McMunn v The Queen
[2007] VSCA 149
•2 August 2007
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 173 of 2005
| JOHN THOMAS McMUNN |
| v |
| THE QUEEN (Commonwealth) |
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JUDGES: | ASHLEY and KELLAM JJA and KAYE AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 24 July 2007 | |
DATE OF JUDGMENT: | 2 August 2007 | |
MEDIUM NEUTRAL CITATION: | [2007] VSCA 149 | |
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Criminal law – Conviction on multiple counts of defrauding the Commonwealth and dishonestly obtaining a financial advantage by deception – Appeal against conviction – Alleged miscarriage of justice by reason of failure of Crown to call witnesses, by a change in the Crown case during the trial and by counsel for the Crown and the judge misstating the nature of the arrangements to which the applicant and taxpayer investors were parties – Whether trial judge erred by admitting into evidence record of examination of applicant by employees of the Australian Taxation Office pursuant to s 264(1)(b) of the Income Tax Assessment Act 1936 (Cth) – Whether trial judge erred by admitting into evidence Position Paper prepared by the Australian Taxation Office – Whether conduct of applicant’s counsel at trial so deficient as to cause a miscarriage of justice – Application dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| Applicant | In person | |
| Respondent | Ms R E Carlin | Commonwealth Director of Public Prosecutions |
ASHLEY JA:
John McMunn seeks leave to appeal against his conviction on 16 counts of defrauding the Commonwealth[1] contrary to the now-repealed s 29D of the Crimes Act 1914 (Cth) (“the Commonwealth Act”) and 16 counts of dishonestly obtaining a financial advantage by deception[2] contrary to s 82 of the Crimes Act 1958 (Vic) (“the State Act”).[3]
[1]Counts 1, 3, 5, 9, 11, 13, 15, 17, 21, 23, 25, 27, 29, 31, 33 and 35. The maximum penalty for each offence was 1,000 penalty units or 10 years’ imprisonment, or both.
[2]Counts 2, 4, 6, 10, 12, 14, 16, 18, 22, 24, 26, 28, 30, 32, 34 and 36. The maximum penalty for each offence was 10 years’ imprisonment.
In respect of his convictions on the counts referable to the State Act (“the State offences”), the judge imposed a total effective sentence of five years and four months’ imprisonment, and fixed a non-parole period of three years and six months. In respect of the offences referable to the Commonwealth Act (“the Commonwealth offences”), the judge imposed a period of two years’ imprisonment commencing on 5 May 2007, and ordered that the applicant then be released on a 12 month recognisance to be of good behaviour. The applicant sought leave to appeal against sentence. But he applied for leave to file a Notice of Abandonment at the hearing, and I am of opinion that the Court should grant the leave sought.
I add this for sake of completeness. At the conclusion of oral submissions, the Court requested written submissions from both parties relating to the propriety of the form of the sentence. In response to submissions made by the respondent, which in my opinion established such propriety, the applicant provided a short written submission. In that document the applicant did not seek to withdraw his Notice of Abandonment, but nonetheless submitted that the sentence imposed on him “was unfair and unjust.” It is not at all clear whether the applicant was thereby seeking to withdraw his Notice of Abandonment. If that was the applicant’s intention, such a withdrawal would have got the applicant nowhere. For, considering all the circumstances, including matters mentioned in the applicant’s submissions to which I have just referred, the substantive application on behalf of the applicant would have been hopeless.
The circumstances of the offending
The offences of which the applicant was convicted related to the mass marketing of a “business opportunity” scheme by the applicant (and persons on his behalf) between early 1998 and about September 1999. The counts upon which he was convicted related to the participation of 16 taxpayers in the scheme. Arising out of such participation, in each instance, the applicant was charged and convicted of two offences: one against the Commonwealth Act, and one against the State Act.
The factual content of the scheme, and of circumstances which led into it, were as follows:
In 1996 the applicant purchased a computer software program which enabled the calculation of interest payable on loans, including house mortgages, commercial bills, overdrafts and business loans. In 1997, the applicant purported to sell this software to Recalculation Services Ltd (“Recalc”), a company registered in New Zealand.
Between 1997 and 2000 Interest Recount Corp Ltd (“Recount”), a company controlled by the applicant, conducted a business on its own behalf through which it offered a service to the public, in the States of Victoria, Western Australia and Queensland, whereby it would, for a fee, calculate the interest properly payable by individuals and entities on their domestic or commercial loans. Under the terms of a written agreement between Recalc and Recount, the latter used the computer software program which Recalc had purchased from the applicant in order to calculate the interest properly payable on the loans. In the event that excess interest was shown to have been charged, Recount also undertook, for a fee, to attempt recovery of the overpayment from the lender, if necessary by instituting legal proceedings. The overall service was, in the main, marketed by salespersons employed by Recount, who made “cold call” telephone contact with prospective clients.
In early 1998, in conjunction with Recount’s interest recalculation business, the applicant also began to promote a scheme to taxpayers which was said to offer the prospect a good return on investment, and as well tax advantages. The scheme involved an arrangement whereby investors could purchase a “Master Licence” from Recalc. Such an agreement, it was represented, would entitle the taxpayer investor to the use – by Recount on the investor’s behalf - of Recalc’s software program, together with a defined client base – this being a list of allocated telephone numbers the size of which would be proportionate the amount of the taxpayer’s investment.
The applicant, and persons on his behalf, represented that pursuant to a Master Licence Agreement -
· Salespersons would ring the telephone numbers provided with the Master Licence Agreement and attempt to interest persons answering the phone in the loan interest recalculation services.
