Munday and Commissioner of Taxation
[2006] AATA 1066
•11 December 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 1066
ADMINISTRATIVE APPEALS TRIBUNAL )
)No WT2004/485-486
TAXATION APPEALS DIVISION ) Re KERRY MUNDAY Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date11 December 2006
PlacePerth
DecisionThe Tribunal:
(1)Affirms the reviewable objection decision of the respondent dated 15 November 2004 in relation to the year of income ended 30 June 1998;
(2)sets aside the reviewable objection decision of the respondent dated 15 November 2004 in relation to the year of income ended 30 June 1999 and remits the matter to the respondent for reconsideration in accordance with the direction that the respondent issue a further amended assessment to income tax to the applicant that gives effect to the Tribunal’s determination pursuant to s 177 F of the Income Tax Assessment Act 1936 that:
(a) the tax benefits obtained by the applicant in relation to his participation in the Banalasta Oil Plantation Project No. 1 shall not be allowable deductions in calculating his taxable income to the extent of $6,036 in the income year ended 30 June 1999; and
(b)that the penalty imposed in respect of year ended 30 June 1999 shall be remitted.
.........(Sgd. Mr A Sweidan)..................
Senior Member
CATCHWORDS
Income tax – eucalyptus oil project –structure of project – licence and management fees borrowed by growers involved ‘round robin’ arrangements – tax advice in relation to the project – income and expenditure projections in prospectus – management fees excessive – taxpayer’s motive - characterisation of expenses – quantum – colourable relationship to production of assessable income – general anti-avoidance provisions – determination to cancel tax benefits that are otherwise allowable deductions –dominant purpose to obtain tax benefits – determination to partially cancel tax benefits.
LEGLISATION
Income Tax Assessment Act 1936
Part IV A - S 177 F (1), S 177 A (1), S177 C (1), S177 D (a) and (b)(i) – (viii)
Income Tax Assessment Act 1997 - S 8-1
CASES
Ure v Federal Commissioner of Taxation (1981) 34 ALR 237;
Puzey v Federal Commissioner of Taxation (2003) 201 ALR 302;
Commissioner of Taxation v Sleight (2004) 206 ALR 302;
Ferguson v FCT (1979) 79 ATC 4261;
Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209;
Milner v Commissioner of Taxation (1975-1976) 133 CLR 526;
Vincent v Federal Commissioner of Taxation (2002) ATC 4742;
Commissioner of Taxation v Cooke (2004) FCAFC 75;
Toohey’s Ltd v Commissioner of Taxation for NSW (1922) 22 SR (NSW) 432;
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47;
Cecil Bros. Pty Ltd v Commissioner of Taxation (1964) 111 CLR 430;
Fletcher v Commissioner of Taxation (1991) 173 CLR 1;
Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404;
Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27;
Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531;
Calder v Commissioner of Taxation [2005] FCA 911;
Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235;
Commissioner of Taxation v Hart (2004) HCA 26;
ADMINISTRATIVE APPEALS TRIBUNAL )
)No WT2004/485-486
TAXATION APPEALS DIVISION ) Re KERRY MUNDAY Applicant
And
COMMISSIONER OF TAXATION
Respondent
No WT2004/492-493
Re STEPHEN CLAMPETT Applicant
And
COMMISSIONER OF TAXATION
Respondent
REASONS FOR DECISION
11 December 2006 Mr A Sweidan, Senior Member Nature of Application – Background
1. These applications arise from the applicants’ participation in a Eucalyptus oil project known as the Banalasta Oil Plantation Project No. 1 (“the project”) during the years ended 30 June 1998 and 30 June 1999.
2. The applicants have sought a review of the respondent’s decisions dated 15 November 2004 in relation to Mr Munday and 8 December 2004 in relation to Mr Clampett to disallow their objections to his amended income tax assessments for those years.
3. By those assessments the respondent applied Part IVA of the Income Tax Assessment Act 1936 (“the Act”) to disallow certain deductions which they had claimed in respect of their participation in the project.
4. Both applications were heard together, the position of the two applicants being substantially similar except for the differences which appear in these reasons and the Tribunal’s decision.
Evidence
5. Both applicants gave evidence and the Tribunal also heard evidence from a number of other witnesses including Mr Simpson and Mr Langridge, expert witnesses for the applicants and the respondent respectively and to whose evidence further reference is made below. The Tribunal was provided with the “T” documents required under s 37 of the Administrative Appeals Tribunal Act 1975 and various other documents relating to the project and the applicants’ participation therein. A number of those documents will be referred to in detail in these reasons.
Deductions in Issue
6. For both Mr Munday and Mr Clampett the claimed deductions are: -
(a)for the year ended 30 June, 1998 (the 1998 year), $19,849, comprised of prepaid: -
(i)management fees, $15,240;
(ii)land use fees, $2,600;
(iii)interest, $2,009;
(b)for the year ended 30 June, 1999 (the 1999 year), $13,086, comprised of: -
(i)prepaid management fees, $10,160;
(ii)prepaid interest, $2,887;
(iii)amortisation of seeds purchased in the previous year, $39.
Part IVA of the Act - relevant provisions
7. Section 177F provides, inter alia, for the disallowance of tax benefits in the form of deductions claimed by taxpayers in connection with a scheme to which Part IVA applies.
8. Section 177C of the Act relevantly defines “tax benefit” in the following terms:
“Subject to this section, a reference in this Part to the obtaining by the taxpayer of a tax benefit in connection with a scheme shall be read as a reference to –
…
(b)a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;
…
and, for the purposes of this Part, the amount of the tax benefit shall be taken to be –
…
(d)in a case to which paragraph (b) applies – the amount of the whole of the deduction or the part of the deduction, as the case may be, referred to in that paragraph. …”
9. S177D is the core provision in Part IVA. It provides that the scheme must be entered into or carried out by a person for a purpose of the kind identified in section 177D(b):see Hart v FCT (2004) 217 CLR 216 per Gleeson CJ and McHugh J at [16], per Gummow and Hayne JJ [34], [37], [50], [56] and per Callinan J [92]. It provides:
“This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date … where –
(a)a taxpayer (in this section referred to as the ‘relevant taxpayer’) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b)having regard to –
(i)the manner in which the scheme was entered into or carried out;
(ii)the form and substance of the scheme;
(iii)the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv)the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii)any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.”
10. Section 177A(5) provides that the “purpose” for which a person entered into or carried out a “scheme” may be the sole purpose or the dominant purpose of doing so.
11. “Scheme” for the purposes of Part IVA is defined in section 177A(1) of the Act as follows:
“‘scheme’ means –
(a)any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b)any scheme, plan, proposal, action, course of action or course of conduct …”.
12. Both the Federal Court and the High Court have stated in numerous cases that the definition of “scheme” in section 177A(1) is very broad. See, for example, Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 425 per McHugh J; Federal Commissioner of Taxation vPeabody (1994) 181 CLR 359 at 383 per Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ; see further Commissioner of Taxation v Hart (2004) 78 ALJR 875 at 878 [9] per Gleeson CJ and McHugh J; 885 [43] per Gummow and Hayne JJ; 893 [85], 899 [87] per Callinan J; Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at 43 [71] per Carr J (Lee and Sundberg JJ agreeing).
