, which involved a minimum payment by each participant of $1000 per month for 24 months payable in advance, being $900 per month payable to ATTORI for scientific research and $100 per month payable to BARM for management services, or alternatively, two annual payments of $12,000 payable in advance, “comprising in each case” a contractual payment to [ATTORI] for scientific research of $900 per month and a management fee to [BARM] of $100 per month”. In that context the following appeared:

   “No payments are required from you beyond 24 months as all costs from that time including Management and Administration Fees will be deducted from the revenue earned from product sales before declaring a net revenue earned by your Syndicate.”

   (In addition, but not here mentioned, each participant was required to pay a Business Establishment Fee of $200 and a Loan Application Fee of $300, in the latter case if a loan was required, which was almost invariably the case).

   (iv)For the administration of the affairs of ATTORI, BARM was to be paid $1200 per “Syndicate Participant” in years 1 and 2 to manage ATTORI, which fee would thereafter reduce to $250 per annum for each “Syndicate Participant” plus annual C.P.I. increments; in addition BARM was to receive “25% of the gross revenue derived from the business of the Syndicate Participant” to pay for its services, which it was authorised to deduct from revenue in its hands;

   (v)The term of the BPS Syndicate was stipulated to be 15 years, whereafter all intellectual property, contracts and any other assets “of the Participant in the Syndicate” would be sold, and the sale proceeds distributed between Syndicate Participants and BARM in certain specified proportions;

   (vi)The minimum number of participations was to be 50 in number; the offer in the Prospectus was for 1000 Syndicate participations; any participant might take more than one Syndicate participation; there was provision for 1,500 oversubscriptions; however it was stated that BARM would only accept oversubscriptions in the event that the Budplan Company Syndicate fell short of its subscription allocation of the approximate equivalent of 1,500 BPS subscriptions. In the events which happened, the aggregate number of BPS subscribers was 2,371;

   (vii)The following so-called risk factors:

   “Money is typically invested in businesses as proposed including research and development because of the potentially high returns. Such high returns are possible under your participant in the [BPS] described in this Prospectus.

   However, the risk in the Business as proposed including research and development is also high and you should not begin your business unless you assess the risks.

   The initial formulae and product concepts and the areas of research selected are those which, in the opinion of the Manager, hold good prospects for success and every endeavour will be made to maximise the returns to your business. Success however can not be guaranteed.”

   (viii)ATTORI had been formed specifically to undertake scientific research and was capable of performing the tasks required of it, and comprised “a body of eminent and experienced industry and business persons and academics which is retained by BPS to provide scientific research”, including the following:

   “·     Enhance existing product formulae and concepts and develop them into ‘Product Packages’.

   ·Research new products and ‘Product Packages’.

   ·Determine the likelihood of success of any particular piece of research to enhance or expand the product range.

   ·Determine research requirements and protocols.

   ·Source suitable researchers and research bodies to conduct the required research and development under the supervision of the Institute.

   ·Assess the potential for successful commercialisation of any proposed piece of research or ‘Product Package’.”

   (ix)Five of the directors of ATTORI, namely the abovementioned Messrs Stotter and Priest, and also Dennis Charles Lear, Peter Charles Lucas and Alan James Gallagher, were also stated to be the directors of BARM, and of companies comprising the Main Camp Group which were suppliers of Main Camp Premium Pharmaceutical Grade Tea Tree Oil. Messrs Lear, Lucas and Gallagher were also stated to be directors of PGF, and Messrs Stotter, Gallagher and Lear were stated to be directors of Monpro Ltd, which acted as a security dealer to introduce participants on behalf of BARM.

2. The following additional material contained in the “Details of the Business” segment requires reproduction verbatim:

   “Marketing Risk Factors

   It is intended to sell the products developed on the world market under the best possible terms and conditions. It is not intended to retail brand products or enter into the business of retail marketing. Rather it is the intention of the Manager to arrange to contract manufacture bulk product for packaging and labelling by large international companies under their own brands.
   The Manager will commence marketing activities immediately upon the commencement of the Syndicate by contacting, or where contact has already been made, by re-contacting, the many large international companies who have already indicated an interest in tea tree oil products. This list will be increased by personal contact, trade shows, trade journals and advertising.
   Constant contact will be maintained with interested parties during the research period and additional interested parties will be sought on an ongoing basis.
   There is no guarantee that the revenue expected will be derived, however every effort will be made to meet and exceed the projections made in the attached report by Excel Consulting Group (Qld) Pty Ltd…”

   Again may be noted the reference to business activities commencing immediately, this time in the nature of marketing activities, notwithstanding that it was already indicated, for instance in the “Business Overview” segment set out in [9] above, and earlier in this “Details of the Business” segment reproduced in [12(vii) and (viii)] above, that research and development activity was required first to be undertaken in order to obtain marketable product packages.

   “More than one Product Package will be developed for each product type to enable the Manager to approach a broad market spectrum and to maximise returns.

   …

   Loan Option

   An intending participant may borrow 100% of the first and second years scientific research expenditure and management fee amounting to $12,000 in the first year and $12,000 in the second year for a total of $24,000.
   The loan is optional, however if you elect to borrow in this way to finance your participation you must comply with the conditions of the loan set out in the Loan Agreement.
   The Loan Agreement requires an application free of $300 and for you to personally make 24 monthly in advance payments of principal and interest amounting to $400 each ($250 principal plus $150 interest). You are not obliged to make any further payments personally after 24 payments have been made, however you must commit not less than 50% of your net Syndicate earnings to the repayment of the loan and interest until expiry of the loan.

   …”

   In the events which happened, apparently all but one of the abovementioned 2371 subscribers opted to borrow the two successive yearly sums of $12,000 (totalling of course $24,000).

   “Put Option

   If you have taken a loan to fund the cost of the Scientific Research expenditure and management fees then you have the benefit of a Put Option whereby you can require the Manager, at the expiry of the term of the Syndicate, to purchase that part of your Business including the assets of the Business and Research Results as shall be equal in amount to the unpaid balance of the loan at the expiry of the term of the Syndicate. If you elect to exercise this option, the Manager may then, at its option, elect to acquire any remaining balance of your Business including the assets of the Business and Research Results at a price determined by independent valuation.”

   The term of the Syndicate, as already indicated, was to be 15 years, though the total payment of $24,000 (or multiples thereof), to be made by two successive amounts of $12,000 (or multiples thereof), were to be so made in advance at successive yearly intervals.

3. The next segment of the Prospectus was described as a “Marketing and Technical Consultant’s Report”. The author was Dr Twomey, who has been identified in [6] above, and who was a director of Excel Consulting Group (Qld) Pty Ltd (identified in the previous paragraph). His credentials and expertise in marketing, strategic planning and organisational development, and as a consultant to major multinationals, were not disputed. Dr Twomey’s Report occupied five pages of the Prospectus, and was also said to have been included in the Budplan Company Syndicate Prospectus. His private company had provided consulting services to the Main Camp Group since 1989. Under the heading “The Opportunities”, the following appears:

   “The Opportunities

   Natural health products are in the top growth areas of the pharmaceutical and cosmetic segments of world markets. It is a trend that is truly international. The growth rate of the markets in both the EU and USA ranged from 8 to 14% p.a. during the past five years. This trend started in 1980, levelled out in 1985-90 and has progressed steadily since.

   Our research has identified several important characteristics of the segments and a role for Tea Tree Oil to share in the growth.

   These are:

   -a trend for synthetics to be replaced by natural products

   -major manufacturers of cosmetics and pharmaceuticals seeking new materials from areas having supply capability

   -innovative products having special features and benefits having the fastest growth

   -over 50% of buyers are women aged 30 to 65

   -over 50% of consumers want ecologically sustainable products

   -over 70% of consumers evaluate the ingredients of a product

   -Tea Tree Oil has the potential to meet many of the market requirements with its many features and benefits.”

4. Under the next heading “The Market Size”, Dr Twomey set out the then current retail market values for the “Cosmetic” products and “Pharmaceutical” products said to then prevail in the European Union, Japan and United States of America, with a degree of overlapping. Thereafter under the heading “Barriers to Capturing Opportunities”, Dr Twomey explained that throughout the world, there was an increasing level of regulatory requirements for validation of efficacy and safety of materials used in pharmaceutical, and to a lesser extent, cosmetic products, and that in particular, the United States Food and Drug Administration (“FDA”) produced monographs which listed substances approved for specific applications, and in the European Union, protocols had been developed for pharmaceutical products, although individual countries continued to have secondary requirements, and Australia stipulated its own requirements under the auspices of the Therapeutic Goods Administration Act 1989 (Cth). I will hereafter refer to the Australian Therapeutic Goods Administration referred to in such legislation as the “TGA”. All such requirements were said to have similarities for verification of safety and efficacy of substances and products, but there were no internationally accepted registrations or protocols. In that context, Dr Twomey offered the following conclusion:

   “This is a relatively simple application of tea tree oil and the review highlights the necessity for definitive research and development.
   Having done this work there is no reason to suggest that the FDA Monograph won’t be achieved.”

