R v Dowding & Grollo
[1999] VSC 497
•6 December 1999
SUPREME COURT OF VICTORIA
CRIMINAL JURISDICTION Do not Send for Reporting Not Restricted
No. 1420 of 1999
| THE QUEEN |
| v. |
| BRUCE IVAR DOWDING, BRUNO GORDANO GROLLO AND RINO JOHN GROLLO |
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JUDGE: | TEAGUE, J. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 23 – 27 AUGUST 1999 | |
DATE OF RULING: | 30 AUGUST 1999 | |
DATE OF REASONS | 6 DECEMBER 1999 | |
CASE MAY BE CITED AS: | THE QUEEN v. DOWDING & ORS. | |
MEDIA NEUTRAL CITATION: | [1999] VSC 497 | |
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CATCHWORDS: Expert taxation accounting witnesses – Taxation accounting events – Characterisation of opinions – Characterisation of prosecution case – Need to state the basis of opinions – Need to set out facts, documents, principles, reasoning – Accounting principles – Inappropriateness of opinions as to dishonesty.
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APPEARANCES: | Counsel | Solicitors |
For the Crown | Mr. D. Maguire and Mr. P. Sest | Commonwealth Director of Public Prosecutions |
| For the Accused | Mr. J. Judd Q.C. with Mr. Robert Heathcote of Arnold | Arnold Bloch Leibler |
HIS HONOUR:
On a pre-trial application I was asked to rule that the prosecution not be permitted to call certain expert evidence. I declined to preclude the calling of the evidence. I said that I would provide reasons later. Regrettably, Court commitments have delayed until now the provision of the reasons.
The three accused are Bruce Dowding, Bruno Grollo and Rino Grollo. They are charged with one count of conspiracy to defraud the Commonwealth contrary to Ss.86(1)(e) & 86A of the Crimes Act 1914. Bruce Dowding is charged in the alternative with two counts of false pretences contrary to ss 29A(2) of the Crimes Act 1914. On the application before me, Mr Judd QC appeared with Mr T Forrest for Dowding, and Mr Archibald QC with Mr Forrest for Rino Grollo. Mr Heathcote of Arnold Bloch Leibler represented Bruno Grollo. Mr Maguire and Mr Sest of counsel appeared for the Commonwealth Department of Public Prosecutions.
Bruno Grollo and Rino Grollo were directors of various companies, including Grofam Pty Ltd and others making up the “Grollo companies”. The main activity of the Grollo companies was the construction of buildings. One such building was the Rialto building on the corner of Collins and King Streets Melbourne. The prosecution case is focused in part on the role of the accused in the preparation and signing of, and the submission to the Commissioner of Taxation of, certain income tax returns of certain Grollo companies. Dowding is an accountant claimed to be responsible for giving certain directions with respect to those returns, and otherwise for accounting work for the Grollo companies. The Rialto building was constructed in the early 1980’s. The company responsible for construction up to 27 October 1983 was Grofam Pty Ltd., and thereafter Grollo Australia Ltd. The information contained in income tax returns lodged on behalf of Grofam Pty Ltd for the years to 30 June 1983 and 1984 was such as to indicate that it had a very low figure for assessable income in both years. It appears that information obtained by the Australian Taxation Office from other sources indicated that a substantial profit had been made on the construction of the Rialto building. The Australian Taxation Office conducted an investigation and audit. That led to proceedings being instituted before the Commonwealth Administrative Appeals Tribunal for the recovery of tax allegedly not paid. In due course there was a hearing before Olney J. Evidence was given by each of the accused. The “recovery” proceedings were eventually settled with a substantial sum being paid to the Commissioner of Taxation.
Independently of the recovery proceedings, criminal proceedings were instituted. Between 1 June 1998 and 25 February 1999, there was a committal hearing with respect to the criminal proceedings. On 1 April 1999, an indictment was filed in this Court. On 1 June 1999, the accused were arraigned and pleaded not guilty to the respective counts on the indictment. Three sets of particulars of the alleged conspiracy were prepared by the prosecution, the first in September 1995, the second in December 1997, and the third in May 1998. There were differences of some significance in the particulars. It is not necessary to dwell here on those differences or on other than paragraph 9 of the May 1998 particulars, which reads:
“9.The object of the conspiracy was sought to be achieved by, inter alia;
(i)preparing books of account, statutory accounts, statutory forms and taxation returns in respect of each of the 1983 and 1984 financial years, so as to conceal the fact that Grofam had derived income/profit in those years pursuant to the building contracts which it entered into with the Rialto joint venturers;
(ii)preparing books of account, statutory accounts, statutory forms and a taxation return for the 1983 financial year which concealed the fact that Grofam (a) had Fee Receipts of $43,414,278 and a total income of $43,533,208;
(b)had incurred expenses of $28,619,664;
(c)had made a net operating profit of $14,913,544;
(iii)preparing books of account, statutory accounts, statutory forms and a taxation return for the 1984 financial year which concealed the fact that Grofam
(a)had Fee Receipts of $87,973,718 and a total income of $88,150,678;
(b)had made a net operating profit of $11,214,506;
