Owen & Others and Commissioner of Taxation - [2001] AATA 789

DECISION AND REASONS FOR DECISION [2001] AATA 789

ADMINISTRATIVE APPEALS TRIBUNAL) Nº AT2000/27—29, 32-34

Nº AT2000/35—37, 38—41, 42—44

TAXATION APPEALS DIVISION) Nº AT2000/45—47, 51—52

Re:            MARALYN MARGARET OWEN
  GEOFFREY JOHN OWEN
  PATRICK M. BARRON
  JOHN ANDREW FITZGERALD
  DANIEL BRUCE MACLEOD
  DAVID IAN PRITCHARD
  P. & B. BARRON PTY LTD

Applicant

And: COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:       Mr B.H. Pascoe, Senior Member
Date:             17 September 2001
Place:            Canberra

Decision:The Tribunal affirms the decisions under review to the extent of the disallowance of deductions claimed by the applicants for share of partnership loss, interest and/or management fees in respect of their partnership in Cooma Community Investments Limited Partnership in the years ended 30 June 1992 to 1995 inclusive.
The Tribunal varies the decisions under review to the extent of remitting the penalty component of additional tax to 15 per cent of the tax shortfall.
The Tribunal varies the decision under review in relation to the first applicant, Mrs M.M. Owen, to the extent of excluding the sum of $75,000 as assessable income in the year ended 30 June 1993.
The Tribunal remits the decision under review in relation to the second applicant, Mr G.J. Owen, to the respondent for reconsideration in accordance with the reasons for decision with liberty to the applicant to apply to the Tribunal in the event of a dispute.
The Tribunal certifies that the result of the proceedings have terminated in a manner favourable to the applicants.

(sgd) B.H. Pascoe
Senior Member
INCOME TAX — deductions claimed for losses incurred by limited partnership — whether interest on unpaid share calls incurred — whether expenditure incurred to produce assessable income — whether scheme to obtain tax benefit — whether additional tax should be remitted
Income Tax Assessment Act 1997
Taxation Administration Act 1953
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) HCA 32

Snook v London & West Riding Investments Ltd (1967) 2 QB 786

REASONS FOR DECISION

17 September 2001 Mr B. H. Pascoe, Senior Member

These are applications to review decisions of the respondent to disallow objections against assessments and amended assessments of tax in respect of the years ended 30 June 1992 to 1995 inclusive. The objections were against the disallowance of a claimed share of loss in the partnership, Cooma Community Investment Limited Partnership ("CCILP").
As the issues and facts involved were the same for all applicants, the applications were heard together by consent. At the hearing, the applicants were represented by Mr D. Bellamy, an accountant, and the respondent by Mr G. Davies qc, assisted by Mr S. Steward, of counsel. Evidence was given by five of the applicants, Mrs M. Owen, Mr Pritchard, Mr Barron, Mr Fitzgerald and Mr G. Owen. Evidence was given also by Mr J. Owen; Mr Cooke, an accountant; Mr Arnold, a real estate agent; Mr Wiley, an accountant; Mr Norton, a former Mayor of Cooma, and Mr Bell, the person responsible for setting up the arrangements in issue.
The facts set out in the large amount of documentary evidence provided in this matter were not in dispute and can be taken conveniently from the respondent's submission (with some editing of the more subjective descriptions contained therein).
Cooma Community Investment Limited Partnership
30 June 1992
The CCILP was formed on 30 June 1992 with five limited partners and a general partner, Cooma Community Investments Pty Limited. The five limited partners were D.T. Wade, M.M. Owen, C.E. Donnelly, M.E. Foxton and R.L. Kent. Each limited partner's contribution was set out in the Deed of Limited Partnership and if prepaid was subject to a discount of 22 per cent on the partnership contribution. Each limited partner entered into a loan agreement with Property Finance Pty Limited for the amount of his or her contribution.
There are minutes dated 29 June 1992, of a meeting of CCILP which record the following resolutions:
(a)the five named individuals be admitted as limited partners and that each be granted a discount of 22 per cent in consideration of prepayment of their subscription to the partnership;
(b)receipt of the sum of $80,730 be acknowledged as payment of the partnership contributions by the five limited partners, such amount being accounted to the partnership by Property Finance Pty Limited as disbursement of loans made to the partners;
(c)Brogana Pty Limited be admitted as a limited partner to the extent of $70,000;
(d)CCILP agree to subscribe to 10,000,000 $1.00 preference shares in John Owen Pty Limited of which 830,600 shares were to be immediately issued and called with the understanding that the balance would not be called before 30 June 1993 and that an option to defer payment of 99 per cent of the called amount and to pay interest on the balance at the rate of 18 per cent per annum yearly be exercised; and
(e)CCILP accept a loan of $60,000 from JS 0wen, such loan to be a call after 12 months and to attract interest at the rate of 14 per cent per annum compounding monthly.
On the same day, the members of John Owen Pty Ltd ("JOPL") resolved by special resolution:
(a)to alter its Memorandum and Articles of Association by increasing the authorised capital by 20,000,000 $1 preference shares;
(b)to permit the subscribers of preference shares to defer payment of any balance owing or calls made on the shares subject to the payment of a minimum of 1 per cent in respect of each share and payment of interest on the balance owing at the rate of 20 per cent per annum payable monthly in arrears or at the rate of 18 per cent payable yearly in advance.
On the same day, the directors of JOPL resolved, inter alia:
(a)to accept the application by CCILP for 10,000,000 $1 preference shares;
(b)to accept the application of John and Maralyn Owen for 10,000,000 $1 preference shares;
(c)to subscribe to 2,000,000 deferred shares in Property Finance Pty Ltd upon an undertaking that calls upon the shares be restricted to not more than $300,000 immediately and not more than $300,000 within each subsequent financial year;
(d)to subscribe to the Hunter Valley Community Limited Partnership ("the Hunter Valley Partnership") to the extent of $70,000;
(e)to pay fees to J. & M. Owen of $8,306; and
(f)to offset the moneys owed to it by CCILP in respect of the preference shares against the moneys owed by it to Property Finance Pty Ltd in respect of the deferred shares.
On 30 June 1992 Property Finance Pty Ltd made resolutions to give effect to the above resolutions by making book entries "only". This involved the making of simultaneous debits and credits in the accounts held by each partner, the Owens, CCILP and the Hunter Valley Partnership respectively, with Property Finance Pty Ltd.
Mr Owen agreed to borrow from Property Finance Pty Ltd to fund her contribution to CCILP of $21,450. In her loan application Mrs Owen agreed to make a repayment of $8100 upon receipt of her tax refund for the 1992 year of income, "subject to a deduction having been allowed for the prepayment of interest for which the advance was made" and a payment of $8100 by 30 June 1993, "subject to a variation of my PAYE tax deduction reflecting the prepayment of interest".
The effect on 30 June 1992 of the above agreements and reductions was as follows:
(a)the total partnership contribution to CCILP as at 30 June 1992 was $150,730.00;
(b)CCILP received $60,000 as a loan from John Owen, a director and shareholder of JOPL;
(c)the whole of the funds ($210,730) were applied by CCILP in the following manner:
(i)establishment costs (paid to Fincorp Australia Pty Ltd)
4,000
(ii)share purchase - Property Finance Pty Limited  40,000
(iii)deposit on preference shares in JOPL  8,306
(iv)prepaid interest on JOPL shares  148,000
(v)expenses  2,730
(vi)deposit with Property Finance  7,694
(d)CCILP was under an ongoing obligation:
(i)to pay the balance of the call ($822,294) and to pay interest at 18 per cent; or 20 per cent whilst the balance remained unpaid; and
(ii)to repay the loan from J. Owen at interest ($60,000 at 14 per cent per annum compound).
In addition, Mr and Mrs Owen jointly were under an obligation to pay the balance of the call ($822,294) on the preference shares issued to them and to pay interest at 18 per cent or 20 per cent whilst the balance remained unpaid.
In the tax return for CCILP for the year ended 30 June 1992, $1 of income was returned together with expenses of $150,731, leaving a loss of $150,730. The loss equalled the total partnership contribution and was distributed to the partners according to their respective partnership contributions. The tax return of Mrs Owen for the year ended 30 June 1992 claims a deduction for a partnership loss of $21,450.