Scheme
13. In the Tribunal’s view it is clear, nor is it disputed by the applicants, that in the case of each applicant, the making and implementation of the prospectus, the application, the plantation right agreement, the primary management agreement, the secondary management agreement, the loan agreement and the project deed (all of which are described in more detail below) constituted a scheme within the meaning of section 177A(1) of the Act.
14. By the application form each applicant applied for the allotment of one Grower’s Interest in the Project and agreed to become a “grower” and hence a party to and to be bound by the terms of each of:
(a) the Project Deed;
(b) the Plantation Right Agreement;
(c) the Primary Management Agreement;(d) the Secondary Management Agreement;
(e) the Loan Agreement -
and gave an irrevocable power of attorney to The Banalasta Oil Plantation Limited (the manager) and Australian Rural Group Limited (the trustee) for the purposes of executing the agreements specified above. If a loan was applied for an applicant was required to pay $2,309 per Grower’s Interest in application monies.
15. The Project Deed (“the Deed”) was made by the manager, the trustee, Armidale Management Development Centre Pty Ltd (the landholder), Plantation Equity Pty Ltd (the lender) and the Growers (collectively those persons accepted by the Manager for a Growers Interest who have agreed by the application forming part of the prospectus to “be bound by and observe the provisions of the Project Documents and the Loan Agreement (if applicable)”.) The Deed provided for the Grower’s Interest to terminate on 30 June 2012 or at a time in accordance with other provisions of the Deed.
16. The terms of the Deed were summarised in the prospectus as follows:
(a) the trustee was to apply monies on behalf of a Grower as follows:-
(i)$15,240 management fees on or before 30 June 1997 under the Primary Management Agreement;
(ii)$10,160 management fees on or before 30 June 1998 under the Secondary Management Agreement;
(iii)$300 for germinated seeds;
(iv)$2,600 for the fees in respect of the first 13 months under the Plantation Right Agreement;
(v)$2,009 for interest on the loan for the first year;
(vi)$2,887 for interest on the loan for the second year;
(vii)$7,000 loan principal repayment in October 1997;
(viii)$3,100 loan principal repayment in October 1998.
17. The trustee was required to apply the gross income from the Grower’s business in priority to the payment of management fees, the payment of fees under the Plantation Rights Agreement, interest and the principal sum under the Loan Agreement. To the extent that the gross income of the year was insufficient to meet these payments then income from future years was to be applied in payment thereof.
18. By the Plantation Right Agreement, the landholder agreed to grant to the Grower the right of access to the Grower’s allotment. Its terms were contained in the prospectus:
(a)by clause 4.2(a) the landholder acknowledged that fees (unspecified) for the first 13 months had been paid in full;
(b)by clause 4, the Grower was obliged to pay to the landholder fees as set out in the Schedule in respect of each year of the term (defined by clause 5.1‑5.2);
(c)by clause 4.2, fees for each of the subsequent years of the term were only payable out of the gross income attributable to the Grower’s Allotment without further recourse to the Grower.
19. Underlying the Plantation Right Agreement was an Agreement of Lease and annexed Lease Agreement made between the trustee and the landholder which commenced upon receipt of applications for 250 Grower’s Interests (Minimum Subscription).
20. By the Primary Management Agreement:‑
(a)the manager undertook management of the Grower’s Interest and the Grower’s Business for the initial 13 months of the project (clause 2 and clause 3); and
(b)amounts were to be paid by the Trustee on behalf of the Grower from the Grower’s application monies and the proceeds of the Growers Loan as follows:
(i) $300 for 1,500 germinated seeds;
(ii)$15,240 for the management of the Grower’s Interest and the Grower’s Business - (clause 5.1).
21. By the Secondary Management Agreement the manager undertook management of the Grower’s Interest and the Grower’s Business from the second year of the project until its expiry (as defined by clause 3). Its terms were contained in the prospectus and included terms that:‑
(a) the Grower pay the manager:‑
(i)a fee of $10,160 on or before 30 June 1998 for the second year of the project; and
(ii)thereafter out of the gross income attributable to the Grower’s Business management fees as set out in the table at clause 5.1 with a variable fee component subject to CPI adjustments in each year at the manager’s discretion (clauses 5.1 and 5.2);
(iii)in the event that gross income attributable to the Grower’s Business in any year was not sufficient to pay the management fees for that year, subject to the Grower’s gross income being made available in its entirety to the Manager for the purpose of paying management fees and paying the fees to the landholder under the Plantation Right Agreement, the manager would have no recourse to the Grower for such management fees (clause 5.4).
22. By the Loan Agreement the lender agreed to lend $28,000 to each Grower in respect of their Grower’s Interest. Its terms were contained in the prospectus and included the following:‑
(a)by clause 2.1 the $28,000 (“the Principal Sum”) was to be advanced to the trustee on behalf of the Grower in two parts being:‑
(i)$17,840 by 30 June 1997; and
(ii)$10,160 by 30 June 1998.
(b)by clause 3.2(a) and 3.3(a)(i) the Grower would pay interest on the Principal Sum for the period from 30 June 1997 to 30 June 1998 at the rate of 17% per annum discounted to 15.25% if the amount of $2,009 was paid on the date of acceptance of the Grower’s application;
(c)by clause 3.2(b) and 3.3(a)(i) the Grower would pay interest on the Principal Sum for the period from July 1998 to 30 June 1999 at the rate of 17% per annum discounted to 15.25% if the amount of $2,887 was paid on or before 30 June 1998;
(d)by clause 3.2(c) and 3.4 on and from 1 July 1999 the Grower would pay the Lender on or before 30 June in each year interest on the Principal Sum calculated at the rate of 12% per annum discounted to 10% if the Grower paid the interest when due;
(e)by clause 3.5(a) on 30 September 1998 the Grower would make a First Principal Repayment of $7,000 to the Trustee for payment to the Lender;
(f)by clause 3.5(b) on 30 September 1999 the Grower would make a Second Principal Repayment of $3,100 to the trustee for payment to the Lender;
(g)by clause 3.6 the balance of the Principal Sum outstanding after payment of the First and Second Principal Repayments and interest thereon, other than the prepayments of interest, and all other moneys owing by the Grower to the Lender would be repaid by direct deduction from the gross income attributable to the Grower’s Business and for that purpose the Grower authorised the Trustee to pay to the Lender the Principal Sum and interest from the gross income attributable to the Grower’s Business;
(h)by clause 3.7 in respect of Years 3 to 11, the Manager was permitted to deduct from the gross income attributable to the Grower’s Business specified amounts to repay the Principal Sum and interest;
(i)by clause 5.1 subject to: -
(i)repayment by the Grower of the First and Second Principal Repayments;
(ii)payment of interest for the first and second years of the term of the loan; and
(iii)the Grower not being in default in the performance of his obligations under the Loan Agreement –
he had no other liability for payment of the balance of the Principal Sum or interest thereon other than out of the gross income attributable to the Grower’s Business;
(j)by clause 6.5 the Grower authorised the Lender to remit the Principal Sum to the Trustee to be applied by the Trustee towards the Grower’s obligation to pay fees under the Plantation Right Agreement and the Primary and Second Management Agreements.
