Re Sanctuary Lakes Pty Ltd and Commissioner of Taxation

[2012] AATA 404

CATCHWORDS – TAXATION – assessments of income tax - whether excessive – whether deductions can be claimed – trading stock - arm’s length trading – objection decisions affirmed.

TAXATION - PENALTIES – statement false or misleading in a material particular – whether shortfall amounts resulted from failure to take reasonable care – reasonably arguable in part - remitted in part.

Administrative Appeals Tribunal Act 1975 ss 33(1AA), 39
Income Tax Assessment Act 1936, ss 6(1), 8-1(2)(a), 8-1(2)(b), 8-1(2)(c), 8-1(2)(d), 26(a), 92(1), 124ZO, 124ZQ, 190(b), 260
Income Tax Assessment Act 1936-1944, ss 51(1), 262A(2)
Income Tax Assessment Act 1997, ss 6-5, 6-10, 6-15, 6-20, 8-1, 70-10, 70-15, 70-25, 70-35, 70-80(1), 70-110, 995-(1), 960-405, 960-410, 995-1
Income Tax and Social Services Contribution Assessment Act 1936-1954, s 51
Petroleum Retail Marketing Franchise Act 1980
Planning and Environment Act 1987 (Vic), ss 8A(1), 173, 174, 181, 182
Tax Laws Amendment (2010 Measures No 1 Act) 2010, s 3 and Sch 6 and items 59-67, s 2 and item 16
Taxation Administration Act 1953, ss 14ZZK, 14ZZK(b)(i), 284-15, 284-75, 298-20
Taxation Laws Amendment Act (No.3) 1991, s 112

