Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 724
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2008/2925-2927,
) 2009/6129-6131,
TAXATION APPEALS DIVISION ) 2010/3423-3425 Re GREGORY MACMAHON Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr Julian Block, Deputy President and Mr S E Frost, Senior Member Date23 September 2010
PlaceSydney
Decision The objection decisions under review are affirmed. ...................[sgd]...........................
Mr Julian Block
Deputy President
CATCHWORDS
TAXATION AND REVENUE – income tax – capital gains tax – disposal of shares – whether there was a trust and whether the beneficial interest in certain shares vested in that trust –whether Halloran’s case is distinguishable – relevance of certain other transactions and in particular the making, issue and endorsement of a promissory note – whether Part IVA applies – whether sign-on fee is assessable income – whether payments by credit card are assessable income – penalty – objection decisions under review affirmed
Income Tax Assessment Act 1936 s 175, Part IVA ss 177A, 177C, 177D, 177F
Income Tax Assessment Act 1997 ss 102-5, 104-10
Taxation Administration Act 1953 ss 14ZL, 14ZU, 14ZZ, 14ZZK, Sch 1 284-145
AAT Case 7240 (1991) 22 ATR 3372
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216
Commissioner of Taxation v Lenzo [2008] FCAFC 50; (2008) 167 FCR 255
Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359
Commissioner of Taxation v Sleight [2004] FCAFC 94; (2004) 136 FCR 211
Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404
DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1980] 1 NSWLR 510
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Fletcher v Commissioner of Taxation (1988) 19 FCR 442
Halloran v Minister Administering National Parks and Wildlife Act 1974 (2006) 229 CLR 545
Jones v Dunkel (1958) 101 CLR 298
Martin v Martin (1959) 110 CLR 297
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263
Peabody v Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531
REASONS FOR DECISION
23 September 2010 Mr Julian Block, Deputy President and Mr S E Frost, Senior Member Part A: Preliminary and background
1. The objection decisions which are under review in these applications relate to the disallowance of objections in respect of amended assessments and also penalty assessments in respect of the years ending 30 June 2001, 30 June 2002, and 30 June 2003.
2. The applications relate to five broad issues:
(a)Issue 1: whether a capital gain was realised by the Applicant in respect of shares which were sold in October 2000;
(b)Issue 2: if not, whether Part IVA applies;
(c)Issue 3: whether amounts paid as a “sign-on fee” are assessable income of the Applicant;
(d)Issue 4: whether amounts paid in respect of the Applicant’s credit cards are assessable income of the Applicant; and
(e)Issue 5 penalties.
3. The Tribunal’s power to review a reviewable objection decision made by the Commissioner arises under s 14ZZ(a)(i) of the Taxation Administration Act 1953 (“TAA”). The relevant objection decisions are:
(a)Issues 1, 2 and 4: TG57-530 to TG57-532 (Notice of Decision); TG2-3 to T2-53 (Reasons for Decision) (AAT No 2008/2925 – 2927); and
(b)Issue 3: TGG6-46 to TGG6-51 (Notice of Decision); TGG2-4 to TGG2-17 (Reasons for Decision) (AAT No 2009/6129 – 6131).
(c)Issue 5: Exhibit R3 – letter from the Commissioner dated 9 August 2010 (AAT No 2010/3423 – 3425).
4. The “taxation objection” (s 14ZL of the TAA) must “state in it, fully and in detail, the grounds that the person relies on”: s 14ZU(c). The Tribunal’s review of a reviewable objection decision is, unless it otherwise orders, “limited to the grounds stated in the taxation objection to which the decision relates”: s 14ZZK(a). The relevant taxation objections are:
(a)Issues 1, 2 and 4: TG47-476 to TG47-513;
(b)Issue 3: TGG4-24 to TGG4-43;
(c) Issue 5: Exhibit R2 – letter from Jade Lawyers dated 5 August 2010.
5. The Applicant was represented by Mr I Young of counsel instructed by Jade Lawyers; the Respondent was represented by Mr T Thawley and Mr G O’Mahoney of counsel; instructed by the ATO Legal Services Branch.
6. The Tribunal had before it two sets of T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. The larger set relates to matters numbered 2008/2925-2927 and consists of 57 tabbed documents and 532 pages. References to this set of T documents are denoted by the letters “TG”. The second set of T documents relates to matters numbered 2009/6129-6131 and it consists of six tabbed documents and 51 pages. References to this latter set of T documents are denoted by the letters “TGG”.
7. Statements of Facts, Issues and Contentions were submitted by both parties and at a time when there were two applicants, and being the Applicant (who is sometimes referred to in these reasons as “Gregory”) and his brother Peter MacMahon (who is usually referred to in these reasons as “Peter”). The Applicant and Peter are sometimes collectively referred to in these reasons as “the brothers” or the “MacMahons”. The Statement of Facts, Issues and Contentions submitted by the Respondent is more detailed than that submitted by the Applicant and accordingly and in order to set the scene, we commence by including its content under the head of “Facts” contained in clauses 3 to 30 (both inclusive, but without footnotes) as follows:
3.Immediately prior to March 2000, the Applicant and his brother Peter MacMahon (‘Peter’) each held 500 shares in Mactek Pty Ltd (‘Mactek’), representing the entire share capital of Mactek. The Applicant paid $500.00 to acquire those shares on or about 4 May 1993.
4.In or about March 2000, Radiodetection Limited, a non-resident company, expressed an interest in the business of Mactek. The Applicant and Peter agreed with Radiodetection Limited that the business would be sold by way of Radiodetection Limited acquiring all the shares in Mactek through an Australian subsidiary – Radiodetection Australia Pty Ltd (‘Radiodetection Australia’).
5.The sale was accomplished through a Share Purchase Agreement executed on 30 October 2000, and completed on 31 October 2000.
Events immediately prior to the execution of the Share Purchase Agreement
6.On 26 October 2000, the Applicant says that the following transactions occurred:
6.1.The Applicant and Peter (individually) wrote to the Applicant and Peter (jointly) each offering to vest their equitable interest in the shares of Mactek “on a unit trust to be known as the Hill End Unit Trust with [the Applicant and Peter] as Trustees of that Trust”.
6.2.The Applicant created the G MacMahon Family Trust; Peter created the P MacMahon Family Trust.
6.3.The Applicant and Peter (individually) delivered their share certificates to the Applicant and Peter (jointly) as trustee for the Hill End Unit Trust. The Applicant became the holder of “B” class units in the Hill End Unit Trust, and Peter became the holder of “A” class units in the Hill End Unit Trust.
6.4.The Applicant as trustee for the G MacMahon Family Trust and Peter as trustee for the P MacMahon Family Trust each applied for 3,750,000 “ordinary” $1.00 units in the Hill End Unit Trust.
6.5.The Applicant and Peter as trustee for the Hill End Unit Trust accepted the application and allocated units accordingly. Consideration for the units was paid by way of a promissory note drawn on the G MacMahon Family Trust and the P MacMahon Family Trust respectively.
6.6.The Applicant redeemed his “B” class units in the Hill End Unit Trust. Peter redeemed his “A” class units in the Hill End Unit Trust. The consideration for the redemption was paid to the Applicant by way of the Applicant and Peter (jointly) as trustee for the Hill End Unit Trust endorsing the relevant promissory note in favour of the Applicant and Peter respectively.
6.7.The Applicant gifted the promissory note to the G MacMahon Family Trust. Peter gifted his promissory note to the P MacMahon Family Trust.
7.The transactions above occurred without the knowledge or consent of Radiodetection Limited, of Radiodetection Australia, and without the knowledge of those companies’ principals and advisers.
The Share Purchase Agreement
8.On 30 October 2000, the Applicant, Peter and Radiodetection Australia entered into an agreement for the sale and purchase of Mactek shares and associated matters.
9. Under the Share Purchase agreement:
9.1.The Applicant and Peter were, jointly and severally, expressed to be the owner of the Mactek shares,
9.2.The Applicant and Peter were to continue as employees of Mactek.
9.3.In consideration for the sale of the shares, Radiodetection Australia agreed to pay to the Applicant and Peter (jointly and severally):
9.3.1an initial amount of $3m, payable upon completion of the agreement;
9.3.2an earn-out amount, being 12.5% of Eligible Sales (excluding GST) of Mactek for each financial year up to 30 June 2005, half of which was payable on completion in advance as an Advance Amount of $3m.
9.4.The Applicant and Peter warranted that the shares were free of all third party interests or rights.
10.The Share Purchase agreement was executed on 30 October 2000, and completed on 31 October 2000 by the performance of things including:
10.1. the delivery of share certificates to Radiodetection Australia
10.2.the provision of a transfer of the shares to Radiodetection Australia, duly executed by each of the Applicant and Peter respectively;
10.3.the execution of employment agreements by both the Applicant and Peter with Mactek.
11.Including the initial amount, the Advance Amount, and the earn-out amount, the Applicant and Peter jointly received a total of $8,303,958 for the sale of their Mactek shares to Radiodetection Australia.
The Employment Agreement
12.In accordance with the Share Purchase Agreement, on 31 October 2000 the Applicant entered into an employment agreement with Mactek. Features of the Employment Agreement include:
12.1.The employment commenced on 1 November 2000, and was for an initial term of 3 years.
12.2. Salary of $100,000 per annum was payable monthly;
12.3.A sign-on fee of $300,024 was payable to the Applicant in 36 equal monthly instalments of $8,334, unless the employment was terminated earlier.
13.The Applicant directed that the sign-on fee be paid to the Port Douglas Stichting.
14.Sign-on fees in the following amounts were paid by Mactek to the Port Douglas Stichting on behalf of the Applicant (being half of the total paid on behalf of both the Applicant and Peter):
14.1 Year ended 30 June 2001: $135,988
14.2. Year ended 30 June 2002: $108,342
14.3 Year ended 30 June 2003: $100,087
15.The Respondent does not know whether the Applicant continues to be employed by Mactek, and if the Applicant is no longer so employed, the Respondent does not know how or when that employment was terminated.
The Port Douglas Stichting
16.On 29 December 2000, the Applicant and Peter caused the Port Douglas Stichting to be created, being an organisation formed under the law of the Netherlands. The objects of the Stichting are expressed to be ‘to grant pensions or distributions or cause pensions or distributions to be granted to individuals who may make a claim thereon according to the Pension Regulations’.
17.The Respondent does not know the detail of any Pension Regulations referred to; nor does the Respondent know the relationship between the Applicant, Peter and the Stichting, other than what is said below.
18.The Respondent does not know how the Stichting dealt with the receipt of the sign-on fee. The Respondent does not know the identity of any participants in the Stichting (other than, apparently, the Applicant and Peter). The Respondent does not know the financial status of the Stichting, including the assets and liabilities of the Stichting, what other contributions were made and by whom, what investments were made by the Stitching [sic], and what return or profit was made on those investments.
The loan
19.On 2 February 2001, the Applicant entered into an agreement with the Port Douglas Stichting under which the Port Douglas Stichting agreed to advance money to the Applicant on certain terms and conditions.
20.The agreement included the following terms and conditions (all dollar amounts in Australian dollars):
20.1. The maximum advance was $500,000.
20.2Loan funds were accessible only by credit card (in the present case a Visa credit card issued by the Bank of Butterfield in the Cayman Islands). That is, amounts were paid from time to time to clear the outstanding balance on the credit card; these amounts were treated as amounts drawn down on the loan.
20.3The manner in which the loan fell to be repaid (or otherwise) depended on the manner in which the Applicant’s employment with Mactek continued or terminated:
20.3.1.If the Applicant completed 3 years of service - no interest is payable, and other conditions would be renegotiated.
20.3.2.If the Applicant resigned with less than 3 years of service (other than by reason of ill health) - the loan is repayable within 12 months of the resignation with interest payable at the Higher Rate.
20.3.3.If the Applicant resigned with less than 3 years of service by reason of ill health - the loan is repayable within 5 years of the resignation with interest payable at 7.5% p.a.
20.3.4.If Mactek terminated the employment agreement within 3 years of service by reason of the Applicant failing to carry out his employment obligations - the loan is repayable within 12 months of the resignation with interest payable at the Higher Rate.
20.3.5.If Mactek terminated the employment agreement after 3 years and 3 months - the loan is forgiven and no interest is payable.
