Player and Anor and Commissioner of Taxation
[2008] AATA 274
•4 April 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 274
ADMINISTRATIVE APPEALS TRIBUNAL )
) No WT200400499 ) WT200400500
TAXATION APPEALS DIVISION ) Re ERIC PLAYER
PETER ALAN CUNNINGApplicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date4 April 2008
PlacePerth
Decision The Tribunal affirms the decisions under review. ............[sgd Mr A Sweidan]..............
Senior Member
CATCHWORDS
Income Tax – “IPF 98” project – deductions claimed for “franchise expenses” – whether deductions allowable – whether anti-avoidance provisions apply
LEGISLATION
Income Tax Assessment Act 1936 – s51(1) – Part IVA
CASES
Amalgamated Zinc (de Bavay’s) Ltd v FCT (1935) CLR 295 at 309
Australian Trade Commission v Disktravel [1999] FCA 48
Clowes v FCT (1954) 91 CLR 209 at 218Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [47]-[50]
Commissioner of Taxation v Sleight (2004) 136 FCR 211
Commissioner of Taxation v Lau (1984) 6 FCR 202
Commissioner of Taxation v Emmakell (1988) 22 FCR 157
Commissioner of Taxation v Cooke (2004) 55 ATR 183
Enviro Systems Renewable Resources Pty Ltd v ASIC (2001) 80 SASR 1 at [36], [43], [44]Eastern Nitrogen Ltd v FCT (2001) 108 FCR 27
FCT v Consolidated Press Holdings (2001) 207 CLR 235 [95]
FCT v Cooke (2004) 55 ATR 183 at [88].
FCT v Hart (2004) 217 CLR 216FCT v Spotless Services Ltd (1996) 186 CLR 404
FCT vPeabody (1994) 181 CLR 359 at 383.
Ferguson v FCT (1979) 26 ALR 307 at 311Fletcher v Commissioner of Taxation (1991) 173 CLR 1
Hope v The Council of the City of Bathurst (1980) 144 CLR 1
Milne v FCT (1976) 133 CLR 526 at 535
Madison Pacific Property Management & Ors v Australian Securities Commission (1999) 30 Pty Ltd and Ors v Australian Trade Commission [1998] AATA 11Puzey v Commissioner of Taxation (2003) 131 FCR 244 at [46]-[49]
Ronpibon Tin NL v FCT (1949) 78 CLR 47
Travel Vision International Pty Ltd and Ors v Australian Trade Commission [1998] AATA 11
Ure v Commissioner of Taxation (1981) 34 ALR 237
Vincent v FCT (2002) 124 FCR 350 at [64], [65] and [67]REASONS FOR DECISION
4 April 2008 Mr A Sweidan, Senior Member Background and Issues
Background
1. The applicants claim to be entitled to income tax deductions (the claimed deductions) for expenses they incurred as franchisees of IPF Finance Corporation Ltd (IPF) in the IPF 98 Project (a reference in these reasons to the “IPF 98 Project” is to the proposal contained in the IPF 98 Information Memorandum (IM) and the arrangements effected by the Licence Agreements, Franchise Agreement, Management Agreement, Loan Deed and Indemnity Agreement considered below and matters incidental to those arrangements). The claimed deductions and the tax benefits and cash savings derived are set out in Appendix A to these reasons.
Issues
2. The issues in these proceedings are:
(a)in each of the applications whether the claimed deductions are allowable under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997);
(b)if the claimed deductions are allowable under section 8-1, whether the applicants obtained tax benefits in connection with a scheme to which Part IVA of the ITAA 1936 applies.
Summary Of Position – IPF 97 and 98
3. The financial products relevant to the IPF 98 Project are different to those involved in the IPF 97 Project which was the subject of concurrent applications to the Tribunal, being application numbers WT2004/297 and 299 to 300, WT2001/3146 and WT2004/257 the decisions in which are being delivered concurrently with this decision, the matters having been heard together. Otherwise, the arrangements effecting the various agreements constituting the two projects were substantially identical. That was reflected in the parties’ approach to the applications in the Tribunal concerning the IPF 98 Project. Much of the evidence adduced in the IPF 97 Project applications was (and was treated by the parties as being) relevant to the IPF 98 Project applications. Both parties accept that the same legal issues arise in the two sets of applications. Consequently, many of the Tribunal’s findings in the IPF 97 Project applications are relevant to the Tribunal’s findings for the IPF 98 Project.
4. The Tribunal will not repeat it’s findings in the IPF 97 Project applications in these reasons. Rather, these reasons will cross-reference to the IPF 97 Project decision and the two decisions should be read together. The abbreviations used in the IPF 97 decision are adopted in this decision.
Products
5. The various companies involved in the IPF 98 Project and the IPF 97 Project were all associates. The additional company involved in the IPF 98 project was Advanced Commission Systems Pty Ltd (ACS). The other corporations involved are detailed in the IPF 97 Project decision.
6. The products to be marketed by the IPF 98 franchisees are identified in the IM as the Vendor Finance and the Commission Finance Products. They are barely described in the IM at pages 4 and 6 (annexure “PAC 7” to the affidavit of Mr Cunning; the affidavit is referred to in this decision as Cunning Ex A1). The Franchise Agreement described the products the following terms:-
“Products” “means the financial services and products provided by the Franchisor more particularly known as the Vendor Finance Products and the Commission Finance Products more particularly described in Item 6 of the Schedule as follows:
“Item 6 –The Products:
VENDOR FINANCE PRODUCTS
These products are designed to provide finance to vendors of retail and wholesale products to enable them to establish credit and finance facilities for their clients under their own badge name.
COMMISSION FINANCE PRODUCTS
This product provides finance for commission based businesses to enable prepayment of commissions to their employees and agents and other third parties.”
7. The Commission Finance Product was a product developed by ACS. Mr Leunig gives some evidence as to the development of the product and the relationship between ACS and the IPF Group in his affidavit sworn 19 October 2005 (the affidavit is referred to in this decision as Leunig Ex A3).
8. Remarkably, in the Tribunal’s view, no direct evidence was given by Mr Leunig or any witness for the applicants about the nature of the Vendor Finance Product – the actual product, its development, how it was to be marketed, whether it had been previously marketed and if so, when and how, the basis for projections concerning franchisee income from the product in the IM and how it was proposed to develop a market for the product remain a mystery.
9. Further, Mr Leunig gave no evidence of any activity in relation to the Vendor Finance Product after about October 1998. At [57] of Leunig Ex A3, he suggested that in late 1998 and early 1999 flyers advertising ACS and Vendor Finance were distributed to financial intermediaries. He produced only one such flyer (“KBL 41”). That flyer only concerned ACS, was undated and made no reference to IPF Finance or any other IPF entity. The lack of any reference to IPF Finance suggests that the flyer may have been produced earlier than 30 June 1998 as, according to the agreements for the IPF 98 Project, IPF Finance was to provide the ACS product to real estate agents.