· If the sales pitch succeeded, the recipient of the call would provide the required details of his or her loan and the interest repayable would be recalculated.
· If an overpayment was detected, action would be initiated on behalf of the client for the recovery of the overpayment
· Recount would undertake any requested recalculation and recovery for a fee.
Some 89 taxpayers took up the “business opportunity”. They – I focus upon the investors (“Master Licensees”) whose transactions were the subject of the State and Commonwealth offences - entered into three written collateral agreements:
· First, a “Management Agreement” between the Master Licensee and Recalc whereby Recalc (through its agent Recount) undertook, for a fee per client, to conduct and manage the business represented by the Master Licence on behalf of the Master Licensee. Recalc was obligated under that agreement, through Recount, to telemarket the telephone numbers allocated to the Master Licensee.
· Second, a “Commission Agreement” between Recount and the Master Licensee whereby Recount was to perform, for a fee per client, and on behalf of the Master Licensee, the actual recalculation of the client’s loan and undertake any recovery action on behalf of the client.
· Third, a “Loan Agreement” under which the Master Licensee was to be provided with a limited recourse loan, the same to be paid in full up-front to Recalc as the Management Fees for the services which Recalc was contracted to perform under the Management Agreement during the first 12 months after the business of the Master Licensee commenced.
The up-front fee charged for a Master Licence was constituted by:
(a) An “Establishment Fee” of $1,250; and
(b) “Initial Master Licence Fees” of not less than $16,000. This was the amount payable if the client base consisted of 2,000 telephone numbers. It was made up of a first annual licence fee of $4,000 and a management fee of $12,000 (for the management services to be provided by Recount on behalf of Recalc in the first 12 months of the business).
Of the minimum amount just described, the Master Licensee was required to personally provide $4,000. This was equivalent to the annual licence fee, and was founded on a client base of 2,000 telephone numbers.
In respect of the balance of the up-front fees - in the example above, the establishment fee of $1,250 plus the management fee of $12,000, a total of $13,250 – the scheme offered the Master Licensee a loan from Bankfix, a company registered in New Zealand. Under the terms of the Loan Agreement, Bankfix undertook to draw down and pay Recalc, on behalf of the Master Licensee, the full amount of that balance. The loan funds were to be paid up front to Recalc in payment for the first year’s management services which were to be provided by it (albeit through Recount). This loan was represented to involve a limited recourse. The Master Licensee was required to repay it solely by way of 70 per cent of the gross yearly profit of the business represented by the Master Licence Agreement and the collateral agreements. Under the Loan Agreement, Bankfix agreed not to bring insolvency proceedings against the Master Licensee in the event of any default.
The limited recourse loan arrangement purported to be for a minimum of $13,250 for each Master Licence plus a further 75 per cent of the total value of any additional telephone numbers purchased over and above the minimum of 2,000 per Master Licence.
In the event, Bankfix did not disburse any monies to Recalc on behalf of the Mater Licensees as loans.
It was the Crown case that the applicant never had had any intention that Bankfix would (or would have the capacity to) make up-front loan advances to or on behalf of Master Licensees in accordance with the written representations relating thereto contained in the promotional material and agreements to which I have referred; and that it was not intended, and there was no financial capacity, for Recalc, through Recount, to conduct the businesses which the investors were led to believe would be conducted.
It was further the Crown case that both Recalc and Bankfix were entities ultimately controlled by the applicant, and that documents provided to the Master Licensees, including agreements, ostensibly originating from those entities were in fact generated by or on behalf of the applicant, in Melbourne, by using rubber stamps of the signatures of the directors of Recalc and Bankfix.
According to the Crown case, the applicant (and persons on his behalf) actively provided and marketed the scheme by making representations as follows:
· For a minimum investment of $17,250, the taxpayer would be provided with a business that was predicted to produce “excellent” cash flows for the benefit of the taxpayer each year for the following 20 years.
· The business would be managed, promoted, advanced and improved on behalf of each participating taxpayer by Recalc. Services would be performed on a day to day basis by Recalc (albeit by contracting out its obligations to perform such services to Recount) in accordance with the terms of written promotional material and of written agreements that were presented to each taxpayer participant, and in an expert, professional manner that would guarantee a satisfactory level of business activity.
· Each taxpayer participant would be entitled to a loan to fund the establishment fee and 75 per cent of the up-front fees which were required to be paid for entry into the scheme, with no requirement that the taxpayer pay interest or repay the loan from personal resources (independent of future profits derived from the business itself) and without any risk to the personal assets of the prospective participant.
· The loan funds were to be applied, in full, in advance payment to Recalc of an establishment fee, and for management services that Recalc was to be contracted to provide in respect of the taxpayer’s business in the first 12 months after entry into the scheme.
· Such management services would be provided during those first 12 months in a quantity and to a standard commensurate with the level of management fees to be incurred by participating taxpayers and paid up-front to Recalc under the terms of the written agreements.
· Providing the participant taxpayer was an Australian resident and was to enter and carry on the business offered (albeit under the management of another) with a dominant commercial purpose, each participant taxpayer, on the basis of the representations of fact referred to above, could claim the whole of the up-front fees (a minimum of $16,000) as a deductible expense against the taxpayer’s assessable income in the financial year in which the taxpayer entered the scheme.
· Such a claim could be expected to provide the taxpayer with an immediate taxation benefit in respect of that same financial year of up to almost double the total outlay required from the taxpayer’s personal resources (independent of future profits derived from the business itself) during the 20 year life of the business offered.
