R v Agius; R v Castagna (No 11)

[2018] NSWSC 2043

Supreme Court

New South Wales

Medium Neutral Citation:	R v Agius; R v Castagna (No 11) [2018] NSWSC 2043
Hearing dates:	21 March 2018
Decision date:	22 March 2018
Jurisdiction:	Common Law - Criminal
Before:	Adamson J
Decision:	Applications for verdict by direction refused
Catchwords:	CRIMINAL LAW – practice and procedure – application for verdicts by direction – refused as question whether income was that of accused or a company a question of fact for the jury
Legislation Cited:	Criminal Code Act 1995, Sch 1, s 135.4 Income Tax Assessment Act 1936 (Cth) s 19, 260 Income Tax Assessment Act 1997 (Cth) s 6-5
Cases Cited:	Baker v Federal Commissioner of Taxation (1989) 20 ATR 798 Baker v Federal Commissioner of Taxation (1989) 20 ATR 1706 Doney v The Queen (1990) 171 CLR 207 Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185; [2003] FCAFC 15 May v O'Sullivan (1955) 92 CLR 654 Raftland Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia (2008) 238 CLR 516; [2008] HCA 21 Snook v London & West Riding Investments Ltd [1967] 2 QB 786 Tupicoff v Commissioner of Taxation (1984) 4 FCR 505
Category:	Procedural and other rulings
Parties:	Regina Robert Francis Agius Anthony Dante Castagna
Representation:	Counsel: P McGuire SC/A McGrath (Crown) P Lowe (Accused Agius) P Strickland SC/S White SC/S Callan (Accused Castagna)   Solicitors: Commonwealth Director of Public Prosecutions (Crown) David J Cohen (Accused Agius) Hazan Hollander Lawyers (Accused Castagna)
File Number(s):	2016/136935; 2016/137095

Judgment

Introduction

1. By written submissions provided on 20 March 2018 after the Court had adjourned, the accused Castagna applied for a verdict by direction on all counts, being counts 1-13 of the indictment. The application was also made on behalf of the accused Agius, who is charged with counts 1, 2 and 13, which are conspiracy counts. The trial has reached the stage, but for this application, of closing addresses as the Crown and each of the two accused have closed the evidence in their cases.

2. The accuseds’ application requires me to apply the test articulated by the High Court in May v O'Sullivan (1955) 92 CLR 654 at 658. The question is whether, at the time a no case submission is made, the accused could lawfully be convicted on the evidence as it stood at that time. This question does not involve an assessment whether the quality of the evidence is such that any verdict of guilty in respect of the counts would be unreasonable, since that would be a matter for the Court of Criminal Appeal: Doney v The Queen (1990) 171 CLR 207 at 214. The High Court said at page 214:

“It follows that, if there is evidence (even if tenuous or inherently weak or vague) which can be taken into account by the jury in its deliberations and that evidence is capable of supporting a verdict of guilty, the matter must be left to the jury for its decision. Or, to put the matter in more usual terms, a verdict of not guilty may be directed only if there is a defect in the evidence such that, taken at its highest, it will not sustain a verdict of guilty.”

The basis of the application

3. It is not necessary, for present purposes, to summarise the whole of the Crown case against both accused. It is sufficient to note that it is an important integer of the Crown case against the two accused on the conspiracy counts (counts 1, 2 and 13) and the accused Castagna on the alternative counts (3-12) that the monies paid by Macquarie Bank (Macquarie) under the consultancy agreements with Billbury Limited, a company registered in the United Kingdom (Billbury) and the accused Castagna (the Consultancy Agreements) constituted the accused Castagna’s income and not Billbury’s income.

4. Mr White SC, who appeared with Mr Strickland SC on behalf of the accused Castagna, submitted that monies paid by Macquarie to Billbury pursuant to the Consultancy Agreements for the provision of services physically performed by the accused Castagna could not, as a matter of law, amount to “income” derived by the accused Castagna. He pointed to the terms of the Consultancy Agreements, to which Macquarie, Billbury and the accused Castagna were parties, which included a term that Macquarie was to pay Billbury the amounts stipulated, together with any performance bonus paid in any given year.

