Parry and Commissioner of Taxation

[2004] AATA 1193

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 1193

ADMINISTRATIVE APPEALS TRIBUNAL      )

) No QT2003/288-291

TAXATION APPEALS DIVISION		)
Re		DAVID PARRY

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member K L Beddoe

Date11 November 2004  

PlaceBrisbane

Decision The Tribunal decides to affirm the decisions under review.

.          ......[Sgd]......

K L Beddoe

Senior Member

CATCHWORDS

TAXATION – Income Tax – Allowable Deductions – employee welfare fund – whether contributions allowable

Income Tax Assessment Act 1936 170, 226, 227

Taxation Administration Act 1953 s14ZZK

Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449

Scott v Commissioner of Taxation (Cth) (No 2) (1996) 40 ALJR 265

Kajewski v Commissioner of Taxation [2003] ATC 4375

Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296

REASONS FOR DECISION

11 November 2004       Senior Member K L Beddoe   

1.      The applicant objected to amended assessments of income tax for the years of income ended 30 June 1997, 1998, 1999 and 2000.

2.      Those objections were disallowed in full and the applicant made valid applications for review in this Tribunal.

3.      In relation to the year ended 30 June 1997 the notice of objection raised issues which may be summarised as follows:

(a)the additional assessable income assessed to the applicant arises from an adjustment of the net income of the Parry Family Trust by disallowance of deductions previously allowed in relation to the “Employee Welfare Fund”;

(b)there is no basis for treating the applicant as presently entitled to the adjusted net income of the trust;

(c)the amended assessment is not authorised by section 170 of the Income Tax Assessment Act 1936 (“the 1936 Act”); and

(d)Part IVA of the 1936 Act does not apply on the facts of this case.

4.      In relation to the subsequent years of income, grounds of objection in similar terms apply.  However for those years of income, the power to amend assessments is not put in issue and the distribution of net income of the Trust is not in issue.

5.      At the hearing the applicant conducted his own case and Ms Ford appeared for the respondent.

6. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the “T” documents T1 to T110.

7.Further documents were tendered and marked as exhibits as follows:

Exhibit A:      Statement of the applicant

Exhibit B:      paragraphs 1 to 33 of the applicant’s Statement of Facts and   Contentions

Exhibit C:      Copy documents relating to National Welfare Trust (New   Zealand) Ltd

Exhibit D:      section 264 documents

Exhibit E       Copy Notices of Amended Assessment (1997 and 1998)

Exhibit F:      Copies of:      Deed of Trust

Life Assurance Policy

Loan Agreement

Exhibit G:      Copy of Eurobank Account in applicant’s name

Exhibit I:        Supplementary Documents marked T111 to T173

Exhibit 3        Certificates as to fraud or evasion.

8.      Exhibit 1 is subject to an objection by the applicant as to the facts asserted therein.

9.      David Parry and Sons Consulting Services Pty Ltd (“the Trustee”) carries on business as computer consultants essentially relying on the skills of the applicant.  The business is conducted by the company for the benefit of the Parry Family Trust (“the Trust”).  The company has from time to time had another employee but the applicant is the only employee who might be described as a permanent employee.

10.     In its income tax return for the year ended 30 June 1997 the Trustee claimed a deduction for $112,000 in respect of its contributions to and establishment of an employee welfare fund (“the fund”).  I understand that the claimed amount was part of a claim for “all other expenses $313,588”, and no separate information was provided in relation to the $112,000 and the fund (T24).

11.     The Trustee’s return showed a loss of $101,813 when the respondent assessed the Trustee’s return.  The claim for deduction of $112,000 was disallowed, the net income calculated to be $12,672 and the respondent treated the applicant as being presently entitled to that amount – hence the amended assessment now in dispute.

12.     In its return of income for the year ended 30 June 1998 the Trustee claimed a deduction for a carry forward loss of $99,328 and also $250 as interest expense.

13.     On assessment of the Trustee’s 1998 return, the respondent disallowed the carry forward loss and the claim for interest expense resulting in an assessed net income of $4,840.

14.     Minutes of meeting of the Trust dated 30 June 1998 show that the applicant (in his capacity as sole director of the Trustee) resolved that the income of the Trust for the year ended 30 June 1998 be appointed as to 100% to himself.  The Trustee also resolved that should the respondent disallow any amount as a deduction or include any amount in the assessable income of the Trust, then such amount is deemed to be appointed, in effect, to the applicant (T49).

