Nathan Jones and and Commissioner of Taxation
[2011] AATA 26
•24 January 2011
[2011] AATA 26
| Division | TAXATION APPEALS DIVISION |
| File Numbers | 2008/4744; 2008/4745; 2008/4749 |
| Re | Nathan Jones |
| APPLICANT | |
| And | Commissioner of Taxation |
| RESPONDENT | |
| Division | TAXATION APPEALS DIVISION |
| File Numbers | 2008/4742; 2008/4743 |
| Re | Company A Pty Ltd |
| APPLICANT | |
| And | Commissioner of Taxation |
| RESPONDENT |
Certain aspects of this decision have been omitted in accordance with Orders of the Administrative Appeals Tribunal. Where this has occurred, it will be indicated by the words “[OMITTED]”.
DECISION
| Tribunal | Honourable Dr B H McPherson CBE Deputy President and |
| Date | 24 January 2011 |
| Place | Brisbane |
The Tribunal:
sets aside the decisions of the respondent in relation to its assessment of the applicants’ liability to taxation and remits the matter to the respondent to further assess the first applicants’ liability in accordance with the attached reasons for decision (in particular, paragraph 77) ; and
sets aside the decision of the respondent in relation to the imposition of administrative penalties under the Act and substitutes its decision that such penalties are not payable by the applicants.
........................................................................
Honourable Dr B H McPherson CBE Deputy President
CATCHWORDS
INCOME TAX – Assessable income – Whether proceeds of sale of business applicant taxpayer comprises assessable income – Consideration for sale included applicant’s good will – Assignment of good will – Effect of confidentiality agreement – Mode of calculating purchase price – Partial discharge of purchaser’s indebtedness by transfer to the applicant of monies received from sale of shares owned by purchaser – Partial discharge of purchaser’s indebtedness by equitable assignment to the applicant of income payable to purchaser by other entities – Nature of equitable assignment – Whether monies paid to the applicant as a result of sale of shares and by equitable assignment constitute assessable income – Monies received by applicant from sale of business settled on trust established by applicant – Borrowings by applicant from the trust constituted loans to and not income received by the applicant – Significance of “re-advancement” to the purchasers of monies paid to the applicant – Application of provisions which reverse the burden of proof – Significance of private declaration of trust – Monies received by the applicants not characterised as income – Applicant not liable to administrative penalties – Monies paid in accordance with trustee’s directions not deemed dividends received by the applicant – Decisions under review set aside.
LEGISLATION
Taxation Administration Act 1953 (Cth) s 14ZZK
Income Tax Assessment Act 1997 (Cth) s 6-5
Income Tax Assessment Act 1936 (Cth) ss 6, 44, 109C,
Administrative Appeals Tribunal Act 1975 (Cth) s 42A
Property Law Act 1974 (Cth) s 199
CASES
Box v Commissioner of Taxation (1952) 86 CLR 387
Brogden v Metropolitan Railway Company (1877) 2 AC 666
Brown v Liell (1885) 16 Q.B.D 229
Bunn v Gay (1803) 4 East 190; 102 E.R. 803
Commissioners of Inland Revenue v Angus & Co (1889) 23 Q.B.D. 579
Commissioners of Inland Revenue v Muller & Co’s Margarine Limited [1901] AC 217
Commissioner of the State Savings Bank of Victoria v Permewan, Wright & Company Limited (1914) 19 CLR 457
Commissioner of Taxes (Queensland) v Ford Motor Company of Australia Propriety Limited (1942) 66 CLR 261
Corporate Affairs Commission v Drysdale (1978) 141 CLR 236
Council of the Upper Hunter Country District v Australian Chilling & Freezing Co Limited (1967) 118 CLR 429
Federal Commissioner of Taxation v Rozman (2010) 186 FCR 1
Griffiths v Young [1970] Ch 675
Hillas & Co v Arcos Ltd [1932] All E.R. Rep 494
McCormack v Federal Commissioner of Taxation (1978) 143 CLR 284
Re Bruynius [1995] 1 QdR 492
Re Sanders Construction Pty Ltd and Eric Newham (Wallerawang) Pty Ltd [1969] Qd R 29
Re Snowden [1979] Ch 528
Salomon v Salomon Co Ltd [1897] AC 22
Shepherd v The Queen (1990) 170 CLR 573
William Brandt’s Sons & Co v Dunlop Rubber Company Limited [1905] AC 454
REASONS FOR DECISION
Honourable Dr B H McPherson CBE Deputy President
Mr R G Kenny, Senior Member
24 January 2011
The applicant taxpayers, Nathan Daniel Jones and three corporations that he controls or controlled have applied to review decisions of the Commissioner of Taxation dismissing their objections to assessments of income tax for each of the tax years from 2000 to 2005. As well as those for Mr Jones personally, the assessments relate to three corporate taxpayers named Company A Pty Ltd (“Company A”), Company B Pty Ltd (“Company B”), and Company C Pty Ltd (“Company C”). Company C was the sole shareholder in Company B, which like the other two companies, was formerly directed and controlled by Mr Jones. At some date in about January 2010, Company B and Company C were deregistered by ASIC acting under s 601AB of the Corporations Act 2001, with the consequence that under s 601AD(1) of that Act, those companies ceased to exist. As a result, the respondent Commissioner, at the beginning of this hearing, sought and obtained from this Tribunal orders dismissing the applicants’ applications for review on the ground of their having failed under s 42A(5)(a) of the Administrative Appeals Tribunal Act 1975 (Cth) to proceed with them. Accordingly, those two companies no longer figure in the outcome of these proceedings, although Mr Aftanas, for the respondent Commissioner, said he did not doubt that the Commissioner might be expected to accept the Tribunal’s reasoning and decisions in the remaining application involving Company A as being applicable to the other two matters.
It is convenient before going further to record briefly something about the applicant Nathan Jones. He was born and grew up in South Africa before immigrating with his wife and two children in the 1980s to New Zealand, where he settled in Christchurch. He has no formal tertiary qualifications having, after completing secondary school, commenced employment as a shop assistant in a retail chain store (OK Bazaars) in South Africa. After arriving in New Zealand with very little capital, he succeeded in acquiring a small supermarket, a fabric or fashion goods business, and a shoe shop. In the course of time he attracted the notice of the National Bank of New Zealand, which was then attempting to dispose of assets in a number of large debtor companies to which it had appointed receivers. Mr Jones was engaged in a consulting and management role to advise the receivers and managers about ways of disposing of the assets to best advantage. This was the source of a career of advising businesses on how to solve their financial problems.
After some time, he became involved in the business of [OMITTED]. The amounts of money involved in these transactions are very large indeed, and the financial capacity and preferences of customers in [OMITTED] are such that they expect to be able to retain and use the same [OMITTED] for many years to come. For that reason, [OMITTED], and Mr Jones, probably through his association with the Bank and other financiers, was drawn into arranging the financing, promotion and carrying out of these transactions. It can be inferred that part of his function was to analyse the businesses of prospective acquirers of such [OMITTED] and to make recommendations to the Bank or other financiers about whether and on what terms a proposed transaction should be financed, if at all. For this purpose, he prepared forms or templates of applications as well as of contracts. Along with [OMITTED], they may be considered to constitute part of the intellectual property of the business that was the subject of the sale here. It should be stressed once again that the amounts of money involved in the foregoing transactions were and are huge, running, on occasions, to hundreds of thousands of [OMITTED] dollars. The financial rewards for those who arrange these transactions naturally are correspondingly large, as can readily be gathered from perusing the figures shown in the Austrac[1] statistics.
[1] See paragraph 24.
As time went on, Mr Jones’s part in promoting and arranging these transactions grew to become a multi-million dollar business. At the same time, he was also toying with the idea of moving into the field of [OMITTED]. Mr Jones conducted his own businesses through a series of companies, at one stage (or so it is said) some 52 or 53 in number. It is apparent from the material and the evidence before us that he was and remained the central figure in all the [OMITTED]. In that respect, his reputation or commercial stature assumed importance in relation to the next event in this narrative, which was the sale of his businesses in [OMITTED].
The purchasers under the contract of sale (“ex 8”), [OMITTED].
THE AGREEMENT FOR SALE AND PURCHASE (EX 8)
Mr Jones eventually grew tired of working as hard as he had been, and began looking for a way out. His marriage had broken down ending in divorce and he became interested in starting a new life. So he made plans to move to Australia, where he became resident on 2 October 1999. Before doing so, and after lengthy negotiations spanning some 12 months or more, he signed a written contract [OMITTED] in which he was named personally as the Vendor and by which he disposed of his business interests in New Zealand. Exhibit 8 is headed “Agreement for Sale and Purchase of Business”. The basic terms of it are that he as Vendor agreed to sell and [OMITTED] named above, [OMITTED] described as the “Purchaser”, agreed to buy “[OMITTED][2]” contained in ex 8. Specifically what Mr Jones agreed to sell and the purchasers to buy was:
(a)the goodwill related to the business;
(b)the fixed assets or plant relating to the business;
(c)the stock in trade associated with the business sale; and
(d)the intellectual property if any.
[2] Recital [OMITTED] of ex 8.
By clause [OMITTED] of ex 8, the Vendor also agreed to [OMITTED]. That, in the end, did not happen; [OMITTED]. In the scheme of things, it did not in fact matter much [OMITTED]. The business operated through personal communication with Mr Jones by telephone calls, and less often by email or fax. Exhibit 8 was not professionally drawn but was written up by Mr Jones himself, using and adapting provisions he found in other contracts. Not surprisingly, it suffers from a number of shortcomings, one of which is that Mr Jones is the only person named as Vendor, whereas one would have expected that, as a matter of caution, one or more of his operating companies would also have been included in that role. So far as the Purchaser is concerned, however, this deficiency is to a large extent offset by the inclusion, in cl [OMITTED] of ex 8, of a warranty or undertaking on the part of Mr Jones as Vendor that he had full power and authority to enter into ex 8 and that the execution, delivery and performance of ex 8 and the consummation of the transaction, had, or would, before settlement, have been duly authorised “by all requisite corporate action, if any”. Clause [OMITTED] contains a further warranty that the Vendor will use best endeavours to ensure that the transfer of the Business and Assets is smoothly achieved and with minimum disruption to business[3]. In fact, although Mr Jones conducted his business or businesses through companies of which he was the sole director, it is apparent that he was the central figure in the business being conducted, and that he was recognised as such throughout the industry. This state of affairs is reinforced by the inclusion in ex 8 of an express agreement by the Vendor, Mr Jones, with the Purchaser “to not compete with the Purchaser in any way for the next 10 years (to 1st April 2005)”[4]. Clause [OMITTED] of ex 8 contains what appears to have been an inchoate attempt to elucidate or expand upon [OMITTED] by including a definition of [OMITTED], as meaning [OMITTED], as well as an extended definition of [OMITTED] as meaning [OMITTED]. In the case of an employee, such an unlimited restraint would almost certainly be invalid as being too widely expressed; but similar restraints have been upheld in the past in cases between vendor and purchaser.