· The facts relevant to the scheme, as represented to the taxpayer in the written promotional materials and agreements referred to above, provided the taxpayer with a true and proper basis for making and for defending such a claim for tax deductible expenditure and for asserting a right to retain taxation benefits thereby obtained.
These representations, the Crown alleged, were substantially false or misleading, as the applicant knew. They were intended to, and did, induce taxpayers to participate in the scheme, to pay the cash component to an account in the name of the applicant’s company, and to make claims for deductible expenses against assessable income.
The fraudulent character of the scheme, the Crown asserted, was discernible at three points at least.
· First, it was never intended that Bankfix make payments to Recalc as might be onsent to Recount for services to be provided; and no such payments were made. It followed that there were no funds with which to conduct the individual businesses; and no such businesses were conducted.[4]
· Second, very little of the “real” money found its way to Recalc; and most of the money that did so was soon returned to Recount.
· Third, much of the money held by or returned to Recount was used by the applicant to fund personal expenditure.
[4]So, significantly, no phone calls were made on behalf of investors.
In all, according to the Crown case, each investor was led to believe that he or she would be engaging in a substantial business activity with prospect of profits, involvement in such activity generating a substantial taxation advantage for a minimal actual outlay and with the certainty that the outlay would never be any greater; whilst the applicant obtained the direct advantage of the payments of “real” money, and his company did not give, and never intended to give the agreed service in return.
The trial, plea and sentence
The trial commenced on 30 March 2005, but a jury was not empanelled until 6 April. There were 36 counts on the indictment/presentment. Between 8 April and 27 April the Crown called 43 witnesses, and put into evidence admissions of fact made by the applicant as well as other exhibits. On 28 April, counsel for the applicant intimated that no evidence would be called on behalf of his client. Then, certain anticipated Crown witnesses not having been called, the jury returned a directed verdict of not guilty on four counts. There followed the closing addresses by counsel, and the judge’s charge. The jury retired on 4 May. On 5 May it returned verdicts of guilty on all the extant counts. A plea hearing was held on 10 May 2005. The learned judge sentenced the applicant on 27 May.
Application for leave to amend grounds of appeal
The applicant was legally represented at trial and when notice of applications for leave to appeal against conviction and sentence were lodged. So also he was represented when the Full Statement of Grounds – which expanded the grounds referable to conviction from 2 to 6 - was prepared and filed.
By April this year, however, the applicant was no longer legally represented. At that time he filed a document headed “Amended Grounds of Appeal”. It related only to the conviction application. The grounds now numbered 15. It is convenient to set out the substance of the last-mentioned document.
“1.That a miscarriage of justice was caused by the failure of the Crown to call David Finney to give evidence at the trial of the applicant.
2.That a miscarriage of justice was caused by the failure of the Crown to call KPMG to give evidence at the trial of the applicant.
3.That a miscarriage of justice was caused by the Crown failing to disclose to the applicant prior to the calling of evidence from the witness, Dennis Masters, that his evidence would be that the financial arrangements in place for the operation of the scheme were a sham and non-existent.
4.That a miscarriage of justice was caused by the Crown deliberately misleading and deceiving the jury into accepting that the Crown’s interpretation of the words sham, charade, fictitious were, in the context of this trial, the only considerations that the jury should deliberate upon.
5.That a miscarriage of justice was caused by the learned trial judge in not excluding the evidence of an interview between the applicant and officers of the Australian Taxation Office, pursuant to s.264 of the Income Tax Assessment Act (1936) (Cth).
6.That a miscarriage of justice was caused by the learned trial judge in not excluding the evidence of the Australian Taxation Office Position Paper.
7.That a miscarriage of justice was caused by the failure of the learned trial judge to properly instruct the jury in matters of law.
8.That a miscarriage of justice was caused by the failure of the learned trial judge to instruct the jury that it was open to them to draw an adverse inference against the Crown following the fundamental change in the way the Crown opened and closed its case on the alleged involvement of David Finney with the applicant namely:
·The Crown opened its case stating that the opinion of David Finney was based on false representations made to him by the applicant; and
·The Crown in its final address, invited the jury to conclude that no false representations had been made to Finney by the applicant but rather to conclude that Finney was an accomplice of the applicant.
9.That a miscarriage of justice was caused by the failure of the learned trial judge to inform the jury that an alternate legal meaning was available for consideration into the words sham and charade, and that an alternate legal meaning was available for consideration into the loan arrangements.
10.That a miscarriage of justice was caused by the failure of trial counsel to object to the constant use of the words dishonestly, dishonest, false and misleading.
11.That a miscarriage of justice was caused by the failure of trial counsel to object to the continuous usage of the words pertaining to loans, loan arrangements, fictitious loans, no real money.
12.That a miscarriage of justice was caused by the incompetence of trial counsel to properly prepare and conduct a defence to counter the claims of the Crown.
13.That a miscarriage of justice was caused by the failure of trial counsel to call witnesses to give evidence at the trial.
14.That a miscarriage of justice was caused by the failure of trial counsel to seek a discharge of the jury, in relation to the change of direction of the Crown’s case.
15.That a miscarriage of justice was caused by the failure of trial counsel to call David Finney as a witness to give evidence at the trial of the applicant.
16.That a miscarriage of justice was caused by the failure of trial counsel to call KPMG as a witness to give evidence at the trial of the applicant.”
The applicant, though not unexpectedly he did not know it at the time, required leave to amend his grounds of appeal. The Court treated the “Amended Grounds of Appeal” as making the appropriate application to amend, and heard the application in the course of the appeal.