15.     That resolution satisfies me that the Trustee had not decided to accumulate income and also that no other beneficiary was presently entitled to income.

16.     In its return of income for the year ended 30 June 1999 the Trustee claimed deductions for carry forward losses of $94,738 and deductions for all other expenses of $66,712 which included $1073 for employee welfare fund expenses and interest expense of $5,500.

17.     On assessment of the Trustee’s return the respondent disallowed the claims for prior year losses and the welfare fund and interest expenses, resulting in a net income of $60,317.

18.     By a resolution dated 30 June 1999 the Trustee appointed the income of the Trust in the same terms as it had for the year ended 30 June 1998 (T75).

19.     In its return of income for the year ended 30 June 2000 the Trustee claimed deductions for prior year losses of $40,994, interest expense of $4,637 of which $3,500 is presently in issue and “all other expenses” of $198,377 of which $58,268 relates to the employee welfare fund claim.

20.     Those deductions were disallowed and the respondent assessed the net income as $90,476.

21.     On 30 June 2000 the Trustee made a further resolution in identical terms as the earlier years which had the effect of appointing the net income as adjusted to the applicant (T80).

22.     In relation to the applicant the respondent made assessments and amended assessments of his taxable income and tax payable as follows:

Year ended 30 June 1997 and 1998

(a)      original credit assessment issued 15 September 1998

(b)      amended debit assessment issued 1 November 2002

Year ended 30 June 1999

(a)      original debit assessment issued 5 April 2001

(b)      amended debit assessment issued 1 November 2002

Year ended 30 June 2000

(a)      original debit assessment issued 9 October 2000

(b)      amended debit assessment issued 1 November 2002.

23.     I accept that acting on advice from its accountants (“Harts”) the Trustee decided to set up an employee welfare fund because of perceptions about the future viability of the Medicare system.  Looked at objectively the employee welfare fund would have the effect of converting employee private expenditure on health services into expenditure incurred by the Trustee in the course of carrying on a business.  As such that is nothing more than an instance of an employer providing benefits in addition to remuneration payable to the employees.  Whether that would result in Fringe Benefits Tax being payable is not in issue before me.  The applicant’s claim that the Medicare system and levy with private health insurance schemes were put in place by 2000/2001 is contrary to the fact.

24.     The arrangements to set up the employee welfare fund had a false start in the year ended 30 June 1997 and were reorganised in the year ended 30 June 1998.

25.     It is relevant to note that the applicant relied on his accountants in the implementation of the arrangements.  He did not himself understand the arrangements.  That is understandable because there was so much smoke in both sets of arrangements that it was (and remains) very difficult to find the mirror to look into those arrangements.

26.     I also accept the applicant’s evidence that the notices of amended assessment were not served on the applicant but were served on a person said to be a nominee of Harts (but unknown to the applicant).

27.     I am satisfied that the notices of amended assessment were served on the applicant by the time he signed the respective notices of objection to those amended assessments on 20 December 2002.  I am also satisfied that the respective notices of amended assessment were addressed to the applicant at his Post Office box address which is the same address notified to this Tribunal (the post code notified to the Tribunal was incorrect).  I do not know whether the respondent did in fact serve the notices at a different address as claimed by the applicant but I accept the applicant’s evidence because of the letter from the Tax Agent’s Board dated 12 February 2002. 

28.     Accepting the respondent served the notices of amended assessment at an address other than the address on the notices of assessment, I am satisfied that nothing turns on that circumstance because the applicant signed objections against those amended assessments within 60 days of their issue.

29.     The Trustee purported to make arrangements for the establishment of the employee welfare fund in about June 1997 after taking advice from Harts and paying a fee of $12,000.

30.     In a letter of June 1997 the applicant referred to a loan application in his own name, for a loan of $100,000 from the European Industrial Bank Ltd (“Eurobank”), Apia, Western Samoa and directed that the full amount be transferred to the National Australia Bank for credit of Dresdner Finance Company Pty Ltd.

31.     Also by letter dated June 1997 the Trustee requested Dresdner Finance Co Pty Ltd to draw on its behalf a cheque for $100,000 payable to Asiaciti Trust (New Zealand) Ltd at a New Zealand address.

32.     In a further letter dated June 1997 the applicant in his role as “Advisory Trustee” of the “David Parry Employee Welfare Fund” confirmed that the $100,000 be invested in Stratford Insurance Company Ltd Life insurance policies in the name of David Lewis Parry.