   A monograph officially lists substances for specific human applications.

5. Under the next heading of Dr Twomey’s Report “Pharmaceutical Research And Development – The Opportunities” the following appeared:

   “Pharmaceutical Research and Development

   The Opportunities

   High value markets exist within the pharmaceutical segment for natural products and formulations containing natural products. The limitations are the lack of controlled clinical efficacy trials with closely defined chemical composition oil. This creates an opportunity to develop a range of products containing tea tree oil, which may be sold to major manufacturers of products who specialise in one or more of the subsegments of the pharmaceutical segment.

   The three subsegments that appear to have the greatest opportunity in terms of competitive advantage and natural product differentiation are:

   ·         Acne

   ·         Hospital and Antiseptic

   ·         Oral Hygiene.”

   Thereafter were set out detailed expositions by Dr Twomey on the subjects of “Acne, Hospital and Minor Wound Care, Oral Hygiene, Commercialising Research and Development”, followed by his assessment of “the potential for commercialisation” of the products which might arise from the research and development needs identified in his report, based upon the following assumptions:

   “ASSUMPTIONS

   sverification of most of the anecdotal and clinical reports will be an outcome

   sa number of patented products and/or processes will result from the research and development

   sa number of unpatented but copyrighted products and/or processes will result from the research and development

   sthe research and development will allow product registration for use as a pharmaceutical in the EU, USA, Japan and other countries

   sproducts will be made available for manufacture by companies who can penetrate specific target markets

   srevenue equal to an average of 5% of the manufactured price will be derived from the sale of bulk and private label products after deduction of all business expenses

   sthe manufactured price is 35% of the retail value of products surveyed in the market research.”

   Such “potential for commercialisation”, which Dr Twomey equated with “The commercial returns on the proposed business” of BPS and the Budplan Company Syndicate, that is to say, for the two syndications in combination, assumed estimated market shares for each product worldwide of 10% for acne, 5% for antiseptic and hospital, and 50% for oral hygiene products, a manufacturing cost of 35% of retail value, an annual profit based on 5% of the two Syndicates’ said market shares, and an exchange rate of the Australian dollar to US dollar of 0.75. The resulting potential annual profit for the two Syndicates was estimated to be AUD38.86 million.

6. The next segment of the Prospectus in sequence was headed “Taxation and Cashflow Aspects of years 1 and 2”, and was based upon the so-called “minimum participation level” of “$1000 per month for 24 months or $12,000 per year for two years”, plus a “Business Establishment Fee” of $200 and a “Loan Application Fee” of $300, and the assumption of a borrowing in advance of the full amount of such minimum participation level amounting to $24,000. The following table thereafter appeared:

Your Funds	Borrowed Funds	Deductible over 2 years
Business Establishment Fee Loan Application Fee Scientific and Research Expenditure and Management Fee over 2 years Interest over 2 years Principal Reduction Over 2 years	200 300 0 3,600 6,000 10,100	-              -     24,000             0       0     24,000	-           120      24,000        3,600       0      27,720

It was thereupon stated in this context that “Taxation savings are not guaranteed and are given for illustrative purposes only. Please read the Taxation reports contained in this Prospectus and seek your own advice to determine if you qualify for a taxation concession to the extent indicated”. Those Reports were prepared by Mr Lear of Lear & Co, who has been identified in [12(ix)] above, and by Clayton Utz, Solicitors and Attorneys. In the case of the Clayton Utz report, it was explicitly stated as follows inter alia by way of introduction:

“The following comments provide only a descriptive summary of the main taxation issues considered. They do not purport to be an exhaustive or definitive analysis of all potential tax issues relevant to participation in the business. The taxation consequences for an investor will depend upon the particular circumstances of each investor. Investors should not rely on this explanatory outline for taxation purposes, but should seek and reply on their own taxation advice.”

1. Based upon the then current personal income tax rates (including Medicare Levy) of 35.5% for each dollar over $20,700, 44.5% for each dollar over $38,000 and 48.5% for each dollar over $50,000, the following three Tables as to cash flow positions were stated as follows:

   “TABLE 1
   Monthly Cash Flow Position (excluding initial one off payment of $500)

Marginal Tax Rate	Your Funds	Tax Savings	Surplus
35.5%	400	410	10
44.5%	400	514	114
48.5%	400	560	160

TABLE 2
First Years Cash Flow Position (excluding initial one off payment of $500)

Marginal Tax Rate	Your Funds	Tax Savings	Surplus
35.5%	4,800	4,920	120
44.5%	4,800	6,168	1,368
48.5%	4,800	6,720	1,920

TABLE 3
Two Years Cash Flow Position (excluding initial one-off payment of $500)

Marginal Tax Rate	Your Funds	Tax Savings	Surplus
35.5%	9,600	9,840	240
44.5%	9,600	12,336	2,736
48.5%	9,600	13,440	3,840

.”

1. The next following segment of the Prospectus of potential significance was headed “Income & Expenditure Illustrations”, and laid out the following assumptions for the purpose of the illustrations which followed:

   “Income

   Income calculations are based on the projected earnings illustrated in the independent Marketing Consultants Report contained in this Prospectus…(ie Dr Twomey’s above report). These figures are based for illustration purposes only on the USA, Japanese and European markets for the designated product categories. It is intended however to market in other available world markets. It could take a few years to reach the potential income and a phase-in period commencing in Year 3 and lasting to Year 6 has been used as follows: 5%, 33%, 66% & 100%.

   A net revenue basis of 5% of ex-factory price has been assumed by the Independent Marketing Consultant as a profit on sales after all expenses. The net earnings from product sales will be shared with other Budplan Personal Syndicate participants and participants in the Budplan Company Syndicate in proportion to the Total Expenditure paid by each participant for scientific research and management costs.

   All the costs of running your business such as manufacturing costs, marketing expenses and overheads will be provided for and borne in the normal manner by the Syndicate from revenue earned, with the surplus being profits to your research business.”

   Reference already appears in [9] above to the contemporaneous Budplan Company Syndicate fundraising. Then were described the varying finance participation levels to be assumed for the illustration to follow, based upon the three assumptions or options extracted below:

   “Loan repayment options

   If you elect to borrow to finance your participation, you have to personally make 24 monthly payments of principal and interest of $400 each per Participation, in addition to your Loan Application Fee of $300.”

   “To repay the remaining debt you may choose to direct either 100% (Option 1) or 50% (Option 2) of your net business earnings to repay principal and interest until the loan is extinguished….

   The illustrations below (ie Tables 1, 2 and 3 referred to in [20] below) assume the net earnings as set out in the independent Marketing Consultants Report (ie Dr Twomey’s report, where he refers to a potential annual profit of AUD$38.86 million per annum for the BPS and the Budplan Company Syndicate together):

   The three tables differ as follows:-

   Table 1           The option of taking no loan

   OR

   Table 2The option of directing 100% of your business earnings, after deduction of fees and costs, to repay your loan

   OR

   Table 3The option of directing 50% of your business earnings after deduction of fees and costs to repay your loan. The remaining 50% would be directed to you as a cash payment.”

   It appears that one person out of the 2371 subscribers to the BPS adopted the Table 1 “option” of participating entirely without borrowing.

1. The three Tables containing the “Income & Expenditure Illustrations”, were each based on the assumed investment return described in Dr Twomey’s report, namely:

   “The Return on Investment (ROI) calculation assumes a return on the Total Expenditure of $24,000 which is payable over 2 years. It is not a true ROI calculation in that it treats the Total Expenditure as an investment. The Total Expenditure is not an investment apart from the resultant business benefits arising from that expenditure to derive business profits. No account of any taxation implications are taken into account in illustrating the ROI.”

   They related respectively to each of the three options set out in [19] above. The first illustration related to a minimum participation level of $1000 per month without any borrowing, which disclosed “Net earnings (5% of sales)” totalling $167,408 over 15 years, with a return on investment growing to an average of 46.5%, after nil returns for the first two years, a 3.2% return for the third year, a 21% return for the fourth year, a 42.1% for the fifth year, and thereafter a constant return of 63.1% per annum for the remaining ten years duration of the BPS. The second and third illustrations related respectively to the loan repayment options of 100% and 50% the subject of Tables 2 and 3 referred to in [19] above, geared to the same participation or subscription level, and assuming again Dr Twomey’s estimate of annual profit of AUD$38.86 million per annum for the BPS and Budplan Company Syndicate in the aggregate, the differences being that in the case of Tables 2 and 3, interest and repayment factors were added to the equations of Table 1, producing in the case of Table 2 a total cash distribution of $144,378 over the 15 year period, and in the case of Table 3 a total cash distribution of $143,210.

2. Under the subsequent heading “Additional Information”, reference was made first to the Trust Deed dated 5 December 1995 referred to in [11] above, with the following explanation:

   “Each Syndicate Participant, by entering into the Budplan Personal Syndicate Deed becomes a party to the Trust Deed. The Deed contains all of the covenants required by Section 1069 of the Corporations Law and Company Regulation 7.12.15….”