A comparison of the Full Statement of Grounds and the “Amended Grounds” shows that paragraphs 2, 4, 6, 7, 9 and 10-15 of the latter raised matters not comprehended by the former. Nonetheless, the Crown did not oppose the application to amend, and we granted it, so that the applicant might have the fullest opportunity to advance his argument.
In his written outline of submissions, and in his oral argument, Mr McMunn attacked –
· The conduct of the Crown at trial.
· The judge’s conduct at trial.
· The conduct of his own legal representatives at trial.
Although the precise complaints which the applicant made against the Crown, the judge and his own representatives were not identical, a number of themes constantly recurred. Those themes, and the other matters raised, may be summarised, in the from of propositions, this way –
1. A man named Finney should have been called by the Crown (ground 1), or by the defence (ground 15).
2. Related to (1) in a way which I shall describe, the Crown should have informed the defence that a witness, Masters, would give evidence that the financial arrangements in place for the operation of the scheme were a sham and non-existent (ground 3).
3. The Crown had changed its case during the course of the trial. Defence counsel should have sought a discharge of the jury (ground 14). (Alternatively), the judge should have instructed the jury that it could draw an adverse inference against the Crown in the circumstances (ground 8).
4. The Crown should have called (a representative of) KPMG to give evidence (ground 2); or else such a person should have been called by the defence (ground 16).
5. The Crown had constantly misstated the nature of the scheme by calling it a sham, a charade, and fictitious (ground 4). That was at odds with the decisions of the Full Federal Court in Commissioner of Taxation v Cooke and Jamieson[5] and of the High Court in Equuscorp Pty Ltd and Anor v Glengallan Investments Pty Ltd.[6] The judge erred by not directing the jury in accordance with those cases (grounds 7 and 9). Counsel for the defence erred by not objecting to the false characterisation of the scheme (grounds 10 and 11), and by not relying upon those authorities (ground 12). In addition, he erred by not calling some, though unidentified, expert witness (ground 13).
[5][2004] FCAFC 75.
[6](2004) 218 CLR 471.
6. The trial judge erred by not excluding from evidence a record of interview with the applicant conducted pursuant to the authority conferred by s 264(1)(b) of the Income Tax Assessment Act 1936 (Cth) (“the Tax Act”) (ground 5).
7. The trial judge erred by not “excluding the evidence of the Australian Taxation Office Position Paper” (ground 6).
I will deal with the appeal by reference to the topics thus identified. In some instances, as will be seen, topics can be grouped together. Before addressing the substance of the issues which were agitated, however, it is convenient to mention that counsel for the applicant at trial, having been apprised of the allegations made against him, intimated to the Court that he did not wish to respond.
Finney (grounds 1 and 15), Masters (ground 3), Change of Case (grounds 8 and 14)
Finney was a solicitor in 1997 and 1998. By letter dated 10 December 1997 he provided an advice to Recalc concerning the “general tax results applicable” to each Master Licensee assuming that such person was an Australian resident. This advice was provided, the applicant informed us, following a number of conferences between he and Finney.
These parts of the advice should be noted –
“I further understand that you will offer to manage the business of the ML as above referred to and shall charge a fee of $24,000 plus 4% of nett [sic] profit as defined. I understand that a loan for the $24,000 is available to approved MLs.
. . .
Under the terms of the Management Agreement fees are to be paid to the manager by the ML. These fees are payable in relation to the gaining of assessable income for the business and would fit within the requirements of Section 51 for tax deductibility purposes.
. . .
In order to qualify for tax deductions under Section 51, the ML is required to be carrying on a business. There are various indicators of whether a business is in fact being carried on. The most important of these is that a profit is intended and likely.
. . .
Based on the information provided to me, there seems no reason to suggest that what is happening here is not a business of ML.
. . .
On balance, it is my view that a Court would find that the activities carried on by you as manager of the business in accordance with the minimum sales requirements set out in the Master Licence Agreement, would constitute the carrying on of a business by ML for the purposes of section 51.
. . .
As I understand the expected income to flow in this business, there is every commercial reason why an ML should enter into this arrangement and in particular the taxpayer will end up paying a substantial amount of tax on the profits which are expected to well exceed any expenses incurred.”
On the face of it, Finney considerably turned his mind to the question whether a Master Licensee should be held to be carrying on a business. The import of his advice was that the activities to be carried on by Recalc under the proposed arrangement would, probably, constitute the carrying on of a business for the purposes of the Tax Act, and not infringe Part 1VA of that Act. The assumption inherent in this was that a business would be conducted. In that connection, the provision of loan moneys to fund the business should be thought to have been important; for it could hardly have been thought that the relatively small proportionate amounts which were to be paid by investors would meet that need.
Finney’s advice was provided to prospective investors. The purpose of this being done, evidently, was to help satisfy them that participation in the scheme would carry with it the asserted tax advantage.
When opening the case, Crown counsel referred to the advice, and observed that it was only as good as the facts upon which it was built. He remarked also that he did not suggest that either Finney or KPMG (which had also provided certain advice) “necessarily got it wrong on the facts as presented to them”.
The gist of the matter, counsel was saying, was that the advices were founded on instructions given by the applicant. They were part of his deception of investors. They said nothing at all about the applicant’s belief or intent concerning the scheme.
It is understandable, in the circumstances, that Finney was not listed as a Crown witness on the indictment/presentment. His advice stood for what it said, directed to investors.
