McCutcheon and Commissioner of Taxation
[2006] AATA 535
•22 June 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 535
ADMINISTRATIVE APPEALS TRIBUNAL )
) No QT2004/182, TAXATION APPEALS DIVISION ) QT2004/183
Re PATRICK DONALD McCUTCHEON
& CAROLYN ANNE McCUTCHEONApplicants
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr SC Fisher, Member Date22 June 2006
PlaceBrisbane
Decision The tribunal decides:
1. In respect of QT2004/182, the Tribunal decides to affirm the decision under review.
2. In respect of QT2004/183, the Tribunal: (1) sets aside the reviewable objection decision of 16 April 2004 in connection with the determination issued under section 177F of the Income Tax Assessment Act 1936 to Farrago (NQ) Pty Ltd ATF the AM Trust; and (2) determines under section 177F(1)(a) of the Income Tax Assessment Act 1936 that the tax benefit that is referable to an amount that has not been included in the income of the Applicant in the income year ended 30 June 1998 is an amount of $1,616,406; and (3) remits this matter to the Respondent for reconsideration in accordance with the direction that the Respondent issue a further amended assessment to income tax to the Applicant that gives effect to the Tribunal’s determination pursuant to section 177F of the Income Tax Assessment Act 1936 that the tax benefits obtained by the Applicant in relation to his participation in the scheme identified by the exclusion of income is an amount of $1,616,406 in the income year ended 30 June 1998.
........[Sgd]........
SC Fisher
Member
CATCHWORDS
TAXATION – Income Tax – Determination - Assessment - whether issuing of two determinations but only one assessment permissible or not under s177F or Part IVA Income Tax Assessment Act –dominant purpose for tax benefit – Part IVA of Income Tax Assessment Act.
Taxation Administration Act 1953 s14ZZA - 14ZZM
Income Tax Assessment Act 1997Income Tax Assessment Act 1936
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284.Gauci v Federal Commissioner of Taxation (1975) 75 ATC 4257
Secretary, Department of Social Security v Murphy (1998) 52 ALD 268.
Ajka Pty Ltd v Australian Fisheries Management Authority [2003] FCA 248
Bantick and Secretary, Department of Family and Community Services [2003] AATA 472
Bramwell v Repatriation Commission (1998) 51 ALD 56
Collins v Minister for Immigration and Ethnic Affairs (1981) 36 ALR 598
Liedig v Commissioner of Taxation (1994) 50 FCR 461
Proctor and Commissioner of Taxation [2005] AATA 389R v Palmer [1981] 1 NSWLR 209
Hope v Bathurst City Council (1980) 144 CLR 1
Australian Kitchen Industries Pty Ltd v Albarran & Anor [2004] NSWSC 1047
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Fletcher v Federal Commissioner of Taxation (1988) 19 ATR 1765
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
WD & HO Wills (Australia) Pty Ltd v FCT (1996) 32 ATR 168
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216
Macquarie Finance Ltd v Federal Commissioner of Taxation [2004] ATC 4866
Commissioner of Taxation v Mochkin (2003) 127 FCR 185
Commissioner of Taxation v Sleight (2004) 206 ALR 511
Commissioner of Taxation v Zoffanies Pty Ltd (2003) 132 FCR 523; [2003] FACFC 236
Commissioner of Taxation v Stokes (1996) 72 FCR 160; 34 ATR 478
Federal Commissioner of Taxation v Jackson (1990) 21 ATR 104
Puzey v Commissioner of Taxation (2003) 131 FCR 244; [2003] FCAFC 197
Clyne v DCT (1981) 150 CLR 1
Fabry v Federal Commissioner of Taxation (2003) 54 ATR 64
Iddles and Commissioner of Taxation [2005] AATA 787
Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27
Calder v Commissioner of Taxation [2005] FCA 911
Ryvitch v Federal Commissioner of Taxation (2001) 47 ATR 381REASONS FOR DECISION
22 June 2006 Mr SC Fisher, Member Introduction and background
1. Patrick Donald McCutcheon and Carolyn Anne McCutcheon (the Applicants) are Australian residents and taxpayers. The Applicants were directors of Pyngrange Pty Ltd (formerly Northern Oil Pty Ltd), having assumed that office on 9 November 1987.
2. For the fiscal year ended 30 June 1998, the Commissioner of Taxation (the Respondent) disallowed objections by the Applicant against the Respondent's decision to make Part IVA determinations varying the assessable income of the Applicants. In the case of Mr McCutcheon, the Respondent varied Mr McCutcheon’s assessable income to an amount of $3,264,079. In the case of Mrs McCutcheon, the Respondent varied Mrs McCutcheon’s assessable income to an amount of $1,653,869.
3. These appeals are governed by the Income Tax Assessment Act 1936 ("ITAA 1936"), in particular Part IVA.
Jurisdiction
4. The Tribunal has jurisdiction in this appeal by virtue of sections 14ZZA – 14ZZM of the Taxation Administration Act 1953.
The Burden of Proof
5. Under section 14ZZK(a) of the Taxation Administration Act 1953, the taxpayer is limited to the grounds stated in the taxation objection to which the decision relates unless this Tribunal orders otherwise. The Applicants did not make any application to the Tribunal to vary the grounds stated in the taxation objections, so this Tribunal did not make an order to that effect. Among other things, the taxpayer has the burden of proving that the assessment is excessive or that the taxation decision concerned should not have been made and that it should have been made differently: section 14ZZK(b). In general, the taxpayer must go further than showing the assessment is excessive or wrong and show what the correct assessment should be: Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87 – 88. In the absence of evidence, the Tribunal is not able to infer facts in favour of taxpayers: McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284. The scheme of the Income Tax Assessment Act 1936 (“ITAA 1936”) and the ITAA 1997 does not place any onus on the Respondent to show that the assessment was correctly made: Gauci v Federal Commissioner of Taxation(1975) 75 ATC 4257 at 4261.
The Decisions Under Review
6. The decisions under review are decisions made by the Respondent on 13 August 2004 which disallowed in full the Applicants' objections against assessments in relation to the fiscal year ended 30 June 1998, which objections were made on behalf of the Applicants on 16 June 2004.
The Role of the Tribunal
7. The role of the Tribunal is to review the merits of the decision before it: section 43 of the Administrative Appeals Tribunal Act 1975 and Secretary, Department of Social Security v Murphy (1998) 52 ALD 268. The Tribunal is guided by the norm that it should reach the correct and preferable decision on the basis of the material before it: Ajka Pty Ltd v Australian Fisheries Management Authority [2003] FCA 248 at [33]. The Tribunal is required to stand in the shoes of the original decision-maker and consider all evidence anew, bearing in mind statutory provisions and any significant legal precedent: Bantick and Secretary, Department of Family and Community Services [2003] AATA 472 at [23]. The Tribunal proceeds de novo: Bramwell v Repatriation Commission (1998) 51 ALD 56 at 60 per Weinberg J. The Tribunal must base its decision upon the material that is logically probative of the existence of facts that emerge from the evidence before it: Collins v Minister for Immigration and Ethnic Affairs (1981) 36 ALR 598 at 601. In undertaking this review, the Tribunal is constrained by the provisions of the Taxation Administration Act 1953, in particular section 14ZZK: see Liedig v Commissioner of Taxation (1994) 50 FCR 461 at 465 per Hill J.
Procedural History
8.Procedurally, the history of these two appeals is outlined next.
§On 21 June 1999, the Applicants lodged income tax returns for the financial year ended 30 June 1998.
§On 13 July 1999, the Applicants were issued with Notices of Assessment by the Respondent.
§On 6 April 2004, the First Assistant Commissioner of Taxation made determinations pursuant to s177F of the ITAA36 in respect of both of the Applicants.
§On 16 April 2004, Notices of Amended Assessments were issued to the Applicants for the financial year ended 30 June 1988 (“the Amended Assessments”)
§On 16 June 2004, Cleary Hoare, the solicitors for the Applicants at that time, submitted Notices of Objection against the Amended Assessments issued to each of the Applicants to the Respondent on behalf of the Applicants.
§On 13 August 2004, the Respondent disallowed the objections of each of the Applicants to the Amended Assessments.
§On 28 September 2004, the Applicants filed these proceedings in this Tribunal seeking review of the Respondent's disallowance of the Applicants' objections to the Amended Assessments.
Transactional History
9. The transactional history relevant to these appeals is explained next. It is taken from the Statement of Facts, Issues and Contentions of the Applicants.
10. On 11 November 1987, the P & A Trust was settled by Michael John Kelly with Pyngrange as trustee.
11. On 13 March 1982, the Pine Grove Unit Trust (“the PGUT”) was settled by Raymond John Foelz with Langton Holdings Pty Ltd (“Langton”) as trustee. In or about September 1992, Oil Services Pty Ltd (“Oil”) became trustee of PGUT. The directors of Oil, at all material times, were the applicants, both of whom were appointed on 15 April 1987.
12. The Northern Capital Trust was settled on 3 March 1998, with Northern as trustee. The primary beneficiary of the Northern Capital Trust, at all material times, was the Australian Red Cross Society, and the secondary beneficiary was the National Heart Foundation, Queensland Division.
13. The Northern Capital Investment Trust (“the NCIT”) was settled on 15 May 1998, with Pyngrange as trustee. The primary, secondary and tertiary beneficiaries are the same as the Northern Capital Trust.
14. The AM Trust was settled on 2 March 1998, with Farrago (NQ) Pty Ltd ACN 081 812 473 (“Farrago”) as trustee. Farrago was incorporated on 27 February 1998. The directors of Farrago, at all material times, were the applicants, both of whom were appointed on 27 February 1998. The primary, secondary and tertiary beneficiaries of the AM Trust are the same as the Northern Capital Trust.
15. The primary beneficiaries specified in the P & A Trust Deed in Clause B(a) and (b) are the applicants. The tertiary beneficiaries are specified in Clause B(d).
16. The units in the PGUT were originally held by the B Langton Family Trust and the T Langton Unit Trust (10 units each). All 20 units were purchased by Northern as trustee of the P & A Trust on 26 June 1992.
17.On 27 November 1987:
a.The trust deed of the PGUT was varied by the trustee to enable the terms of the Deed to be varied by oral declaration, and
b.Mr McCutcheon made an oral declaration to add a definition of discretionary beneficiary, and to permit distribution of income to such discretionary beneficiaries.
18. The Schedule to the Trust Deed of the Northern Capital Trust provides that tertiary beneficiaries are:
“Subject to Clause 13 and subject to the laws against perpetuities and without limiting Clause 5.3 any trustee of any settlement trust or superannuation fund or any company or corporation whereunder or wherein the Trustee as trustee of this Trust or any of the beneficiaries is a beneficiary or member, whether vested, contingent or wholly discretionary or otherwise and whether specifically or by membership of a class, or holds shares, as the case may be, in each case whether in its own right or as trustee, and whenever and wherever such settlement trust, superannuation fund, company or corporation is constituted incorporated registered or administered.”
19.Clause 5.1 of the Northern Capital Trust Deed provides:
"The trustee shall have and may exercise in its absolute discretion at any time or times and from time to time prior to the Perpetuity Date power to pay or apply the whole or any part of the Trust Fund to or for the benefit of all or anyone or more exclusively of the others of the Primary Beneficiaries, the Secondary Beneficiaries or the Tertiary Beneficiaries then living or in existence and in such proportions or manner as the Trustee shall in its absolute discretion from time to time think fit."
20. Clause 5.1 of the Trust Deed for the NCIT is in the same terms as Clause 5.1 of the Northern Capital Trust. The primary, secondary and tertiary beneficiaries are defined in the same terms as in the Northern Capital Trust.