(iv)preparing books of account, and statutory accounts, which falsely and dishonestly reduced the net operating profit derived by Grofam in the 1983 financial year from $14,913,544 to $59,504 by inter alia;
(a)failing to account for and thereby omitting closing debtors of $4,478,127 from its income when no proper basis for such an omission existed;
(b)reducing its income by $3,621,873 as an alleged net overclaim on unexecuted works when no proper basis for such a reduction existed;
(c)falsely accounting in respect of an amount of $500,000, being a debt owed by an entity within the Lustig & Moar group of companies to L. Grollo & Co Pty Ltd and subsequently assigned to Grofam, and reducing its income by that amount when no proper basis for such a reduction existed;
(d)reducing its income by $3,500,000, being a sum transferred to Grollo Australia Pty Ltd (“Grollo Australia”), when no proper basis for such a reduction and such a transfer existed;
(e)claiming alleged deductions for “interest paid” in a total sum of $2,754,040, and thereby reducing its income by that amount, when no proper basis for such claims and such reduction existed;
(v)preparing books of account, and statutory accounts, which falsely and dishonestly reduced the net operating profit derived by Grofam in the 1984 financial year from $11,214,506 to $6,968 by inter alia failing to account for and thereby omitting trade debtors of $19,807,538 from its income when no proper basis for such an omission existed. That omission occurred after reversal entries were made in its books of account which had the effect of bringing a total sum of $8,600,000 (being the total of the sums referred to in sub-paragraphs 9(iv) (a) to (c) hereof) to account as income in this financial year which was properly to be brought to account as income in the 1983 financial year;
(vi)further, preparing taxation returns for the 1983 and 1984 financial years for Grofam which concealed the fact that, according to the books of account of Grofam, it had made a net profit in the 1983 financial year of at least $3.5 million, and had transferred that sum of $3.5 million to Grollo Australia;
(vii)further, preparing books of account, and statutory accounts, which falsely and dishonestly reduced the 1983 financial year net profit of Grofam from an identified interim surplus figure of $12,669 million to $3.5 million by, inter alia:
(a)allocating a variance between the cash receipts journal and the Grofam general ledger of approximately $2.2 million as an expense in respect of the Rialto Project when in fact the $2.2 million was not an expense of the Rialto Project;
(b)reducing its income by $3,621,873 as an alleged net overclaim on unexecuted works when no proper basis for such a reduction existed;
(c)falsely accounting in respect of an amount of $500,000, being a debt owed by an entity within the Lustig & Moar group of companies to L. Grollo & Co Pty Ltd and subsequently assigned to Grofam, and reducing its income by that amount when no proper basis for such a reduction existed;
(d)claiming alleged deductions for “interest paid” in a total sum of $2,754,040, and thereby reducing its income by that amount, when no proper basis for such claims and such reduction existed.”
The prosecution proposed to call expert evidence from Messrs Leon Maddern and Raymond Conwell. Leon Maddern provided several statements, one signed in August 1994, and two others signed in May and August 1998. There were about 80 attachments to those statements before me. According to the statements, Leon Maddern is a qualified accountant and a member of the Australian Society of Accountants. He was employed by the Australian Taxation Office for a period of 16 years until 20 August 1996, for 14 of those years in the Audit Branch. During that period he was involved in the audit and assessment of the Grollo Group of companies. He has since been employed in private accounting practice. In his statements, Leon Maddern referred extensively to the August 1994 statement of Peter Vine, a chartered accountant who commenced employment with the Grollo Group in February 1982. Raymond Conwell was a senior partner of the Victorian Tax Consulting Division of Deloitte Touche Tohmatsu. He provided one statement dated 27 August 1998. There were 18 annexures to the statement, one being a report with two attachments. My references to page numbers in the Second and Third Tables below are to the report, not the statement. Peter Vine and Leon Maddern were, but Raymond Conwell was not, cross-examined at the committal hearing. One thing is common to the statements of Peter Vine, Leon Maddern and Raymond Conwell. It is the focus on seven “taxation accounting events”, which are to be found in paragraph 9 of the particulars.
At this point I interpose three tables. The First Table is a table of cases and articles prepared for ease of reference. The Second and Third Tables are not intended to be precisely accurate. The Second Table was prepared by me to facilitate my understanding of the proposed evidence. The Third Table was prepared by me to facilitate my understanding of the documents.
First Table
| 7 AGC | Australian Guarantee Corporation v Federal Commissioner of Taxation | (1983) 15 ATR 53 |
| AGL | Federal Commissioner of Taxation v Australian Gas Light Co. | (1983) 1 ATR 105 |
| Albion | Albion Hotel Pty. Limited v Federal Commissioner of Taxation | (1965) 13 ATD 435 |
| Am. Jurisprudence | American Jurisprudence - Federal Tax Enforcement | (2d) Volume 35 |
| Arnotts | Arnotts Limited and other v Trade Practices Commission | (1900) 24 FCR 313 |
| Augustine | United States v Augustine | 189 F.2d 587 (3d Cir. 1951) |