20.3.6.If the Applicant dies - the loan is forgiven and no interest is payable
20.3.7.If the employment was terminated because Mactek becomes insolvent, appoints an administrator, is deregistered or otherwise incapable of continuing business obligations (other than by reason of the Applicant's fraudulent activity) - the loan is forgiven and no interest is payable.
20.3.8. If the employment was terminated because Mactek becomes insolvent, appoints an administrator, is deregistered or otherwise incapable of continuing business obligations, by reason of the Applicant’s fraudulent activity - the loan is repayable within 12 months of the termination with interest payable at the Higher Rate.
21.As mentioned above, the Respondent does not know how the Applicant’s employment with Mactek terminated (if at all).
22.The Applicant used the relevant credit card for his personal expenses. Payment of the credit card was made automatically by direct debit. It appears that the payment was made by Mactek providing funds to the Stichting, and the Stichting would then use those funds to pay the credit card.
23.For the monthly billing period ending on 3 October 2003, the amount so paid was US$6,373.11.
24.In the absence of information provided by the Applicant, the Respondent extrapolated that US$76,477.32 was paid in each year. Applying relevant exchange rates, the annual payment was (in Australian dollars)
24.1. Year ended 30 June 2001: $142,071.93
24.2. Year ended 30 June 2002: $146,004.81
24.3. Year ended 30 June 2003: $130,909.48
Audit, Objection, Appeal
25.On 28 April 2006, the Respondent completed an audit on the Applicant. Among other adjustments, the Respondent found that:
25.1.In the disposal by the Applicant of his shares in Mactek to Radiodetection Australia, the Applicant realised a net capital gain of $2,075,739.
25.2.The payment of the sign-on fee was assessable income of the Applicant.
25.3.The payment of the Applicant’s credit card expenses was assessable income of the Applicant.
26.On 10 May 2006, the Respondent made a determination under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (‘the Part IVA determination’) in relation to the net capital gain of $2,075,739.
27.On 12 May 2006, amended assessments were issued for the years ended 30 June 2001, 30 June 2002 and 30 June 2003 (‘the relevant years’) reflecting, inter alia, the adjustments above.
28.On 28 June 2006, the Applicant objected against the notices of amended assessment.
29. On 19 March 2008, the Respondent disallowed the objection.
30.On 28 July 2008, the Applicant applied to the Administrative Appeals Tribunal for review of the objection decision.
8. It may be noted that the Applicant’s Statement of Facts, Issues and Contentions dated 26 February 2009 was submitted by Bonnell Rowntree LP who were then the solicitors acting for the MacMahons in respect of their applications.
9. We intend in these reasons to utilize a number of abbreviations; the term “Unit Trust” refers to the Hill End Unit Trust (which is referred to in clause 6.1 of the Respondent’s Statement of Facts, Issues and Contentions); the term “Family Trust” refers to the “G MacMahon Family Trust” referred to in clause 6.2 of the Respondent’s Statement of Facts, Issues and Contentions. Mactek and Radiodetection Australia, which are themselves abbreviations contained in the Respondent’s Statement of Facts, Issues and Contentions are sometimes referred to respectively as “the Company” and “the Purchaser”. The Share Purchase Agreement dated 30 October 2000 is sometimes referred to as “the Sale Agreement”.
10. Although four hearing days commencing with 10 August 2010 were scheduled in respect of the hearing of these applications the Tribunal, in the result and during that period heard little of substance other than the commencement of outline submissions on behalf of the Applicant; the reasons why this is so are set out in Part B.
Part B: Relevant events prior to and during the hearing days
11. On 10 August 2010 there were two applicants (the MacMahons) each of whom had filed applications for review in almost identical terms; those two applicants were the brothers each of whom was the seller of one half of the issued shares in the Company to the Purchaser pursuant to the Sale Agreement.
12. In directions given in March 2010 the Tribunal directed that the applications in respect of each of the Applicant and Peter be heard together on the basis that the evidence in respect of either brother would be evidence in respect of the other. Those directions were given by consent and because it was obviously convenient that two almost identical applications originating from the same transaction be heard together. In addition, the applications were listed for hearing on four days and being dates selected to suit the convenience of counsel on both sides. (At the directions hearing referred to previously in this clause the applications were listed to be heard on four days in July 2010 but on 31 March 2010 those dates were, by consent, vacated and four days commencing on 10 August 2010 agreed and scheduled in place of the vacated dates.)
13. On 3 August 2010 and at a directions hearing convened in response to a postponement request by the brothers, Mr Young, who appeared for both of them, applied for the vacation of the scheduled hearing dates because the penalty issue was not properly before the Tribunal in that although the parties referred to penalty in the documents before the Tribunal, the brothers had never formally objected to the penalty assessments. Directions designed to rectify any possible procedural defects were issued; those directions, which need not be repeated in these reasons, were designed to ensure that the Tribunal could in respect of both brothers hear all objection decisions on the allotted days. In the result, the Applicant complied with the Tribunal’s directions and matter numbers 2010/3423-3426 were allotted to the penalty application in respect of the Applicant.
14. When the hearing commenced on 10 August 2010 Mr Young advised the Tribunal that a gentleman standing at the back of the hearing room wished to address the Tribunal. Mr David Solomons then proceeded to advise the Tribunal that the estate of Peter had become or was in the process of becoming a bankrupt estate in consequence of a petition filed on the preceding day, 9 August 2010, and that he, Mr Solomons, and a partner would be the trustees of Peter’s bankrupt estate. Documents received on the following day indicated that the petition in respect of Peter’s bankruptcy was brought by Peter himself. (The Tribunal accepts that mention of this latter fact was made by Mr Solomons at the time of his appearance). The applications in respect of Peter were accordingly stayed in accordance with s 60(2) of the Bankruptcy Act 1966. Mr Solomons asked for an extension of time of three months within which to enable him to consider the documents and to enable him to decide whether or not to proceed with Peter’s applications. The Tribunal was initially reluctant to grant so lengthy an extension of time, but in the result granted an extension to Peter’s trustees until 10 November 2010 to enable them to make a decision.
15. Mr Young then applied for a stay in respect of the Applicant’s applications on the basis that a stay in respect of Peter entitled the Applicant also to a stay. Because notice of that application had not been given to counsel for the Respondent the Tribunal adjourned until 2:00 pm on that day to enable them to prepare argument. At 2:00 pm on that day argument was heard and at 4:00 pm the Tribunal delivered written reasons for its refusal of the application. (The reference to those reasons is Re MacMahon & Anor and Commissioner of Taxation [2010] AATA 594). Put in very brief summary form the Tribunal was of the view that the brothers were separate applicants in respect of separate applications and whose (separate) applications were joined as a matter of convenience; they were not co-applicants. In refusing the application the Tribunal also reversed the directions pursuant to which the applications were to be heard together and where the evidence in respect of either brother would be evidence in respect of the other brother.
16. Mr Young had notified the Tribunal that he intended, if the application for a stay was not granted, to seek relief from the Federal Court and it was therefore decided that an adjournment until 2:00 pm on the following day should be allowed and so as to afford the Applicant an opportunity to make his application to the Federal Court. That time was in the result extended to midday on 12 August 2010 because the Federal Court judgment denying the interlocutory relief sought was handed down in the morning of 12 August 2010: MacMahon v Block [2010] FCA 947. It may be noted that in the Federal Court application Mr Young was led by senior counsel.
17. On resumption on Thursday 12 August 2010 Mr Casselden of counsel sought leave to be heard on behalf of the trustees of Peter’s bankrupt estate. He asked the Tribunal to postpone the hearings in respect of the Applicant on the basis that to continue would cause prejudice to Peter’s trustees. Mr Casselden admitted that he had just been briefed, that he had not read the papers and knew very little of what was involved. His application was refused.
18. Counsel for the Respondent had earlier informed Mr Young that the Applicant would not be required for cross-examination; the Applicant had furnished two witness statements and which are set out in full later in these reasons. The Tribunal informed Mr Young that it wished to ask some questions of the Applicant. At 2:00 pm Mr Young advised the Tribunal that the Applicant would not be available either that day or the following day. A summons was then served on the Applicant’s solicitor requiring the Applicant’s attendance at 2:00 pm on the following Tuesday, 17 August 2010; the Applicant’s solicitor subsequently faxed the Tribunal to the effect that she was not authorized to accept service and that in any event the summons had not been served in accordance with the regulations.
19. Given that Mr Young had no other witnesses the next step would have been closing submissions on behalf of the Applicant. Mr Young asked for an extension until the following day to enable him to “collect [his] thoughts” and in order to present outline submissions; that request was granted.
20. On the following day and when the hearing commenced Mr Thawley submitted to the Tribunal that it would be preferable not to require the Applicant’s attendance, but rather to invite him (but not oblige him) to do so. The Tribunal accepted that submission and it was arranged that for this purpose the 2:00 pm listing on 17 August 2010 would be retained.
21. Mr Young then commenced with what he described as preliminary submissions. After those submissions had been in process for a period Mr Thawley submitted that it would be preferable to rely on written submissions from both sides, a timetable having been arranged for this purpose. The Tribunal on that day admitted into evidence exhibits as follows:
·Exhibit R1 is a bundle of documents described as “tender bundle” tendered by the Respondent;
·Exhibit R2 is a letter by the Applicant’s solicitor dated 5 August 2010 (being the notice of objection in respect to the penalty assessments);
·Exhibit R3 is a letter by the Respondent dated 9 August 2010 (being the objection decision in respect of the penalty assessments);
·Exhibit A1 is a witness statement by the Applicant which was lodged in the Tribunal on 16 June 2009;
·Exhibit A2 is a further witness statement by the Applicant dated 28 July 2010.
Exhibits A1 and A2 were admitted on a provisional basis and having regard to the fact that it was contemplated that if the Applicant did elect to give oral evidence he would confirm their content.
22. In the result the Applicant did not elect to give oral evidence. The Applicant made one further application on 17 August 2010, but it is unnecessary to deal with it because it was withdrawn.
23. Submissions were received from the parties in accordance with the timetable which had been arranged. The term “AS” refers to the submissions by the Applicant dated 20 August 2010 and “SAS” refers to his submissions in reply dated 31 August 2010. The term “RS” refers to the Respondent’s submissions dated 27 August 2010. We have drawn on the submissions to some considerable extent in respect of these reasons.
Part C: The evidence of the Applicant
24. In the result the only evidence before the Tribunal apart from the T documents is the witness statement evidence tendered by the Applicant.
25. Exhibit A1 reads as follows:
1. I am the Applicant in these proceedings.
2.In or around May 1993 Mactek Pty Limited (Mactek) was incorporated. The shares in Mactek were owned by my brother and I. I owned 500 shares and my brother owned 500 shares.
3.In or around September 2000 my brother and I entered into negotiations to sell the shares in Mactek to Radiodetection Limited a United Kingdom company which set up an Australian company Radiodetection Australia Pty Limited to be the purchaser (Radiodetection).
4.The terms of the sale were recorded in an Agreement for Sale, which is at T135-176. Under the Agreement for Sale Radiodetection agreed to make further payments to me based on the performance of the company, terms which are commonly referred to as an earn out. The terms of the earn out were commercially significant. Under the earn out I received an additional $1,151,979.00 from Radiodetection, which I received on trust for the Hill End Unit Trust (HEUT).
5.I sought advice as to the taxation consequences of the sale and the best way that the proceeds of sale (including any proceeds of the earn out) could be protected from any future claims by Radiodetection should there be any allegation of breach of warranty. The advice given was that transactions involving the sale of an equitable interest in the shares should be undertaken.
6.Pursuant to the advice on 26 October 2000 my brother and I made an offer to that if accepted would lead to the creation of a unit trust, to be known as the Hill End Unit Trust.
7.The offer was accepted and 3,750,000 units in the HEUT were allotted to each of my brother and I. On the same day Family Trusts set up for the benefit of my brother and I and our respective families applied for an allotment of units in the HEUT. This allotment was for 3,750,000 units for each Family Trust. The allotment was funded by a gift of 3,750,000 paid by way of promissory note.
8.The Trustee of the HEUT used the promissory notes to redeem the units held by my brother and I.