33.     Document T21 is a copy of a term loan facility agreement entered into by the applicant as borrower with Eurobank for $100,000.  The applicant signed the document on 27 June 1997.  The purpose of the loan is given as “Loan to David Parry and Sons Consulting Services Pty Ltd”.  The company is shown as the third party guarantor of the loan.

34.     The accounts of the Trustee for the year ended 30 June 1997 show “Welfare expenses” $112,000 and capital contributed by the applicant of $100,000.  There is no acknowledgement of a debt to Eurobank owing by the Trustee.

35.     That is consistent with Exhibit G which is a copy of the account with Eurobank in the applicant’s name.

36.     Apparently, acting unilaterally Harts advised clients (I infer including the applicant) by letter dated 2 June 1998 that:

(a)“the welfare fund you contributed to last year has now changed trustees.  The new trustee of your welfare fund is as follows:

National Welfare Trust (New Zealand) Ltd
Christchurch Business Centre
PO Box 13689

CHRISTCHURCH   NEW ZEALAND”

(b)the letter also referred to the loan borrowed from Eurobank and stated:

“this loan has now been taken over by the following entity:

United Overseas Credit Ltd
12^th Floor Ruttonjee House
11 Duddell Street

HONG KONG”

(c)new documentation was to be signed, the interest rate adjusted, and the insurance bond had been redeemed with a new insurance bond obtained from:

European Grande Assurance SA

5 Duke of Edinburgh Avenue

Port Louis

MAURITIUS

The postal address of the company being:

12^th Floor Ruttonjee House
11 Duddell Street

HONG KONG

Steve Hart also advised his clients of the new Trustee’s charges.

37.     Exhibit F includes a document described as a deed of trust David Parry Pty Ltd Employee Welfare Fund.  The import of this exhibit is unclear but assuming it is meant to refer to the Trustee I am not satisfied the document assists me.

38.     Exhibit F also includes an extract from a “Life Insurance Policy” issued by European Grande Assurance SA.  The Schedule shows David Lewis Parry as the person assured, the policy owner as National Welfare Trust (New Zealand) Ltd, and the beneficiary as National Welfare Trust (New Zealand) Ltd with the premium of $100,000 payable by the policy owner in Mauritius.

39.     Exhibit F also includes a copy of a loan agreement dated 22 May 1998 by which the applicant in his own name borrowed $100,000 from United Overseas Credit Ltd on 7 May 1999.  There is nothing in the document to suggest that the Trustee is the borrower or that the borrowing is guaranteed by the Trustee.  That is confirmed by the documents in Exhibit C.

40.     On the basis of documents in Exhibit F, in particular I am satisfied that the Trustee as employer made claims on the David Parry Pty Ltd Employee Welfare Fund in relation to the applicant and another employee.  In light of the applicant’s evidence I am also satisfied that the Trustee reimbursed the Fund before payment of claims made on it.  That leads me to conclude that there was in fact no fund in New Zealand.

41.     Harts had erected a structure based on documents which were not intended to have any effect except to earn fees and commissions for those who purported to be conducting the various steps in the arrangements.  I agree with Ms Ford’s contention that Harts erected a “paper mirage” on behalf of its clients.

Consideration

42.     In these proceedings the applicant has the burden of proving in effect that the amended assessments notified on 1 November 2002 are excessive (section 14ZZK Taxation Administration Act 1953).

43.     The applicant admitted he was unable to show that the employee welfare fund was in fact created.  Clearly he entered into the transactions on some sort of assurance from Harts that the transactions had the effect of creating a fund.  However the documents do not lead me to that conclusion.

44.     Whether the transactions said to be evidenced by the documents constituted a sham as submitted for the respondent may be doubted.  It is difficult to characterise the documents as being intended to have an effect other than to create an employee welfare fund, when examined from the perspective of the Trustee and the applicant.

45.     I doubt that the documentation was intended to be mistaken for something else rather than what it purports to be, although it seems to be reasonable to characterise it as a false front because there is nothing of substance behind it (c.f. Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 where Lockhart J discussed the meaning of ‘sham’ at pages 453-4 as follows:

“The meaning of the word ‘sham’ has been considered in many cases.  In Scott v Commissioner of Taxation (Cth) (No 2) (1996) 40 ALJR 265 Windeyer J said (at 279):

‘On the other hand, if the scheme including the deed, was intended to be a mere façade behind which activities might be carried on which were not to be really directed to the stated purposes but to other ends, the words of the deed should be disregarded… A disguise as a real thing: it may be an elaborate and carefully prepared thing; but it is nevertheless a disguise.  The difficult and debatable philosophic form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be, and in fact use it as, merely a disguise, a façade, a sham, a false front – all these words have been metaphorically used – concealing their real transaction…’

I shall have occasion to refer again to this passage later in this judgement.  Diplock LJ described the ‘popular and pejorative word’ sham in Snook v London & West Riding Investments Ltd (at 802) in these terms:

‘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 intend to create.  But one thing, I think, is clear in legal principle, morality and the authorities … 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’.”