21. Clause 5.1 of the Trust Deed for the AM Trust is in identical terms to the same provision in the Northern Capital Trust Deed and the primary, secondary and tertiary beneficiaries are also defined in the same terms.
22. The distributions for the P & A trust, for the years 1988/89 and 1996/97, are as follows:
1988/89 Loss year
1989/90 CA McCutcheon $4,859
1990/91 CA McCutcheon $2,818
1991/92 CA McCutcheon $1,346
Pine Grove (Unit Trust) $58,000
1992/93 Loss Year
1993/94 Loss Year
1994/95 PD McCutcheon $6,400
CA McCutcheon $5,100
Pine Grove $48,500
Pennant Fuel (Pty Ltd) $12,857
1995/96 PD McCutcheon $19,000
CA McCutcheon $6,000
Pennant Fuel Pty Ltd $113,528
Sally McCutcheon $400
Claire McCutcheon $400
1996/97 PD McCutcheon $25,000
CA McCutcheon $13,000
Pennant Fuels Pty Ltd $88,796
Sally McCutcheon $642
Claire McCutcheon $642
23.On 30 June 1997, the P & A Trust resolved to distribute income to:
Sally McCutcheon
Claire McCutcheon
Patrick Donald McCutcheon
Carolyn Anne McCutcheon
Balance to Pennant Fuels Pty Ltd
Capital Gains: All to Thomas McCutcheon
24. Lake Mylor Pty Ltd ACN 077 859 762 ("Lake Mylor"), in its capacity as trustee of the LM Income Discretionary Trust ("the LMIDT"), the India Unit Trust ("the IUT"), the Pine Grove Discretionary Trust ("the PGDT"), and the India Fixed Trust ("the IFT"), was incorporated on 13 March 1997. Its directors, at all material times, were Michael James Patrick Hart ("Mr Hart"), Ian David Stafford Collie ("Mr Collie"), John Joseph Hoare ("Mr Hoare") and Steven John Grant ("Mr Grant").
25. Retail Technology Holdings Pty Ltd ACN 001 008 331 ("Retail") was incorporated in or about 1987, originally under the name Sefhare Holdings Pty Ltd, which was changed to Retail on 2 February 1993. The directors, at all material times, were Charles William Hahn ("Mr Hahn"), Stephen William Woods ("Mr Woods") and Richard Thomas Arnold ("Mr Arnold").
26. The applicants caused the following transactions to take place in order for distributions to be made from Northern as trustee of the P & A Trust to the AM Trust (“the Transactions”).
a.On 27 November 1987, the Trust Deed for the PGUT was varied to:
i.Allow oral variation of the Deed; and
ii.Provide for discretionary beneficiaries and to permit distribution of income to such discretionary beneficiaries;
b.On 20 February 1998, the PGDT was settled by Maurice John Collins with Lake Mylor as trustee;
c.On 25 February 1998:
i.Northern as trustee of the P & A Trust resolved to make an interim distribution of $1.8 million of income to Oil as trustee of the PGUT;
ii.Oil as trustee of the PGUT resolved to make an interim distribution of $1.8 million to Lake Mylor as trustee of the PGDT and further resolved that the distribution be by way of delivery of a bearer promissory note drawn by the company as to $1,656,000.00, and the balance by cheque payable as directed by Lake Mylor.
iii.Lake Mylor as trustee of the PGDT directed Oil as trustee of the PGUT to pay $144,000 by cheque to Cleary Hoare’s trust account;
iv.Oil as trustee of the PGUT created a bearer promissory note in the amount of $1,656,000.00;
v.Retail made a gift of $1,750,500.00 to Lake Mylor as trustee of the LMIDT;
vi.The gift was by way of delivery of bearer promissory notes drawn by Retail for the amount of $1,656,000.00 and a second promissory note for $94,500.00;
vii.Lake Mylor as trustee of the LMIDT acknowledged receipt of the gift of $1,750,500.00 by way of delivery of a bearer promissory note drawn by Retail as aforesaid;
viii.Lake Mylor as trustee of the LMIDT resolved to subscribe for 16,500 "B" units in Lake Mylor as trustee of the IUT, each paid to $100.00. Application moneys were satisfied by delivery of bearer promissory note drawn by Retail in the amount of $1,656,000.00;
ix.Lake Mylor as trustee for the LMIDT subscribed to Lake Mylor as trustee for the IUT for 16,500 "B" units each paid to $100.00, with payment of application moneys by way of attached bearer promissory note drawn by Retail;
x.Lake Mylor as trustee of the lUT acknowledged the application for 16,500 "B" units together with delivery of the bearer promissory note and issued a Unit Certificate to certify that Lake Mylor as trustee of the LMIDT was the registered holder of 16,500 "B" class units;
xi.Lake Mylor as trustee of the PGDT made an interim distribution of $1.8 million to Lake Mylor as trustee of the IFT. The interim distribution was made by delivery of promissory note drawn by Oil as trustee of PGUT for $1,656,000.00 to the trustee of the IFT or otherwise as directed together with $144,000.00 cheque payable a directed;
xii.Lake Mylor as trustee of the IFT acknowledged the distribution of income from the PGUT, as aforesaid, and resolved to make an interim distribution of income in the amount of $1.8 million to the fixed beneficiary, to be paid forthwith, as to the amount of a bearer promissory note by delivery of a bearer promissory note or as otherwise directed by it;
xiii.The bearer promissory note drawn by Lake Mylor as trustee for the PGDT was delivered by Lake Mylor as trustee of the IFT to Lake Mylor as trustee of the IUT in satisfaction of obligations arising under the bearer promissory note in the amount of $1,656,000.00 drawn by Retail and delivered to Lake Mylor as trustee of the IUT in respect of the application for the “B” class units in the IUT;
d.On 2 March 1998, the AM Trust was settled by Stephanie Maria Mauchlan with Farrago as trustee;
e.On 3 March 1998, the following events occurred:
i.The Northern Capital Trust was settled by Maurice John Collins with Northern as trustee;
ii. Lake Mylor as trustee of the IUT resolved to make a gift of $1,656,000.00 to Northern as trustee of the Northern Capital Trust by way of delivery of bearer promissory note for the amount of the gift drawn by Oil as trustee of the PGUT;
iii. Northern as trustee of the Northern Capital Trust resolved to accept the gift of capital totalling $1,656,000.00 from Lake Mylor as trustee of the IUT;
iv.Payment of $144,000.00 was received by Cleary Hoare trust account;
f.On 6 April 1998, the P & A Trust paid by cheque no. 500004, $1,656,000.00 to the AM Trust, which represented a loan from the Northern Capital Trust to the AM Trust;
g.On 27 November 1997, the Trust Deed for the PGUT was varied in the terms previously set out herein;
h.On 20 February 1998, the PGDT was settled by Mr Collins with Lake Mylor as trustee;
i.On 12 May 1998, the following relevant events occurred:
(i) Oil. As trustee for P & A Trust resolved to make a final distribution of the balance of any income and capital gains to PGUT. The distribution was $1,167,952.00 income;
(ii) Oil as trustee for the P & A Trust resolved to distribute non-assessable capital reserves of the trust to PGUT. The distribution was $264,861.00 which was made as follows:
Nonassessable Capital Profit $5,015
Income Tax Adjustment Reserve $140,141
Capital Adjustment Reserve $ 119,705(iii)Oil as trustee of the PGUT resolved to make a final distribution of $1,167,952.00 income and a capital distribution of $264,861.00 for the 1998 tax year to Lake Mylor as trustee of PGDT:
A.Resolved that the distribution be by way of delivery of a bearer promissory note drawn by the company as to $1,339,376.00 and the balance by cheque payable as directed by Lake Mylor as trustee of PGDT;
BLake Mylor as trustee of the PGDT directed Oil as trustee of the PGUT to pay $93,437.00 by cheque to Clearly Hoare Trust Account
(iv)Oil as trustee of the PGUT created bearer promissory note for $1,339,376.00;
(v)Retail made a gift of $1,400,696.00 to Lake Mylor in its capacity as trustee of LMIDT;
A.Gift by way of delivery of bearer promissory note drawn by Retail for $1,339,376.00 and a second bearer promissory note for $61,320.00;
(vi)Lake Mylor as trustee of LMIDT acknowledged gift of $1,400,696.00 by way of delivery of bearer promissory notes drawn by Retrail for $1,339,376.00 and a second bearer promissory note for $61,320.00:
(vii)Lake Mylor as trustee of the LMIDT resolved to subscribe for 13,394 “B” units in the Lake Mylor as trustee of the IUT each paid to $100.00;
A.Application moneys to be satisfied by delivery of bearer promissory note drawn by Retail for $1,339,376.00;
(viii)Lake Mylor as trustee of the LMIDT subscribed for 13,394 “B” units each paid to $100.00 in Lake Mylor as trustee of the IUT, with payment of application moneys by means of delivery of attached bearer promissory note drawn by Retail;
(ix)Lake Mylor as trustee of the IUT acknowledged application for 13,394 “B” units received from Lake Mylor as trustee LMIDT together with delivery of the bearer promissory note drawn by Retail;
(x)Unit Certificate issued to certify that Lake Mylor as trustee of the LMIDT is registered holder of 13,394 “B” class units in the IUT:
(xi)Lake Mylor as trustee of PGDT made a final distribution of $1,432,813.00 to Lake Mylor as trustee of IFT:
A.The final distribution was made by delivery of promissory note drawn by Oil as trustee of PGUT for $1,339,376.00 to the trustee of IFT or otherwise as directed:
(xii)Lake Mylor as trustee of IFT acknowledged receipt of final distribution from Lake Mylor as trustee of PGDT of $1,432,813.00 (comprised of income totalling $1,167,952.00 and capital of $264,861.00) of which $1,339,376.00 had been paid by delivery of a bearer promissory note:
A.Lake Mylor as trustee of IFT resolved to make final distribution of income and capital in the respective amounts to the fixed beneficiary to be paid forthwith as to the amount of the promissory note by delivery of the promissory note to the fixed beneficiary or as otherwise directed by it;
(xiii)The bearer promissory note drawn by Lake Mylor as trustee for the PGDT was delivered by Lake Mylor as trustee of the IFT to Lake Mylor as trustee of IUT in satisfaction of the obligations arising under the bearer promissory note for $1,339,376.00 drawn by Retail and delivered to Lake Mylor as trustee of IUT in respect of application “B” class units in the IUT:
(j)On 13 May 1998, PGUT paid, by cheque no 1035, the amount of $1,339,376.00 to the AM Trust, representing a loan from the NCIT to the AM Trust;
(k)On 15 May 1998:
(i)NCIT was settled by Maurice John Collins, with Pyngrange as trustee;
(ii)Lake Mylor as trustee of the IUT resolved to make a gift of $1,339,376.00 out of the capital of the Trust to Pyngrange as trustee of the NCIT by way of delivery of a bearer promissory note for the amount of the gift drawn by Oil as trustee of the PGUT;
(iii)Pyngrange as trustee of the NCIT resolved to accept the gift of capital totalling $1,339,376.00 from Lake Mylor as trustee of the IUT, and acknowledge receipt by way of delivery of bearer promissory note;
(iv)Payment of $93,437.00 was made into the trust account of Cleary Hoare;
(i)On 30 June 1998:
(i)Oil as trustee for the Northern Capital Trust:
A.Resolved to bring forward the vesting date of the trust to the date of the resolution;
B.Resolved, in accordance with Clause 4 of the Trust Deed, to distribute the capital of the trust to Farrago as trustee for the AM Trust;
C.Resolved to terminate the trust with immediate effect;
(ii)Pyngrange as trustee for the NCIT;
A.Resolved that vesting day be brought forward to date of the resolution;
B.Resolved, in accordance with Clause 4 of the Trust Deed, to distribute the capital of the trust to Farrago as trustee of the AM Trust;
C.Resolved to terminate the trust with immediate effect;
(iii)Oil as trustee for the P & A Trust:
A.Resolved to bring vesting date brought forward to date of the resolution;
B.Resolved to terminate the trust with immediate effect as there were no assets of the trust to be distributed;
(iv)Oil as trustee for the PGUT;
A.Resolved to treat the trust as terminated as there were no assets to distribute.