5. Mr White relied on the decision of the Full Federal Court in Tupicoff v Commissioner of Taxation (1984) 4 FCR 505 (Tupicoff) in support of the proposition that, as the Consultancy Agreements provided that Macquarie was obliged to pay Billbury for the accused Castagna’s work, the monies paid by Macquarie constituted Billbury’s income and not the accused Castagna’s income, unless and until Billbury transferred the money to the accused Castagna. Mr White submitted that the relevant source of rights to the amounts paid by Macquarie were the Consultancy Agreements and that, as a matter of law, in circumstances where the Crown did not suggest that any of the Consultancy Agreements were shams, no regard could be had to anything outside the four corners of these agreements. Mr White’s submissions were adopted by Mr Lowe, who appeared on behalf of the accused Agius.

6. The Crown opposed the application. It submitted that Tupicoff was distinguishable from the present case and that the approach which I ought follow is the one approved by the Full Federal Court (Davies, Lockhart and Wilcox JJ) in Baker v Federal Commissioner of Taxation (1989) 20 ATR 1706 (Baker FFC), which dismissed an appeal from Pincus J in Baker v Federal Commissioner of Taxation (1989) 20 ATR 798 (Baker). The Crown submitted that the question whether income was that of an individual was a question of fact which was to be determined having regard to all relevant circumstances and not solely by reference to the terms of the Consultancy Agreements.

7. The Crown identified the following factual matters as germane to the issue whether the whole of the monies paid by Macquarie to Billbury constituted income of the accused Castagna:

“15   The relevant factual matrix, to establish that the accused Dr Castagna derived the income by direction and action, includes the following combination of matters:

(a)   the consultancy agreement with MBL [Macquarie] was a tripartite contract, which Dr Castagna signed as a contracting party;

(b)   the services provided to MBL were Dr Castagna’s personal skills and experience, as opposed to any skills provided by Billbury;

(c)   the initial, part-time, contract with MBL was entered into by Dr Castagna personally;

(d)   Dr Castagna provided the services to MBL;

(e)   Dr Castagna arranged and directed that payment for those services should be made to Billbury, including by directing the bank account into which the income was to be paid;

(f)   Dr Castagna was the only person who could provide those services and no other person was contemplated or could be substituted to provide those services under the consultancy agreement;

(g)   the consultancy agreement with MBL could be terminated by MBL if Dr Castagna was not available to perform the services;

(h)   there is no evidence to show Billbury carried on the business of providing any consultancy services during the relevant period;

(i)   Dr Castagna admitted in his voluntary disclosure statement that the initial draft of the contract with MBL included a non-competes clause which would prevent him personally from working in the industry, and that he personally negotiated for the removal of that clause;

(j)   the funds transferred by MBL to Billbury were transferred to IFTCO within a few days of receipt with the only deduction being a bank transaction fee rather than a profit derived from the provision of services;

(k)   Billbury earned very little or no income for financial years 1998 to 2007;

(l)   The turnover represented in the financial statements of Billbury is from interest and commission earned on loans and deposits made through financing operations, not from the provision of consulting services;

(m)   For financial years 1998 to 2000 Billbury operated at a loss. For the 2002 to 2007 financial years the company appeared to be inactive as it did not earn any income or incur any expenses and had $3 Cash at Bank;

(n)   Billbury’s Directors and Secretary is Astrolabe Limited, a Vanuatu Nominee company utilised by PKF Vanuatu. In 2008 Mr Agius was named as a Director, additionally to Astrolabe Nominees Limited. Two shares were issued in the company. One held by Astrolabe Limited and the other by Astrolabe Nominees Limited.

(o)   The financial statements indicate Billbury has no employees. The statements report the directors did not receive emoluments for their services, and there was no remuneration paid to the two employees during this time. Billbury does not appear to have any other paid employees;

(p)   Billbury is not registered for a TFN or an ABN for Australian tax purposes and has never lodged an Australian tax return;

(q)   On 22 November 2007 Mr Agius sent an email to his solicitor stating he “controlled and owned Billbury”.

