Mitri and Commissioner of Taxation (Taxation)
[2023] AATA 3762
•30 October 2023
Mitri and Commissioner of Taxation (Taxation) [2023] AATA 3762 (30 October 2023)
Division:TAXATION AND COMMERCIAL DIVISION
File Numbers:2021/4969-4970
2021/4902-4903
2021/4904-4905
2021/4906-4914
2021/4915-4916
Re:Renee Mitri
APPLICANT
Re:Michelle Mondous
APPLICANT
Re:Natalie Mondous
APPLICANT
Re:Frontlink Pty Ltd
APPLICANT
Re:Frontlink Pty Ltd as trustee for The Mondous Family Trust
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President Bernard J McCabe
Senior Member Robert J OldingDate:30 October 2023
Place:Melbourne
1.By 14 November 2023, the parties must file in the Tribunal agreed orders that give effect to the conclusions in the accompanying reasons for decision or, failing agreement, each party’s proposed orders and short supporting submissions.
2.By 14 November 2023, the applicants must file in the Tribunal and serve on the respondent any further written submissions regarding administrative penalties and shortfall interest charges.
3.By 28 November 2023, the respondent must file in the Tribunal and serve on the applicants any further written submissions regarding administrative penalties and shortfall interest charges.
4.By 5 December 2023, the applicants must file in the Tribunal and serve on the respondent any submissions in reply.
.......................[SGD]...................................
Deputy President Bernard J McCabe
Senior Member Robert J OldingCatchwords
TAXATION – INCOME TAX – whether applicants discharged burden of proving gains on sale of real property were capital in nature and properties acquired by applicant not in its own right but as trustee of a trust – held burden of proof not discharged
Legislation
Income Tax Assessment Act 1997, s 6-5
Taxation Administration Act 1953, s 14ZZKCases
Admin Exploration Pty Limited (inLiq) v Federal Commissioner of Taxation (1972) ATC 4253
Anglo American Investments Pty Ltd v Commissioner of Taxation [2022] FCA 971
Buckland v Commissioner of Taxation (1960) ALJR 60
Casey v Repatriation Commission (1995) 60 FCR 510
Commissioner of Taxation v Cooling [1990] FCA 204
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199
Greig v Commissioner of Taxation [2020] FCAFC 25
McCurry v Federal Commissioner of Taxation [1998] FCA 512
Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972Moana Sands Pty Ltd v Federal Commissioner of Taxation [1988] FCA 401
REASONS FOR DECISION
Deputy President Bernard J McCabe
Senior Member Robert J Olding30 October 2023
WHAT IS THIS CASE ABOUT?
This case is about the income tax treatment of profits or gains on sales of various properties by Frontlink Pty Ltd (Frontlink). The primary issue is whether the profits or gains were on revenue or capital account.
If profits or gains on sales of land subdivided from the most significant property (the Cranbourne property) were on capital account, a further issue would arise regarding application of the small business capital gains tax concessions. In view of the conclusions we have reached, it is not necessary to address those issues.
In respect of the other properties, there is also a controversy regarding whether Frontlink undertook some of the transactions in its own right or, as the applicants assert, as trustee for The Natalie Mondous Family Trust (NMFT).
Additionally, there are assessments of administrative penalties and shortfall interest charge (SIC) before the Tribunal for review.
Other than in respect of certain concessions made by the Commissioner, we have concluded the applicants have not discharged the burden of proving the primary tax assessments are excessive. Since our findings may inform the appropriate decisions concerning penalties and SIC, we have decided to give the parties an opportunity to make further submissions on those matters.
BACKGROUND[1]
[1] The evidential foundation of the findings included in this and the next part of these reasons is set out as necessary in the more detailed discussion later in the reasons.
Souhail Mondous (known as Sam) has a long and successful history as a land developer. He has carried out numerous developments though various entities over some decades.
In 2013, Sam was in the happy position that Frontlink - a company with which, although wholly owned by his daughter, Natalie Mondous, Sam had been deeply involved from the time of its acquisition as a shelf company - had realised gains on sale of the Cranbourne property of over $40M in the 2011 and 2013 income years. But with good financial fortune comes substantial taxation liabilities and, if those liabilities are not met in a timely fashion, interest charges.
If the gains were brought to account by Frontlink as ordinary income, the company would have been facing a substantial tax bill. It would also face substantial interest charges given its 2011 and 2013 returns were not lodged until March 2014 and June 2015 respectively. If the gains were on capital account there was potential for the 50% CGT reduction under the small business provisions to apply and the remaining 50% to be rolled over to a later year, with substantially lower taxation and interest liabilities.
The latter option, treating the gains as on capital account, claiming the 50% CGT reduction and rolling over the remaining 50% to a later year, was obviously far more attractive. But there were some difficulties with taking that course.
The first was Sam’s long history as a land developer. That might give rise to an inference Frontlink was just another Mondous entity that had embarked on a business of buying, developing and selling land. However, Sam gave evidence that Frontlink was established for Natalie’s long-term benefit and the Cranbourne property (and the other properties it acquired) were intended to be operated as farms. At the time they were acquired, he said there was no intention to sell the properties at a profit.
A second issue was that if only the Cranbourne property were counted, Frontlink might qualify for the CGT concession. However, if the other properties, or other assets held by Mondous family entities, were counted it would not.
The applicants maintain that Frontlink acquired the other properties as trustee for the NMFT. On this premise, these other properties would be assets of the NMFT for tax purposes and not assets of Frontlink. Significantly, accounts were not prepared for the NMFT until 2013; before that, the properties were included in the accounts of Frontlink.
The applicants also deny that Frontlink could reasonably be expected to act in concert with or in accordance with the wishes of Sam such that, under the relevant CGT provisions, assets of other Mondous family entities would be aggregated with the Cranbourne property. Specifically, Sam repeatedly denied that he made decisions for Natalie, asserting that he provided advice but Natalie could and did make her own decisions as Frontlink’s sole director.
In relation to penalties, the applicants maintained they could not, in the way tax returns were lodged, be said to have intentionally disregarded the law. Alternatively, they submit it is appropriate to remit any administrative penalties, and that SIC should also be remitted.
SUMMARY OF OUR CONCLUSIONS
The applicants face considerable hurdles in persuading us the assessments are excessive.
Aside from documentary evidence, the main evidence before the Tribunal is the evidence of Sam. However, Sam maintains he merely assisted Natalie who made her own decisions.[2] Natalie did not give evidence of the decisions she made or the considerations that motivated them.
[2] See, for example, Transcript P35, lines 29-37; P134, lines 1-21.
There is no doubt Sam was heavily involved in most aspects of Frontlink’s affairs and executed key documents on behalf of Frontlink. However, there is also evidence that Natalie executed some important documents herself – such as an affidavit prepared in connection with a Victorian land tax issue, some contractual documents and an authority for Sam to negotiate on her behalf as director of Frontlink. And she is, after all, Frontlink’s sole director.
Mr Solomon KC, who appeared for the applicants, explicitly declined to identify any individual as the controlling mind of Frontlink. In particular, Mr Solomon did not submit Sam was Frontlink’s controlling mind.[3]
[3] Transcript, P 306-310.
We expect Mr Solomon had good forensic reasons for adopting that position, related to the control tests under the CGT provisions, but it has consequences for the Tribunal’s task. The Tribunal is left in a position where a corporate taxpayer (Frontlink) asks the Tribunal to make findings regarding the company’s purpose, in circumstances where:
(a)the company will not say which individual’s purpose should be attributed to the company;
(b)the sole director and shareholder of the company has not given evidence;
(c)Sam - the only other likely candidate as the controlling mind of the company -repeatedly denied under oath that he made decisions for the director. He insisted he provided advice in the style of a mentor but the director made up her own mind.
If Sam was not the directing mind and will of Frontlink, it is unclear why we should give any weight to his evidence as to the company’s purpose in entering into any of the transactions in question. If we take that approach, it is difficult to see how the applicants can succeed in the absence of other evidence (provided by the director, for example) about the company’s purpose. But we have difficulties with Sam’s evidence in any event that contribute to our conclusion that we are not persuaded the primary tax assessments are excessive, other than in some respects conceded by the Commissioner.
One difficulty arises out of the profound inconsistencies between Sam’s evidence in this case and the sworn evidence he has given elsewhere. An example, discussed further below, is evidence Sam gave in proceedings in the Supreme Court of Victoria which contradicts what he has said in this case in important respects. He now claims that earlier evidence was incorrect because he was saying what his lawyers told him to say on that occasion, and because it was the first time he had given evidence in the Supreme Court. Neither of those explanations gives us confidence that Sam’s evidence before the Tribunal may be relied upon.