Tax benefit
23. The Respondent did not concede, despite an assertion to the contrary by the applicants, that the applicants are entitled to allowable deductions under paragraph 8‑1 of the Income Tax Assessment Act 1997.
24. However the Tribunal notes that in determining whether there is a tax benefit for the purposes of Part IVA, the task is to determine, in the context of this case, whether the deduction in question was otherwise allowable. While the Commissioner has invoked Part IVA it is nevertheless for the Tribunal to determine whether the tax benefits asserted meet the requirements of section 177C.
25. In that context the respondent says that, as set out above, both Mr Munday and Mr Clampett claimed deductions of $19,849 and $13,086 respectively to be allowable for the 1998 and 1999 years predominantly in respect of their prepaid management fees, land use fees and interest payable in respect of participation in the project.
26. The Tribunal finds that, as asserted by the respondent, but for the scheme identified above, the claimed deductions would not have been allowable or might reasonably be expected not to have been allowable to the applicants. Accordingly, the Tribunal finds that in each of the 1998 and 1999 years, each of the applicants obtained, in connection with the scheme, a tax benefit within the meaning of sections 177C(1) and 177D(a) of the Act in the respective amounts of $19,849 and $13,086.
Section 177D(b) factors
27. The Tribunal notes that there is overwhelming authority that the test posited by section 177D is an objective one: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 421-423, 424; Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235 [95]; Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 per Carr, J. at [80]-[84]; Commissioner of Taxation v Sleight (2004) 136 FCR 211 per Hill J (Hely J agreeing) at [67] and per Carr, J. at [205]; Calder v FCT (2005) 61 ATR 267 at [91]; Commissioner of Taxation v Cooke (2004) 55 ATR 183 at [88]. As stated by the High Court it does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered in to or carried out the scheme or any part of it: Hart v FCT (2004) 217 CLR 216 at [65]. Accordingly, it is clear that the subjective knowledge, understanding or intention of the applicants (or anyone else) with respect to the financial structuring of the project, the round robin transactions or perceived returns from the project is irrelevant and the evidence which the applicants placed before the Tribunal in that regard is of little, if any, assistance.
28. The Tribunal refers further in this respect to the Federal Court decision in Vincent v Commissioner of Taxation (2002) ATC 4490 (at first instance) at [133] and [142]. There French, J. found, for the purposes of section 51(1) of the Act, that Mrs Vincent’s purpose was to obtain investment returns from the project under consideration. In the context of Part IVA, however, her subjective purpose was not material. On the basis of the financial structuring and operations of the project entities his Honour found that it would be concluded that the dominant purpose of Mrs Vincent in entering into the project was to obtain the relevant tax benefits. Further, a taxpayer’s unawareness of round robin transactions was, specifically, held to be immaterial in Calder v FCT (2005) 61 ATR 267 at [114].
29. The terms of section 177D make it clear that the reference in that section to “purpose”, objectively determined, includes not only the applicants’ respective purposes in entering the scheme, but the purpose of the scheme’s promoters in enabling the applicants and other investors who subscribed to the project to obtain tax benefits in connection with the scheme. In that regard the Tribunal notes the Federal Court decision in Vincent v Commissioner of Taxation (2002) 124 FCR 350 at [100] per Hill, Tamberlin and Hely JJ; Puzey v Federal Commissioner of Taxation (2002) 194 ALR 615 per Lee, J. [105]; Commissioner of Taxation v Sleight (2004) 136 FCR 211 per Hill, J. (Hely, J. agreeing) at [65]-[66], [67.3], [96] and per Carr, J. at [239]-[240].
30. While it is clear that each of the eight factors set out in section 177D(b) must be considered as Hill J pointed out in Peabody v Commissioner of Taxation (1993) 40 FCR 531 at 543:
“This does not mean that each of those matters must point to the necessary purpose referred to in s 177D(b). Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers.”
31. Notwithstanding this, it has been held that the relevant purpose may be so apparent on the evidence taken as a whole that consideration of the statutory factors listed in section 177D(b) can be collapsed into a global assessment of purpose: Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235 at [94] and Commissioner of Taxation v Sleight (2004) 136 FCR 211, per Hill, J. at [67]. Echoing the statement in FCT v Consolidated Press Holdings Ltd (2001) 207 CLR 235 per the Court at [94], the Full Federal Court in Calder v FCT (2005) 61 ATR 267, at [79]-[80] stated:- “It is important, however, to bear in mind that the ultimate judgment as to purpose under s177D is holistic, albeit it requires that regard be paid to each of the eight factors listed in s177D(b). Indeed it can be expressed as a global or overall judgment provided that it is apparent that those factors have been considered”.
32. Critically, the pursuit of a commercial objective is not inconsistent with the existence of a dominant purpose of enabling the taxpayer to obtain a tax benefit. This has been pointed out: -
(a)from the earliest authority, Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 415, 416 (and see Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235 [96]) –
(b)through the authorities concerning agricultural investments structured in substantially the same way as this one: FCT v Sleight (2004) 136 FCR 211 per Hill J at [67.6] (Hely, J. agreeing) and per Carr J [206]; Calder v FCT (2005) 61 ATR 267 at [92]; and FCT v Cooke (2004) 55 ATR 183 at [93] –
(c)and, ultimately, confirmed by the High Court in Commissioner of Taxation v Hart (2004) 217 CLR 216 per Gleeson CJ and McHugh J at [10]-[12], [16]-[18] per Gummow and Hayne JJ at [52], [68], [71]; and per Callinan, J. at [93]-[96].
In both Spotless and Hart, the High Court emphasized the shape or form taken by the scheme as pointing to its purpose.
33. The respondent submitted and the Tribunal agrees that it is not appropriate to compare the approaches taken in other cases to select a preferred approach and that to do this is to misconceive the task under Part IVA. As Gummow and Hayne JJ put it in Hart (2004) 217 CLR 216 at [52]: “Always the question must be whether the terms of the Act apply to the facts and circumstances of the particular case.” And see Sleight per Hill and Carr JJ at [244] and [111].
34. Statements of Income and Expenses exhibited to the applicants’ affidavits indicate that eucalyptus oil was produced and some distributions of income set off against management fees payable by participants. However the respondent submits and the Tribunal finds that to point to any such commercial outcome is insufficient for the purposes of section 177D(b). In the Tribunal’s view examination of the circumstances of the project and the implications of the agreements by which it was given effect by reference to the factors identified in section 177D(b), clearly shows that the dominant purpose of the arrangements was to secure a tax benefit for the applicants and other participants having regard to the following represntations made to them ie.
(a)they were able to obtain tax deductions over two years in respect of large prepaid management and land use fees which were fully funded by their loans;
(b)they were able to claim large tax deductions totalling $32,935 over the two years in respect of those fees for a total cash outlay of only $12,196 in Mr Munday’s case and $11,498 in Mr Clampett’s case. (Mr Clampett was allowed a $698 discount to clear his debt);
(c)the resulting tax savings would put them in a positive net cash position as at 30 June, 1999; and the Tribunal notes further that:
(i)in the event, the commercial performance of the project was not material. The tax savings were to cover their initial payment obligations. Further payments, in respect of the loan, management fees and land use fees were to be met only from the proceeds of the project. Accordingly, the applicants and other participants would keep the benefit of the tax savings without further risk and regardless of the outcome of the project;
(ii)from a commercial viewpoint, the project was a high risk agricultural venture, growing trees untried in commercial forestry to produce oil for which a market had not been established. The predicted returns from the commercial venture were, on any view, uncertain and, in any event, in the Tribunal’s view unsatisfactory in light of the project’s speculative nature;
(iii)ultimately, the large up-front management and land use fees had no commercial function. No actual funds were advanced by the lender in respect of them. The only possible function of the high prepaid fees and the loan was to gear up the available tax deductions.