30 June 1993

In 1993 promotional material was prepared, which informed proposed investors that tax losses equal to their capital contributions would be distributed to them in the initial years.
On 26 June 1993 the directors of JOPL resolved amongst other things, to make a further call of 87 cents per share on the preference shares issued to CCILP.
On the same day CCILP resolved:
(a)to admit new members to the partnership;
(b)to exercise the option of deferring payment of 99 per cent of the called amount and to prepay yearly interest on the balance at the rate of 18 per cent per annum;
(c)to obtain loans from Property Finance Pty Limited or Investment Finance Pty Limited to enable the part payment for the shares and prepayment of interest.
These new partners included G. Owen who subscribed the sum of $5000, J. Fitzgerald who subscribed the sum of $28,000, P. Barron who subscribed the sum of $8100, P. & B. Barron Pty Ltd which subscribed the sum of $50,000, D. Pritchard who subscribed the sum of $21,000, Brogana Pty Ltd which subscribed the sum of $750,000 and JOPL which subscribed the sum of $600,000. The total contribution for the 1993-year was $1,589,100.
Each new partner borrowed the amount of his, her or its contributions from Investment Finance Pty Ltd or Property Finance Pty Ltd. D. Pritchard appears to have entered into two loan agreements with Investment Finance Pty Ltd in the sum of $22,000, the first being dated 28 June 1993 and the second being dated 30 June 1993. The former included a clause requiring the payment of $7920 upon receipt of Mr Pritchard's 1993-tax refund.
Pursuant to the transactions to give effect to the resolutions made on 26 June 1993:
(a)CCILP was liable to pay to JOPL $87,000 in respect of the 1 per cent part payment and an amount of $1,550,340 (being 18 per cent of $8,613,000) representing interest on the unpaid balance of the 87 cents per share call, together with an amount of $148,000 in respect of interest on the unpaid balance of the call made in the 1992 year, the total interest being $1,698,340;
(b)CCILP was under an obligation to pay interest and principal in respect of additional funds borrowed from Investment Finance which were required in order to make the payments to JOPL.
The transactions were effected by book entries only.
In addition, the resolutions of JOPL made on 26 June 1993 created:
(a)a liability for Mr and Mrs Owen jointly to pay the amount of the call ($8,700,000); and
(b)a liability for Mr and Mrs Owen to pay interest on the amount of the unpaid balance of the call at not less than 18 per cent per annum.
In its Income Tax Return for the year ended 30 June 1993, CCILP returned a loss of $1,739,830 which comprised the interest on unpaid calls ($1,698,340), an amount of interest payable on the advance from Investment Finance Pty Limited ($37,705) and other expenses of $4652. An amount of $867 representing interest on deposit with Investment Finance Pty Ltd was returned as income.
The amount of this loss ($1,739,830) equalled the total partnership contributions (being the aggregate of $150,730 in the 1992-year and $1,589,100 in the 1993 year).   CCILP distributed the loss to the limited partners in accordance with their respective partnership contributions.   The following deductions were claimed by the applicants:
M. Owen  21,450
G. Owen  5,000
J. Fitzgerald  28,000
D. Pritchard  21,000
P. & D. Barron  50,000
The following partners also claimed deductions for other amounts:
G. Owen   822
J. Fitzgerald  500
D. Pritchard  1000
as a management fee payable to
Cooma Community Investments Pty Ltd

30 June 1994

In the year ended 30 June 1994, two further partners were admitted to CCILP with a total subscription of $65,000. There were no further calls by JOPL in respect of the preference shares acquired by the CCILP.
CCILP returned a loss of $1,804,830 which consisted of interest on the unpaid share calls of $1,698,340, interest on advances payable to Investment Finance Pty Ltd in the amount of $101,490 and other expenses of $5000.   There was no income for the year.   The amount of the loss equalled the total amount of the partnership contribution of the limited partners (being the aggregate of $65,000, $1,589,100 and $150,730).   CCILP distributed these losses to the limited partners in accordance with their respective partnership contributions.   The applicants claimed deductions for the following losses:
M. Owen  21,450
G. Owen  4,766
J. Fitzgerald  28,000
D. Pritchard  21,000
D. Macleod  25,000
The following applicants also claimed deductions for interest:
G. Owen  641
J. Fitzgerald  4134
D. Pritchard  2940