Quite apart from those questions of credit, important parts of Sam’s evidence in these proceedings were difficult to accept. For instance, in respect of the Cranbourne property, Sam maintained that:
(a)he knew nothing of proposed re-zoning which ultimately led, along with the subdivision it permitted, to the substantial gains upon sale of the subdivided lots;
(b)he was not interested in the re-zoning;
(c)Frontlink would not have purchased the property if he had known of the potential re-zoning;
(d)it was the rezoning, resulting in higher holding costs, that forced Frontlink to sell the property.[4]
[4] Exhibit 5.3, paragraph 10.
The applicants would have us accept that evidence by Sam in the face of uncontroverted evidence that:
(a)the option to purchase the Cranbourne property, which preceded the contract of sale, executed by Sam was conditional upon rezoning occurring;
(b)the Casey City Council had embarked upon an extensive consultation program about zoning of the land;
(c)after settlement, Sam attended meetings with the Council about representations being made for the lands to be rezoned;
(d)Frontlink voluntarily paid over $100,000 to the Council in connection with the proposed rezoning.[5]
[5] Strategic Planning Funding Agreement dated 3 August 2006, Hearing Book, 3579.
Sam’s evidence that the properties were acquired only for farming and generated “good income” from farming had its own difficulties. Chief among these is the properties never generated a profit in any of the years for which financial information was provided. Nor was there any evidence that Sam or anyone else undertook any projections or other investigation to determine whether the properties could support a viable farming enterprise before they were purchased. Indeed, an external consultant engaged by the vendors of the Cranbourne property advised planning authorities that it was not a viable farm and any grazing was primarily for weed control.
Sam’s assertion that Frontlink intended the other properties would be acquired in its capacity as trustee of the NMFT is also problematic. First, there is the difficulty that such treatment was inconsistent with financial statements prepared for Frontlink and that the properties were never treated as assets of the NMFT until accounts were prepared for the NMFT and Frontlink’s accounts retrospectively adjusted years later. Additionally, there are affidavits of Sam and Natalie deposing in 2008 that Frontlink did not act as trustee, and at least one contract containing a warranty to that effect.
Further, Sam’s evidence was that Frontlink was established for Natalie’s benefit and the NMFT was established for his three daughters - Natalie, Renee Mitri and Michelle Mondous - in the context of resolving a dispute with his wife, Naila, that had been the subject of such ongoing tension that it threatened their marriage. Against that background, it stretches credibility to accept that Sam never noticed over the years the properties were listed as assets, and the income accounted for, in the accounts of Frontlink and no accounts were prepared for the entity – the NMFT – said to have been created as part of the resolution of the dispute with Naila and to hold 14 valuable properties.
Further, Renee and Michelle did not become beneficiaries of the NMFT until 2014. Nor, even though they were applicants in the proceedings, did they give evidence regarding the arrangements said to have been entered into for their benefit and participation.
Because of the factors outlined above, the evidence provided primarily by Sam, considered in the context of contrary documentary evidence is, in our view, insufficiently reliable to discharge the burden of proving the gains were not of a revenue nature and, so far as it remains relevant, that any properties were acquired by Frontlink as trustee for the NMFT. We set out more detailed findings and reasons in relation to these issues below.
THE PROPERTIES AND GAINS
Cranbourne property
Frontlink derived profits or gains of over $42m from the sale of subdivided lots under a contract with a subsidiary of the Australand property development group in the 2011 and 2013 income years.
The parties agree Frontlink conducted these transactions in its own right and not as trustee for the NMFT.
Frontlink says the transactions were on capital account and lodged its returns on the basis that it was entitled to bring to account 50% of the gains in accordance with the CGT small business concessions, and rollover the remaining 50%.
The Commissioner says the profits or gains were revenue in nature and in any case Frontlink would not qualify for the CGT small business concessions.
Beveridge property
In the 2009 income year, Frontlink sold this property to a related entity (which on the same day entered into an option agreement for the development of the property with an Australand company) at a profit or gain of $5M. The sale price was payable in instalments of $500,000 per year.
Frontlink contends this transaction was capital in nature and that the property was acquired and sold in its capacity as trustee of the NMFT.
The primary assessments (see below) reflect the Commissioner’s contention that the transaction was on revenue account and conducted by Frontlink in its own right.
There is no alternative assessment on the footing that Frontlink sold the Beveridge property as trustee of the NMFT. That is because, on the Commissioner’s case, if any of Frontlink’s properties came to be held by Frontlink as trustee of the NMFT, that did not occur until the 2014 income year.
Clyde North properties
These are three properties located at Pound Road, Grices Road and Soldiers Road respectively. Under a project delivery agreement with an Australand company, Frontlink made a profit or gain of over $13m in the 2014 and 2015 income years from the sale of lots subdivided from these properties.
Frontlink contends these transactions were capital in nature and conducted in its capacity as trustee for the NMFT.
Primary assessments
The primary assessments reflect the Commissioner’s contention that the transactions were on revenue account and conducted by Frontlink in its own right.
However, the Commissioner now accepts Frontlink sold these properties as trustee for the NMFT on the basis that Frontlink commenced holding the Clyde North properties as trustee for the NMFT from October 2013.
Alternative assessments
The Commissioner issued alternative assessments against Frontlink as trustee for the NMFT for the 2014 and 2015 income years on the premise that purported distributions to the beneficiaries were invalid. The Commissioner no longer presses that contention or otherwise seeks to support the trustee assessments.
The Commissioner also issued alternative assessments to Natalie, Renee and Michelle for the 2014 and 2015 income years. These are premised on the contention that, if the transactions were conducted by Frontlink in its capacity as trustee for the NMFT, profits from the sale of the properties formed part of the net income of the trust distributed to Natalie, Renee and Michelle as beneficiaries. As noted above, the Commissioner now accepts the Clyde North properties were held by Frontlink as trustee for the NMFT from October 2013.
Yarra Glen Property
Frontlink sold the Yarra Glen property to a third party for a profit or gain of $230,000 in the 2014 income year.
Primary assessment
The primary assessment reflected the Commissioner’s contention that Frontlink transacted the sale of the Yarra Glen Property in its own capacity and not as trustee of the NMFT.
Alternative assessment
The Commissioner also reflected this transaction in the alternative assessment for the 2014 income year issued to Frontlink as trustee for the NMFT. As noted above, the Commissioner no longer presses the trustee assessment but continues to press the beneficiary assessments.
The Commissioner now contends that Frontlink commenced to hold the Yarra Glen Property as trustee for the NMFT from October 2013.
DECISIONS UNDER REVIEW
Primary income tax assessments
The primary decision before the Tribunal for review is the decision of the Commissioner dated 27 May 2021 disallowing Frontlink’s objection dated 8 December 2017 against assessments of income tax for the 2007 to 2015 income years (and associated assessments of administrative penalties and SIC).
As noted above, the Commissioner now accepts the Clyde Road and Yarra Glen properties were held by Frontlink as trustee for the NMFT from October 2013. The further amounts assessed against Frontlink in respect of those properties should therefore be removed from those assessments.
Alternative assessments
There are also decisions disallowing objections against alternative assessments issued to:
(a)Frontlink as trustee of the NMFT for the 2014 and 2015 income years.
As noted above, those assessments are no longer pressed by the Commissioner.
(b)Natalie, Renee and Michelle, as beneficiaries of the NMFT, for the 2014 and 2015 income years.
Administrative penalty assessments
The Commissioner assessed Frontlink with administrative penalties for each year in which a shortfall was said to have arisen. The base penalty amount was assessed at 75% of the shortfall on the basis that it arose from intentional disregard of the law.
An uplift of 20% was also applied. At objection, the Commissioner maintained the base penalties and uplifts and declined to remit the penalties wholly or partly. However, the Commissioner no longer presses the uplift for the 2009 year. We are satisfied that concession is appropriate.
As noted, the Commissioner now accepts the sales of the Clyde North and Yarra Glen properties were made by Frontlink as trustee for the NMFT. On that basis, there would be no shortfall in Frontlink’s returns for the 2014 and 2015 income years and the penalties assessed against Frontlink for those years would fall away.
Additionally, in closing submissions the Commissioner noted that Frontlink included what it characterised as a discount net capital gain of $21,253,457, in its 2012 income tax return, representing 50% of the gain from the sales of the Cranbourne property rolled over from the 2010 income year. For that reason, the Commissioner submitted the penalty assessed against Frontlink for the 2011 and 2013 income years should be remitted by 50%.