9.Therefore on 26 October 2000 the shares in Mactek were owned by my brother and I as Trustees for the HEUT. HEUT in turn was owned by the two Family Trusts. The documents which evidence these transactions are at T 185-252.
10.On 30 October 2000 my brother and I executed a Share Purchase Agreement under which the shares in Mactek were sold to Radiodetection. Total proceeds from the sale of Mactek were $8,303,958.00.
11.On 31 October my brother and I agreed to be employed by Mactek. Under the employment agreement Mactek agreed to pay a “sign-on” fee which was payable in instalments and the continued payment of these instalments was contingent on my continued employment.
12.On 29 December 2000 my brother and I caused a Stichting to be set up, the Port Douglas Stichting. The terms of the Stichting were that it was set up for the purpose of paying pension and was therefore a retirement fund.
13.After the establishment of the Stichting I directed that any future payments due to be paid to me as the “sign-on fee” should be paid as a contribution to the Stichting. Mactek made these payments to the Stichting and I borrowed sums from the Stichting.
26. Exhibit A2 (without its annexure and being the Sale Agreement) reads as follows:
1. I am the Applicant in these proceedings.
2.In or around May 1993, my brother and I incorporated a company called Mactek Pty Ltd ACN 059 793 538 (“Mactek”). Mactek was running a business as an international manufacturer and agent of electronic testing equipment (“the Business”).
3.In or around September 2000, Michael Napper, the business development director of a company called Radiodetection Limited (“RD”) approach my brother and I to purchase Mactek for fifteen million dollars ($15,000,000.00) (“the Purchase Price”).
4.It was agreed between RD, my brother and I that the amount was to be paid as follows:
a.three million dollars ($3,000,000.00) upon execution of the Share Purchase Agreement (“the Agreement”);
b.three million dollars ($3,000,000.00) as advance on “earn out” which was treated by RD as pre-payment of the Earn Out Amount, as described in clause 4.3 of the Agreement;
c.that the balance of the Purchase Price would be paid to my brother and I, pursuant to clause 4.3 of the Agreement.
Annexed herewith and marked with the letter “A” is a copy of the Agreement.
5.The terms of the sale of the business required my brother and I to remain as executive directors of Mactek for a period of 3 years and to continue to run the Business.
6.I recall that I received a draft copy of the Agreement sometime early October 2000.
7.Around the same time, my brother and I went to see Brian Killalea, our company Solicitor, whose office was located at North Sydney.
8.I recall Brian, in the presence of my brother, advising me, words to the following effect:
Brian:“The way this Agreement has been written, you have the potential of losing the money they have paid you.”
Peter: “What do you mean?”
Brian:“Clause 4.4 of the Agreement means that they can potentially come back to you for everything that they have paid you.”
Peter: “What is your advice to protect us?”
Greg: “We need to protect ourselves.”
Brian: “Go back to your accountant and get good accounting advice.”
9.Shortly thereafter, my brother and I went to see our accountant, Morton O’Leary at North Sydney. I recall Peter and I had a conversation with him with words to the following effect:
Peter:“Brian has asked us to see you regarding this Agreement.”
Morton:“I can see problems with this Agreement especially clause 4.4. I will need to look at this Agreement closely and probably obtain legal advice from someone I know who may be able to help you. Let me arrange a conference and let you know the time for you to come back.”
10.I do not recall the exact date, but sometime shortly thereafter, my brother and I had a conference with Morton, a Michelle Dodd and David Bonnell. Michelle Dodd was an accountant and David Bonnell was a solicitor. During that conference, I recall I had a conversation with David and Michelle. I recall the content of the conversation but I do not recall whom said what and to whom. I recall that the following words to the following effect were said between myself, my brother, David and Michelle:
David/Michelle: “You have got a problem with this agreement. I have a way to fix it. I will have to look at the way your business is structured to make sure you are not personally exposed in the event RD decides to go after you because of clause 4.4.”
Peter:“What do we have to do to fix it?”
Greg:“We should not be personally liable for this.”
David/Michelle: “You need to set up a trust to purchase the shares to give you the protection you need going forward so that RD does not and cannot come after the money they paid you.”
Me:“Can you please arrange for whatever documents and structure you think to be the right thing to do to protect us.”
11.My brother and I had a second meeting with David Bonnell and Michelle Dodd at Morton’s office prior to the execution of the Agreement. At this meeting, I do not recall exactly who was talking but I recall either David or Michelle saying words to the following effect:
David/Michelle: “I have set up a structure for you which will protect you. The structure will be two family trusts for both of you and a unit trust whereby the two family trusts are unit holders. There should be a sale of an equitable interest in the shares you both currently have to your unit trust. You need to give me a name.”
Greg:“Hill End.”
Peter:“Can you call it the Hill End Unit Trust”
David/Michelle: “So if we do the structure this way, you will hold the shares currently in Mactek as trustees for the Hill End Unit Trust. I have then created two family trusts for the benefit of each of your families. The next step would be to have the family trusts make an application to the Hill End Unit Trust for units. This will be funded by a promissory note.”
Peter:“How will it all work”
David/Michelle: “As trustees of the Hill End Unit Trust, you will use the promissory notes to redeem the units held by each of you.”
Me:“OK. What do we need to do now?”
David/Michelle: “As trustees of the Hill End Unit Trust, will you use the promissory notes to redeem the shares you both currently hold in Mactek?”
Me:“Yes.”
12.I refer to paragraph 10 of the statement made by me which was filed in this Tribunal on 16 June 2009 and say that at no stage did Peter, myself or Mactek receive the fifteen million dollar ($15,000,000.00) purchase price from RD.
13.At no stage did RD pay the sum of fifteen million dollars ($15,000,000.00) for the Agreement. The total sum received from RD for the purchase of the Business was $7,453,912.46. I note that paragraph 10 of my previous statement filed in this Tribunal on 16 June 2009 said that the total amount received from RD for the purchase of the Business was $8,303,958.00. I say that this amount was stated in error.
14.I was placed on “Gardening Leave” in either September or October 2003. My employment agreement was terminated with Mactek in or about February 2004.
15.A few months prior to my termination, I was told by a couple of the Directors of RD that SPX Corp., the US Holding Company of RD, that their legal section was looking into ways of commencing proceedings against me pursuant to clause 4.4 of the Agreement.
16.When I was told this, I had Peter contact David Bonnell to ensure that I was not personally exposed. I recall Peter saying to me words to the following effect:
“Greg, I have spoken to David. David has said that everything is in place and we are ok.”
17.It was not until May or June 2005 that RD personals again indicated to me that they were proposing to instigate proceedings against me under clause 4.4 of the Agreement. I recall during a conversation that I had with a Roger Holmes, the Managing Director of RD, he said to me words to the following effect:
“The Telstra business was a shame and we will be going after you under the claw back clause.”
18. I have not heard anything further from RD after this conversation with Roger.
27. It will be noted, in particular, that clause 5 of Exhibit A1 sets out that the Applicant sought advice as to “the taxation consequences of the sale” and also as to the manner in which protection against a warranty claim by the Purchaser could be obtained.
28. Exhibit A2 contains rather more detail as to the professional advice sought and obtained. The Applicant said that he sought advice from his solicitor, Mr Killalea, as to how he could obtain protection against a warranty claim and was advised (surprisingly in the view of the Tribunal) that he should consult his accountant. Thereafter the Applicant consulted Mr David Bonnell, a solicitor, and Ms Michelle Dodd, an accountant. It will be remembered that Mr Bonnell’s firm was, until a late stage, the solicitors to the brothers.
29. The evidence of the professional advisers referred to in Exhibit A2 was clearly relevant, but none of them gave evidence before the Tribunal. This is particularly so in respect of Mr Bonnell whose legal firm received a fee of $750,000 from each of the brothers. The Tribunal must draw an inference that that evidence would not have assisted the Applicant: Jones v Dunkel (1958) 101 CLR 298.
30. The Sale Agreement which was drawn by Freehills is comprehensive. The warranties are in particular comprehensive and they indicate in clear terms that they were not the warranties which would have been required of sellers in their capacity as trustee of a trust. Put in general terms the Sale Agreement reveals in stark detail an agreement between the brothers as sellers, and in respect of each of them as to one half of the issued shares in the Company, to the Purchaser. We refer to the Sale Agreement in more detail later in these reasons.
31. The Applicant notes in clause 3 of SAS that the Respondent characterised some of the Applicant’s evidence as being of a hearsay nature (see clause 7 of RS). However, the Respondent did not (contrary to the Applicant’s assertion to this effect) object to any of such evidence. Exhibits A1 and A2 were accepted without objection of any kind by the Respondent. Those two exhibits regarded in aggregate are by any standards quite remarkably sparse as to a number of relevant aspects; we refer in this context to clause 34 below.
32. On 12 August 2010, the Tribunal indicated that it wished to ask questions of the Applicant. The opportunity to assist the Tribunal by filling in the numerous gaps in his evidence was declined by the Applicant. The fact that the Applicant did not assist the Tribunal leads us to think that he was afraid to do so. As was stated by Handley JA, applying reasoning analogous to that in Jones v Dunkel, in Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418:
There appears to be no Australian authority which extends the principles of Jones v Dunkel to a case where a party fails to ask questions of a witness in chief. However I can see no reason why those principles should not apply when a party by failing to examine a witness in chief on some topic, indicates “as the most natural inference that the party fears to do so”. This fear is then “some evidence” that such examination in chief “would have exposed facts unfavourable to the party”…
Part D: The warranty fear
33. It is relevant to refer, albeit briefly, to the fact that the Applicant bears the onus of proof. Thus, Brennan J said in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621:
[T]he purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act ...
It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed ... unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer ... The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.
34. The principles enunciated in Dalco are particularly significant. One thing can be said at the outset; the Applicant’s statements (Exhibits A1 and A2) are very brief and do not address:
(a)whether the transactions were in fact entered into or how they were entered into or in what order they were entered into;
(b)why particular aspects of the transaction were entered into (if that be relevant);
(c)in any reliable fashion, what the capital proceeds from the disposal of shares were;
(d)whether part of the capital proceeds were paid to some other entity;
(e)the role of the promissory note or the commercial reasons for it;
(f)the commercial reasons for the scheme or for individual parts of it;
(g)the fee of $750,000 paid by the Applicant (and also by Peter) to Mr Bonnell’s firm and how it was arrived at and what it was for;
(h)the purposes of the Stichting;
(i)the way in which the Stichting was in fact operated;
(j)whether amounts paid by the Stichting as “loans” were in addition to, or entirely comprised of, payments made to the Stichting by the employer;
(k)the amount of the so-called, but misnamed, “loans”;
(l)the advice allegedly received from which it is said that the position adopted by the Applicant was reasonably arguable or not reckless.
35. As set out previously, the Applicant and Peter in September 2000 entered into negotiations for the sale of their respective shares in the Company to the Purchaser. As set out previously, they each owned one half of the share capital in the Company.
36. The Applicant and Peter, having decided to sell their shares in the Company to the Purchaser sought advice “as to the taxation consequences of the sale and the best way that the proceeds of sale (including any proceeds of the earn out) could be protected from any future claims by [the Purchaser]”. The Applicant says: “The advice given was that transactions involving the sale of an equitable interest in the shares should be undertaken”. The Applicant then went on to say: “Pursuant to the advice on 26 October 2000 my brother and I made an offer to [sic] that if accepted would lead to the creation of a unit trust, to be known as the Hill End Unit Trust”.
37. The Applicant asserts, in his objection, that the solicitor’s advice was confirmed by a barrister. The barrister’s advice was directed to a different transaction (although similar in certain respects) from that entered into and was unconcerned with considerations of asset protection; it was solely concerned with the taxation consequences of “restructuring of ownership of CGT assets” that is, an attempt, by taking “unusual” steps, to avoid triggering a CGT event. The advice given was that CGT Events A1, E1 and E2 would not be triggered if the “unusual” steps were taken. The advice noted that it did not deal with Part IVA issues.
38. The second statement of the Applicant ignores the fact, recorded in the earlier statement, that the brothers had sought advice “as to the taxation consequences of the sale” and focuses, rather, on seeking to suggest that the advice was sought for the purposes of asset protection. We consider that the conversations referred to are not credible insofar as they seek to suggest that the steps undertaken were directed to asset protection rather than tax avoidance.