   The only other matter in this segment referred to, which should be reproduced, is as follows:

   “12.     Nature of Your Business

   Your business is the development and sale of tea tree oil products to marketers or manufacturers of products in the target areas of research. These areas are:

   ·         Acne treatment

   ·         Hospital ad Antiseptic products

   ·         Oral hygiene

   In the event research is not proving to be successful or, in the opinion of the Manager, may not produce a satisfactory commercial return, then the Manager will request the Research Institute to substitute an alternative area of research which, in the Manager’s opinion, will provide a better return to the Syndicate Participants. In the event this Prospectus is not fully subscribed the scope of the research may need to be curtailed. Subject to the minimum subscription level, if this occurs the Manager will request the Research Institute to proceed with a reduced programme deemed to be in the best interests of the Syndicate Participants.”

3. The next segment of the Prospectus headed “Questions and Answers” contained a series of ten questions and answers. One related to the availability of TTO to meet the “market uptake” of the products predicted in the Marketing and Technical Consultant’s Report, which “… in the fullness of time… will mean a requirement of 366 tonnes of oil annually”. Such requirement of supply of TTO was said to be “covered by the anticipated production of Main Group Premium Pharmaceutical Grade Tea Tree Oil”. Others were largely repetitive of what has been already referred to in [17] and [19] above. Three of the questions and answers warrant reproduction in full below, albeit that the same were largely repetitive of what has been reproduced already above:

   “Q.     What is my Total Expenditure?

   A.The minimum Total Expenditure of $1,000 per month for 24 months plus a Business Establishment Fee of $200. You may increase above this minimum in multiples of $500 per month. These amounts are dissected between a management fee of $100 per month and scientific research expenditure of $900 per month. No payments beyond 24 months are required from you personally as further expenditure can only come from the proceeds of product sales.

   Q.How does the Loan Agreement work?

   A.You may borrow 100% of each of the first years and second years Total Expenditure – a total of $24,000 at the minimum level of participation. Following 24 monthly payments of $400 principal and interest, you can nominate to repay the balance of your loan by directing either 50% or 100% of your Syndicate earnings toward repaying the balance of your loan account. The Loan Application Fee is $300.

   Security for your loan is your Business interest and providing you comply strictly with the conditions of the loan, your personal liability for the balance of principal and interest after 24 monthly payments have been made on time, is to repay the principal and interest from the income of your Business. However, if a balance exists at the end of the period of 15 years from the loan being made to you, you may effect a put option to require the Manager to pay you a minimum price, as specified in the Budplan Personal Syndicate Deed, which must be used by you to enable the repayment of the outstanding principal and interest, if any.

   The Loan conditions set out in the Loan Agreement make particular reference to the prompt monthly payment of $400 principal and interest for the first 24 months.

   An additional benefit of complying promptly with all of your loan conditions is that from Year 2, your interest rate will be reduced from 15% to 8.57% p.a. (refer Loan Agreement for details).

   Failure to comply with the payments referred to above means that the Lender has recourse to you personally in addition to the earnings of your Business and will apply the penalty interest rate of 17% p.a.

   More importantly, on default, the Lender may at any time call in the balance of the loan and look at the borrower personally to satisfy the debt. Your attention is drawn to the Loan Agreement in this regard.

   Q.What is the maximum I can personally be called upon to pay?

   A.If you have met all the conditions of the Loan Agreement then you are personally responsible for 24 monthly payments of principal and interest of $400 each for a total of $9,600. The balance of your loan and interest and any management fees can come only from the earnings of your Syndicate Business providing you have adhered to the terms of the loan and is subject to your right to effect a put option in accordance with the Budplan Personal Syndicate Deed as referred to above.

   If you fail to meet the conditions of the Loan Agreement then you will be asked to repay the balance of your loan account including penalty interest and pay in full any as yet unpaid Management Fees.

   It is best therefore if you feel you are unable to meet your principal and interest payments of $400 per month for 24 months that you do not participate.”

   The abovementioned sum of $9600 picks up again the aggregate of the figures of $3600 and $6000 referred to in the Table reproduced in [17] above.

4. Then in sequence contained in the Prospectus were the two expert reports concerning the availability to participants of tax deductibility, which I have already identified, an Investigating Accountant’s Report prepared by Greenwood Challoner, which disclosed inter alia that as at 27 November 1995, BARM’s net assets stood at $25,000, as at 30 June 1995 PGF’s total shareholders’ equity stood at $298,596, and ATTORI had not traded as at 23 November 1995, followed by a pro forma of the so-called Principal Deed to be entered into between BARM of the first part, the participant of the second part, all other participants of the third part (who were not understandably actual signatories thereto), PGF of the fourth part and ATTORI of the fifth part, followed next by the Budplan Personal Syndicate Deed to be entered into between each participant of the first part, the existing participants of the second part, BARM of the third part and ATTORI of the fourth part, thereafter the Loan Agreement to be entered into between PGF as lender and each participant as borrower, and finally the Prospectus Application Form for syndicate participations and for notification of exercise of the borrowing option (if required). Each applicant was required to execute the Principal Deed, to which was annexed the Syndicate Deed, the Loan Agreement and the Prospectus Application Form as documents deemed to form part of the Principal Deed. Two copies of each of those documents were contained within the Prospectus – an executable copy which could be detached from the Prospectus by perforations, and a copy which could be retained by the participant. The Syndicate Deed was not in fact intended to be signed, but to comprise a schedule of terms deemed to form part of the Principal Deed. Thus Clause 1.1 of the Principal Deed provided as follows:

   “1.1The parties agree that the documents attached hereto… shall be deemed to form part of this Deed and, where the Participant has requested a loan from the Lender under the Application Form, the document attached hereto as set out below as Annexure B (ie the Loan Agreement) shall be deemed to form part of this Deed….”

   In addition to the Principal Deed and Syndicate Deed was the Trust Deed to which reference appears at the conclusion of [11] above; it would appear that the Principal and Syndicate Deeds were intended to be in the nature of sub-trusts to the Trust Deed.

5. Certain aspects of the Syndicate Deed and the Loan Agreement require extraction. Addressing first for convenience the Loan Agreement, the Lender thereunder being PGF and the Borrower being a participant seeking to be financed in respect of his participation (which as earlier indicated comprised all but one participant), the following definitions were included:

   “1.1.2“Business” has the same meaning as defined in the Budplan Personal Syndicate Deed.

   1.1.3“Gross Income” shall have the same meaning as Assessable Income as defined in Section 6(1) of the Income Tax Assessment Act.

   1.1.4“Initial Period” means the twelve (12) month period from the payment date of the Budplan Personal Syndicate.

   1.1.7“Net Amount” shall mean Gross Income of the Business reduced by all expenses of the Business and all management fees calculated in accordance with the Budplan Personal Syndicate Deed.

   1.1.8“Payment Date” means the first day of the calendar month following the date hereof or the date hereof if executed on the first day of a calender month.

   1.1.10“Principal Sum” means the sum or sums set out in sub-clauses 2.2.1 and 2.2.2 hereof.

   1.1.11“Reduced Principal Sum” means the Principal Sum less any payments of principal made pursuant to sub-clause 4.1 hereof and including any interest which may be capitalised or remaining (sic) unpaid.”

   Thereafter by clause 2.2 of the Loan Agreement it was provided as follows:

   “2.2     The Principal Sum shall be advanced to the Borrower as follows:

   2.2.1On the Payment Date the sum set out in Annexure “C” to the Principal Deed, as required for payment for the Initial Period of the sum of Ten Thousand Eight Hundred Dollars ($10,800) to the Institute and One Thousand Two Hundred Dollars ($1,200) to the Manager together with if the Borrower so chooses further multiples of Five Thousand Four Hundred Dollars ($5,400) to the Institute and Six Hundred Dollars ($600) to the Manager.

   2.2.2On the day after the expiration of the Initial Period the Lender will advance to the Borrower a further sum equal to the amount advanced to the Borrower pursuant to sub-clause 2.2.1 hereof.”

   Provision was made for payment of interest as follows:

   “3.1.1On the Payment Date interest shall be calculated and charged in advance at the rate of 17% per annum on the Principal Sum.

   3.1.2In consideration of the Borrower paying interest and principal payments monthly on the Payment Date and on the first day of each month thereafter or within seven (7) days of such date the Lender hereby agrees to accept interest at the rate of 15% per annum.

   3.1.3On the execution hereof the Borrower shall pay to the Lender the sum of One Hundred and fifty dollars ($150) together with the amount of Seventy Five Dollars ($75) for each additional Six Thousand Dollars ($6,000) borrowed pursuant to sub-clause 2.2.1 hereof being the first instalment of interest as aforesaid which amount will be applied to payment of interest on the Payment Date as set out in sub-clauses 3.1.1 and 3.1.2 of this Clause.

   3.1.4Thereafter, instalments of interest payable as aforesaid shall be payable on the first day of each of the succeeding eleven (11) calendar months.

   3.1.5On the day after the expiration of the Initial Period and for the succeeding twelve (12) calendar months the rate of interest shall be further reduced to Eight point five seven per cent (8.57%) per annum subject to payment of interest and principal payments within seven (7) days of the due date as specified in sub-clause 3.1.6.