| Batagol | Batagol v Commissioner of Taxation | (1963) 109 C.L.R. 243 |
| Ben-Odeco | Ben-Odeco Ltd. V Powlson (Inspector of Taxes) | [1978] 1 WLR 1093 |
| Blowman | F.J. Blowman Pty Ltd v Commissioner of Taxation | (1981) 147 C.L.R. 360 |
| Carden | The Commissioner of Taxes (South Australia) v The Executors Trustee and Agency Company of South Australia Limited | (1938) 63 CLR 108 |
| Clark | Clark v Ryan | (1960) 103 CLR 486 |
| Coles Myer | Coles Myer Finance Limited v Commissioner of Taxation of the Commonwealth of Australia | (1992-1993) 176 CLR 640 |
| Cooper | Mr (now Professor) Cooper – Some Observations on Tax Accounting – Australian Tax Review | (1986) ATR 221 |
| Cornelius | Cornelius & Briggs | (1988) 34 ACrimR 49 |
| Cyclone | Federal Commissioner of Taxation v Cyclone Scaffolding Pty. Ltd. | (1987) 19 ATR 674 |
| Dart | Dart Industries Inc. v The Décor Corporation Pty Ltd and another | (1992-1993) 179 CLR 101 |
| Edwards | R v Edwards and Another | [1988] VR 481 |
| Farmers | Inland Revenue Commissioner (NZ) v Farmers’ Trading Co. Ltd. | (1982) ATR 334 |
| Flood | Federal Commissioner of Taxation v James Flood Proprietary Limited | (1953) 88 CLR 492 |
| Gallagher | Gallagher v Jones (Inspector of Taxes) | (1994) Ch. 107 |
| Glass | Glass JA – Expert Evidence – Australian Bar Review | (1986) ABR 43 |
| Grey | Grey v Australian Motorists & General Insurance Co. Pty. Ltd | [1976] NSWLR 669 |
| Grismore | Grismore v Consolidated Products Co. | (1942) 5 NW Rep (2d) 646 |
| Haidley | R v Haidley and Alford | [1984] VR 229 |
| Hally | R v Hally | (1962) Qd R 214 |
| Hunter | Hunter v Chief Constable of the West Midlands Police and Others | [1982] A.C. 529 |
| R v J | R v J | (1994) 75A Crim R 522 |
| Jacobs | Jacobs v The Queen | Unreported SACCA 29/4/88 |
| Johnson | United States v Johnson | 319 U.S. 503 |
| Klein | Klein v Deputy Commissioner of Taxation, | 10 C.L.R. 1 |
| Lehmann | Taxation Law in Australia by G. Lehmann & C. Coleman. 2nd ed. | Butterworths, 1991 |
| Miller | R W Miller & Co Pty Ltd v Krupp (Australia) Pty Ltd | (1991) 34 NSWLR 129 |
| Mitchell | R v Mitchell | [1971] VR 46 |
| Murphy | Murphy v The Queen | (1988-1989)167 CLR 94 |
| Nilsen | Nilsen Development Laboratories Pty Ltd | (1980-1981) 144 CLR 616 |
| O’Donovan | O’Donovan v Vereker | (1987) 18 FCR 101 |
| Palmer | R v Palmer | (1981) 1 NSWLR 209 |
| Paric | Paric v John Holland (Constructions) Pty Ltd | (1985) 62ALR 85 |
| Parsons | Income Taxation in Australia by R. W. Parsons | Law Book Co., 1985 |
| Philip Morris | Philip Morris Ltd. V Federal Commissioner of Taxation | (1979) 38 FLR 383 |
| Potts | Potts v Miller | (1940) 64 CLR 282 |
| Quick | Quick v Stoland Pty Ltd | (1998) 157 ALR 615 |
| Rogers | Rogers v Queen | (1994) 181 C.L.R. 251 |
| Rowe | J Rowe and Son Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia | (1971) 124 CLR 421 |
| RTZ | R.T.Z. Oil and Gas Ltd. v Elliss (Inspector of Taxes) | [1987] 1 WLR 1442 |
| Skidmore | United States v Skidmore | 123 F2d 604 |
| Smith | Smith v The Queen | (1970) 121 CLR 572 |
| Stockwell | R v Stockwell | (1993) 97 Cr. App R 260 |
| Suttons | Suttons Motors (Chullora) Wholesale Pty. Ltd. v Federal Commissioner of Taxation | (1982) 13 ATR 313 |
| Walter | Deputy Commissioner of Taxation v Richard Walter Pty Ltd. | 183 C.L.R. 168 |
| Wigmore | Wigmore | (1997) Supp. Vol. VII |
The Second Table
| Orange | Red | Green | Blue | Brown | Purple | Pink |
| 9 (iv) (a) | 9 (iv) (b) | 9 (iv) (c) | 9 (iv) (d) | 9 (iv) (e) 1 | 9 (iv) (e) 2 | 9 (v) |
| 4.478,127 | 3,621,873 | 500,000 | 3,500,000 | 1,151,237 | 1,602,803 | 19,807,538 |
| Opening | ||||||
| 152 | / | |||||
| 160 | / | |||||
| 161 | / | / | ||||
| 162 | / | / | ||||
| 163>4 | / | |||||
| 182 | / | / | / | / | ||
| 183 | / | / | / | / | ||
| 184 | / | |||||
| 186 | / | / | ||||
| 191>3 | / | |||||
| 193 | / | / | ||||
| 194>5 | / | |||||
| 195>8 | / | |||||
| 198 | / | |||||
| 199 | / | / | ||||
| 200>2 | / | |||||
| 202 | / | / | / | / | / | / |
| 203>213 | / | |||||
| 207>9 | / | / | / | |||
| Vine 1 | ||||||
| 9>12 | / | / | ||||
| 12 | / | |||||
| 13>14 | / | |||||
| 14>18 | ||||||
| Vine 2 | ||||||
| 2 | / | / | / | |||
| 5>7 | / | / | ||||
| 9>10 | / | |||||
| 10 | / | |||||
| 11>13 | / | / | ||||
| 13>14 | / | / | ||||
| 14 | / | |||||
| 14>15 | / | |||||
| Maddern 1 | ||||||
| 18>21 | / | |||||
| 21 | / | |||||
| Maddern 2 | ||||||
| 9>12 | / | / | / | / | ||
| 12>14 | / | / | ||||
| 14>18 | / | |||||
| 18>31 | / | |||||
| 31>34 | / | / | ||||
| 34>43 | / | |||||
| 43>46 | / | |||||
| 46>51 | / | / | ||||
| 53>58 | / | |||||
| 59>60 | / | / | / | / | ||
| 60>63 | / | |||||
| Conwell | ||||||
| 6 (11928) | / | / | / | / | / | |
| 8 | / | / | ||||
| 9>13 | / | |||||
| 13>16 | / | |||||
| 16 | / | / | / | |||
| 16>18 | / | |||||
| 19>20 | / | |||||
| 20>23 | / | / | ||||
| 24>26 | / | / | / | |||
| 26>28 | / | |||||
| 28>29 | / | / | / |
The Third Table
| Description | POK | Open | Vine | Maddern | M p | Conwell | C p | Orange | Red | Green | Blue | Brown | Purple | Pink |
| GUT Return to 30/6/83 | 500 027 | 47 | K | J | C (e) | / | / | / | / | / | / | |||
| 7/12/83 GUT journal entry | 500 003 097 | 49 | D | U | 1/23 1/44 2/30 2/42 2/44 2/49 | E pt | 9 16 17 19 22 | / | / | / | / | |||
| 6/10/83 GUT journal entry | 500 003 110 | 50 | E | T | 1/23 2/47 | E pt | 21 | / | ||||||
| Vine h/w notes | 605 002 | 51 | J | R | 20 | D (f) | 9 | / | / | / | / | |||
| 31/8/83 L/F Pinnells | 100 264 068 001 | 53 | CH pt | 2/23 | / | |||||||||
| 6/10/83 GUT journal entry | 500 003 116 | 54 | CB pt | 2/47 | E pt | / | ||||||||