10. For the reasons set out in the Tribunal’s decision concerning the IPF 97 Project, Mr Leunig’s evidence in the IPF 98 Project applications is only accepted where it was corroborated by a contemporaneous document or related to a matter that was not contentious or was an admission against the interests of the applicants. Otherwise his evidence carries no weight. His evidence that there were flyers distributed concerning the Vendor Finance Product is rejected, especially in the light of the matters referred to in the Tribunal’s decision in IPF 97.
11. There is also a reference to Vendor Finance in the notes for meeting produced by Mr Player, annexure “EJRP 13”/173 to Ex A2. There is no evidence concerning who prepared the notes. No weight can be given by the Tribunal to any statement in the notes in the absence of evidence as to their authorship and the basis upon which they were prepared. There is no evidence to substantiate the statement that Vendor Finance was “well placed to be a very profitable, volume high…”. There is no evidence of any transaction undertaken in relation to the Vendor Finance Product (whatever it may have been) and no accounting record indicating any trading activity.
12. The clear inference is that there was no specific Vendor Finance Product and that the references to the product were included in the IM to give the IPF 98 Project the appearance of greater substance than was the reality. The Tribunal also finds that there was no activity involving the Product after the commencement of the Project.
13. The applicants made no enquiries concerning the nature of the Vendor Finance Product. It is to be inferred that had they done so they would have discovered that the product was no more than an idea for which there was no established market and in respect of which no steps had been taken to develop or market the product.
14. The financial information concerning ACS examined by respondent’s expert witness Mr Dawson indicated that for the year ended 30 June 1998 the company’s revenue was negligible. For the year ended 30 June 1999, the profit and loss statement showed income of $33,735 and a loss of $3,900. There were no payments to franchisees identified (Dawson, Ex R9 at [10]).
15. Not surprisingly, Mr Dawson stated that he was not able to determine from the documents the name of the business or entity that provided the Vendor Finance Product (Dawson, Ex R9 at [11]).
16. Mr Dawson also noted that the 1998 balance sheet for CCF showed the provision of loan finance to franchisees for the payment of royalty and management fees sourced from a Retail Management Services Trust loan: (Dawson, Ex R9 at [10] and [11]).
17. Mr Leunig gave evidence at [39] to [47] of Leunig Ex A3 regarding the development of the Commission Finance Product. “KBL 32” (call reports) and “KBL 33”(minutes of meetings) record marketing and management activities associated with ACS up to early October 1998. The notes for a meeting produced by Mr Player and referred to above suggest that Mr Tolhurst and Mr Barsden ceased their involvement in November 1998 (Player Ex A2, “EJRP 13”/1730. There is no evidence of any activity concerning the Commission Finance Product after October 1998, apart from Mr Leunig’s assertion about the distribution of flyers Leunig Ex A3[57] and KBL41. Although no weight can be placed on the notes for meeting document for the reasons already stated, there is corroboration for the statement concerning Mr Tolhurst and Mr Barsden in the documents produced by Mr Leunig and in particular, in the absence of any activity concerning ACS or the Commission Finance Product after October 1998.
THE IPF 98 PROJECT DOCUMENTS
IM (“EJRP 4” and “PAC 7”)
18. IPF issued a Business Opportunity Information Memorandum for 1998 and marketed the franchises through Chambers Investment Planners.
19. The front sheet of the IM describes the content as a “Business Opportunity”, and a “Finance Business Franchise”. “The Franchise Offer” is described at page 7 of the 1998 IM in similar terms to that set out in the IM for the IPF 97 Project. The difference in wording is highlighted in the passage below:-
“IPF Finance Corporation Ltd (
“the Franchisor”) is granting up to nine hundred and fifty (950) franchises, each for a ten year period.
Each Franchise will be granted an exclusive geographic area and will operate in the marketing offinancial services within the badged products and services of the FranchisorVendor Finance products and Commission Finance products available from the Franchisor.
The Franchisor will provide a full service to the Franchisees to assist them to develop and maintain their business.
These include, but are not limited to, the Franchise System,computer software, licensing and representative requirements, accounting and financial control, training and marketing. These are provided as a service to benefit and assist the Franchisee.”
20. The IM further states at page 16 that:
“At the date of this Information Memorandum the Franchisor has issued 720 Franchises to market Insurance Premium Finance, Easyrent and Mortgages Direct products. This current granting of 950 Franchises is to market Vendor Finance products and Commission Finance products and is separate and distinct in all respects from previously issued Franchises and their products and services.”
21. The “Summary of Franchise Offer” in the IM contains no information about the nature of the franchisees rights. The difference in wording to the summary in the IM for the IPF 97 Project is highlighted in the passage below from page 4:
·“
IPF Finance Corporation Ltd has identified and operates in three strategic and profitable financial service markets and is now granting exclusive Franchise rights to market these financial services to both businesses and individuals based on specific geographic locations throughout Australia.IPF Finance Corporation Ltd proposes to issue 950 Franchises to applicants to carry on a business to market and provide finance to businesses in the niche market areas of Vendor Finance products and Commission Finance products throughout Australia to continue the penetration to increase the loan portfolio and provide the opportunity to further develop and expand IPF Finance Corporation Ltd nationally.·IPF Finance Corporation Ltd will provide finance for corporations who wish to badge their own finance products for their customers under their own name. These finance products are in demand by vendors and businesses who wish to provide a user friendly finance facility under their own badged name to facilitate their sales and create brand loyalty to their business and products.
[Advanced Commisions System Pty Ltd is given as an example of the Commission Finance product].
·The Franchises have been structured so that the Franchisees have the opportunity to elect to either have their Franchise area managed by a Professional Manager or manage it themselves.
·The first year’s expense for each franchise under management is $32,000, followed by annual fees, based on the gross revenue of each Franchise.
·A medium term business loan of up to $20,000 at an interest rate of 7% per annum,
secured by the Franchise and repayable from the net profits of the Franchise business is available forsubject to adequate security, is available for approved Franchisees.·
The Loan Insurance FeeA Loan Indemnity facility is available which provides the Franchisee with aninsurance policyIndemnity Agreement which will indemnify the Franchisee against loan principalrepay the business loanand any accrued interest, in full, should the Franchise not make sufficient net profit to repay the loan balance by the end of the Franchise Agreement. The Loan Indemnity facility does not abrogate or reduce the obligation of the Franchisee to repay the business loan taken out by the Franchisee.
·The loan is repayable from the net profit of the Franchise business and loan insurance is available.·If the business loan option is used, the Franchisee is required to pay $12,000 of the first year’s Franchise expenses at the time of application. (This includes $200 for the grant of the Franchise, $375 for legal documentation and stamp duty and
$625$425 LoanInsuranceIndemnity Fee).·A short term credit facility of $10,000 may also be made to approved applicants.
·Applicants wishing to proceed with this Business Opportunity, should read this Information Memorandum and consult with their professional adviser before completing
and then completethe Application Form attached and forwarding it to the Franchisor.”
22. The IM at pages 10 to 11 contained “Estimated Returns to the Franchisee” on a pre-tax basis from a franchise operated for a 10 year period. No explanation of the projections or the assumptions on which they were based was included and the estimated returns are expressly disclaimed. The only information in relation to the estimated returns to the franchises were stated at page 9 of the IM as follows:
“The Income and Expenditure estimates for the Franchiseee have been based on the business being operated for 10 years.