It is not in dispute that, before trial, the defence did not request the Crown to call Finney.
At trial, a man named Masters was called by the Crown. He described his occupation as “part-time taxi driver, accountant and business consultant”. In early 1998 he had been a shareholder (or perhaps a proposed shareholder) in a McMunn company, and an employee of that company. In evidence which travelled beyond an earlier written statement Masters said that Finney had made it clear, in the course of a meeting in January 1998 attended by the applicant and the witness, that he was aware that the loan moneys which the scheme envisaged being paid by Bankfix to Recalc was not to involve the payment of real money. It was “just a revolving door”; “a piece of paper”.
That evidence was not the subject of cross-examination. It was not in dispute at trial – for the applicant made formal admissions – that in the relevant period Bankfix had not engaged in any loan transactions, nor (with strictly limited exceptions) had received or disbursed any moneys at all. Masters’ evidence, if accepted, showed that by January 1998 Finney knew about a circumstance that was not in debate. That did not necessarily mean that he had been seised of such information when he gave his advice a month or so earlier. On its face, the advice suggested the contrary.
Assuming that counsel for the Crown knew in advance Masters would give the particular evidence, I consider that no miscarriage occurred by leading that evidence without notice having been given to the defence side. For, as I have said, the evidence attracted no cross-examination; and in a way defence counsel sought to rely, in his final address, on Finney having the particular awareness. For he argued that the applicant had relied upon the (informed) advice of a tax expert, this negating a suggestion of dishonesty on the part of his client.
I have already observed that counsel for the applicant made no request, before the trial began, that the Crown to call Finney. Masters’ evidence, I now note, did not provoke any such request.
In closing address, counsel for the Crown referred to Finney’s advice and to Masters’ uncontroverted evidence. He pointed out that Masters had been dismissed within a few days of expressing concern about the arrangement. He then submitted:
“So there can’t be any doubt the Crown says that the accused was well aware that there was an issue of controversy here arising from the loan arrangements … controversy that would have been relevant to the investors, their financial and legal advisers and to the tax office ultimately.”
A point which he seems to have been making was that the applicant’s dishonest intent was underlined by his getting rid of Masters when the latter became apprised that there were no loan moneys.
It was in the context thus described that counsel said this about Finney:
“Now, where does that leave Mr Finney in all of this because his advice seems to suggest, and it’s a matter for you whether it does, but I would submit that if you read Mr Finney’s advice it is couched on the basis that there are real funds behind these loan arrangements and that the scheme is supposed to operate in the way that real funds that are to be used for the provision of the management services under these loan arrangements.”
and
“Now, if the advice does bear that reading, and we submit it does, then that puts a real big question mark over the role of Mr Finney in all of this, does it not.”
and
“We would submit that it would be open for you to conclude that Mr Finney was an accomplice. But that’s nothing you have to decide. But if you’re looking to the role of Mr Finney and to the quality of the advice that he has given, given the knowledge that he apparently had at least in January of 1998 then, in our submission, you would treat that advice with a good deal of suspicion. Of course that’s not to say that any of the investors would have been aware of what Mr Finney knew, nor any of the financial advisers who relied upon his advice.
On the face of it the advice appears to be sound. There’s no particular reason to doubt what Mr Finney says from the face of the advice. Because if you take it that there are real funds behind the loan arrangements, the arguments he presents do on the face of it, we accept, have a degree of coherence and accuracy about them. Just as based apparently on a similar misunderstanding of the true facts, namely that there were real funds behind the loan transactions, the advice of KPMG also stacks up in similar terms. There’s nothing apparently wrong with the advice that they’ve given.
But the advice is only as good as the facts upon which it’s based.”
Counsel for the defence sought to make a lot of what he asserted was a change of direction in the Crown case. Counsel for the Crown, he submitted, had uttered an “absolute bombshell” in his final address, by raising the possibility that Finney had been an accomplice. It was an “outrageous allegation right at the last minute”. You could not have someone “who’s an unwitting person doing it one minute and call him a crook the next.” The Crown had never sought to call Finney, or any representative of KPMG. There had been an attack on Finney, but not on KPMG. The explanation was that the latter was “a world wide organisation”, and that taking it on “might be a bit risky”. Why, counsel asked, should the applicant not have relied upon the tax advice of an expert such as Finney?
Counsel did not seek, however, the jury’s discharge in the face of this asserted change in direction. Rather, he pressed the judge to direct the jury that the prosecution case must end as it had begun.
Her Honour did not accept that there had been a change in the substance of the Crown case. In my opinion, she was right so to conclude. The submissions of defence counsel took every possible advantage of what was called the change in direction of the Crown case. But the gist of that case, I consider, really remained constant. Finney’s advice, founded on instructions given by the applicant, was misleading, and a false encouragement to investors. It was misleading whether Finney, as his advice would suggest, believed that there were to be loan moneys, or whether he then (or thereafter) knew that this was not to be the situation. In the first case he had been the applicant’s unwitting dupe; in the latter, he had been complicit in the applicant’s dishonesty. As the prosecutor rightly said, whether Finney’s role was one or the other did not have to be decided. For his advice was, on its face, founded on an erroneous factual situation supplied by the applicant. On neither analysis of Finney’s role was this a case of the advice having led the applicant to a conclusion that the scheme involved no relevant dishonesty. There was no unfairness to the applicant in the way that the case finally went to the jury.[7]
[7]An instance of a similar conclusion being reached is to be found in R v Debs & Roberts [2005] VSCA 66, [319]–[322], (Vincent JA).