30 June 1995

In the year ended 30 June 1995 the partnership returned a loss of $1,804,830 made up in the same amounts as for the year ended 30 June 1994. There was no income for the year. For the fourth year in a row since the partnership was constituted, the amount of the loss equalled the total partnership contributions of the limited partners.
CCILP distributed these losses to the limited partners in accordance with their respective partnership contributions.   The applicants claimed deductions for the following losses:
M. Owen  21,450
G. Owen  4,753
J. Fitzgerald  28,000
D. Pritchard  21,000
D. Macleod  25,000
P. Barron  8,100
The following applicants also claimed deductions for interest:
G. Owen  1,680
J. Fitzgerald  2,175
D. Pritchard  7,122
D. Macleod  1,925
Throughout the period the income tax returns of the applicants reveal their gross income to be as follows:
M. Owen
1992   $50,361 of salary and $97 of other income;
1993   $51,080 of salary and $1937 of other income;
1994   $50,295 of salary and $431 of other income; and
1995   $52,008 of salary and $125 of other income.
G. Owen
1993   $22,193 of salary and $147 of other income;
1994   $28,364 of salary and $551 of other income; and
1995   $34,867 of salary and $1605 of other income.
J. Fitzgerald
1993   $42,571 of salary and $1404 of other income;
1994   $38,616 of salary and $6 of other income; and
1995   $38,706 of salary and $6 of other income.
D. Macleod
1994   $81,998 of salary and $7371; and
1995$81,547 of salary, $3991 of other income and a $25,070 eligible termination payment.
D. Pritchard
1993   $45,396 of salary and $2779 of other income;
1994   $42,124 of salary and $445 of other income; and
1995   $39, 391 of salary and $623 of other income.
P. Barron
1995   $26,180 of salary and $11,592 of other income
P. & B. Barron Pty Ltd
1993   An operating profit of $36,518.

John Owen Pty Ltd

JOPL was incorporated on 23 July 1964. The directors of JOPL are Maralyn Owen, John Owen and Harold Blythe.
Throughout the period under review JOPL was in severe financial difficulty.
Between 1987 and 1991, JOPL returned the following trading losses—
1987  152,888
1988  39,251
1989  3,355
1990  111,946
1991  70,429
By 30 June 1991 the accumulated losses of JOPL were $602,416. Debts totalling approximately $1.6 million were owed to a number of banks. These debts were secured. The National Bank of Australia held a debenture charge over the assets of the company. The State Bank of New South Wales held first mortgages over properties owned by John and Maralyn Owen and property of JOPL including, the Platypus Lodge Holiday Units and Restaurant. The Commonwealth Development Bank held second mortgages over those properties. The debts owed to the banks vastly exceeded the book value of the assets held by JOPL.
In May 1991 and again in October 1991 JOPL had tried to sell off its assets without success.
For the year ended 30 June 1992, JOPL included in its income tax return total income of $280,316 including interest on unpaid share calls of $148,000. JOPL returned a loss of $9375.
According to the financial statements of JOPL, as at 30 June 1992:
(a)it had derived interest on unpaid share calls of $148,000;
(b)it had a receivable being a loan of $148,000 to Property Finance Pty Ltd;
(c)it had accumulated losses of $611,791;
(d)it had a deficiency in shareholders equity of $540,664;
(e)it had total current liabilities of $2,273,359;
(f)it had total assets of $1,741,063 which included the loan of $148,000 to Property Finance Pty Ltd.
According to the records of JOPL, CCILP, the Hunter Valley Partnership, Property Finance and Investment Finance, on or about 26 June 1993:
(a)JOPL received interest on unpaid or called capital of $1,862,785;
(b)JOPL became a member of CCILP and provided a partnership contribution of $600,000;
(c)JOPL provided a further partnership contribution of $750,000 to the Hunter Valley Partnership;
(d)JOPL received a distribution of partnership losses of $1,420,000;
(e)JOPL subscribed for 400,000 $1 shares in Investment Finance Pty Ltd;
(f)it held 50,000 $1 shares in Property Finance Pty Ltd shown as acquired on or about 1 July 1992.
For the year ended 30 June 1993, JOPL included in its income tax return a trading profit of $1,424,908 which was calculated by including interest of $1,862,785 (being interest on unpaid share call) and partnership losses of $1,420,000 comprised of a loss from the Hunter Valley Community Investment Limited Partnership of $820,000 and a loss from CCILP of $600,000. An operating profit of $4908 was offset by prior year losses.
In July 1993 JOPL put a proposal to the NSW State Savings Bank and the Commonwealth Development Bank in respect of the debts owed to them.
In May 1994 the Commonwealth Development Bank issued Notices of Demand against JOPL.
According to the records of JOPL, during the year ended 30 June 1994:
(a)it received interest on unpaid and called capital of $ 1,698,340;
(b)it purchased a further 150,000 $1 shares in Investment Finance Pty Ltd;
(c)it purchased 300,000 $1 shares in Hastings Equity Finance Pty Ltd;
(d)it received a distribution of partnership losses of $1,420,000.
For the year ended 30 June 1994, JOPL in its income tax return disclosed a total income of $1,798,783 including interest on unpaid share call of $1,698,340. Partnership losses in the sum of $1,420,000 made up in the same amounts as for the year ended 30 June 1993 were claimed as deductions. A returned operating profit for the year of $148,504 was fully offset by prior year losses.
In December 1994 JOPL again attempted to sell its properties at auction. No bids were received.
For the year ended 30 June 1995, the profit and loss account of JOPL recorded a total income of $1,972,113. This included interest on unpaid share call of $1,842,340. Partnership losses in the same amounts as the previous two years ($1,420,000) were claimed and following deductions for other expenses the company returned a net loss $494,649. Included in other expenses was an amount for interest of $859,825 of which $798,000 was shown as paid to Hastings Equity Finance Pty Ltd.