Section 177D(b)(i): the manner in which the scheme was entered into or carried out
The contentions raised in the respondent’s submissions in this regard are as follows:
Marketing of the scheme emphasized its tax effectiveness
35. Investment in the scheme was offered by a prospectus dated 12 May, 1997.
36. The prospectus spelt out the positive net cash position as a result of tax deductions available to participants in the project regardless of its performance, that is for a total cash outlay of $15,296 participants paying the highest marginal tax rate obtained a tax benefit of $16,032 regardless of any investment returns that might be derived from the project.
37. The tax advantages were specifically drawn to the attention of these applicants by a Mr Horner who approached them and offered the investment in the project and another project, Base Metals Exploration and Prospecting. Both Mr Clampett and Mr Munday gave oral evidence that they understood from Mr Horner that all the money to be paid was to come from tax deductions. Mr Clampett said that the tax benefits allowed him the affordability to go into the project Mr Horner prepared a Business Plan Recommendation for each applicant which explained how the tax savings to be made over the first two years of the project and another project, Base Metals, funded the payments the applicants had to make. Mr Munday’s evidence was that Mr Horner took him through that explanation as well as the explanation contained in the prospectus.
Entry into the scheme
38. Each of the applicants signed up for the project by completing a standard form of application which was contained in the prospectus. (Clampett affidavit, para 19; Munday affidavit, para 16). According to their oral evidence, thereafter, they waited for invoices from the project to advise them of payments required from them.
39. By the application form each applicant: -
(a)applied for a Grower’s Interest in the project;
(b)applied for a loan of $28,000. Having done so, he became obliged, according to the application form, to pay application monies of $2,309;
(c)acknowledged that he had read the prospectus and had read and agreed to become a party to and bound by the terms of each of the following agreements (the terms of which appeared in the prospectus and were not otherwise provided to the applicants): -
(i)the project deed;
(ii)the primary management agreement and secondary management agreement;
(iii)the plantation right agreement;
(iv)the loan agreement.
(d)gave an irrevocable power of attorney to each of the manager (Banalasta Oil Plantation Ltd) and the trustee (Australian Rural Group Limited) to execute each of the above agreements.
40. By the loan agreement, each applicant borrowed $28,000 to be advanced as to:
(a) $17,840, by the date of acceptance of his application (first advance);
(b) $10,160, by 30 June, 1998 –
41. These amounts covered the whole of the management fees payable: -
(a) under the primary management agreement, $15,240;
(b) on or before 30 June, 1998 under the secondary management agreement, $10,160
42. Recital F of the loan agreement also expressed the loan to be in respect of fees under the plantation right agreement for the first 13 months of its term. By clause 4.2(a) and the Schedule to the plantation right agreement, the landholder acknowledged that those fees had been paid in full. Their amount is not specified but would appear to be $2,600 (being the amount of the first advance, $17,840, less the management fees under the primary management agreement, $15,240).
43. The loan agreement required the following payments from the applicants: -
(a) interest, which the lender would accept as: -
(i)$2,009 for the period to 30 June, 1998 if paid on or before the date of acceptance of the application;
(ii)$2,887 for the period to 30 June, 1999 if paid on or before 30 June, 1998 –
(b) in respect of principal: -
(i) on 30 June, 1998, in the amount of $7,000;
(ii) on 30 June, 1999, in the amount of $3,100 –
44. Any further expenditure on the project for management fees, land use fees, repayment of the loan and interest was to come out of such future profits as the project might make, as the applicants understood.
45. Accordingly, the carrying out of the project required nothing from participants beyond making an application form and required cash payments. Participants took the benefit of the available tax deductions regardless of the outcome of the project. This is reflected in the Statements of Transaction exhibited to Mr Clampett’s affidavit and Mr Munday’s affidavit noted below. They express their outstanding liabilities only in terms of the cash payments that were required of them. As Mr Clampett put it in cross‑examination, he believed that there was no risk even if the project made no money and that if the project made no money he “didn’t have to pay”.
The project was carried out without regard to the obligations created by the project agreements.
46. Notwithstanding the terms of the application form, a receipt from SecurInvest dated 25 September, 1997 (Clampett affidavit, exhibit SC10) suggests that Mr Clampett paid only $150 on application, that amount being credited towards payment for seeds (in respect of which the total payment required was $300. Mr Munday’s evidence is that he paid $150 on application for seeds and paid the balance of $150 (for a total of $300) on 28 October 1998. The respondent referred in this regard to a report prepared by the respondent’s expert witness, Mr Landridge. As Mr Langridge’s report explains, the interest prepayment of $2,009 required on application was treated as a loan in the books of the lender.
47. Mr Clampett first heard from the manager more than 3 months after his application in September, by letter dated 2 January, 1998, which advised that his application had been accepted. A similar letter to Mr Munday was dated 19 March, 1998.
48. Despite the terms of the loan agreement, loan principal repayments required of Mr Clampett were: -
(a) $5,041 on 30 September, 1998; and
(b) $1,959 on 30 September, 1999.
49. According to exhibit SC35, Mr Clampett’s interest and the adjusted principal repayments were not finalized until 16 June, 2005. This followed demands for payment dated:
(a)28 October 1999 by which the lender threatened recovery of the whole of the outstanding balance of the loan in default of payment of the second year payments totalling $4,846;
(b)25 February 2000 following which Mr Clampett appears to have made a single payment of $200;
(c)16 October 2001 following which Mr Clampett appears to have made regular payments;
(d)23 February 2004 which offered a discount in order to clear the balance.
50. Had Mr Clampett believed in the project as he asserted, he would have met his payment obligations as they fell due or made arrangements to do so promptly thereafter. The record shows that his actions were consistent with his evidence that his participation in the project was driven by the tax deductions which made the project affordable without risk to his own funds.
51. The loan principal payments required of Mr Munday were:-
(a) $5,041 on 30 September, 1998; and
(b) $1,959 on 30 September, 1999.
52. According to exhibit KAM24, Mr Munday’s interest and the adjusted principal repayments were not finalized until 17 October 2001. As in Mr Clampett’s case, Mr Munday’s evidence indicates that the second year payment obligations were met only after demands from the lender which threatened recovery of the whole of the outstanding balance of the loan in default of the second year payments.
53. In respect of both applicants, and as Mr Munday acknowledged in his oral evidence, by entering into the project, obligations were undertaken to make payments to Banalasta. In return, Banalasta undertook to plant trees, harvest and sell oil and pay the proceeds of sale to the applicants. The ATO had nothing to do with those arrangements. The attitude of the ATO to the tax deductibility of expenses incurred ought to have been irrelevant to meeting the obligations under the agreements entered into.