Administrative penalties were also assessed against Frontlink as trustee for the NMFT. With the Commissioner no longer pressing the trustee primary tax assessments, those penalties fall away.
Penalties assessed against the beneficiaries - Natalie, Renee and Michelle - were remitted in full at objection.
Shortfall interest charge
The Commissioner declined to remit, in whole or in part, SIC payable by Frontlink; Frontlink as trustee for the NMFT; and the beneficiaries.
As the Commissioner has abandoned the primary tax assessments against Frontlink as trustee for the NMFT, whether SIC payable by Frontlink as trustee should be remitted is no longer an issue.
Whether SIC payable by Frontlink in its own right, or by the beneficiaries, should be wholly or partly remitted remains in issue.
We understand Frontlink’s liability for SIC in respect of the 2014 and 2015 income years is no longer in issue following the Commissioner’s acceptance that the Clyde North and Yarra Glen properties were held by Frontlink as trustee for the NMFT from October 2013 and sold in that capacity.
ISSUES TO BE RESOLVED
Frontlink and the beneficiaries have the burden of proving the assessments are excessive and what amounts should have been assessed: Taxation Administration Act 1953 (Cth), s 14ZZK.
Having regard to the Commissioner’s concessions and confinement of the issues as outlined above, the task for the Tribunal is to determine whether the respective applicants have discharged the burden of proving that:
Frontlink - 2009 income year – Beveridge property
(a) the profit or gain on sale of the Beveridge property was on capital account;
(b) the base penalty amount calculated at 75% is excessive because Frontlink did not intentionally disregard the law and, if so, what base penalty, if any, should have been assessed; and/or
(c) the base penalty should be wholly or partly remitted;
(d) the SIC should be wholly or partly remitted;
Frontlink - 2011 and 2013 income years – Cranbourne property
(e) the profit or gain on sale of the Cranbourne property lots was on capital account;
(f) the base penalty amounts calculated as 75% of the shortfalls in each year are excessive because Frontlink did not intentionally disregard the law and what base penalty, if any, should be assessed;[6] and/or
(g) the base penalties, which were uplifted by 20% and which the Commissioner submits should be remitted by 50%, should be remitted to a greater extent;
(h) the SIC should be wholly or partly remitted;
Beneficiaries – 2014 – Yarra Glen property and Clyde North properties
(i) the profit or gain on sale of the Yarra Glen property is capital in nature;
(j) the profit or gain on sale of the Clyde North properties is capital in nature;
(k) SIC should be wholly or partly remitted;
Beneficiaries – 2015 – Clyde North properties
(l) the profit or gain on sale of the Clyde North properties is capital in nature;
(m) SIC should be wholly or partly remitted.
[6] It is clear the uplift applies if there is a shortfall for these years and the 2009 base penalty is properly maintained. The applicants did not submit otherwise.
EVIDENCE
A large volume of documentation was filed in the Tribunal. However, after the close of the hearing the parties helpfully agreed upon those documents which they considered the Tribunal should treat as evidence. These were identified by providing a copy of the index of the tribunal book prepared for the hearing with the documents the parties had agreed the Tribunal need not have regard to struck through.
Witness statements were provided by Sam and Naila as well as Matt Ravalli and Tony Comito, who were respectively representatives of the Mondous family accountants and solicitors at relevant time.
Sam was cross-examined over a period of four days. Naila, Mr Ravalli and Mr Comito were also cross-examined though much more briefly.
As already noted, Natalie, who was the sole director and shareholder of Frontlink at most relevant times, did not give evidence. Nor did her sisters, Renee and Michelle, notwithstanding that they were applicants in the proceeding and said to have been, with Natalie, the persons for whose benefit the NMFT was established and the properties (other than the Cranbourne property) acquired.
In considering whether, on the basis of this evidence, the applicants have discharged the burden of proof in respect of these issues, the principles to be applied include:
(a) Facts may be found on the basis of oral evidence alone. In other words, there is no requirement that direct evidence by oral testimony may only be accepted if corroborated, for example, by documentary evidence; a fact may be found on basis of the uncorroborated evidence of a witness.
(b) While self-serving statements should be given close scrutiny, evidence of a taxpayer is not to be regarded as prima facie unacceptable.
(c) If the taxpayer succeeds in ‘weighing down [the] scales ever so slightly in [the taxpayer’s] favour then [the taxpayer] has discharged the burden [the taxpayer] carries’.[7]
[7] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212.
We are also mindful of recent observations of Logan J in Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972 noting that informality can and often does attend the formation of legal relations in small business (although the scale of Frontlink’s activities, if properly described as a small business, would put it at the upper end of that category) As his Honour went on to note:
Even more is this so where the relevant corporate actors are or are represented by the same individual acting in different capacities or by individuals who are close family members or business associates. Sometimes the only documentary manifestation of that legal relationship may be a transaction recorded in a ledger or perhaps just an annually prepared profit and loss account and accompanying annotations. There may then, in a taxation appeal, be related oral evidence of the individual(s) concerned that the transaction was as recorded . . .[8]
[8] Anglo American Investments Pty Ltd v Commissioner of Taxation [2022] FCA 971, [54].
That is not to say there is any special or lesser standard of proof for a small business. Where informality is present, “much can depend on the credibility one affords the accounts given by participants and, where they exist, representations in business records created under their supervision or with their approval”.[9]
[9] Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972, [47].
However, in this case for the reasons already touched upon, we have concerns regarding the credibility of Sam’s evidence. And, so far as whether Frontlink acquired properties as trustee, there were no financial records created for the NMFT and those created for Frontlink pointed to the opposite conclusion. We elaborate on this below.
Our approach to Sam’s evidence
Sam’s evidence is necessarily self-serving. In accordance with the principles outlined above, we did not approach it from a default position his evidence is not to be believed or must be corroborated. However, as we have indicated, examples of Sam’s attitude to sworn or solemnly declared evidence on past occasions underline the importance of approaching his evidence with care.
The most significant example is, as we have mentioned, the sworn evidence Sam gave in a trial in the Supreme Court of Victoria in 2010 to the effect that his companies would acquire land, lobby councils to change the zoning and carry out developments. Sam stated under oath:
My company and associated company hold a lot of land. The structure of our company to buy land (sic), hold it for the long, short, medium, and long term, to change the zoning and get the benefit of the zoning. The land everywhere– the price of the land everywhere is almost the same. What make (sic) the land enhance in value is the zoning and the permit. So we become specialised for (indistinct). We buy land a lot far. We buy in 100, 500, 1000 acre in one lump sum. We wait on it. We wait with the council, we wait with the government at the time. We know how to do the structure plan. Our business know how to deal with the council, to lobby the government to achieve a zoning and a permit . . . If we don’t achieve the zoning then we sell it. We achieve the zoning, we achieve the permit and we do the full development to the end.[10]
[10] Hearing Book, page 7599.
In oral evidence in the current proceeding, Sam adamantly and repeatedly maintained that evidence was not correct and his companies did not lobby for rezoning to take place. For example, he stated:
Q: So you’re saying the company didn’t do those things? The companies didn’t do those things?
A: No, never. We never ever sold – bought any land for – to be zoned or for rezoning, and we never spent any money for any zoning whatsoever. And that’s the history for the moment since 1972 now it’s 50 years, we never ever bought land to be zoned or spent any money for rezoning. Never, . . . [11]
[11] Transcript, P-213, lines 38-44.
When given the opportunity to explain why he had given incorrect evidence under oath, Sam stated that he read out what his lawyers told him to say. He also stated that it was his first time giving evidence in the Supreme Court.[12] Self-evidently, those are wholly unsatisfactory explanations for giving false evidence under oath.
[12] Transcript, P-216, line 19.
Another example is an affidavit provided to the Victorian Revenue Office as discussed further below, although in that case Sam claims to have intended to convey a different meaning to that plainly set out in the affidavit.
The upshot of the apparent lack of regard for accuracy in sworn or solemnly declared evidence – particularly as evidenced by Sam’s attitude to the evidence he gave to the Supreme Court – and the credibility-stretching features of some of his evidence we noted earlier, is that we rely predominantly on objective documentary evidence in making relevant findings.
Transcript evidence of Natalie’s responses to compulsory interview questions
As part of investigations preceding the contested assessments, Natalie participated in a compulsory interview conducted by senior counsel on behalf of the Commissioner. Her answers revealed that she had at best a basic understanding of Frontlink’s activities which also casts doubt on the reliability of Sam’s evidence. She also did not know where Frontlink carried out farming and said she had not been to Frontlink’s farms.