In the event, had defence counsel sought the jury’s discharge, the application would rightly have been refused. So also, the judge did not err in failing to give a direction such as the applicant submitted before us should have been given.
That leaves the question whether, despite his name not being listed on the indictment/presentment, and despite the defence side having made no relevant request, the Crown caused a miscarriage of justice by not calling Finney; and the further question whether the defence side seriously erred by not doing so. In my opinion those questions should be resolved against the applicant.
Finney’s significance in the overall picture lay in the advice which he gave, apparently founded on a state of facts which did not represent the true situation. The advice was apt, and was used, to encourage investors to participate in the scheme. It supported a conclusion that the applicant had been knowingly dishonest – either by misleading Finney as to the true situation regarding loan moneys (and thus Recalc’s intent and ability to conduct the business which was promoted); or else by informing Finney of the true position and yet promoting the scheme by reference to an advice which was apparently founded on a different assumed state of fact. Neither alternative was any the better for the applicant.
What, then, could have been the purpose of requesting the Crown to call Finney; and the possible utility, from the applicant’s standpoint, of doing so? Had he been called, he might have said – contrary to Masters’ evidence – that he understood that there were to be “real” loan moneys. That would have validated his advice; but it would have emphasised the falsity of the applicant’s instructions. Alternatively, he might have said that he knew from the outset that there were to be no “real” loan moneys; and then have refused to answer questions concerning his advice - in reliance on the privilege against self-incrimination. Alternatively again, he might have said that he believed there were to be “real” loan moneys when he gave his advice, but later learned that this was not so. That would have required him to explain why he did not then give a supplementary advice founded upon the true situation – unless he was prepared to say that it did not matter. The latter course would have been very difficult, and such evidence would have lacked credibility. Finally, he might have said that he always knew that there were to be no real loan moneys, and yet that he adhered to his advice. That would also have been extremely difficult in light of the tenor of the advice itself; and again such evidence would have lacked credibility.
In all, any evidence that Finney might have given would very likely have further damaged the applicant’s case. I see no basis upon which it could be successfully argued, by reference to authorities cited by the applicant such as R v Apostilides[8] and Tran v Magistrates’ Court[9], that the Crown must have called Finney; and I would not criticize defence counsel in any way for not doing so.[10]
[8](1984) 154 CLR 563, particularly at 575-576.
[9](1998) 4 VR 294 .
[10]The correct approach to consideration of a complaint against counsel’s conduct of the trial being illustrated by, for example, R v Birks (1990) 19 NSWLR 677 at 685 (Gleeson CJ) and R v MNG [2002] VSCA 7 at [36]–[38] (Phillips JA).
KPMG (grounds 2 and 16)
KPMG provided Recalc with a general advice dated 20 March 1998 concerning the taxation implications of the scheme for Master Licensees. It was founded on documents provided by the applicant.
The advice plainly stated that the tax treatment of each cost to be incurred by a Master Licensee was “based on the premise that the Master Licensee carries on business for the purpose of earning assessable income”.
The advice referred to the proposed loans. A copy of the pro forma loan agreement was annexed to the advice. Nothing in the advice suggested awareness that the loans would not be “real money”. Indeed, repeated reference to it being assumed that the arrangement was to involve the carrying on of a business with a view of profit implies the contrary.
The KPMG advice was prepared for use, and was used, to encourage participation by investors. In both his opening and final addresses, counsel for the Crown referred to the advice. He submitted that it was only as good as the facts on which it was built. Counsel did not submit that it was wrong on the state of fact assumed by the author. But that state, he contended, did not represent the true situation. The applicant could not gain comfort from the advice, counsel submitted in his final address, because he knew the real facts.
In my opinion, the applicant’s submissions that the Crown’s conduct in not calling a representative of KPMG caused a miscarriage of justice, and that his own counsel gravely erred by not calling such a person, lacked substance. No KPMG representative was listed as a witness on the indictment/presentment; and in my view there was no reason why such a witness should have been listed. Further, the fact that defence counsel did not request the Crown to call such a person was in my opinion entirely understandable. I think it is very clear that any evidence which a KPMG representative might have given would not have assisted the applicant. It would have confirmed, if confirmation be needed, that the KPMG advice had been given on the basis of instructions which emanated from the applicant, and which were erroneous in a very material respect. This must have tended to highlight what the Crown claimed was the applicant’s dishonest intent in the context of both the Commonwealth and State offences.
The false characterisation of the scheme [grounds 4, 7, 9, 10, 11, 12 and 13]
It was the Crown case that the scheme was a sham, a charade and fictitious. It could hardly be expected that Crown counsel would not use such words, and use them often, in the course of the trial; just as it should have been expected, and it was the case, that defence counsel would robustly challenge such a characterisation. What the jury had to decide - as it was very clearly informed by counsel, and by the learned trial judge - was whether the Crown had established the elements of the Commonwealth or State offence, as the case might be, upon each specific count. Looked at in the broad, I think it is not at all likely that the jury would have been distracted from its task by the appellations of the scheme offered by counsel.
According to the applicant, however, the way in which counsel for the Crown characterised the scheme was unsupportable in light of the Cooke and Equuscorp cases; and it was those decisions which had required the trial judge and counsel for the defence to act otherwise then they did.