   3.1.6On payment of the second advance pursuant to sub-clause 2.2.2 the Borrower will pay interest instalments of One Hundred and Fifty dollars ($150) per month the first such payment on the date of receipt of the second advance as aforesaid and thereafter on the same day for each of the succeeding eleven (11) calendar months.

   3.1.7Thereafter the rate of interest shall be Seventeen per cent (17%) per annum reduced in Eight point five seven per cent (8.57%) calculated at yearly rests in advance on the anniversary of the Payment Date provided all payments of principal and interest as provided for herein have been made and such interest shall be met for the Borrower’s Net Amount.”

   (The twenty-four monthly interest payments of $150 payable pursuant to Clauses 3.1.3, 3.1.4 and 3.1.6 equal the interest sum of $3600 referred to in [17] above). Thereafter provision was made for repayment of principal as follows:

   “4.      Principal

   4.1The Borrower shall make principal repayments of Two Hundred and Fifty Dollars ($250) plus One Hundred and Twenty Five Dollars ($125) for each additional multiple of Six Thousand Dollars ($6,000) borrowed pursuant to sub-clauses 2.2.1 and 2.2.2 hereof for twenty four months commencing on the Payment Date and thereafter on the first day of each calendar month within seven (7) days of such date in reduction of principal.”

   (Such principal repayments thus amounted to the sum of $6000 referred to in [17] above).

   “4.2The Reduced Principal Sum shall be repaid together with interest thereon in accordance with sub-clause 4.3 from the Net Amount after reduction of the Net Amount by interest as provided for in sub-clause 3.1.7.

   4.3Such payments of principal as are set out in sub-clause 4.2 above shall be made at the rate of Fifty per cent (50%) of the Net Amount after reduction of the Net Amount by interest as provided for in sub-clause 3.1.7 or such greater amount or percentage as the Borrower shall choose.”

6. Under the heading “Limitation of Borrower’s Liability”, the following then appeared:

   “7.1The Borrower shall have no other liability for payment of the Reduced Principal Sum or interest thereon other than out of Gross Income of the Business as provided for in sub-clause 3.1.7, 4.2 and 4.3 hereof provided that should the interest of the Borrower in the Net Amount be insufficient to pay the principal sum and interest by the expiration of the term then the term of this loan shall be extended until the principal sum and interest is paid from the Borrower’s Gross Income of the Business or Net Amount as the case may be but in any event for no longer than fifteen (15) years from the date hereof at which time the Borrower shall repay any outstanding principal and interest, subject to the following:

   7.1.1Repayment by the Borrower of the principal repayments set forth in either sub-clause 4.1, 4.2 or 4.3 by the due date for each payment; and

   7.1.2Payment of interest for the term of the loan as set forth in sub-clauses 3.1.1 to 3.1.8 by the due dates; and

   7.1.3Due performance of the Borrower’s obligation pursuant to the provisions of the Budplan Personal Syndicate Deed (in this agreement no act or omission by the Manager in the due performance of its obligations will be regarded as non performance by the Borrower under the aforesaid Deed).”

   I should conclude by reproducing Clause 8.5 of the Loan Agreement reading as follows:

   “8.5The Borrower hereby authorises the Lender to remit the principal sum to the Manager to be applied by the Manager toward the obligation of the Borrower to make payment of management fees, research fees and expenses pursuant to the Budplan Personal Syndicate Deed and the Lender irrevocably agrees to remit such funds as aforesaid in satisfaction of the Borrower’s obligations under the aforesaid Deed.”

7. In the events which happened, at least the Applicants Ms Howland-Rose, Mr Harvey and Mr Davidson entered into a so-called Alternative Loan Agreement, instead of the Loan Agreement set out in the Prospectus; it is unclear whether the Applicant Mr Braysich entered into the Loan Agreement or the Alternative Loan Agreement. The Alternative Loan Agreement was almost identical to the Loan Agreement, the principal exception being the inclusion in the former of a new Clause 3.1.8 (which required the existing Clause 3.1.8 to the Loan Agreement to be renumbered 3.1.9) reading as follows:

   “3.1.8  The Borrower shall have the option of prepaying interest as follows:

   (i)As to the interest due pursuant to sub-clauses 3.1.3 and 3.1.5 on execution hereof and the day after the expiration of the Initial Period respectively the Lender shall accept such amount less a discount of Three Hundred Dollars ($300) in the case of a prepayment of One Thousand Eight Hundred Dollars ($1,800) and One Hundred and Fifty Dollars ($150) for each additional Nine Hundred Dollars ($900) prepaid;

   (ii)Alternatively the Borrower may prepay thirteen (13) months interest and be entitled to a discount of Three Hundred and Twenty Five Dollars ($325) for each interest payment of One Thousand Nine Hundred and Fifty Dollars ($1,950) and One Hundred and Sixty Two Dollars ($162) for each additional interest prepayment of Nine Hundred and Seventy Five Dollars ($975).”

   It appears that Ms Howland-Rose was the only one of the four Applicants who exercised the option contained in Clause 3.1.8 of the Alternative Loan Agreement, thereby reducing her interest liability by $300.

8. Each of the Applicants signed their respective application forms for so-called syndicate participations during May 1996, by drawing cheques for the following respective amounts comprising the first month’s repayment of principal and interest under the (Alternative) Loan Agreement (amounting to $400), the business establishment fee and the loan application fee (amounting to $200 and $300 respectively):

   (i)Ms Howland-Rose as to $900 for one syndicate participation;

   (ii)Mr Harvey as to $2,700 for three syndicate participations;

   (iii)Mr Davidson as to $3,600 for four syndicate participations; and

   (iv)Mr Braysich as to $900 for one syndicate participation.

   Each thereby obtained a percentage interest in the so-called “Research Results” referred to below in my summary of the Syndicate Deed in [28] below, being a percentage calculable by reference to the total number of 2721 participants, and the respective sums the subject of their syndicate participations.

9. The Budplan Personal Syndicate Deed, to which I have been referring as the “Syndicate Deed” for brevity, should next be summarised in its aspects potentially relevant in the proceedings. The pro forma thereof set out in the Prospectus stipulated that the parties thereto were each individual participant of the first part, those other participants who concurrently with or prior to the execution of the Syndicate Deed had entered into an identical deed of the second part, BARM as Manager of the Syndicate of the third part and ATTORI of the fourth part. The Syndicate Deed testified as to the formation of the Syndicate (defined as “the joint venture formed pursuant to this Deed known as the Budplan Personal Syndicate”) upon the terms and conditions of the Deed for the purpose of conducting the “Business”, such term being defined by Clause 1.1.2 thereof as follows:

   “1.1.2“Business” means such business actions undertaken to enable the derivation of income by the Participants from the following activities:

   (i)the production and sale of products and Research Results including Product Packages based on tea tree oil including (but not limited to) formulae, packaging and labelling;

   (ii)product development including the research and development of products;

   (iii)the purchasing of necessary technology for the purposes outlined in 1.1.2(i) and (ii) above;

   (iv)the sale of purchased or developed technology to enhance such business and its future prospects or, on the basis that a suitable return is obtained, by the sale at an earlier than envisaged time;

   (v)the holding of all appropriate technology developed whether developed or acquired or from purchased technology;

   (vi)derivation of income and profits from the above activities including where appropriate future royalty income; and

   (vii)derivation of income from creation of Research Results including Product Packages and Research and Development.”

   The observation made in [10] above concerning the merger of elements of the so-called “business” into a unified concept may here be repeated. The expressions “Product Packages”, “Research and Development” and “Research Results” were in turn respectively defined as follows:

   “1.1.12“Product Packages” means formulae and concepts using Main Camp Pharmaceutical Grade Tea Tree Oil and includes product formulae, product samples, stability and safety information and efficacy data, scientific and technical labelling and packaging specifications.

   1.1.13“Research and Development” shall mean research into the properties and applications of tea tree oil and development of the processes and products specifically for use in acne treatment, hospital and antiseptic and oral hygiene applications and includes the establishment of research facilities, the engagement of suitably qualified personnel, and sourcing and compilation of various existing technology and research information and creation of databases, the establishment of research protocols, the establishment of projects based on existing uses, quantitative and qualitative analysis of extracted substances, laboratory and clinical trials and all works and processes that flow therefrom.

   1.1.14“Research Results” means all data, research papers, test results, experiments, processes, products, Product Packages and any intellectual property rights which arise out of or come into existence as a consequence of the Research and Development, and includes any commercially exploitable equipment or other items incorporating such intellectual property rights.”

   I interpolate here to add that as foreshadowed in [27] above, by Clause 5.1 it was further provided that the Research Results would be the property of the participant, subject to conditions which need not be reproduced; since there were 2371 participants, Clause 5.1 referred to below would need to be read accordingly.