[3] See also cl [OMITTED].
[4] Recital [OMITTED], ex 8.
One such case is Box v Commissioner of Taxation[5], in which a restraint against competing for 10 years in the making, delivery and selling of bread in Hobart was treated by the High Court as presenting no difficulties of enforcement. Their Honours (Dixon CJ, Williams, Fullagar and Kitto JJ), without adversely commenting on the 10 year restraint, observed that the sum of £1750 payable by the purchaser under the contract in that case was,
“… paid as consideration for the vendor entering into a covenant not to compete with the purchaser in the business which he had previously been carrying on. It was paid to protect and enhance the value of the business so that the purchaser would be able to carry it on in the future in the same profitable manner as the vendor had previously carried it on without the risk of the vendor commencing or becoming engaged in a competing business.”[6]
[5] (1952) 86 CLR 387.
[6] Ibid at 397.
Taken in conjunction with the explanation of [OMITTED] in [OMITTED] of ex 8, the restraint in the present case seems to us to be indistinguishable in language or effect from that in Box’s case. It is true that “Goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business”[7]. But ex 8 [OMITTED], as well as the goodwill attaching to it. The contract for sale of the business by Mr Jones himself was prepared with what appears to have been scant regard for the decision in Salomon v Salomon Co Ltd;[8] but, as already mentioned, Mr Jones was described in it as having himself generated the goodwill and profits “through” his various companies[9]. He was the centre from which the goodwill emanated or radiated.
[7] Commissioner of Taxes (Queensland) v Ford Motor Company of Australia Propriety Limited (1942) 66 CLR 261, 272.
[8] [1897] AC 22.
[9] Recital [OMITTED], ex 8.
On behalf of the Commissioner, Mr Aftanas of counsel in his submissions was critical of ex 8, because of its failure to point out a method of transferring the goodwill sold. But goodwill is a chose in action; and so is a species of personal property that is transferable by any method available for transferring property of that nature[10]. The most obvious method is by an assignment, which may be statutory, under s 199 of the Property Law Act 1974 (Qld); or equitable under the general law. The latter can be effectuated by a mere written contract to assign. No particular form is required and a contract to assign constitutes an agreement to assign that is specifically enforceable and, in equity, is considered as the assignment itself. In practice, it is therefore the contract for the sale of the business goodwill that effects the assignment of goodwill[11]. Consistently with this, ex 8 expressly declares in [OMITTED].There is thus no substance in this criticism levelled against ex 8 in the present case.
[10] See Commissioners of Inland Revenue v Muller & Co’s Margarine Limited [1901] AC 217, 223.
[11] Hailsham Lord, Halsbury’s Laws of England (4th ed, Butterworths, 1984) 47 at [5] citing Commissioners of Inland Revenue v Angus & Co (1889) 23 Q.B.D. 579, 593.
That the purchasers were nevertheless aware of and troubled by the problem of ensuring that the goodwill was effectively transferred to themselves from Mr Jones and his businesses is confirmed by the terms of [OMITTED] of ex 8, which declared that the Vendor:
[OMITTED]
Reference should also be made here to the terms of [OMITTED] of ex 8, which acknowledge that, although the business has [OMITTED], the Vendor agrees to the Purchaser [OMITTED].
THE CONFIDENTIALITY AGREEMENT (EX 9)
To our minds, a prime function of [OMITTED] of ex 8 was [OMITTED]. Such an agreement has been held valid at common law[12]. [OMITTED] ex 8 [OMITTED]. This was, in our view, almost certainly also the underlying explanation for ex 9, which is a Confidentiality Agreement entered into between the same parties and on the same date [OMITTED] as ex 8, [OMITTED] .
[12] Bunn v Gay (1803) 4 East 190; 102 E.R. 803.
The foregoing impression of the purpose of ex 9 is confirmed by a number of contractual provisions in ex 8 but especially by [OMITTED]:
[OMITTED]
A defacto director is someone who acts as a director without having been formally appointed to the office of director[13]. [OMITTED]:
[OMITTED]
[OMITTED]
[OMITTED]
In addition, [OMITTED] of ex 8 [OMITTED].
[13] Corporate Affairs Commission v Drysdale (1978) 141 CLR 236, 253-256.
[OMITTED] of ex 9, [OMITTED].
[OMITTED] of ex 9. [OMITTED]. Whatever the reason, the purchasers have always been insistent about maintaining secrecy and, since 2006, they have, as they had threatened they would, even gone as far as to claim a right to refuse to make any further payments under ex 8 on the ground of a breach by the Vendor of ex 9. The alleged breach in question arose through the action of Mr Jones in an interview conducted by Australian Taxation Office (“ATO”) officers in 2005 in connection with his tax affairs. In the course of the interview, he furnished to the ATO copies of both ex 8 and ex 9 in response to a notice given to him in the exercise of the ATO’s compulsive powers under statute. After the purchasers came to know of this disclosure they suspended further payments under ex 8. It might be thought that, as a matter of contract, such action by the purchasers was not authorised by the terms of [OMITTED] of ex 9, or, if it was, that equity would relieve against it as a penal forfeiture that was not directly related to the actual loss likely to be sustained by the purchasers as a result of that breach of ex 9. Apart, however, from suing the purchasers in [OMITTED], there is not much that Mr ames can do about it, as he is now under the disadvantage of being subject to a Departure Prohibition Order (“DPO”) imposed in Australia, making litigation in [OMITTED] effectively impossible for him to conduct. The purchasers may fairly be assumed to have become aware of this alteration in his position, and of its implications for enforcement of their obligations under ex 8. The stark fact is, however, that in 2006, payments under ex 8 ceased and are unlikely to be resumed voluntarily except under the impetus of a court order or judgment.
THE PURCHASE PRICE UNDER THE AGREEMENT (EX 8)
It is necessary now to say something about the provisions of ex 8 that bear upon and govern payment of the purchase price. The ATO and the Commissioner are suspicious of the genuineness of the Agreement for Sale and Purchase embodied in ex 8. In their submissions, they constantly refer to it as the “purported business sale”. Exhibit 8 contains a mechanism for working out the purchase price payable under it. While it is obvious that most normal purchasers would not be prepared to pay more for it than the business was really worth, [OMITTED]. The respondent has nevertheless treated the foregoing bank deposits as assessable income of Mr Jones and assessed him to tax accordingly.
The terms of ex 8 were subjected to a barrage of criticism by the respondent. Some have already been discussed and disposed of, such as that no explicit procedure was provided for transferring the goodwill to the buyer. Another is the absence (as it is claimed) of any provision for payment of the price or for fixing the time at which it was to take place. But payment is a matter governed by [OMITTED] of ex 8, [OMITTED]. The definition of “Purchase Price” in [OMITTED]. Multiplying that figure, which came out at $4,157,512, by a factor of 8 as provided for in [OMITTED], produced the vast total of NZ $33,260,096, which thus became the purchase price under ex 8. Mr Jones said it had not been expected it would be as large as that, but an advance indication of its likely size could have been gained from the EBIT figure for the preceding year (1994) of NZ $3,503,096, which, when multiplied by 8, would by itself have produced a total purchase price of more than NZ $28 million. The respondent condemns ex 8 as not being entered into “at arms length”. This does not mean, however, that the contract is said to be a fiction or a sham. Mr Aftanas specifically rejected any suggestion that the respondent was “going so far as to say that there never was a contract”[14]. And whether or not ex 8 was negotiated at “arm’s length” is immaterial if the purchasers contractually agreed to commit themselves to a legal liability by signing the contract to pay a purchase price that in fact worked out at some $33 million when calculated under [OMITTED] of ex 8. The purchasers have until as recently as February 2006 never in any way attempted to repudiate their obligation to pay that price.
[14] Transcript, p 252, line 15.
It is hardly to be expected that the purchasers would have been in a position to pay an amount as large as $33 million “immediately” upon its determination as required by [OMITTED] and [OMITTED] of ex 8. At a relatively early stage, they seem to have succeeded in paying and so reducing the amount owing by some millions of dollars to $20,484,772.20[15] after Mr Jones had begun complaining that the money was coming in too slowly. The reduction in amount owing was, it seems, achieved by selling some company shares. However, that source of funds was soon exhausted. Eventually, an arrangement was reached between the Purchasers and Mr Jones, or so he claims, by which he was to be paid by [OMITTED] (which was the Purchasers’ trading entity) amounts being received from its customers overseas, that were agreed to be applied in reduction of the Purchasers’ indebtedness under ex 8. There is a spreadsheet[16] prepared by Mr Jones that assembles details of payments received from or on behalf of the Purchaser. It shows that, of the amount originally owing of $33,260,096, some $14,899,324.33 had by 11 May 1995, been discharged by the Purchaser, leaving a balance still owing at that date of $18,360,771,67. Another document or memorandum (“ex 11”), addressed by Mr Jones to the [OMITTED] purchasers, along with [OMITTED] and its Financial Controller [OMITTED], sought confirmation of a figure then owing under ex 8 at 31 March 2005 of $20,484,772.20. Exhibit 11 (which is dated 11 May 2005) requested and received confirmation on behalf of the addressees by its being signed by [OMITTED], as requested, at the foot of the document. It confirmed the amount claimed as owing and also that, while [OMITTED] continued to generate profits, they “would be paid to you, as you have directed”, in reduction of the debt of $20,484,772.20. By signing ex 11, [OMITTED] confirmed what was then owing to Mr Jones by the purchasers under ex 8.
[15] See exhibit 11.
[16] Exhibit 1: Supplementary T Documents, Vol 5, pp 1609-1613.
THE “GARNISHEE ARRANGEMENT”
The spreadsheet referred to above shows the indebtedness as it stood at about 30 June 2005 (as appears from the last entry on the sheet). It acknowledges net payments from the price to that date “as above”. It summarises payments received, which are represented by various entries in the spreadsheet under the heading “Recoveries”. The balance owing is by then shown as $18,360,771.67, which is of course a considerable reduction down from the original debt of $33,260,096. Exhibit 11 also refers to a “previous arrangement” that was made by the parties after complaints by Mr Jones that the money was coming in too slowly. Described by Mr Jones as a “garnishee arrangement”, it was a procedure he devised by which [OMITTED] customers were, with the approval of the purchasers, instructed to pay their debts, not to [OMITTED], but to the credit of a bank account in Australia operated by Company B Ltd, which was the other company that was an applicant here.