The Material Before the Tribunal
27.The following documentary evidence was before the Tribunal:
Exhibit 1 Reasons for Decision and Relevant Documents concerning Mrs McCutcheon (documents T1 – T11).
Exhibit 2Reasons for Decision and Relevant Documents concerning Mr McCutcheon (documents T1 – T11).
Exhibit 3Common Relevant Documents.
Exhibit 4Witness Statement of Patrick Donald McCutcheon sworn 23 June 2005.
Exhibit 5Bundle of ASIC documents relating to Pennant Fuels Pty Ltd.
Exhibit 6Income Tax Returns for Pine Grove Unit Trust for the Fiscal Years 1992, 1995, 1998 and Income Tax Returns for Pennant Fuels Pty Ltd for the fiscal years 1995, 1996, 1997 and 1998 and company extract for Pennant Fuels Pty Ltd.
Exhibit 7Witness Statement of Carolyn Anne McCutcheon sworn 24 June 2005.
28. The Applicants were represented by Mr CD Coulson of Counsel. Exhibits 1, 2, 3, 4 and 7 were lodged on behalf of the Applicant. In addition, prior to the hearing the Applicants provided a Statement of Facts, Issues and Contentions to the Tribunal.
29. The Respondent lodged documents T1 to T11 pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. These documents were taken into evidence as Exhibit 1. Exhibits 5 and 6 were lodged on behalf of the Respondent.
30. The Respondent was represented by Mr GT Pagone QC and Mr SHP Steward of Counsel. The Respondent’s Counsel provided Submissions to the Tribunal.
Evidence
31. The Applicants gave evidence in person. Their evidence in chief consisted of statements (Exhibit 1 in the case of Mr McCutcheon and Exhibit 7 and the case of Mrs McCutcheon). Mr McCutcheon was cross-examined while Mrs McCutcheon was not. The parties agreed that the evidence given by Mr McCutcheon (which related to QT 2004/183) would be treated as the evidence given by Mrs McCutcheon (which related to QT 2004/182).
32. The effect of Mr McCutcheon’s evidence, to the extent that is material to the issues of this appeal, can be summarised in these terms:
A.Apart from a period of employment by Shell after he completed a Bachelor of Commerce at University, the first business venture operated by Mrs McCutcheon was the acquisition in 1984 of a Shell distributorship business in Dalby, Queensland through a company called Pennant Fuels Pty Ltd. This business was operated for about 5 to 6 years.
B.In approximately April 1987, Dalby Tyre Service Pty Ltd was incorporated to purchase and operate Dalby Tyre Service. This business was operated for about two years, and then sold to a third party. The sale proceeds were used to purchase a Shell distribution business and 2 retail service station businesses in the Townsville region. Later, the companies operating these businesses sold them to a Shell-related corporation known as North Qld Oil Pty Ltd.
C.In February and March 1998, Mr McCutcheon used companies called Primemovers (NQ) Pty Ltd and Farrago (NQ) Pty Ltd to acquire and operate separate businesses (involving truck sales and repairs and printed circuit boards respectively).
D.Mr McCutcheon's accountants advised him that certain tax issues would arise as a result of the mismatch between the depreciation values of the Townsville businesses and the acquisition by the purchasers of plant and equipment at higher amounts. Mr McCutcheon was then referred to Cleary Hoare Lawyers who were in a position to provide specialist tax advice.
E.Mr McCutcheon was informed in November 1997 about an Opinion from a Queen's Counsel which Cleary Hoare Lawyers said would address the commercial and tax issues associated with the disposal of the Townsville businesses. Mr McCutcheon said in his evidence in chief that he did not see this Opinion, but that the effect of it was explained to him.
F.Mr McCutcheon said that he followed legal advice given to him by Cleary Hoare Lawyers and decided to enter into certain transactions. One of these was acting on a 27 November 1997 resolution from the unit holders of the Pine Grove Unit Trust authorising the trustee Oil Services Pty Ltd to make an oral variation to the Pine Grove Unit Trust Deed.
G.In approximately 25 November 1998, Mr and Mrs McCutcheon executed documents comprising:
(1) Resolution of Directors of Northern Oil Pty Ltd ATF the P & A Trust resolving to make an interim distribution of not less than $1.8 million to Oil Services Pty Ltd ATF Pine Grove Unit Trust; and
(2) Resolution of Directors of Northern Oil Pty Ltd ATF the Pine Grove Unit Trust to make an interim distribution of $1.8 million to Lake Mylor Pty Ltd ATF the Pine Grove Discretionary Trust, and that the distribution be by way of delivery of a Bearer Promissory Note drawn by the company is to $1.656 million, with the balance by cheque payable as directed by Lake Mylor Pty Ltd; and
(3) Bearer Promissory Note from Oil Services Pty Ltd atf the Pine Grove Unit Trust for the sum of $1.656m which was receipted by Lake Mylor Pty Ltd atf Pine Grove Discretionary Trust and by Lake Mylor Pty Ltd ATF India Unit Trust.
33. Mr McCutcheon denied knowledge of the terms "New Venture Income" or "NVI" as well as of the following documents:
25.2.1998
1. Letter from Retail Technology Holdings Pty Ltd to Lake Mylor Pty Ltd AFT the LM Income Discretionary Trust regarding the Retail Technology Holdings Pty Ltd decision to make a gift of $1,750,000 by way of two promissory notes.
25.2.1998
2. Bearer Promissory Note from Retail Technology Holdings Pty Ltd to Lake Mylor Pty Ltd ATF the LM Income Discretionary Trust and Lake Mylor Pty Ltd atf the India Unit Trust for the sum of $1,656,000. It was receipted by Lake Mylor Pty Ltd ATF LM Income Discretionary Trust; by Lake Mylor Pty Ltd ATF India Unit Trust.
25.2.1998
3. Bearer Promissory Note from Retail Technology Holdings Pty Ltd to Lake Mylor Pty Ltd ATF the LM Income Discretionary Trust for the sum of $94,500. It was receipted by Lake Mylor Pty Ltd atf LM Income Discretionary Trust.
25.2.1998
4. Resolution of Directors of Lake Mylor Pty Ltd ATF the LM Income Discretionary Trust resolving to accept a gift of $1,750,500 from Retail Technology Holdings Pty Ltd by way of delivery of a Bearer Promissory Note drawn by Retail Technology Holdings Pty Ltd for $1,656,000 and a second Bearer Promissory Note for $94,500.
5. Further resolving to subscribe for 16,550 “B” units in India Unit Trust paid to $100 using the first promissory note.
28.2.1998
6. Application for 16,550 “B” Units paid to $100 to Lake Mylor Pty Ltd ATF the India Unit Trust to Lake Mylor Pty Ltd ATF the LM Income Discretionary Trust.
25.2.1998
7. Resolution of directors of Lake Mylor Pty Ltd ATF the India Unit Trust noting an application was received for 16,550 “B” Units paid to $100 by Lake Mylor Pty Ltd AFT LM Income Discretionary Trust. Resolving to accept promissory note as payment.
25.2.1998
8. Unit Certificate for Lake Mylor Pty Ltd ATF the LM Income Discretionary Trust for 16,550 “B” units held in the India Unit Trust.
Undated
9. Authority for Delivery of Promissory Note to Lake Mylor Pty Ltd ATF the Pine Grove Discretionary Trust and Lake Mylor Pty Ltd ATF the India Fixed Trust from Retail Technology Holdings Pty Ltd and Lake Mylor Pty Ltd ATF the LM Income Discretionary Trust. Regarding the interim distribution of income from Pine Grove Discretionary Trust amounting to $1.8m ($1,656m by promissory note).
25.2.1998
25.02.1998
10. Resolution of Directors of Lake Mylor Pty Ltd ATF the Pine Grove Discretionary Trust noting:
§ the receipt of a gift of $1,750,500 from Retail Technology Holdings Pty Ltd
§ that Retail Technology Holdings Pty Ltd was the fixed beneficiary of the India Fixed Trust and therefore the India Fixed Trust qualified as a beneficiary of Pine Grove Discretionary Trust
§ the receipt of an interim distribution from Pine Grove Unit Trust of $1.8m ($144,000 by way of cheque payable as directed and the balance by promissory note).
11. Resolving to make an interim distribution of income to India Fixed Trust equal to $1.8m.
12. Resolution of Directors of Lake Mylor Pty Ltd AFT the India Fixed Trust noting the receipt of an interim distribution from Pine Grove Discretionary trust of $1.8m. Resolving to make an interim distribution to the fixed beneficiary.
34. Mr McCutcheon's evidence in chief included the following material which is set out verbatim in view of its importance to these appeals:
“March 1998
58. On or about 3 March 1998, Northern Oil Pty Ltd was requested to accept trusteeship of the Northern Capital Trust. The directors of Northern Oil Pty Ltd ultimately resolved to accept that trusteeship, and further accept a gift of capital from Lake Mylor Pty Ltd ACN 077 859 762 as Trustee of the India Unit Trust and delivery of a bearer promissory note in satisfaction of the gift and to formally acknowledge receipt of delivery. The documents executed by me and my wife as directors of Northern Oil Pty Ltd are included as documents T35 and T36 in the Common Relevant Documents filed by the Respondent. A copy of the Trust Deed for the Northern Capital Trust dated 3 March 1998 is included as document T33 in the Common Relevant Documents filed by the Respondent.
May 1998
59. On or about 12 May 1998, the directors of Oil Services Pty Ltd received a letter from Cleary Hoare, Solicitors. That letter is included as document T40 in the Common Relevant Documents filed by the Respondent. Also enclosed with that letter was an Authority to Pay to Oil Services Pty Ltd, which is included as document T45 in the Common Relevant Documents filed by the Respondent. The payment directed in that authority was ultimately made on 14 May 1998, as is evidenced by the copy of the deposit receipt included in document T45.
60. Consequent upon receiving that letter, on 12 May 1998, certain resolutions were made by Pyngrange Pty Ltd and Oil Services Pty Ltd. Those resolutions are included as documents T47 and T48 in the Common Relevant Documents filed by the respondent. At the same time, Oil Services Pty Ltd (by me) executed a bearer promissory note, which is included as document T46 in the Common Relevant Documents filed by the respondent.
61. As regards documents T41 to T44, T49 to T54 and T56 contained in the Common Relevant Documents filed by the Respondent, to the best of my recollection I was never shown those documents by either my accountants or Mr Collie, and neither my accountants nor Mr Collie explained to me at any time the precise terms of the arrangement to be entered into and how that arrangement achieved the commercial outcome that I was promised. It has only been since, again to the best of his recollection, having received documents from the Australian Taxation office in or about 2003 that the exact nature of that arrangement including the identities of the relevant entities has been made known to me.
62. On or about 15 May 1998, Pyngrange Pty Ltd was requested to accept trusteeship of the Northern Capital Investment Trust. The directors of Pyngrange Pty Ltd ultimately resolved to accept that trusteeship, and further accept a gift of capital from Lake Mylor Pty Ltd ACN 077 859 762 as trustee of the India Unit Trust and delivery of a bearer promissory note in satisfaction of the gift and to formally acknowledge receipt of delivery. The documents executed by me and my wife as directors of Pyngrange Pty Ltd are included as document T57 in the Common Relevant Documents filed by the Respondent. A copy of the Trust Deed for the Northern Capital Investment Trust dated 15 May 1998 is included as document T58 in the Common Relevant Documents filed by the Respondent.