| GUT Return to 30/6/84 | 500 028 | 57 | T | K | 1/7 | / | ||||||||
| Reconstruction | 777 770 07 | 59 | CM | 2/55 | Appen 1,2,3 | 26 27 | / | |||||||
| 18/9/84 GUT journal entry | 500 003 261 | 60 | CB pt | 2/59 | E pt | 28 | / | / | ||||||
| 12/12/84 GUT journal entry | 500 003 241 | 61 | ML6 | CB pt | 2/59 | E pt | 18 | / | / | |||||
| Vine h/w notes | 607 001 | F | / | / | / | / | ||||||||
| GUT general ledger entry | 500 003 095 | G | / | |||||||||||
| RUT general ledger entry | 500 001 086 | H | / | |||||||||||
| RUT journal entries | 500 001 088 | I | / | |||||||||||
| LGS journal entry | 608 011 | ML11 | / | |||||||||||
| Return | 608 004 | ML4 | / | |||||||||||
| Return to 30/6/82 | 608 005 | ML5 | / | / | ||||||||||
| 18/9/84 GUT journal entry | 608 007 | ML7 | / | |||||||||||
| Vine h/w notes | 608 009 | ML9 | / | |||||||||||
| 13/12/84 RUT journal entry | 608 010 | ML10 | / | |||||||||||
| Journal/ledger entries | 500 001 084>8 | 1/18A | E pt | / | ||||||||||
| Journal/ledger entries | 500 003 007>95 | 1/19B | E pt | / | ||||||||||
| 11/7/83 + letters + | 800 227 010 | CD | 2/14 | 9 13 14 | / | |||||||||
| 5/8/82 letters | 800 121 001 | CE | 2/20 | / | ||||||||||
| Undated letter | 800 041 001 | CE | 2/20 | / | ||||||||||
| 6/7/82 letter | 100 454 030 001 | CF | 2/21 | 9 | / | |||||||||
| 27/10/83 Deeds | CG | 2/21 | 9 26 | / | ||||||||||
| 29/6/83 + letters + | 800 303 010 801 303 006 801 303 007 801 303 004 801 138 001 605 017 800 303 008 800 303 009 | CH | 2/23 2/27 | / | ||||||||||
| Vine h/w notes | 607 001 | CI | 2/24 2/27 | / | ||||||||||
| Balance sheets of LGC | ??? | CJ | 2/37 | 17 | / | |||||||||
| GUT journal entry | 500 003 115 | CB pt | 2/41 | E pt | 17 | / | ||||||||
| GUT journal entry | 500 003 259 | CB pt | 2/51 | |||||||||||
| GUT journal entry | 500 003 129 | CB pt | 2/56 2/57 | / | ||||||||||
| GUT journal entries | 500 003 274>7 | CB pt | 2/57 | / | ||||||||||
| GUT journal entry | 500 003 248 | CB pt | 2/57 | / | ||||||||||
| GUT journal entry | 500 003 251 | CB pt | 2/57 | / | ||||||||||
| GUT journal entries | 500 003 130>190 | CB pt | 2/58 | / | ||||||||||
| RUT entry | 500 001 021 | HUB | 2/61 | / | ||||||||||
| Vine h/w notes | 605 004 | HUB | 2/61 | / | ||||||||||
| 4 | 13 | 8 | 9 | 4 | 4 | 13 |
In the Second Table, the first column lists pages in the committal opening, and the statements of Peter Vine, Leon Maddern and the report of Raymond Conwell. The other seven columns serve to link by (/) passages on those pages to the seven taxation accounting events which are the main focus of the opinions of Leon Maddern and Raymond Conwell. For three reasons I have chosen to identify those events by colours. It is easier to mark both passages in statements and documents with a distinctive colour. It is easier to refer to what I choose to call the red event than the event under paragraph 9 (iv) (b) of the particulars. I also think that it is preferable in this context to refer to an event in a neutral way than by a description that is of either a characterisation (“overclaim”) or quantification (“$500,000”) nature. That is because the exercise of analysing each taxation accounting event at least potentially involves:
· verification, in other words that it is not a fabricated event,
· characterisation, that is, determining its true character or nature,
· allocation as to time, that is as between one financial year and another
· allocation as between entities, that is as between one person/company/entity and another, and
· quantification.
I would note that, in using terms like “taxation accounting event”, I have adapted much of what is said in the article of Cooper, which is noted in the First Table. I would also add that I considered adding a ninth column to the Second Table. That ninth column would have added page references to passages in the committal opening, and passages in the statements of Leon Maddern and Raymond Conwell which exhibit a particular aspect or approach by the prosecution which I find inappropriate. I refer to those passages that focus not on the treatment of a taxation accounting event, but on a particular aspect of the consequences of the treatment of that event. That particular aspect is what difference a correct treatment would have made to the amount of the income on which taxation would have been payable. It is not that I consider that the consequences of treatment are irrelevant. I consider that it is appropriate to address the matter of consequences, but broadly and neither with attention to specific amounts, nor with the making of the assumption that there is only one correct treatment.
Those representing the accused have attacked the approach of the prosecution, and the prosecution has defended its approach. For the accused, it is said that the wrongness of the approach of the prosecution is so fundamental that it must serve to cause me to preclude the prosecution from calling Leon Maddern and Raymond Conwell. Put shortly, it is my assessment that both the prosecution and the defence had taken inappropriate positions. On the one hand, I consider that the prosecution has sought to elevate to a level of importance a matter which is not to be so regarded. On the other hand, I consider that the defence has inappropriately sought to magnify the effect of that inappropriate elevation. In my opinion, the assessment of where the appropriate emphasis or level of importance is to be placed is to be found in some of the numerous cases, mainly in the High Court, which have been concerned with the treatment of taxation accounting events, albeit in a civil case or recovery context.