(r)   On 13 February 2008 Mr Agius swore a Statutory Declaration, declaring the following:

-   he was a Director of Billbury;

-   Billbury is a foreign company for the purposes of the Australian Corporations Law;

-   Billbury is not a foreign company registered in Australia; and

-   Billbury does not carry on business in Australia.

(s)   Billbury has never reported its business activity as including providing consultancy services. Nor has it reported any income that could have been derived from providing such services.

(t)   The inference is Billbury is neither a legitimate finance company, nor a consultancy firm. Entities controlled by PKF Vanuatu employees, Astrolabe Limited and Astrolabe Nominees Limited were shareholders and office bearers of Billbury;

(u)   The lack of activity in Billbury’s accounts coupled with the fact its Director is a Nominee Vanuatu company controlled by PKF Vanuatu indicates Billbury is nothing more than a nominee company managed by PKF Vanuatu and utilised on its client’s behalf.

(v)   There is no evidence Billbury has made decisions concerning the manner in which the consultancy services would be carried out by Castagna for MBL;

(w)   Billbury was only used to receive and on-forward payments from MBL;

(x)   Billbury is described in the partnership agreement (Ex 1D-5) as an on-billing company;

(y)   No agreement setting out the terms of any arrangement between Dr Castagna and Billbury has been located, nor is any such agreement referred to in the evidence.

16.   The true nature of the arrangement is further apparent from the evidence of Mr Daniel Phillips, an Executive Director at MBL, who stated that he formed the view Dr Castagna had the appropriate skills and experience to assist MBL so he offered him a consultancy. He did not seek out a consultancy firm and ask if they had a consultant available to provide the required services. Nor did he seek out Billbury. Mr Phillips stated he only ever had dealings with Dr Castagna and no other officers of Billbury. Further he gave evidence that he had no interest in anyone from Billbury providing the services in question and that the bonus payments were quantified on the basis of Dr Castagna’s personal contributions.

17.   Further in April 2005, Dr Castagna had a conversation with his accountant Mr Nussbaum where he raised the consultancy fees received from MBL. Mr Nussbaum’s file note of this conversation states:

“Discussed consultancy fees received from Macquarie… He basically has a contract with Macquarie to provide his services”.

18.   Dr Castagna himself acknowledged that the money was derived by him in his meeting with Mr Nussbaum on 9 September 2008, discussed further below, where Dr Castagna stated that the balance of the money paid by Macquarie was paid into a retirement fund for himself.”

8. It was accepted on behalf of both accused that if I regarded the approach sanctioned in Baker as applicable in the instant case, the factual matrix identified by the Crown in the summary of evidence above would be sufficient to meet the threshold test in May v O’Sullivan referred to above.

Consideration

9. Before considering the authorities, it is significant to note that the Crown did not suggest that the Consultancy Agreements were shams. It accepted that, for an agreement to be a sham, it is necessary that all of the parties to the agreement have a common intention not to create the legal rights and obligations apparently conferred or imposed by the agreement: Snook vLondon & West Riding Investments Ltd [1967] 2 QB 786 at 802, cited with approval in Raftland Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia (2008) 238 CLR 516; [2008] HCA 21 at [148] (Kirby J).

10. In the present case, the Crown accepted that Macquarie intended to perform the Consultancy Agreements in accordance with their terms. Indeed, it was Macquarie which stipulated as a condition of accepting the accused Castagna’s services, that he nominate a corporate entity with which, in addition to the accused Castagna, Macquarie could contract. Macquarie’s commercial objective was to ensure that the accused Castagna was not regarded as its employee.