There are several independent sources that confirm that the total price payable by the purchasers under ex 8 was somewhere in the region of $33 million. Among those sources, probably the most compelling is ex 11, the memo dated 11 May 2005 and signed by [OMITTED]. It was addressed by Mr Jones to [OMITTED], along with their trading company [OMITTED] and it’s Financial Controller, [OMITTED]. So far as material, ex 11 is as follows. Reading it, as emanating (as it did) from Mr Jones, it begins:
“Consistent with our usual procedure, I seek confirmation that the balance due to me resulting from the sale of my business in March, 1995 is NZ$20,484,772.20 as at the close of business on 31 March, 2005, and that further reductions are intended.
I wish to continue the previous arrangement whereby all your off-shore trading be conducted through [OMITTED] and that those profits be paid to me in reduction of the above amount into the currency-relevant Company B Pty Ltd Bank Account.
Please sign the foot hereof and fax back to the above fax number.
This memorandum, when signed, replaces any earlier version/s which are disabled.”
The communication was duly signed at the foot of ex 11 by [OMITTED] immediately below a sentence that reads:
“We confirm that while [OMITTED] continues to generate profits, those profits will be paid to you, as you have directed, in reduction of the NZ$20,484,772.20 that we confirm is owed to you.”
23. The statement about [OMITTED] profits being paid “to you” is evidently a reference to the procedure devised by Mr Jones by which payment of debts due to [OMITTED] by its overseas customers was directed to be made not to [OMITTED] but instead to the Company B bank account in Australia. It was designated by Mr Jones a “garnishee arrangement” but, properly analysed, it was, legally speaking, simply an equitable assignment to Mr Jones or his company Company B of debts owing to [OMITTED] by its many overseas customers. By accident rather than design, Mr Jones thus hit upon a legally recognised method for discharging a debt by means of an equitable assignment of a debt owed to the payer by someone else. It received the sanction of the House of Lords in William Brandt’s Sons & Co v Dunlop Rubber Company Limited[17]. The facts there were that Brandts were a firm of merchant bankers who financed the business of importing raw rubber for sale in England. Brandts would not allow the imported rubber to be released for delivery to a buyer in England unless the buyer first signed a document agreeing that the sale price of the rubber was to be paid to Brandts rather than to a third party (K) as seller. In holding this to be an equitable assignment to Brandts of the debt due and arising from the sale entered into by K, Lord Macnaghten rejected a submission (which had succeeded in the Court of Appeal below) that the document was not framed in words of assignment. His Lordship said:
“An equitable assignment does not always take that form. It may be addressed to the debtor. It may be couched in the language of command. It may be a courteous request. It may assume the form of mere permission. The language is immaterial if the meaning is plain. All that is necessary is that the debtor should be given to understand that the debt has been made over by the creditor to some third person”[18].
[17] [1905] AC 454.
[18] Ibid at 462.
The decision has frequently been followed and applied in England[19] and in Australia[20]. So, in the present case, it was enough that a customer who owed money to [OMITTED] should realise that the customer’s indebtedness to [OMITTED] would be discharged by paying Mr Jones or his company instead of [OMITTED]. That is in fact what happened. It was the spectacle of all these payments arriving from overseas and being banked in Australia from [OMITTED] customers in various places abroad that led the ATO and the respondent to conclude that those payments must be the proceeds of some other business being conducted by Mr Jones or his companies. The payments being received into the Company B bank account were detected by means of the Australian Transactions Report and Analysis Centre (“Austrac”) facility and it was the Austrac records of those credits that created the ATO’s mistaken impression that those receipts represented undisclosed income in Australia of some business that was being conducted abroad by Mr Jones or one of his companies. Mr Jones and his companies were accordingly assessed in respect of this undisclosed income, as it was believed by the respondent to be.
[19] Megarry, RE and Baker, PV, Snell’s Principles of Equity (26th ed, Sweet & Maxwell, 1966) pp 84-86.
[20] Tolhurst G, The Assignment of Contractual Rights (1st ed, Hart Publishing, 2006) pp 318-323; see also Re Bruynius [1995] 1 QdR 492.
A practical matter requiring attention if the procedure for payment by equitable assignment was to be followed by the parties to ex 8, was the formulation of a method of recording and notifying, both the person making the payment and the purchasers under ex 8, that a payment had been received from an overseas customer, with a consequential reduction in the amount owing to Mr Jones as the Vendor under ex 8. The way this was managed was that, on receipt from the bank of notice of an incoming payment for the credit of the Company B account, Mr Jones was notified by the bank and a record was made[21] of the amount received, its date, and the name of the person paying it, as well as a record of those payments[22] from which to notify the purchasers under ex 8 of the consequent reductions that were being effected in the outstanding balance of the debt due by them to the Vendor Mr Jones under ex 8. In effect, it was the bank records of payments into and out of the Company B bank account that were used to keep track of payments in reduction of the ex 8 debt. In the end, any problems were successfully mastered, and the process worked satisfactorily until payments were suspended by the purchasers in 2006, in consequence of the breach by Mr Jones (as it was asserted to be) of the terms of ex 9.
[21] Above, n 16.
[22] Exhibit 25.
THE TRUST INSTRUMENTS (EX 16 AND 17)
As part of the narrative it is relevant also to mention that, upon the purchase price being determined and agreed at $33 million, Mr Jones arranged by ex 17 dated 1 July 1998, for the proceeds to be made subject to an instrument entitled “Deed of Settlement”, which is ex 16. Exhibit 16 was executed on 31 March 1994, which was just a year before ex 8 was entered into. It or a copy appears to have been later attached to ex 8, so that it was evidently intended from the beginning that the proceeds of sale when received under ex 8 would be settled under ex 16, a copy of which seems to have accompanied ex 8 as Attachment C. The Settlor under ex 16 was Madeline Jones, who is the former wife of Mr Jones. Exhibit 16 was prepared by a [OMITTED], solicitors of [OMITTED], and [OMITTED] himself was nominated as the first trustee under the Deed. Exhibit 16 recited that Madeline Jones had paid a nominal $10 to the trustee and intended that the trustee should acquire certain further assets to be held for and on behalf of the trust constituted by the Deed. Clause 1.6 of ex 16 declared that the name of the Trust was to be the NJ Trust and that its beneficiaries were Nathan Jones and some further trusts (of which [OMITTED] was also the trustee) that were identified as the MJ Trust, the DJ Trust and the LJ Trust. The first two of these presumably refer to Mr Jones’s children Melissa and Dylan Jones. The terms of the trust declared by cl 1.5 of ex 16 may be described as conventional, in that the trustee was to hold the trust fund, defined to include the original settled sum of $10 and all other assets transferred by any other person to the Trustees, for the purposes of the trusts. By another instrument dated 1 July 1998 (“ex 17”), Mr Jones irrevocably declared that he stood possessed of the assets specified in the schedule to ex 17, which were the proceeds of the Business Sale of 31 March 1995, in trust for the benefit of the Beneficiary, who is the NJ Trust. By a series of further documents (“ex 13”) signed by Mr Jones in his capacity as director, as well as in his personal capacity, and variously dated between January 2000 and August 2004 (which was after he had become an Australian resident) Mr Jones acknowledged that all monies, directly or indirectly received from Nathan Jones personally or from any of his companies were to be held in trust for the NJ Trust in New Zealand. This was to include monies received from Company C Pty Ltd and other companies associated with Mr Jones.
The personal bank accounts of Mr Jones in Australia show large amounts being credited to him from New Zealand. The explanation given by Mr Jones to the ATO is that these were amounts being lent to him by the trustee of the NJ Trust, who since 20 July 1995 has been a Mr Andrew [OMITTED] of [OMITTED], accountants of [OMITTED]. We have noticed that cl 1.2 of the Fourth Schedule of ex 16 expressly invests the trustee with power to make loans to a beneficiary of the Trust. In the exercise of that power, [OMITTED], at the request of Mr Jones, who was then attempting to set up businesses in Australia, transmitted monies to Mr Jones that thereupon became loans owing by him to the NJ Trust. A covering letter dated 18 December 2006, addressed by [OMITTED] “To whom it may concern” records:
“This communication serves to confirm that I am the Trustee of The N J Trust and that monies owed by the following companies to The N J Trust have been paid to Mr Nathan Daniel Jones of [OMITTED], Clear Island Waters, Queensland 4226, Australia during the period 01/07/1999 to 30/06/2005, into his personal banking accounts. These monies are on loan to Mr Jones by The N J Trust and repayable upon demand by The N J Trust.
Aus$
Monies owned by Company C Pty Ltd and paid to Mr Jones 55,609.34
Monies owned by Be Ready Pty Ltd and paid to Mr Jones 1,000.00
Monies owed by Company B Pty Ltd and paid to Mr Jones 86,500.00
Monies owed by Australian Wholesale Auto Parts Pty Ltd
And paid to Mr Jones 107,193.59
Monies owed by Designer’s Quarters Pty Ltd and paid
to Mr Jones 7,000.00
Monies owed by South East Finance Pty Ltd and paid
to Mr Jones 10,000.00
Monies owed by Bollard Management Pty Ltd and paid
to Mr Jones 20,000.00
Monies owed by Jones Family Trust and paid to Mr Jones 201,200.00
Monies owed by Contract Purchasing Corporation and
paid to Mr Jones 24,575.93
Total paid into Mr Jones personal bank accounts on
Behalf of The N J Trust 488,502.93
========
Yours faithfully
Andrew[OMITTED][23]”
[23] Exhibit 3(1), Folio’s 129-138.
The companies that are listed in the letter dated 18 December 2006, as this letter implies, owed money to the NJ Trust that was being redirected by [OMITTED] letter on loan to Mr Jones, where it formed part of the amount owing by him on his loan account with the NJ Trust. The communication from Andrew [OMITTED] is evidence that confirms the taxpayer’s claim that moneys being received by him from [OMITTED] and deposited to the credit of his personal bank account in Australia were loans from the NJ Trust. Inevitably, however, the ATO and the Commissioner do not accept as true any statements made by [OMITTED]. As can be seen from his earlier letter dated 26 September 2005, (which follows hereafter), it is, however, a mistake to assume that [OMITTED] was a supine trustee, who simply accepted and acted according to whatever Mr Jones told him. The letter dated 26 September 2005 reads as follows:
“Dear Nathan
Thankyou for your fax advising of the interception of the Trust’s funds to Company B and their deployment “In Trust” and “on my behalf” and to family entities.