The estimates are based on the development of a network of intermediaries
and mortgage originators to market andto distribute the products and services.The Franchisee receives income from each financial transaction completed in their geographic franchise area.”
23. The applicants produced no evidence to support the reasonableness of the projections in the IM. An affidavit sworn by Mr Lenegan was filed but he was not called as a witness by the applicants.
24. The reports of Mr Dawson (Ex R9 at [17]) and Mr Acheson (Ex R7 p 27) in respect of the projections for the IPF 98 Project expressed views similar to those they held concerning the IPF 97 Project projections; that is, it would not have been possible to properly assess the projected returns from the IM. Mr Dawson also stated that any calculated measure of return, including an IRR, would have been meaningless.
25. The submission by the applicants that the projections in the IM were reasonable is rejected for the reasons given in the Tribunal’s decision on the IPF 97 Project. Further, the views expressed by Mr Dawson and Mr Acheson in these (IPF 98) applications were not contested by contrary opinions expressed by other experts.
The 1998 Application Form
26. The franchise application form in the IM is in similar terms to the form in the IM for the IPF 97 project. The differences in wording are highlighted in the passage below:
I, We __________________________________________________
Address ________________________________________________
(Tel) _______________________ (Fax) _____________________
hereby apply for __________ IPF Finance Corporation Ltd Franchise/s.
IPF Finance Corporation Ltd (ACN 078 250 807) will allocate franchises according to availability firstly within the State of the Applicant and thereafter according to availability within Australia.
Attached is a cheque for
$31,375.00$31,575 being the first year Franchise Royalty ($10,000), the first year Management Fee ($21,000.00)and,the Legal Costsof($375.00) and the Grant of Franchise Fee ($200).- OR-
* I/We wish to borrow $______ for the first Year Franchise Royalty and part payment of the first year Management Fee and attach a cheque for $ being the balance of the Management Fee ($ ), Loan Insurance ($625.00) and Legal Costs of ($375.00)*I wish to enter ________ IPF Business Franchises and for each Franchise, attached is a cheque for $ _________ being the deposit for ____ Franchises and I/we wish to arrange borrowings of $ ________ for the balance of the first year’s Franchise Royalty and Management Fees, Legal Fees Loan Indemnity Fees and Grant of Franchise Fee.
- AND -
* I will/will not appoint Retail Management Australia Pty. Ltd (ACN 078 250 781) to manage my Franchise business.
* I appoint ________ to manage my Franchise business.
I agree
ment and acknowledge that upon signing of this application form, a binding agreement will be deemed to have been entered into between the Applicant and IPF Finance Corporation Ltd, and furthermore, I will be bound to execute the Franchise Agreement,the Management Agreement and the Loan Agreementand any other applicable agreements, in the standard form issued. I undertake to execute and return those documents within 3 days of receipt. By signing the Power of Attorney and Appointment of Agent attached to this application I irrevocably appoint my agent and attorney to act as my agent and attorney with power to enter into and execute the Franchise Agreement, the Management Agreement and the Loan Agreement and the Indemnity Agreement (where applicable), upon the terms and conditions therein contained.”
The 1998 Franchise Agreement (“EJRP 5” and “PAC 8”)
27. The Franchise Agreement was made between IPF Finance as Franchisor and the respective Franchisee. It is for the most part in similar terms to the 1997 Franchise Agreement. Relevant provisions that are unique to the 1998 Franchise Agreement follow.
28. Recitals A to E of the 1998 Franchise Agreement are in the same terms as the 1997 Franchise Agreement except that the financial services and products are specified as :-
(1) Vendor Finance Products;
(2) Commission Finance Products.
29. Accordingly, the term “products” was defined differently. The definition is set out in paragraph 6 above.
30. The System was defined in clause 1.1.31 of the Franchise Agreement as follows:
“System means the system developed by the Franchisor involving the identification and recruitment of Clients for the Products through the use of the Computer Software and the marketing and contact with businesses, finance brokers, accountancy and law firms operating throughout Australia for the purpose of introducing those Clients to the
Financial ProvidersFranchisor who will provide the Products to those Clients.“Computer Software” means the computer software to be provided by the Franchisor to the Franchisee pursuant to Clause 8 hereto.”
Clause 8 is not helpful in elucidating the nature of the software indicating only that it is for use by the Franchisee in carrying on and operating the System.
“Clients” means those persons introduced to the Franchisor by the Franchisee for and on behalf of the Franchisor in accordance with the System and upon the terms and conditions contained in this Agreement”.
31. The absence of any reference to real estate agents in the definition of the System is indicative of how little attention was actually paid in the documentation to the nature of the Franchise Businesses that were supposedly constituted pursuant to the Franchise Agreement.
32. By clause 3.1 of the 1998 Franchise Agreement and “In consideration of the Franchisee paying the sum of $200 to the Franchisor the Franchisor hereby grants to the Franchisee and the Franchisee accepts an exclusive licence in the Territory for the Term to use the System in relation to the conduct of the Franchised Business”.
33. The Franchisees’ Entitlement was in similar terms to the Franchisees’ Entitlement clause in the 1997 Franchise Agreement, except that it did not refer to any Licence between the Franchisor and any Financial Provider. The word Franchisor was substituted for the term Financial Providers with curious results: see clause 4.2.3 where the Franchisor is to pay the Royalty to the Franchisor. Again, the lack of any real consideration of the relationships and rights and obligations created by the Franchise Agreement is obvious.
The 1998 Management Agreement (“EJRP6” and “PAC 9”)
34. The Management Agreement was made between RMA and the respective Franchisee. It was substantially identical to the Management Agreement for the IPF 97 Project. The relevant provisions of the 1998 Management Agreement that are unique follow.
35. The Franchisor was not a party to the 1998 Management Agreement but Recital F recorded that the Franchisor had approved the appointment of the Manager to manage the Franchised Business on behalf of the Franchisee. It was also recited at Recital A that the Franchisor marketed and provided the Vendor Finance Products and the Commission Finance Products.
36. Under clause 4, the management fee changed for the second and subsequent years of the term. The Franchisee was to pay to the Manager the management fee of $21,000 for the first year of the Term in advance within 14 days of the Commencement Date. For the subsequent years of the Term, the annual management fee was the amount specified in Item 3 of the Schedule to be paid annually. The Franchisee could elect in the second or any subsequent year of the Term to pay the management fee in arrears in an amount equal to 20% of the Franchisee’s Entitlement for the preceding year. If the Franchisee elected to pay in this way, to the extent that his Franchisee’s Entitlement for the preceding year was insufficient to pay the whole or part of the management fee, then the unpaid amount was to be carried forward as a debt due to the Manager to the next year and shall be deducted from the Franchisee’s Entitlement for the next year and each subsequent year until all outstanding amounts were repaid in full.