That does not sit comfortably with Sam’s evidence that one of the reasons for purchasing farming properties was so his daughters could be involved with the properties in a hands-on way, and in respect of Natalie that it allowed her to, and she was, involved in running a cattle business on the Cranbourne property.[13]
[13] Transcript P-121, lines 7-9. Exhibit 5.2, page 3. Exhibit 5.3, paragraph 7.
Mr Solomon submitted the transcript should be dealt with in accordance with the rules of evidence. The Tribunal is not bound by the rules of evidence. However, we accept the principles underlying those rules may guide the admission and consideration of evidence.
Generally, though, relevant evidence may be admitted subject to considerations of fairness.[14] The weight to be given to such evidence is then a matter for the Tribunal having regard to all relevant circumstances such as, where the evidence is of a hearsay nature, the circumstances of the hearsay and other considerations of fairness.
[14] Casey v Repatriation Commission (1995) 60 FCR 510, 511-515.
For this transcript, the context includes that Natalie is an applicant in the proceedings and the sole director of the primary applicant; and Sam has maintained that he merely advised her and also that the Cranbourne property was acquired not just for financial reasons but as an interest for Natalie. The transcript is plainly relevant to those issues. The applicants had an opportunity to call Natalie to give evidence but did not do so.
Accordingly, we see no unfairness in taking this relevant evidence into account. Having said that, we would reach the same conclusions in this matter without considering the transcript.
THE FAMILY BACKGROUND
The applicants maintain that to understand the nature of the transactions it is necessary consider them in the context of the family background leading to the acquisition of Frontlink as a shelf company and creation of the NMFT.
The following background findings are mainly drawn from Sam’s witness statement and are, we understand, largely uncontroversial.
Mondous family history
Frontlink is one of many “entities” created for the Mondous family. The immediate family comprises Sam and Naila; their daughters Natalie, Renee and Michelle; and their son, Kameel Mondous.
Sam was born in June 1947, and grew up in the Middle East, first in what was then Palestine, then Israel and, then continuously from 1956 in Lebanon. His father is of the Catholic faith and his mother is Jewish.
Sam enjoyed only a limited formal education. Additionally, English is not his first language. However, based on our observation over several days of oral testimony, Sam was able to understand English sufficiently to understand questions put to him and to reply coherently to questions.
In 1970, Sam moved to Australia. In 1977, his parents “found a wife” for him. Sam and Naila married three months later in January 1978. The four children were born over the following ten years.
A history of real estate dealings
Sam undertook his first property development on 20 acres of land acquired in 1972/73. He subdivided the land into 14 lots and sold it for $500,000 in 1974 or 1975.
He has undertaken numerous developments since through various entities.
Natalie’s disability
Natalie was born prematurely and with what Sam describes as a “minor intellectual disability”. Although Sam says Natalie is “very capable in most things”, Naila acts as her guardian.
The Mondous Family Trust
Shortly after the birth of Kameel, Sam caused The Mondous Family Trust (“NFT”) to be created. Kameel Pty Ltd is trustee of the MFT.
Since that time, property developments have been undertaken by various Mondous entities, commonly the trustee of a unit trust in which the units are held by the trustee of the MFT.
However, the properties which are the subject of the current proceedings and the other properties mentioned below - in total 15 properties - were acquired by Frontlink.
Tension between Sam and Naila’s wishes
The acquisition of Frontlink followed, Sam said, a tense dispute between he and Naila which put their relationship under strain and threatened their marriage.
The issue arose out of their differing cultural backgrounds. Sam believed that his wealth should pass to his son, Kameel. The financial security of their daughters would be in the hands of their future husbands. Naila believed provision should be made for their daughters. We accept this account which is corroborated by Nalia’s evidence.
Eventually, Sam ceded to Naila’s wishes and agreed to set aside $20M in assets for their daughters. This would be, he said, in the form of long-term farming assets. In that respect, the activities and objectives of Frontlink would be different to those of his numerous other entities set up to carry out individual development activities.
Acquisition of Frontlink Pty Ltd
Frontlink was incorporated as a shelf company on 17 May 1996.
According to ASIC records, the shares in Frontlink were transferred from Salvatore Gurciullo, a partner in the Mondous group’s accounting firm, to Natalie on 15 November 2000. At that time, Natalie was an adult, but the other three Mondous children were minors.
For reasons that are unclear, and Sam says were a mistake, the shares were again held by Mr Gurciullo and then Kameel Pty Ltd (of which Sam was the sole shareholder) between November 2000 and 3 August 2006. Natalie has been the sole shareholder of Frontlink since 4 August 2006.
Mr Gurciullo was the sole director of Frontlink until 8 October 2000. Natalie was appointed as the sole director of Frontlink with effect from 9 October 2000 and has remained the sole director since that time.
The Natalie Mondous Family Trust
According to the date appearing on the trust deed, the NMFT was settled on 13 January 2000 with Frontlink as trustee and Natalie as the “Specified Beneficiary”, “Guardian” and “Appointor”.
The trust deed records that it was signed by Natalie as the sole director and secretary of Frontlink. Curiously, Natalie did not become the director of Frontlink until 9 October 2000. The family’s solicitor, Mr Comito, said the executed deed was not returned to him until late October 2000 and speculated the deed may in fact have been executed in October 2000 after Natalie was appointed as director.
Under the deed, “General Beneficiaries” means the Specified Beneficiary (ie Natalie) and other persons from a list contained in the deed (which included various relatives including Natalie’s sisters) nominated in writing from time to time by the Specified Beneficiary. Such nominations are to be “with the consent of the Guardian (if any) and if there is no Guardian with the consent of the Appointor”.
By deed dated 16 August 2004, the trust deed was amended to appoint Kameel as Appointor in place of Natalie. This occurred shortly after Kameel turned 18 and, according to Sam, was “to ensure that the control of the trust would be beyond the influence of any future husbands of Renee and Michelle”.[15]
[15] Exhibit 5.1, Statement of Souhail Mondous, 6, [37].
The 15 properties acquired by Frontlink
While the capacity in and purpose for which Frontlink acquired some of the properties is contested, it is uncontroversial that Frontlink acquired legal title to the following properties:
Location
Date of contract for purchase
Date of settlement
Purchase price
Selling price
Date sold
1.
Inverloch
15.4.99
21.10.02
$485,000
n/a
Not sold
2.
Lyndhurst
11.1.00
14.03.00
$1,000,000
n/a
Not sold
3.
Clyde North (Pound Road)
02.03.00
23.6.00
$1,950,000
Various
Various
4.
Clyde North (Grices Road)
29.9.00
01.02.01
$705,000
Various
Various
5.
Beveridge
11.10.01
18.04.02
$4,700,000
25.08.08
$10,150,000
6.
Yarra Glen
02.03.02
23.05.02
$670,500
22.04.14
$900,000
7.
Clyde North (Soldiers Road)
01.07.02
01.07.03
$1,400,000
Various
Various
8.
South Gippsland Highway
23.07.02
26.06.03
$1,000,000
n/a
Not sold
9.
Lot 1, Baldhill Road, Pakenham
23.12.02
26.06.03
$1,500,000
n/a
Not sold
10.
Lot 2, Baldhill Road, Pakenham
10.02.03
14.03.06
$2,000,000
n/a
Not sold
11.
Lot 5, 75 Coop Road, Pakenham
24.07.03
22.07.05
$500,000
n/a
Not sold
12.
Lot 12, 75 Coop Road, Pakenham
24.07.03
22.07.04
$760,000
n/a
Not sold
13.
Cranbourne
17.04.03
22.03.04
$3,500,000
Various
Various
14.
Wonthaggi
09.02.04
02.07.07
$1,140,000
21.01.16
$1,220,000
15.
70 Coop Road, Pakenham
25.11.04
16.11.09
$1,500,000
n/a
Not sold
Total:
$22,810,500
As this table demonstrates, eight of the properties were still held by Frontlink approximately 15-20 years after they were acquired.
REVENUE OR CAPITAL?
The parties’ submission in summary
Applicant’s submissions
Mr Solomon was at pains to point out the Commissioner does not assert that the properties were ventured into a business or other commercial venture some time after they were acquired. Rather, the Commissioner contended that Frontlink acquired the properties as trading stock or otherwise in the course of a business or for a profit-making purpose.
On that basis, Mr Solomon submitted the time for inquiry regarding Frontlink’s purpose is in each case the time of acquisition of the properties. The Commissioner accepted the relevant time for inquiry into Frontlink’s purpose is the time of acquisition of each property.