63. Subsequent to receipt of the letter dated 12 May 1998 from Cleary Hoare, I do not recall having any further personal dealings directly with Cleary Hoare until instructing them (by Mr Ian Collie) to lodged an objection on my behalf to the amended assessment the subject of these proceedings. Prior to that time, any further communication or dealings that were had in relation to the above matters were discussed with LRK Walkers. I do not recall receiving any further documents from Cleary Hoare after 12 May 1998 until instructing them to lodge an objection on my behalf to the amended assessment the subject of these proceedings, but if I did receive any further correspondence or documents, I would certainly have called LRK Walkers by telephone to discuss them further.
June 1998
64 On 30 June 1998, on the advice of my accountants, LRK Walkers, various resolutions of various entities were made, as follows:
a.Resolution of Directors of Northern Oil Pty Ltd as Trustee for the Northern Capital Trust (included as document T61 in the Common Relevant Documents filed by the Respondent);
b.Resolution of Directors of Pnygrange Pty Ltd as Trustee for the Northern Capital Investment Trust (included as document T62 in the Common Relevant Documents filed by the Respondent);
c.Resolution of Directors of Pyngrange Pty Ltd as Trustee for the P & A Trust (included as document T63 in the Common Relevant Documents filed by the Respondent);
d.Resolution of Directors of Oil Services Pty Ltd as Trustee for the Pine Grove Unit Trust (included as document T64 in the Common Relevant Documents filed by the Respondent); and
e.Meeting of Directors of Primemovers (NQ) Pty Ltd as Trustee for the PM Trust (included as document T65 in the Common Relevant Documents filed by the respondent); and
f.Minutes of Meeting of Directors of Farrago (NQ) Pty Ltd as Trustee for the AM Trust (included as document T72 in the Common Relevant Documents filed by the Respondent).
Funding for Business Acquisitions
65. As a consequence of transactions entered into above, funding was procured for the purchase of the Primemovers Business and the East Coast Printed Circuits Businesses by the AM Trust making loans to the PM Trust and East Coast Circuits Pty Ltd.
Distributions from the P & A Trust
66 Had the distributions dated 25 February 1998 and 12 May 1998 detailed above not been made from Pyngrange Pty Ltd as trustee for the P & A Trust, distributions for the financial year ended 30 June 1998 would not have been made to me and my wife in the proportions of 50% each.
67. Firstly, Oil Services Pty Ltd as trustee for the Pine Grove Unit Trust was a vendor of the Townsville Retail Businesses and as such was entitled to a substantial part of the proceeds of sale. Accordingly, a substantial part of the income received by Northern Oil Pty Ltd as trustee for the P & A Trust was in any event owing, due and payable to Oil Services Pty Ltd as trustee for the Pine Grove Unit Trust.
68. Further, the P & A Trust has never distributed large amounts of income to either my wife or I,and would never have distributed such a substantial portion to either my wife or I. The largest amount of income ever distributed to Mr McCutcheon or his wife by the P & A Trust was $25,000 to McCutcheon and $13,000 to his wife on 30 June 1997. The P & A Trust has a history of distributing the bulk of its income to other related entitles and only very small amounts to my wife and I and our daughters, Sally and Claire McCutcheon. Indeed, the P & A Trust has a history of distributing large amounts of income to the Pine Grove Unit Trust.
Summary
69. At all times in relation to my taxation affairs I have retained accountants and solicitors to ensure compliance with all relevant legislation. I also have followed the advice of my accountants and advisors.
70. In the present instance, upon the sale of the Townsville businesses, I had to ensure that sufficient funds were available to purchase the Primemovers Business and the East Coast Printed Circuits Businesses.”
35. In cross-examination, Mr McCutcheon explained the relationship between the wholesale and trading entities (Northern Oil Pty Ltd and Oil Services Pty Ltd) and how the purchase consideration for the disposal of the businesses conducted by those companies had been paid when they were sold to a Shell-affiliated distributor. Northern Oil Pty Ltd owed money to Oil Services Pty Ltd.
36.The following exchanges occurred in cross-examination of Mr McCutcheon:
“All right. I accept that Shell paid money. You with me so far?---Yes
Are you happy with that? ---Yes.
And what is going to be put to the Tribunal is that the amount of money that Shell did pay, which was received by Northern Oil, did not at any stage form part of a debt owing, due, and payable to Oil Services. Do you follow what’s going to be put? ---Yes.
Okay. Now, the reason - - -? ---I don’t agree with it, but I understand what you’re trying to say.
Well, I realise you don’t agree with it because it’s the exact opposite of what you have said in your affidavit? --- It’s the exact opposite to the sales contracts that occurred.
And the reason that its going to be put that it wasn’t an amount owing, due, and payable is because, as will be shown, and indeed as your evidence shows, Oil Services as trustee for the Pine Grove Unit Trust, was trustee wholly for the benefit of Northern Oil Proprietary Limited as trustee for the P and A Trust. That’s what’s going to be put. Now, do you want to comment on that; yes or no? --- Well, they were two legal identities that traded separately, and money was paid by a third person – paid it all to Northern Oil. Some of the money was due to Northern Oil, some of it was due to Oil Services.
That’s your answer? --- Yes.
Thank you. And when you say they were two separate entities, they were both two separate entities always acting as trustee, were they not? --- Yes.
Thank you. Can I ask you to have a look at the diagram that – perhaps, before I do that, can I just ask you to stick with your witness statement for the moment – to paragraph 41. Again, as a matter of fairness to you, I think what appears in 41 is part of a section that begins at paragraph 38. There’s a heading there, Sale Of the Townsville Businesses, and you see that in paragraph 39, towards the end of that paragraph, you say that, generally, you wished to keep accounting and tax matters as uncomplicated as possible? You see that? --- Yes.
Do you want to change that in any way? --- No.”
37.The Respondent did not call any evidence.
Discussion of the Evidence
38. The Respondent objected to a small portion of the evidence in chief of the Applicants (Exhibits 4 and 7). In relation to both Exhibits 1 and 7, there appears the following excerpts (taken from Exhibit 4):
“56 As regards documents T22 to T31 inclusive contained in the Common Relevant Documents filed by the Respondent, to the best of my recollection I was never shown those documents by either my accountants or Mr Collie, and neither my accountants or Mr Collie explained to Mr McCutcheon at any time the precise terms of the arrangement to be entered into and how that argument achieved the commercial outcome that I was promised. It has only been since, again to the best of Mr McCutcheon’s recollection, having received documents from the Australian Taxation Office in or about 2003 that the exact nature of that arrangement including the identities of the relevant entities has been made known to me. I have never had any interest in any of Lake Mylor Pty Ltd, the Pine Grove Discretionary Trust, the LM Income Discretionary Trust, the India Unit Trust, the India Fixed Trust or Retail Technology Holdings Pty Ltd.
68. Further, the P & A Trust has never distributed large amounts of income to either Mrs McCutcheon or his wife and would never have distributed such a substantial portion to either my wife or I. The largest amount of income ever distributed tMrsMr McCutcheon or his wife by the P & A Trust was $25,000 to McCutcheon and $13,000 to his wife on 30 June 1997. The P & A Trust has a history of distributing the bulk of its income to other related entitles and only very small amountsMrso Mr McCutcheon and his wife and our daughters, Sally and Claire McCutcheon. Indeed, the P & A Trust has a history of distributing large amounts of income to the Pine Grove UniMrs Trus”t [bold added].
39. The Respondent objected to the entirety of paragraph 56 of Exhibit 4, and to the italicised portion of paragraph 68 of Exhibit 4 (the corresponding paragraphs in Exhibit 7 are numbered 51 and 63 respecti“ely) ("the disputed e”idence"). The basis for the objection of the Respondent to the disputed evidence was that it concerned the ultimate fact in issue (factum probandum). Senior Counsel for the Respondent referred the Tribunal to a previous decision of the Tribunal in Proctor and Commissioner of Taxation [2005] AATA 389 at [68]. There, Forgie DP ruled that in the case of this Tribunal (which is not bound by the rules of evidence by virtue of section 33(1)(c) of the Administrative Appeals Tribunal Act 1975 when read together with section 4 and the definitMrson of “federMrsl court” in Part I of the Dictionary to the Evidence Act 1995), citing R v Palmer [1981] 1 NSWLR 209 at 214; 1 A Crim 458 at 464 (CCA), evidence is not to be received in any matter where the application of any given legal standard is at issue as the ultimate issue.
40. The Tribunal did not have regard to the disputed evidence to the extent that it touches on the ultimate issue in these appeals. This being whether Part IVA can be seen to apply, on its correct construction, and having regard to the facts to be found in these appeals on the basis of the evidence before it. Nothing limits the admissibility of the disputed evidence to any matter concerning the facta probantia (the facts adduced to prove or disprove the ultimate fact or ultimate issue).
41. The Tribunal also excluded, for the same reasons, the following sentence from paragraMrs 67 of Mr’McCutcheon's evidence“in chief: "Accordingly, a substantial part of the income received by Northern Oil Pty Ltd as trustee for the P & A Trust was in any event owing, due and payable to Oil Services Pty Ltd as trustee for the Pine Grove”Unit Trust".
42. In any case, the Tribunal took into account that its task in the present case is to proceed according to the relevant principles as enunciated by Mason J in Hope v Bathurst City Council (1980) 144 CLR 1 at 7:
“Many authorities can be found to sustain the proposition that the question whether facts fully found fall within the provisions of a statutory enactment properly construed is a question of law. One example is the judgment of Fullagar J in Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47, at p 51, where his Honour quoted the comment of Lord Parker of Waddington in Farm’r v Cotton's Trustees [1915] AC 922, at p 932, which was adopted by Latham CJ in Commissioner of Taxation v Miller (1946) 73 CLR 93, at p 97, that where all the material facts are fully found, and the only question is whether the facts are such as to bring the case within the provisions properly construed of some statutory enactment, the question is one of law only. Fullagar J then said (1956) 96 CLR, atI51 :
‘... this seems to me to be the only reasonable view. The distinction between the two classes of question is, I think, greatly simplified, if we bear in mind the distinction, so clearly drawn by Wigmore, between the factum probandum (the ultimate fact in issue) and facta probantia (the facts adduced to prove or disprove that ultimate fact). The `facts' referred to by Lord Parker ... are the facta probantia. Where the factum probandum involves a term used in a statute, the question whether the accepted facta probantia establish that factum probandum will generally--so far as I can see, always be a question of law.’"
Hope v Bathurst City Council was followed in Australian Kitchen Industries Pty Ltd v Albarran & Anor [2004] NSWSC 1047 at [23].