54. The applicants’ looking to the attitude of the ATO objectively demonstrates that the commercial purpose of obtaining a return from the investment was secondary to the purpose of obtaining the tax deductions by which participation was to be funded.
55. Additionally, in the result, the actual cash payments required of the applicants reduced the obligations placed on them still further whilst improving their respective net cash positions secured by the tax deductions: -
(a)cash payments required were $11,896 in respect of the loan and $300 in respect of seeds ($12,196 in all) instead of a total $15,296;
(b)the required cash payments were made not over the 1998 and 1999 years but over a considerably longer period;
(c)Mr Clampett was, ultimately given a discount of $698;
(d)the applicants would nevertheless, take the benefit of the same tax deductions in respect of prepaid management and land use fees and interest, totalling, $32,926 over the 1998 and 1999 years.
Mr Langridge’s report explains the positive effect these changes had on the applicants’ respective net cash positions resulting from entry into the project.
56. On the other hand, there was no resulting commercial benefit to the project entities to whom the flow of funds was, correspondingly, reduced.
57. Moreover, the applicants were simply not charged amounts which the terms of the project agreements required to be paid from the income of the project. As appears from the Statements of Income and Expenses exhibited to Mr Clampett’s affidavit and Mr Munday’s affidavit and noted above:-
(a)land use fees were not charged at all contrary to the terms of the plantation right agreement (clause 4.2(b) and (c) and Schedule;
(b)management fees were not charged in the amounts detailed in clause 5.1 of the secondary management agreement;
(c)interest on the loan, beyond the initial prepayments, was advised to be accruing because project income was insufficient to meet it when due. However, interest amounts due and accruing were not shown on statements to the applicants.
The flow of funds to the project was confined to the cash payments made by participants.
58. The applicants entered into the project in the 1998 year and incurred obligations for the 1998 and 1999 years. However, the project commenced with subscriptions for interests in the year ended 30 June, 1997 (the 1997 year).
59. Table 1 at page 8 of Mr Langridge’s report summarizes loans made in the 1997 year in respect of interests as follows: -
(a)external – 116;
(b)the manager – 93 (reflected in the manager’s accounts as explained at pages 11 – 12 of Mr Langridge’s report);
(c)Blickling, director of the project entities – 3 (reflected in the manager’s accounts as explained at page 14 of Mr Langridge’s affidavit).
60. These loans were effected by a round robin of cheques and cash transfers made on 1 July, 1997 (accounted for as at 30 June, 1997) between the various project entities. The net cash effect of these transactions was nil. This is explained diagrammatically by Appendix 2 to Mr Langridge’s report.
61. The accounts of the project entities reflect the transfers as internal transactions between the project entities. The amounts lent by the lender for management and land use fees were in turn lent to it by the manager and the landholder. See Langridge report, page 9, in respect of the accounts of the lender. The transactions for the manager are summarized at page 13 and reflected in the take-up of management fees by the journal entry at page 10. The corresponding accounting of the landholder is summarized at page 16.
62. Although 116 external interests were recorded, the accounts of the manager recorded cash deposits for only 26.5. Book entries recorded so-called secondary loans from the landholder in respect of the balance of 89.5 subscriptions in respect of which cash was, apparently, received after 30 June, 1997 (Langridge report, pages 12, 17).
63. For the 1998 year, Mr Langridge traces the making of loans for the project through two sets of figures prepared for the lender, respectively in September and October, 1998.
64. The September figures reflect loans made in respect of 412.5 new external interests in the 1998 year. Table 5 at page 23 of Mr Langridge’s report indicates that loans were made in respect of these interests for the prepaid management and land use fees ($17,840) in accordance with the loan agreement. Additionally, these growers were also lent the first prepaid interest amount of $2,009 which was, consequently, reflected in the lender’s accounts as paid (Langridge report, pages 21, 22.5). This reflects the manner in which the applicants’ payments were dealt with as outlined above. As also noted above however it is inconsistent with the requirements outlined in the prospectus, the application form and the requirements of the loan agreement.
65. Loans made to the new 412.5 external investors were effected by bills of exchange executed between the landholder, the manager and the lender and recorded as internal loans. Pages 21 – 22 of Mr Langridge’s report summarize the bill of exchange transactions and accounting by the lender. The corresponding transactions and accounting of the manager are described at page 30 and Table 8 and form part of the journal entry in the landholder’s accounts summarized at page 34.
66. As the net cash movements summarized by Mr Langridge demonstrate, there was no cash movement in the bill of exchange transactions (see page 22 in respect of the lender, page 31 for the manager).
67. According to Mr Langridge’s report (pages 25-27 including Table 6) and page 28 especially Table 7 the 1998 year figures prepared in respect of the lender in October 1998 suggest the taking up of: -
(a)a further 24 interests by the lender;
(b)a further 40 interests by the manager (reflected in its accounts as summarized at pages 32 – 33 of Mr Langridge’s report);
(c)25 interests by the landholder (reflected in its accounts as summarized at page 35 of Mr Langridge’s report);
(d)and a further 68.5 external interests.
68. Table 6 at page 27 of Mr Langridge’s report indicates that these further external investors were also lent not only first year management and land use fees but their first year interest amount (reflected as received by the journal entry on page 27 of the report).
69. These loans were reflected only in book entries recording internal loan transactions between the project entities as before. See Langridge report at page 27 in respect of the lender. In the manager’s accounts, they form part of the journal entry at page 30. And see Table 10, page 33 in the manager’s take-up of the management fees at page 34. The landholder’s corresponding accounting appears at page 34 of the report.
70. The accounting does not reflect the making of the second part of the loan, in the amount of $10,160. As Mr Langridge reports (at page 37) accounting for the 1999 year was incomplete.
71. The 1999 accounting does, however, reflect the cancellation by the project entities of interests taken up by them in the previous two years. This was effected by a simple reversal in the accounts of the various entities, underlining the book entry nature of the purported acquisitions in the first place (Langridge report, page 37; and see documents referred to in the entries in the respondent’s chronology for 11 December and 16 December 1999). Ultimately, from the standpoint of a successful outcome for the project, neither the participation of the Banalasta interests as Growers nor their subsequent withdrawal makes any commercial sense.
72. Section 3 of Mr Langridge’s report (pages 38 – 42) reports that none of the project entities had identifiable sources of funds for the making of project loans in the 1997 and 1998 years and concludes that funds generated by the project were generated by receipts from investors (save for a short-term loan amount in the 1998 year). Reference is made to various documents which indicate that the project entities were obliged to borrow funds in order to meet ASIC’s liquidity requirements.
73. Mr Langridge’s review of the accounts establishes that the only funds available to the project came from external investors such as the applicants. Loans in respect of management and land use fees pursuant to loan agreements, and additional loans, particularly in respect of first year prepaid interest were effected only by internal accounting in the project entities. Accordingly, the management fees and land use fees charged did not serve the commercial purposes of the project. Their only function was to inflate the amount of tax deductions that participants might claim.
74. The project was carried out by three companies under the same ownership. The conduct of the project by three separate but related entities created a complex structure with no commercial purpose. It did, however, facilitate the making of loans to participants without the support of actual funds.