It is the duty of the Trustee to receive and disburse funds owed the trust and accordingly I request you remit the total of US$108,266.66 to me as soon as possible.
Yours Sincerely
[Signed] Andrew [OMITTED] – Trustee, NJ Trust”
From this it is evident that [OMITTED] was protesting against a tendency on the part of Mr Jones unilaterally to appropriate trust funds as loans to himself. He was saying that only the trustee had power to do that.
By a series of documents forming part of ex 13, Mr Jones acknowledged both personally and as director that all monies, directly or indirectly received from Nathan Daniel Jones or any of his companies were to be held in trust for the NJ Trust constituted by ex 16. This was to include, in particular, monies received from Company C Pty Ltd and other companies associated with Mr Jones. Similar documents also forming part of ex 13 were signed by or on behalf of other of Mr Jones’ companies. Trust moneys advanced and paid over to or by any other entity were not to constitute loans from the Trust to that entity, but rather a transfer of moneys from that entity to be held in trust[24]. For completeness it is as well also to recall here that clause 1.2 of the Fourth Schedule to ex 16 specifically invested the trustee with power to lend trust money to a beneficiary (which includes Mr Jones himself) of the trust, and to do so with or without security.
[24] See exhibit 13.
THE “RE-ADVANCES”
A practical problem that had to be solved in carrying out these arrangements, (although it was by no means peculiar to the method of payment adopted here) was that payment to Company B (rather than [OMITTED]) of the whole of the debt owed by the customer to [OMITTED] would end up leaving the stock of [OMITTED] (as supplier) depleted as well as its liquidity diminished.
To avoid this, Mr Jones adopted a practice of repaying or “re-advancing” to [OMITTED] or its customers a proportion (often as much as 80%) of the amount being paid over by the overseas customers. This re-advance commonly took place only a few days after the overseas payment had been credited to the Company B account. Many instances of this practice are visible on the aforementioned Company B spreadsheet[25] where the entries distinguish between “Recoveries” and “Re-advances”. At a later stage, these re-advances were placed on a formal footing by arranging to have them lent by another specially formed (in 1999) company, Company D Ltd (“Company D”), on interest-bearing loans to [OMITTED] that were to be secured by a charge over [OMITTED] assets. The arrangements for payment by “garnishee” or equitable assignment of debts is evidently what is being referred to by [OMITTED] in ex 11, where she adverts to the “previous arrangement”, which she confirmed by signing at the foot of ex 11 as requested. She later also acknowledged in a letter to the [OMITTED] Inland Revenue Department (“IRD”) on behalf of the Purchaser and [OMITTED] that, as a result of transactions with the Purchaser, “a debt became due” and (without expressly specifying how much it was) she noted “we were unable to meet repayments to him and a compromise situation was negotiated[26]”. In the letter dated 1 February 2008 (forming part of ex 23), [OMITTED] on behalf of [OMITTED], later mentions that the basis for calculating the purchase price was included in ex 8, adding, however, that it was “subject to dispute for many years”. This remark has been seized upon by the respondent as showing that no agreement was ever reached between Mr Jones and the purchasers with respect to the purchase price under ex 8. It is, however, quite impossible to reconcile that hypothesis with the unqualified admission in ex 11 previously signed (in May 1995) by [OMITTED] as Financial Controller that an amount of $20,484,772 was still owing to Mr Jones, and that [OMITTED] would continue to pay it as directed by Mr Jones from “profits” of [OMITTED] overseas trading. The respondent claims that Mr Jones and the applicants have failed to produce evidence that the purchasers ever acknowledged or accepted the EBIT figure that was to be fixed under ex 8, and the respondent’s written submissions conclude with the comment that ex 23 indicates “a resistance on the part of the purchasers towards payment of the purchase price” and that “the purchasers considered the purchase price had never been determined”[27].
[25] Above, n 16.
[26] Exhibit 23 1 February 2007.
[27] Respondents written submissions at [66].
THE FAX (EX 14) DATED 16 JUNE 2005 FROM [OMITTED]
“Resistance” is perhaps an understatement of the purchaser’s attitude being exhibited in their letter of February 2008, but any such resistance is surely due to a growing reluctance on their part to continue paying such a huge debt now that Mr Jones has been prevented by the DPO from travelling to New Zealand to see to the enforcement of ex 8. The ATO’s comments simply ignore the evidence against the purchasers and [OMITTED] of their having, through [OMITTED], made an express admission in writing in ex 11, without any qualification at all, of their indebtedness to Mr Jones in the sum then still owing of $20,484,772. As a written admission, ex 11 cannot be explained away, and no attempt to do so has been made by the purchasers or the respondent, who simply ignore it altogether. The written and signed evidence of the debt contained in ex 11 is overwhelming. It is, moreover, supported by another independent source. [OMITTED] is a solicitor and a member of the firm [OMITTED], solicitors of [OMITTED], who at the time of execution and settlement of ex 8, were acting for the purchasers in relation to it. Because the ATO were questioning the validity or veracity of ex 8 and the price payable under it, Mr Jones wrote to [OMITTED] for his confirmation of the transaction. The response by [OMITTED], which is dated 16 June 2005 (“ex 14”), is as follows:
“To Whom It May Concern
Re: Mr Nathan Jones
I am aware of copies of documentation and, at the request of Mr Jones I record the existence of documentation accordingly. My responsibility is to my client(s) and I do not accept responsibility to Mr Jones or any other party.
1There is [he went on] an agreement dated 31 March 1995 whereby Nathan Daniel Jones personally sold business assets.
2As at that date I acted as solicitor for [OMITTED] who were and remain New Zealand Residents. Those three individuals were named as the purchaser in the aforesaid document.
3My same [OMITTED] clients are also named as the purchaser under a Confidentiality Agreement dated [OMITTED] and Nathan Daniel Jones is named as vendor. Under the provisions of the Confidentiality Agreement, it will remain in force until the purchaser [OMITTED] agrees to the contrary. [OMITTED] have not agreed to the contrary.
4The purchase and sale agreement, referred to in 1 above, provided for a purchase consideration to be finalised by the end of 1998, using the formula of 1997/98 net profit before tax multiplied by 8. Records show that the figure of net profit for the formula was finally determined at $4,157,512.
5There is also documentation recording that the Jones entity now entitled to the benefit of the sale agreement as at 31 March 2005 is still entitled to a balance outstanding being [in 2005] an amount exceeding NZ$20 million.
6I am informed that instructions have been given that as and when payments are made under the agreement, those payments are directed to either Company C or Company B, and that these are companies in Australia.
7Due to the constraints under the Confidentiality Agreement and my duties to my client(s), I am unable to add to the above which is the limit of my instructions.
Yours faithfully
[Signed]
[OMITTED]
Partner – [OMITTED]
COMMISSIONER’S REJECTION OF THE FAX (EX 14)
One might reasonably have expected that this would be regarded as sufficiently confirming the account given by Mr Jones, as indeed it does in several material particulars. As can be seen from ex 14, [OMITTED] confirmed the existence of ex 8, as well as its date; that he had acted for the purchasers; and, as well, that ex 8 contained provision for arriving at the purchase price, of which (he added) a total of more than $20 million was still owing on 31 March 2005. It is therefore surprising to find that the respondent rejects this apparently acceptable written statement from a senior partner of a long established (in [OMITTED]) firm of solicitors in [OMITTED]: yet the statement by [OMITTED] in ex 14 is discounted by the respondent because [OMITTED] was for a time, the trustee of the NJ Trust (he resigned in mid-1998) under ex 16 which he had drawn for Mrs Jones; and also because the firm of solicitors of which he is a partner had received payments totalling about $4,500 on account of fees owed and paid by Mr Jones for professional work undertaken for him or his companies during the preceding three years or so. The matters raised against the reliability or veracity of [OMITTED], whether considered singly or in combination with some other equally trifling matters, are, it need scarcely be said, nowhere near sufficient to compromise the professional integrity or the standing of [OMITTED], or to throw doubt on the accuracy of his careful statement in ex 14 of the facts about ex 8. If charging and being paid fees for professional legal work or even for acting as a trustee are now to be regarded as raising doubts about the veracity or independence of a solicitor of the standing of [OMITTED], it will not be long before statements by all professional people will have to be rejected. What [OMITTED] wrote to the ATO in ex 14 amply confirms what Mr Jones has all along been saying about ex 8, both at the ATO interviews in August and September 2005 and in his evidence at the hearing before this Tribunal.
The fax from [OMITTED] dated 16 June 2005 was followed by a further inquiry from the ATO designed to check on the authenticity of the response they had previously received from [OMITTED], as well as to seek further details of ex’s 8 and 9. Confirming that he had indeed sent the fax, [OMITTED] replied on 20 June 2005 in ex 14 saying:
“1The confidentiality agreement was entered into in strict terms with [OMITTED] as purchasers and it would not be in their interest for the terms of it, however amended, to be placed in the files of the companies with which [OMITTED] have no direct connection.
2The [OMITTED] concerned are not aware that Nathan Jones has claimed, accrued or received any interest, nor has any trust associated with him, in connection with the outstanding balance due by [OMITTED].”
The reference to an “outstanding balance” due by [OMITTED] may be noted. Despite this response, the respondent and the ATO continue to question the genuineness of ex 8 and the price payable under it. They consider that because of the matters mentioned, [OMITTED] was too closely associated with Mr Jones to be regarded as a “reliable third party source”. From what we have said above, this assessment is plainly misconceived, and ought now to be reconsidered and displaced.
The inadequacies of ex 8 have been constantly rehearsed by the respondent and the ATO. It is, however, appropriate to recall what was said by Lord Wright in Hillas & Co v Arcos Ltd:[28]
“Business men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects …”[29]
[28] [1932] All E.R. Rep 494.
[29] Ibid at 503.
And in the same case Lord Tomlin stated the correct approach in equally strong language:
“The governing principles of construction recognised by the law are applicable to every document, and yet none would gainsay that the effect of their application is to some extent governed by the nature of the document. On the one hand, the conveyance of real estate presenting an artificial form grown up through the centuries and embodying terms of art whose meanings and effect have long since been determined by the Courts, and, on the other hand, the formless document, the product of the minds of men seeking to record a complex trade bargain intended to be carried out, both fall to be construed by the same legal principles, and the problem for a court of construction must always be so to balance matters that, without violation of an essential principle, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains”[30].
[30] Above, n 29, at 499.