On page 454 he continues:

“A ‘sham’ is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be.  It is a spurious imitation, a counterfeit, a disguise or a false front.  It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not.  It is something which is false or deceptive.”

46.     So instructed, I am satisfied that on the material before me both sets of arrangements as evidenced by the documents were intended to create a façade that there was a fund called the David Parry Pty Ltd Employee Welfare Fund.

47.     As an issue of fact I am satisfied that no such fund ever existed nor was intended to exist.  It was a paper façade with nothing behind it, or as Windeyer J said in Scott’s case: “it was a mere façade behind which activities might be carried on which were not really directed to the stated purpose but to other ends, in this case the avoidance of income tax”.

48.     Being so satisfied I am also satisfied that in respect of the claimed deductions the Trustee did not incur losses or outgoings in the course of carrying on its business for the purpose of gaining or producing assessable income.  Section 51(1) of the 1936 Act (and section 8-1 of the 1997 Act) are not satisfied. 

49.     I am satisfied that the essential character of the outgoings in so far as they were incurred by the Trustee, was to create a “mirage” of deductible outgoings.  The outgoings were not incurred in the course of gaining or producing assessable income and were not incurred in carrying on business for that purpose.  Tax saving is the only reasonable explanation for incurring the outgoings and they should be characterised accordingly.

50. The 1997 and 1998 amended assessments will only be authorised by section 170 of the 1936 Act if there has been an avoidance of tax and the Tribunal is of the opinion that the avoidance of tax is due to fraud or evasion (section 170(2)(a)).

51.     The Trustee’s income tax returns did not disclose the nature of outgoings said to have been incurred in relation to the employee welfare fund.  Whether that was because the Trustee and Harts thought the claims for deductions would not stand up to scrutiny by the respondent, I am unable to say.  However, I am satisfied that where a claim for deduction of outgoings said to have been incurred is only justified by a façade of documents properly characterised as a sham, the attempted avoidance of tax is properly characterised as evasion.

52.     In coming to that conclusion I have been instructed by the dicta of Drummond J in Kajewski v Commissioner of Taxation [2003] ATC 4375 at page 4400 paragraph 111 where his Honour also referred to the judgment of Dixon J in Denver Chemical Manufacturing Company v Commissioner of Taxation (NSW) (1949) 79 CLR 296 at 313 as follows:

“Dixon J, said of the word ‘evasion’ in a statute not materially difference from s 170(2) in words applicable to this provision:

‘…I think it is unwise to attempt to define the word ‘evasion’.  The context of s210(2) shows that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information.  It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated.  An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion’.”

53.     I am satisfied that the amended assessments were authorised by paragraph 170(2)(a) of the 1936 Act.

54.     In relation to the assessment of penalties pursuant to section 226H of the 1936 Act I am satisfied on the basis of the material before me that Harts, as the tax agent, was reckless in the purported implementation of the employee welfare fund schemes.  There seems to have been a complete disregard for the consequences of each scheme for their client if only because there was never any basis in fact, on the material before me, to show that an employee welfare fund had been established.

55.     I accept that recklessness involves carelessness without regard for the consequences.  That is an apt description of the actions of Harts in lodging the Trustees income taxation returns for the relevant years.

56.     I am satisfied section 266H applies to the facts of this case in each year of income before me.

57.     I am also satisfied there are no mitigating factors which would justify a favourable exercise of discretion under sub-section 227(3) of the 1936 Act.

58.     In relation to each of the objection decisions I am satisfied that the applicant has not been able to establish that the amended assessments are excessive (section 14ZZK Taxation Administration Act 1953).

59.     For these reasons the decision under review will be affirmed.

I certify that the 59 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member K L Beddoe

Signed:   T Ritchie

Associate

Date/s of Hearing: 27 & 28 April 2004
Date of Decision: 11 November 2004 
The Applicant represented himself.
The respondent was represented by Ms Ford of counsel.