The Tribunal accepts the above contentions of the respondent which are supported by the evidence before the Tribunal.
Section 177D(b)(ii) – the form and substance of the scheme
75. The respondent’s submissions were as follows:
“71. The schemes took the form of a business growing and producing eucalyptus oil which was commenced by the acquisition of rights to use land and the appointment of a manager.
72. In substance, however, the project took a shape which was not necessary to its commercial outcomes. That shape ensured deductions for management and land use fees incurred but which, by the terms of the loan agreement, were never required to be met. The loan did not serve the commercial outcomes of the project as obligations in respect of the management and land use fees, although legally satisfied, were not actually paid.
73. “…. the particular shape the investment took was clearly fashioned in a way that would maximize the tax deductions. They were geared up by the loan agreement with up front interest payments. But for the tax deductions the form the investment might be expected to take would clearly relate more to the substance of what happened. Rather than a loan with prepaid interest where the loan was to be repaid out of the investor’s profit share without recourse … the substance is that the investor was to receive only a lesser share of profit over the term of the loan agreement. The loan allowed, also, the prepayment of the management fee and the deduction which emanated from that”: Commissioner of Taxation v Sleight (2004) 136 FCR 211 per Hill, J at [82]. And see Calder v FCT (2005) 61 ATR 267 at [69] and [117].
74. In substance, participants in the project were passive investors. Indeed, the applicants were sold the scheme as an investment by a financial advisor (Clampett affidavit, paragraph 12 and Munday affidavit, paragraph 11).”
The Tribunal agrees with the respondent’s submissions.
Section 177D(b)(iii) – the time at which the scheme was entered into and the length of the period during which the scheme was carried out
76. The respondent submitted that:
“75. The prospectus issued on 12 May, 1997 offering investment in the project which was to run over twelve years.
76. Mr Clampett had applied to participate in the project by 25 September, 1997. See receipt from SecurInvest dated 25 September, 1997.
77. Mr Munday had applied to participate in the project by 17 October, 1997. See receipt from SecurInvest dated 17 October, 1997.
78. Generally, investors’ active participation in the project ceased in June, 1999 with their final repayment of loan principal.
79. Mr Clampett’s interest and principal repayments were finalized in June, 2005.
80. Mr Munday’s interest and principal repayments were finalized in October, 2001.
81. In the year ended 30 June, 1999, the project entities withdrew subscriptions they had made in the previous two years . See Mr Langridge’s report at page 37.
82. The project has now failed. By a Notice to Growers dated 4 July 2005, the company secretary of Banalasta gave notice to the growers of the project of a proposal to wind the project up. Banalasta had formed the view that the purpose of the project could not be accomplished. The notice stated that due to yields and agricultural risks there was insufficient revenue and the project was not viable and there would never be a financial return to investors.
83. According to Dr Weber’s oral evidence, the plantation continues to be harvested for the benefit of the Banalasta farm.”
The Tribunal accepts these submissions which are in accordance with the evidence.
Section 177D(b) (iv) – the result in relation to the operation of this Act that, but for this Part would be achieved by the scheme
77. The respondent submitted that:
“84. But for Part IVA, the result of the scheme was that the applicants became entitled:
(a) in the 1998 year, to deductions totaling $19,849 in respect of management fees, land use fees and interest;
(b) in the 1999 year, to deductions totalling $13,086 in respect of management fees and interest.”
In the Tribunal’s view this is clearly so.
Section 177D(b)(v) – any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme
78. The respondent submitted that:
“85. Leaving aside the tax effect of the other projects they entered into at the time, as a result of entering into the project, each applicant generated tax deductions sufficient to recoup the cash contributions he made to the project and retain a surplus.
86. Mr Langridge’s report, relevantly, details the tax effect of investment in the project, in respect of: -
(a)Mr Clampett at pages 60-64 and 66
(b)Mr Munday at pages 53-57 and 66
(c)the hypothetical investor paying tax at the top marginal rate contemplated by the project prospectus, at pages 64-66.
87. The tax effect of other projects entered into by the applicants is not material to the question of whether Part IVA applies in respect of the deductions claimed by them in respect of their participation in the project. They clearly had a considerable value to each applicant, particularly if the other deductions claimed were not allowable. See Commissioner of Taxation v Sleight (2004) 136 FCR 211 per Hill, J at [88] and Carr, J. at [225]. Moreover, as Carr, J. observed, at [224]: “on a proper construction of s 177D(b) the assessment should be made, in respect of this factor … as at the time of entry into the scheme. A reasonable person would be entitled to draw his conclusion about dominant purpose on the basis that the respondent entered into three schemes at one time and that each of those schemes would result (but for Part IVA) in the allowance of the deductions claimed.”
88. Beyond the required cash contributions, the applicants did not have to contribute any more money to the project. All management fees and land use fees payable after the 1998 year were to be recouped only from such gross income as the project might generate. Similarly, principal and interest repayments on the balance of the loan were payable only from future project income.
89. The project has not generated income sufficient to cover those costs to date. Accordingly, the applicants’ participation has not resulted in any change in their financial position beyond any surplus created by the claimed tax deductions.
90. In Commissioner of Taxation v Sleight the Court contrasted the availability of tax deductions with the uncertainty of the investment yields which the project there might realize (see (2004) 136 FCR 211 per Hill, J at [88], [93], [94] and per Carr, J. at [216], [226] – [227]).
91. This project was highly speculative. It could not be reasonably expected that there would be any material change in the financial position of the applicants and other investors as a result of their participation.
92. The prospectus contained income projections which were unreliable by their very nature. Being made over 15 years, they, necessarily, became no more than predictions the further out they purported to state returns. Moreover, they unrealistically predicted increasing and constant returns notwithstanding the vagaries of agriculture. The achievement of those returns was dependent on the coming together of a number of variables as the assumptions at T107 V1/438 make clear. At least one of those assumptions, regarding biomass, was speculative and optimistic as Mr Wilson advised at the time (Wilson affidavit, paragraph 43 and exhibit DCW13).
93. The prospectus itself revealed the speculative nature of the venture. Not only was it an agricultural venture, subject to the various, stated, vagaries of agriculture. The Agricultural Report and the Market Report contained in the prospectus indicated that the project was to grow trees untried in commercial forestry on a large scale. Mr Wilson agreed in cross‑examination that on this basis the project was speculative. Moreover it was proposed to produce oil for which a market had not been established.
94. Mr Wilson’s Agricultural Report (commencing at page 24 of the prospectus, exhibit KJM1) indicated that eucalyptus radiata had only been trialled as a plantation tree. Accordingly, he could say no more than that: -
“(a)the introduction of irrigation as supplemented watering should considerably increase the length of growing season and rate of growth of a plantation in this geographical location”;
(b)[e]arly summer harvesting should also ensure vigorous coppice regrowth before the onslaught of winter frosts”;
(c)[t]he first harvest should be possible after 2 growing seasons” – ”
95. The “Oil Quality” section of the Agricultural Report concluded, based on recent results obtained once in the area, that Banalasta’s budget of 14 kg biomass per hectare was an achievable yield for the future. Similarly, Mr Wilson concluded that Banalasta’s budgeted oil yield of 5% was achievable but with the use of high oil yielding provenances. He emphasized, however, that the study and selection of premium provenances for seed selection “is an early trial of limited extent and any commercial analysis of trial results should reflect this matter.”