Cooke was a civil case involving a dispute between a taxpayer and the Commissioner of Taxation. The Full Court of the Federal Court dismissed an appeal against a decision at first instance which allowed full tax deductibility of a taxpayer’s participation in a flower growing and export scheme - participation in which had been assured by the taxpayer borrowing most of the amount payable. There was no suggestion in that case that the borrowing did not take place. Further, the judge at first instance accepted expert evidence as to the horticultural viability of the scheme, and accepted that the taxpayer’s dominant purpose in entering into the scheme was the gaining of assessable income.[11] The issues which arose both at trial and on appeal were distant from the issues which arose on this prosecution. It was beside the point that in Cooke there were various inner-company loans of which the taxpayer was not apprised.
[11]And on appeal it was concluded also that the plantation manager’s dominant purpose was not shown to be that the taxpayer thereby obtain tax benefits.
The Equuscorp litigation arose out of the participation by investors in a “large scale aquaculture project in Northern Queensland”. Participation was by purchase of units. Provision was made for borrowing almost all of the cost of units. It was asserted by the promoter that nearly all the cost would be deductible in the initial financial year. Equuscorp (as assignee of the loans) in due course sued the investors relying upon written loan agreements which they had executed – but which, they claimed did not constitute their agreement to the lender. The question which arose was whether any loans had been made to the investors. If there had been no loans, then there could be no recovery by Equuscorp.
It was held at first instance that there were no loans because a round robin of transactions were “book entries made to create an audit trail”, and that each of the transactions was “a complete artifice or charade”. The Queensland Court of Appeal dismissed Equuscorp’s appeal, observing that “it was fundamental to the performance of the various agreements … that real money flow from [the purported lender] to the entities responsible for conducting the enterprise”. In the High Court, however, a contrary conclusion was reached. The Court held that the source of rights and obligations was the written agreement executed by each of the investors. It further held that each of the financial transactions recorded by Westpac was legally effective. Debts were “created and satisfied at all points in the chain”.[12]
[12][40].
The applicant seized on references to “real money” in the reasons for judgment in Equuscorp[13] as if they provided an answer to the charges brought against him. But nothing said by the High Court addressed the circumstances of the present matter. The Crown case here was that there never was the capacity, and it was never intended by the applicant, that there be any loan to investors, satisfied by payment to Recalc; and that there were no loans in fact. Absent loans, the Crown argued, there was no capital for use in prosecuting the telemarketing business; and in fact that business was not prosecuted in the case of any investor. Moreover, the question whether or not the Equuscorp investors could properly claim tax deductibility of what they had expended, very largely by way of loans which the High Court held had actually been made to them, would say nothing about the tax deductibility of an investment in respect of which expenditure largely consisted of a loan which was never made.
[13]Particularly at [43] and following.
In the event, properly understood neither Cooke nor Equuscorp assisted the applicant; and it was unremarkable that they were not relied upon at trial.
In part related to the conclusions just expressed, I would not criticize defence counsel for not calling “an expert”. An expert to say what? Such a person could not have made anything out of Cooke or Equuscorp. Neither would such a person have been permitted to give evidence, as perhaps the applicant suggested, that hundreds of schemes like his had been floating around over the years without attracting the attention of the Australian Taxation Office (“ATO”). Again, calling an expert would have been fraught with danger if such person had been confronted with commenting upon the apparent bona fides of a scheme which would be very largely bereft of funds for prosecution of the asserted “business opportunity.”
The s 264 record of interview
By letter dated 24 May 1999 the ATO gave notice to the applicant pursuant to s 264(1)(b) of the Tax Act. It required him to attend and give evidence –
“ ... concerning the income or assessment of the following: John McMunn; Victor Boscoe; Peter Fulton-Kennedy; Victoria Fulton-Kennedy; Interest Recount Corporation Pty Ltd; Interest Recount (WA) Pty Ltd; Interest Recount (Qld) Pty Ltd; Interest Recount (SA/NT) Pty Ltd for the period 1 January 1997 to 24 May 1999.”
The applicant did attend, was examined, and a record was made.
It was not contended at trial that the record did not contain material which was relevant to the charges laid against the applicant. The learned judge identified this potential relevance of the record in her ruling as to its admissibility.
Counsel submitted, however, the record of interview should not be admitted because the interview had been conducted for an improper purpose – that is, to establish that the applicant had committed criminal offences; and this in circumstances where he had not been accorded any of the safeguards set out in Division 30A of Part III of the State Act and its equivalent in the Commonwealth Act. He perhaps submitted, in connection with his contention concerning failure to warn, that the record of interview should be excluded on the grounds of fairness.
The judge held, correctly in my respectful opinion, that neither Division 30A nor its Commonwealth equivalent had operation in respect of an examination conducted pursuant to s 264(1)(b). She rightly observed, also, that on such an examination there is no privilege against self-incrimination. So any warning would have been an exercise in futility.
The judge further concluded, having examined the record of interview, that the interview was not shown to have been conducted for a purpose other than that authorised by s 264. In my opinion that conclusion, for the reasons which her Honour gave, is unassailable.
Finally, the judge concluded, giving reasons, that there was no unfairness as should lead to the record of interview being excluded. Again, I consider, her Honour’s conclusion was unassailable.
On the appeal, the applicant’s written outline complained of a denial of natural justice, a failure to warn, and the pursuit of an improper purpose. The substance of those matters was correctly disposed of by the trial judge.
The applicant also complained that admitting the record at least created a risk that the jury might conclude from the form of the questioning that the loan arrangements should be characterised in the way for which the Crown contended. I do not accept that there was such a risk. Nor do I accept, if there was, that it should have led to the exclusion of the record of interview. In truth, in any event, there was no controversy at trial about critical aspects of the loan arrangements.