39. Mr Killalea is alleged to have suggested that the brothers should seek accounting advice when the issue – asset protection – is one on which they would be seeking legal advice, not accounting advice. Mr Killalea was not called to give evidence and what he did or did not say could not be tested.
40. The advice in fact received (assuming that advice was to take the steps which were taken) is clearly directed to taxation issues, not asset protection issues. No cogent reason was advanced as to how the contrived transactions entered into could have had any value in terms of asset protection. There is nothing in the steps actually taken which served to protect the brothers from whatever it was they were afraid of. In particular, if the transactions were effective in such a way that the Applicant and Peter sold the shares as trustee, they would still be personally liable in respect of a breach of warranty claim by the Purchaser.
41. A file note prepared by Freehills (acting for the Purchaser) dated 6 October 2000 (Exhibit R1) refers to a discussion with Mr Killalea in which he is recorded as having stated: “plan to restructure deal to refl. tax advice received by Mactek”. The note also refers to providing “tax-driven” changes and that the tax advisers are also lawyers and will draft the suggested changes. The reference to lawyers is presumably a reference to Mr Bonnell’s firm and Mr Bonnell in particular.
42. There are other reasons why the evidence as to a fear of a warranty claim is not worthy of credit.
43. Exhibit A2 in contrast with Exhibit A1 deals with the Applicant’s alleged fears of a warranty claim. He refers to conversations with his advisers both prior to and long after completion. Except for statements by the Applicant himself there is no evidence that any such claims were contemplated or threatened. There was no evidence of any kind as to the specific warranties which might be the subject of a claim or as to the manner in which there was any alleged breach of any such warranties. Even more to the point is the fact that the steps alleged to have been taken by way of protection against a warranty claim did not assist the Applicant. These aspects will be dealt with in more detail later in these reasons.
44. The size of the fee paid to Mr Bonnell’s firm ($750,000 by each of the brothers) bears no conceivable relation to time spent and must inevitably lead to a conclusion that it was not paid for advice as to possible warranty claims.
Part E: The Unit Trust – the events of 26 October 2000
45. By a letter dated 26 October 2000, the Applicant wrote to himself and Peter in these terms (TG23-187):
I am the owner of 500 shares in the share capital of Mactek Pty Limited (ACN 059 793 538) (the “Shares”).
I hereby offer to vest the equitable estate in the Shares on a unit trust to be known as the Hill End Unit Trust with you as Trustees of that Trust.
You may accept the offer contained in this letter to be the Trustees of the Hill End Unit Trust by accepting delivery of the title documents to the Shares and recording an allotment to me of Three Million Seven Hundred and Fifty Thousand A Class Units in the Hill End Unit Trust.
Once this offer has been accepted, you shall be bound to hold the Shares on trust on the terms and conditions of the draft Deed of Unit Trust annexed hereto and marked with the letter “A”. Further I will be recorded as holding all the B Class units in the Hill End Unit Trust.
Further upon acceptance of the title documents and the creation of the Hill End Unit Trust I shall continue to hold legal title to the Shares as your nominee. I will transfer the Shares to you or as you direct.
46. This letter was apparently presented at a meeting held on 26 October 2000 and a Statutory Declaration of Michelle Dodd made on 27 October 2000 (TG26-223) states that she was present at such a meeting. As noted above, she was evidently not prepared to give evidence and her evidence could not have assisted the Applicants; whatever evidence she may have given was not capable of being tested and neither was her statutory declaration.
47. The intention conveyed by the letter was that Gregory would continue to hold legal title to his parcel of shares, but would transfer the “equitable estate” (or beneficial interest) in the shares to the Unit Trust. The letter conveys the intention that Gregory was to remain the legal owner of his shares as “nominee” or bare trustee of them for the Unit Trust. All that was intended to be transferred (or, according to the Applicant created), assuming the transaction was otherwise effective, was the “equitable estate” or beneficial interest in the shares. However, for reasons set out below, we do not believe that there was any such transfer.
48. “Minutes of Meeting” dated 26 October 2000 (TG24-208) provide:
PRESENT:
Peter James MacMahon and Gregory John MacMahon
CHAIRMAN:
Peter James MacMahon was appointed Chairman of the meeting
LETTER OF OFFER:
Produced at the meeting were letters of offer made by Peter James MacMahon and Gregory John MacMahon to Peter James MacMahon and Gregory John MacMahon. The letters stated that Peter James MacMahon and Gregory John MacMahon wished to vest the equitable estate in all the shares owned by each of them in Mactek Pty Limited (the “Shares”) in a unit trust to be created on vesting. Vesting was to occur on acceptance by Peter James MacMahon and Gregory John MacMahon of the title documents.
It was noted that upon acceptance Peter James MacMahon and Gregory John MacMahon would be the Trustees of the Hill End Unit Trust holding the equitable interest in all the Shares, of which Peter James MacMahon and Gregory John MacMahon are registered proprietors on terms of the draft Unit Trust annexed to the Offer and that Peter James MacMahon and Gregory John MacMahon would remain legal owners of the Shares as nominees for the Trust and subject to the terms of the Hill End Unit Trust.
RESOLVED that Peter James MacMahon and Gregory John MacMahon should accept the Offer contained in the tabled letter. Accordingly they resolved to accept delivery of the title documents of the Shares and to assume the role of Trustees of the Unit Trust. It was noted that the names of Peter James MacMahon and Gregory John MacMahon in a register of Unit Holders in accordance with the Schedule of the Letter of Offer.
CLOSURE:
There being no further business, the meeting was declared closed.
49. The minutes confirm the evident intention that Peter and Gregory remain the legal owners of their respective shares. The evident intention is that neither Peter nor Gregory part with legal title; each is to transfer the “equitable estate”, that is, the beneficial interest in the shares to the trustee of the Unit Trust.
50. The letter of offer dated 26 October 2000 (TG23-187) is said to have had attached to it a “draft Deed of Unit Trust” (“draft Trust Deed”). The draft Trust Deed was never signed, or dated. But the letter of offer stated (emphasis added):
Once this offer has been accepted, you shall be bound to hold the Shares on trust on the terms and conditions of the draft Deed of Unit Trust annexed hereto and marked with the letter “A”.
It will be noted, in particular, that on acceptance of the offer the trustee was bound to hold the shares on trust; the document in question does not refer to the equitable estate or beneficial interest in (and these terms are used interchangeably) the relevant shares.
51. The draft Trust Deed (TG23-188) contained the following definitions:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Document unless the context otherwise requires:
“Commencement Date” means the date of creation of the Trust;
“Trust” means the trust constituted by the acceptance of the Trustee of the equitable obligations in relation to certain property and to be known as Hill End Unit Trust or by any other name decided at any time by the Trustee;
“Fund” and “Trust Fund” mean all the property held by the Trustee upon the trusts of this Document including:
(a)The property vested in the Trustee by the Unit Holders referred to in Clause 4 upon creation of this trust;
(b)all other money and property paid or transferred to, vested in and accepted by the Trustee as additional to the Fund including amounts received by the Trustee by way of subscription for Units and the money and investments for the time being representing the same;
(c)all additions or accretions to the Fund in respect of or in connection with any property forming part of the Fund or from any other sources; and
(d)all Income for the time being in the hands of the Trustee;
“Income” has the same meaning as that given to the expression “net income” in section 95 of the Income Tax Assessment Act;
“Registered Holder” means the person for the time being registered under the provisions of this Document as the holder of a Unit and includes persons jointly registered;
“Special Unit” means any unit issued by the Trustee in accordance with clause 5 and, except where the context does not allow, a Unit includes a Special Unit;
“Trustee” means each and every Trustee for the time being of this Document, whether original, additional or substituted;
“Unit” means an undivided part or share in the Trust Fund as described in clause 4;
“month” means calendar month;
“person” includes company, corporation, firm or body of persons.
52. Clause 2 provided:
2. THE TRUSTS OF THE FUND
2.1The Trustee will hold the capital and income of the Trust Fund on trust for the Registered Holders in proportion to the number of Units held by them.
2.2The Trustee must at the request of a Registered Holder pay, apply or otherwise deal with the share of the income of the Trust Fund to which that Registered Holder is entitled in the manner which the Registered Holder directs.
2.3A Registered Holder will be entitled as provided in this Document to a beneficial interest in the Trust Fund, but the Registered Holder will not be entitled, other than as provided in this Document to:
(a) interfere with or to question the exercise or non-exercise by the Trustee of its rights and powers in dealing with the Trust Fund or any part of it;
(b) exercise any rights, powers or privileges in respect of any investment forming part of the Trust Fund; or
(c) require the transfer to him of any of the assets or property which at any time constitute the Trust Fund.
53. It will be noted that clause 2 of the Trust Deed contemplates one “Trust Fund”, which is to comprise “the property vested in the Trustee by the Unit Holders referred to in Clause 4 upon creation of this trust”, namely Peter and Gregory. The “property vested in the Trustee”, assuming the Unit Trust came into existence (although we do not think it did), was the beneficial interest in Peter’s shares and the beneficial interest in Gregory’s shares. The “Trustee”, assuming the Unit Trust came into existence, was Peter and Gregory.
54. Clause 4 of the draft Trust Deed dealt with units (emphasis added):
4.UNITS
4.1 The beneficial interest in the Fund will be divided into Units. Every Unit will confer an interest in the Fund but will not, unless stated otherwise by the Trustee confer any interest in any particular part of the Fund or of any investment. At any time all the Units will be of equal value.
4.2 The beneficial interest in the Fund as originally [sic] will be divided into 7,500,000 Units having an initial value of $1.00 each. Those Units will be held subject to this Document by the following person as the Registered Holder of those Units:
Peter James MacMahon 3,750,000 “A” Class Units
Gregory John MacMahon 3,750,000 “B” Class Units
Peter James MacMahon shall be beneficially entitled to the property transferred to the trust fund by him in consideration of the allotment of the A Class units. Gregory John MacMahon shall be beneficially entitled to the property transferred to the trust fund by him in consideration of the allotment of the B Class units.
4.3 As and when any addition is made to the Fund under clause 3.2 additional Units will be created. The number of those additional Units will be determined by the Trustee having regard to the value of Units in existence immediately before that addition to the Fund. In the case of creation of any additional Units those additional Units will only be entitled to share in the income of the Trust Fund from the date of their creation
55. The underlined words in the preceding clause are significant in particular in that they refer to a transfer of property. Mr Young had informed the Tribunal that the Applicant contends that there was a vesting, but not a transfer. Such a contention was necessary because if there was a transfer then there was of necessity a CGT event. The underlined words also indicate that the trustee (namely Peter and Gregory) was to hold the property transferred to it in consideration for the issue of units in the Unit Trust on trust for Peter and Gregory. Thus, clause 4 contemplates that Peter and Gregory would, as trustee of the Unit Trust, jointly hold:
(a)the equitable estate (or beneficial interest) in Peter’s shares on bare trust for Peter;
(b)the equitable estate (or beneficial interest) in Gregory’s shares on bare trust for Gregory.
The Tribunal does not believe that for the reasons set out later in these reasons this was possible. The beneficial ownership of the shares cannot vest in both the Unit Trust and in (respectively) Peter and Gregory. The Tribunal considers also that because there was no transfer of legal title, there was never any trust property.
56. The remaining transactions which are alleged to have occurred on 26 October 2000 are set out hereafter in these reasons. Family trusts were apparently created for each of Peter and Gregory.
57. Minutes of Meeting dated 26 October 2000 (TG25-213) record:
PRESENT:
Gregory John MacMahon and Peter James MacMahon
CHAIRMAN:
Gregory John MacMahon was appointed Chairman of the meeting
ALLOTMENTOF UNITS:
Produced at the meeting were two Applications for the allotment of 3,750,000 one dollar ($1.00) units in the Hill End Unit Trust at a price of one dollar per unit from both the P MacMahon Family Trust and the G MacMahon Family Trust.
RESOLVED: that the Trustee of the Hill End Unit Trust should allot 3,750,000 one dollar ($1.00) ordinary units in the Hill End Unit Trust to each of the P MacMahon Family Trust and the G MacMahon Family Trust, totalling an allotment of 7,500,000 units.