In May 1995 JOPL and the State Bank executed a Deed of Release. JOPL did not meet its obligations under that Deed and in mid-1996 there were further negotiations concerning JOPL's indebtedness to the Bank.
JOPL is now in liquidation. During the period 30 June 1992 to date, no dividends have been paid to CCILP or to Mr and Mrs Owen by JOPL. JOPL has not received any distribution of partnership income from its investment in the Hunter Valley Partnership. Apart from the amount of interest on unpaid share calls, JOPL returned only relatively small amounts of income during the period 30 June 1992 to 30 June 1995.
As much of the factual background to this matter involves JOPL, it is appropriate to deal with the evidence of Mr John Owen first. Mr Owen is a real estate agent who has been carrying on business in Cooma since 1985. Between 1978 and 1985 he managed a rural and industrial supply business. Between 1964 and 1977 he managed a smash repair business in Sydney. In 1973 he and his wife purchased a property near Cooma and moved to that location in 1976. The company, JOPL, was established in 1964 and was the owner of the smash repair business, the rural supply business and, until Mr Owen entered into a franchise agreement, the owner of the real estate business.
Mr Owen said that, in 1982, he purchased land in Cooma together with another party and operated a piggery. In 1986, he bought out the other party. The property became known as Scenic Hills Estate and, in 1985, approval for rezoning as residential and subdivision into 344 blocks was obtained. In 1988, Commonwealth Development Bank valued the land at $900,000 for the purpose of financing the development as subdivisional land. Mr Owen said that, at the time, he believed that the Very Fast Train ("VFT") between Sydney and Melbourne would proceed and that visitors and new residents would be attracted to Cooma. By 1992 survey and design work had been completed and exploratory road excavation undertaken.
Mr Owen said that, in 1987, JOPL purchased former Snowy Mountains Authority workers' quarters with the intention to renovate and operate the complex as a tourism/hospitality facility to be known as Platypus Lodge. Funds were provided by the State Bank and Commonwealth Development Bank for renovations and improvements. First bookings were in the winter of 1990 and the restaurant and reception lounges were fully operational by January 1991. During that year, the facility was used for several conferences and functions and self-contained holiday accommodation. After a liquidator was appointed to JOPL in 1999, Mr and Mrs Owen have managed Platypus Lodge on behalf of the mortgagee.
In 1992, Mr Owen undertook preliminary work on developing a "Time Walk" tourist attraction on land adjoining Platypus Lodge and arranged for site plans and artist impression of the project.
Mr Owen said that, by 1991, JOPL had insufficient funds to complete any of his projects and high interest rates made it difficult to service existing loans. He advertised for a partner or joint venturer to provide equity finance without success. He was introduced to Mr Bell who proposed a structure for investment by members of the local community. He understood that this structure required JOPL to issue a new class of preference share with subscribers having the option of deferring payment subject to interest on the unpaid balance. He believed that this would provide JOPL with income to meet expenses and, ultimately, reduction of loans. He saw the main beneficiaries of the JOPL projects as the new investors who would need to receive a return on their investment in priority to himself and his family. Mr Owen acknowledged that he and his wife subscribed for 10,000,000 preference shares, also, but maintained that he expected to be able to meet interest due from management fees, real estate commission, sale of personally owned land and loans. He said that, as a last resort, he considered it possible to sell some of the shares at a price above the subscription price. Mr Owen stated that he had believed that JOPL would produce dividends in excess of interest paid by subscribers after three years. He said that this did not eventuate because of changes in tax laws in August 1992, preventing the partnership obtaining new members and the abandonment of the VFT project.
In cross-examination, Mr Owen displayed a marked lack of knowledge of the variety of transactions involving JOPL. He could not recall the reason for he and his wife subscribing for 10,000,000 preference shares nor any advice to maintain over 50 per cent of equity to protect the company losses. He could not recall how the 1 per cent of the call on the shares was to be financed although believed that he was never called upon to pay the 1 per cent or the interest on the outstanding balance. He believed that Brogana Pty Ltd was involved in the Hunter Valley Limited Partnership as it was introduced by Mr Bell but could not recall anything about the company or why it became a partner in CCILP. He could not recall why and how JOPL became a limited partner in the Hunter Valley partnership. He had no knowledge of the loan by JOPL to CCILP or any of the investments by JOPL in Property Finance Pty Ltd, Investment Finance Pty Ltd or Hastings Equity Finance Pty Ltd. He maintained that all of the transactions were subject to the advice of his accountant, Mr Cooke, after recommendations of Mr Bell. Mr Owen acknowledged that the subdivisional land was in his own name and not owned by JOPL but said that, while it was always intended to be in the company's name, the cost of stamp duty had precluded a transfer.
Mr Cooke is a chartered accountant and a cousin of Mr Owen. He had prepared income tax returns and financial statements for JOPL from 1987. The last financial statement he prepared was for the year ended 30 June 1995 as, for the subsequent year, he felt unable to prepare accounts because the records were incomplete. Mr Cooke said that he first became aware of CCILP in late 1992 and prepared and lodged partnership income tax returns for the years ended 30 June 1992 to 1995 inclusive. He said that he was not involved in discussions prior to setting up the structure of CCILP or any advice on the transactions contemplated. He was not involved in any decisions relating to the various investments. Mr Cooke said that his only involvement with the two finance companies was to telephone the accountants in Newcastle to obtain information necessary to complete the accounts of JOPL and CCILP. He accepted that the transactions were accomplished by book entries in the finance companies. He believed that the partnership had made an election under s.94D of the Income Tax Assessment Act 1997 ("the Act") by having a meeting which resolved to distribute losses to the partners. Mr Cooke said that he had been of the opinion in 1992 that the projects with which JOPL was involved were commercially viable.
Mr Bell gave evidence that he proposed and developed the concept of CCILP after being introduced to Mr Owen in 1991. Formerly with ANZ Funds Management, Mr Bell has no formal qualifications in accounting or law and said that, since 1987, he had been involved in coordinating investment projects with a number of companies. During 1991 and 1992, his main role was the establishment of CCILP and a similar structure, the Hunter Valley Partnership. He said that he had minimal involvement with Property Finance Pty Ltd, which was administered by Fincorp Pty Ltd from its office in Newcastle where he was located. Mr Bell said that Brogana Pty Ltd was a real estate developer in Maitland, New South Wales, and that the Hunter Valley Partnership was established to inject funds into Brogana Pty Ltd in a parallel situation to that of CCILP and JOPL. He said that Hastings Equity Finance Pty Ltd, in which JOPL invested in 1994, was a company involved in "general investment" through interest on unpaid share capital in similar circumstances to the two limited partnerships. He maintained that the investment by JOPL in the Hunter Valley Partnership and the investment by Brogana Pty Ltd in CCILP was designed to spread equity between the two different developments. Mr Bell acknowledged that all of the transactions involving issue of shares, interest on unpaid calls, the various investments by JOPL and the investment in CCILP by Brogana Pty Ltd were arranged by him and he either drafted or was involved in the drafting of the various minutes of CCILP and JOPL. He said that he had relied on advice from various accountants and solicitors and that much of the documentation was based on precedents obtained elsewhere. Mr Bell said that Investment Finance Pty Ltd was incorporated on 30 June 1993 and took over the loans of Property Finance Pty Ltd. He maintained that Property Finance Pty Ltd did have some independent funds although was somewhat vague as to their source but, nevertheless, acknowledged that it did not have sufficient funds to make the alleged loans and needed to have such loans come back to it. He agreed that the various transactions were dealt with by way of entries in the books of the finance companies.