Frontlink submits the evidence establishes the properties were acquired not for sale at a profit but as farming land for the benefit of Natalie, in the case of the Cranbourne property, and Natalie, Renee and Michelle, in the case of the other properties.
The applicants’ submissions endeavoured to frame the proceedings as concerning the 15 properties acquired by Frontlink as set out above. In that regard, the applicants emphasised that eight of the 15 properties are still held 15-20 years after they were acquired.
Of course, the proceedings are concerned only with the tax treatment of the proceeds of sale of those properties that were sold in the relevant income years. The tax treatment of the other properties is not before the Tribunal. Nevertheless, we accept the broader context in which the 15 properties were acquired may be relevant to characterisation of the proceeds of the relevant sales before the Tribunal.
This attempt to place the 15 properties in a different category to other developments undertaken by Mondous entities was part of a broader over-arching narrative to which Sam returned time and again throughout his cross-examination. The narrative is Frontlink was set up to provide for Natalie and the NMFT was set up to provide for the three daughters following the resolution of the disagreement between Sam and Naila.
Sam returned continuously to this narrative of Frontlink being established as a result of settling the disagreement with his wife. However, even accepting Frontlink and the NMFT were set up and conducted for the benefit of the daughters, it would not follow that Frontlink was not engaged in buying potential development land with a view to sale at a profit. That, too, would provide for the daughters’ financial wellbeing and would not be inconsistent with the agreement reached between Sam and Naila.
Respondent’s submissions
The Commissioner put his case for the transactions being of a revenue nature on alternative bases; namely that:
(a) the properties were trading stock;
(b) the acquisitions and sales otherwise occurred in the course of a business; or
(c) the sale proceeds were income according to ordinary concepts under s 6-5 of the Income Tax Assessment Act 1997 (Cth) in accordance with the principle in Federal Commissioner of Taxation v The Myer Emporium Ltd.[16]
[16] (1987) 163 CLR 199.
Mr Davies KC, who appeared for the Commissioner, confirmed the tax outcomes would be the same under each of the Commissioner’s alternative submissions.[17]
[17] Transcript, P-374, lines 4-41.
The principles regarding trading stock and when a business is carried on are well known. However, some comments regarding the Myer principle are warranted.
Myer principle
It is settled law that, under the principle identified by the High Court in the Myer case, a gain on sale of property not acquired as part of a business may nevertheless be income if the property was acquired in a commercial operation for the purpose of profit-making by the means giving rise to the profit.[18]
[18] (1987) 163 CLR 199, 209.
Reflecting the language of the Full Federal Court in Federal Commissioner of Taxation v Cooling,[19] the Commissioner submitted it is sufficient if the seller had a “not insignificant” purpose of resale at a profit at the time of acquisition. The applicants submitted that does not represent the current law “[a]t the very least . . . where the sale of an asset is by an entity not otherwise engaged in business”. It is, according to the applicants, necessary for profit-making to be the dominant purpose.
[19] [1990] FCA 204.
The applicants’ written submissions cited comments of Davies J in McCurry v Federal Commissioner of Taxation[20] in support of this proposition. In oral submissions, Mr Solomon relied predominantly on the reasoning of Derrington J in dissent in Greig v Commissioner of Taxation.[21]
[20] [1998] FCA 512.
[21] [2020] FCAFC 25.
In McCurry, Davies J stated:
It is not inconsistent with there being a profit-making undertaking or scheme that two possible ends were in mind, one, that of deriving a profit on resale and the other of deriving regular income. It does not matter that the taxpayer had in mind these two alternatives provided that the possibility of making a profit by the development of the land and its resale was the predominant factor moving the acquisition and development of the land.[22]
[22] [1998] FCA 512.
His Honour cited two High Court decisions in support of the proposition that “it is the main or dominant purpose of the scheme which is important”: Buckland v Commissioner of Taxation[23] and Admin Exploration Pty Limited (inLiq) v Federal Commissioner of Taxation.[24] Those decisions pre-date the Myer case. Also, they were concerned with the construction of the first limb of the former s 26(a) of the Income Tax Assessment Act 1936.
[23] (1960) ALJR 60.
[24] (1972) 72 ATC 4253.
McCurry, a single judge decision, does not refer to the decision of the Full Federal Court in Moana Sands Pty Ltd v Federal Commissioner of Taxation.[25] In that case, the taxpayer acquired property for the dual purpose of selling sand on the property and thereafter holding the property until it became appropriate to sell it for subdivision. The Full Court unanimously concluded the profit on sale of the property was income according to ordinary concepts, notwithstanding the finding of the Tribunal below that profit-making on sale was not the dominant purpose of acquiring the property.
[25] [1988] FCA 401.
Delivering the primary judgement in Commissioner of Taxation v Cooling,[26] Hill J, with whom Lockhardt and Gummow JJ relevantly agreed, stated:
54. A scheme may be a profit making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit. In Myer the assignment of the right to interest was an integral part of the total reorganisation entered into by the Myer Group. While the judgment of the High Court in Myer referred to the case as involving the intention or the purpose of making the profit there is no suggestion that the Court dissented from the factual finding of Murphy J. that the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify. . .
55. In Moana Sand Pty Ltd v. Federal Commissioner of Taxation (1988) 88 ATC 4897, the profit made by a taxpayer on the sale of land acquired with the twofold purpose of working and/or selling surplus sand on it and thereafter holding the land until some time in the future when it became appropriate to sell it at a profit, was held to be income in ordinary concepts. This was so despite a finding that the dominant purpose of the company in acquiring the land was not resale of the land at a profit. The Court (Sheppard, Wilcox and Lee JJ.) applied Myer's case in so holding.
56. In my view the transaction entered into by the firm was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment.
(Emphasis added.)[26] [1990] FCA 204.
His Honour’s opening comments in [54] and the reference in [56] to a “not insignificant purpose” of profit-making have led to the formulation that it is not necessary for profit-making to be the dominant purpose of a transaction but, unsurprisingly, an insignificant purpose would not suffice.
Our attention was not drawn to any other case that explicitly or implicitly overturns the reasoning in Moana Sands and Cooling in this regard. On our reading of the judgment of Derrington J in Greig, it appears his Honour was addressing the particular need, in the context of a gain not derived in the course of a business, to ascertain intention at the time of acquisition of the relevant property rather than whether a dominant profit-making purpose is required. The main principle to emerge from Greig, in our view, is that the required commercial dimension of the transaction is satisfied if the taxpayer’s actions are the kind of thing a businessperson or person in trade would do in seeking to make a profit.[27]
[27] Kenny J at [31], Steward J at [242].
Accordingly, we proceed on the basis that to succeed the applicants must prove the properties were not acquired in a commercial transaction for the not insignificant purpose of resale at a profit. Having said that, on the evidence before us we would in any case not be satisfied that it was not the dominant purpose of Frontlink to acquire the properties for resale at a profit.
Cranbourne property
Acquisition of Cranbourne property
The following findings regarding the acquisition of the Cranbourne property are taken from Sam’s witness statement and the option and sale agreements:
(a)The Cranbourne property was listed for sale for a long time.
(b)Naila had noticed a billboard on the property when taking Natalie to music lessons.
(c)On 21 March 2001, Sam signed an option agreement to acquire the property on behalf of Frontlink at a price of $3,500,000.
(d)The option agreement included the following features:
(i)The grantee was stated to be “SOUHAIL MONDOUS [ie Sam] AND/OR NOMINEE”.
(ii)The option fee was $80,000.
(iii)The fee was to be paid in $20,000 instalments, the first to occur after 60 days the grantee was to have “to consider the cost and availability of providing infrastructure works to the land”.
(iv)The option was “conditional upon the Grantee obtaining re-zoning for residential purposes in accordance with plans to be prepared by the Grantee”.
(e)By a document dated 17 April 2003, Natalie authorised Sam to negotiate and if successful execute a contract for purchase of the land on behalf of Frontlink.
(f)On 17 April 2003, Sam executed a contract to purchase the Cranbourne property on behalf of Frontlink.
(g)The contract provided that, if the land were rezoned as within the Urban Growth Boundary, the purchaser must settle within 30 days of being notified to that effect.
(h)Frontlink was nominated as purchaser on 13 February 2004.
(i)Settlement occurred on 22 March 2004 and the property was transferred to Frontlink.
Rezoning of Cranbourne property
As noted, the option agreement was subject to re-zoning.