43. It was common ground between the parties, and the appeals were conducted on the basis, that the two distributions which took place during 1998 could be summarised in diagrammatic form. The distribution of $1.8 million from the P & A Trust to the Pine Grove Unit Trust was in the following form:
Distribution of income PGUT promissory note $1,800,000 $1,656,000
P & A Trust
(Northern Oil Pty Ltd)
Pine Grove Unit Trust (Oil Services Pty Ltd)
Cheque 144,000
Distribution of Income $1,800,000
Pine Grove Discretionary Trust (Lake Mylor Pty Ltd)
Cheque $144,000
PGUT promissory
Note $1,656,000
Cleary & Hoare
Trust vested $1,656,000
(PGUT promissory note)
India Fixed Trust
(Lake Mylor Pty Ltd)
LM Income Discretionary Trust (Lake Mylor Pty Ltd)
India Unit Trust
(Lake Mylor Pty Ltd)
AM Trust (Farrago (NQ) Pty Ltd
Northern Capital Trust (Northern Oil Pty Ltd)
Retail Technology Holdings Pty Ltd
1998 Distribution 1
44. The distribution of $1,432,813 (comprising income of $1,167,952 and capital of $264,861) from the P & A Trust to the Pine Grove Unit Trust was in the following form:
P & A Trust
(Northern Oil Pty Ltd)
Pine Grove Unit Trust (Oil Services Pty Ltd)
Cheque 144,000
Income $1,167,952
Capital $264,861 Distribution of Income $1,167,952
Capital $264,861
Pine Grove Discretionary Trust (Lake Mylor Pty Ltd)
Cheque $93,437
PGUT promissory
Note $1,339,376
Cleary & Hoare
PGUT promissory
Note $1,339,376
Distribution of Income
Income $1,167,952
Capital $264,861
Distribution of Income
Income $1,167,952
Capital $264,861
Distribution of Income
Income $1,167,952
Capital $264,861
1998 Distribution 2
Trust vested $1,339,376
(PGUT promissory note)
India Fixed Trust
(Lake Mylor Pty Ltd)
LM Income Discretionary Trust (Lake Mylor Pty Ltd)
India Unit Trust
(Lake Mylor Pty Ltd)
AM Trust (Farrago (NQ) Pty Ltd
Northern Capital Trust (Northern Oil Pty Ltd)
Retail Technology Holdings Pty Ltd
Issue
45. The central issue in this appeal is whether the Respondent was correct to cancel a tax benefit in the nature of income amounts and raise amended notice of assessments for each of the Applicants using the machinery contained in Part IVA.
Part IVA Determinations
46. The Part IVA determinations made by the Respondent were as follows.
47. On 6 April 2004, a Part IVA Determination was issued to each of the applicants in the amount of $1,616,406.00, representing 50% of the share of the income from the P & A Trust of $3,232,813.00, and on 16 April 2004, an amended assessment for the year ended 30 June 1998 was issued to Mrs McCutcheon increasing her taxable income by $1,616,406.00 and imposing:
a.Understatement penalties of $391,703.55 at the rate of 50% on the tax shortfall pursuant to s 226H of the ITAA36; and
bUnderstatement interest of $604,877.15 on the tax shortfall pursuant to s170AA of the ITAA36.
48. A Part IVA Determination was also issued to Farrago as trustee of the AM Trust in the amount of $3,232,813.00, on the basis of an alternate view, that is that the trustee of the AM Trust was an eligible beneficiary under clause B(d) of the P & A Trust Deed and that the trustee of the P & A Trust had actually applied the benefit of that income to Farrago in the following amounts:
a. $1,656.000.00 on 6 April 1998;
b. $1,339,376.00, on 13 May 1998; and
c. Alleged promoter’s fees of $237,437.00
49. On 30 June 1998, a meeting of the directors of Farrago, as trustee of the AM Trust, resolved that the net income of the trust was to be distributed 100% to Mr McCutcheon.
50.On the basis of the alternative view:
a.On 6 April 2004, a Part IVA Determination was issued to Mr McCutcheon in the amount of $3,232,813.00, representing the income from the AM Trust; and
b.On 16 April 2004, an amended assessment for the year ended 30 June 1998 was issued to Mr McCutcheon increasing his taxable income by $3,232,813.00 and imposing:
i.Understatement penalties of $783,328.45 at the rate of 50% on the tax shortfall pursuant to s226H of the ITAA36; and
ii.Understatement interest of $1,209, 632.85 on the tax shortfall pursuant to s 170AA of the ITAA36.
Applicant’s Submissions
51. In its Statements of Facts, Issues and Contentions, the Applicants contended that the Transactions were intended by the parties to have legal effect according to their terms. If the Transactions did not have legal and operative effect according to their terms, the distributions determined by the Respondent to have been tax benefits pursuant to Part IVA of the ITAA36 cannot be supported.
52. In connection with the application of Part IVA, the Applicants contended that Part IVA is based upon the making of a prediction upon an assumption. The qualification of any non-inclusion of assessable income or the obtaining of a deduction as a “tax benefit” depends upon a prediction about events (namely that the “tax benefit” would not have been obtained or would not reasonably be expected to have been obtained) upon the assumption that the “scheme” had not been entered into or carried out.
53. In Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, the joint judgment of the High Court held 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.”
54. In respect of the Part IVA determinations, the pattern of previous distributions by the trustee of the P & A Trust is inconsistent with the Respondent’s assertions that each of the Applicants would have received distributions equivalent to 50% each of the income of that trust, in the relevant year of income, but for the entry by the relevant entities into the alleged scheme.
55. The Respondent asserts that the P & A Trust “traditionally distributes to the “primary beneficiaries and family members”, and “the only times distributions are made to ‘tertiary beneficiaries’ is when those entities have losses available”. This assertion is inaccurate but, even if this was accepted, it still would not support the conclusion expressed at page 7 of the Respondent’s Reasons for Decision (that the applicants would have received 50% each of the distributable income of the P & A Trust for the year ended 30 June 1998, had the alleged scheme not been entered into or, at the least, they might reasonably have been expected to have received 50% each of the said income).
56. It therefore cannot be said that the conclusion expressed at page 8 of the Reasons for Decision for each of the Applicants as a prediction is sufficiently reliable for it to be regarded as reasonable.
57. The Applicants contend that the Respondent has not satisfied the relevant test, and that the Part IVA determinations referred to are not valid.
58. As regards the Part IVA determinations, the Applicants state that any “tax benefit” could not have reasonably been expected to have been included in the assessable income of the AM Trust of that year of income if the alleged scheme had not been entered into as:
(a)The respondent has categorised the settlement of the AM Trust as part of the alleged scheme and accordingly, if the alleged scheme had not been entered into, the settlement of the AM Trust would not have occurred; and
(b)In the alternative, if the alleged scheme is said not to include the settlement of the AM Trust, the AM Trust had not been settled prior to the commencement of the alleged scheme.
In this regard, the Applicants contend that a non-existent party could not, as a matter of obvious practicality and law, be a party to a “scheme” at a time prior to its coming into existence.
59.Accordingly, the Applicants contend that the Part IVA determinations are invalid.
60. The Respondent sets out in pages 8 to 11 of its Reasons for Decision in respect of each of the Applicants’ factors it considers relevant to the dominant purpose for the Applicants’ entering into the Transactions. In this regard, the Applicants contend:
(a)The dominant purpose for entering into the Transactions was to provide funding to purchase a new business from the proceeds of the sale of a Shell distributorship business traded by Northern;
(b)The Applicants did not enter into the Transactions as a consequence of any marketing by Cleary Hoare but were referred to Cleary Hoare by their accountants, LRK Walkers;
(c)Prior to entering into the Transactions, neither of the Applicants had previously heard of or dealt with Cleary Hoare or any of its members;
(d)The only representations made to the Applicants by Cleary Hoare in relation to the Transactions were that there was an arrangement that the Applicants’ companies could undertake, which would allow the legitimate utilisation of existing losses in order to enable funding of a new entity to purchase a truck sales and repairs business in Townsville known as “Primemovers (NQ)”, and a print and circuit board company located in Perth, Western Austrlia known as “East Coast Printed Circuits”;
(e)After receiving advice from Cleary Hoare as to the effect that there was a Queen’s Counsel opinion to support their proposed structure and that it was perfectly legal, and after discussions with the Applicants’ accountants, based upon the advice obtained that the transactions proposed met the commercial needs of the Applicants, predominantly the funding of the acquisition of the new businesses, the Applicants proceeded with the Transactions;
(f)The Applicants had never heard of the terms “NVI” or “New Venture Income”, and no one ever mentioned those terms to the Applicants until, to the best of their recollection, upon receiving documents from the Australian Taxation Office in 2003 or 2004.
61.The Applicants contend that:
(a)The Transactions are not sham transactions;
(b)The Part IVA determinations made by the Respondent are invalid:
(c)The Tribunal should set aside the decisions under review and make a decision allowing the objections of each of the Applicants in full in substitution thereof.
62. Further and alternatively, the alternative assessments issued by the Respondent to the Applicants (pursuant to the Part IVA determination in respect of Mrs McCutcheon, and pursuant to the Part IVA determination in respect of Mr McCutcheon) cannot concurrently stand. Accordingly, the Tribunal ought to set aside either:
(a)The decision under review of Mr McCutcheon and make a decision allowing the objection of Mrs McCutcheon in full in substitution thereof; or
(b)The decision under review of Mrs McCutcheon and make a decision allowing the objection of Mr McCutcheon in full in substitution thereof.
63.Further and alternatively, for the reasons set out herein:
(a)There ought to be no penalties and interest imposed on the Applicants; or
(b)The interest and/or penalties ought to be substantially reduced.
64. Further and alternatively, the Tribunal ought to set aside the decisions under review and make a decision allowing the objections of each of the Applicants in part by reference to the history of distributions in substitution thereof.
65. In oral argument, counsel for the Applicants made also the following additional contentions.
66. The Applicants cited the following passage from The Commissioner of Taxation of the Commonwealth of Australia v Peabody (1994) 181 CLR 359 at 382 – 383:
“24. Under s.177F(1), the Commissioner's discretion to cancel a tax benefit extends only to a tax benefit obtained in connection with a scheme to which Pt IVA applies. The existence of the discretion is not made to depend upon the Commissioner's opinion or satisfaction that there is a tax benefit or that, if there is a tax benefit, it was obtained in connection with a Pt IVA scheme. Those are posited as objective facts (See McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 276-277 per Kitto J; cf. Avon Downs Pty. Ltd. v Federal Commissioner of Taxation (1949) 78 CLR 353 at 360 per Dixon J). The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connection of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s.177F(1) only if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner. An error of a more fundamental kind, however, may have that result - where, for example, it leads to the identification of the wrong taxpayer as the recipient of the tax benefit. But the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connection with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner.
25. Of course, the Commissioner may be required to supply particulars of the scheme relied on (See Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214) and in this case has supplied them in the form of the ten steps identified by the Commissioner. But the Commissioner is entitled to put his case in alternative ways. If, within a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the requirements of Pt IVA, then in our view there is no reason why the Commissioner should not be permitted to do so (See Xco Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 343 at 349 per Gibbs J), provided it causes no undue embarrassment or surprise to the other side. If it does, the situation may be cured by amendment, provided the interests of justice allow such a course (Bailey v Federal Commissioner of Taxation (1977) 136 CLR at 219).”
67. From this baseline, the Applicants argued that the pattern of distributions made by the trusts included distributions to taxpayers or entities besides the Applicants themselves. The Applicants contended that the Respondent was in error in making section 177F(1)(a) determinations and increasing the assessable income of the Applicants as took place on 6 April 2004. The Applicants argued that it was unreasonable for the Respondent to identify a tax benefit in light of the history of distributions to companies and entities besides the Applicants personally.
68. The Applicants also took issue with the making of the alternative Part IVA determination to Mr McCutcheon in the amount of $3,323.813.00 on 6 April 2004. The Applicants accepted that Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 was correct insofar as it empowered the Respondent to issue assessments on an alternative basis to different taxpayers in respect of the same income stream within the scheme of sections 175 and 177 of the ITAA 1936. The Applicants sought to distinguish Richard Walter on the basis that in this case, the Respondent issued two assessments to the same taxpayer (Mr McCutcheon). The Applicants sought to distinguish section 177(2D) on the basis that in this case, it didn't apply where there are two determinations and one assessment. The Applicants pointed out that the Respondent had also made a Part IVA determination to Farrago (NQ) Pty Ltd, and argued that the machinery of Part IVA did not support an alternative determination to a different taxpayer. The Applicants argued that the existence of two determinations directed at the one taxpayer (Mr McCutcheon) which also identified two different tax benefits meant that the exercise of the discretion was tainted and therefore should be set aside by this Tribunal. The Applicants also contended that if the original assessment in respect of Mr McCutcheon is bad because the underlying discretion relating to the making of the Part IVA determination miscarried, so too was the determination and subsequent assessment which issued in respect of Mrs McCutcheon.