Tupicoff

11. In Tupicoff a commission agent for an insurance company, Tupicoff, resigned and entered into a new contract with the insurance company to which his family trust company was a party. According to the agreement, the trust company was responsible for selling insurance policies. It employed Tupicoff to perform the work which he had previously performed on his own account. The insurance company paid commissions to the trust company, which paid wages to Tupicoff and made distributions under the discretionary trust. The Full Federal Court dismissed an appeal by Tupicoff and found that the commissions paid to the trust company constituted income of the trust company and not income of Tupicoff. It also found the arrangement to be void as against the Commissioner of Taxation pursuant to s 260 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) on the ground that it amounted to tax avoidance.

12. The relevant finding appears from the following passages from the reasons of Beaumont J (Fisher and Jenkinson JJ agreeing) at 519-520:

“But here, whatever practical importance the parties attached to the continued participation of the taxpayer in the affairs of the company, the legal source of the company's income, in the form of remuneration or commission earned by it, was the contract of agency made between National Mutual and the company. If, in accordance with that contract, commission becomes payable to the company by National Mutual, then, at law, the operation of s 260 apart, it is income derived by the company: it is not technically income derived by the taxpayer, however instrumental he may have been in the performance of the company's contract with National Mutual.

The statements in Spratt and Peate, cited supra, may, I think, be distinguished for present purposes. These cases may well have been in point here if, say, the company in this case had purported to assign to a third party its remuneration under its contract with National Mutual. But no such question arises here. In my opinion, once it is accepted that no "sham" is involved, it must follow that the legal source of the company's income is its contract of agency with National Mutual. It further follows that no question of any attempt to assign any income can arise in the present case: on the hypothesis that there is no ‘sham’, and this hypothesis must now be accepted, the efforts of the taxpayer should be seen as acts done by the company, through the taxpayer as its agent for the purpose, in the performance of its agreement with National Mutual. From its inception, the commission was income technically derived by the company. Since, apart from the possible operation of s 260, it never was the taxpayer's income to assign, no question of his purporting to assign it can arise. It follows, in my opinion, that this submission also should be rejected.”

13. Tupicoff has been followed, including by the Full Federal Court in Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185; [2003] FCAFC 15 (Mochkin), which concerned the Income Tax Assessment Act 1997 (Cth) (the 1997 Act). The facts in Mochkin were similar to those in Tupicoff. Mochkin arranged for a company (Ledger) to be the trustee of his family trust. Ledger entered into a commission-sharing arrangement with a firm of stockbrokers (Pembroke). The Commissioner argued that the fees or commissions paid to Ledger by the various brokers ought be treated as Mochkin’s income. The Full Federal Court (Sackville J, Merkel and Kenny JJ agreeing) held at [128]-[131]:

[128]    The primary judge rejected the argument [that the money paid to Ledger was Mochkin’s income]. His Honour pointed out that the Commissioner had disavowed any suggestion that the arrangements between Ledger and the various brokers had been a sham. Ledger could have sued in its own name to recover the fees and commissions and was responsible to the broker for client defaults. It followed that fees and commissions payable pursuant to the arrangement constituted income derived by Ledger. No income was derived by the Taxpayer otherwise than as an employee of Ledger, until a determination was made to distribute income to him as a beneficiary of the relevant trust.

. . .

[130]    The Commissioner’s submissions face two obstacles, each of which, in my opinion, is fatal to their success. The first is that the findings of fact made by the primary judge are inconsistent with the contention that Ledger was a ‘‘one-person business’’. As I have explained, Ledger provided an important service to brokers that the Taxpayer himself refused to provide, that is, a guarantee of the obligations of defaulting clients. Ledger had a ‘‘team’’ of persons who provided services to clients and brokers. When the Taxpayer was absent, which was often the case after 1993, the team took orders, conducted trades and provided services to clients without reference to the Taxpayer himself. Moreover, Ledger maintained an administrative structure, including an extensive array of information technology. As Mr de Wijn said, from a factual point of view, this was not the case to assert that income paid to a corporation was in truth wholly due to the personal exertion of an individual.

[131]   Secondly, as Mr Maxwell frankly acknowledged, his submission was inconsistent with the decision of the Full Court in Tupicoff.”