Mr Bell was not prepared to accept that it was not possible for CCILP to fund an annual interest expense of approximately $1.7 million in the years ended 30 June 1993 to 1995 inclusive much less the liability of some $9.4 million for unpaid calls on the JOPL shares. He acknowledged that the total capital to be contributed to the partnership from partners other than Brogana Pty Ltd and JOPL up to 30 June 1995 was $384,730 and it was these partners only who were required to make such contributions from their own resources, albeit over a period. Mr Bell maintained that the introduction of s.94D of the Act in August 1`992 precluded the partnership from attracting the substantial investment which he had expected. In addition he maintained that the failure of the VFT project made the developments proposed by JOPL less attractive. Mr Bell insisted that he had expected to obtain adequate funds from new partners to finance the commitments of the partnership and that funds would have enabled JOPL to produce profits and distribution to the partnership within three years.
Mrs Owen is the wife of Mr Owen and one of the original partners in CCILP. She was a director and shareholder of JOPL although could not recall the percentage of shares in that company owned by her. She said that she and her husband saw themselves as an informal partnership involving the provision of management and financial assistance to JOPL. Mrs Owen maintained that, in June 1992, it was anticipated that sufficient new limited partners would be introduced by 30 June 1993 to meet the partnership commitments until profits were distributed to the partnerships from JOPL. She said, also, that it was believed that she and her husband could meet the commitments on their new preference shareholding out of management fees, sale of the subdivisional land to JOPL, dividends and, if necessary, sale of some of the JOPL shares. She accepted that it was unnecessary for her to be a partner in CCILP to share in any JOPL profits but said that she understood that involvement in CCILP would provide a spread of investment into the Hunter Valley Partnership and potentially other investments. Mrs Owen said that, although a director of JOPL, she was not actively involved in the various transactions to which the company was a party and had relied upon her husband. She did acknowledge that, through all of the relevant period including June 1992, JOPL was in desperate problems with servicing its loans from the banks. Mrs Owen had very little knowledge of the details of the various transactions involving CCILP and JOPL or of the Hunter Valley Partnership and companies such as Brogana Pty Ltd, Property Finance Pty Ltd, Investment Finance Pty Ltd etc. She maintained that the investment in CCILP was not made for the purpose of obtaining a taxation deduction although she acknowledged that she may not have invested some $21,450 if it were not for the expected deduction for losses. Mrs Owen did not see the claiming of deductions in excess of $80,000 over four years for a cost of some $26,000 (including interest) as odd but she accepted that she may have been naive. She accepted, also, that it was unlikely that potential profits of JOPL could have funded the commitment of CCILP for some $8.7 million in unpaid share calls.
Mr Pritchard said that he became aware of CCILP in 1992 after meeting Mr Bell through Mr Owen. He adopted a "wait and see approach" awaiting the response by the community and any adverse reaction from the Taxation Office. He became a limited partner in CCILP in 1993 after again being approached by Mr Bell. He maintained that he did not join the partnership for tax reasons but was aware of the apparent taxation benefits. He understood that the partnership would provide funds to JOPL to enable that company to meet its expenses and carry out its activities to produce dividends from profits. Mr Pritchard said that he borrowed $22,000 from Investment Finance Pty Ltd being $21,000 partnership contribution and $1000 management fee payable to the general partner Cooma Community Investments Pty Ltd. He was unable to explain why two loan agreements had been signed by him. One provided for repayments of principal and interest annually of 36 per cent of the advance and the other provided for repayments of $7920 on receipt of 1993-tax refund. Nor was he able to explain why the statement from Investment Finance Pty Ltd showed an advance of $25,000 partnership contribution and $1000 fee and repayments of $380 per fortnight commencing in January 1994 instead of either $660 per month or the $7920. He did acknowledge that the sum of $380 was equal to the tax instalments formerly deducted from his salary prior to an application under s.221D of the Act. Mr Pritchard acknowledged that he was not given any details of JOPL financial situation, did not see any financial statements and could not recall whether he knew the partnership was investing in shares in JOPL, rather than the specific development projects. He said that, in 1993, he did not have capital to invest and could not have made the investment without the reduction in tax instalment deductions after the s.221D application. While he agreed that it may be difficult to accept, he maintained that taxation was a secondary consideration in the decision to invest. He acknowledged that losses of some $74,000 over three years were claimed compared with total payments in the same period of some $17,000.
Although Mr G. Owen is the son of Mr and Mrs Owen and had some first hand knowledge of the proposed development projects by JOPL, he shared with Mr Barron and Mr Fitzgerald a complete lack of knowledge of the form of investment, the way in which CCILP proposed to operate, the fact that CCILP invested in partly paid shares in JOPL, the specific documents signed by them or the financial position of JOPL. They had relied variously on their accountant, Mr Bell or, in the case of Mr Fitzgerald, his wife. All understood that they were to be involved, directly or indirectly, in projects including the subdivision and Platypus Lodge. All believed that the changes in tax laws and the abandonment of the VFT project resulted in the investment failing to produce a satisfactory result.
The evidence of Mr Arnold and Mr Norton was limited to comment on their perceptions of the potential of the subdivisional land and Platypus Lodge. Neither had any knowledge of the financial position of JOPL or the income of Platypus Lodge. Neither was aware of the structure or transactions involving CCILP. Similarly, Mr Wiley, an accountant in Cooma, knew little of the specifics of JOPL, or the structure and transactions of CCILP other than that there appeared to be some complex arrangements. He had spoken to Mr Bell and agreed with Mr Pritchard for him to become a partner of CCILP. He understood that it was a negative gearing proposal and, if a good investment, would produce income in later years.
It is relevant to note that Mr Bell and some of the CCILP partners appeared to have assumed that the structure and transactions of CCILP had been approved by the respondent. In a letter of 3 June 1992 in the name of CCILP, comments were sought from the respondent in relation to the partnership. This letter stated that the "partnership will mainly enter into Joint Ventures with builders and others" by meeting expenses and that:
. . . income derived by the taxpayer from the Partnership, after each full 12 months period, is expected to be higher than the taxpayer's contribution. As such the investment is not designed to be negatively geared and any tax advantages against other income are by prepayment of expenses.