The applicant, by oral submissions, focused upon none of the matters set out in his outline. He rather argued that the judge erred in admitting the record of interview because she was ignorant of Cooke and Equuscorp, and because she had a “sympathetic bias” towards the ATO’s position – not that she had been biased. In my judgment, there was no substance to those submissions. For reasons indicated, neither Cooke nor Equuscorp bore upon the applicant’s guilt or innocence. Again, I consider that the judge’s conduct of the trial was properly even-handed. The examples which the applicant provided of “sympathetic bias” established nothing of the kind. In considerable part, I add, the transcript references which he provided were to the submissions of counsel.
The ATO position paper (ground 6)
On 27 July 2000 the ATO sent a document to all the taxpayers who had made a claim for tax deductibility in respect of their investment in Recount. It advised the ATO’s conclusion that the claims were not deductible; and that this was so for a number of alternative reasons: that the arrangements were a sham; that the expenditure had been incurred for a purpose other than gaining or producing assessable income; that the expenditure had not been wholly incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for that purpose; that, if the expenses had been so incurred, then any revenue component should be apportioned over a number of years: and that the anti-avoidance provisions operated. The analysis, which addressed a number of the provisions of the Tax Act, was accompanied by an encouragement to the addressee taxpayer to “voluntarily provide details of all deductions claimed and [to] request the Commissioner to amend” the taxpayer’s assessment(s).
The analysis – called a Position Paper - showed that, whilst the ATO was by then seised of a good deal of information about the scheme, its knowledge about matters which it considered were relevant to its assessment of taxation consequences was patchy. Thus, the document said that – “it is suspected that the loan funding was provided by way of a ‘round robin’ and that these loans were not intended to result in the provision of real funds”. Again, the paper referred to a ”suspected lack of real funds being available to the manager to perform tasks required under the Management Agreement, to “conflicting information from [Recalc] as to the overall performance of the Recount arrangement”, to “no details [being] provided regarding outstanding loans”, and to “Recount ‘appear[ing] to have applied [cash contributions] for purposes unrelated to investors [sic] businesses.”
In all, the paper showed that although the ATO then had sufficient information to form an opinion about the non-deductibility of moneys paid and moneys apparently borrowed, it did not know the full story. It had not got the full story from the applicant. Further, as the Crown asserted, it could not get all relevant information from the investors – for they did not know the full story.
The importance of this situation, from the Crown’s standpoint, was that in proof of the Commonwealth offences it had to establish, in the first place, that the applicant
“had intentionally created a situation that had the effect of depriving the Commonwealth of money or putting the money of the Commonwealth at risk or prejudicially affecting the Commonwealth in relation to its right or interest in protecting the national revenue.”[14]
[14]This was the way that counsel for the Crown put it in opening. The judge used much the same language in her charge.
In proof that the applicant had acted in such a way, the Crown relied upon his having deliberately putting out falsehoods which were such as to encourage taxpayers to participate in the scheme and to claim tax deductions on the basis of false facts – the falsity of which they did not know, and could thus not reveal to the ATO; the true substance of the arrangements, despite the s 264 examination of the applicant, remaining in part unknown to the ATO a considerable time after the relevant transactions had taken place.
It was thus relevant that the ATO, despite enquiry, still had unanswered questions concerning the scheme in 2000. It was, to the contrary, not in point that, equipped with such information as it did possess, ATO had formed an opinion that the investors’ actual and presumed expenditure was not deductible.
In the course of the trial, the Crown sought to tender the Position Paper, to establish that the ATO “had been prejudiced by the fact that material information was deliberately concealed from [it], in particular in connection with the loan agreements and the existence or otherwise of real funds flowing into the businesses by way of management fees.” Counsel for the applicant objected. Then counsel for the Crown submitted that the alternative was to lead evidence viva voce from an ATO witness, specifically as to the prejudice to the ATO of not knowing there were no loan funds.
The position was thus reached that the document was not admitted into evidence but that, no objection being taken to that course, certain viva voce evidence could be led in respect of matters dealt with by the document. Such evidence, quite limited in its scope, was led.
Then counsel for the applicant cross-examined. In the course of doing so in robust fashion, he sought to establish that there were errors in the analysis which it made.[15] The cross-examination had some force. But it led to the Crown making a successful application in re-examination for the document to be admitted in order to put a context to concessions which had been made in cross-examination.
[15]Indeed, he went much further, and in substance attempted to extract admissions from the witness that the ATO’s non-deductibility conclusion had been erroneous.
On the appeal, the applicant submitted that the effect of admitting the document was to place before the jury the answer to the question which it had to determine in respect of the Commonwealth offences – by placing before it an untested characterisation of the arrangements which reflected the biased position of the ATO, a position which was contrary to authority.
In my opinion, in the circumstances which arose, the document was not wrongly admitted. Moreover, in my opinion it is clear that counsel for the Crown in his final address, and the learned judge in her charge, properly explained the basis of the admission, and the matters to which the content of the document could go. So, I consider, the risk was obviated that the jury might be influenced to a finding of guilt of the applicant in respect of the Commonwealth offences by adoption of the ATO’s expressed position.
Orders
In my opinion, the application for leave to appeal against conviction should
be dismissed, and leave should be granted to the applicant to abandon his application for leave to appeal against sentence.
KELLAM JA:
I agree.
KAYE AJA:
I have had the advantage of reading in draft the reasons given by Ashley JA. For the reasons expressed by his Honour I agree that the application for leave to appeal against conviction should be dismissed. I also agree that the applicant should have leave to abandon his application for leave to appeal against sentence.
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