1. The term of the BPS was stated by Clause 3.1 to be 15 years from the date of entry of the last Participant into the Syndicate Deed, unless the same was to be sooner determined by dissolution in the circumstances set forth in Clause 8 of the Syndicate Deed. Clause 3.1 may be compared to Clause 6.3 to which reference is made below. Clauses 4.1 and 4.2 stipulated for the following payments to be made by a participant to BARM over the ensuing period of two years for research and management fees:

   “4.      Research and Management Fees

   4.1On execution hereof the Participant will pay to the Manager as Agent for the Participant and Manager of the Syndicate an amount of Two Hundred Dollars ($200) or, where the Participant has elected to take a multiple as set out in sub-clause 4.2 hereof, a further sum of One Hundred ($100) for each additional multiple, which amount will be used by the Manager to commence the Business in the Syndicate with others PROVIDED THAT if the Business does not proceed such amount will be refunded.

   4.2Subject to the following provisions of this Clause on the Payment Date and thereafter on the first day of each succeeding month for twenty three (23) months the Participant will pay to the Manager as Agent for the Participant and Manager of the Syndicate the sum of One Thousand Dollars ($1,000) being a total of Twenty Four Thousand Dollars ($24,000) or additional multiples of Twelve Thousand Dollars ($12,000) by way of monthly payments of Five Hundred Dollars ($500) on the Payment Date and thereafter on the first day of each succeeding month and the Manager as Agent for the Participant and Manager of the Syndicate shall direct or disburse the aforesaid amounts as follows:

   1.To the Institute monthly payments of Nine Hundred Dollars ($900) and where an additional multiple of Twelve Thousand Dollars ($12,000) has been elected a further sum of Four Hundred and Fifty Dollars ($450) per month for each such additional multiple for research fees in consideration of the Institute undertaking the Research and Development obligations set out in Clause 6 hereof.

   2.To the Manager monthly payments of One Hundred Dollars ($100) and where an additional multiple of Twelve Thousand Dollars ($12,000) has been elected a further sum of Fifty Dollars ($50) per month for each such additional multiple for management fees in consideration of the Manager undertaking the duties and obligations set out in Clause 7 hereof and such amount shall be paid in such manner as the Manager shall direct.”

   An alternative scheme for yearly payments by a participant to BARM over the same two year period for research and management fees was provided for in Clauses 4.3, 4.4 and 4.5, which need not be reproduced. Clauses 4.6 of the Syndicate Deed occasioned particular attention in the presentation of the Commissioner’s case; it provided as follows:

   “4.6In addition to the management fees set out above the Manager shall receive from the revenue of the Business an amount equal to Twenty Five percent (25%) of the Gross Income of the Business during the term of the Syndicate which amount shall be calculated and paid to the Manager on a monthly basis.”

   As will later be seen, the Commissioner’s financial expert, who gave evidence in the proceedings (Mr Lonergan), considered that the foregoing formula, in combination with what appears by Clause 5.3 reproduced below, produced the consequence that a participant would be denied any financial return.

2. The following further provisions of the Syndicate Deed may be highlighted in summary as follows. Clause 5.1 provided that the “Research Results” would be the property of the participant, subject to Clauses 5.3 and 5.4. Clause 5.2 provided that in the event that research and development produced research results of commercial value, BARM as agent for each participant and manager of the syndicate would investigate and pursue the commercialisation thereof for the production of income. Clause 5.3 stipulated that each participant would be entitled to 100% of the Research Results as specified in Clause 5.1 above, but the remainder of Clause 5.3, together with Cluse 5.4, went on to stipulate as set out below:

   “5.3…PROVIDED, HOWEVER, that in the event of sale of any of the Research Results, Business and Research Management Limited will be entitled in its own right to the payment by the Participant of a lump sum royalty in consideration of Business and Research Management Limited forgoing all its rights and entitlements to any other royalties in respect of the Research Results, which in accordance with the generally accepted market expectations and usual business and commercial practice may have amounted to a quantum in the range of 15%-25% per annum of the marketing income arising from commercialisation of the Research Results, such lump sum royalty to amount to Fifty Percent (50%) of the gross sale proceeds of the relevant Research Results and which shall be deducted directly from the sales proceeds due and payable to the Participant in full and final consideration of Business and Research Management Limited using its expertise in commercialisation of the Research Results and successfully negotiating the sale of them.

   5.4Each Participant’s interest in the Business, Business Assets, Research Results, Gross Income of the Business and expenses of the Business shall be that proportion expressed as a percentage which the research fees paid by the Participant bears to the total research fees paid by all Participants in the Syndicate.”

   Clause 6.3 of the Syndicate Deed required ATTORI to conduct research and development for the ensuing two years, and to provide BARM as agent for each participant with such follow-up support as might be required by BARM to obtain necessary licenses and registration for the research results, and product formulae, any stability and safety information, efficacy data, scientific and technical labelling and packaging specifications, and any other intellectual property rights arising out of or coming into existence as a consequence of the research and development activities. Clause 6.6 required ATTORI to undertake a number of specific responsibilities in relation to so-called “Research Results” and “Research and Development”, including the development of appropriate processes, trial batches, production scale batches, and of conduct process validation trials on formulae using TTO, and of product specifications, and also the development of analytical methods and validation processes for products using TTO, and the conduct of safety studies and efficacy studies.

3. Other provisions of the Syndicate Deed were Clause 6.7, which provided for the appointment by ATTORI of BARM to carry out ATTORI’s administrative and management functions, such as the sourcing of suitable premises, facilities and personnel for the conduct of research and development and the maintenance of books of account, registers and licenses necessary for ATTORI’s administration and conduct of research. For those services, BARM was to be paid by ATTORI an administration fee of $1,200 for each participant (and an additional fee for each multiple interest of a participant) for apparently each of the first two years, reducing to $250 per annum thereafter (subject to indexation). Clause 7 provided for the appointment by each participant of the Manager to manage the BPS and the business thereof, and for various obligations and duties of management, including the following:

   “7.11The Manager will act as Agent for the Participant in respect of the carrying on of the Business and use its best endeavours to commercialise the intellectual property and to continue to carry on the Business and will bring to bear all of its skill and expertise in promoting the Business and maximising the profit therefrom."

4. Further as to the Syndicate Deed, I would add reference to Clause 8.1 thereof, which provides for dissolution of the Syndicate by a majority vote of 75% of participants attending and voting at a meeting thereof, being a provision which the Commissioner asserted would have necessarily ensured in practical reality that the Syndicate would never be formally dissolved at the initiative of dissentient syndicate participants, and to Clause 9 thereof for the grant of a put option in favour of each participant stating as follows:

   “9.      Put Option

   9.1If the Participant has requested a loan from the Lender and the Lender has agreed to lend the Principal Sum in accordance with the Loan Agreement comprising Annexure B to the Principal Deed then the Participant will be entitled to the Put Option which will require the Manager to purchase from the Participant the Business including the assets of the Business and the Research Results at the expiration of the period specified in sub-clause 3.1 for the Minimum Price. The Put Option shall be exercised by the Participant notifying the Manager in writing that sub-clause 9.1 is to apply.”

   “Minimum Price” was defined earlier by Clause 1.1.7 as follows:

   “‘The Minimum Price’ means the amount equal to the amount of the outstanding principal and interest repayable to the Lender in accordance with sub-clause 7.1 of the Loan Agreement.”

   Sub-clause 7.1 of the Loan Agreement has been already extracted in [25] above. Finally as to the Syndicate Deed, I would refer to Clause 11.2 thereof, which required a 50% vote or more of participants for the removal of BARM.

   The Applicants and their respective testimonies

5. Ms Howland-Rose is a qualified architect, though not engaged in practice on her own account. She had personally used TTO as an antiseptic. She was attracted to the development of what she thought to be a viable project involving a natural Australian product, which was environmentally sound, and which would earn substantial revenue for her in the future. She was further attracted by “the cash flow side” of the project as a person in receipt of a modest income, and because “It allowed lower income earners to all invest in such businesses, and not just wealthy people”. A financial adviser introduced Ms Howland-Rose and her prospective husband to the project with the aid of a video and a spreadsheet showing projected income from the venture over 15 years. She observed the tax opinions set out in the Prospectus, and in particular that provided by Clayton Utz, whom she identified as a large and well respected law firm. Although Ms Howland-Rose read the disclaimer contained in that opinion, she “… felt these disclaimers would appear from anyone, irrespective of what opinion they were giving”. Having subsequently received the Commissioner’s issue of a so-called Section 221D variation made pursuant to her request to vary her provisional tax upon the footing of allowable deductibility in respect of her subscriptions to the BPS, she inferred that the Australian Tax Office must have approved her participation in the BPS.