The following findings of activities that occurred in relation to re-zoning, before Frontlink entered into an option agreement with Australand on 1 May 2007 as described below, are drawn from documents footnoted in the Commissioner’s written closing submissions. We understand the findings, although not the inferences to be drawn from them, are uncontroversial.
(a)On 3 September 2002, the Casey City Council adopted the “Casey C21 Strategy”. The plan stated that comprehensive consultation had occurred, including public forums and distribution of flyers to all 55,000 households in February 2002.
(b)The Cranbourne property was within the Casey C21 Plan.
(c)On 11 February 2003, Earth Tech Engineering Pty Ltd on behalf of the then owners made submissions relating to “Melbourne 2030” – the Victorian Government’s strategic plan to manage urban growth - at the Victorian Department of Infrastructure. The submissions included the reference to the Cranbourne property not being viable farm land referenced above.
(d)On 14 February 2003, lawyers acting for the then owners made submissions to Melbourne 2030 urging that the Cranbourne property be included in the Urban Growth Boundary. The submissions stated:
For over 10 years the City of Casey’s Municipal Strategic Statement (‘’MSS’) has classified the Subject Land as Urban Fringe land committed for future urban development … [and] defines the Subject Land as urban fringe green field land that would be re-zoned as residential within approximately three years, depending on the rate of growth.”
(e)On the same date, the Council made submissions to Melbourne 2030 to the effect that land in which the Cranbourne property is included should be entirely included in the Urban Growth Boundary.
(f)On March 2005, the Council wrote to Sam regarding the Cranbourne West & Lyndhurst Development Plan noting:
you have expressed an interest in contributing funds to this study, to enable Council to commence the work . . .
(g)On 11 November 2005, the Council wrote to Sam regarding the Cranbourne West & Lyndhurst Development Plan and Funding Agreement. The letter noted that “Confirmed fundees” included “Sam Mondous”.
(h)On 3 August 2006, the Council and Frontlink entered into a Strategic Planning Funding Agreement. The agreement:
(i)noted that Frontlink and other land owners had requested the Council to commence the strategic planning required to facilitate development of the land for urban purposes; and
(ii)required Frontlink to make an initial contribution of $69,000 plus GST.
(i)Minutes record that Sam attended various meetings at the Council of the “Fundee Group” in 2006 and 2007.
Notwithstanding the extensive consultation by the Council, Sam maintained that at the time he signed the contract to purchase the property he not only did not know about the prospect of re-zoning but had no interest in it. In fact, Sam maintained Frontlink would not have purchased the Cranbourne property if he had known and that the increased holding costs after the re-zoning made it not viable for farming purposes. As we have already noted, the objective evidence establishes the property was never viable as a profitable farming property.
Given Sam’s long history in purchasing and developing real estate, and the specific references to zoning in the option and sale contracts, we are not persuaded he was unaware of the potential for rezoning and that the prospect of rezoning played no part in the purchase decision in circumstances where (he claimed) the applicants were motivated by a desire to purchase farming land Whatever he says now, what Sam did at the time plainly shows he was alive to the potential rezoning and personally engaged on the issue. For these reasons and having regard to the concerns already expressed regarding his credit, we do not accept that Sam or Frontlink had no knowledge of or interest in the potential re-zoning of the property when the property was acquired.
Sale to Australand
On 1 May 2007, Frontlink entered into a put and call option deed with Australand entities for an option fee of $2,613,130.30 including GST.[28] The agreement was subject to re-zoning occurring.
[28] Hearing Book, 1946.
Following two variations which we need not detail, Australand exercised its option and the parties entered into an agreement for sale on 30 April 2010 at a price of $37M plus GST.[29] Under the sale contract, Australand could apply to subdivide the property.
[29] Hearing Book, 2273.
In accordance with contractual obligations, Frontlink facilitated subdivision applications.
Following variations to the contract, Frontlink progressively transferred subdivided lots to Australand between 30 July 2010 and 12 November 2012 for a total consideration of $46,256,481.63.
Beveridge property
Purchase of Beveridge property
On 11 October 2001, Sam entered into a contract to purchase the Beveridge property for $4.7M. The purchaser was specified as “Sam Mondous and or Nominee”. Sam subsequently nominated Frontlink as purchaser on 2 April 2002. The sale and purchase settled on 18 April 2002 with Frontlink as purchaser.
Sale of Beveridge property and the Australand joint venture
According to Sam, his daughters wanted to sell this property and a property at Wonthaggi because they were too far from their homes to manage inspections and the like. Why this was not apparent when the properties were acquired was not explained. These sales were also said to be for cash flow purposes, inferentially because the farming activities were not generating positive cash flows.
The family discussed a proposal from Australand to enter into a joint venture to develop and sell the land. They decided to first transfer the property to S&N Super Fund Pty Ltd as trustee for the Souhail Mondous Superannuation Fund, which could enter into the joint venture with Australand. The sale occurred on 25 August 2008.
Sam and Naila were the directors of the purchaser company. The beneficiaries of the superannuation fund are Sam, Naila, Natalie and Kameel. The sale was for $10.15M, which amount was determined by a valuation, but on vendor terms.
On the same day as the transfer to the superannuation fund - 25 August 2008 - Frontlink, S&N Super Fund Pty Ltd and an Australand entity entered into an option agreement. Under the option agreement, Australand was granted an option to enter into a Project Delivery Agreement for a fee of $3M.[30]
[30] Hearing Book, 2900.
On 23 August 2009, the parties entered into a Project Delivery Agreement the features of which included:
(a)The agreement contemplated development and sale of the land.
(b)The agreement became, as part of a subsequent variation, subject to Australand obtaining rezoning.
(c)Frontlink was to receive 40% of the gross revenue as a landowner payment and a 50% profit share.[31]
[31] Hearing Book, 2920.
Australand failed to obtain the required zoning and the Agreement was cancelled. The land remains an asset of the superannuation fund.
Yarra Glen property
Sam entered into a contract to purchase this property on 2 March 2002 for $670,500.
The contract specified the purchaser to be “Sam Mondous and/or his nominees.” Sam nominated Frontlink as the purchaser on 23 May 2002. Settlement occurred on 31 May 2002 and Frontlink became the owner of the property.
On 26 June 2014, the property was sold to a third party for $900,000. The contract specified the vendor to be Frontlink as trustee for the NMFT.
Clyde North properties
Acquisition of the three properties
These three properties were acquired progressively by contracts entered into from March 2000 to July 2002 with settlement of the third property occurring by 1 July 2003. Frontlink was nominated as the purchaser in each case.
Australand agreement
On 11 September 2007, Frontlink entered into a Project Delivery Agreement with Australand entities. The agreement included the following features:
(a)Frontlink as owner engaged Australand as developer to execute the project.
(b)The project was the development and sale of the land with the objective of maximising the commercial return.
(c)Costs incurred would be reimbursed to the party incurring them.
(d)Frontlink would receive 40% of the GST-exclusive proceeds of sale of lots as a lot owner payment.
(e)Australand entities would receive a 2% project fee cost and 4% marketing fee.
(f)The balance would be shared 55% to Frontlink and 45% to Australand, or 50/50 if there were buildings on the lot.
(g)A Management Committee would be the “executive management vehicle” for the project. The committee would comprise Sam and Kameel representing Frontlink and two Australand representatives.
Frontlink also entered into a marketing agreement with an Australand entity.
In oral testimony, Sam endeavoured to distance Frontlink from management of the venture. However, it emerged that Frontlink was represented at management committee meetings, usually by Kameel.
Sam also would not acknowledge the reality that, when subdivided lots were sold to third parties, it was Frontlink, not Australand, that made the sales. As we understood his evidence, Sam considered the commercial reality to be that Frontlink sold the land to Australand which carried out the development and sold the subdivided lots.
We accept that may be how Sam perceived the transactions. However, the sale contracts were entered into on behalf of Frontlink and title to the subdivided lots passed from Frontlink to the purchasers. Australand entities were the developer and marketers but they were not the vendors of the subdivided lots. Although Australand carried out the work, Frontlink participated in the management of the venture through the management committee and it was Frontlink that acquired, developed, subdivided and sold the lots albeit through the agency of Australand entities.
Consideration of the evidence
The applicants’ overarching narrative regarding the intended use of the properties for farming is at the centre of their submissions relating to all of the properties.
There is, of course, no inconsistency between land being acquired with the intention that cattle would be grazed or continue to be grazed on the land and a not insignificant purpose of subsequent subdivision and sale at a profit. That may occur to generate income to defray holding costs; or, as suggested by the external report in relation to the Cranbourne property extracted below, for weed control purposes; or even to generate a profit. None of those objectives would necessarily be inconsistent with an objective of selling the properties at a profit.