37. The “Management Plan” was formulated differently. Item 4 provided that:
“ITEM:4 MANAGEMENT PLAN FOR THE FIRST TWELVE (12) MONTHS OF THE TERM (Clauses 1.10, 9.2 and 9.3)
Advertising Programme:
The Manager shall:
(1)place advertisements in national, state and regional newspapers promoting the Products on a regular basis; and
(2)issue direct advertising literature where the Manager deems it to be most effective.
Marketing Programme:
The Manager shall:
(1)review and update the computer software programs used by the Franchisee to locate the Clients for the Franchisor to market and promote the Products;
(2)establish contractual and non contractual arrangements with businesses within the Territory to assist in the identification of Clients and the general promotion of the Products within the Territory;
(3)contact its database of finance brokers and accountancy firms and businesses within the Territory to develop further business relationships to market and promote the Products;
(4)conduct seminars targeting finance brokers and accountancy firms and businesses within the Territory to promote and market the Products; and
(5)engage in such other activities in relation to the marketing of the Products as may be determined from time to time by the Manager.
Staff:
The Manager shall allocate sufficient staff who shall spend a fair and reasonable percentage of their total hours direct canvassing for Clients.”
38. A change was made to clause 9.2 of the Management Agreement. Clause 9.2 of the 1997 Management Agreement obliged the Manager to accept any recommendations or amendments suggested by the Franchisee, and plans were to be made on a six (6) month basis. The 1998 changes provided for the Management Plan to be revised:
“Not later than four (4) weeks prior to the end of every twelve (12) month period of the Term, the Manager shall submit a Management Plan for the Franchised Business for the management of the Franchised Business for the next twelve (12) month period of the Term for the approval of the Franchisee. The Manager shall use its best endeavours to accept any recommendations or amendments to the Management Plan suggested by the Franchisee unless such recommendations or amendments cannot be complied with by the Manager without there arising a breach by the Franchisee of the Franchise Agreement. [clause 9.2];
The Manager covenants and agrees that the advertising and promotional activities contained in the Management Plan for any twelve (12) month period (subsequent to the first twelve (12) month period) shall be comparable to the advertising and promotional activities contained in the Management Plant for the first twelve (12) month period as is more particularly described in Item 4 of the Schedule hereto.” [clause 9.4].
39. The 1998 Management Agreement also entitled the Franchisee to terminate if:
“10.2.1the Manager is in default of any obligation under this Agreement and such default shall have continued for a period of one (1) month after receipt by the Manager of written notice from the Franchisee specifying the default and requesting that the default be remedied.”
The 1998 Loan Deed (“EJRP 7” and “PAC 10”)
40. Franchisees were given the option of financing the first year fees that were to be paid in advance. The 1998 Loan Deed was made between CCF and the Franchisee as borrower.
41. The provisions of the 1998 Loan Deed were the same as the 1997 Loan Deed apart from cl 8 which in the 1998 Loan Deed also provided authority for the Lender to pay monies due and owing or required to be paid by the borrower pursuant to the Indemnity Agreement including the annual indemnity fee.
42. The applicants received correspondence from the Lender confirming that it had advanced the Principal Sum to IPF and the Manager, and correspondence from IPF and the Manager confirming receipt: see Player, “EJRP14”/194, 198-199 and Cunning, “PAC 15”/152-153; “PAC 18”/165.
The 1998 Indemnity Agreement (“EJRP 8” and “PAC 11”)
43. The Recitals to the 1998 Indemnity Agreement were similar to the 1997 Indemnity Agreement. The differences were as follows:-
“A.The Franchisee has entered into the Franchise Agreement and the Management Agreement in the capacity as franchisee and has entered into the Loan Agreement in the capacity as borrower.
B.The Indemnifier has agreed to indemnify the Franchisee against personal liability for part of the monies due and owing by the Franchisee in the Franchisee’s
respective capacities as franchisee under the Franchise Agreement and the Management Agreement and in the Franchisee’scapacity as borrower under the Loan Agreement.C.The parties acknowledge and agree that the purpose of this indemnity is to protect the Franchisee from liability arising under the
AgreementsLoan Agreement referred to in Recital B upon the terms and conditions hereinafter contained to the extent that the income and assets of the Franchisee’s franchised business are insufficient to meet the Franchisee’s financial commitments underthose Agreementsthat Agreement but only in circumstances where the Franchisee hasproperly carried on its franchised business in accordance with the terms of those Agreementscomplied in all respects with the terms of this Agreement.”
44. Otherwise, the terms of the 1998 Indemnity Agreement differed from the 1997 Indemnity Agreement as follows:-
(a)the Franchisee’s obligations under the Indemnity Agreement were to pay the sum of $425 to the Indemnifier in advance on or before the Commencement Date and in each subsequent year of the Term an “annual payment” being an amount equal to 1% of the balance of the principal sum due and owing by the Franchisee under the Loan Deed as determined by the Indemnifier (cl 3.1).
(b)the Indemnifier agreed to pay the Indemnified Monies owing for which written demand has been made by the Lender on the date of the expiration or sooner determination of the terms of the Loan Agreement (cl 4.3).
ENTRY INTO THE IPF 98 PROJECT
Applications and entry into the franchises
45. The IPF projects were promoted by the Chambers Group as being tax effective, as set out in the Tribunal’s decision on the IPF 97 Project. The evidence of Mr Clements, Mr Player and Mr Cunning indicated that the IPF 98 Project was promoted as being tax effective. Further, each of them was concerned with ensuring that the suggested tax benefit would be conferred. That was the primary focus of Mr Player and Mr Cunning in entering into the Project and of Mr Clements in advising on the Project.
46. The applicants deposed to entering the IPF 98 Project in the following way.
47. Mr Player stated that he entered the “Project” by signing the application form for one franchise and executing the Deed of Power of Attorney and Appointment of Agent in the IM: Player Ex A2 at [15]. He produced the following documents:
(a)a letter dated 15 June 1998 from IPF Finance confirming receipt of his application and the Power of Attorney: “EJRP10”/125;
(b)a letter dated 19 August 1998 from IPF Finance enclosing the following franchise documentation which had been stamped and signed; “EJRP9”/123;
(c)Franchise Agreement dated 29 June 1998 with IPF Finance as trustee for the IPF Unit Trust (the Franchisor) for an exclusive licence in the Territory for the Term to use the System in relation to the conduct of the Franchised Business: “EJRP5”/52;
(d)Management Agreement dated 29 June 1998 and made with RMA as Manager commissioning the Manager to carry out the Services for the Term together with other duties and obligations as detailed in the Management Plan: “ERJP6”/86;
(e)Loan Deed dated 29 June 1998 with CCF as Lender for an advance of $30,000 comprising the First Principal Sum of $20,000 and the Second Principal Sum of $10,000: “ERJP7”/105;
(f)Indemnity Agreement dated 29 June 1998 with CIA as Indemnifier for an indemnity indemnifying the Franchisee from and against all actions, proceedings, costs, claims, demands and liabilities howsoever arising against the Franchisee in respect of the Indemnified Monies: “EJRP8”/114
(g)Challenge Bank statements said to evidence the following payments:-
(i)on 15 June 1998 - $2,000;
(ii)on 25 September 1998 - $10,000 (“EJRP14”/189 and 192).