These two pronouncements of high authority were adopted and applied by the Full Court of Queensland in Re Sanders Construction Pty Ltd and Eric Newham (Wallerawang) Pty Ltd[31] and must be adopted and applied here[32]. Despite judicial statements, like those in Hillas v Arcos, the respondent, ignoring ex 11, continues to maintain that, whatever may be the terms of ex 8, the applicants have not discharged the burden of proving that it resulted in an indebtedness on the part of the purchasers amounting to some millions of dollars or at all. The respondent also maintains that Mr Jones has not produced evidence that the purchasers ever acknowledged or accepted the EBIT figure for 1998 of more than $4,157,512 from which the total purchase price of $33 million was calculated. The Commissioner concludes his comments by submitting that the letter dated 1 February 2007 in ex 23 from [OMITTED] manifests “a resistance on the part of the purchasers toward payment” of the purchase price under ex 8 in that “the purchaser considers that the purchase price has never been determined”[33].
[31] [1969] Qd R 29, 38.
[32] See also Council of the Upper Hunter Country District v Australian Chilling & Freezing Co Limited (1967) 118 CLR 429, 437.
[33] Above, n 28.
To speak of the letter of 1 February 2007 in ex 23 as manifesting a “resistance” to an indebtedness in excess of NZ$33 million or, as it is now, some $18 million, scarcely does justice to the letter. It is a serious understatement of the purchasers’ current attitude as it is now expressed in ex 23. Except that it is contained in a letter written not to Mr Jones and his companies but to the New Zealand IRD, and that it may therefore not have been intended to find its way to Mr Jones, the letter in ex 23 looks very much like an outright repudiation by the purchaser of the multi million dollar debt and of the contract in ex 8 that gave rise to it. According to ex 23, the purchasers are now aiming to “challenge and overturn” the contract or the debt. At the same time, a letter contained in ex 23 from the purchasers to the IRD NZ itself serves to confirm some of what Mr Jones himself has been saying. It is as follows:
“We refer to your letter to us dated 9 November 2006.
Except as is outlined below we currently have no association with Mr Nathan Jones or any of his companies that we are aware of, and at all times he has been independent from any ownership or control of our group of companies.
We were introduced to Mr Jones in about 1988. He was doing management consulting work for the Bank of New Zealand. Our company was experiencing serious financial difficulties and had been transferred to the BNZ Debt Recovery Division. The BNZ introduced him to us and our involvement was mainly management consulting work, however, we understand he also had his own trading businesses at that time.
From 1988 to 1995 Mr Jones, using various companies, had a consulting and trading relationship with our group but at all times acted as an independent consultant, unable to commit our companies.
In 1995, after a conflict of interest situation, the consulting relationship came to an end. After some negotiation, agreement was reached whereby the directors of our group, acquired some business interests of Mr Jones, to remove his ability to compete …
[Note: This part of ex 23 was edited out, presumably by the IRD NZ, of the copy provided]
… company Company D Pty Ltd with interest being payable and security given from one of our companies
Over recent years we have established a strategy to challenge and overturn this arrangement. This has involved the formation of the new trading company [OMITTED], which is not party to any agreement with Mr Jones or any of his companies, and we are presently winding up the old companies in the group. Once that has been finalised we will be in a position to take action to recover any funds withheld from [OMITTED] against loans owing by other companies.
The costs and cashflow implications of the above have been significant to our group and has at many times threatened the future existence of the business. No supplies have been made to any of Mr Jones’ companies for some time now and we intend not to do so in the future, unless it is on a cash-on-delivery basis.
The specific payments you queried relate to loans as referred to above. Company C Pty Ltd and Company D Pty Ltd, companies associated with Mr Jones, advanced loan funds to companies associated with [OMITTED], as part of the renegotiation of the outstanding loans referred to above. The payments you have queried are related to new advances from Company D Pty Ltd and repayments to Company C Pty Ltd.
We hope that this provides sufficient information with regard to your queries.”
Exhibit 23 includes a copy of the letter dated 1 February 2007 signed by [OMITTED], which is one of several documents obtained from the NZ IRD to which it is addressed. The reference in the letter dated 1 February 2007 in ex 23 to Company D “with interest … and security” reflects the attempt in recent times to reconstitute and replace the informal readvances with formal loans executed on behalf of the borrowers. Exhibit 23 was apparently obtained by Mr Jones from [OMITTED] by means of a Freedom of Information application there. Or it may be a copy that was furnished to the ATO by their New Zealand counterparts. It does not really matter which. Exhibit 23 is, however, completely at odds with the earlier letter from [OMITTED] in ex 11, of 11 May 1995, containing the unqualified admission that at that date (11 May 1995) an amount of $20,484,722 was owed to Mr Jones and that [OMITTED] would continue to pay it as directed by Mr Jones in accordance with their “previous arrangement” for as long as it continued to receive profits. This last remark looks very much like a confirmation of the “garnishee” arrangement or equitable assignment by which [OMITTED] customers were asked to pay their debts into the Company B bank account in Australia. Any support detected by the ATO in ex 23 for the notion that the price under ex 8 was never fixed or acknowledged by the purchasers completely ignores, and fails to grapple with, the plain admission of indebtedness of $20 million or more appearing in ex 11. It is also quite inconsistent with the statement by [OMITTED] in ex 14 that over $20 million was owing in June 2005. Resistance to paying a debt as large as $20 million is not itself surprising; but it may in this instance have been precipitated by a discovery that Mr Jones had relocated to Australia, where he is now marooned by the DPO. The purchasers’ new-found reluctance to pay is also completely inconsistent with the previous statement signed by [OMITTED] in ex 11 that the purchasers had by 11 May 1995 paid off so much of the indebtedness under ex 8 as to leave a balance owing of $20,484,772. This figure corresponds to the final entry on Mr Jones’s spreadsheet in the Supplementary T documents[34], which identifies a series of preceding entries under the heading “Recoveries”. There, the balance owing (at 30 June 2005) is shown as $18,360,771.67 (itself a considerable reduction from the original debt under ex 8 of $33 million), down from the previous balance of $20,484,772 acknowledged in ex 11 as owing on 11 May 1995. At the same time it may be noticed that there is in ex 23 also a copy of another letter dated 1 February 2008 from [OMITTED] to the NZ IRD enclosing a copy of ex 8 (which is not said to be ineffective) supplied to the IRD by the purchasers themselves. So much for the purchasers’ professed concern about breaching ex 9 and their expressed wish to “overturn” the Agreement for Sale contained in ex 8.
[34] Above, n 16.
THE GARNISHEE ARRANGEMENT
41. It will be seen, in ex 11, that Mr Jones requested and received written confirmation from the purchasers through their Financial Controller, [OMITTED], of the previous arrangement “by which off-shore trading was to be conducted through [OMITTED], with the profits being “paid to you, as you have directed” to the Company B bank account in reduction of the unpaid balance of $20,484,722. This corresponds to the arrangement in ex 11 that was to continue for as long as [OMITTED] trading continued to “generate profits”. The “previous arrangement” in ex 11 pretty clearly refers to the “garnishee arrangement” devised by Mr Jones by which [OMITTED] overseas customers were instructed to pay their debts not to [OMITTED] but to the bank account in Australia operated by the (former) applicant Company B, which was a Jones corporate entity, in which all shares were held by Company C Pty Ltd, it being the other former applicant taxpayer here. The “previous arrangement” was evidently the procedure designated as the “garnishee arrangement” by Mr Jones. A true garnishee process involves a court order directing payment of a debt due to another. There was no court order in the present case; but, although the description “garnishee arrangement” is very loose, the underlying notion is not altogether dissimilar. Whatever it was called, legally speaking, the procedure devised by Mr Jones for paying the ex 8 debt amounted to nothing more nor less than an equitable assignment by [OMITTED] of the debts owing to it by its overseas customers. As such, the equitable assignments also operated in equity as creating equitable charges on the debts assigned[35].
[35] Tolhurst G, The Assignment of Contractual Rights (1st, Hart Publishing, 2006), at [3.17].
42. This explanation for those payments is rejected by the respondent Commissioner and the ATO, who argue that there is no evidence of any equitable assignment or “garnishee arrangement”, and that the payments received in the Company B bank account are simply manifestations of some other, as yet unidentified business activity now being conducted in Australia or elsewhere by Mr Jones or his companies. A moment’s reflection serves to demonstrate that the inescapable implication of such a hypothesis must be that Mr Jones has in the course of a single lifetime succeeded in establishing not merely one but two multi-million dollar businesses – the first consisting of [OMITTED] in New Zealand, and the second (although its shape and nature are as yet unspecified by and unknown to the respondent) being some other but equally profitable business in Australia that is producing millions of dollars in bank deposits. On any view of it, such a conclusion appears too absurd to warrant serious consideration. On all the evidence, this second so-called “business” or activity is simply what Mr Jones says it is – that is, receipt of the residue of payments of the price owing for the [OMITTED] business that he sold to the purchasers under ex 8 in [OMITTED]. The only explanation that there is for the Commissioner’s uncompromising opposition in the face of all the evidence presented to him is, we suspect, ultimately traceable to a misconception he or his counsel entertains concerning the operation of s 14ZZK(b)(i) of the Taxation Administration Act 1953. That section imposes on the taxpayer in an appeal or review like this, the burden of proving on a balance of probabilities that the challenged assessment is excessive. But it is to the ultimate burden of proof that s 14ZZK(b)(i) is addressed. It does not impose on a taxpayer the onus of establishing separately every specific evidentiary circumstance or fact on which the taxpayer may rely on the road to reaching that final or ultimate conclusion, nor of disproving every single factual proposition that the Commissioner may choose to advance in the course of reaching such an ultimate conclusion. To adopt such a view of the operation of the section would be to resurrect the fallacy that at one time threatened the conduct of criminal proceedings, which was that the prosecution was bound to prove beyond reasonable doubt each and every matter, fact or circumstance relied on to support a conviction of the accused. This particular fallacy was exposed and rejected by the High Court in Shepherd v The Queen[36]. It would do a serious disservice to the legal system if it were now to be resurrected in proceedings for the recovery of income tax. There is nothing in either s 14ZZK(b)(i) itself or in judicial expositions of its effect, such as that in McCormack v Federal Commissioner of Taxation[37], to furnish encouragement for any such impression of its operation.
[36] (1990) 170 CLR 573.
[37] (1978) 143 CLR 284.