96. Mr Wilson’s consideration and conclusions about Banalasta’s yield projections were also circumspect. His overall conclusion was limited to the statement: “Proposals to date demonstrate the potential for the successful establishment of a Eucalyptus plantation…”.
97. The Marketing Report (prospectus, T107 beginning at V1/450) examined the world supply of Eucalyptus Radiata oil, then 100 tonnes per annum of approximately 3,000 tonnes of eucalyptus oil, mainly produced by China. The writers concluded: -
“The major challenges for potential Eucalyptus radiata producers are to convince prospective buyers to pay a premium for a reliable, high quality product, as well as developing new products, creating new markets and increasing world demand for their product.”
98. The magnitude of that challenge becomes apparent when one looks at the projected income for the project. The prospectus proposed that there would be 400 growers producing 300 kg of oil per allotment by 1999 or 120 tonnes, more than the 1997 world production. In the 2000 year, the projected output of the plantation was to more than double, leveling out from 2003 to 1,050 kg per allotment or 420 tonnes per annum. At the same time as production of eucalyptus radiate oil from the Banalasta plantation was growing to 4 times that of world production, prices were increasing from $12 per kg to $16 per kg and eventually to $20 per kg.
99. The writers report fluctuating prices, that the product has market potential but that demand is difficult to predict. Having examined the marketing risks, they concluded that “potential for expansion in Australian and overseas markets exists” but, at the end: -
“Sales of oil from Australian plantations of Eucalyptus radiata … will depend on product development and marketing. Australian-grown Eucalyptus radiata oil …could capture the imagination, enthusiasm and acceptance of domestic markets as well as appreciative consumers world-wide.”
100. Further, Mr Langridge’s report at pages 69 and 70 indicates that in light of the project risks, even if the project achieved the predicted returns, it would not yield a satisfactory commercial return, even assuming the rate of return calculated by Mr Simpson. (The expert witness of the applicants) Mr Langridge’s view is borne out by views expressed at a meeting between Mr Blickling and corporate finance managers from Macquarie Bank and Coopers & Lybrand in November 1996. The notes of the meeting record “We assumed a marketable and achievable product would need on IRR of approximately 25%” (T documents, V8/2745).
101. In the end, participants in the project could not reasonably expect any material return beyond the early tax benefits their participation yielded. Indeed, because of the early tax benefits they expected and the limited recourse terms of the loan, investors could participate in the project without any risk to their own funds. Accordingly, participants could take a chance on the commercial performance of the project. Its actual performance was of limited concern. Any return achieved was an additional benefit but by no means certain compared with the expected tax benefits.
102. In that context, the comparison of different rates of return is immaterial. It is, therefore, inappropriate to compare rates of return indicated by the projections here with returns predicted for the project in Commissioner of Taxation v Cooke (2004) 55 ATR 183, at least without an understanding of the risks of the project there. In Cooke the Court’s consideration of the commercial viability of the project was restricted to the prospectus without more. As the evidence here shows, the predicted returns are not to be taken at face value.
In Tribunal’s view the respondents contentions are borne out by the evidence.
Section 177D(b)(vi) – any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result from the scheme
79. The respondent submitted that:
103. The evidence indicates that Banalasta and its associated companies were concerned to raise funds from investors which met their urgent short-term requirement for funds to satisfy their bank’s demands as well as begin to establish a eucalyptus radiata plantation. They were able, and intended to do so, because of the immediate attraction to investors of the tax deductions which funded their initial cash outlays whilst leaving investors with a cash surplus.
104. Beyond the cash payments sourced from participants’ tax savings, the financial position of the project entities did not change as a result of the scheme. Loan funds were not made available and not intended to be.
105. Moreover, the lender had no substance. According to the prospectus, the lender was incorporated on 9 April, 1997 and had assets consisting of $2 of share capital. Considered as a separate entity, which it purported to be, the lender had little prospect of obtaining funds to make the loans it undertook, which were to its commercial disadvantage:
(a)it proposed to make loans totalling $28,000 per Grower’s Interest to be repaid only to the extent of $10,000 (according to the loan documentation). Beyond that, repayment was dependent upon the project yielding profits;
(b)repayment terms were informally adjusted to require total cash repayments of only $7,000 per Grower’s Interest, to the lender’s further disadvantage;
(c)interest payments were limited to prepayments of $2,009 and $2,889 for the first and second years of the loan. Beyond that, interest, too, was dependent upon the success of the project;
(d)management fees and land use fees were payable from the proceeds of the sale of oil before interest and principal payable in respect of the loan;
(e)if the proceeds of sale were not sufficient to meet loan principal repayments as well as management fees, land use fees and interest, the manager (and not the lender, itself) had a discretion as to the amount of loan repayment to be made.
(f)As already outlined, there was a real prospect that the income generated by the project would not be sufficient to ensure payments of interest and the balance of the principal of the loan.
The Tribunal agrees with the respondent’s contentions.
Applicants’ Contentions
80. The applicants asserted on various grounds that having regard to the matters set out in s177D(b) of the Act it would not be concluded by a reasonable person that the persons, or one or more of the persons who entered into or carried out the scheme or part of the scheme (including the applicants) did so for the dominant purpose of enabling the applicants to obtain the relevant deductions.
81. The Tribunal has duly considered the applicants’ submissions but has formed the view that they are not supported by the evidence and are of little merit or substance and that the applicants have comprehensively failed to discharge the onus which rests on them to show that the assessments in question are excessive, except to the extent set out below.
82. Conversely, the Tribunal finds that the respondent’s submissions are overwhelmingly supported by the evidence and that the conclusions to be drawn are those set out below.
Section 177D(b) - conclusion
83. The Tribunal finds that the consideration of the section 177D(b) factors as set out above leads to the conclusion that the scheme “took such a form that there is a particular scheme in respect of which a conclusion of the kind described in s177D is required, even though the particular scheme also advances a wider commercial objective”: FCT v Hart (2004) 217 CLR 216 per Gleeson CJ and McHugh J at [16].
84. In the Tribunal’s view it is clear that the following aspects of the scheme were extraneous to the substance of an investment in a commercial agricultural project: -
(a)large up-front charges of a revenue character –
(b)funded by a loan –
(c)made on limited recourse terms; and
(d)further project charges were to be met only from the proceeds of the project.
85. The Tribunal is of the view that these aspects of the scheme served no purpose except to create large tax deductions from which the project could be funded, without further demand being made on the investor. They clearly did not fund the commercial conduct of the project. The loans, made by entries in the books of the various project entities (and in the 1998 year by bills of exchange) were not supported by cash. In the result, the project could only be conducted using cash payments made by participants in respect of principal and interest on their loans.
86. Accordingly, it would be concluded objectively that:
(a)the purpose of the applicants, in entering into or carrying out the scheme, was to obtain the tax benefits;
(b)the purpose of the project entities, and Mr Blickling, who stood behind them, in entering into or carrying out the scheme, was to obtain a tax benefit for participants in the project, including the applicants. It is not to the point that the overall commercial objective of the project entities was to make money. It is clear from the evidence that they achieved their commercial purpose by creating a structure to which the attractiveness of the tax advantages it secured was central. It is also clear that obiter comments made in the Full Federal Court decisions in Vincent at [100] and Sleight at [95]‑[96] must now be read in light of the High Court decision in Hart.