69. In connection with the operation of section 177C, the Applicants contended (as shown by the transcript) that section 177C(1)(a), which, in effect, is the sister provision of 177(f)(1)(a). this brings up again this question of there has to be a nexus between the taxpayer and the tax benefit, and, for instance, if there had only been a determination in respect to Mrs McCutcheon for the assessable income which gave rise to her amended assessment, the Applicants would have nothing to complain about. However, this gets back to this question about, in exercising his discretion to make the determination, has the Commissioner properly identified the relevant tax benefit. And here there is this inconsistency again, because Mr McCutcheon gets assessed in respect to an additional of assessable income which does not appear on the fact of his determination. His determination is at page 70 of the reasons for decision and relevant documents for him, and it refers to the inclusion of an amount of $1.61 million.
70. The applicants further contended: Again, if that’s all there was, the Applicants would have a difficult time. But here, all of that, we,say is tainted and means that there hasn’t been a proper process, its not the proper process, it’s just the discretion to be carried out by the Commissioner just hasn’t been carried out.….The Commissioner is confused about the identification of the tax benefit in deciding that the – in making the determinations. That is the only explanation for the two determinations that result in a different assessable income being added. The Commissioner must first find if there is a scheme, define the scheme, must identify a tax benefit, and what we are saying is that the Commissioner couldn’t have properly carried out that step, because the Commissioner wants to have a bet both ways, and there are two taxing points. Once to have a shot at the start of the scheme and secondly a shot at the end of the scheme.
71. So the Applicants say that the process of identification of the tax benefit is what hasn’t been done properly, and it is not just an irregularity; it was an essential step, and the mirror submission, if you like, as a matter of common sense, it must be right, because what this section is about is cancelling a tax benefit. And here, through the one notice of assessment, the Commissioner wants to have a shot at cancelling two.
72. And that is including in Mr McCutcheon’s income the $1.6m and also seeking to include in the one notice of assessment the $3.2m. If the Commissioner hadn’t have made Mr McCutcheon’s $1.6m determination, then, this argument wouldn’t be open. So what the Applicants are saying is it is not simply a public law proposition that discretions have to be exercised. The Applicants say here by trying to have two bites, there is a fundamental flaw in the process. The Commissioner has not done what he is required to do to make the determination. If he had, there couldn’t have been two determinations issued in respect to Mr McCutcheon seeking to attack different parts of the scheme.
73. At the heart of the matter is whether the Commissioner identify one scheme, have multiple attempts at it, make multiple determinations that sheet home into one assessment, and that is why Richard Walter doesn’t apply, because there is not multiple assessments.
74. While the Respondent didn’t address it directly, but it is on their statement of facts, issues, and contentions, this matter is a little unusual in that there has been a considerable time delay from the first investigations of the scheme and the determinations in getting to court. Indeed, the time limit almost ran out before the determinations were made. The returns concern June 1998, the determinations are made April 2004. As a result, penalties and interest have run on for a considerable period of time. In respect of that the Applicants say this: that leaving aside the issue of GIC, on the issue of penalty, this wasn’t something which there was simply clear abandonment or recklessness to such an extent that nobody looked at anything.
75. Here, the Applicants have gone to professional advisers. They were shown an advice from a reputable senior counsel. They embarked on these arrangements on professional advice,, and the best evidence of that is the conclusion in the advice of senior counsel that these arrangements were unlikely to be caught by Part IVA. So that even if the taxpayers are unsuccessful, then the penalties should not stand in tis current form.
76. And also due to the delay, there is already a significant monetary penalty through the accrual of GIC.
Respondent’s Submissions
§ Scheme
77. In the present case, it is submitted that the steps entered into between November 1997 to June 1998 constitute a scheme for the purposes of s177 A. The Applicants do not challenge this.
§ Tax Benefit
78. A taxpayer obtains a tax benefit in connection with a scheme where an amount, which is not included in his or her assessable income for a year of income, would have been included, or might reasonably be expected to have been included, in his or her assessable income for that year of income if the scheme had not been entered into or carried out: s177C(1)(a). Already at para [54] In Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, the High Court said 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.”
79. In the case of a tax benefit being the non-inclusion of assessable income in the taxable income of a taxpayer, it is “sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out” Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 424.
80. The Commissioner primarily contends that the tax benefit is the non-inclusion in the assessable income of each Applicant of the sum in total of $3,323,813. They submit that having regard to the pattern of distributions of the P & A Trust, it is not reasonable to expect that but for the entry into the NVI arrangement, the P & A Trust would have made distributions of $1,606,416 to each Applicant. That argument is incorrect for the following reasons:
(a)First, the Applicants ultimately owned and controlled each of P & A Trust, the Pine Grove Unit Trust, the Northern Capital Trust, the Northern Capital Investment Trust and the AM Trust. As a result they also retained the use and enjoyment of the proceeds of the sale of the distributorship business: they were the economic owners of that income. It is plain that those proceeds were used to purchase two new businesses for the ultimate benefit of each Applicant. In these circumstances, had the scheme not been entered into it is submitted that the proceeds of the sale of the Townsville business “might reasonably” have been included in the assessable income of each Applicant;
(b)Secondly, the onus is upon each Applicant to demonstrate that the amended assessment issued to them are excessive: s14ZZK(b) of the Taxation Administration Act. In Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89, Mason J said:
“The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.” (89)
This passage was followed in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624.
(c)In the case of s177C, the existence of this onus requires the presence of evidence led by the Applicants as to what would have happened had the scheme not been carried out. Subjective statements on the part of each Applicant that, for instance, in hindsight Mr McCutcheon “would never have distributed … a substantial portion to either my wife or I” do not amount to such evidence, and if anything, represent an inadmissible opinion concerning an ultimate issue for determination by the Tribunal, and in such circumstances should be disregarded. In any event such evidence amounts to no more than speculation. Speculation as to the various “possibilities” is not a sufficient discharge of the onus imposed by the Act in the case of s 177C. The reasons of Sackville J in WD & HO Wills (Australia) Pty Ltd v Federal Commissioner of Taxation Year (1996) 96 ATC 4223, 32 ATR 168, illustrate this. His Honour said,
“167. The difficulty in this case is that the evidence did not explore what would have happened had the scheme not been entered into or carried out. To a large extent the answer must be speculative.
…
170. On the evidence before me, I would have concluded that a reasonable prediction, had the scheme not been entered or carried out, is that Wills would have simply taken the risk of claims being made against it by persons claiming to be adversely affected by its cigarette products. The various alternatives posed by Mr Ellicott are all possibilities, but I could not regard any of them as a reliable prediction, at least in the absence of further evidence …. Moreover, s14ZZO of the Taxation Administration Act 1953 (Cth) imposes upon an appellant the burden of proving that the taxation decision under challenge is excessive.
171. Accordingly, if it had been necessary to do so, I would have found that Wills obtained a taxation benefit in connection with the scheme.”
(d)The Applicants here have led no evidence as to what distributions would have been made by the P & A Trust, had the NVI arrangement not been entered into. Their assertions of what might have happened are no more than statements of a possible alternative of the kind rejected by Sackville J in WD &HO Wills.
(e)A consideration of the pattern of previous distributions does not require a different conclusion. The only other beneficiaries who received substantial distributions in prior years were:
(i)the Pine Grove Unit Trust; and
(ii)Pennant Fuels.
(f)In the case of the Pine Grove Unit Trust, distributions were made to it in the years ended 30 June 1991 and 1995. In those years the P & A Trust held all of the units in the Pine Grove Unit Trust. The only reason for making these distributions was because the Pine Grove Unit Trust had tax losses which could be used to offset the income received. This is evidenced in the relevant income tax returns. The making of distributions to a ‘loss trust’ in this way is in accord with Mr McCutcheon’s evidence that distributions were made in the most tax effective way. In the 1998 year the trust vested. It is not suggested that it had carry forward losses to offset a distribution of $3,232.813. Indeed, in that year the income tax return for the trust for that year suggests otherwise. In these circumstances, a distribution to the Pine Grove Unit Trust of the proceeds of the sale of the Townsville business would have served no purpose, given that but for the scheme, the P & A Trust was the sole unit holder in the Pine Grove Unit Trust.
(g)These conclusions are consistent with the letter written to Cleary Hoare by the Applicants’ accountants on 14 November 1997 which described the Pine Grove Unit Trust and Pennant Fuels as a ‘loss trust’ and ‘loss company respectively’ in relation to the distributions described above.
(h)Pennant Fuels was owned by the Applicants and carried on business from 1984 to 1990. There is no evidence before the tribunal that it served any purpose thereafter save that it received distributions in the years ended 30 June 1995, 1996 and 1997 because it had to carry forward tax losses against which to offset most of this income. Again this fact is evidenced in the relevant income tax returns. On 27 May 1998, the company resolved to enter into voluntary liquidation. It distributed all of its income and capital to the Applicants. It was ultimately de-registered on 7 December 1998 (see the ASIC extract at “PDM 1”). It is improbable that the sum of $3,232,813 would have been distributed to this entity as it does not appear to have had sufficient tax losses in the 1998 year (the tax return records losses of only $15,449), and in any event was destined to be wound up: and
(i)This leaves the children of the Applicants. They received nominal distributions in 1996 and 1997. It is improbable that the children would have received the $3,232,813, or a significant component of this sum, because minors are taxed at the top marginal rate (for amounts received above a low threshold).
81. In the Commissioner’s submission, for the reasons set out above, it is reasonable to conclude that had the scheme not been entered into and carried out, the monies would have been distributed to the Applicants as the ultimate beneficial owners of the business of the P & A Trust. They each thus obtained a tax benefit.
82. In the alternative, it is submitted that Mr McCutcheon obtained a tax benefit, being the non-inclusion in his assessable income of the sum of $3,232.813. The basis for this conclusion lies in the fact that:
(a)The AM Trust is the ultimate repository of the monies distributed by the P & A Trust. The AM Trust then lent those monies to Primemovers and East Coast Business; and
140. In the case of Mrs McCutcheon, there was only the one section 177F determination made in her case. The attack on the determination made in her case centred upon the incorrect adoption by the Respondent of an assumption that but for the Part IVA scheme, Mrs McCutcheon would have expected to have received 50% of the distributions made by the trustee of the P & A Trust any distribution of income for the purposes of the 1998 fiscal year. The evidence in chief led by the Applicants in this respect has been ruled to be evidence that goes to the ultimate issue, and cannot be received even in the light of the liberal regime for the reception of evidence countenanced by section 33(1)(c) of the Administrative Appeals Tribunal Act 1975. Even if this gateway had been open to the Applicants, it is the case that the task of ascertaining purpose under Part IVA is an exercise that depends upon the ascertainment of objective facts: Peabody at 382. Subjective statements of intent (when relevant or admissible) take the inquiry so far and no further (see Iddles and Commissioner of Taxation [2005] AATA 787 at [104]).
D. “Scheme” within Part IVA
141. The Respondent contended that the relevant Part IVA scheme in these appeals were as follows.
November 1997
A. On 27 November 1997 the unit holder of the Pine Grove Unit Trust (namely Pyngrange as trustee of the P & A Trust) authorised Oil Services to authorise Mr McCutcheon to make an oral variation of the Pine Grove Unit Trust Deed. A Deed of Variation was executed on the same day, and Mr McCutcheon declared amendments to the Deed which would enlarge the class of eligible beneficiaries to include Lake Mylor as Trustee of the Pine Grove Discretionary Trust.