Baker

14. In Baker, an accountant (Baker) advised clients on tax-avoidance schemes and charged a commission. The fees for commission were not billed as such but were the balance remaining in the accounts of two companies (S and L), which were controlled by Baker. The principal issue was whether the monies received by the companies constituted income of Baker or the companies. Pincus J found at first instance that Baker had been unable to show that the monies received by the companies, which had been the result of his own work, constituted income of the companies. His Honour found it unnecessary to consider what would have been the case had contracts for the sale of goods been entered into, which was the basis on which Baker claimed the receipts by the companies were not to be regarded as his income.

15. Of present significance, Pincus J regarded the determination of whether the monies paid to the companies were income of the companies or Baker’s income as a question of fact which was to be determined in light of all the circumstances. His Honour found that there were no contracts between the clients and Baker’s companies. This was regarded as significant in the context of the factual matrix, but not determinative. In considering the legal character of what was done, Pincus J said at 812-813:

“In determining whether it was the appellant who derived the income from the work the appellant did, it appears to me that a practical approach is required — although, here, it does not seem to matter whether or not one takes such an approach. In Arthur Murray (NSW) Pty Ltd v FCT(1965) 114 CLR 314 at 318; 9 AITR 673 ‘ at 688, the High Court said:

The ultimate inquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income.

It is true that the court had in mind, in speaking of ‘what constitutes a derivation of income’, the question of the stage at which moneys should be brought to account rather than who derived it; but I can see no reason why the ‘general understanding among practical business people of what constitutes a derivation of income’ should not be also of importance in a case of this sort. In FCT v Everett(1978) 9 ATR 211 at 230; 21 ALR 625 at 648, the question was whether a solicitor's assignment of a share in the profits of a partnership was effective to split income. The dissenting judgment of Dean J provides some guidance as to the possibility of a professional man's diverting or splitting his income — although his Honour's final conclusion on the facts of that case must be taken to be incorrect. His Honour said:

‘The reality and the substance of the matter was that, notwithstanding the effect of the deed of assignment, the relevant part of the taxpayer's share of profits was and remained income derived by means of his own exertion, being part of his earnings derived from his professional activities, and did not constitute the income of income-producing property or income of a trust estate . . .’

It is an important aspect of the appellant's case that the income earned by the means analysed above is to be sharply distinguished from his ordinary professional income. As to the latter, it would seem clear that if he simply directed his clients to pay fees to his company rather than to him, he would nevertheless be taxable. It was argued that the company earned the income in the first place, having become entitled to it under contracts for sale and the like. There were no such contracts, and the entitlement arose, in my opinion, under contracts made by the appellant himself. The sums paid to Serula were paid under that agreement, the true consideration being the work the appellant did.”

16. The Full Court in Baker FFC decided that Pincus J had correctly found that the case turned on what were, essentially, questions of fact. They found that there was ample evidence to justify the conclusion that the companies were Baker’s agents rather than the other way around. The Full Court did not disturb the primary judge’s finding that all relevant activities which led to the derivation of the income were carried out by Baker himself. The Full Court narrated the relevant facts and concluded, at 1711:

“Those facts are the elements in the matrix of facts to which regard must be had in determining who in truth derived the income. When those elements are viewed in the context of all the facts, his Honour was plainly right in concluding that it was the appellant who in truth derived the relevant income.”

17. Neither Pincus J nor the Full Court in Baker was referred to Tupicoff, a case which was decided five years earlier. However, the facts of Baker were so different from Tupicoff that this is understandable. In Tupicoff the relationship between the individual and the trust company which contracted with the insurance company had been established as a matter of contract and trust law. The individual was an employee of the trust company and had no right to receive the commissions from the insurance company, even though his work was what had generated them. The legal relationships between the relevant parties were well-documented and clearly established in Tupicoff. In Baker, the documentary evidence was unreliable, some of it was manufactured and the oral evidence was not accepted.