It was also resolved that a unit certificate should be issued to each of the P MacMahon Family Trust and the G MacMahon Family Trust evidencing theses [sic] allotments.
58. Gregory, as trustee of his Family Trust, resolved that the trust “should apply for the allotment of 3,750,000 One Dollar ($1.00) units in the Hill End Unit Trust ... and to pay the sum of $3,750,000 by way of promissory note on behalf of the” Family Trust: TG26-215. The application for the units is at TG26-216.
59. A “Unit Certificate” certifying that the Family Trust was the registered holder of 3,750,000 “Ordinary Class units” signed by Peter and Gregory as trustee of the Unit Trust is at TG26-217.
60. A letter from Gregory as trustee for his Family Trust promising to pay, on demand, $3,750,000 to Peter and Gregory as trustee for the Unit Trust is at TG26-220 (“Gregory’s Promissory Note”). An attachment to the Promissory Note (TG26-221) entitled “Endorsements” (or, assuming the correctness of statements from the bar table in this context by Mr Young, and we have no reason to doubt them, the back of the Promissory Note) provides:
(a)a promise by Gregory and Peter (as trustee for the Unit Trust) to pay Gregory the sum of $3,750,000;
(b)a promise by Gregory to pay himself (as trustee for his Family Trust) the amount of $3,750,000.
61. A further Minutes of Meeting dated 26 October 2000 (TG26-218) records:
PRESENT:
Gregory John MacMahon and Peter James MacMahon
CHAIRMAN:
Gregory John MacMahon was appointed Chairman of the meeting
REDEMPTIONOF UNITS:
Produced to the Trustees were the Unit Certificates issued to Peter James MacMahon and Gregory John MacMahon evidencing the allotment to them of 3,750,000 “A” Class Units and 3,750,000 “B” Class Units respectively in the Hill End Unit Trust.
Also produced at the meeting were Requests for the Redemption of all the units held by Peter James MacMahon and Gregory John MacMahon in the Hill End Unit Trust at a price of One Dollar per unit.
RESOLVED: that the Trustees of The Hill End Unit [sic] should redeem all the A and B Class units held by Peter James MacMahon and Gregory John MacMahon in the Hill End Unit Trust at a price of One Dollar each by the endorsement of promissory notes received from the P MacMahon Family Trust and the G MacMahon Family Trust and that the Unit Certificates issued to them evidencing those Units should be cancelled.
62. The “Request for Redemption of Units” is at TG26-219.
63. Minutes of Resolution of Gregory as trustee of his Family Trust (TG26-222) provide:
THE HILL END UNIT TRUST:
Produced to the Trustee was a Promissory Note issued by the Trustee on behalf of the Trust. The Note had been endorsed by the Trustee of the Hill End Unit Trust in favour of Gregory John MacMahon and by Gregory John MacMahon in favour of the G MacMahon Family Trust. Gregory MacMahon informed the Trustee that the Note was being endorsed by him to the Trust as a gift to the Trust.
RESOLVED: That the Trustee of the G MacMahon Family Trust should accept delivery of the Promissory Note as a settlement on the Trust.
64. The promissory note was the subject of some discussion at the hearing on 13 August 2010. It was made by Gregory as trustee of the Family Trust in favour of the brothers as trustee of the Unit Trust by way of subscription for 3,750,000 units; the amount of the promissory note ($3,750,000) was used to redeem the Applicant’s units in the Unit Trust and the promissory note was thus endorsed in favour of the Applicant. He then endorsed the promissory note in favour of the Family Trust by way of gift and thus completing the circle. No amount changed hands; the promissory note was made and endorsed on the same day in such manner that it was made by the Family Trust and ended in the hands of the Family Trust. The Applicant contends in clause 10 of SAS that: “It is clear, for example what the commercial reasons for the promissory note were, it was either as a gift to the trust, or subscription for loans or redemption of units and the like. The documents had their stated effect and legal operation”. That contention may be correct in that it furnishes a reason for each step in the progress of the promissory note; it does not explain what those steps achieved or were designed to achieve; the Tribunal does not believe that they achieved anything at all.
65. It was suggested to the Tribunal (and as to which we refer to the transcript of 13 August 2010) that the effect of the promissory note was to effect a change in unit holder in respect of the Unit Trust. This was put in the context of the desirability of protection of the trust property against a warranty claim. Of course it did nothing of the sort. The fact that there was a change in the unit holder had no effect whatever as to the relevant property and which was and remained (in accordance with the trust deed) the equitable estate in the Applicant’s shareholding held on bare trust for the Applicant himself (and also the equitable estate in Peter’s shareholding held on bare trust for Peter).
66. In any event the Purchaser knew nothing whatever of the trust arrangements. We deal with the Sale Agreement in more detail later in these reasons. If the Purchaser had brought an action for damages in consequence of breach of warranty it would have been brought against the brothers who could not have pleaded that the wrong defendant had been sued. Nor did the Unit Trust arrangement offer any protection in respect of the asset involved. The Applicant was the legal and equitable owner of his shareholding before the Unit Trust arrangement was entered into and he remained the legal and equitable owner thereafter. A claim by the Purchaser would have sounded in money; on the basis that; if money was paid into the Unit Trust that money would have been held on bare trust for the Applicant (and Peter). Nothing whatever was achieved as regards the alleged protection and the promissory note appears to have been nothing more than a meaningless arrangement designed by way of camouflage. The same might be said of the Family Trust and which was apparently a discretionary trust; there was no aspect of the trust arrangement which was in any way discretionary in any sense which is relevant for the purposes of these reasons.
67. The evidence by the Applicant as regards asset protection is not worthy of credit. (It is in this particular context that the evidence of Mr Bonnell might have been of assistance.) There is one factor above all else which indicates how untruthful this evidence is and that arises from the fee of $750,000 paid to Mr Bonnell of his firm. The Applicant would not have paid that very high fee otherwise than to avoid tax and certainly not to avoid a warranty claim or, as was also alleged, to avoid stamp duty. Stamp duty on the transfers to the Purchaser would have been paid by the Purchaser. The brothers purported to vest the equitable estate in their shares in themselves as trustee of the Unit Trust by a written offer accepted by conduct and so that as stamp duty law stood at that time no duty was payable.
68. The real answer appears to be that having set up the Unit Trust arrangement the brothers simply ignored it and treated it as if it did not exist. The Tribunal refers in this context to Part F as to the Sale Agreement which effectively treats the trust arrangement as if it did not exist.
Part F: The Sale Agreement
69. On 30 October 2000, Peter and Gregory entered into an agreement to sell their respective shares in Mactek to Radiodetection Australia pursuant to a written “Share Purchase Agreement”: TG19-135. There is nothing in the Share Purchase Agreement which indicates that the shares are held by them as trustee only. Indeed, the warranties set out in Schedule 1 are directly inconsistent with such a proposition. Schedule 1 set out warranties and clause 1 of Schedule 1 provided:
1 Shares and capital
1.1 No investments
...
1.2 No Encumbrances or Arrangements - Shares
(a)The Shares are free of all Security Interests and other third party interests or rights.
(b)The Shares can be sold and transferred without the consent of any other person and free of any pre-emptive rights or rights of first refusal or similar rights.
(c)The Shares have been validly allotted and issued, are fully paid and no money is owing in respect of them.
(d)There are no voting agreements or arrangements with respect to the Shares.
(e)The Company has no obligation to issue or allot, and no person has the right to call for the issue, allotment or transfer of, any shares or other securities in the Company at any time.
(f)There are no issued securities of the Company with conversion rights to shares or securities and there are no agreements or arrangements under which options or convertible notes have been issued.
(g)There are no agreements or arrangements between the shareholders in the Company relating to the control, management or funding of the Company.
1.3Issued capital
The Shares constitute the entire issued share capital of the Company.
1.4 No legal impediment
The execution, delivery and performance by the Seller of this agreement complies with:
(a)each law, regulation, authorisation, ruling, judgment, order or decree of any Governmental Agency;
(b)any Security Interest or other agreement or document which is binding on the Seller in relation to the Shares and the Company.
70. Clause 17 in Schedule 1 warranted that the Company records were up to date and had been fully and accurately maintained. The share register (TG33-342) did not disclose – because it did not occur – a transfer of the shares owned by Peter and Gregory respectively to themselves as trustee on 26 October 2000. The Purchaser must have assumed, as in fact occurred, that it acquired the legal and beneficial interest in the shares as to one half from Peter and as to the remaining one half from Gregory. (We accept as noted elsewhere in these reasons that trust interests are not generally recorded in share registers.)
71. The price payable for the shares was the sum of “the Initial Amount” and “the Earn-Out Amount”: cl 3.2. Those amounts were payable in accordance with clause 4: cl 3.2. The “Initial Amount” was defined to mean $3,000,000. The “Earn-Out Amount” was defined to be the amount payable under clause 4.3. Clauses 4.3 and 4.5 provided:
4.3Payment of Earn-Out Amount
(a)Subject to clauses 4.4 and 4.5, as soon as possible after an Earn-Out Statement has been agreed or determined under clause 4.2, the Buyer must pay to the Seller a sum equal to 12.5% of the value of the Eligible Sales, after deducting amounts payable by the Company in respect of GST for the Eligible Sales, set out in the Earn-Out Statement.
(b)The Buyer will have no obligation to make payments under this clause:
(1) in respect of Eligible Sales after 31 October 2005; or
(2)to the extent that the aggregate amount of all payments required under clause 4.3(a) and 4.5(a) would exceed $15 million.
(c)Any set off by the Buyer under clause 4.4 is to be ignored in determining the aggregate amount of payments for the purposes of clause 4.3(b)(2).
...
4.5Prepayment of Earn-Out Amount
(a)On the Completion Date the Buyer must pay to the Seller the Advance Amount in Immediately Available Funds, by way of partial prepayment of the Earn-Out Amount.
(b)The Seller must apply the Advance Amount towards any Earn-Out Payments required to be made by the Buyer at a rate of $0.50 in the dollar, so that the Buyer will be obliged to pay only one half of each Earn-Out Payment until (but only to the extent that) the entire Advance Amount has been so applied.
(c)To the extent that the Earn-Out Payments to be made by the Buyer under this agreement total less than the Advance Amount, the Seller must repay the difference to the Buyer as soon as possible after the Earn-Out Statement in respect of the period ending on 31 October 2005 has been agreed or determined.
72. Completion was dealt with in clause 6 and was on 31 October 2000, or such other time as was agreed. Amounts totalling $8,303,958 were received from Radiodetection Australia for the shares: TG37-384. The assertion in Exhibit A2, that only an amount of $7,453,912.46 was received, is not supported by any reliable documentary or other evidence. It is possible that the capital proceeds may have been paid directly to some other recipient (and for example Mr Bonnell’s firm) at the direction or request of Gregory or Peter. (The amount now asserted to be the capital proceeds is approximately $850,000 less than previously admitted.) There is simply no reliable evidence before the Tribunal for us to conclude that the amount of $8,303,958 is excessive (or what the correct amount is, if not that amount).
73. The Share Purchase Agreement was executed by Gregory (by his attorney and solicitor, Bryan Killalea) and Peter in their personal capacity, not as trustee: TG19-176.
74. The share register does not disclose any transfers by the Applicant or Peter respectively to themselves as trustee either on 26 October 2000 or at all (TG33-342); the share register records only the transfers by the Applicant and Peter individually of their shares in the Company to the Purchaser. The Tribunal accepts that, as submitted by Mr Young, share registers do not record trust interests. We consider, nevertheless, that having regard in particular to the Sale Agreement the Applicant and Peter acted inconsistently with their contention that there were any relevant trust interests.
75. The letter of offer dated 26 October 2000 and the draft Trust Deed (and the remaining transaction documents relating to the events on 26 October 2000) were provided to the ATO under cover of a letter dated 17 November 2004 (TG22-183) from Morton O’Leary, Chartered Accountants (signed by Mr Morton) which included (emphasis added):
We now enclose a copy of the documents that evidence transactions entered into on 26 October 2000 by Greg and Peter MacMahon to vest their shares in Mactek Pty Limited in the Hill End Unit Trust.