The applicants point to a number of factors in support of the proposition that the properties were purchased to be held as farming properties.
One is the involvement of a real estate agent, the late Ms Helen Sheedy, who specialised in farming properties. We give little weight to this. In a context in which Sam’s entities had a history of acquiring land for subdivision, and substantial subdivisions of some of the properties occurred, it is not surprising that large landholdings would, at the time of acquisition, be of a rural nature. There must be countless examples of rural land being acquired for subdivision.
It is also said that the properties were acquired for “rural prices”. There is no suggestion the properties were acquired other than at market value. In the case of the Cranbourne property, where the option agreement initially entered into by Sam was subject to rezoning approval being obtained, it would defy common sense to suggest the potential for rezoning was not factored into the price for which the vendor was prepared to sell.
Further, in relation to Cranbourne, the applicant submitted that because it was Naila, not Sam, who first identified the property as potentially suitable for Frontlink to purchase, it necessarily followed the property was acquired for farming and not with a view to subdivision and sale. We accept Naila’s identification of the property may support a conclusion that it was considered suitable to acquire for Natalie’s benefit. However, as already noted, Natalie could (and did) derive significant benefits from the subdivision and sale of subdivided lots. Conversely, the evidence indicates Frontlink would have benefitted in only a negligible way, if at all, from farming. Further, while Sam maintained a major consideration was to not risk a loss in value of the assets set aside for his daughters, seeking re-zoning in itself would involve minimal risk and yield potentially substantial gains in value, as indeed occurred.
In that regard, the applicants point to farming actually being carried out on the properties in support of their contention. However, the objective evidence indicates Frontlink was unlikely to ever profit from farming. It did not do so in the years after acquisition of the properties for which financial records were provided to the Tribunal.
Additionally, in respect of Cranbourne, a Planning Report dated 13 February 2023 commissioned by the previous owners concluded:
The land is not a viable farm and any use of the property for agricultural
purposes, is largely aimed at weed management rather than the use of the land as a productive enterprise.[32][32] Earth Tech report, Hearing Book page 4426.
Sam denied ever knowing about the report and denied the property was not suitable for farming.[33] However, there is no evidence that Sam or anyone else made any assessment of the profitability of farming on any of the properties or that they had any expertise in farming beyond what might be expected of a developer of rural lands on which, for example, cattle may be grazed pending development or sale of lots. There were no projections indicating commercial returns commensurate with the amounts invested and holding costs could ever be achieved.
[33] Transcript, P-59, 61.
The evidence is that Frontlink was loaned around $20M by related trustees of trusts created for the Mondous family. With interest being charged on the loans at commercial rates, Frontlink consistently suffered losses from its farming activities. The only income ever distributed from Frontlink and the NMFT resulted from sales of properties.[34]
[34] Hearing Book, 4406.
Sam gave evidence that after 10 years the loans were to be forgiven. No contemporaneous evidence of the lender entities having agreed to this was produced. How trustees could, consistent with their duties to beneficiaries, allow the substantial value of assets - the debts created by these loans - to be destroyed was not explained.
In any case, Frontlink never generated a profit from farming; profits were only able to be distributed as a consequence of the land dealings .[35] It would simply not make commercial sense to invest the substantial amounts in acquiring the properties for no or negligible returns, unless Frontlink also contemplated sale of the properties at a profit at an appropriate time. In the context of land holdings, in particular where, as in the case of Cranbourne at least, rezoning processes are contemplated, that profit may not be expected to emerge in the short term. But it may nevertheless be profit contemplated at the time of acquisition.
[35] For example, the gross farm income from all properties then held (the properties were not separately accounted for in the accounts of Frontlink) for 2007-2009 was: $227,700 (2005), $165,250 (2006), $37,456 (2007): Exhibit 5.3. Sam’s description of these returns as “generating good income” strikes us as a rather generous one.
The applicants also pointed to the diverse locations of the properties as supportive of their purchase for farming purposes. We consider this factor to be, at best, neutral as an indicator of intention. If farming by and for the daughters were intended as the predominant purpose of the acquisitions, would it not be expected that any properties would be co-located or at least at reasonable distances from the daughters’ or Sam and Naila’s homes?
A further difficulty arises in respect of this narrative. Aside from Cranbourne Road, the properties were said to have been acquired as farming properties for the benefit of the three daughters. However, Michelle and Renee were not nominated as beneficiaries of the NMFT until 2014, well after the properties were acquired.
Having regard to these considerations, and in particular the difficulty in accepting Sam’s evidence at face value, we are not persuaded the main purpose of acquisition of any of the properties was for Frontlink to carry out a farming business.
That conclusion alone is sufficient for the Commissioner to succeed. The ‘purchase for farming narrative’ was the basis on which the applicants sought to discharge the burden of proving the properties were not acquired in the course of a business of buying land for sale or development and sale, or in a commercial transaction for a purpose of resale at a profit.
Additionally, in relation to the Cranbourne property, we have already indicated we do not accept Sam’s assertion that he was unaware of and not interested in the potential re-zoning of the land, having regard to:
(a)the terms of the option agreement;
(b)the substantial activity at the Council and Victorian Government level related to zoning including extensive consultation;
(c)Sam’s long background in land development;
(d)his statements in the Supreme Court regarding the modus operandi of acquiring properties and seeking favourable rezoning; and
(e)the question mark over his commitment to providing accurate testimony under oath.
Against that background, we are firmly of the view that the evidence does not discharge the burden of proving the profits were not on revenue account.
At the very least, having regard to the terms of the option agreement it would be concluded that the applicants have not proved the land was not acquired with the not insignificant purpose of resale at a profit. Entry into the sophisticated option agreement subject to the obtaining of rezoning approval is the type of thing a businessperson would do, marking it out as a commercial transaction. That is sufficient for the profits to be ordinary income under the Myer principle.
Whether the Cranbourne and other transactions would properly be regarded as a dealing in trading stock or otherwise as part of a broader business carried on by Frontlink is less clear. For the Commissioner to succeed, it is, of course, not necessary for us to make a positive finding in that regard. It is sufficient if we are not satisfied the applicants have discharged the burden of proving otherwise.
In view of the conclusion we have reached that the applicants have not discharged the burden of proving the profits were not income according to ordinary concepts under the Myer principle, it is not essential that we consider this further. However, our conclusion that we do not accept the applicants’ narrative about the sole purpose being to hold the lands long term for farming also means the applicants have necessarily failed to discharge the burden of proving the acquisitions were not, consistent with the way Sam described other Mondous group entities’ business model in the Supreme Court proceedings mentioned above, part of a business carried on by Frontlink. The farming narrative, which we have rejected, was the basis on which the applicants’ case proceeded. The applicants did not advance any other case theory.
For completeness, we address an issue that first arose in oral closing submissions. As noted above, in written closing submissions the Commissioner accepted for the first time that the Yarra Glen and Clyde North properties commenced to be held by Frontlink in its capacity as trustee for the NMFT in October 2013. In closing oral submissions, Mr Davies submitted for the Commissioner this meant the time for testing whether Frontlink as trustee had a profit-making intention was when the properties came to be held by the trust “entity” in October 2013. If that is the relevant time for testing purpose, it must be concluded the Clyde North properties were acquired by the trust for the purpose of development and sale, since around the same time Frontlink entered into an agreement with Australand confirming the project agreement was entered into in its capacity as trustee.
If the purpose of Frontlink as trustee of the NMFT were to be tested as at October 2013, it must be concluded that its purpose was to sell subdivided lots at a profit. However, Mr Solomon submitted that as a matter of procedural fairness that submission, made for the first time in oral closing submissions, should not be entertained.
This issue arises against the backdrop of our conclusions that the applicants have not discharged the burden of proving:
(a)the profits on sale of the properties were not of a revenue nature;
(b)the Clyde North properties were held by Frontlink in its capacity as trustee of the NMFT from the outset (for the reasons indicated below).
Those conclusions are fatal to the applicants’ case in respect of the primary tax assessments relating to the profit on sale of the Clyde North properties. That would be the case whether or not the Commissioner’s late submission is taken into account. It is therefore not necessary for us to consider it further.
In summary, for the reasons set out above, we are not persuaded the gains on sale of the properties are not of a revenue nature.
COMPANY OR TRUST?
In this section, we consider whether the applicants have discharged the burden of proving the properties (other than the Cranbourne property) were acquired by Frontlink in its capacity as trustee of the NMFT.