Interim Distribution
A. On 20 February 1998 the Pine Grove Discretionary Trust was settled by Maurice John Collins, with Lake Mylor Pty Ltd (Lake Mylor) as trustee.
B. On 25 February 1998:
(a)Pyngrange, in its capacity as trustee of the P & A Trust, made an interim distribution of $1,800,000 to Oil Services Pty Ltd (Oil Services), it its capacity as trustee of the Pine Grove Unit Trust.
(b)Oil Services, in its capacity as trustee of Pine Grove Unit Trust, made an interim distribution of $1,800,000 to Lake Mylor, in its capacity as trustee of the Pine Grove Discretionary Trust.
(c)The said distribution was effected by delivery of a bearer promissory note drawn by Oil Services in the sum of $1,656,000, and a cheque in the amount of $144,000, to the Trustee of the Pine Grove Discretionary Trust.
(d)Lake Mylor, in its capacity as trustee of the Pine Grove Discretionary Trust made an interim distribution of $1,800,000 to Lake Mylor, in its capacity as the trustee of India Fixed Trust;
(e)The said distribution was effected by delivery of a promissory note drawn by Oil Services in the sum of $1,656,000 to the trustee of India Fixed Trust, together with a cheque for $144,000, payable as directed;
(f)Lake Mylor, in its capacity as trustee of India Fixed Trust, made an interim distribution in the amount of $1,800,000 to the fixed beneficiary of that trust, being Retail Technology Holdings Pty Ltd (RTH).
(g)payment of this distribution was effected by the delivery to RTH of a promissory note drawn by Lake Mylor;
(h)RTH wholly offset the receipt of $1,800,000 of income with deductions claimed by it;
(i)RTH made a gift of $1,750,500 to Lake Mylor in its capacity as trustee of the LM Income Discretionary Trust (LMIDT);
(j)The gift was effected by the delivery of two bearer promissory notes drawn by RTH, one in the sum of $1,656,000 and the other for the sum of $94,500.
(k)Lake Mylor, in its capacity as trustee of the LMIDT subscribed for 16,500 “B” units in the India Unit Trust each paid to $100 for a total price of $1,650,000.
(l)Payment of the said sum of $1,650,000 was effected by the delivery of the bearer promissory note drawn by RTH in the sum of $1,650,000;
(m)Lake Mylor, in its capacity as trustee of Pine Grove Discretionary Trust also directed Oil Services to pay $144,000 to the Cleary Hoare Trust Account for the benefit of Messrs Cleary Hoare and/or their associates.
C.On 2 March 1998 the AM Trust was settled by Stephanie Maria Mauchlan, with Farrago (NQ) Pty Ltd and trustee.
D.On 3 March 1998:
(a)Northern Capital Trust was settled by Maurice John Collins, with Pyngrange as trustee;
(b)Lake Mylor, in its capacity as trustee of the India Unit Trust, made a gift of $1,656,000 to Pyngrange, in its capacity as trustee of Northern Capital Trust;
(c)The gift was effected by the delivery of a bearer promissory note drawn by Oil Services, in the sum of $1,656,000;
(d)Cleary Hoare received payment of $144,000 from Lake Mylor.
E.On 6 April 1998, the Northern Capital Trust lent the sum of $1,656,000 to the AM Trust.
Final Distribution
A.On 12 May 1998:
(a)Pyngrange, in its capacity as trustee of the P & A Trust, made a final distribution of $1,432,813 to Oil Services, in its capacity as trustee of the Pine Grove Unit Trust.
(b)Oil Services, in its capacity as trustee of the Pine Grove Unit Trust, made a final distribution of $1,432,813 to Lake Mylor, in its capacity as trustee of the Pine Grove Discretionary Trust.
(c)the said distribution was effected by delivery of a bearer promissory note drawn by Oil Services in the sum of $1,339,376 and a cheque in the amount of $93,437, to the trustee of the Pine Grove Discretionary Trust;
(d)Lake Mylor, in its capacity as trustee of the Pine Grove Discretionary trust made a final distribution of $1,432,813 to Lake Mylor, in its capacity as the trustee of India Fixed Trust;
(e)the said distribution was effected by the delivery of promissory note drawn by Oil Services in the sum of $1,339,376 to the trustee of India Fixed Trust, together with a cheque for balance, payable as directed;
(f)Lake Mylor, in its capacity as trustee of India Fixed Trust, made a final distribution in the amount of $1,339,376 to the fixed beneficiary of that trust, being RTH;
(g)payment of this distribution was effected by the delivery to RTH of a promissory note drawn by Lake Mylor;
(h)RTH wholly offset the receipt of $1,339,376 of income with deductions claimed by it;
(i)RTH made a gift of $1,400,696 to Lake Mylor in its capacity as trustee of the LMIDT;
(j)the gift was effected by the delivery of two bearer promissory notes drawn by RTH, one in the sum of $1,339,376 and the other for the sum of $61,320;
(k)Lake Mylor, in its capacity as trustee of the LMIDT subscribed for 13,394 “B” units in the India Unit Trust each paid to $100 for a total price of $1,339,400;
(l)payment of the said sum of $1,339,400 was effected by the delivery of the bearer promissory note drawn by RTH in the sum of $1,339,376;
(m)Lake Mylor, in its capacity as trustee of Pine Grove Discretionary Trust also directed Oil Services to pay $93,437 to the Cleary Hoare Trust Account for the benefit of Messrs Cleary Hoare and/or their associates.
B.On 14 and 15 May 1998 respectively:
(a)The Northern Capital Investment Trust was settled, with Pyngrange as the trustee;
(b)Lake Mylor, in its capacity as trustee of the India Unit Trust, made a gift of $1,339,376 to Pyngrange, in its capacity as trustee of Northern Capital Investment Trust;
(c)the gift was effected by the delivery of a bearer promissory note drawn by Oil Services, in the sum of $1,339,376;
(d)Cleary Hoare Trust Account received payment of $93,437 from Lake Mylor;
C.On 30 June 1998 the Northern Capital Investment Trust lent the sum of $1,339,376 to the AM Trust;
D.On 30 June 1998 the respective trustees of the Northern Capital Trust, the Northern Capital Investment Trust, the P & A Trust and the Pine Grove Unit Trust resolved to terminate each trust with immediate effect.
142. The Applicants did not dispute the characterisation of the "scheme" which the Respondent contended existed in this case. The Tribunal is satisfied that, taken together, these steps identified by the Respondent as particularised in the preceding paragraph constitute a scheme for the purposes of Part IVA. More particularly, these steps fit within the definition of "scheme" in section 177A(1) and that they constitute individually and together an agreement or arrangement which in turn fit into each of scheme, plan, proposal, action, course of action or course of conduct.
E. “Tax benefit” within Part IVA
143. Whether tax benefits arose in the present cases was the critical issue in these appeals. This is not just an abstract question, since the High Court has made it plain that a tax benefit must arise in connection with a Part IVA scheme: Commissioner of Taxation v Hart (2004) 217 CLR 216; [2004] HCA 26 at [33]. The Respondent contended that the operation of the scheme has resulted in amounts that have not been included in the assessable income of the Applicants where those amounts would otherwise be included. In the case of both Applicants, the Respondent contended that having regard to the change to beneficiaries under the P & A Trust Deed and the previous pattern of distributions, it is reasonable to expect that each of these taxpayers would have been presently entitled to 50% each of the net income of the P & A Trust in the 1998 fiscal year if the scheme contended for have not been entered into. That tax benefit was quantified as $3,232,813 in gross or $1,616,406 each.
144. The Applicants' attack on the tax benefit question was based on the adoption by the Respondent of an incorrect assumption that any benefits which were derived from the so-called scheme would have been distributed equally between the two Applicants. The Applicants pointed to the making of distributions to persons besides themselves in the years of income leading up to the 1998 fiscal year. These prior year distributions were in evidence before the Tribunal. Citing Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 385, the Applicants said that the Respondent could not have reasonably predicted that distributions would only have taken place to the Applicants arising out of the 1998 fiscal year. Commissioner of Taxation v Mochkin (2003) 127 FCR 185 at 194; [26] is authority for the proposition that if the taxpayer has obtained a tax benefit in connection with a scheme to which Part IVA applies, the determination will be valid. If the taxpayer has not obtained such a tax benefit, the determination will be invalid and will not support an assessment. This dichotomous reasoning was employed, in effect, by the Applicants to contend that they did not in fact derive tax benefits and that accordingly the determination and consequent assessments were invalid.
145. The Tribunal finds that the tax benefits are as follows. First, section 177C(1)(a) applies, and the tax benefit is $3,232,813 in aggregate. The Respondent attributed, alternatively, 50% of that tax benefit to each of the Applicants (namely $1,616,406) or the entire amount ($3,232,813) to Mr McCutcheon because of a 30 June 1998 resolution of the AM Trust appointing all income to Mr McCutcheon. This decision was attacked by the Applicants on the grounds indicated earlier. The Tribunal has concluded that the notice of amended assessment issued in relation to Mr McCutcheon is invalid because it is based on a section 177F determination in a much lower amount. If the Tribunal is in error on this point, then alternatively the Tribunal would be prepared to find that the tax benefit was $1,616,406 each in the case of Mr and Mrs McCutcheon. The Tribunal agrees with the reasons and submissions advanced by the Respondent in connection with the quantification of the tax benefit in the case of each of Mr and Mrs McCutcheon for reasons which will be explained next.
146. The Tribunal is of the opinion that while the scheme was entered into for the purpose of obtaining a tax benefit in the case of both Applicants (the non-inclusion of assessable income within section 177C(1)(a)), nevertheless it is not correct to say, as the Respondent contended that the full amount of the non-included assessable income would have been shared equally by the Applicants. The previous distribution history indicates that there were persons besides the Applicants personally who did receive distributions from the P & A Trust. There was, however, no evidence before the Tribunal upon which it could act in order to determine what the Applicants would have done had the scheme not been entered into and executed. It will be recalled that the disputed evidence of subjective intention went to the ultimate issue, and so was properly discarded. The Tribunal decided that evidence of subjective intention on the part of the Applicants in the shape of their evidence in chief went to the ultimate issue. There was no evidence in the nature of the requisite facta probantia that indicated what the Applicants would have done if the scheme had not been entered into (compare WD & HO Wills (Australia) (1996) 96 ATC 4223, 32 ATR 168). The Applicants argued that this evidence was supplied in the shape of the history of previous distributions. In the opinion of the Tribunal, those distributions are of a significantly lower order of magnitude than the funds flows in this case as a result of entering into the scheme. Underlying the distribution in the 1998 fiscal year was the sale of two businesses and the acquisition of other businesses. Accordingly, in the opinion of the Tribunal, it would be speculative to adopt the submission of the Applicants to negate or dilute the tax benefit which they obtained as a result of entering into the scheme. The evidence of prior year distributions from the P & A Trust does not in and of itself show persuasively what the Applicants would have done in the absence of the scheme they did in fact enter into.
147. The matter does not end there, however. The Peabody reasonable expectation propositum (when read properly in its context within the framework of section 177D) is a matter for the Respondent to demonstrate and it 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. In cross-examination, the Respondent was able to show, and the Tribunal finds, that Mr McCutcheon was motivated by the desire to receive the sale proceeds stemming from the sale of two businesses in as tax effective a manner as was possible and to reinvest those proceeds. In and of itself, this is not indicative of a purpose to gain a tax benefit within section 177D, but it is a fact which is relevant to consider and give appropriate weight to.