Counsel for the accused have applied to have the evidence of Leon Maddern and Raymond Conwell excluded on the grounds that it is inadmissible and irrelevant. Their main submission was that the purpose of the evidence is to establish an impermissible assessment of the taxpayers’ liability to the Commonwealth. Counsel contended that due to the way in which the prosecution had chosen to construct its case and had indicated that it proposed to prove that case, it was essential to that case to establish a “true” or “correct” tax liability, in opposition to the assessment of liability actually arrived at by the Commissioner under the statutory procedure and the review processes which followed. It was submitted that the prosecution case stands or falls on establishing this “true” or “correct” liability as an amount to which the Commonwealth was entitled, prior to identifying the ways in which it is claimed the Commonwealth was defrauded of its entitlement. Counsel identified Paragraph 9 (ii) to (v) of the Particulars as an illustration of the prosecution approach. It was put to me that, if the “correct” figure as nominated was not first established as a starting point, the conduct identified in the evidence of Leon Maddern and Raymond Conwell could have no significance, and accordingly the evidence was not admissible.
Counsel for the accused challenged the prosecution approach on a number of grounds. Firstly, it was submitted that an entitlement of the Commonwealth comes into existence exclusively under the statutory procedure. Mr Archibald outlined the key provisions of the Commonwealth legislation which establish how and when a debt to the Commonwealth is created. The provisions have been the subject of interpretation by the High Court in Klein, Batagol and Walter. What the Act and the case law establish, Mr Archibald contended, is that outside that statutory procedure, there is no entitlement. Yet, he said, the sole purpose of the evidence of Leon Maddern and Raymond Conwell is to establish by a process of “parallel synthetic assessment” that a specific amount of tax different to that actually assessed was due and payable. As such, he argued, the evidence is inadmissible. It was submitted that the opinions of Leon Maddern and Raymond Conwell as to the entitlement of the Commonwealth are irrelevant. They are inconsistent with and contradict the assessment arrived at by the Commissioner, and breach the Terms of Settlement agreed to by the parties. The prosecution, it was submitted, are unable to establish by a process outside the statute the “true” tax liability of the accused. They are thus unable by these means to prove the existence of an amount owing to the Commonwealth of which it has been defrauded.
Further to the above, it was submitted that as a consequence of s.177 of the Income Tax Assessment Act (“the Act”), the assessment of the Commissioner was final for all purposes. Under the operation of that section, so it was argued, the assessment concludes, especially when the appeal processes have been exhausted, what is and is taken always to have been the taxable income of that entity for the year in question. This section also operates to prevent the establishment of an alternative “true” liability. Mr Judd put a further argument as to the conclusiveness of the assessment made the Commissioner for the accused. He argued that the Terms of Settlement dated 22 September 1993 and 17 April 1997, signed in the former case by the Director of Public Prosecutions, finalised all tax matters between the parties. He submitted that it was a collateral attack on those Terms, and an abuse of process, to introduce evidence contradicting the assessment of the tax liability finally resolved in those Terms. He cited the authority of Rogers and Hunter in support of this contention that a litigant will be precluded from asserting a position that has been finally resolved against him in prior proceedings.
Counsel for the accused relied on O’Donovan as authority for the proposition that a magistrate, and by extension a judge or jury, cannot reach a decision about the true level of taxable income in a criminal proceeding. Yet, counsel for the accused contended, the prosecution was seeking to present the evidence of Leon Maddern and Raymond Conwell to the jury to enable them to do just that.
The prosecution, on the other hand, challenged the way that the defence sought to characterise the evidence of Leon Maddern and Raymond Conwell. They argued that it ought to be treated as expert evidence, of a usual kind appropriate to assist the jury identify and understand what the prosecution contended were overt acts, and dishonest means employed to conceal profit. The prosecution contended that, as the overt acts and dishonest means were not obvious on the face of the income tax returns, the prosecution was entitled to lead evidence from experts to assist the jury to understand the overt acts and dishonest means by which the prosecution seek to establish the existence of the conspiracy.
The prosecution took no issue with Mr Archibald’s submissions regarding the exclusivity of the assessment procedures under the Act, but denied that the evidence of Leon Maddern and Raymond Conwell was appropriately to be characterised as a “simulated assessment process” or as a process of “parallel synthetic assessment.” The prosecution argued that the calculation of the actual amount due and payable as it appears in the Particulars was part of but incidental to the proof of the conspiracy and was included merely for the sake of completeness. The prosecution argued that it was seeking only to establish that overt acts and dishonest means were employed to conceal profits on which tax might be payable.
The prosecution argued that s.177 was confined to the operation of the position of the Commissioner as opposed to the taxpayer, the purpose and policy of the section being to make it impossible for a taxpayer to challenge an assessment other than in the prescribed proceedings. This submission was supported by reference to Walter and to Blowman. It was argued that the section had no operation at all on the Director of Public Prosecutions, whose duty is separate from, and independent of, that of the Commissioner, or on a criminal proceeding as opposed to proceedings over a civil debt. It was argued further that if the section had been intended to have the far-reaching effect that counsel for the accused contended for, one would expect to see clear language to that effect. The prosecution contended that it was no part of their case to challenge the liability established by the assessment process, and that the civil tax debt remains undisturbed by these proceedings, and therefore s 177 had no application.
The prosecution argued that the Director of Public Prosecutions was not bound in the manner contended for by the Terms of Settlement. It was submitted that the two proceedings, one dealing with civil tax liability, the other with criminal conspiracy, did not deal with the same issue in the sense required for the Rogers line of authority to apply. It was argued for the prosecution that the abuse of process argument put by counsel for the accused relied on their characterisation of the evidence as a parallel assessment process, which ought not to be accepted.