The transactions proceeded by way of written offers and oral acceptances. The effect of the transactions was to create the Hill End Unit Trust by way of resulting trust. The delivery of the share certificates and the agreement to allot units providing the consideration for the transactions.
We submit that these transactions did not trigger a capital gains tax event. There was no change of ownership on the creation of the Hill End Unit Trust. Further there was no trigger event in relation to the creation of a trust because the trust was not created either by way of declaration or settlement.
At the time Greg and Peter MacMahon redeemed their units there was no taxable capital gain as they had a cost base in their units equal to the market value of the shares at the time of the allotment of the units. The Hill End Unit Trust made no taxable capital gain because it had a cost base in the shares in Mactek Pty Limited equal to the market value of the shares.
We are currently preparing the tax returns for the Hill End Unit Trust and the two family trusts.
It is relevant to note that tax returns were not submitted at or about the date of the letter by the Chartered Accountants and were in fact submitted only after the Respondent commenced audit enquiries.
76. The documents which were attached to the letter dated 17 November 2004 from Morton O’Leary commenced with a cover page entitled: “Documentation to Vest Equitable Interest of Property in Unit Trust”.
Part G: Halloran’s case and the unit trust
77. The Applicant, as set out in clause 75, contended that the steps taken had the effect that there was a resulting trust; that resulting trust could of course relate only to the beneficial interest in the Applicant’s shares in the Company. The basis upon which that claim was made is entirely unclear; in any event, the Applicant later (and correctly) abandoned it; the Applicant then claimed, in contrast, that it resulted in a constructive trust coming into being. We do not accept that there was any occasion upon which there was a remedy by any person against the Applicant which could or did result in the imposition of a constructive trust.
78. The Applicant contends that the steps taken in this matter are identical to the steps taken in Halloran v Minister Administering National Parks and Wildlife Act 1974 (2006) 229 CLR 545 (“Halloran”) where the High Court held that a trust could in certain circumstances arise in equity where an equitable interest in property vested in trustees in the manner which occurred in Halloran’s case.
79. It is relevant at the outset to note that Halloran’s case was decided in 2006 whereas the Sale Agreement was completed in October 2000 and so that it is not possible for the Applicant to contend that the structures were entered into in 2000 in reliance on Halloran’s case.
80. It is relevant to note that, as indicated previously, Mr Young issued an opinion in August 2001 and in which, while he reserved on the effect of Part IVA, he in effect approved the steps taken and the purpose sought to be achieved by them.
81. The Respondent contends in RS that this case is not “identical to” or “on all fours” with Halloran’s case; we refer in this context to clauses 88 to 93 of RS (omitting footnotes) as follows:
88.In his written submissions, the applicant no longer places reliance on the existence of a resulting trust. Now, the contention is that there is a constructive trust. Again, the contention is misconceived. The applicant always held the legal title to (and beneficial interest in) the shares until he sold that legal title (and beneficial interest) to Radiodetection. There was never any occasion for any remedy against himself which could result in the imposition of a constructive trust.
89.The applicant submits that the present case is “identical” to, and “on all fours” with, Halloran v Minister Administering National Parks and Wildlife Act 1974 (2006) 229 CLR 545 (“Halloran”). That is simply not so.
90.Before identifying the fundamental difference, it is to be noted that the High Court did not accept that the scheme in that case worked; it assumed it did for the purpose of disposing of the appeal. The intention of the scheme was that Sealark would acquire legal title to land (from Pacinette under a court approved scheme of arrangement) and sell that legal title to Pacinette (as trustee) in consideration for the issue of A class units in a unit trust which had already been created – see at [44]. However, Sealark never acquired legal title to the land; Sealark “had an unregistered, and, in that sense, an equitable interest” – see at [37], [46]. The majority concluded:
[47]On one view, the scheme represented by these steps failed by reason of misidentification of the subject-matter. But the ultimate issue concerns the existence of a compensable interest in Pacinette at the resumption date. The appeal may be considered on the footing that what was proposed and what was actually done was in respect of properly identified subject-matter.
91.In Halloran, the unit trust was created before the vesting of the equitable interest in land in the unit trust in exchange for units – see at [49], [50]. In the present case, it is asserted that the unit trust came into existence by the vesting of the equitable estate in the shares. If that failed (as it did), the unit trust in the present case simply does not exist.
92.The steps in Halloran “were intended to vest in Pacinette the beneficial interest in land previously owned [beneficially] by Sealark” – see at [50]. It is to be noted that the majority describe Sealark’s interest in the land interchangeably as an “equitable interest” and a “beneficial interest” – because there is no difference. Steps (vi) to (x) set out at 229 CLR 564 represent the steps intended to vest the beneficial interest in Pacinette as trustee of the unit trust. This is where the present case is fundamentally different. In Halloran, the unit trust actually got the beneficial interest. (Thus, at [75], the majority noted “Sealark would not have any interest in any particular part of the Trust Fund or in any investment thereof”.) In the present case, the terms of the trust deed are wildly different and the opposite conclusion must be reached: the terms of the trust deed here include that the very beneficial interest purportedly transferred is held beneficially by those who transferred it. The Trust Deed here provided:
(a)Step 1 – Letters were written by Gregory and Peter to offer the equitable interest in their Mactek shares to the Unit Trust. At this meeting Gregory and Peter presented the letters of offer to vest the equitable interests in the shares of Mactek in the Unit Trust, and as trustee for the Unit Trust they purport to have accepted the offers.
(b)Step 2 – Gregory and Peter created family trusts for the benefit of themselves and their families. The deeds for these trusts were executed on this day but they were not stamped until 6 November 2000.
(c)Step 3 – Gregory and Peter delivered the title documents to the shares to the trustee of the Unit Trust. At this meeting it had been resolved that Gregory and Peter should each be allocated 3.75 million $1 units in the Unit Trust. Both brothers continued to hold the title of the shares in Mactek. The allocation of units was recorded in the register of units.
(d)Step 4 – At this meeting the trustee had resolved to allocate 3.75 million $1 units to each of the family trusts. The allocation was “paid for” by promissory notes issued by Gregory and Peter as trustees of their family trusts. The allocation was recorded in the unit register.
(e)Step 5 – Gregory and Peter requested the redemption of the units. At this meeting the trustee (Gregory and Peter) of the Unit Trust agreed to redeem the units allocated directly to Gregory and Peter using the promissory notes received from the family trusts as payment. The redemption was noted in the unit register.
(f)Step 6 – Gregory and Peter gifted their promissory notes to their family trusts.
(g)Step 7 – The purchase contract (Sale Agreement) was executed. Gregory and Peter sold 1,000 ordinary shares to the Australian subsidiary of a foreign company. The contract was completed on 31 October 2000.
(h)Step 8 – Most of the sale proceeds were (so it is alleged) banked into the Unit Trust’s bank account.
The Applicant now concedes that those steps comprise a scheme: 13/08T19.22 to .27.
Section 177C – the “tax benefit”
102. The next question is whether the Applicant obtained “a tax benefit in connection with a scheme”. The answer depends, relevantly, on whether an amount was not included in the assessable income of the Applicant where that amount would have been included, or might reasonably be expected to have been included, if the scheme had not been entered into or carried out.
103. What might “reasonably be expected” to have occurred “if the scheme had not been entered into or carried out” has been referred to in the cases as the “counterfactual” (for example, Commissioner of Taxation v Lenzo [2008] FCAFC 50 at [106]; (2008) 167 FCR 255 at 274), or sometimes as the “alternative postulate” (Commissioner of Taxation v Hart [2004] HCA 26 at [66]; (2004) 217 CLR 216 at 243).
104. That counterfactual, or alternative postulate, must be a “reasonable” one. And as the High Court said in Commissioner of Taxation v Peabody [1994] HCA 43 at [31]; (1994) 181 CLR 359 at 385:
… A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.
105. The Commissioner submitted in RS at clause 112:
Here, it is tolerably clear that the taxpayers would have sold their shares directly to Radiodetection. They only chose to alter the structure of the transaction on or around 6 October 2000 when they requested “tax-driven” changes. In fact, those changes were not even implemented until 26 October 2000. The tax benefit was the non-inclusion of the net capital gain in assessable income. No contrary evidence was led; no contrary submission was put.
106. That is undoubtedly correct.
Section 177D(b) – the general principles
107. The question in s 177D is whether, having regard to the eight matters in paragraph (b), and only those matters, “it would be concluded” that the dominant purpose of the taxpayer’s entry into the transaction was to obtain a tax benefit. In that context, the following propositions have been established:
(a)The fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D (Hart, at [15]; 217 CLR 216 at 227, per Gleeson CJ and McHugh J);
(b)Equally, the existence of a rational commercial objective does not mandate a negative answer to the question (Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 416, per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ);
(c)There is no room in the enquiry under s 177D for a consideration of the subjective purpose or motivation of a particular person, because that is not one of the eight matters specified (Commissioner of Taxation v Sleight [2004] FCAFC 94 at [67]; (2004) 136 FCR 211 at 229-230, per Hill J; Hart, at [65]; 217 CLR at 243, per Gummow and Hayne JJ); and
(d)Some of the eight matters may point one way, others may point in the opposite direction, and some may be neutral: it is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers (Peabody v Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531 at 543, per Hill J).
108. The Applicant submits that it would not be concluded that he entered into or carried out the scheme for the purpose of enabling him to obtain a tax benefit. Clauses 35-38 of AS read as follows:
35.In the instant case, viewed from the standpoint of an impartial reasonable minded observer, objectively viewed, the arrangements to vest the equitable interest in the Mactek shares in the Hill End Unit Trust as a constructive trust had the following commercial purposes:
(a)It secured asset protection by removing ownership of the purchase moneys from the applicant personally and having those purchase moneys as an asset ultimately held through a family discretionary trust;
(b)It had the consequence that any attempt by Radiodetection to enforce their indemnities under clause 9.4 of the sale agreement against the applicant personally would not succeed;
(c)It avoided, as the arrangements in Halloran would demonstrate, the imposition of stamp duty on a written declaration of trust of the Mactek shares.
36.Here the unchallenged evidence of the Applicant was that he was concerned about potential claw back of the purchase price as a set-off under clause 4.4 of the sale agreement by Radiodetection (witness statement 3 August 2010 at para 8). The Applicant did not wish to be personally liable to Radiodetection and the constructive trust structure and underlying discretionary trust was set up to protect him from any Radiodetection claim (witness statement at para 10). The applicant’s employment with Mactek was subsequently terminated (para 14). Further the applicant was informed of attempts by the American parent company of Radiodetection that it was investigating means of commencing proceedings pursuant to clause 4.4 (para 15).
37.In FCT v Mochkin (2003) 127 FCR 185 the taxpayer, having settled litigation concerning his stockbroking business previously carried on in his name was not thereafter prepared to carry on the broking business in his own name. He refused to accept personal liability to other brokers for client defaults. At page 206 paragraph [82] the Sackville Merkel and Kenny JJ said:
“Nor is the present case one where the Taxpayer simply substituted a corporate entity for his own services. Daccar and Ledger accepted that they were liable for the default of their clients. Ledger made good such defaults. The willingness of Daccar and Ledger to indemnify the various brokers against client defaults was essential, from a commercial perspective, to the conduct of the business. In this sense, Daccar and Ledger provided a "service" that, on the objective evidence, the Taxpayer was simply not prepared to provide. Unlike the Taxpayer in Case W58, the Taxpayer in this case was unwilling at any time after February 1988 to provide the full range of services essential to generate commission income in his own right.” (Emphasis added)
Subsequently at paragraph [89} the Court stated:
“The corporate vehicles were essential to achieve the Taxpayer's commercial objectives of avoiding exposure to personal liability.”
38.Within the decision in Mochkin, the Court concluded that a reasonable observer would conclude that the objectively ascertained purpose of the arrangement was asset protection and the avoidance of an actual or apprehended personal liability. In the applicant’s contention, a similar conclusion should be drawn in this case and refers to and relies upon the discussion of factors in sec 177D(b) contained in the Applicant’s objection at T47-481-484 as if contained in and herein reproduced.
109. The Applicant in his objection (and we have included paragraph numbers as a matter of convenience) said:
(1)I submit that the sole or dominant purpose of undertaking these transactions was not the purpose of tax avoidance. The transactions were undertaken in the way they were undertaken to achieve a number of purposes. The first and dominant purpose was to achieve asset protection.