Conclusion with respect to Part IVA
87. It follows from the foregoing that, in respect of each of the 1998 and 1999 years the Tribunal is of the view that the respondent was authorised and entitled under section 177F(1)(b) of the Act to determine that the tax deductions claimed by each applicant in each of the 1998 and 1999 years were not allowable, save to the extent set out below.
Section 169A(3)
88. The Tribunal finds that as contended by the respondent and contrary to the assertions made on behalf of Mr Munday, the determination made by the respondent on 15 November 2004, in connection with consideration of Mr Munday’s notices of objection is valid by reason of the operation of section 169A(3) of the Act. Section 169A(3) provides:
“In determining whether an assessment is correct, any determination, opinion or judgement of the Commissioner made, held or formed in connection with the consideration of an objection against the assessment shall be deemed to have been made, held or formed when the assessment was made.”
89. In the Tribunal’s view by the operation of section 169A(3), the determination made on 15 November, 2004 was deemed to have been made at the time Mr Munday’s amended assessment for the 1998 year was made, that is on 24 January, 2000. That amended assessment, accordingly, gave effect to the determination for the purposes of section 177F.
90. The Tribunal is of the view that the making by the Commissioner of an earlier section 177F determination, on 24 February 2000, has no bearing on the validity of the determination made on 15 November, 2004. Section 169A(3) is expressed in broad terms. It covers any determination made at the relevant time. It is not fettered by the making of any previous determination. To suggest so as contended by counsel for Mr Munday would be to read into the section conditions that are not apparent from its language.
Deductions for Payments Actually made by the Applicants
91. Reflecting the reasoning in Commissioner of Taxation v Sleight (2004) 136 FCR 211 per Hill J at [112]-[115] (Hely J agreeing) and per Carr J at [246] the respondent’s Statements of Facts and Contentions filed in the applications indicated that, subject to the evidence, the exercise of discretion under section 177F(1)(b) of the Act ought to reflect the actual cash payments made by the applicants in the 1998 and 1999 years.
92. The final Statement of Transactions issued to the applicants and produced in evidence record payments from Mr Clampett and Mr Munday in the 1998 and 1999 years credited as interest payments as follows: -
(a) Mr Clampett:
(i)1998 year, $1,009, being $850 paid 2 March, 1998 and $159 paid 30 March;
(ii)1999 year, $1,000, paid 7 November, 1998;
(b)Mr Munday, $2009 paid 28 October, 1998 (1999 year).
The respondent has conceded that these amounts may properly be allowed as deductions to the respective applicants pursuant to section 177F(1)(b) and the Tribunal is of the view that the applicants should be allowed deductions for those amounts.
93. The Statements of Transactions also record further payments from Mr Clampett and Mr Munday credited as loan principal repayments in the 1998 and/or 1999 years, as follows:
(a) Mr Clampett: -
(i) 1998 year, $841 paid on 30 March, 1998;
(ii) 1999 year, $4,200, paid 7 November, 1998;
(b) Mr Munday, $5,041 paid 28 October, 1998 (1999 year).
In respect of those amounts (which would not, strictly, be deductible), the respondent concedes that the Tribunal might properly adjust the respective applicant’s taxable income by those amounts by making a determination under section 177F(3) and the Tribunal so determines.
94. The Tribunal also notes that the evidence reflects that Mr Clampett and Mr Munday made further cash payments in respect of their participation in the project after the disputed income years. However because subsequent years of income are not before the Tribunal, any allowance for those cash payments ought, properly, to be the subject of application to the respondent for a separate determination under section 177F(3).
Penalties
95. In the 1999 year the applicants did not claim the relevant deductions, accordingly there was no tax shortfall resulting from the income tax returns they lodged for that year. However section 226 of the Act operates to impose penalty upon the making of a valid determination under section 177F. In the circumstances of these cases however, the respondent concedes that it would be appropriate to remit penalty imposed in respect of the 1999 year (section 227(3)) and the Tribunal accordingly determines that those penalties should be remitted.
Decision
96. The Tribunal sets aside the reviewable objection decisions and remits these matters to the respondent for reconsideration in accordance with the direction that the respondent issue further amended assessments to income tax to the applicants that give effect to the Tribunal’s decision to which these reasons are appended ie: In relation to Mr Munday:
The Tribunal:
(1)Affirms the reviewable objection decision of the respondent dated 15 November 2004 in relation to the year of income ended 30 June 1998;
(2)sets aside the reviewable objection decision of the respondent dated 15 November 2004 in relation to the year of income ended 30 June 1999 and remits the matter to the respondent for reconsideration in accordance with the direction that the respondent issue a further amended assessment to income tax to the applicant that gives effect to the Tribunal’s determination pursuant to s 177 F of the Income Tax Assessment Act 1936 that:
(a) the tax benefits obtained by the applicant in relation to his participation in the Banalasta Oil Plantation Project No. 1 shall not be allowable deductions in calculating his taxable income to the extent of $6,036 in the income year ended 30 June 1999; and
(b)that the penalty imposed in respect of year ended 30 June 1999 shall be remitted.
In relation to Mr Clampett:
The Tribunal:
(1)Sets aside the reviewable objection decision of the respondent dated 8 December 2004 in relation to the year of income ended 30 June 1998 and remits the matter to the respondent for reconsideration in accordance with the direction that the respondent issue a further amended assessment to income tax to the applicant that gives effect to the Tribunal’s determination pursuant to s 177F of the Income Tax Assessment Act 1936 that the tax benefits obtained by the applicant in relation to his participation in the Banalasta Oil Plantation Project No. 1 shall not be allowable deductions in calculating his taxable income to the extent of $17,999 in the income year ended 30 June 1998;
(2)sets aside the reviewable objection decision of the respondent dated 8 December 2004 in relation to the year of income ended 30 June 1999 and remits the matter to the respondent for reconsideration in accordance with the direction that the respondent issue a further amended assessment to income tax to the applicant that gives effect to the Tribunal’s determination pursuant to s 177 F of the Income Tax Assessment Act 1936 that:
(a) the tax benefits obtained by the applicant in relation to his participation in the Banalasta Oil Plantation Project No. 1 shall not be allowable deductions in calculating his taxable income to the extent of $7,886 in the income year ended 30 June 1999; and
(b)that the penalty imposed in respect of the year ended 30 June 1999 shall be remitted.
I certify that the ninety six (96) preceding paragraphs are a true copy of the reasons for the decision herein of
Signed: .....................(Sgd. Ms R Riberi).......................
AssociateDates of Hearing 4 – 6 September 2006
Date of Decision 11 December 2006
Counsel for the Applicant Mr F Wilson, Wilson & Atkinson
Solicitor for the Applicant Mr D Romano, Wilson & Atkinson
Senior Counsel for the Respondent Ms H Symon
Counsel for the Respondent Ms L PriceSolicitor for the Respondent Mr T Burrows, Australian Government
Solicitor
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