The prosecution sought to distinguish O’Donovan on the grounds that it and others cases such as Edwards and Cornelius are tax minimisation scheme cases where the efficacy of the scheme was still to be resolved at the time of the criminal conspiracy charges being heard. The courts decided that the efficacy of the scheme was irrelevant to the criminal charges. It was submitted that the case currently before the court does not involve a tax minimisation scheme and is in a quite different category of cases. However the prosecution do submit that the efficacy of the overt acts and dishonest means employed to conceal profit is also irrelevant to the prosecution case, in line with these authorities. The prosecution contended that evidence supporting a dishonest intention to deprive the Commissioner of such tax as might be assessed is all that has to be proved, not that the Commissioner was in fact deceived. It was submitted that the jury was entitled to have the evidence that goes to that issue put before it.
As noted earlier, while I accept the prosecution’s submissions that there are no grounds sufficient to exclude the evidence of Leon Maddern and Raymond Conwell, I also consider that the statements of Leon Maddern and Raymond Conwell are ill-framed, and in significant respects. I would set the scene for explaining my criticisms by some general comments about expert evidence of an accounting nature. The primary function of such evidence in a case of this kind is to inform the court as to, and to make understandable, matters of terminology and methodology and prevailing standards with respect to the treatment of taxation accounting events. The leading authority as to the function and qualifications of expert witnesses generally is Clark, but it contains little of direct relevance in this context.
It is an important principle applying to all expert testimony that the expert must set out the facts upon which his opinion is based. If the expert has been misinformed, or has taken into account irrelevant matters, exposure of such and other deficiencies will be maximised if the factual basis for the opinion is presented for review. In a simple case, stating the facts will be a relatively straightforward exercise. With a medical opinion, the basic facts may consist of a few lines of history, complaints and findings on examination. This is not a simple case. Some cases may be complex in that the facts may be more difficult to state because there are different versions of what occurred, with issues arising as to credibility of witnesses. The instant case seems to me not to be complex in that way. The complexity arises in part from at least three matters. The first is the need to focus on extracts from, or entries in, a significant number of documents. Those extracts or entries are effectively facts, which are the basis for the drawing of inferences. The drawing of such inferences is a process that involves the use of reason and experience. The expert accounting is required to apply to the facts what I choose to call “accounting principles”. In the cases, a considerable number of similar expressions, as by adding words like “current”, “accepted”, and “commercial” are used. Additional complexity arises because those accounting principles need to be spelt out, preferably with the sources of the principles being stated. Additional complexity arises from the inevitable need to use specialist terminology. At times, to be reasonably comprehensible to a person other than another accountant, the terminology needs to be defined. The processes of reasoning at each stage, from the identification of the documents, through the identification of the accounting principles and of the sources of those principles, through the defining of terms as appropriate, to the ultimate conclusions, ought to be spelt out.
The process is closely comparable to that which faces a judge writing a judgment. Ideally, like a judgment, an expert accountant’s statement should set out what are seen to be relevant background facts, what are the documents that have been examined, what are seen to be the relevant extracts and entries in those documents, what are the inferences drawn from same, what are the applicable principles with sources, and what are any intermediate and ultimate conclusions drawn from the application of those principles. I would note that there are several good examples of the process being applied in judgments to which I have referred in this ruling, in the context of the appropriateness of the treatment of taxation accounting events, including Gallagher and Farmers. However, it seems to me that by far the best general judicial review of the process of preparing to give expert evidence is to be found in Arnott. In that regard, I note what is said as to identifying the facts assumed upon which the opinion is based in Arnott at 347, 348. See also Paric 87/88 and R v J at 524. I would also note what is said in Arnott as to spelling out: “the processes of reasoning”, “the premises”, “ the proper inferences or conclusions to be drawn from the facts” and “the weight to be given to certain matters” at 348, 349. Also in Arnott, there are references relevant to a subject to which I will turn shortly. That is the subject of what experts can be allowed to say as to the “ultimate issue” or “the very question which the jury have to decide”. Those references are at 347 and 350 and 351. Before turning to that subject I would note that I accept that the burden on an expert to do what I say has to be done, in a case of this kind is indeed onerous. The reason lies primarily in the need to closely analyse several taxation accounting events.
Turning to the subject of “the ultimate issue”, I would note that there is a wide range of judicial comment to be taken into account. There are plenty of comments, judicial and other, distancing the judge or other commentator from the strictness of the proposition that an expert cannot give an opinion as to the ultimate fact that the jury has to decide. See Murphy 110, Arnott at 350 and 351, Miller 130, Stockwell 265/6, and Archbold (1999) 10-66. In comments on and off the bench, Glass JA has argued that, instead of the “ultimate issue” proposition, the true rule is that no evidence can be received upon any question, the answer to which involves the application of a legal standard. As to that position see Grismore 663, Grey 675, Palmer 214, Glass 49. Examples of legal standard include: that a defendant was negligent; that a deceased lacked testamentary capacity; that the accused was provoked. A like result, but with reasons framed with reference to the “old common law rule” was arrived at in Haidley. There, the focus was on the questions of whether the accused had the specific intention required as an element of the offence, and whether a particular act was done voluntarily.
The last of the authorities in this area to which I wish to refer is Hally, a decision of Gibbs J, with which Mansfield CJ agreed. It is one on which I particularly rely. In Hally, it was accepted that it was proper for an expert witness, who had examined books of account, to give evidence as to the effect of their contents. It was not accepted that the expert could give an opinion upon the very question that the jury had to decide or any matter of legal or moral obligation. Opinions expressed by the witness that the appellant had been dishonest in the manner of keeping accounts and that he had misappropriated trust money were held to be inadmissible. I am satisfied that Leon Maddern and Raymond Conwell should not be permitted to express opinions that any or all of the accused have acted dishonestly whether by directing that accounts be prepared dishonestly or incorrectly or otherwise. But that would not preclude their expressing an opinion as to whether or not a particular treatment of a taxation accounting event was such as to be substantially correct reflex of the true position of the relevant entity.