6. Ms Howland-Rose claimed that she did not take up her single unit or syndicate participation in the BPS, primarily because of the prospective availability of tax deductions, since she realised from the outset that there was a risk that the Australian Tax Office might not allow tax deductibility. It was for that reason she said that she could not afford to take up additional units. She asserted elsewhere in her affidavit however that she thought the scheme was “a project that the government was supporting by allowing deductions as an indirect way of supporting Australian investment [in] research and development”. Ms Howland-Rose espoused personal interest in natural products, and because she knew TTO already had “a tradition”, she thought that the project was more likely to be a success, and make a substantial contribution to her source of income in later years. She also knew TTO to be a good disinfectant, and she had used it in conjunction with other home cleaning products to maintain her home. Ms Howland-Rose recalled that at the time she decided to participate in the BPS, she had calculated that after taking into account her prospective tax position, she would sustain an overall cash shortfall of $293 from her participation, given her gross annual salary of $34,000, the applicable tax rate of 35.5%, and her project outlays comprising application and establishment fees of $500, plus 24 monthly payments of $400 amounting to $9,600, less a total tax saving of $9,807. The explanation for that apparent shortfall in relation to Ms Howland-Rose is apparently given in [26] above.

7. The Second Applicant Mr Harvey was the General Manager of “The Land” newspaper published by Rural Press Limited, having 28 years experience as a rural journalist, and prior to that time 8 years experience in agriculture and in the pastoral industry. He was introduced to the BPS by his financial adviser. He had been previously aware of livestock based investment products, and had formed the view that “those projects… had a tax advantage, but [were] not much of a business”. Mr Harvey was attracted to the project because he saw it as a good opportunity to invest in an agriculturally based project which would produce products which added value to a raw material produced in Australia, and would have a better chance of success than the sale merely of the raw material. He thought that the BPS prospectus, with its business plan and income projections, was impressive. He had recalled attending conferences on the subject of value adding raw materials, at which Dr Twomey was a key speaker, but he added that “Had he not had an agricultural science degree, I believe I would have questioned his prospectus report and his background. I had no reason to think that this was anything other than a proper report”.

8. Nevertheless Mr Harvey was at least partly motivated in taking up three units or syndicate participations in the BPS (as to which see [27] above) by the represented availability of income tax incentives. Thus he said in his affidavit:

   “I recall when I looked at the spreadsheet provided to me by (his financial adviser) that there were a number of large figures for projected income. My view was that if I got my $2,700 back I was in front. I was impressed with the income projections that were put to me but I also felt that there was a good chance that I could only get back my $2,700. Repayments of principal and interest were initially covered by my $2,700 and the tax variation and by income from BPS. I would have been happy simply to break even…

   I recall that at the time I thought the projections contained in the prospectus were optimistic. Whilst I would have been very pleased if those projections came to fruition, I was happy to simply break even and get back my original investment.”

   Mr Harvey further said in his affidavit:

   “If there had not been any opportunity to obtain section 221D variations I believe that I still would have taken some units in BPS. I believe that I would have taken up at least one unit. The tax deduction enabled me to take more units in BPS but my primary purpose was to generate income for retirement.”

   And in the concluding passage of his affidavit, he added:

   “I was always impressed with the speed with which the section 221D variations came through… I took the speed with which the variations came through to mean that the ATO had enclosed the Budplans.”

9. The Third Applicant Mr Braysich is the managing director of Saxby Bridge Pty Limited, a diversified financial services company, and of most of its subsidiaries, and is also a member of the Sydney Stock Exchange. He pursued a policy of investment diversification prior to his involvement with the BPS, one of which investments had related to the Bopple Macadamia Nut project. Although advisers employed by a related financial advisory firm recommended Budplan investment schemes to clients, he did not personally make any such recommendations. Altogether 575 clients of Saxby Bridge and its related company invested in the BPS, after their “product researchers” had visited ATTORI’s Research Institute and the Main Camp Tea Tree Plantations. Mr Braysich took up only one unit or syndicate participation in the BPS, as appears in [27] above. He understood that “the funding was limited recourse to the project”, but did not regard that circumstance to be particularly unusual. He was in receipt of a salary, with income tax deducted at the source, and he did not submit a s 221D variation because “I did not think about it…”. He became aware that the Australian Tax Office had at one stage commenced the disallowance of s 221D variations in relation to participants in the BPS, and had subsequently reversed that course of action, a matter which gave him “a great deal of comfort”, but such disallowances and subsequent reversals thereof occurred, as in the case of Ms Howland-Rose and Mr Harvey, after his subscriptions for a unit or syndicate participation had already been made in respect of the 1995-1996 fiscal year.

10. The following passage encapsulates Mr Braysich’s stated purpose in taking up his single unit or syndicate participation:

    “I was not particularly interested in the tax, and it would not have made a significant difference in my position…. Whilst BPS was speculative, I felt that if it was successful, it was going to produce a significant level of income. I saw BPS as being no different from investments which don’t have tax advantages… My purpose for investing in BPS was to continue my diversification of my speculative investments. I perceived that it was an opportunity and if I didn’t take advantage of it I would miss out….”

11. The Fourth Applicant Mr Davidson is the Chief Operating Officer of Inovax Limited, an entrepreneurial pharmaceutical company engaged in the development and commercialisation of pharmaceutical products in Australia and Indonesia. His employee role includes monitoring and advising upon development projects. In the context of having received from a previous employer a substantial redundancy payment, Mr Davidson consulted with a certain financial planning company, which, amongst its variety of recommendations, included the BPS. He was attracted to the project particularly because of his lengthy involvement in the pharmaceutical industry. As to the Prospectus projections, he gave the following evidence in his affidavit evidence:

    “The Australian market comprises 1% of the worldwide pharmaceutical industry. In comparing the figures in the Australian Hospital and Retail Sales Indexes to the figures contained in the BPS prospectus, I arrived at the same figures for the market size. I considered the penetration forecasts contained in the BPS prospectus were somewhat optimistic, however once I verified the market size and penetration, I was satisfied that the projections in the BPS prospectus were adequate.

    …

    Once I had verified the market size I was largely comforted by the prospectus. I questioned the penetration. However Dr Twomey’s experience and credentials seemed adequate in my view.”

12. Mr Davidson subscribed for his 4 units or syndicate participations in the BPS (see [27] above), because he liked the project, and considered that it was “especially good”, being himself already engaged in the pharmaceutical industry, and the development of pharmaceutical products. He said he was attracted to the BPS because of the income projections outlined in the Prospectus, and although the income returns were “on the high side”, he was aware from his involvement in the industry that if the products were successful, “exceptional results could be achieved”. He believed that TTO had great potential in the areas described by the Prospectus. In relation to the income tax deductibility factor, Mr Davidson said as follows:

    “It was my perception that the section 221D variations allowed me to purchase more units in the BPS. There was a financial risk for me in the sense that I had to make repayments of the loan. However I was aware that I did not have [to] pay off the loan after two years, because the loan would be repaid out of any profits from the business.
    I did not consider that the section 221D variations amounted to a return. The tax refund did not form part of my calculations when deciding to enter the BPS, only how many units I might take.”

1. Consequently it would not be to the point that any one or more of the Applicants testified as to a primary purpose of deriving assessable income from participation in the BPS. What is called for is an objective analysis of relevant facts, and the drawing of conclusions therefrom as to the existence of a dominant purpose of enabling a participant in the BPS, such as any one or more of the Applicants, to obtain a tax benefit. An objective analysis must be chiefly based upon the contents of the Prospectus which have been comprehensively extracted in these Reasons for Judgment. Perforated syndicate participation application forms were contained in each printed copy of the Prospectus, and a pro forma of the Loan Agreement and of the Syndicate Agreement were embodied therein, preceded by explanations, summaries and illustrations of the operation of such Agreements, including the fiscal implications thereof. In the context of a disputed claim for tax deductibility, and in concluding that Pt IVA adversely applied to disallow the claim, Gyles J in Hart v Commissioner of Taxation [2001] FCA 1547, adopted the abovementioned theme in Spotless as to “making no sense”, along with the related notion of “commercial rationale”, in the following context:

   “48.It can hardly be seriously doubted that a purpose of both Austral and the ordinary borrower in entering into a transaction such as that in issue here would be to take advantage of the tax benefits claimed and demonstrated by Austral, namely, the deductibility of all interest, including additional and further interest. This was a significant advantage of the product. …

   49.I am satisfied that there would be no commercial rationale for the arrangements in issue without the borrower being able to deduct all of the interest incurred for taxation purposes. It would make no sense otherwise. This is borne out by the manner in which the product was presented by Austral.”

2. The Applicants however sought support for resisting the application of Pt IVA upon the basis of a recent decision of the New Zealand Court of Appeal in Commissioner of Inland Revenue v BNZ Investments Limited (2001) 20 NZTC 17,103, in which there was emphasised the need to establish the existence of consensual conduct, an element which the Applicants asserted to be here absent. The Applicants referred in particular to passages appearing in the joint judgment of Richardson P, Keith and Tipping JJ (at par 50), and the judgment of Blanchard J (at par 172), which respectively read as follows:

   “In short, an arrangement involves a consensus, a meeting of minds between parties involving an expectation on the part of each that the other will act in a particular way. The descending order of the terms “contract, agreement, plan or understanding” suggests that there are descending degrees of enforceability, so that a contract is ordinarily but not necessarily legally enforceable, as is perhaps an agreement, while a plan or understanding may often not be legally enforceable. The essential thread is mutuality as to content. The meeting of minds embodies an expectation as to future conduct. There is a consensus as to what is to be done. [50]

   It is a fundamental pre-requisite to the use of section 99 against the taxpayer that there be a contract, agreement, plan or understanding (the words the legislature chose to use in s 99(1) in defining “arrangement”) in which the taxpayer is a participant. This state of affairs cannot exist for the taxpayer unless there has been formally or informally – even if unenforceably – a consensus between the taxpayer and another or others as to what, in general terms, will occur pursuant to the arrangement. The taxpayer does not have to know all the detail or be able to discern exactly how the arrangement will avoid tax by producing the illegitimate tax advantage, by which I mean an advantage which the legislature cannot have contemplated as flowing from the legislation. But the taxpayer must at least have a broad appreciation of the character of what is occurring.” [172]

   However the operation of the New Zealand legislation is controlled by a statutory definition of “arrangement”, which reads as follows:

   “‘Arrangement’ means any contract, agreement, plan or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect.”