ACI Operations Pty Ltd v Berri Ltd [2005] VSC 201; (2005) 15 VR 312
Allen (Trustee), in the matter of Allen’s Asphalt Staff Superannuation Fund v Commissioner of Taxation [2011] FCAFC 118
Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; (1983) 83 ATC 4015
Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295; 3 ATD 288; 9 ALJR 342
BP Australia Limited v Commissioner of Taxation (1965) 112 CLR 386
Browne v Dunn (1893) 6 R 67, HL
Business & Research Management Ltd (in liq) v Federal Commissioner of Taxation (2008) 173 FCR 204
Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344
Cliffs International Inc v Commissioner of Taxation [1979] HCA 8; (1979) 142 CLR 140; 24 ALR 579; ATR 507; 53 ALJR 321
Codelfa Construction Pty Ltd v State Rail Authority of NSW ^[1] [1982] HCA 24; (1982) 149 CLR 337; 41 ALR 367
Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640
Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428
Commissioner of Taxation v AXA Asia Pacific Holdings Ltd [2010] FCAFC 134; (2010) 189 FCR 204
Commissioner of Taxation v Cooling (1990) 22 FCR 42; 94 ALR 121; 21 ATR 13
Commissioner of Taxation v Day [2008] HCA 53; (2008) 236 CLR 163; 250 ALR 388; [2008] ATC 8,842; 70 ATR 14; 83 ALJR 68
Commissioner of Taxation v Lau (1984) 6 FCR 202
Commissioner of Taxation v Malouf [2009] FCAFC 44; ATC 20-099; (2009) 174 FCR 581; 75 ATR 335
Commissioner of Taxation v Mercantile Mutual Insurance (Workers’ Compensation) Ltd [1999] FCA 351; (1999) 87 FCR 536; 162 ALR 130; 42 ATR 8
Commissioner of Taxation v McDonald (1987) 15 FCR 172; 87 ATC 4541; 18 ATR 957
Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561
Commonwealth Homes and Investment Co Ltd v MacKellar (1939) 63 CLR 351
Crawford v Commissioner of Taxation [1993] FCA 647; (1993) 27 ATR 326
Dunn v Maritime Services Board [1998] NSWSC 250
Eldridge v Federal Commissioner of Taxation [1990] FCA 369; (1990) 90 ATC 4907; 21 ATR 897
Europa Oil (N.Z.) Ltd v Inland Revenue Commissioner [1976] 1 WLR 464
Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375
Federal Commissioner of Taxation v Broken Hill Pty Co Ltd [2000] FCA 1431; (2000) 179 ALR 593
Federal Commissioner of Taxation v Citylink Melbourne Ltd [2006] HCA 35; (2006) 228 CLR 1; 228 ALR 301; (2006) 80 ALJR 1282; (2006) 62 ATR 648
Federal Commissioner of Taxation v Cliffs International Inc (1977) 77 ATC 4,564
Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088
Federal Commissioner of Taxation v Dixon (Trustee) (2007) ATC 4748; [2007] FCA 1079
Federal Commissioner of Taxation v Foxwood (Tolga) Pty Ltd (1981) 147 CLR 278
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492
Federal Commissioner of Taxation v Munro; British Imperial Oil Co Ltd [1926] HCA 58; (1926) 38 CLR 153
Federal Commissioner of Taxation v Payne [2001] HCA 3; ATC 4027; (2001) 202 CLR 93; 177 ALR 270; 46 ATR 228; 75 ALJR 442
Federal Commissioner of Taxation v Rothmans of Pall Mall (Australia) Ltd (1992) 92 ATC 4508
Federal Commissioner of Taxation v Smith (1981) 147 CLR 578
Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd [1978] HCA 32; (1978) 140 CLR 645; 21 ALR 59; 78 ATC 4412; 52 ALJR 640; 8 ATR 879
Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277
Federal Commissioner of Taxation v Turner (1984) 15 ATR 379
Federal Commissioner of Taxation v White (No 2) [2010] FCA 942; (2010) 117 ALD 335; [2010] ATC 20-205
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1; 103 ALR 97; 91 ATC 4950
Galea v Commissioner of Taxation [1990] FCA 456; (1990) 90 ATC 5060; 21 ATR 1108
Gange v Sullivan (1996) 116 CLR 418
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Goodman Fielder Wattie Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4438
GP International Pipecoaters Pty Ltd v Commissioner of Taxation (1990) 170 CLR 124
Granby v Federal Commissioner of Taxation (1995) 129 ALR 503; 30 ATR 400
Haberfield v Department of Veterans’ Affairs [2002] FCA 1579; (2002) 121 FCR 233; 72 ALD 333
Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34; (1946) 72 CLR 634
Handley v Federal Commissioner of Taxation (1981) 148 CLR 182
Hart v Federal Commissioner of Taxation [2003] FCAFC 105; (2003) 131 FCR 203; 53 ATR 371; [2003] ATC 2467
John v Federal Commissioner of Taxation (1989) 166 CLR 417
John Fairfax Pty Ltd v Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30; 32 ALJR 370
Jones v Dunkel (1959) 101 CLR 298
Kajewski v Federal Commissioner of Taxation [2003] FCA 258; [2003] ATC 4375
Kioa v West (1985) 59 CLR 550
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263; 30 ALJR 464
McCormack v Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284; 23 ALR 583; 9 ATR 610; 53 ALJR 436; 79 ATC 4111
Merrill Lynch International (Australia) Ltd v Commissioner of Taxation [2001] FCA 1127; (2001) 113 FCR 79; 191 ALR 420; 47 ATR 611
Minister for Immigration v Dela Cruz [1992] FCA 71; (1992) 34 FCR 348; 110 ALR 367; 26 ALD 663
MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; 63 NSWLR 167
Mobil Oil Australia Pty Ltd v Federal Commissioner of Taxation (1963) 113 CLR 475
Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation [1981] HCA 6; (1981) 144 CLR 616; 33 ALR 161; 55 ALJR 97; 81 ATC 4031; 11 ATR 505
Pearson v Deputy Commissioner of Taxation [2009] FCA 558; (2009) 74 ATR 437
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; (2004) 213 ALR 450; 58 ATR 210
R v Allen [1989] VicRp 64; [1989] VR 736
R v Birks (1990) 19 NSWLR 677
R v Fenlon (1980) 71 Cr App R 307
R v Foley [2000] 1 Qd R 290
R v Lao [2002] VSCA 157; (2002) VR 129
RACV Insurance Pty Ltd v Commissioner of Taxation [1975] VicRp 1; [1975] VR 1
Re Hutson and Commissioner of Taxation [2009] AATA 574; [2009] ATC 10-099
Re Kumar and Minister for Immigration and Citizenship [2009] AATA 124; (2009) 107 ALD 178; 50 AAR 96
Re Sinclair and Commissioner of Taxation [2010] AATA 902
Re Zheng and Minister for Immigration and Citizenship [2011] AATA 304; (2011) 121 ALD 372
Reliance Finance Corporation Pty Ltd v FCT (1987) 87 FLR 305
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47; 8 ATD 431
Rotherwood Pty Ltd v Commissioner of Taxation (1996) 64 FCR 313
Russell v Duke of Norfolk [1949] 1 All ER 109
Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153
Spassked Pty Ltd v Commissioner of Taxation [2003] FCAFC 282; (2003) 136 FCR 441; 203 ALR 515; 54 ATR 546
Stern v National Australia Bank [2000] 171 ALR 192; (2000) 171 ALR 192
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337
3D Scaffolding Pty Ltd v Federal Commissioner of Taxation [2009] FCAFC 75; 2009 ATC 20-111
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165; 211 ALR 342; 79 ALJR 129
Trustees of Estate Mortgage Fighting Fund Trust v Federal Commissioner of Taxation [2000] FCA 981; (2000) 102 FCR 15; 45 ATR 7; 175 ALR 482; 2000 ATC 4525
Tyco Australia Pty Ltd v Commissioner of Taxation [2007] FCA 1055; (2007) 67 ATR 63
Vu v Commissioner of Taxation [2006] FCA 889; (2006) 63 ATR 341
W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290
W Whebe Pty Ltd v Federal Commissioner of Taxation (1993) 27 ATR 172
Walstern Pty Ltd v Federal Commissioner of Taxation (2003) 2003 ATC 5,067
Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 282 ALR 604; 86 ALJR 1
Western Gold Mines (NL) v Commissioner of Taxation (WA) (1938) 59 CLR 729
Whisprun Pty Ltd v Dixon [2003] HCA 48; (2003) 200 ALR 447; 77 ALJR 1598
William John Crawford v Commissioner of Taxation [1993] FCA 647; 27 ATR 326