48. Mr Cunning stated that on 18 June 1998 he entered into the Project by signing the application form in the IM and executed a Deed of Power of Attorney and Appointment of Agent in the IM. Mr Cunning paid $2,000 on application for one franchise and borrowed the balance of the prepaid fees of $30,000: Cunning Ex A1 at [18], [21] and [22].
49. Mr Cunning produced the following documents:
(c)a letter dated 22 June 1998 from IPF confirming receipt of his application and the Power of Attorney: “PAC 12”/145;
(d)a letter dated 19 August 1998 from IPF enclosing the following franchise documentation which had been stamped and signed: “PAC 14”/150;
(e)Franchise Agreement dated 29 June 1998 made with IPF Finance for an exclusive licence in the Territory for the Term to use the System in relation to the conduct of the Franchised Business:”PAC 8”/74;
(f)Management Agreement undated but stamped 11 August 1998 with RMA commissioning the Manager to carry out the Services in respect of each Franchised Business for the Term together with other duties and obligations as detailed in the Management Plan: “PAC 9”/108;
(g)Loan Deed dated 29 June 1998 with CCF for an advance of $30,000 comprising the First Principal Sum of $20,000 and the Second Principal Sum of $10,000: “PAC 10”/127;
(h)Indemnity Agreement dated 29 June 1998 with CIA for an indemnity indemnifying the Franchisee from and against all actions, proceedings, costs, claims, demands and liabilities howsoever arising against the Franchisee in respect of the Indemnified Monies: “PAC 11”/136;
(i)Financial institution account transaction records (“PAC 16”/155-160) maintained by Mr Cunning and said to evidence the following payments:-
(i)on 19 June 1998 - $2,000;
(ii)on 29 September 1998 - $10,200;
(iii)on 5 August 1999 - $200;
(iv)on 25 October 2000 - $220.
Pre-entry inquiries made by the Applicants
50. Mr Player gave the following evidence in Player Ex A3 about the inquiries he made prior to entering into the IPF 98 Project:
(a)He was involved in the IPF 97 Project and decided to consider IPF 98 when it was presented to him “by my financial adviser Mr Clements from Chambers Investment Planners Pty Ltd”: [7] and [8];
(b)Mr Clements went through the structure of the Project “and informed me of the minimal changes in this project as opposed to the 1997 project”: [11];
(c)Mr Clements explained the financial products as follows: “Advanced Commissions System was explained to me by Clements to be a business which provided finance to commission based businesses, such as real estate agents. Vendor Finance was explained to me by Clements to be a business which provided finance to vendors of retail or wholesale products, such as “Myer Finance” to be used by their customers.” At the conclusion of his meeting with Mr Clements he was handed a package which contained the IM and a tax opinion from Ernst & Young: [11, [12];
(d)He met and spoke with his accountant Mr Lee about the project. He said Mr Lee was comfortable with the structure and the financial projections in the IM: [13];
(e)He did not seek any further expert advice: [15].
51. Mr Cunning gave the following evidence of his inquiries concerning the IPF 98 Project (Ex A1):
(a)Initially he sought advice from Mr Clements on salary sacrifice arrangements. Subsequently Mr Clements provided him with the IM: [11].
(b)He read the IM and obtained the opinion of a family friend and accountants. His friend “could not find anything untoward with the Project” and confirmed it “looked to be a commercially viable Project”: [13].
(c)He read the opinion from Ernst & Young in relation to the deductibility of my business expenses”: [17].
Payments made in respect of the IPF 98 Project
52. The ATO audit report on the IPF 98 Project is at T71/V2/551. The financing arrangements are dealt with at [39] (p 561) and following.
53. As with the IPF 97 Project, there was a round robin of “payments” using electronic bank transfers. The transfers involved $160,000 for royalties payable in advance and $320,000 for management fees and were effected on 1 July 1998 (see at [51] – [53] of the audit report, p 563).
54. The applicants did not challenge the fact that the round robin had occurred or the evidence in the audit report concerning the round robin.
55. The result of the round robin was that each applicant only paid $12,000 in cash - $2,000 on entry into the Project and $10,000 in repayment of the short-term loan by 30 September 1998.
Application of funds raised by the IPF 98 Project
56. The application of funds raised by the IPF 98 Project is dealt with at [54] of the audit report and following (p 563).
57. The audit report was based on the accounts for IPF Finance, RMA and CIA. The accounts did not distinguish between IPF 97 and IPF 98. However, the report records that substantial amounts were distributed to Denby Vale in 1998 and 1999 (at [58]).
Franchise Activity by the franchisees
58. Mr Player gave the following evidence with regard to his franchise activities (Player Ex A2):
(d)He applied to enter into a franchise prior to 15 June 1998 by signing the Application Form and the Deed of Power of Attorney and Appointment of Agent in the IM appointing IPF Finance as his agent and attorney to enter into and execute the Franchise Agreement, the Management Agreement, the Loan Deed and the Indemnity Agreement. He was unable to locate the completed Application Form and the Power of Attorney: [12], [15] and “EJRP5” to “EJRP 10”.
(e)By the Loan Deed he borrowed $30,000 to meet the balance of the first year royalty fee of $10,000 and the $21,000 first year management fee: “EJRP 7”/110.
(f)He paid the cash payments required under the Loan Deed and the application form in respect of his franchise in the amounts of $2,000 and $10,000. Ex A2 at [25], “EJRP 14”.
(g)He was allocated a franchise territory WA 338 comprising the suburbs of Gnangara, Guildford, Gwelup, Hazelmere, Helena Valley, Henley Brook, Hamstead Ridge, Hope Valley, Hovea, Jolimont, Martin, Merriwa in Western Australia: “EJRP 5”/83.
(h)At times he referred people who were interested in financing insurance premiums or purchasing a house or renting equipment. He had agreed with Mr Peter Jones that all clients he referred “would be automatically allocated to me regardless of which territory they were located in”: [18]. Later in giving oral evidence in respect of the IPF 97 project, Mr Player stated this conversation occurred after he had entered into the project. See paragraph 108(f) of the IPF 97 decision.
(i)He attended several franchise meetings where he was informed of progress: [21]. The meetings did not concern the position of his franchise but rather discussed the businesses of the Financial Providers and the Projects generally.
(j)He was sent reports by the manager: [24] and “EJRP 13”. Those reports were the same as the reports to which he referred in his evidence on IPF 97. The reports did not refer to his franchise but were general reports concerning the Financial Providers and the Projects. They contained no reference to the Commission Finance or Vendor Finance Products other than a fleeting reference in a summary of a franchisees’ meeting held on 10 September 1998: “EJRP 13” at p 166.
(k)He was in contact with Mr John Wells regularly. They discussed progress including how Mr Player’s franchise was going.
(l)To the date of the project’s collapse Mr Player had derived income of $3,488.34 from the project against a forecasted income of $15,544: [20] and “EJRP 1”/127-129.