(2)The sale of the Mactek shares exposed us to great financial risk from possible law suits by Radiodetection Limited. This threat is still real and correspondence is available to show that Radiodetection has threatened us with legal action.
(3)Undertaking the transactions in the way we did protected the proceeds of sale of shares from the day we undertook the transaction until the last of the proceeds were received. Your position paper on Part IVA suggests that there was no significant commercial result achieved by these transactions and that is simply not the case. On the day the transactions occurred we retained legal ownership of the shares but divested ourselves of the economic benefit of ownership. We did this by way of gift to the family trusts. As more than four years has passed that gift cannot be undone by a trustee in bankruptcy and the value of the shares is preserved in the trusts, regardless of whether Radiodetection sues us personally.
(4) This was the dominant purpose of the transactions.
(5)It was essential to fulfilling this purpose that Radiodetection was not made aware of the divesting of our economic interest in the shares. If Radiodetection became aware that the value of the shares would be captured in the Family Trusts, beyond the reach of any claims by it, then Radiodetection would have undoubtedly sought guarantees and indemnities from the Family Trusts making the transactions pointless.
(6)The next reason for undertaking the transaction in the way it was done was to avoid stamp duty on the change of ownership of the shares. Vesting shares in the trust in this way, without triggering a change in beneficial ownership of the shares would avoid the payment of duty.
(7)Your position paper on Part IVA considers the 8 factors prescribed by law to determine whether the transaction was carried out for the dominant purpose of tax avoidance. I will address a number of your conclusions, referring to the paragraph numbers in which they are discussed.
(8)Paragraph 47 states that there was no commercial or business sense in retaining legal ownership. As discussed above there clearly was a commercial benefit of not disclosing the movement of the economic value of the shares from me to the Family Trust to Radiodetection.
(9)Paragraph 47 also states that the transactions only proceeded once the sale to Radiodetection was to proceed. Again this makes commercial sense from an asset protection perspective because until that sale I was not exposed to any unknown significant liability. There was therefore, no need prior to the sale, to divest myself of the economic value of the shares.
(10)The round robin nature of the transaction is not “artificial and contrived”. It was a sensible way to achieve the result sought after. A declaration of trust over the shares in favour of my family trust would have resulted in a stamp duty bill of $375,000.00. A gift of the proceeds of sale of the shares would only be effective from the date of receipt of the proceeds, as this was an instalment transaction this would not have achieved the commercial result sought after.
(11)Finally the fact that the transactions occurred on one day has no significant bearing that the transaction was done for the purpose of tax avoidance.
(12)The form and substance of the scheme achieved significant commercial and economic benefits for me. It meant that from that day on the economic benefit of selling the shares vested in my family trust and not in me personally. The significance of this is totally missing from your discussion of the transactions in paragraph 48. Indeed paragraph 48 states that I was to enjoy the real economic enjoyment of the sale by way of loans. That completely misstates the effect of the transaction. My brother and I owe significant amounts of money and the Family Trusts will provide for our families the real economic enjoyment of the transaction. Your failure to understand the economic significance of the transaction undermines the validity of the conclusion that you come to that the transaction was undertaken for the sole or dominant purpose of tax avoidance.
(13)Paragraph 49 discusses the time at which the scheme was entered into and again the occurrence of the transactions prior to the sale of the shares was crucial to achieving the commercial intentions of the transaction.
(14)Paragraph 50 concludes that if the transaction had not been undertaken then a simple sale of shares would have proceeded. This is not true. My brother and I would not have sold our shares if we did not believe that we could effectively protect the proceeds of sale from claims in the future by Radiodetection. If the transaction vesting the shares in the HEUT did not proceed then a sale of the shares in Mactek would not have proceeded either. Therefore there would be no capital gain but for the vesting of shares in this way.
(15)Paragraph 51 again misrepresents the financial effect of vesting the shares in HEUT. I personally owe a large sum of money and that debt would not have existed without undertaking the arrangement.
(16) I therefore submit that Part IVA cannot apply for two reasons:
i.The transaction was undertaken for the dominant purpose of providing asset protection (Mochkin v Federal Commissioner of Taxation (2002) ATC 4465) by transferring the economic enjoyment of the sale to my family trust and creating in me a significant liability; and
ii.But for the transaction providing the benefits in paragraph i I would not have entered into the sale with Radiodetection as the risk of future litigation would have outweighed the benefits of the sale.
110. An obvious point to note – and this is relevant to paragraphs (1), (4) and (6) in particular – is the Applicant’s focus on the dominant purpose of the scheme (or the dominant purpose of the Applicant in carrying out this scheme) as asset protection. But the assertion is put in terms of the Applicant’s own, personal, subjective purpose – and, as is stated in Sleight and Hart ([107](c) above), there is no room in the enquiry under s 177D for a consideration of subjective purpose.
111. If, however, asset protection were to be objectively identified (by reference to the eight factors in s 177D(b)) as the purpose (or one of the purposes) of the entry into or carrying out of the scheme, then that may be relevant – but only if it were found to be, objectively, the sole or (by s 177A(5)) the dominant purpose. For, as was stated in Spotless ([107](b) above), the existence of a rational commercial objective does not mandate a negative answer to the question under s 177D.
112. Against that background, we now address, in turn, each of the eight matters in s 177D(b) of the Act.
The first matter – the manner in which the scheme was entered into or carried out
113. It was only after the brothers had decided to sell their shares to Radiodetection that they launched themselves down the path of the scheme. It is said that the scheme would provide protection in the event that Radiodetection should allege a breach of warranty; what is not said is why the particular scheme, and no other, would achieve that end. The arrangement overall, of course, is highly contrived and artificial, and if the proper taxation outcome is as favourable to the Applicant as is submitted on his behalf, then it is no surprise that the fee paid to Bonnell Rowntree was as large as it was.
114. That is not to say that a person, when faced with a range of possible arrangements, is obliged to fix upon the one which provides the least favourable taxation outcome, for fear that Part IVA would otherwise be attracted. But what is particularly noteworthy about this matter is the apparent assiduity with which the Applicant has determined to keep the full story beyond the Tribunal’s reach.
The second matter – the form and substance of the scheme
115. The form of the scheme is that there would be created a unit trust, in which would vest the beneficial interest in the Applicant’s shares, and which would dispose of that interest to a third-party purchaser.
116. The substance of the scheme is that the Applicant – who, despite the vesting in the unit trust of the beneficial interest in the shares, would retain the beneficial interest in the shares – would dispose of his shares without incurring a liability to include the net capital gain on that disposal in his assessable income.
The third matter – the time at which the scheme was entered into and the length of the period during which the scheme was carried out
117. The scheme was entered into after the Applicant and his brother had decided to sell their shares in Mactek to Radiodetection. In the space of a few weeks they implemented the scheme and then, all on the one day, they carried out the six distinct steps as set out in [101] above. A few days later they carried out the remaining two steps.
The fourth matter – the result in relation to the operation of this Act that, but for Part IVA, would be achieved by the scheme
118. If the scheme was effective, the result for taxation purposes (but for Part IVA) is that a net capital gain which would appear to have accrued to the Applicant is assessable in the hands of no-one.
The fifth matter – any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme
119. The Applicant will have disposed of his legal and beneficial interest in the Mactek shares without having any liability to include in his assessable income the net capital gain arising from that disposal. This is despite the fact that the benefit of the sale proceeds accrued to him through the so-called loan that the Unit Trust is alleged to have made to him (and as to the repayment of which, or the terms of any such repayment, there is no evidence).
The sixth matter – any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme
120. Bonnell Rowntree (which has, or has had, a business connection with the Applicant) received payment of $1.5 million in fees, directly (as we find) as a result of the scheme and the tax savings that are said to arise from it.
The seventh matter – any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out
121. Despite an expectation that the net capital gain may have shifted from the Applicant to the Unit Trust, the Unit Trust did not (according to the Applicant) derive a net capital gain because its cost base was equivalent to the capital proceeds on disposal.
The eighth matter – the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)
122. There is nothing relevant to this matter that we have not already dealt with.
An overall assessment of the eight matters
123. The dominant purpose, concluded in accordance with Part IVA, for the scheme was the obtaining of a tax benefit, namely the non-inclusion of a net capital gain in the assessable income of the Applicant. Given the state of the evidence, this conclusion is inescapable.
124. This is a case where each of the factors to be taken into account under s 177D(b) points clearly against the taxpayer. There is no need to undertake the (often difficult) task of weighing the factors pointing one way with those pointing the other; we can say without hesitation that if there has been a more straightforward case under Part IVA we are not aware of it.
125. For completeness, and as foreshadowed in clause 97 above, we determine under s 177F(2) that the amount of the Event A1 capital gain caught by s 104-10 of the Income Tax Assessment Act 1997 be included in the net capital gain brought into assessable income by s 102-5 of that Act.
Part I: Sign –on fees
126. We commence by including (with approval) clauses 125 to 137 (omitting footnotes) of RS as follows:
125.On 31 October 2000, Gregory entered into a contract of employment with Mactek (TG18-129 to TG18-134) (“Employment Agreement”). Under the Employment Agreement, Mactek employed Gregory as Executive Directors [sic] commencing 1 November 2000: TG18-129.
126.Apart from a base salary of $100,000 per annum to be paid monthly by direct bank deposits into a designated bank account, the Employment Agreement provided that Gregory was entitled to what was labelled “contract sign-on fees” of $300,024.00 (“Sign-On Fees”). The Sign-on Fees were to be paid in 36 monthly instalments of $8,334.00 (“Instalments”) to bank accounts specified by Gregory, commencing being 30 November 2000: TG18-130.
127. Clause 6.2 of the Employment Agreement provided:
Contract Sign-On Fee
The Company [Mactek] will pay you a contract sign-on fee of $300,024.00 to be paid by 36 monthly instalments of $8,334.00 each, paid into a bank account specified by you, the first instalment to be paid on 30 November 2000…
128.The Employment Agreement provided that, in the event that the employment of Gregory terminated within three years from 1 November 2000 (unless either party gave twelve months notice of termination), the employer was not required to continue paying the Instalments following the date of termination. Clause 6.2 provided:
…if your employment terminates within 3 years of the Commencement Date for any reason (other than under clause 9.2), the Company will not be obliged to pay any instalments of the sign-on fee that would otherwise have been due for payment after the date your employment terminates.
129.Clause 9.2 of the Employment Agreement concerned “Termination with Notice”. That clause provided:
Termination with Notice
At any time after 1 November 2002 you or the Company may give 12 months written notice terminating your employment. In the event that notice of termination is given by you or by the Company, the Company may:
(a)require you to continue to work for part of the whole of the notice period or may, in its absolute discretion, make a payment in lieu of the unworked period of the notice, such payment to be calculated by reference to your Total Employment Cost at the date of termination of your employment;
(b)require you to cease carrying out your then current duties and responsibilities with effect from such date as may be nominated by the Company and to undertake alternative duties and responsibilities;
(c)appoint, with effect from such date as may be nominated by the Company, another person to undertake as your successor your then current duties and responsibilities;
(d)require you to resign from any position as a director or other office holder of the Company or any other group company with effect from such date as may be nominated by the Company; and/or
(e)change your then current title to such other title as may be nominated by the company.
For the purposes of the above clause, and the Employment Agreements generally, “Total Employment Cost” means […]
130.The Employment Agreement provided for the payment of “discretionary performance based bonuses as awarded time to time (clause 6.4)”. Such “bonuses” were to be paid in addition to the Sign-On Fee: TG18-130. No discretionary bonuses were paid to the applicant during the relevant period: TG28-257.
131.The Employment Agreement also provided for superannuation contributions to be made to the MacMahon Superannuation Fund (clause 6.3):
The Company will make superannuation contributions on your behalf as required by applicable legislation to the MacMahon Superannuation Fund, governed by a trust deed dated 17 August 1999 as amended from time to time, or if it is unable to make contributions to this fund for any reason, to such other fund as the Company determined.”
132.The employment of Gregory ended after the three year period provided for in clause 6.2 of the Employment Agreement (see paragraph 128 above) had passed: Statement of Gregory dated 28 July 2010, paragraph 14.