THE DECLARATION OF TRUST (EX 17) OF THE PROCEEDS OF THE AGREEMENT (EX 8)
As has been mentioned, some three or so years after the date (31 March 1995) of ex 8, Mr Jones signed another instrument (ex 17) dated 1 July 1998, described as a Declaration of Trust. In it, he declared himself to be irrevocably possessed, on trust for the benefit of the Beneficiary, of the assets set out in the Schedule to ex 17, which are identified there as “Proceeds of Business Sale dated 31 March 1995” (ex 8) subject to Confidentiality Agreement of same date” (ex 9). The “Beneficiary” is identified in ex 17 as the NJ Trust formed on 17 March 1995, contained in ex 16, of which the first and founding trustee was [OMITTED], solicitor, of [OMITTED]. On its face, ex 17 constitutes a valid declaration of trust of all money becoming or to become due to Mr Jones from the [OMITTED] purchasers under ex 8. Despite some apparent hesitation on the part of the respondent, there is no reason at all for doubting the validity or efficacy of either ex 16 or ex 17. The result therefore is that on or from the date of execution of ex 17 on 1 July 1998, any amount, becoming payable or paid by the purchasers under ex 8 was held by Mr Jones on trust for the NJ Trust in accordance with ex 17. From the bank account operated by Company B, funds constituting trust moneys under ex 17 were paid either to Company C Pty Ltd or directly to the trustee Andrew [OMITTED], of [OMITTED], accountants, of [OMITTED], who on 20 July 1998 became the sole trustee of the NJ Trust, in succession to [OMITTED].
THE NATURE OF THE BUSINESS AND THE GOODWILL
A further submission by Mr Aftanas on behalf of the respondent was that at the time of the sale in [OMITTED] there was no business being conducted by Mr Jones, and that consequently there was nothing capable of being sold for $33 million or any other sum. It requires a degree of hardihood to describe as “nothing” an activity that, on any view of it, has been generating income running into some millions of dollars annually. But Mr Aftanas was not deterred by that reflection. What, then, precisely was it that was sold by Mr Jones to the purchasers under ex 8? In [OMITTED]. Exhibit 8 makes it clear that what was being sold was the “goodwill” of his existing business. But what is goodwill? Over a century ago in Inland Revenue Commissioners v Muller & Co’s Margarine Ltd,[38] Lord Macnaghten said that goodwill “is a thing very easy to describe, very difficult to define[39]”. It is, he said, the attractive force that brings in custom:
“It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyse goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into the various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such[40]”.
[38] [1901] AC 217.
[39] Ibid at 223.
[40] Ibid at 224.
Goodwill, as the remarks of Lord Macnaghten imply, is an elusive thing that is not always immediately recognizable as such. In Queensland Retail Milk Vendors’ Association v Deacon,[41] Hart J held that the right of selling and delivering milk to homes in Brisbane merited protection by injunction[42]. If it was not goodwill, his Honour said, it was at least analogous to it. Mr Jones’ business enjoyed a goodwill that was at least as deserving of protection as the right upheld in Deacon’s case.
[41] [1974] Qd R 234.
[42] Ibid at 242.
46. Exhibit 15 is yet another documentary exhibit. It is headed “Agreement to Assign Benefits and Obligations”. It is dated 16 August 1999, which is when it was signed by Mr Jones as one of the [OMITTED] parties to it. He is described in it, consistently with his designation in ex 8, as the “Vendor”. It is also signed by [OMITTED] other parties, who are [OMITTED] purchasers [OMITTED] under ex 8) who in ex 15, are designated the “Assignor”. It was signed by [OMITTED], in ex 15 called the “Covenantor”, and by another company, [OMITTED], which in ex 15 is called the “Assignee”. What ex 15 purports to do, after reciting the Agreement for Sale and Purchase dated 31 March 1995 under which the Purchaser was the [OMITTED], is to acknowledge [OMITTED] that they had requested the Vendor (Nathan Jones) to agree that all remaining benefits under ex 8 would now be assigned to the Assignee [OMITTED]; also that Mr Jones, the Vendor, had (in [OMITTED]) agreed to the proposed assignment, provided that [OMITTED] as Covenantor unconditionally guaranteed to Jones all remaining obligations that had previously vested upon (sic) the Assignor and thereafter should vest upon (sic) the Assignee. In [OMITTED] the Assignor [OMITTED] were then to have no further obligations to the Vendor (Jones) pursuant to the Agreement for Sale and Purchase of Business with the Vendor dated 31 March 1995.
THE NATURE OF THE BUSINESS
47. As we have seen, goodwill cannot exist independently of a business. The Agreement in ex 8 sold the business that underlies the goodwill here, as well as the business itself. What then was the business under the ex 8? When it was sold in [OMITTED],it did not include [OMITTED]. It was not until shortly before he signed ex 8 that Mr Jones began to interest himself in entering the field of [OMITTED]. What was sold was his business of [OMITTED]. This strongly implies that the goodwill here was purely personal and not local or associated with a particular site or place. It was at one time thought not to be possible to sell or transfer personal goodwill; but that restrictive view has long since been abandoned. The decisive authority was Bunn v Gay (1803)[43], which upheld the validity of the sale of a London solicitor’s practice. It is now accepted that personal goodwill is freely saleable and transferable, for example, in the case of stockbrokers, solicitors, doctors, and dentists[44]. In Bunn v Gay there was in the contract (as there is here in Recital C of ex 8) a clause restraining the vendor from engaging in competition. There was also a contractual provision permitting the purchaser to use the vendor’s name. In ex 8, the place of that provision is taken by [OMITTED] of ex 8 which, [OMITTED], proceeds to authorise the purchaser to use the words “Nathan” and “Jones”. That is another strong indication of the personal character of the goodwill associated with Mr Jones’s business.
[43] 4 East 190; 102 ER 402.
[44] See Heydon, JD, The Restraint of Trade Doctrine (2nd ed, Butterworths, 1999) p 152.
THE OBLIGATION TO PAY $33 MILLION
A criticism that was stressed in submissions by the respondent is that there was nothing to show that an amount of $33 million or anything like it was ever agreed by the parties as the amount payable under the ex 8. In particular, it was said that the figure [OMITTED] from which the total price of $33 million was calculated was not proved to have been arrived at in conformity with the provisions of the contract. The latter point may be conceded, but it is a consideration that is immaterial if the parties agreed, as in fact they are shown to have done, on a total amount payable of some $33 million or so. That some such a total was accepted and agreed upon clearly appears from two of the written exhibits that have already been identified and admitted in evidence. Of these, the more compelling is ex 11, of 11 May 1995, which is the memorandum agreed by [OMITTED], Financial Controller for the purchasers and [OMITTED], in which she acknowledged that, after making allowances for amounts already paid, an amount of more than $20 million still remained due as at 11 May 1995, under ex 8. Then there is ex 14 dated some time later on 16 June 2005 from [OMITTED], solicitors for the purchasers under ex 8. It provides a brief account of ex 8 and acknowledges the EBIT figure of $4,157,512 which, when multiplied by 8, produced the total price payable of some $33 million. The respondent, of course, rejects the statement made by [OMITTED] in ex 14. [OMITTED] is said not to be a “reliable independent third party source” because he and Mr Jones are or were friendly and are said to have had business dealings together. However, the impression that a statement is not to be relied on unless it emanates from someone who is actively hostile to the taxpayer is obviously untenable. Equally, the idea that ex 8 is suspect because it was not negotiated between parties “at arm’s length” is, with great respect, also simply not supportable. It is not the law (and there is no suggestion or indication anywhere in any textbook or decision) that a contract is not or is any the less binding because it was entered into by or between parties who were not “at arms’ length”, whatever precisely that expression may mean in this context. It is not suggested that ex 8 is a sham or fiction or that it was the product of undue influence. We have more than once referred to the passage in the transcript of proceedings, in which Mr Aftanas disavowed any submission that the contract was not a valid or binding agreement.
Any suggestion that ex 8 loses force because the [OMITTED] figure was not shown to have been calculated or arrived at strictly in accordance with [OMITTED] ex 8 ceased to matter once the parties themselves accepted $33 million as being the total amount payable under it. Even if [OMITTED] had introduced into the contract a suspensive condition, it remained competent for the parties to waive and ignore it if they wished[45]. No matter what defects there may be in its formation, an agreement is an effective contract if the parties themselves act upon and treat it as such[46]. That is what the parties did in the present case.
[45] Griffiths v Young [1970] Ch 675, 685.
[46] Brogden v Metropolitan Railway Company (1877) 2 AC 666, 693.
The respondent and the ATO formed the opinion that the way in which Mr Jones claimed to have done business with the purchasers under ex 8 was far too informal to be accepted as the truth. It was said, for example, there was nothing in writing to show that they ever agreed on the “garnishee arrangement” by which debts owing to [OMITTED] and derived from trading with its own customers were equitably assigned to Mr Jones, so as to be applied in reduction of the debt of which [OMITTED] confirms more than $20 million was in May 2005, still owing. Of course, the respondent and the ATO reject the statements of [OMITTED] in ex 14 because he is on friendly terms with Mr Jones. If that constitutes a sufficient reason for rejecting it, then the only acceptable “third party” statements will be those made by people who are shown to be positively hostile to the taxpayer. There was and is no good reason for discounting what [OMITTED] set out in ex 14.
THE GARNISHEE ARRANGEMENT
The respondent and the ATO also formed the opinion that there was nothing to prove that the “garnishee arrangement” had ever been agreed to or adopted by the parties, and nothing to show any agreement for the equitable assignment of [OMITTED] customer debts. We do not agree with this conclusion. We have on several occasions referred and discussed ex 11 dated 11 May 1995 signed by [OMITTED], the Financial Controller of [OMITTED]. In it she confirmed, as she was requested to do, a “previous arrangement” that, while [OMITTED] “continues to generate profits”, those profits “would be paid to [Mr Jones]…in reduction of the NZ $20,484,772.80” that was agreed to be owed under ex 8. The only “previous arrangement” of any kind to which ex 11 was capable of referring was, on the evidence, the “garnishee arrangement” by which debts owed by overseas customers (the “overseas trading”) of [OMITTED] were to be paid to the credit of the Company B “currency relevant” bank account in Australia that was being used to convert into US or Australian dollars payments that were being received from overseas in foreign currency.