59. In Ex A1, Mr Cunning stated that he undertook the following activity in respect of his franchise:
(a)He applied to enter into a franchise on about 18 June 1998 by signing the application form in the IM and the Deed of Power of Attorney and appointment of Agent in the IM appointing IPF Finance as his agent and attorney to enter into and execute the Franchise Agreement, the Management Agreement, the Loan Deed and the Indemnity Agreement. He was unable to locate a copy of the completed Application Form and the Power of Attorney: [18] and “PAC 8” – “PAC 13”.
(b)He borrowed $30,000 to meet the balance of the first year prepaid royalty fee of $10,000 and the $21,000 first year prepaid management fee: “PAC 10”/132.
(c)He paid $2,000 on application and the $10,200 due for payment on 30 September 1998: [22] and “PAC 16 and 17”.
(d)By the Franchise Agreement he was allocated franchise territory 382 comprising the suburbs of Rossmoyne and Safety Bay in Western Australia: [23] and “PAC 8”/105.
(e)He attended some franchise meetings: [25]. His recollection is that he became interested in attending these when the restructure was under consideration. The meetings did not discuss the position of his particular franchise.
(f)He was sent reports and newsletters: [25] and “PAC 20”. The reports were similar in content to those referred to by Mr Player.
(g)To the date of the project collapse he derived income of $3,488.37 from the project against a forecasted income of $15,544: [24] and “PAC 19”/167-172.
60. Mr Cunning stated that in June 2000 he was informed by IPF Finance that a restructure was planned to allow for a listing on the Australian Stock Exchange. A meeting of franchisees was held to discuss the restructure. In May 2001 he was informed that the proposed float on the Australian Stock Exchange was unsuccessful. Later that year he was informed the IPF 98 entities had been put into voluntary liquidation and were gearing up for a possible relaunch. Later again, he was informed by IPF Finance that efforts to recapitalise had been unsuccessful and that it had ceased trading. He stated that his loan was called upon and he invoked the indemnity to discharge the loan liability: [26] - [29], “PAC 21-27”.
THE FRANCHISE BUSINESSES
The System
61. As with the IPF 97 Project, the System was at the heart of the Franchise Businesses constituted by the agreements for the IPF 98 Project. Again, there was no evidence as to what constituted the System (the System, of course, being different to any system operated by ACS or IPF Finance in respect of Commission Finance).
62. The manual referred to by Mr Leunig in [58] of Leunig A3 (and see “KBL 42”) is the same manual that he referred to in relation to the IPF 97 Project. It was not a franchisee manual for the reasons submitted in relation to the IPF 97 Project. Further, it did not even refer to ACS, Commission Finance or Vendor Finance Products. The manual was not given to the applicants.
63. The computer software referred to by Mr Leunig at [54] of Leunig Ex A3 is also the same as he referred to in relation to the IPF 97 Project.
64. Neither Mr Player nor Mr Cunning were able to give any explanation of the System nor did they make any inquiries about the System and its supposed operation in their franchises.
65. The Tribunal makes the same findings regarding the System in these applications as it made in the applications on the IPF 97 Project.
Allocation of Territories
66. Mr Leunig gave the same evidence at [21] of Leunig Ex A3 concerning the allocation of Territories as he gave in relation to the IPF 97 Project.
67. As with the IPF 97 Project, 950 Territories were offered in the IPF 98 Project. There was no evidence of any prior investigation having been undertaken to establish the viability of such a large number of Territories.
68. Given the evidence concerning the operation of the Franchise Businesses by IPF Finance and RMA for the IPF 97 Project on and from 30 June 1997 (there was no attempt to conduct any of the Franchise Businesses as separate businesses) and the lack of resources available to IPF Finance and RMA to discharge their obligations under the IPF 97 Project agreements, it is to be inferred and the Tribunal finds that the number of Territories offered in the IPF 98 Project was simply a device to raise funds from a number of investors by creating a tax benefit.
69. The Tribunal makes the same findings regarding the allocation of Territories in these applications as it made in the applications on the IPF 97 Project.
The Management Plan
70. The Management Plan for the IPF 98 Project imposed significantly less onerous obligations on RMA than the initial Management Plan for the IPF 97 Project. Despite that, the only evidence proffered by the applicants concerning fulfilment of the Plan was that given by Mr Leunig at [57] of Leunig Ex A3.
71. That evidence is not accepted by the Tribunal for the reasons already stated. However, it is plain that no serious attempt was made to fulfil the requirements of the Management Plan even if the evidence is accepted.
72. It is to be inferred from the available evidence that attempts to market the Commission Finance Product effectively ended with the departure of Mr Tolhurst and Mr Barsden. Certainly, there is no evidence of the product being marketed after October 1998. That (together with the lack of evidence of any activity concerning the Vendor Finance Product) supports the Tribunal’s finding that there was no attempt made to fulfil the Management Plan.
73. The applicants made no enquiries regarding the implementation of the Management Plan. The System and the Management Plan were central to the Franchise Businesses. The applicants’ lack of any knowledge about the System and its utilisation and their failure to inquire about the implementation of the Management Plan tell against any suggestion that they were conducting their own businesses as purported by the project documents for IPF 98.
Training
74. There was no evidence that the applicants received any training concerning the conduct of the Franchise Businesses at the time they became franchisees or subsequently.
75. Mr Leunig repeated the evidence he gave about franchisee meetings in the applications concerning the IPF 97 Project.
76. The evidence about those meetings given by Mr Player and Mr Cunning and the promotional material they received concerned the IPF Group and the Projects generally. There was no material directed to their franchises (apart from their income statements) or to the conduct of the purported Franchise Businesses.
77. The Tribunal makes the same findings regarding training as it made in the applications on the IPF 97 Project.
Income received by the applicants
78. The entitlements paid to franchisees were a percentage of the proceeds from selling the Products as determined by the directors and were not calculated in accordance with the formula in the Franchise Agreement and the Licence Agreements.
79. According to the ATO audit report (T71/V2/559) at [27], [28] and [31], the source of funds for making payments to franchisees was not income derived from Clients in their Territories acquiring the Products but from sources such as loans brokered by CCF with the ANZ Bank and NAB for clients of Plantation Forestry for which CCF received a brokerage fee and interest received by CCF from Hadley Hall investors.
80. Mr Dawson at Dawson Ex R 9 [10(b)] stated that there were no payments to franchisees shown in the expenses for ACS for the year ended 30 June 1999. He does not comment in respect of the year ended 30 June 2000.
81. The Franchise Financial Statements provided to the applicants recorded the following outcomes in contrast to the gross income projected in the IM:
Year
IM
$
Player
$
Cunning
$
1999
1,793
1,421.61
1,421.61
2000
13,751
2,066.73
2,066.73
82. The fact that Mr Player and Mr Cunning received such amounts suggests, along with the audit evidence as to the source of funds, that franchisees were simply paid an equal amount of whatever funds could be found within the Chambers Group for that purpose.
Records maintained by IPF Finance and RMA
83. The evidence was that there were no procedures in existence directed to and no effort was made to record:
(a)activity undertaken for each franchised territory;
(b)Clients introduced by the Franchisees or by their Manager’s use of the System for each franchised territory;
(c)business written for the Clients by the Franchisees or by their Manager’s use of the System for each franchised territory;
(d)the amount of the entitlements of the Franchisees from the business written;
(e)the marketing and financial results for each franchise Territory.