133.Instead of being paid to a bank account, Gregory directed that the employer Mactek pay the Instalments by direct debit to the Port Douglas Stichting (“Stichting”) – see the Statement Gregory filed 16 June 2009 (paragraph 13):
After the establishment of the Stichting I directed that any future payments due to be paid to me as the “sign-on fee” should be paid as a contribution to the Stichting. Mactek made these payments to the Stichting and I borrowed sums from the Stichting.
134.Between 30 April 2001 and 16 June 2003, the Instalments were regularly paid by the employer Mactek to the Stichting: TG37-390-391.
135.In a letter dated 24 October 2005 addressed to the ATO, the tax agent for Peter and Gregory states that “[a] sum of $16,668.00 was paid monthly to the Stichting by Mactek until October, 2003” and that those monthly payments were made “in fulfilment of Mactek’s obligations to pay [Gregory] a sign on fee”: TG35-358.
136.The applicant did not include the Sign-On Fee as assessable income in his tax returns (TG3-54 to TG8-93). He subsequently conceded the Sign-On Fee should have been properly assessable as ordinary income: TG38-407. Gregory now seeks to retract that concession. The applicant now says that his earlier concession was made on the basis of legal advice which misunderstood the structure of the Stichting. Despite the disclosure of the substance of that advice, no such evidence has been placed by the applicant before the Tribunal.
137.On 12 May 2006, amended assessments were issued which included the Sign-On Fee in his assessable income for the income years ended 30 June 2001 (in the amount of $135,988), 30 June 2002 ($108,342) and 30 June 2003 ($100,087): TG44-454 to 44-457.
127. It is abundantly clear that the sign-on fee was a reward for service to be provided and constitutes assessable income according to ordinary concepts. RS includes considerable authority as to the tax treatment of sign-on fees, but it is not necessary for us to refer to those authorities. The clear fact is that the sign-on fees were derived by the Applicant and were assessable in his hands and his direction that the fees be paid to the Stichting overseas achieved nothing to disturb the plain fact that he derived them. We refer in particular to clause 11 of Exhibit A1 which sets out in clear terms that instalments of the sign-on fee were to continue only for so long as the Applicant continued in employment.
128. AS contains a contention to the effect that the sign-on fees attracted fringe benefits tax payable by the Company: cl 48. In clause 33 of SAS the Applicant contended that payments for the benefit of employees are fringe benefits and taxable as such. The Applicant then in clause 34 of SAS suggests, in the alternative, if the Commissioner is correct that the second and subsequent payments fall within the Commissioner’s ruling on salary sacrifice and superannuation. The plain fact is that the sign-on fee was contracted for and was payable to the Applicant and would no doubt have been paid to him if it had not been paid in accordance with his direction to the Stichting. The Applicant was correct when he conceded that the sign-on fee was taxable; see clause 136 of RS quoted above. His witness statements do not deal with his admission and subsequent retraction of that admission.
Part J: Payments in respect of credit cards
129. RS contains detailed contentions as to why payments from the Stichting alleged to be loans are not true loans; see RS clauses 157 to 181. The Applicant did not dispute the content of RS in this context and has not advanced any evidence to contradict it. We hold, accordingly, that the alleged loans were not true loans.
130. The Applicant contends that to tax the credit card payments in addition to the sign-on fees would amount to double counting; clause 51 of AS reads as follows:
The unchallenged evidence of the applicant at para 13 of the statement of 16 June 2009 is that the payments into the Stichting were the amounts drawn down or borrowed from the Stichting. On the Commissioner’s analysis there is a clear double dipping assessing action to assess the same amount twice over to the one Applicant. The sign on fee is assessed as salary going into the Stichting and assessed a second time on amounts drawn down from the Stichting as loans. That assessing action, assessing the same amount to the same taxpayer, as both a deposit and a withdrawal, a movement of funds in and out of a bank account, is not authorized at law and contrary to the principle against double taxation underlying the ITAA 1936 and ITAA 1997: see Executor Trustee & Agency Co of SA Ltd v FCT (1932) 48 CLR 26 at 44 per Dixon J. This is not a case such as the double assessment to two different taxpayers: cf Richardson v FCT (1932) 48 CLR 192 and Richard Walter v FCT (1995) 183 CLR 168.
131. It will be noted that in clause 51 of AS the Applicant referred to clause 13 of Exhibit A1; clause 13 provides simply that “[the Company by direction] made these payments to the Stichting and I borrowed sums” from the Stichting.
132. The Tribunal is here concerned with specific payments made through the credit card. It was always open to the Applicant to present evidence which would establish that the credit card payments in question were in fact the same moneys which had been paid into the Stichting. To furnish that evidence would surely not have been difficult. The Tribunal cannot infer that this must be so and there is in other words no evidentiary link between the sign-on fees and the credit card payments. The Applicant chose not to furnish the necessary evidence and it follows that he does not discharge the onus.
Part K: Penalty
133. Penalties were imposed as follows:
a.net capital gain on sale of shares 50% recklessness (or scheme)
b.sign-on fee 50% recklessness
c.so-called loans from the Stichting 50% recklessness
134. It was asserted by the Applicant in his original objection (the objection relating to issues 1, 2 and 4) that he received legal advice “given to me by my solicitor and confirmed in a written advice to my solicitor from a barrister” that no capital gains tax trigger event occurred: TG47-485. Such advice from the solicitor has not been produced (if written) (see Exhibit R1, pages 4, 12) and no evidence has been given by the solicitor (Mr Bonnell).
135. The Commissioner submits that it is difficult to accept that any lawyer could have given advice that the transactions entered into had the consequence that Gregory did not need to include in his assessable income the net capital proceeds arising from a disposal of his shares, or that no CGT event was triggered. We agree. We also agree with the Commissioner’s submission that it is difficult to believe that the Applicant was ever advised that income payments made at his direction to an entity other than himself thereby escaped assessment. The earnings, of course, remain taxable.
136. The Applicant’s position is not reasonably arguable. It does not arise from “a simple straightforward reading of the decision of the High Court in Halloran” as asserted by the Applicant in paragraph 27 of AS.
137. The Applicant submits in AS:
31.It is not “recklessness” for a taxpayer to take a carefully considered position, based on High court authority, being a position as a matter of law that the Commissioner dislikes and finds unpatable [sic].
32.In the further alternative, the decision in Halloran and the taxpayer’s reliance thereupon are highly relevant matters that should be taken into account by the Tribunal in considering the question of remission within sec 298-20 of Schedule 1 of the TAA.
But that is not what happened. That the position taken was “carefully considered” rises no higher than a bare assertion to that effect on the Applicant’s behalf: there has certainly been no evidence presented to the Tribunal to support the assertion. And, of course, it is nonsense to suggest that that position, carefully considered or not, was based on High Court authority; the taxpayer could not have relied on Halloran since that case would not be decided until some six years after the transactions were undertaken and five years after lodgment of the relevant tax return.
138. There is no basis for the remission of the penalty imposed. The evidence before the Tribunal, and the manner in which this case was conducted, indicates in the clearest possible terms that the Applicant entered into a highly complex but contrived and artificial scheme (some of the steps in respect of which do not appear to serve any purpose other than that of obfuscation) for the sole purpose of avoiding tax. Not content with avoiding tax on his capital gain he also entered into an equally artificial and blatantly tax motivated scheme to avoid income tax on his sign-on fees. His conduct in our view was within the very highest degree of recklessness and was undertaken with no objective other than the avoidance of tax for which he was legally liable. It follows that the rate imposed was the correct one. If our analysis of the transactions in Part G of these reasons is wrong then Part IVA clearly applies, and in that event the penalty imposed by s 284-145(1) is also 50%. We do not think there are any grounds for reducing the rate of penalty imposed.
Part L: Conclusion
139. The Applicant contends (in SAS) that when the Respondent decided not to cross-examine the Applicant it followed that Exhibits A1 and A2 must of necessity be accepted in their entirety. A close examination of those exhibits demonstrates the fallacy in this contention. In Exhibit A1 the Applicant claimed that he was motivated by considerations of tax and also considerations of a possible warranty claim. Exhibit A2, by contrast, says nothing whatever of considerations of tax, but does set out (and largely through statements of a hearsay nature) that advice was required in respect of possible warranty claims; Exhibit A2 refers in particular to certain threats (never specified as to any particular warranties or any alleged breaches or as to the damages said to be likely to flow from them) and in one case made long after the Sale Agreement was completed. Neither exhibit makes any mention of the fee paid by each of the Applicant and Peter to Bonnell Rowntree in an aggregate amount of $1,500,000, an amount which cannot have been calculated in accordance with time spent or any other proper and rational basis. If there was a genuine fear of a warranty claim there would have been evidence as to the warranty alleged to have been breached and also as to the damages which might result from such a breach. There was in fact no evidence of any kind by anyone at all as to any of these aspects and in particular there was no evidence by the professionals involved and in particular Mr Bonnell and Ms Dodd. Mr Young contended, as noted earlier in these reasons, that this case was in effect warranted by the judgment of the High Court in Halloran, but again as set out previously the Sale Agreement predated Halloran by some six years. The two witness statements are remarkable not so much for what they do say (and they say very little), but for what they do not say. Exhibit A2 was prepared at a time when the Applicant was fully aware of the case against him and his failure to deal with it must be fatal to him. Overall, the evidence before the Tribunal indicates a flagrant attempt to avoid capital gains tax by entirely artificial means coupled with an attempt to avoid income tax on the sign-on fee through a direction that it be paid to the Stichting. All of this was sought to be achieved by the most artificial and contrived means and not excluding for this purpose the loan arrangement between the Applicant and the Stichting. The aggregate amount of $1,500,000 was paid to Bonnell Rowntree for the structure and not for advice as to warranties; the amount involved is such that in the absence of evidence to the contrary no other conclusion is possible. It may be noted that here too the evidence is not credible. As we have noted, Mr Killalea acted on the Sale Agreement, but is alleged to have warned that advice as to warranty liability should be obtained from on accountant.
140. In all the circumstances the objection decisions under review must be affirmed.
I certify that the 140 preceding paragraphs are a true copy of the reasons for the decision herein of Mr Julian Block, Deputy President and Mr S E Frost, Senior Member
Signed: ..............[sgd]..................................................................
AssociateDates of Hearing 10, 12, 13, 17 August 2010
Date of Decision 23 September 2010
Counsel for the Applicant Mr I Young
Solicitor for the Applicant Jade Lawyers
Counsel for the Respondent Mr T Thawley and Mr G O’Mahoney
Solicitor for the Respondent ATO Legal Services Branch
- AGLC
- MACMAHON And COMMISSIONER OF TAXATION [2010] AATA 724
- Case
- [2010] AATA 724
- Decision Date
CaseChat Overview and Summary
The court examined whether the taxpayer had established a trust and if the beneficial interest in certain shares had vested in that trust. The court scrutinised the nature of the transactions and whether they were genuinely commercial or part of an arrangement to reduce tax liability. It also explored the relevance of the promissory note and other related transactions in determining the taxpayer’s tax obligations. The court evaluated the applicability of Part IVA, which targets general anti-avoidance rules, to the taxpayer’s arrangements, considering whether the taxpayer had engaged in a scheme to gain a tax benefit. Furthermore, the court assessed the assessability of the sign-on fee and payments made by credit card under the Income Tax Assessment Act 1997.
In its reasoning, the court concluded that the objection decisions under review should be affirmed. The court found that the taxpayer had not established a trust in the manner claimed, and the beneficial interests in the shares did not vest in the trust as alleged. The court held that the promissory note and related transactions did not alter the fundamental nature of the arrangements. The court determined that Part IVA applied to the taxpayer’s arrangements, finding them to be part of a scheme designed to gain a tax benefit. Consequently, the sign-on fee and credit card payments were found to be assessable income. The court upheld the penalty imposed by the Commissioner of Taxation.
The final orders of the court affirmed the objection decisions under review, upholding the assessments made by the Commissioner of Taxation. The court found in favour of the Commissioner, confirming the tax liabilities and penalties imposed on the taxpayer.
Orders
Orders of the court
The objection decisions under review are affirmed.
Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
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Ratio Decidendi
Legal Principle Established
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