THE AGREEMENT TO ASSIGN RIGHTS AND BENEFITS (EX 15)
There is a further written exhibit (ex 15) that is relied on by Mr Jones as evidence of the garnishee arrangement. Exhibit 15 is the Assignment of Rights and Benefits. It was signed in August 1999 by [OMITTED] parties to it, who are (1) Mr Jones (designated “the Vendor”); (2) [OMITTED] purchasers under ex 8, [OMITTED] (“the Assignor”); (3) [OMITTED] (“the Covenantor”) and (4) [OMITTED] (“the Assignee”). What ex 15 set out to achieve was to discharge the purchasers in part by assigning their obligations under ex 8 in return for a guarantee from [OMITTED] that those obligations would be performed. Of course, there cannot in law be an assignment of contractual duties and burdens as distinct from rights[47]. That restriction may, however, be circumvented by arranging for the parties to enter into a novation, by which all of them agree to alter their respective rights. Exhibit 15, which involved all [OMITTED] parties, is an example of a novation. A question arises, however, whether Mr Jones as the “Vendor” under ex 15 was competent to agree to discharge [OMITTED] the purchasers from their obligations under ex 8, after he had by ex 17 already declared a trust in favour of the NJ Trust in respect of the very same proceeds of sale arising under ex 8. Having by ex 17 already disposed of those proceeds in trust, it was no longer competent for him to detract from that trust (or the interest in the sale proceeds created by agreeing to it) by nullifying the obligations of the purchasers under ex 8.
[47] See Tolhurst G, The Assignment of Contractual Rights (1st ed, Hart Publishing, 2006) at [6.101].
53. Viewed as a disposition of the equitable interest in the proceeds of sale, there must therefore be serious doubt about the efficacy of the so-called Assignment embodied in ex 15 to achieve its stated purpose [OMITTED] of discharging the [OMITTED] purchasers from their obligation under ex 8 to pay the purchase price to the Vendor. We should, however, emphasise that, while we doubt whether ex 15 was competent to affect ex 8, after the proceeds of sale had already been irrevocably settled in trust by ex 17, this conclusion does not prevent ex 15 being resorted to in order to manifest the contractual intention of the parties as exemplified in ex 15.
Having on 1 July 1998 declared in ex 17 that he stood possessed as trustee of the proceeds of sale under ex 8, it ceased to be open to Mr Jones to discharge the individual purchasers from their obligations under ex 8. This is not, however, to say that the terms of ex 15 may not be looked at in order to determine what was intended by ex 15. In addition to the provision in [OMITTED] of ex 15 purporting to discharge the purchasers from liability, ex 15 also contains [OMITTED] as follows:
“The Assignee and the Covenantor hereby also grants the Vendor the unfettered right, immediately upon any demand being made by the Vendor, to surrender any entitlement to any and all Accounts Receivable (Debtors of the Assignee and / or Covenantor) that are directly or indirectly owing to the Assignee and the Covenantor from their Customers. The Assignee and the Covenantor shall forthwith send any notice required by the Vendor to such Debtors so as to give proper effect to this matter. Any monies so received by the Vendor from Debtors of the Assignee and the Covenantor shall be in reduction of monies owed to the Vendor under the provisions of the Agreement for Sale and Purchase of Businesses with the Vendor dated 31 March 1995.”
Being, as we suspect it is, another instance of Mr Jones’s homespun legal drafting, it is hardly to be expected that it would be a masterpiece of the art. But this much can certainly be said about it. It was designed to confer on Mr Jones, or to ensure that he retained, some form of right that, before the existence of ex 15, he was entitled to enjoy. The most obvious such right is the “garnishee arrangement”. One of the consequences of discharging the purchasers from liability under ex 8, would have been to terminate the existing arrangement for the garnishee or equitable assignment of the debts due to the purchasers or [OMITTED]. Clause 6 was inserted to ensure that Mr Jones retained a right to insist on having debts assigned and paid in reduction of the monies owed to him under ex 8. One might have wished that, instead of saying “surrender any entitlement … to Accounts Receivable”, [OMITTED] had spoken more simply and directly of an entitlement or right to insist on the surrender or assignment of debts due to [OMITTED] by its customers; but that was the intention of [OMITTED] even if it is not lucidly expressed. It was designed to maintain the “garnishee arrangement” as the means of ensuring that Mr Jones would be paid, with such amounts to be applied (as ex 15 itself records) “in reduction of monies owed to the Vendor” under ex 8.
We therefore consider that ex 15 affords written support or confirmation of the existence of a “garnishee arrangement” or agreement for the assignment to Company B of debts owing by customers of the purchasers or their company [OMITTED].
OTHER CRITICISMS
57. There are a few other criticisms of Mr Jones or his case that it is convenient to dispose of at this point.
Privately authored documents
It is a source of dissatisfaction to the respondent that, in order to establish some of his own actions or transactions, the taxpayer relies on documents that were “authored” and signed only by him. This complaint relates in particular to the two trust instruments on which Mr Jones relies. The criticism can be relevant, if at all, only to ex 17, dated 1 July 1998, because ex 16 was in fact executed by Mrs Jones, after having been prepared and signed by the solicitor, [OMITTED] and witnessed by a [OMITTED], who is described alongside her signature as a Legal Secretary. Exhibit 17 was executed by Mr Jones personally. It may be that it was done privately, but, historically speaking, it is probably more common than not for trusts to be declared privately, often with very little accompanying publicity, and sometimes only in private correspondence, as can be seen from the decisions discussed in Lewin on Trusts[48]. Exhibits 16 and 17 took effect when they were signed, irrespective of when they were first published at large. Absent fraud, the standard of proof for establishing a “secret” trust is the same as it is for any other trust. It is the ordinary civil standard of proof on the balance of probabilities[49]. The ATO’s adverse comment about the two trust instruments is reminiscent of complaints by King Henry VIII in the sixteenth century, who did his best to have trusts abolished altogether because of their tendency to facilitate tax avoidance.
[48] Mowbray, WJ, Lewin on Trusts (16th ed, Sweet & Maxwell, 1964) pp 25, 29.
[49] Re Snowden [1979] Ch 528.
“Surreptitious” Behaviour
When required by the ATO in August 2005 to produce a copy of ex 8, Mr Jones did not have a copy readily to hand. He consequently approached [OMITTED], Financial Controller of [OMITTED], to let him have a copy of ex 8 held by the purchasers, which she obligingly did. Mr Jones made that request without alerting the purchasers to it. The respondent chose to stigmatize his conduct in this regard as “surreptitious[50]”. We do not think the epithet is warranted, especially when it is borne in mind that parties having a common interest in a document (such as a written contract) held by one of them, are each entitled to inspect and copy it[51]. This criticism of Mr Jones was therefore misplaced, but is and was hardly relevant to his tax liability, except perhaps for what it shows about the ATO’s underlying attitude to Mr Jones.
[50] Respondents written submissions at [23].
[51] Brown v Liell (1885) 16 Q.B.D 229, 230.
The Statute of Limitations
It is also a matter for remark that, during the course of one of the ATO interviews of Mr Jones in 2005, a member of the audit team thought it appropriate to engage in a contest with Mr Jones about the applicability of the Statute of Limitations to ex 8. The period of limitation is, of course, that which applies to a simple contract, which both in Queensland and New Zealand is six years. Of course, it is also the law that, if before the limitation period has elapsed, there is an acknowledgement by the debtor of his indebtedness, or a part payment of the debt, the limitation period (of six years) starts running again. The ATO officer wrongly insisted the limitation period was only three years. The ATO officer was quite wrong in his opinion, which in any event was not relevant to Mr Jones’ tax liability. The officer’s belief that ex 8 has by now become unenforceable through the lapse of time is therefore entirely misconceived. Of course, if before the period of six years has elapsed, there had been (as there was here) an acknowledgment of the debt or a part payment of it, the period of six years would start running again. The ATO member was mistaken in his opinion that the debt under ex 8 is now statute barred, which in any event he had no occasion to offer in a taxation interview to which it had no relevance.
CREDIBILITY FINDINGS
Having for the better part of five days seen and heard Mr Jones giving his evidence, we place on record now that, in giving his evidence at the hearing before us, he was honest, and that the account he gave was in our view true in essential particulars. He is not what anyone would describe as a “good” witness. Like some other people, he has an unfortunate tendency to break the thread of what he is saying by constantly interrupting its flow whenever an additional thought occurs to him. This produces a fragmented delivery, making the narrative sometimes difficult to follow; but having seen and listened to him for the better part of five days at the hearing, we are satisfied of his honesty and truthfulness. We therefore have no hesitation in accepting his account of critical events and happenings in this matter.
OUR FINDINGS SUMMARISED
To attempt to summarise the essential findings in this matter is not an easy task without repeating much of what has gone before. The basic contention of Mr Jones in this application is that the receipt of the payments that were discovered by the Austrac facility coming into the Company B bank account in Australia was not, as the respondent suggests, undeclared income being received by Mr Jones or his companies but in fact represented proceeds of the sale to [OMITTED] by the Agreement of 31 March 1995 of the goodwill of Mr Jones business formerly conducted in and from New Zealand of dealing in [OMITTED]. The fact that those payments arrived in Australia in the form of foreign currency from so many different sources overseas is evidence that it was not income of a business that Mr Jones is conducting in Australia, but (as he claims) the result of equitable assignments of numerous debts now being paid to Mr Jones by overseas customers of [OMITTED] at the direction of the purchasers or their corporate trading entity, [OMITTED]. The payments amounting to millions of dollars that were almost contemporaneously being made out of the Company B bank accounts are accounted for by the fact that the money being re-advanced or lent by Mr Jones to [OMITTED] or associated companies was intended to make good what would otherwise have been a shortfall in the [OMITTED] resulting from the transaction that gave rise to the indebtedness of the purchasers that was in the process of being discharged. Otherwise the businesses could not have survived. These re-advances to [OMITTED] are now being consolidated and re-constituted as formal loans from Company D on which interest is payable and which are secured by a charge over [OMITTED] assets.
INCOME ACCORDING TO ORDINARY CONCEPTS
63. The respondent submitted that the payments that were being made to the applicant companies were “income according to ordinary concepts” and therefore assessable pursuant to s 6-5 of the Income Tax Assessment Act of 1997. But the conclusion reached here is that, because those international payments were made on account of the purchase price of the [OMITTED] business formerly conducted by Mr Jones, they did not constitute payments of an income character and were instead payments made and received for and in consideration of the acquisition of the capital asset represented by the business being acquired. Accordingly they do not amount to payments of income at all. They are not income according to ordinary or any other concept and so are not liable to be assessed for income tax. Given the findings of fact that we have made here, so much was, we understood, conceded on behalf of the respondent. We find that Mr Jones has discharged the onus imposed on him (see para 42) by s 14ZZK(b)(i) of the Taxation Administration Act 1953.