The present case

18. Tupicoff and Baker were decided by reference to the 1936 Act and, relevantly, s 19. The relevant provision relating to income in the 1997 Act, which applies to the present case, is s 6-5, which provides, relevantly, that assessable income includes ordinary income derived directly or indirectly from all sources. I do not consider the differences between the sections to be material in the present case. Indeed, the reliance by the accused on Tupicoff and the Crown on Baker indicates that the parties do not consider the legislative change to be presently significant.

19. In the present case, the relevant agreements, the Consultancy Agreements, were tripartite agreements. The accused Castagna nominated Billbury as the company which would also be a party to the Consultancy Agreements. Unlike in Tupicoff, there was no evidence by way of enforceable legal documentation of the relationship between Billbury and the accused Castagna. Although Billbury had a primary right to be paid for the accused Castagna’s services, I do not accept the submission that the accused Castagna would not have had a right to sue for monies owing to him by Macquarie if Billbury did not. After all, he had privity of contract with Macquarie for which he was physically performing work. In the present case, the evidence is capable of establishing that Billbury contributed nothing of value to the Consultancy Agreements or their performance. Although it undertook various obligations under the Consultancy Agreements, it had no assets (according to the accounts supplied to Macquarie) such as would render Billbury’s promises valuable or provide Macquarie with a remedy of damages for their breach. The accused Castagna performed all the work; he had an office in Macquarie; Macquarie paid money into a bank account nominated by the accused Castagna. Billbury, on one view of the evidence, was merely the conduit through which money passed at the accused Castagna’s direction. On the admissions of the accused Castagna, Billbury retained none of the amounts paid by Macquarie under the Consultancy Agreements for itself. All monies paid by Macquarie were either paid straight to the accused Castagna or paid to another account for his benefit.

20. I regard Tupicoff as factually distinguishable from the present case in a number of respects. Of significance is the documentation which establishes the legal relationship between the insurance company, the trust company, Tupicoff as employee and the structure of the trust company, which held assets and took out insurance. While the facts of the present case are not similar to Baker, where there were found to be no agreements in place to provide a legal justification for the payments by clients to Baker’s companies, I consider the statements of principle in Baker and Baker FFC to be applicable in the instant case. As their Honours said, the question of whether the income was that of the individual (in this case, the accused Castagna) or the company (in this case, Billbury) is to be determined by reference to the whole factual matrix. As such, it is a question for the jury as the tribunal of fact. Having regard to Mr White’s acceptance that, if the question is a factual rather than a legal one, there is sufficient evidence for the matter to be left to the jury, it is not necessary to analyse further the evidence relied upon by the Crown in support of its case on this question.

21. Mr Lowe also relied on s 135.4 of Schedule 1 to the Criminal Code Act 1995 (Cth) (the Criminal Code) which provides for the offence which forms the basis of counts 1 and 2. He referred me to s 135.4(13) which provides that a court may dismiss a charge of an offence against this section “if the court thinks that the interests of justice require the court to do so”. He did not specify any matters in addition to those referred to above as being relevant to an assessment of “the interests of justice”. Where it would be open to the jury to be satisfied, taking the evidence at its highest, of the Crown case on these counts, I do not regard it as being in the interests of justice to dismiss the charges. The determination of the guilt or innocence of the accused of these charges is a matter which should be left to the jury, for the reasons given above.

22. For the foregoing reasons the applications for directed verdicts of acquittal made on behalf of both accused are refused.

Proposed directions to the jury

23. I note for completeness that the Crown proposed that I give certain directions to the jury about the relevant tax law in the form of a written document that was marked MFI 25. The accused Castagna proposed an alternative, which was marked MFI 30. I rejected the proposed [18] and [19] of MFI 30 since it amounted, in my view, to a direction to the jury (along the lines of the submissions made by the accused Castagna which are referred to above) that they should acquit the accused Castagna and did not correspond with the law. There was a debate about the wording of certain directions. While the tax directions need to be finalised before the summing up I do not regard it as necessary that they be finalised before closing addresses.

Order

24. I make the following order:

1. Refuse the applications of each accused for verdicts by direction.

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Decision last updated: 06 March 2019