The use of “correct” causes me concern for more than one reason. Its use may and often will convey the impression that there is only one correct treatment, and that any other treatment is incorrect. It can also be susceptible to use as a springboard for defining consequences. Relative to the taxation accounting events, the statements are framed as if the witness was responding to an examiner. The questions, and necessarily the answers to the questions, put to Raymond Conwell are the most obvious examples of the approach which I consider to be inappropriate. I consider that the appropriate approach is one based on what was said by Dixon J in Carden at 154. The “substantially correct reflex” approach has been adopted in many later cases, including Rowe 434 and 452 Farmers 351 Suttons 332 Cyclone 675. In short, the appropriate question is to ask whether the taxpayer’s treatment of the taxation accounting event was such as to provide a substantially correct reflection of the true position. By way of footnote, I would note that there has been judicial use of “correct” and “correctly” such as to indicate that the words can in some circumstances be entirely appropriate. See Albion 442 and RTZ 1450/1.
I was taken by counsel for the prosecution to quite a number of United States sources, textbook and decided cases, as to the reception of accounting evidence in prosecutions for income tax violations. On the one hand, the courts in the United States have accepted the appropriateness of receiving such evidence to explain such things as the taxpayer’s bookkeeping and to show that income tax was due. On the other hand, they have not accepted unreservedly that expert testimony can be received as to what the taxpayer’s income should have been, or what would have been the amount of tax due. See Am. Jurisprudence §151, Wigmore VII, 200§1978 Augustine 589/90, Johnson 519, Skidmore 609. In the light of my review of authorities more directly bearing on me, and particularly Hally, I consider that the approach adopted both generally and in certain cases such as Augustine is more liberal that I would regard as appropriate. I would add that I was also taken by counsel for the prosecution to a number of Australian cases as to the reception of accounting evidence in cases other than prosecutions for income tax violations. It was plain from cases like Potts, Smith, Mitchell, Jacobs and Quick that the reception of such evidence is not unusual. But a review of the circumstances of those cases otherwise served to add little to my determining where lines as to admissibility should be drawn in the instant case.
I have spent many hours working through the statements of Peter Vine, Leon Maddern and Raymond Conwell, having different purposes in doing so at different times. I found it an exercise of particular difficulty to trace, through the different statements, the particular documents that the witness was referring to relative to the particular taxation accounting event then under review. I found it necessary to use colours and a table to keep track of the documents. I also found that the only satisfactory way of linking documents to their analysis by Leon Maddern and Raymond Conwell was to take the statements in a particular sequence. I had to start with those of Peter Vine, then go to those of Leon Maddern, and finally to that of Raymond Conwell. There were, and still are, documents that I may or may not have properly placed. The use of POK references made the exercise easier. Unfortunately, while generally Leon Maddern used POK references, Raymond Conwell did not.
There are other deficiencies in the statement of Leon Maddern and the report of Raymond Conwell. There is not in either a comprehensive statement of basic principles. That is not unusual, but this is not a usual case. There is not a reference to a source from which those basic principles could be found. That is not unusual either, but in a case like the instant one, it seems to me that it is highly desirable that there should be one.
I will come back to what I regard as one particularly significant deficiency, namely the relative absence of references in the statement and report to statutes, standards, decided cases, and other sources. I want first to dwell on the subject of evidence as to the basics of accounting. I have no doubt that jurors will have trouble even with many aspects of basic accounting principles and practice, such as double-entry accounting, accrual accounting, and concepts such as “prudence” “consistency” and “matching”. Unless an order permitting same is made, the jury will not have at land, as I have, the CCH Macquarie Dictionary of Accounting. My concerns as to the limitations of a jury have only been heightened by what was revealed earlier this year in the AIJA’s study on “Australian Judicial Perspectives on Expert Evidence”. Not surprisingly, at least to me, judges nominated accounting and psychiatry as the most difficult areas for jurors to deal with, and accounting evidence as the most difficult for the judge to comprehend. In my view there is a need to explain the basics at length. I have sought to improve my familiarity with the basics in ways that have included reviewing many cases concerned mainly with the treatment of taxation accounting events in what are “recovery” not “prosecution” income taxation cases.
As to sources specifically relevant to accounting principles, I would note, as to the “accrual method”: Gallagher 117, Cooper 226f and Australian Accounting Standard AAS3. As to “prudence”, see Gallagher 117. “Consistency” has a meaning for accountants like other terms given a special meaning in a special context. It can also mean that taxpayers in objectively similar situations should receive similar tax treatment. See Ben-Odeco 195 and Farmers 340. As to “matching”, see Coles Myer 665/6 and Cooper 225. Linked to “matching”, I would also note, relative to the issue of the appropriateness of making a reasonable estimate in appropriate circumstances, what was said in Cyclone at 678 and Coles Myer at 665/6. It provides at least a partial answer to what was put to be the inappropriateness of the approach of Leon Maddern and Raymond Conwell to what I choose to refer to as the pink taxation accounting event.
I turn back to matters raised in the “recovery” cases. Not surprisingly, one point made in those cases is, in short, that applicable statutory provisions are all-important. See Carden 135, 152 to 4, 156, Flood 505, 506/7 and Nilsen 628, 630. That vital first principle is of limited application in the context of the taxation accounting events of instant concern save as to deductions, given that the applicable statutory provisions are minimal. The next point I would make is that there is powerful judicial comment indicating that there is relatively little difference between the UK and Australian legislation applicable to taxation accounting events involving “income” and “profit”. See Rowe 434 and Nilsen 628/9. There is significantly more of a difference as to taxation accounting events involving deductions, as to which see Flood 506/7.