   That definition is to be contrasted with the wider and more comprehensive definitions of “scheme” etc which I have extracted above from s 177A of the ITAA, and which extend inter alia to unilateral courses of action by a particular person or persons, being not necessarily the taxpayer who obtains a tax benefit in connection with a scheme. I therefore derive no assistance from the dicta in BNZ cited above, and reject the Applicants’ submission that “[t]here cannot be a relevant scheme to which the taxpayer is a party which has features of another scheme to which the taxpayer is not a party”, even if it was correct to say here that there existed relevantly a scheme to which the Applicants or any one of them were or was not privy (as to which see [136] below).

3. My extensive summary of the contents of the Prospectus, set out at some length earlier in these Reasons for Judgment, demonstrates that prospective applicants for syndicate participations were informed that although there were potentially high returns for participants, the risks involved in participation in the business as described, including the activities of research and development, were also high, and in particular that there was no guarantee that “the revenue expected will be derived “ (see again [12(vii)] and [13] above). Nevertheless prospective applicants were also informed by the Prospectus that there were limitations upon financial recourse on the part of PGF as financier/lender to the participants personally, by virtue of certain terms of the Loan Agreement, as well as fiscal or taxation advantages. In summary, those limitations and advantages were as follows:

   (i)each participant’s personal commitment to the BPS scheme would be limited to $10,100 per syndicate participation payable over 2 years (apart from the relatively minor “business establishment fee” and “loan application fee”), made up of $6000 for principal loan reduction (ie for every $24,000 lent in two successive yearly amounts of $12,000) and $3,600 for interest (calculated for 2 years);

   (ii)each participant would obtain tax deductibility in excess of the above amounts of principal and interest so repaid of $6,000 and $3,600, being deductibility calculated in relation to an amount of $27,600 per syndicate participation over 2 years, made up of $24,000 to be purportedly borrowed to make payment in respect of research and development over that period of time, together with the said sum of $3,600 for interest (I put aside reference to the amount of $300 said to be additionally deductable for “loan application fee”); and

   (iii)even if the BPS was to be an entire commercial failure, in the sense of producing no assessable income, each participant would nevertheless obtain an ultimate cash ‘surplus’, as calculated at page 13 of the Prospectus, as a result of the postulated income tax deductibility entitlements exceeding the amount of the actual cash commitments.

   Thus, what has been earlier extracted extensively from the Prospectus, and in particular that which is set out in [17-18] above, provided all prospective applicants for syndicate participations with information to the effect that irrespective of an entirely adverse financial outcome to their involvement in the BPS, in the sense of recovering no monetary return, if tax deductibility was allowed by the Commissioner to the extent calculated in the Prospectus, all tax-paying applicants would achieve a return of surplus funds over their cost of acquisition of the syndicate participations, or more precisely, their respective costs of research and development and associated management.

4. The Commissioner provided extensive particulars of the integers of the scheme which were asserted to have been brought into existence and implemented, and which were said to satisfy the requirements of Pt IVA. In summary, the scheme so particularised comprised the Prospectus and all pro forma documentation set out in the Prospectus, certain additional documents collateral to the transactions said to be contemplated by the Prospectus, and the carrying into effect of all such documents by the parties thereto. The parties to the scheme so particularised were said by the Commissioner to be those entities and persons privy to a certain Option Deed entered into shortly prior to the issue of the Prospectus between Main Camp Marketing Pty Ltd and BARM, and the directors and officers of those two companies, and the advisers to such entities and persons. The tax benefits asserted by the Commissioner to have been obtained by the Applicants in connection with the scheme comprised the tax deductions attributable to the research and development fees paid to ATTORI, the management fees paid to BARM, the interest paid over two years to PGF, and part of the borrowing costs (the latter being identified in [17] above as “Business Establishment Fee”).

5. As to the first of the categories set out in paragraph (b) of s 177D of the ITAA reproduced in [132] above, namely “the manner in which the scheme was entered into or carried out”, the Commissioner particularised numerous matters; I would highlight the following below, without adhering literally to the descriptive language adopted more elaborately by the Commissioner:

   (i)The surplus moneys obtainable by participants over the first two fiscal years of participation, by reason of the difference between the monetary value of the income tax deductibility obtainable by participants in respect of that period of time, and the lesser amount required to be outlaid over the same period of time for reduction in the principal amount of moneys borrowed plus interest in respect thereof, and additionally the so-called business establishment fee and loan application fee; that surplus was represented by the sum of $27,720 exemplified in the Prospectus and being identifiable in [17] above.

   (ii)The net effect of the arrangements outlaid by the Prospectus, whereby the entire contribution of participants to research etc fees would be funded by borrowing from PGF with interest, and the fact that the borrowing would be undertaken pursuant to non-recourse lending arrangements whereby the participant would only be required to repay principal as to $6,000 and interest as to $3,600, plus the minor fees of $500 for “business establishment” and “loan application”, totalling $10,100 in respect of each borrowing of the principal sum of $24,000 (again as set out from the Prospectus in [17] above).

   (iii)The circumstances that during the period of about two years for which the abovementioned income tax deductions would be claimed, a substantially lesser sum was actually outlaid in cash by participants to ATTORI and BARM than would have been the case had participants outlaid cash of $24,000 from their own resources, instead of purportedly borrowing units of $24,000 from PGF.

   (iv)The consequence that participants (with one exception out of 2721 participants) purportedly achieved a “deduction acceleration factor of nearly 300%, that is to say, they generated tax deductions of $27,720 over two years out of $10,100 outlaid in cash, with the consequential surpluses illustrated in [18] above.

   (v)By reason of the implications flowing from Clauses 6.3 and 6.4 of the Syndicate Deed, which I have referred to but not extracted in full in [30] above, BARM was not required to provide so-called “follow-up support and data… to enable the Manager… to obtain necessary licenses and registrations” beyond the initial term of two years.

6. As to the next category of paragraph (b) of s 177D to be examined, namely “the form and substance of the scheme”, it suffices to extract below the particulars provided by the Commissioner, which were essentially an abbreviation of those summarised above in relation to the first category:

   “(ii)     “the form and substance of the scheme”

   (a)the form of the scheme involved Participants purportedly paying an amount of $24,000 each to ATTORI as consideration for ATTORI developing and testing products in accordance with the terms of the Budplan Personal Syndicate Deed;

   (b)in substance the scheme involved;

   (i)no actual contribution of any cash pursuant to the purported loan transactions;

   (ii)the funding of ATTORI to carry out its contractual obligations as to product development and testing activities out of cash made available by the Participants’ loan repayments;

   (iii)the conduct of the affairs of the Budplan Personal Syndicate on a basis which was highly unlikely ever to produce any commercial return to the Participants from the development and exploitation of products;

   (iv)the limitation of a Participant’s involvement to the signing of the Prospectus documentation, and the making of payments of $9,600 over two years;

   (v)the structuring of legal arrangements, in particular the limited recourse loans, in such a way as to ensure the at Participants would become entitled to claim deductions over two years in an amount of $27,720 while they would be protected from financial liability for any amount greater than $9,600.”

   The above reference to “payments over two years” was of course only to payments on account of principal, and not of interest.

7. The succeeding categories (iii), (iv) and (vii) of paragraph (b) of s 177D, to which I referred in [132] above, merely attracted from the Commissioner certain of the particulars I have already summarised and extracted above.

8. Apart from the submission based upon BNZ, which I have rejected for the reasons set out in [135] above, the Applicants sought to answer the Commissioner’s case by reliance upon dictum of Emmett J in Metal Manufactures Ltd v Federal Commissioner of Taxation (1999) 99 ATC 5229 (his Honour’s judgment was affirmed on appeal: Federal Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150), and in particular the following passages in what appears at 5275:

   “260… a taxpayer may have a particular objective or requirement that is to be met or pursued by a particular transaction. The shape of such a transaction need not necessarily take one form. It is only to be expected that the adoption of one form over another may be influenced by revenue considerations… Nor, in my opinion, does the fact that a taxpayer chooses one or two more alternative courses of action, being the one that produces a tax benefit, determine the answer to that questions. Part IVA will be satisfied if it was the obtaining of the tax benefit that directed the relevant persons in taking steps they otherwise would not have taken by entering into the scheme – Spotless Services Ltd at ATC 5210; CLR 423.