The reply dated 19 August 1992 stated that "limited partnerships are acceptable for taxation purposes and are treated the same as ordinary partnerships". The reply went on to discuss the principles on deductibility of interest and prepayments under ss.82KZL-82KZM. It stated further that contributions to the partnership by partners would be regarded as capital. There is little, if anything, in the reply which could be seen as any form of approval for the arrangements actually entered into by the partnership.

While not necessarily directly relevant to the particular issues in this case, a number of promotional type letters and circulars were produced in evidence. These included a "Memo to Members and Intending Members" which was undated but clearly prepared prior to 30 June 1993, showing estimated tax deductions of $60,000 to 30 June 1995 for a $20,000 contribution prior to 30 June 1993 and repayments of loan and interest of $21,600 to 30 June 1995. The memorandum referred to the tax law changes of August 1992 and need to comply with "same ownership" and "same business" tests and went on to state that:
. . . at this point we will accept a further $2 m which will allow only around 100 new members. Applications are expected to exceed this and those waiting till near the end of time may miss out.

Another "urgent Memo" stated that "Hunter Valley Limited Partnership has far more applications than it can accommodate" that "neither partnership need now look for further members but Cooma is first giving opportunity to locals" and "this priority will be held open only until Monday 28/6/93". The memorandum went on to say that:

. . . the opportunity to acquire a share in investments financed with no significant outlay by members, fully repaid by tax savings on other income, and without the normal risk associated with borrowing/investing can not be repeated under the present amended tax laws.

It was submitted for the applicants that the interest claimed by the partnership on unpaid calls on the preference shares in JOPL was incurred, was an allowable deduction and each of the limited partners was entitled to a deduction for a share of the partnership loss in each of the years ended 30 June 1992 to 1995 inclusive. It was said that none of the partners had invested in the partnership with the dominant motive of obtaining a tax benefit so that the provisions of Part IVA of the Act did not apply. It was submitted that in 1992 the then partners had a reasonable expectation that sufficient new members would be obtained to fund the liabilities of the partnership; that the projects of JOPL would be profitable and dividends would flow from JOPL to the partnership. It was said that the introduction of s.94D into the Act and other economic factors such as the failure of the VFT project led to the inability of the investment by the partners to be profitable.
It was submitted for the respondent that CCILP was not entitled to a deduction for the amounts purportedly paid as interest. It was argued that there was never an intention to be contractually bound to fulfil the financial obligations contemplated in the resolutions of June 1992 or June 1993 relating to subscriptions for shares in JOPL. It was said that the evidence showed that the subscribers to the shares, both CCILP and Mr and Mrs Owen, could never have fulfilled the obligations purportedly imposed upon them. In addition, it was submitted that the book entries in the finance companies purportedly effecting payments of interest were a fiction in that there were no underlying funds to support the entries. Further, it was argued that there was no prospect of JOPL deriving a profit which could be distributed to the partnership by 30 June 1995 and the purported payment of interest was not to derive assessable income but for the purpose of giving rise to a deductible outgoing. Alternatively, it was submitted that CCILP did not make an election under s.94D(d), could not have passed the continuity of ownership test in s.94G and was, therefore, a corporate limited partnership so that its purported losses could not be distributed to partners for tax purposes. Finally, the respondent submitted that there was a scheme to which Part IVA of the Act applied. It was said that the scheme comprised the creation of CCILP, the admission of the applicants as limited partners, the making of contributions to CCILP funded from loans from either Property Finance Pty Ltd or Investment Finance Pty Ltd, the making of resolutions, the making of book entries, the subscription for preference shares in JOPL, the prepayment of interest on unpaid calls to JOPL and the distribution of the resulting partnership loss to each applicant. It was argued that, when regard is had to each of the eight matters referred to in s.177D(b), it would be concluded that each of the parties involved who entered into or carried out the scheme did so for the sole or dominant purpose of obtaining a tax benefit.

The issues in this case are:
(a)whether CCILP incurred allowable deductions in each of the years ended 30 June 1992 to 1995 inclusive so as to have a partnership loss in each of the years;
(b)whether each of the applicants is entitled to the deduction claimed for a share of such partnership loss;
(c)whether the applicants who so claimed a deduction are entitled to such a deduction for interest on loans from which to make capital contributions to the partnership or for management fees paid;
(d)whether Part IVA of the Act operates to disallow the claimed deductions; and
(e)whether additional tax was properly levied.
The losses claimed by CCILP amounted to:
150,731 in the year ended 30 June 1992
1,739,830 in the year ended 30 June 1993
1,804,830 in the year ended 30 June 1994
1,804,830 in the year ended 30 June 1995,

a total of $5,500.221 over the fours years. The bulk of the losses represented interest claimed on unpaid calls on the shares in JOPL with the balance being interest to the finance companies and a small amount of management expenses. During this period, the only potential capital from the limited partners other than JOPL and Brogana Pty Ltd amounted to $384,730. The purported capital from JOPL is excluded because it is clear that JOPL had no funds available and that its purported capital contribution was part of the "round robin" of book entries with its only source, the alleged interest payable to it by the partnership. Although there was no evidence of the financial position of Brogana Pty Ltd, it can be readily accepted that its purported capital contribution to the partnership was again part of the round robin of book entires and, in particular, a contra for the purported investment of the same amount in the Hunter Valley Partnership by JOPL. In not one of the four years in question were funds available or likely to be available to meet the interest commitment. The only way in which the book entries could purport to incur the expense was to show JOPL as having expended equivalent amounts by way of loans to CCILP, loans to the finance company, subscribed to share capital of the finance company, invested in CCILP and the Hunter Valley Partnership or invested in Hastings Equity Finance Pty Ltd. I am left in no doubt that it was clearly in the mind of Mr Bell, the architect and instigator of the complex web of purported transactions that these various purposed investments were to be recorded in the various books of account prior to CCILP entering into the deferred share purchase arrangement with JOPL. As such, it is difficult to regard CCILP as having incurred the expenses claimed. There was no possibility and, likely, no then intention that such expenditure could be met by the partnership.

There was little in the way of evidence presented to the Tribunal of how much money was received by or for the real benefit of JOPL. In his oral evidence, Mr Bell said that he believed that some $50,000 was actually paid to JOPL. After an overnight adjournment of the hearing, Mr Bell produced a statement said to be from the records of Investment Finance Pty Ltd which he said showed that $463,147.56 had been paid to JOPL or to mortgagees of JOPL property over the relevant period. There was no other confirming evidence of this amount. Clearly neither Mr nor Mrs Owen had any knowledge of what actual money finished up being for the benefit of JOPL. It should be noted also that some of the mortgages against which payments were said to have been made were over property, particularly the major subdivisional land, which was not owned by JOPL but by Mr Owen personally. All of this results in a finding that the expenditure claimed by way of interest by CCILP was not incurred by that partnership.
In my view, the alleged transactions were a sham. In Snook v London & West Riding Investments Ltd (1967) 2 QB 786 (at p.802) Diplock LJ made the oft quoted statement in relation to sham, where he said:
. . . As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a "sham", it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. But one thing, I think, is clear in legal principle, morality and authorities (see Yorkshire Railway Wagon Co. v. Maclure (1882) 21 Ch.D. 309 and Stoneleigh Finance Ltd. v. Philips (1965) 2 Q.B. 537), that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.

In this case, the parties who created the various documents purporting to evidence the issue of preference shares, the making and deferring a call on the shares, the payment of interest on the unpaid call and the borrowing of funds to meet such payment were the general partner of CCILP, JOPL and Property Finance Pty Ltd and/or Investment Finance Pty Ltd. All of the documents were either prepared by or with the involvement of Mr Bell. The Tribunal is satisfied that these documents were prepared to create the appearance of establishing rights and obligations without any intention of satisfying such rights and obligations, perhaps unless some unlikely miracle attracted some $10 million of investment in CCILP. At the time the documents were created there was no prospect of such a miracle. In finding that the alleged transactions were a sham, it follows that the claimed expenditure of interest paid to JOPL was not incurred.