Oral evidence of each applicant and the other witnesses
84. The project collapsed in or about early 2001: Cunning Ex A2 at [26]-[29] and “PAC21-27”.
85. The evidence of Mr Dawson and Mr Acheson is the subject of comment in the Tribunal’s decision in IPF 97.
86. Mr Clements filed affidavits only in the IPF 98 project applications but upon the witness being called, counsel for the applicants informed the Tribunal that Mr Clements evidence was now being given on the basis that it relates to both IPF matters: T383/36-45. His evidence is the subject of comment in the IPF 97 decision.
Mr Leunig
87. Mr Leunig’s evidence was that Advanced Commission System was designed by Messrs Barsden and Tolhurst and was introduced to the Chambers Group by presentation of a business plan late in 1997: T608/39-46 Leunig Ex A3[35] and KBL21. Early in 1998 the Chambers Group completed due diligence on this model and Mr Jones sought to establish a joint venture between Chambers Group and Messrs Barsden and Tolhurst, anticipated to commence on 1 April 1998: Leunig Ex A3[38] and KBL22. A facility arrangement deed was drafted and an operational manual was designed by Messrs Barsden and Tolhurst: Leunig Ex A3[43]-[44] and KBL27, 29. On 3 June 1998 a licence was entered into for the system with IPF Finance as the Franchisor: Leunig Ex A3[47] and KBL34.
88. There was no evidence that the product was marketed prior to May 1998. Nor was there evidence that the product was successfully established with any agent committed to the product. See Tp648/32-40. Mr Leunig did not deny that Want & Co in May 1998 was the first agent who agreed to use the product: Tp614/5-7 and Leunig Ex A3, KBL32/984. Mr Leunig agreed that at the end of July 1998 the volumes in relation to the marketing of the product were low and that Mr Wells was concerned. He then stated “Those concerns persisted up until November of 1998 until the end of 1998? --- Well, they would have persisted I would think until Barsden and Tolhurst were removed. They left, didn’t they, in November of 1998? --- I don’t recall the date but I know that they were removed because they weren’t providing what they had promised.”: Tp626/7-28.
89. Mr Leunig agreed that there was no evidence in his affidavit that the vendor finance product had been marketed prior to 30 June 1998: Tp648/28-30. Mr Leunig said he did not recall any vendor finance product contracts being written: Tp641/45 to Tp642/32. He also agreed that he never saw separate projections at any time for vendor finance products: Tp616/33-44.
90. Mr Leunig could not identify the System in the IPF98 Project describing it as:
“…what was it the franchisees were getting from the franchisor for payment of their royalty fees in respect of IPF98, on your understanding?---They employed the system …To market, to manage, to supply support, to seek out new business for those products.
Where do we find the system for each of those steps?---Well, the system was already there in the IPF system which was established in the ’97 project. The ’98 project is an extension of that, so you know, the infrastructure is there, there is just the opportunity for further franchisees to come on line to lend money at a profit through---
When you say “to lend money at a profit”---?---Well, that’s the fundamental basis of the business,”: Tp632/17-33.
Mr Player
91. In oral evidence about his investment in the IPF98 project, Mr Player agreed it was passive income and tax benefits that attracted him to invest in the project: Tp574/3-30. He saw it as “I’m investing in the company”: Tp593/9-10. Mr Clements explained to him the tax benefits he would get from the project deduction: Tp577/8-17. In acquiring a franchise he took option B to get the benefit of the indemnity: Tp578/16-24. Mr Player understood that he could claim a loss suffered by his franchise: Tp582/32-34.
92. Mr Player said that he took comfort in the Ernst & Young opinion because it meant he would get his deductions without challenge by the ATO: Tp579/34-43. He also discussed the opinion with Mr Lee to ensure he would get the benefit of the deduction: Tp580/4-7. Mr Player said he did not even consider it a risk that he would not get the deduction as he believed the Ernst & Young view was sound: Tp586/7-34.
93. He could not recall what Mr Clements had told him about the specifics of the business or whether the products were already being marketed: Tp580/37 to Tp581/27.
94. Mr Player agreed he had no information on which to form a view as to whether the Advanced Commission System product was going to be successful: Tp585/16-30. He agreed he knew even less about the Vendor Finance product: Tp585/41 to Tp586/5.
95. Before making application he was not provided with copies of any of the agreements he was to enter into (Tp592/35-36) and made no inquiries about the following matters:
(a)What a real estate agent would have to pay to use the product, whether any real estate agency had committed to the Advanced Commission System and whether anyone else was providing a similar product: Tp584/37 to Tp585/14;
(b)The territory to be allocated to him: Tp589/4-5;
(c)The capacity of RMA and IPF Finance to provide services to 950 new franchisees: Tp591/3-9;
(d)Who was to fund the money needed to operate the proposed Vendor Finance product: Tp591/15-34.
96. Mr Player agreed (Tp594 to Tp595) that once he had entered into the IPF 98 project:
(a)He did not receive any 6 monthly reports or any reports at all specifically about his Territory;
(b)He made no inquiries about the difference between the gross income received and the projected income;
(c)He was given no information about the transactions in his Territory and did not seek any further information about this.
97. He never made any inquiries as to how much of the income from his franchise was derived from the Advanced Commission System product and how much from the Vendor Finance product. Nor did he inquire as to whether anyone was sharing in the income from his franchise territory or that he had been charged the correct fees. See Tp583/5-28.
98. He also agreed that at meetings of franchisees there was no discussion about particular franchises and specific territories. He agreed that the only information he had annexed to his affidavit about the Commission Finance and Vendor Finance products is at Ex A2, EJRP 12/ foot of page 172 and pages 173-174. This is a document titled ‘Key Discussion Point Franchisees Meeting’ and incorporates figures for Easyrent and Insurance Premium Funding for the year to 30 June 1999, i.e. after the IPF 98 project had been on foot for a year. Mr Player agreed that by contrast with the reporting for IPF 97 products, this document contained no financial information or information about the number of contracts and the size of the loan books for the IPF 98 products. He also said that he had no recollection of being informed before this franchisees’ meeting (sometime after June 1999) about the departure of Messrs Barsden and Tolhurst and the legal problems in using these products in Victoria and New South Wales. Mr Wells had not advised him of these matters during their discussions. See Tp595 to Tp597/15-35.
Mr Cunning
99. Mr Cunning gave oral evidence that he discussed the Ernst & Young opinion with Mr Clements to understand more about Part IVA. He said the structure of the loans and the tax deductions was the way he could afford to start this sort of investment. They made it possible for him to invest at that time. See Tp535/6-29, Tp536/32-34 and Tp567/16-22.
100. He said he only expected to put the $2,000 initial payment and the $10,000 loan payment as cash into the project. He understood that the project tax deductions would produce a significant refund more than the $12,000 cash payment and he would not have to outlay any more. He also understood he would continue to get tax deductions and he could claim any loss as a deduction. The only risk to his outlay was that the deductions were not allowable. See Tp537/26-30, Tp543/29-45 and Tp553/17 to Tp554/44.