Where statutory provisions are limited, where does one go? The next most important source is case law. The importance of the cases is apparent from my proceeding as I now do, to reflect upon what matters have received judicial comment in the cases. But there is a broader understanding to be gained from the cases. For example, it is important to heed the caveat that questions of fact should not be turned into questions of law governed by legal rules formulated from accounting principles. See Carden 151 to 154, Rowe 436,439 and Gallagher 124. There are many judicial comments in the cases on the proper use of accounting principles. See Carden 153 to 155, Flood 506, Nilsen 628 to 630 and Gallagher 129. It is important to recognise that accounting principles will remain accounting principles even though the effect of analysis through litigation may lead to them being adopted also as legal principles. See Carden 153/4.
Another important source of accounting principles can be the standards set by accountants. See Farmers 337 and 345, AGC 56 and Gallagher 116 to 118. I referred earlier to some matters of a general nature like prudence and consistency and matching. I note that the particular standards referred to by the Master of the Rolls in Gallagher include some of those matters. I also note that a significant number of those standards and those set out in AAS3 are framed in a way as to indicate what the appropriate treatment of taxation accounting events “should be”. That could have been a factor influencing the framing of opinions by Leon Maddern and Raymond Conwell in terms that, because the event was not, or did not appear to be, so treated it had been treated “incorrectly”. In my opinion, that is not, or at least not generally, an appropriate approach. I qualify with the word “generally” to allow for circumstances where there is unequivocally only one “correct“ treatment.
Another source can be textbooks. The courts are willing to treat certain textbooks as authoritative. See Farmers 337 and Dart 126/7. Texts which deal specifically with the Australian position include Parsons and Lehmann, both held in the Supreme Court Library. Another source can be papers and articles. See Philip Morris 389 to 392 and Suttons 327 to 329. I have noted in this ruling the value I have found in the Cooper paper.
Finally I would note that there can be other sources as to matters of general application. And there can be sources of specific application. One important accounting principle is known by the tag “going concern” which is linked to “continuity”. See Carden 158 and AGC 56. A related but separate point is made at times in the cases that different businesses can have different approaches to what treatments are potentially appropriate. See Carden 157 and AGL 112. That point is made even more comprehensively in the textbooks like Parsons and Lehmann. The instant case is concerned with the treatment of taxation accounting events involving entities in the construction industry. I have turned my mind to the question of what sources are available of specific application. I am not in a position to know, but experts in the field should be. Perhaps there are no more than the one noted by Raymond Conwell in his report, but I would doubt that.
I am unable to accept the submissions based on the characterisation of the statements of Leon Maddern and Raymond Conwell as a “parallel synthetic assessment”. These include the arguments based on the substantial provisions of the Act, on the operation of s 177, and on alleged abuse of process. I accept that the approach of the prosecution was flawed. However, I do not accept that the flaw was as significant, or as incurable, as counsel for the accused contended. The prosecution erred in the emphasis that it put on spelling out steps towards arriving at a calculation of the specific amount of tax, which it contended was due and payable. The calculation was not necessary in order for the prosecution to establish, with the aid of expert evidence, that the treatment of the tax accounting events was not a true reflex of the true position of the taxpayer. The continued inclusion of the steps towards the calculation in places such as the opening at the committal hearing and in the questions put to the Raymond Conwell for opinion, invited confusion. It did so because it admixed inappropriately the subject of the treatment of taxation accounting events with the subject of the procedure under the Act to make an assessment of taxable income.
Each taxation accounting event needs to be considered individually. Opinions may differ from expert to expert as to whether the treatment of any particular accounting event was such as to provide a substantially correct reflection of the true position. Indeed, it is apparent from the statements of Leon Maddern and Raymond Conwell that they do differ as to the appropriateness of the treatment of what I choose to call the orange taxation accounting event. The statements need not be tightly limited to the issue of whether the treatment of some or all of the events was not a correct reflex. The expert could address in broad terms the issue of what the consequences would be of failing to adopt a treatment that was not a substantially correct reflection of the true position, as to one or more than one of the taxation accounting events. But that would mean no more than indicating the kind of difference that the use of an inappropriate treatment would make, without being directed to establishing with precision what that figure would be. That is more clearly the position given the number of taxation accounting events.
If the prosecution case was dependent on establishing a “correct” taxable income as contended for by counsel for the accused, I would have to address the question of whether the challenged evidence should not be admitted. I am not satisfied that it is necessary, notwithstanding that that could be seen to have been suggested from some aspects of how the prosecution case has been formulated. The statements of Leon Maddern and Raymond Conwell are clearly relevant to the analysis of the tax accounting events said to evidence the conspiracy to defraud. They have relevance other than as part of a “synthetic” assessment. The evidence will have to be presented in a manner appropriate to its role and in conformity with the principles for expert evidence discussed in Arnott’s case.
Finally, I propose to add somewhat more to what I have said earlier as to what I think that the prosecution should now do relative to the preparation of revised statements of Leon Maddern and Raymond Conwell addressing the treatment of taxation accounting events. It would be appropriate to eliminate opinions as to honesty, propriety or otherwise reflecting on the state of mind of those responsible for preparing accounting entries. It would also be appropriate to reframe opinions as to what the correct treatment of the taxation accounting events should have been (as distinct from what the actual treatment was or appeared to be) (and unless there is unequivocally only one correct treatment for such an event) or otherwise as to precise (as distinct from broad) consequences of the actual treatment. It would be appropriate to reframe opinions as to the treatment of each taxation accounting event in terms of whether the treatment amounted to a substantially correct reflex of the true position. It would be appropriate that those accounting principles seen to be relevant to the treatment of each taxation accounting event should be specified. Ideally that would mean setting out definitions or a reference to a standard text containing definitions. It would also mean setting out references to relevant statutory provisions, decided cases, standards, and otherwise as appropriate with sources. It would be desirable that the documents seen to be relevant to the treatment of each taxation accounting event be set out in a way that is reasonably readily comprehensible. In other words, something along the lines of my table, but more professional than it is, should be utilised. It is my expectation that the time needed either for the prosecution to rectify the statements of Leon Maddern and Raymond Conwell or for the defence to prepare their own expert witness statements, should not be substantial.
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