There is a further argument against a deduction being available under s.51(1) of the Act for the purported interest on unpaid calls on the shares in JOPL.   The purported minute of a general meeting of JOPL of 29 June 1992 has a resolution to create 20 million preference shares in the following terms:
[A].   It was resolved that the Memorandum & Articles of Association be altered by an increase of authorised capital of the company by $20,000,000 by the creation of 20,000,000 shares each of one dollar, such shares to be designated "Preference Shares" and that the holders of such shares be entitled to:
[a]   a return of capital upon a winding up in priority to the holders of all other classes of shares.
[b]   all dividends paid by the company from profits earned, and, in the event of a winding up of the company to all surplus monies realised, until a total combined amount has been received equal to the calculation of;
"Total amount subscribed and called increased by (24% p.a. less the rate of taxation payable by companies in respect of each relevant year) calculated on daily balances and compounded yearly"
And thereafter 50% of any additional dividends and/or surplus capital.
[c]   The right at any general meeting of the company to one vote for each share held, except that collectively the holders of Preference shares shall be entitled to not less than 60% of the total vote and if necessary the value of each vote recorded from holders of Preference shares shall be increased to achieve this result.
[B]   It was resolved that the subscribers to such shares be allowed to defer payment of any balance owing on calls made on such shares subject to the payment of a minimum of one cent in respect of each share and payment of interest on any balance owing at the rate of 20% p.a. payable monthly in arrears, or alternatively, at the rate of 18% p.a. payable yearly in advance, at the option of the subscriber.
[C]   It was resolved that the Articles of Association be amended to increase the rate of interest that may be charged on unpaid share subscriptions from 8% to 24%.

The effect of such a resolution appears to be that preference shareholders would be entitled to dividends or a surplus on winding up ahead of ordinary shareholders until they had received the full amount of the called up preference share capital plus the interest on unpaid calls. This appeared to be on the assumption that the 99 cents unpaid call per share would never be paid. It is difficult to make sense of the calculation in paragraph [A][b] of the resolution otherwise. This leads to the question of whether it can be said that the interest purportedly paid on the uncalled capital could, itself, be of a capital nature. Given the various findings in reaching my decision, it is unnecessary for me to make a positive finding on this questionnaire.

The respondent argued that CCILP was, in any event, a corporate limited partnership for the years ended 30 June 1993 and subsequently as no election required by s.94D(d) was made and the partnership could not have passed the continuity of ownership test in s.94G. The applicants argued that the preparation and lodgement of partnership returns for those years was sufficient evidence of having made the election. There was no evidence that anybody turned their mind to the requirements of the legislation introduced from 19 August 1992 other than some general comments in brochures about limitation imposed by the "same ownership" and "same business" tests in that legislation. There is no reference anywhere to an election being required or made. Fortunately, again, it is unnecessary to make a specific finding on this issue given the findings on the other issues.
The respondent argued that, as JOPL was not in the relevant period in a position or showed any future likelihood to produce profit from its projects from which a dividend could be paid, the alleged interest expenditure was not for the purpose of driving assessable income of CCILP. It should be said that I accept that the bulk of the individual outside investors in CCILP thought that they were investing in potentially profitable projects of JOPL. This belief may also have been in the mind of Mrs Owen, although as a director and shareholder of JOPL, she might have been expected to have a greater knowledge of the "smoke and mirrors" which sought to disguise the nature of the structure. However, it was Mr Bell who was the instigator of the raft of book entries and I have no doubt that he was aware from the outset that little or no money, particularly at each year end, was to be expended in profit making ventures of JOPL. As such, I cannot be satisfied that there was any intention or expectation of CCILP that the alleged expenditure was for the purpose of producing assessable income. In view of this there is no need for me to deal in detail with the position of JOPL other than to say that the company was clearly insolvent at 30 June 1992 and remained insolvent throughout the period in question. There was much evidence of the attempts to have lenders write-off debt and restructure loans and to dispose of some of the company's assets, all without success.
Even if I am wrong in finding that the expenditure claimed by CCILP was neither incurred nor for the purpose of producing assessable income, the provisions of Part IVA of the Act apply so that the deductions claimed are not allowable.   The relevant sections of this Part are:
177A(1)   In this Part, unless the contrary intention appears:
. . .
"scheme" means:
(a)any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b)any scheme, plan, proposal, action, course of action or course of conduct;
. . .
177C(1)   Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:
(a). . .
(b)a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or
. . .
177D       This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:
(a)a taxpayer (in this section referred to as the "relevant taxpayer") has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b)having regard to:
(i)the manner in which the scheme was entered into or carried out;
(ii)the form and substance of the scheme;
(iii)the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv)the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii)any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).
. . .
177F(1)    Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may:
(a). . .
(b)in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; or
. . .
There is no doubt that the arrangements and course of action pursued by the parties involved in this matter constituted a scheme. It is clear, also, that if the purpose of their investment by the applicants was to provide capital either as a joint venturer or as a shareholder in JOPL which appears to be the evidence of the applicants, then such investment was likely to have been of a capital nature. The complex and somewhat complicated structure set up by Mr Bell was a most unlikely structure to have been preferred or even understood by the individual investors who were being sought.
In Federal Commissioner of Taxation v Spotless Services Ltd (1996) CLR 404, the High Court said that the conclusion to be drawn under s.177D depends on objective facts and is not concerned with subjective motivation. It was said, also, that the conclusion must relate to the dominant purpose of a person who either entered into or carried out the scheme or a part of it. Dominant, for the purposes of the section, was said to be the ruling, prevailing or most influential purpose. In Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) HCA 32 (31 May 2001) it was said (at paragraph 95) that ". . . One of the reasons for making s 177D turn upon the objective matters listed in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer". Earlier in that paragraph the Court said that "Attributing the purpose of a professional adviser to one or more of the corporate parties in the present case is both possible and appropriate." In this case none of the applicants had any real understanding of the structure adopted or purported transactions and said that they relied on either Mr Bell, their accountant, a wife or the fact that other persons had invested.
Considering the eight matters listed in s.177D to which regard is to be had in reaching a conclusion as to purpose, the following comments are appropriate:
(a)the scheme was entered into and carried out in a manner which relied on book entries to create loans and purported expenditure of large sums well in excess of any real funds available;
(b)the form and substance of the scheme was to create liabilities for large amounts of prepaid interest, little of which resulted in any benefit to JOPL with no liability on the limited partners for any amount in excess of their agreed contribution but to provide taxation deductions of several times the amount of that contribution;
(c)each step of the scheme involved multiple book entries at or near 30 June of each year, continued over four years notwithstanding clear problems created by s.94D from August 1992, and ceased abruptly after 30 June 1995 for no apparent commercial reason.
(d)notwithstanding my earlier findings, it is clear that the result sought by subscribing for a $10 million, making a call with an ability to pay interest in advance in lieu of the call and purporting to borrow the funds to pay such interest was intended to result in allowable deductions equal to the capital contributed to CCILP and for such deductions to continue over several years;
(e)the structure of the scheme was intended to result in each investor in CCILP to meet the cost of the investment out of tax savings and an ultimate result of tax savings exceeding such cost of the investment;
(f)in the case of Mrs Owen, the scheme, if successful, may have been expected to generate capital into the company in which she and Mr Owen were directors and shareholders with such capital having been provided out of reductions in income tax payable by the partners of CCILP, including herself;
(g)there would not appear to be other relevant consequences of the scheme; and
(h)Mrs Owen was a director and shareholder of JOPL. Mr Owen, perhaps with little understanding, was significantly involved in transactions with CCILP and worked with Mr Bell in establishing CCILP, and allowing JOPL to participate in a "round robin" of journal entries purporting to evidence investments in the Hunter Valley Partnership, Property Finance Pty Ltd, Investment Finance Pty Ltd, Hastings Equity Finance Pty Ltd and CCILP.
While all of the applicants argued that their motive in becoming a limited partner in CCILP was to participate and assist in the development of projects by JOPL, it is clear that they could not and would not have invested in the partnership without the promise that the investment would be funded from tax savings. They may have had a somewhat vague expectation that their money would assist in developments in Cooma but it is not possible to conclude otherwise than the dominant purpose, having regard to the objective matters listed in s.177D, was for the purpose of enabling each of the limited partners in CCILP to obtain a tax benefit in connection with the scheme. There is no doubt in my mind that Mr Bell set up the structure with that dominant purpose.