101. He did not ask to see financial information as to how IPF 97 was travelling: Tp539/15-16. His understanding of the products was limited to what was contained in the IM, he did not recall Mr Clements giving him any further explanation about the products: Tp541.
102. Mr Clements said that he thought the projections were “pretty optimistic” and the net return would have been much less after payment of the cash outlay and the loan: Tp542/27-28 and Tp542/41 to Tp543/4.
103. He did not wish to operate the franchise himself, or find referrals (he did not think he would be good at it) and wanted an income stream. He saw himself as investing in an innovative product. Tp544/1-36, Tp551/29-36 and Tp564/36-38.
104. In cross-examination he said he did not understand who the vendor finance product would be marketed to and had no understanding whether the product was already being made available by IPF Finance, he assumed the IPF 98 project was the first time it was offered. He said he did not pay attention to this product because he was attracted to the commission finance product component. However his evidence was that his knowledge of the commission finance product was no better. He had no knowledge whether any product of that kind was already being marketed. See Tp546/45 to Tp547/48.
105. He did not recall asking Mr Clements about the following:-
(a)the allocation of territories, and apart from what he was told in the application form did not know what territory he would be allocated prior to entering the project: Tp548/1-44;
(b)how the income to be allocated to him would be calculated: Tp549/1-21;
(c)any existing arrangements with real estate agents who use the products and whether commissions would be payable: Tp549/33-39;
(d)the Manager and the capacity of the Manager, but expected the manager to be competent and experienced: Tp549/16-20, 33-39 and Tp550/16-20;
(e)the system and the computer software referred to in the IM, and he had no understanding of it. He did not recall receiving any documentation such as an operation manual and he did not recall asking to look at them: Tp550/29-40, Tp552/22-48 and Tp558/28-34;
(f)the reasonableness of the management and royalty fees with respect to the projected net income: Tp551/1-14. He had only a superficial understanding of what he would get for the fees and did not recall viewing the agreements before completing the application form: Tp551/16 to Tp552/6.
106. When his income statements were received Mr Cunning made no inquiries as to:
(a)his share of income from either product;
(b)whether he was receiving all the income from his territory;
(c)the number of agents signed up or contacted in his territory.
107. Notwithstanding paragraph 25 of his affidavit, he concluded in cross-examination that there were no quarterly franchise meetings and he had received only general reports on how the IPF projects were going, and not specific to his territory. Indeed on being taken to the reports in cross-examination he agreed that the commission finance and the vendor finance products were for the most part not mentioned. See Tp561/9-18, Tp562/1 to Tp563/44 and Tp565/4-23.
Law – Tribunal’s Findings
Section 8-1 non-deductibility
Part IVA determination
Part VII penalty
108. In relation to all of the above issues the Tribunal makes the same findings as it made in the IPF 97 Project for the same reasons stated in it’s decision on IPF 97. There is no material difference between the two projects that alters the findings set out in the Tribunal’s decision on the IPF 97 Project.
APPENDIX A – CLAIMED DEDUCTIONS AND TAX SAVINGS
Eric Player: $31,000
Claimed in the income year ended 30 June 1998 in respect of his acquisition of one franchise and comprising a first year annual royalty fee of $10,000 and a first year management fee of $21,000: EJRP1, page 212.
Peter Cunning: $31,425
Claimed in the income year ended 30 June 1998 in respect of the acquisition of one franchise and comprising per franchise a first year annual royalty fee of $10,000, a first year management fee of $21,000: and an indemnity fee of $425: PAC1 pages 14 and 22.
The claimed deductions resulted in tax savings and cash benefits calculated as follows:-
Eric Player
Year
Deduction claimed
Tax saving
Cash outlays
Net cash position
1998
$31,000[1]
$13,145.41
$12,000[2]
$1,145.41
[1] Affidavit of Eric James Richard Player sworn 3 November 2005 para 5
[2] Affidavit of Eric James Richard Player sworn 3 November 2005 para 25. $2,000 was paid 15 June 1998 and $10,000 on 25 September 1998
Peter Cunning
Year
Deduction claimed
Tax saving
Cash outlays
Net cash position
1998
$31,425[3]
$14,500.73
$12,620[4]
$1,880.73
[3] Affidavit of Peter Allan Cunning sworn 13 October 2005 para 6. Note the amended assessment issued 21/2/01 disallows $31,000 not $31,425
[4] Affidavit of Peter Allan Cunning sworn 13 October 2005 para 22. $2,000 deposit was paid on 19 June 1998. $10,200 was paid on 29 September 1998, $200 on 5 August 1999 and $220 on 25 October 2000
Player: 1 licence 1998 year
Cash payments $12,000.00
Claimed deduction $31,000.00
Taxable income returned $27,157
Tax on taxable income returned $5,255.38
Medicare levy 407.35
Rebates and other credits NIL
-------------
$5,662.73
Taxable income without claimed deductions $58,157
Tax on taxable income without claimed deductions $17,935.79
Medicare levy 872.35
Rebates and other credits NIL
-------------
$18,808.14
Tax saved:
Tax without claimed deductions $18,808.14
Tax after claimed deductions $ 5,662.73
------------
$13,145.41
Tax position:
Tax saved $13,145.41
Cash payments $12,000.00
-----------
Net surplus $1,145.41
Notice of Assessment for 98 year (T4/30)
Notice of Amended Assessment for 98 year (T7/34)
Affidavit of Eric James Richard Player sworn 3 November 2005 paras 5 and 25
Cunning: 1 licence 1998 year
Cash payments $12,620.00
Claimed deduction $31,425.00
Taxable income returned $34,121
Tax on taxable income returned $7,223.14
Medicare Levy 511.81
Rebates and other credits 450.00 -------------
$7,284.95
Taxable income without claimed deductions $65,121
Tax on taxable income without claimed deductions $20,808.87
Medicare levy 976.81
Rebates and other credits NIL -------------
$21,785.68
Tax saved:
Tax without claimed deductions $21,785.68
Tax after claimed deductions $7,284.95
-------------
$14,500.73
Tax position:
Tax saved $14,500.73
Cash payments $12,620.00
-----------
Net surplus $1,880.73
Notice of Assessment for 98 year (T4/21)
Notice of Amended Assessment for 98 year (T5/23)
Notice of Amended Assessment for 98 year (T8/28)
Affidavit of Peter Alan Cunning sworn 13 October 2005 paragraph 22Decision
109. The Tribunal affirms the decisions under review.
I certify that the 109 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed: .....[sgd Mr J Lim]....................
AssociateDate/s of Hearing 16-26 April 2007 & 18 October 2007
Date of Decision 4 April 2008Counsel for the Applicant Mr M McCusker QC
Mr D Romano
Solicitor for the Applicant Wilson & Atkinson
Counsel for the Respondent Mr M Corboy SC
Ms L Price
Solicitor for the Respondent Australian Government Solicitor
0
22
0