F. The test prescribed by section 177D(b)
148. The Tribunal considered next each of the matters referred to in section 177D(b)(i)-(viii) in turn. It is well established within the jurisprudence on section 177D(b) that the eight nominated statutory factors constitute an exhaustive list of the matters to be considered by the relevant decision maker or adjudicator (see Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 416 and 421-422; Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27; Commissioner of Taxation v Sleight [2004] FCAFC 94; Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531; Calder v Commissioner of Taxation [2005] FCA 911 and Iddles and Commissioner of Taxation [2005] AATA 787 at [104]).
149. By way of preliminary comment, the Tribunal noted that oral argument for the Applicants did not dispute the contentions of the Respondent concerning the application of section 177D. The Applicants' Statements of the Facts, Issues and Contentions did put the taxpayers' views on the operation of these factors in a summary form, which the Tribunal considered.
(i) the manner in which the scheme was entered into or carried out
150. The Applicants entered into the scheme on the advice of their accountants and lawyers. The Tribunal accepts the evidence of the Applicants to the effect that they were not aware of the New Venture Income scheme promoted by their lawyers in such terms until 2003 of the earliest, and that they were referred to Cleary Hoare by their accountants. Cross-examination of Mr McCutcheon on this point did not dislodge this. The Tribunal accepts that the Applicants entered into the scheme transactions in order to provide funding to purchase new businesses following the sale of wholesale and retail petroleum businesses they had conducted. Mr McCutcheon was aware and stated in cross-examination that but for the scheme transactions, he would have had a tax liability and it was this prospect which led him to consult his taxation advisers and lawyers. The scheme has, however, several artificial steps or layers designed to avoid the application of section 100A (trust stripping). Several payments took the form of bearer promissory notes which were transferred for no consideration between different entities who were participants to the scheme. The scheme was said to be legitimated or justified in terms of its legality by an Opinion from an eminent Queen's Counsel practising in Queensland. The text of this Opinion was not in evidence before the Tribunal.
(ii) the form and substance of the scheme
151. The Tribunal accepts the characterisation of the form and substance of the scheme in terms put by the Respondent. This was not gainsaid by the Applicants. The successive layers of the scheme used promissory notes. While promissory notes find their formal genesis in Part IV of the Bills of Exchange Act 1909, and they can be used as credit instruments and payment instruments (refer to section 89(1) of the Bills of Exchange Act 1909), in the present case the use of the promissory notes obviated the need for physical funds transfers.
152. Essentially, there were two broad clusters of involved parties. The first were entities associated with the Applicants (P & A Trust and the Pine Grove Unit Trust). The second were entities associated with Cleary Hoare (Pine Grove Discretionary Trust, India Fixed Trust, Retail Technology Holdings Pty Ltd, LM Income Discretionary Trust and India Unit Trust). No tax has been paid by these entities. The scheme transactions began with entities associated with the Applicants, then moved downstream to entities associated with Cleary Hoare before finally looping back to entities associated with the Applicants.
(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out
153. The scheme was carried out within the compass of one financial year (the 1998 fiscal year). More particularly, it was between 14 November 1997 (when the accountants for Mr and Mrs McCutcheon engaged or liaised with Cleary Hoare on their behalf) and 30 June 1998 that the relevant transactions forming part of the scheme took place. In short, the shelf-life of the scheme was 7½ months. The Applicants did not dispute the contentions of the Respondent in that regard.
(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme
154. The result accomplished by the scheme was that no tax was payable in respect of $3,232,813 of income distributed by the P & A Trust. The commercial backdrop and impetus to the result achieved by the scheme was to provide the purchase consideration for the acquisition of two businesses by the Applicants in a tax-free form (alternatively, in a tax-effective form).
(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme
155. The Tribunal accepts the characterisation of the form and substance of the scheme in terms put by the Respondent. This was not challenged by the Applicants. Effectively, the Applicants were able to convert taxable sale proceeds into non-taxable form such that there were significant tax savings.
(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme
156. The Tribunal accepts the characterisation of the form and substance of the scheme in terms put by the Respondent. This was not gainsaid by the Applicants. Essentially, there were two broad clusters of involved parties. The first were entities associated with the Applicants (P & A Trust and the Pine Grove Unit Trust). The second were entities associated with Cleary Hoare (Pine Grove Discretionary Trust, India Fixed Trust, Retail Technology Holdings Pty Ltd, LM Income Discretionary Trust and India Unit Trust). No tax has been paid by these entities. The scheme transactions began with entities associated with the Applicants, then moved downstream to entities associated with Cleary Hoare before finally looping back to entities associated with the Applicants. The intermediate Cleary Hoare parties did not have any commercial or legal connection with the Applicants' entities until 20 February 1998, when the Pine Grove Discretionary Trust was settled with Lake Mylor Pty Ltd as trustee. This particular transaction was at the beginning of the chain of transactions involving Cleary Hoare entities.
(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out
157.No evidence about this criterion was put before the Tribunal.
(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)
158. The Tribunal accepts the characterisation of the form and substance of the scheme in terms put by the Respondent. This was not gainsaid by the Applicants. Essentially, there were two broad clusters of involved parties. The first were entities associated with the Applicants. The second were entities associated with Cleary Hoare. The scheme transactions began with entities associated with the Applicants, then moved downstream to entities associated with Cleary Hoare before finally looping back to entities associated with the Applicants. It may be said that but for the Applicants' desire to avoid possible tax liabilities associated with the disposal of businesses, they would not have acted on the referral to Cleary Hoare on the advice of their accountants. Another way of expressing the linkages contemplated by this criterion is that the relationship between Cleary Hoare and the Applicants was the solicitor and client relationship (a subset of professional relationships[5]) and to that extent it was a commercial relationship but certainly not a family or business relationship.
[5] See J Rohde, "Solicitor and Client", Chapter 23 in S Fisher (ed), The Law of Commercial and Professional Relationships, (FT Law & Law, Melbourne, 1996), pp 629 – 655.
(ix) dominant purpose
159. As explained by the Tribunal in Taxpayers and Commissioner of Taxation [2005] AATA 1251 at [52), the purpose referred to in section 177D(b) is the sole or dominant purpose. As the High Court explained in Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 423 per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ, the real question is whether:
…a reasonable person would conclude that the taxpayers in entering into and carrying out the particular scheme had, as their most influential and prevailing or ruling purpose, and thus their dominant purpose, the obtaining thereby of a tax benefit, in the statutory sense.
160. The respective contentions of the parties on the dominant purpose criterion have been noted earlier in these Reasons for Decision.
161. When all of the section 177D(b) factors are taken into account and given appropriate weight (both singly and collectively), the inexorable conclusion the Tribunal is led to is that the Applicants entered into the scheme and its associated transactions in order to ensure that they did not pay tax on the sale proceeds of funds generate from the sale of the businesses, which they had earmarked for acquiring new businesses. To that end, the scheme and its transactions were entered into. It is certainly true that the Applicants wanted to roll over sole proceeds from one set of businesses to another set of businesses, but this took place through some related and some unrelated business entities in order to achieve the goal of tax-free monies.
G. Re-making the section 177F determination
162. The Respondent contended that the Tribunal is able to make a fresh Part IVA determination, citing Fletcher v Federal Commissioner of Taxation (1988) 19 ATR 1765 and Fabry v Federal Commissioner of Taxation (2003) 54 ATR 64.
163. In this case, the Tribunal is of the opinion that it is appropriate to make a fresh Part IVA determination in the case of Mr McCutcheon. Accordingly, the Tribunal determines under section 177F(1)(a) of the Income Tax Assessment Act 1936 that the tax benefit that is referable to an amount that has not been included in the income of the Applicant in the income year ended 30 June 1998 is an amount of $1,616,406.
H. Penalty tax
164. This leads to the question of penalty tax. The Respondent imposed administrative penalties under section 226 of the ITAA 1936 equal to 50% of the tax shortfall. The Commissioner argued in the alternative that penalties under section 226H of the ITAA 1936 were appropriate because the taxpayers’ position was caused by recklessness.
165. Section 226 toggles between 50% penalty tax and 25% penalty tax in the case of situations governed by Part IVA. The discriminant between these two levels is whether it is reasonably arguable that Part IVA does not apply. An affirmative answer leads to 25% penalty tax, while a negative answer leads to a 50% penalty tax. The Applicants’ position was that it was reasonably arguable that Part IVA does not apply. Besides making of this contention, no compelling evidence or reasons were advanced against the application of an administrative penalty under section 226.
166. The criterion of "reasonably arguable" within section 226 is an objective criterion, and it is also not nested within a general or untrammelled discretion to vary the penalty tax in question. The adjudicator or decision maker is entitled to take into account all of the relevant facts and circumstances germane to this particular inquiry. For its part, the Tribunal took into account that the Applicants acted on the advice of their professional accounting and legal advisers. That advice was, apparently, that Part IVA would not apply to the scheme in question. The Applicants were not the promoters of the schemes in which they participated. The Tribunal considers that, having regard to its reasoning and conclusions on the application of Part IVA, it is not reasonably arguable that Part IVA does not apply. Accordingly, the Tribunal declines to reduce the penalty tax from 50% to 25%.
167. The Respondent also relied on section 226H of the ITAA 1936. This provision imposes a penalty tax equal to 50% of the shortfall if that was caused by the recklessness of the taxpayer. Recklessness is a standard or norm drawn from the law of civil liability, and means, at bottom, gross carelessness or gross negligence (Ryvitch v Federal Commissioner of Taxation (2001) 47 ATR 381 at 392). The Tribunal is not satisfied that recklessness caused the tax shortfall in the present case. The Tribunal is satisfied that the scheme that the Applicants participated in was provided on the basis of professional legal and accounting advice. The Tribunal is not satisfied that gross negligence or gross carelessness caused or explained the conduct or actions of the Applicants in this case. Section 226H is not applicable.
Tribunal’s Conclusion
168. For these reasons, the Tribunal concludes that the decision of the Respondent in QT2004/182 was correct and should be affirmed.
169. In QT2004/183, the Tribunal concludes that the challenge to the determination issued to Farrago (NQ) Pty Ltd in an amount of $3,232,813 succeeds because it was issued to the wrong taxpayer. In other respects, the underlying decisions in this appeal were correct. In the interests of administrative efficiency, the Tribunal determines under section 177F(1)(a) of the Income Tax Assessment Act 1936 that the tax benefit that is referable to an amount that has not been included in the income of the Applicant in the income year ended 30 June 1998 is an amount of $1,616,406.
Tribunal’s Order
170.The Tribunal decides:
1.In respect of QT2004/182, the Tribunal decides to affirm the decision under review.
2.In respect of QT2004/183, the Tribunal: (1) sets aside the reviewable objection decision of 16 April 2004 in connection with the determination issued under section 177F of the Income Tax Assessment Act 1936 to Farrago (NQ) Pty Ltd ATF the AM Trust; and (2) determines under section 177F(1)(a) of the Income Tax Assessment Act 1936 that the tax benefit that is referable to an amount that has not been included in the income of the Applicant in the income year ended 30 June 1998 is an amount of $1,616,406; and (3) remits this matter to the Respondent for reconsideration in accordance with the direction that the Respondent issue a further amended assessment to income tax to the Applicant that gives effect to the Tribunal’s determination pursuant to section 177F of the Income Tax Assessment Act 1936 that the tax benefits obtained by the Applicant in relation to his participation in the scheme identified by the exclusion of income is an amount of $1,616,406 in the income year ended 30 June 1998.
I certify that the 170 preceding paragraphs are a true copy of the reasons for the decision herein of Member SC Fisher
Signed: …Jeff Mills
Legal Research Officer
Dates of Hearing 20 and 21 February 2006
Date of Decision 22 June 2006Counsel for the Applicants Mr CD Coulson
Solicitor for the Applicants Tucker & CowanCounsel for the Respondent Mr GT Pagone QC & Mr SHP Steward
Solicitor for the Respondent Australian Government Solicitor
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