64. What tends to support Mr Jones’s explanation of the facts is that millions of dollars worth of payments were being received from overseas creditors, of which a part was paid or lent to Mr Jones by the trustee for NJ Trust, and part was re-lent or repaid in order to ensure the business had sufficient funds or stock to keep going. Along with other evidence, these two elements support the evidence of Mr Jones that the very large price of $33 million for the business was being paid by assignments to him of the amounts owing to the purchasers by trade debtors of the business who had made trade purchases from the business that the purchasers were now conducting. The explanation given by Mr Jones has the virtue of hanging together, we think, as a rational inference from all of the objective or established facts and circumstances. Any other hypothesis is simply guesswork unsupported by evidence, or anything else in its favour except the statutory presumption.
BANKING BUSINESS
From time to time, faint suggestions have been made by the respondent that the applicants incurred liability to pay income tax because they or their companies have been carrying on the business of banking. The “essential characteristics” of banking were defined by Isaacs J in Commissioner of the State Savings Bank of Victoria v Permewan, Wright & Company Limited[52] as follows:
“… the collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilization of the money so collected by lending it again in such sums as are required. These are the essential functions of a bank as an instrument of society. It is, in effect, a financial reservoir receiving streams of currency in every direction, and from which there issue outflowing streams where and as required to sustain and fructify or assist commercial, industrial or other enterprises or adventures.[53]”
[52] (1914) 19 CLR 457.
[53] Ibid at 471.
One has only to read the definition of banking to appreciate how remote the activities of Mr Jones and his corporate associates have been from the business of banking. They took in no deposits of money on loan, nor did they lend it out again. It is simply not open to argument that Mr Jones or the corporate applicants were in any way carrying on the business of banking.
SUMMARY OF FINDINGS AND CONCLUSIONS
The basic contention put forward by Mr Jones is that the sums being deposited in the Company B bank account in Australia were not, as the respondent suggests, undisclosed income received by Mr Jones or his companies that was being generated by some kind of business being conducted here or overseas; but that these “international” payments as the respondent calls them represented in fact part of the proceeds of sale to [OMITTED] as purchaser under the Agreement for sale dated 31 March 2005 of the business he formerly conducted in New Zealand [OMITTED]. The fact that those international payments were arriving here in the form of foreign currency from so many different places overseas is evidence to suggest they were not income of a business that Mr Jones is now conducting overseas. They are, as he claims, the result of equitable assignments of international trading debts generated by the purchasers or [OMITTED] corporate trading entities. Payment of those debts is being made as directed by Mr Jones into the Company B bank accounts in Australia, from which outgoing payments are also being made to cater for what would otherwise be a shortfall in the stock [OMITTED] available for sale by the purchasers of the Jones business. Those “re-advances” are now in the process of being consolidated and reconstituted as formal loans from another Jones company, Company D, with interest being payable and security provided. The existence of the new agreements for these loans is confirmed in the undeleted passages in the letter dated 1 February 2007 (part of ex 23) from [OMITTED] to the NZ IRD, in which on behalf of [OMITTED], she says:
“After some negotiation, agreement was reached whereby the directors, of our group, acquired some business interests of Mr Jones, to remove his ability to compete with the group and to improve the overall profitability of our businesses”.
She goes on:
“Originally the outstanding amounts were unsecured and interest free. To improve his position Mr Jones arranged for loans from Company C Pty Ltd to enable repayment of these outstandings and for other funding needs of our companies. These were also unsecured but as part of a further renegotiation these were refinanced through his company Company D Pty Ltd, with interest being payable and security from one of our companies”.
Addressing NZ IRD’s inquiries, [OMITTED] proceeds:
“The specific payments you queried relate to loans as referred to above. Company C Pty Ltd and Company D Pty Ltd, companies associated with Mr Jones, advanced loan funds to companies associated with [OMITTED], as part of the renegotiation of the outstanding loans referred to above. The payments you have queried are related to new advances from Company D Pty Ltd and repayments to Company C Pty Ltd”.
Although partly obscured by editing that the letter has undergone, enough of ex 23 remains legible to provide clear confirmation of Mr Jones’s evidence that he adopted a practice of “re-advancing” to the purchasers or their companies a proportion of the monies being paid to him under the “garnishee arrangement”. This was done to ease the plight of the purchasers arising from the depletion of their stock from sales of items of stock to overseas traders. Why else would Mr Jones have been prepared to “re-advance” funds being paid to him under the “garnishee arrangement”? Why else would he have been prepared to make re-advances to the purchasers when he was constantly upbraiding them for their tardiness in paying the amount due under ex 8? The “garnishee arrangement” devised and put in place by Mr Jones was in legal terms simply an equitable assignment to Mr Jones of trading debts owing to [OMITTED] and the purchasers by their international customers. Requiring those debts to be paid into the Company B bank account gave Mr Jones control over them as well as (although he may not have known it) the status of a creditor secured in equity. It was the very large number and amount of those payments that, when discovered by the Austrac facility, attracted the attention of the respondent, who drew the inference (mistakenly in our view) that they represented payments of income that should have been disclosed in the applicant’s tax returns. We are satisfied that Mr Jones was not conducting an income‑earning business in Australia and that the payments being made to the credit of the Company B bank account in Australia were being made simply on account of the obligations of the purchaser to pay the price of the [OMITTED] business that they bought from Mr Jones in 1995. As such, those payments were not income but payments made for the purchase of a capital asset, and as such should not have been assessed to income tax in the hands of the recipient Mr Jones.
71. Part of what confers an element of veracity to Mr Jones’s account of his actions is their very naivety. If he had been intent on defrauding the revenue or misleading the respondent, he would surely have approached the task in a more sophisticated fashion. Instead, he acted as his own legal draftsman and adviser, and thereby inevitably aroused suspicions that might otherwise have been avoided or allayed. In this, he has no doubt been somewhat artless, but that does not make him a tax cheat.
DEEMED DIVIDENDS
72. In relation primarily to Mr Jones’s personal tax returns and assessments, the respondent also relied on the provisions of the Income Tax Assessment Act 1936 relating to what are commonly called “deemed dividends”. Section 44(1)(a)(i) of the Income Tax Assessment Act 1936 declares that the assessable income of a shareholder includes dividends. Section 109C Subdivision B, which has the heading Private company payments, loans and debt forgiveness are treated as dividends, provides:
“(1)A private company is taken to pay a dividend to an entity at the end of the private company’s year of income if the private company pays an amount to the entity during the year and either:
(a)the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or
(b)a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.”
The word “dividend” is defined in various places in the Act and in various ways. Some of the definitions are very wide. For example, under s 6 of the Income Tax Assessment Act 1936, a dividend includes any “distribution” made by a company to any of its shareholders, and whether made in money or other property. Under the same section, “dividend” includes “any amount credited by a company to any of its shareholders as shareholders”.
One of the issues arising in this matter concerns the payments made out of the funds of the NJ Trust that were credited to the private bank account of Mr Jones or of one or more of his corporate associates. The most obvious examples of this are the payments made by directions of [OMITTED] as trustee of the NJ Trust as loans to Mr Jones. These payments are referred to in the letter dated 18 December 2006 from [OMITTED] which we have set out in paragraph 27 of these reasons. The payments in that letter, as the letter itself explains, came from various companies and are made by [OMITTED] as trustee of the NJ Trust. As such, those payments are to be considered as having been made by the trustee himself rather than by the companies referred to in the letter. In Federal Commissioner of Taxation v Rozman,[54] Perrom J applied an observation of de Jersey CJ that a person directing a debtor to pay another “is to be regarded as making the payment”[55]. The question is, as we see it, simply an application of the ordinary principles of agency. If someone is instructed by his principal to pay, it is the principal rather than the agent who is considered as making the payment. Accordingly, payments made pursuant to the trustee’s direction in the letter of 18 December 2006 (paragraph 27 of these reasons) were made by [OMITTED] as trustee and not by the particular company that was directed to pay or that paid Mr Jones. This seems to us to take those payments outside the preview of s 109C(1) of the Income Tax Assessment Act 1936. It is only if a private company itself pays the amount and not if a trustee like [OMITTED] pays it, that s 109C(1) applies. There is, to our way of thinking, a possible further question whether s 109C(1)(b) is satisfied in this instance. That is because a reasonable person would, under s 109C(1)(b), conclude (having regard to all the circumstances earlier discussed in this decision) that the payment was made to Mr Jones not because he was a shareholder or associate of the payee company, but because he was a beneficiary of the NJ Trust in whose favour the trustee exercised his discretion under cl 1.2 of the Fourth Schedule of ex 16 to lend the amount of the payment or credit.
[54] (2010) 186 FCR 1.
[55] Ibid at 8.
But a payment by [OMITTED] or at his discretion as trustee is not a payment by a private company, and so it falls outside the scope of s 109C(1). On the other hand, there appears to be no difficulty in satisfying alternative (b) of s 109C(1) if in other respects it is fulfilled: If the payment were made by a “private company” the payment would fall within s 109C(1)(a) as being made when the entity Mr Jones was a shareholder in that company. It was not the subject of any submissions in argument, but it seems to us to be clear that the requirement of s 109C(1)(a) calls for no more than a determination of the time at which payment (if any) is made.
76. The result is that, on the face of it, payments made in accordance with the trustee’s directions in the letter of 18 December 2006 did not amount to payments in terms of s 109C(1) and so were not “deemed dividends” or income within the meaning of the provision in s 109C(1).
77. What is not clear is whether any other payments have been assessed even though they were like those mentioned in the letter dated 18 December 2006, made by the trustee and not by a private company within s 109C(1). The matter was not discussed in submissions before us; but before the assessment can be upheld we need to be sure that there are no other payments falling within this category. It is therefore necessary to set aside the assessment and to remit the matter to the respondent to determine the question of Mr Jones’s liability to be assessed to income tax in accordance with the reasons given here.
PENALTIES
The commissioner assessed the applicant to substantial administrative penalties under the Act. Speaking of the sums received from overseas (“the deposits”), the commissioner said:
“…the applicant was aware the deposits in question were deposits of assessable amounts and the applicant deliberately omitted these amounts from the relevant returns[56]”.
[56] Respondents written submissions at [92].
On the footing the applicant was subjected to severe penalties in the form of heavy interest under the Act. In view of our findings on the subject in the course of these reasons, it is evident that the penalty cannot stand and the decision under review is set aside accordingly.
| I certify that the preceding 79 (seventy-nine) paragraphs are a true copy of the reasons for the decision herein of Honourable Dr B H McPherson CBE Deputy President and Mr R G Kenny, Senior Member. |
........................................................................
Associate
Dated 24 January 2011
| Date(s) of hearing | 6 - 10 September 2010 |
| Applicant | In person |
| Solicitors for the Respondent | ATO Legal Services Branch |
3
1