Background to the company vs trust controversy
As already noted, the NMFT was created by a deed bearing the date 13 January 2000. The applicants claim all of the properties, other than the Cranbourne property, were acquired by Frontlink in its capacity as trustee of the NMFT.
However, before October 2013:
(a)no financial statements or other financial records were prepared for the NMFT;
(b)the NMFT did not have a bank account or an ABN;
(c)Natalie had not made any nomination to add Renee and Michelle as general beneficiaries as required under the terms of the NMFT deed;
(d)the NMFT was not mentioned in any contract entered into by Frontlink for the purchase of the lands or nomination of Frontlink as purchaser.
Additionally, various documents had been executed denying that Frontlink acted in a trustee capacity, including:
(a)The project deliver agreement for the Clyde North development which contained a clause warranting that Frontlink “does not enter into any Transaction Document in the capacity of a trustee or any trust or settlement”.[36]
(b)An affidavit dated 22 December 2008, apparently relating to issues raised by the Victorian Revenue Office, in which Sam referred to “a number of other items of real estate” and stated:
These acquisitions were made by Frontlink as the legal and beneficial owner. Frontlink was not acting in a trustee capacity.
(c)An affidavit of the same date in which Natalie deposed that:
Because Frontlink was acquired expressly for the purpose of commencing a real estate investment portfolio on my behalf and I was the sole shareholder of Frontlink, the legal and beneficial ownership of the land was acquired by Frontlink. At no time has Frontlink ever operated in a trustee capacity.
[36] Hearing Book, 2675.
Around October 2013 and following, these events occurred:
(a)In April 2003, a bank account for the NMFT was opened for the first time.
(b)On 20 May 2013, the NMFT obtained an ABN registration, backdated to 1 July 2000.
(c)In October 2013, Frontlink entered into a deed of confirmation and variation in respect of the Clyde North project delivery agreement that:
(i)replaced Frontlink as a party with Frontlink as trustee for the NMFT;
(ii)deleted the clause warranting that Frontlink did not enter into transaction documents in a trustee capacity.
(d)In October – November 2013, financial accounts for the NMFT were prepared for the first time for the year ended 30 June 2007 and following years and tax returns lodged for the NMFT for the years ending 30 June 2007 to 30 June 2009.
(e)In the period March to July 2014, tax returns were lodged for the NMFT for the years ended 30 June 2010 to 30 June 2010.
(f)Minutes dated 24 June 2014 recorded that any revenue or capital gain of the NMFT were to be distributed equally to Natalie, Renee and Michelle.
(g)In December 2014, the NMFT registered for GST, backdated to 1 July 2006.
Not surprisingly, when the issue arose for consideration the group’s accountants were uncomfortable with recasting financial statements many years later. Mr Ravalli - who had been preparing draft accounts and returns - had not even heard of the existence of the NMFT until 2013.
There is some evidence indicating it was contemplated Frontlink would acquire properties as trustee for the NMFT. For example, Mr Comito produced a copy of minutes dated 13 January 2000 recording that Frontlink resolved to execute contracts for the purchase of two properties, including one of the Clyde North properties, in its capacity as trustee. However, Frontlink never executed a contract for the purchase of that property; the contract was executed by Sam.
There is also in evidence a loan agreement dated 28 February 2000 under which “Sam Mondous on behalf of Kameel Pty Ltd and any of his associated companies” undertakes to loan funds to “Frontlink Pty Ltd as Trustee for the Natalie Mondous Family Trust”. The agreement states that the lender will advance the loan amount “only for the purpose of purchasing farm property for the benefit of Frontlink Trust.”
The execution clauses indicate the agreement was signed by Natalie on behalf of the “Frontlink Trust”. That may have been intended to be a reference to the NMFT. But Natalie had no authority to sign for Frontlink, the trustee of that trust, because she did not become a director until October 2000. The agreement is also said to be signed by Renee on behalf of the Frontlink Trust; it is unclear in what capacity Renee purportedly signed since Renee has never been a director of Frontlink and only became a general beneficiary of the NMFT upon her nomination as such in 2014.
Aside from these matters, the more fundamental issue is that there is no contemporaneous evidence of any loan being advanced under this agreement.
Mr Comito also wrote to the accountants on 25 September 2013 advising that the NMFT was set up to acquire properties and that in 2001 his firm prepared the minutes mentioned about which Frontlink was to use as pro forma minutes for other properties.
The very creation of the NMFT is also consistent with Sam’s account. There is no doubt the trust was created and no suggestion it ever acquired any other properties or was used for any other purpose.
In summary, this and other evidence identified by the applicants provides some support for a conclusion that it may have been contemplated Frontlink would acquire the properties as trustee. However, in our view there is insufficient evidence for the Tribunal to be satisfied any such contemplation ever crystallised into action. In the absence of any financial record of transactions conducted by Frontlink in its capacity as trustee of the NMFT created before 2013, and having regard to the contrary statements in the documents mentioned above and the accounting for the properties in Frontlink’s accounts, we are not satisfied Frontlink acquired the properties in its capacity as trustee of the NMFT.
ADMINISTRATIVE PENALTIES AND SIC
Even with the Commissioner’s concessions, the penalty and SIC amounts remaining in dispute are very substantial amounts – $5,798,973.81 and $3,687,125.16 on the applicants’ calculations. It is likely the considerations relevant to both base penalty calculations and remission of penalties and SIC will be informed, at least in part, by the basis on which we have reached our conclusions regarding primary tax. Additionally, if any remission of SIC is warranted, there may be challenges in determining quantum having regard to the cumulative nature of the calculation of SIC. Further, given the number of income years, taxpayers, issues and concessions involved, the Tribunal would benefit from assurance regarding the amounts of the shortfalls and SIC in respect of each income year, after adjusting for our decisions regarding primary tax, before making decisions regarding remission.
In those circumstances, we have decided to give the parties an opportunity to make further submissions regarding penalties and SIC. Without limiting the scope of any submissions the parties may care to make, we mention the following issues on which the views of the parties would be appreciated:
(a)Mr Solomon handed up, on the last day of the hearing, a document setting out the applicants understanding of the consequences of the Commissioner’s concessions for the amounts payable by the applicant.[37] We would be grateful for confirmation, or otherwise, that those amounts are agreed.
(b)Based on the numbers in that document, the total of Frontlink’s shortfalls in the income years from 2009 to 2013 amounts to $12,627,234.30 and the total of the remaining penalties would be $$5,798,973.81. However, if the credits due to Frontlink in respect of the 2010 and $2012 years are deducted from the shortfall total, the “net shortfall” across those years is $5,878,191.90. Is the relatively high percentage that the total remaining penalty bears to the “net shortfall” a relevant factor to be taken into account in relation to penalty remission?
(c)The applicants’ written closing submissions note, at [278], that SIC has been applied to the shortfalls in each year in which they occurred without allowing for the substantial credits due to Frontlink in respect of the 2010 and 2012 years, amounting to $96,466.50 and $6,652,575.90 respectively. Should there be remission to reflect these credits and, if so, how should such a remission be calculated?
(d)Have the parties identified any authorities, or do they have other submissions to make, regarding the principles to be applied and circumstances that are relevant and not relevant in deciding whether to wholly or partly remit SIC?[38]
[37] Applicants’ submission regarding Commissioner’s written closing submissions and the consequences for the amount payable by the applicants, dated 10 May 2023.
[38] If, contrary to closing submissions, the parties come to agree some remission on the basis mentioned at (b) or (c) is warranted, we would be grateful if they would endeavour to agree upon an appropriate basis for calculating the amount to be remitted.
DECISIONS AND DIRECTIONS
As foreshadowed, we have made directions facilitating the provision of written submissions regarding penalties and SIC. If, in view of the issues we have raised, the parties prefer to make further oral submissions, or written and oral submissions, they should communicate with the Registry in the usual way.
Given the number of assessments, alternative assessments and concessions, we also invite the parties to endeavour to agree upon the formal decisions required to give effect to these reasons.
I certify that the preceding 194 (one hundred and ninety-four) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe and Senior Member Robert J Olding
...........................[SGD]...........................................
Associate
Dated: 30 October 2023
Dates of hearing: 17, 19, 20, 21, 24 April 2023, 11-12 May 2023 Date final submissions received: 23 May 2023 Counsel for the Applicants: P Solomon KC with A Wilson Solicitors for the Applicants: Gadens Counsel for the Respondent: G Davies KC with A Lee Solicitors for the Respondent: HWL Ebsworth Lawyers