   261However, more is required that that a taxpayer has merely arranged its business or investments in a way that derives a tax benefit. The scheme must be examined in the light of the eight matters set out in section 177D(b). Further that examination must give rise to the objective conclusion that some person entered into or carried out the scheme or part of the scheme for the sole or dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. Such a conclusion will seldom, if ever, be drawn if no more appears than that a change of business or investment has produced a tax benefit for a taxpayer -… Nor should such a conclusion be drawn if no more appears than that a taxpayer adopted one or two or more alternative courses of action, being the alternative that produces a tax benefit.”

9. The statement of principles set out in Metal Manufactures above does not assist the Applicants. The decision of each of the Applicants to participate in the BPS was not made in the context of existing business operations which they were respectively conducting, as in the case of Metal Manufactures, so that it was not the situation here of the Applicants merely adopting a particular course of action capable of being influenced by revenue considerations, nor the case of the Applicants adopting one of two alternative courses of action, being the one that produces a tax benefit. In circumstances such as the present of an isolated investment activity de novo, it is appropriate to apply in principle the “no sense” test in Spotless. As was observed in Hart, it can hardly be doubted that an objective purpose of each of the Applicants, in entering into participation in the BPS scheme, was to take advantage of the tax benefits propounded in the Prospectus. It was thus a situation of the Applicants choosing whether or not to participate in an investment scheme offered by promoters. Given the circumstances that the Prospectus demonstrated, as set out in [17] above, that participation would result in a cash surplus to participants of the order exemplified variously in [18] above, notwithstanding an entire loss of the participant’s invested funds in research and development which might be wholly unsuccessful, there was in my opinion no commercial rationale, or “no sense”, for participation in the BPS arrangements, without being able to underwrite the “no cash loss” situation held out by the terms of the Prospectus. As has been seen, all prospective participants were duly warned by the Prospectus that a negative outcome of research and development was a real possibility. What the Prospectus presented was not deductibility for expenditure actually outlaid, but deductibility for expenditure not to be in fact immediately outlaid (other than to the extent of 25% thereof), except out of future profits which might well never be attained in any event. The fact that all but one of 2721 participants took up the Prospectus scheme with the financial consequences to participants illustrated in [17-18] above is testimony to the fundamental attraction of the tax deductibility structure which literally underwrote the scheme. The unprecedented subs 51(1) incentives, and the encouragements elsewhere in the Prospectus to borrow the whole of the funds to be subscribed, so readily apparent from the material set out in [12(iii)], [13], [19] and [22] above, indicated implicitly that the promoters expected all or virtually all participants to enter into the borrowing arrangements.

10. The impact of the material in the various parts of the Prospectus which I have identified immediately above leads inevitably in my opinion to the conclusion that contrary to my earlier finding as to the absence of deductibility pursuant to subs 51(1), the Applicants acquired their respective syndicate participations objectively for the dominant purpose of obtaining the benefit of the taxation deductibility opportunities so prominently featured in the Prospectus. The circumstance that each Applicant testified as to an incentive of deriving substantial revenue in due course, as a consequence hopefully of future successful research and product development, cannot in my opinion avoid the result that he or she adopted a mechanism for so doing by way of participation in the process of research and development at no, or virtually no, ultimate cash shortfall, by reason of the excess or likely excess of the monetary benefits flowing in principle from the incidents of taxation deductibility over the cost of participation outlaid in cash.

11. I would therefore hold that if I am wrong in my opinion as to the absence of entitlement of the Applicants to deductibility relevantly pursuant to subs 51(1), each of them should be in any event denied deductibility by reason of an adverse application of Pt IVA of the ITAA.

    Section 82KZM

12. Alternatively to denial of deductibility under subs 51(1) or pursuant to Pt IVA of the ITAA, the Commissioner contended that the provisions of s 82KZM thereof should apply in relation to the sums the subject of claims to subs 51(1) deductibility. Section 82KZM reads as follows:

    “Where

    (a)a taxpayer incurs expenditure under an agreement entered into after 25 May 1988;

    (b)the expenditure is:

    (i)incurred in return for the doing of a thing under the agreement that is not to be wholly done within 13 months after the day on which it is incurred; and

    (ii)not excluded expenditure; and

    (c)a deduction under section 51 in respect of the expenditure would, apart from this section, be allowable from the assessable income of the taxpayer of the year of income in which the expenditure is incurred;

    then, for the purposes of this Act, instead of the deduction under section 51 being allowable as mentioned in paragraph (c), a proportion of the deduction is allowable from the assessable income of the taxpayer of each year of income during which the whole or part of the eligible service period in relation to the expenditure occurs, being a proportion ascertain in accordance with the formula:

    Period in year       
      Eligible service period

    Where:

    Period in year is the number of days in the whole or part of the eligible service period that occurs in the year of income;

    Eligible service period is the number of days in the eligible service period.”

1. The Commissioner initially propounded, but subsequently eschewed reliance upon s 82KZM at an early stage in the hearing, apparently by reason of Clause 6.3 of the Syndicate Deed, which reads as follows:

   “6.3In consideration of the research fees the Institute shall for a period of twelve (12) months from the Payment Date and for a further period of twelve (12) months from the day after the expiration of the Initial Period (pursuant to the payment made under sub-clause 2.2.2 hereof) conduct the Research and Development and shall engage or cause to be engaged such personnel and facilities as are in its discretion necessary for the completion of the Research and Development.”

2. When the Applicants provided written submissions in chief on 9 November 2001, there appeared the following:

   “In addition, clause 6.4 required ATTORI to provide follow-up support and data to enable BARM to obtain necessary licenses and registrations for the research results, including product packages. This clearly extends beyond the first 2 years covered by clause 6.3 and was so understood by Dr Bell who was responsible for overseeing the ATTORI R & D program. ATTORI did in fact continue collecting data on the product packages developed for the Syndicate after the expiry of the initial 2 year period until it went into voluntary administration in May 2001.”

   Clause 6.4 of the Syndicate is reproduced in [149] below.

3. Those submissions provoked the Commissioner to seek to re-agitate reliance upon s 82KZM, upon the following basis:

   “If it is held that ATTORI was contractually bound to provide services beyond the initial 24 month period and it is further found that the expenditure in respect thereof is deductible under section 51(1) of the Act, the respondent submits that such expenditure is required to be pro-rated pursuant to section 82KZM over a period of 10 years (no lesser “eligible service period” have been specified).”

4. The Applicants opposed any such re-agitation of the s 82KZM issue, and referred me to what was said in the House of Lords by Lord Griffiths in Ketteman v Hansel Properties Ltd [1987] AC 189 at 219, which related to a late attempt to raise a limitation defence. The Applicants submitted as follows:

   “If the Commissioner is now permitted to raise s 82KZM, the applicants will be prejudiced by reason of the way they conducted the trial. In particular, in order to meet the Commissioner’s suggestion that the projections in the Prospectus were unrealistic, the applicants adduced evidence from witnesses to establish that clause 6.4 of the Syndicate Deed would enable BARM to obtain assistance from ATTORI to achieve necessary licences and registrations for the research results beyond the two year period covered by clause 6.3 of the Syndicate Deed: Bell, T392 lines 7-25. The Applicants’ Written Submissions also highlighted that clause 6.4 required ATTORI to perform work after the expiration of the initial 2 year research period (see para 28). This would not have been done if the Commissioner had maintained that s 82KZM applied.”

5. Clause 6.4 of the Syndicate Deed read as follows:

   “6.4The Institute shall provide the Manager as Agent for the Participant and Manager of the Syndicate with such follow up support and data as may be reasonably required by the Manager as Agent for the Participant and Manager of the Syndicate to enable the Manager as Agent for the Participant and Manager of the Syndicate to obtain necessary licenses and registrations for the Research Results including Product Packages and finished Products.”

6. I accept Senior Counsel’s assurance set out in [148] above and decline to permit re-opening of the Commissioner’s case. I would however observe that in the light of the text of Clauses 6.3 and 6.4 of the Syndicate Deed, the Commissioner’s reliance upon s 82KZM would probably have failed. The issue is academic in any event, in the light of my conclusions upon the subs 51(1) and Pt IVA issues.

   Conclusion

7. I would accordingly uphold the assessments of the Commissioner in relation to each of the Applicants, and therefore dismiss the Applications. For the reasons foreshadowed in [3] above, I make no order as to the costs of the proceedings.

I certify that the preceding one hundred and fifty-one (151) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti .

Associate:

Dated:             18 March 2002

Counsel for the Applicant:	G K Downes QC and M Richmond
Solicitor for the Applicant:	Minter Ellison Lawyers
Counsel for the Respondent:	D H Bloom QC, B J Sullivan SC, E Collins, M White and J H Momsen
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	4-6 June 2001, 8 June 2001, 26-28 September 2001, 2-5 October 2001, 29-31 October, 2001, 12-15 November 2001, 21-22 November 2001
Date of Judgment:	18 March 2002