There is one other question which arises in the matter of the use of a limited partner. It was raised by the Tribunal during the hearing but neither party sought to make submissions in relation to it. That question is whether, in a limited partnership, a limited partner can be said to have an individual interest in a partnership loss in excess of the capital contribution to the partnership. The basis of a limited partnership is that the limited partner has no liability to contribute to any liabilities or losses of the partnership in excess of the agreed contribution. As in this matter, once the agreed capital contribution has been expended and lost in the first year, it is difficult to see how it can be said that the limited partner has any interest in losses of subsequent years. Given my findings in this case, it is unnecessary to deal with this question but, in the absence of such earlier findings against the applicants, I may well have been disposed to find that, once a share of loss equal to the contribution of a partner has been claimed as a deductions, that partner has no individual interest in any further partnership loss within s.92 of the Act.
For the same reasons that the Tribunal has given for the non-deductibility of amounts claimed for purported interest on unpaid shares, the amounts claimed on deductions by the applicants for interest on purported funds borrowed for their partnership contributions and management fees are not deductible. There was no valid borrowing from the finance companies and the funds ultimately paid by them were not used for the purpose of producing assessable income. Again, the scheme adopted and the objective criteria of s.177D lead to the conclusion that s.177F of the Act disallows any deduction.
In relation to Mrs Owen there is one other matter. In the amended assessment for the year ended 30 June 1993, the respondent in addition to disallowing the claim for a share of CCILP loss, included a further sum of $75,000 as assessable income. This amount represented 50 per cent of a purported management fee of $150,000 from JOPL to Mr and Mrs Owen. During the hearing, the respondent acknowledged that the book entry which recorded this fee was as much a fiction as the bulk of the other book entries and did not constitute assessable income of Mrs Owen. I must agree. Consequently, it is appropriate to allow an extension to the grounds of objection pursuant to s.14ZZK of the Taxation Administration Act1953 and allow such objection to the extent of excluding $75,000 from assessable income of Mrs Owen for the year ended 30 June 1993.
In relation to Mr G. Owen, adjustments to the taxable incomes assessed in the amended assessments for the years ended 30 June 1993, 1994 and 1995 appear necessary. The amounts disallowed for the claimed share of loss in the years ended 30 June 1993 and 1994 appear to be in excess of the amounts claimed as a result of unrelated deductions claimed in the returns against dividend income. The precise amounts were not made clear in the hearing and the details of a 1995 adjustment need clarification. The respondent undertook to check and rectify any errors and it is appropriate that the matter of Mr G. Owen's assessments be remitted to the respondent for reconsideration with liberty to apply to the Tribunal if there is a dispute as to the appropriate adjustment.
The final issue is the question of additional tax charged in the amended assessments issued to the applicants.   In each assessment additional tax of 25 per cent of the tax shortfall was levied plus a per annum interest component.   The additional tax was said to have been imposed under ss.223 or 226 for the 1992-year or s.226G in subsequent years.   The applicants submitted that they were somewhat innocent victims in their participation in the scheme and that the discretion under s.227 should be exercised to remit the additional tax to a much lower percentage and that the interest component should be reduced.   In relation to the interest component, the Tribunal has no jurisdiction but is prepared to recommend to the respondent that consideration be given to a reduction of the relevant rate of interest recently announced in relation to "taxation schemes".   With some reservations regarding Mrs Owen, I am prepared to accept that the applicants were somewhat naive in their participation in CCILP and were misled by Mr Bell into believing that their investment would assist in development of projects in their local area and that the deductions claimed were legitimate.   I am conscious also of the considerable expenditure incurred by them in seeking to overturn the respondent's decision in the belief, unfortunately mistaken, that they had done nothing wrong.   In the circumstances, I am prepared to exercise the discretion under s.227 of the Act to remit the additional tax being the penalty component under s.223 or under s.226G to 15 per cent of the tax shortfall.   My reservation in relation to Mrs Owen is because of her association with JOPL as a director and shareholder who should be expected to have had a greater understanding of the purported transactions.   She should have been expected to recognise the implausibility of the issues of 10,000,000 shares to CCILP and, more particularly, the issue of a similar number of shares to herself and Mr Owen.   Nevertheless, I accepted her evidence as genuine and she had little or no understanding of the transactions involved.   Consequently and notwithstanding those reservations, I am prepared to include her in the decision to remit the additional tax to 15 per cent.
I certify that the eighty-one [81] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B.H. Pascoe, Senior Member
(sgd) Catherine Thomas
          Clerk
Dates of Hearing  28—31 May 2001
Date of Decision  14 September 2001
Solicitor for the Applicant            Nil — Mr D. Bellamy, accountant
Counsel for the Respondent        Mr G. Davies qc and Mr S. Steward
Solicitor for the Respondent        Australian Government Solicitor