Chambers 21^st Century Dictionary, 1999, reprinted 2004, Chambers
Land Valuation and Compensation in Australia RO Rost and HG Collins, 3^rd edition, 1984, reprinted 1996, Southwood Press Pty Ltd, Marrickville, Australia

DECISION AND REASONS FOR DECISION [2012] AATA 404

ADMINISTRATIVE APPEALS TRIBUNAL     )          
  )          2010/0720
TAXATION APPEALS DIVISION  )          2010/1370

ReSANCTUARY LAKES PTY LTD

Applicant

AndCOMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal:                   Deputy President S A Forgie
Date:  29 June 2012
Place:  Melbourne

Decision:The Tribunal decides to:

1.affirm the Commissioner’s objection decisions dated 23 December 2009 and 23 February 2010 disallowing the applicant’s objections to assessments of income tax; and

2.in relation to the Commissioner’s objection decisions disallowing the applicant’s objections to assessments of penalties:

(1)set aside those decisions to the extent that they impose a penalty in relation to the applicant’s claim for a deduction of $1,275,800 in the 2003 income year for expenditure in relation to its obligations under s 173 of the Planning and Environment Act 1987 (Vic); and

(2)otherwise affirm the decisions.

S A Forgie

Deputy President

REASONS FOR DECISION

Sanctuary Lakes Pty Ltd (Lakes) has applied for review of two decisions, dated 23 December 2009 and 23 February 2010, made by the Commissioner of Taxation (Commissioner) disallowing in full objections it made to assessments he had made.  The first related to his assessment of income tax and the second to his assessment of penalties payable.  Both related to the 2003 income year and to claims for deductions made by Lakes arising out of transactions arising from its involvement in the Sanctuary Lakes Development at Point Cook in Victoria.  I have decided to affirm the Commissioner’s decisions.

THE ISSUES

1. The issue in this case is whether the Commissioner’s assessments are excessive.  The Commissioner described Lakes’ application for review as raising five issues and, if relevant, the issue of penalties and their remission.  Lakes’ has agreed that the application raises five subject areas but disputes the description given to those areas by the Commissioner.  I have reproduced the Commissioner’s description but used italics to identify the words that concern Lakes.  I have followed them with Lakes’ concern in bolded words in brackets:[1]    

   (1)Is Lakes entitled to claim a deduction in the 2003 income year for a loss of $8,436,342 incurred on the sale of memberships (too limited) in the Sanctuary Lakes Golf Club?

   (2)is Lakes entitled to deduct from its assessable income in the 2003 income year all or any of the amount of $1 million deposited into Maddocks Trust Account on 29 January 2003?

   (3)Is Lakes entitled to an income tax deduction in the 2003 income year for the amount of $3,410,252 being the write-off of advances (incorrect) made by Lakes to the Sanctuary Lakes Residents Association Limited (SLRA)?

   (4)Is Lakes entitled to a deduction of $4,134,000 in the 2003 income year in respect of its obligations to undertake development works under cl 5.2 of the Loose Ends Agreement[2] (too limited)?

   (5)Is Lakes entitled to a deduction of $1,275,800 in the 2003 income year for expenditure in relation to obligations under s 173 of the Planning and Environment Act 1987 (Vic) incurred under cl 5.2 of the Supplementary Agreement (too limited)?

   [1] Applicant’s submissions at [12]  The Commissioner’s summary of issues originally identified a further issue relating to whether certain losses were available to transfer to Lakes from Clubs in the 2003 income year).  That issue was discontinued prior to hearing: Applicant’s submissions dated 23 November 2011, FN 6.  No further reference is made to it in these reasons.

   [2] The agreement known as the “Loose Ends Agreement” is dated 30 June 2003 and follows upon the earlier Development Lease and Supplementary Agreement; see [100]-[105] below.

STRUCTURE OF REASONS

1. A more detailed index appears in Attachment D.  For the moment, I note that I have divided these reasons into the main sections shown in the table below.  Although divided in that way, they are not intended to be read disjunctively.  For example, my consideration of each of the issues in relation to the assessment of income tax is to be read with my understanding of the law as set out in Attachments B and C as well as with the findings of fact in the Factual Background section and the legislation in the Legislative Background.

Paragraphs	Heading
[1]-[2]	Introductory paragraphs
[3]	The Issues
[4]-[19]	Legislative Background
[20]-[109]	Factual Background
[110]-[177]	Consideration: Issues relating to assessment of income tax
[110]-[141]	ISSUE 1: Is Lakes entitled to claim a deduction in the 2003 income year for a loss of $8,436,342.00 incurred on the sale of memberships in SLGC?
[142]-[149]	ISSUE 2: in 2003 income year, is Lakes entitled to deduct all or any of the sum of $1 million deposited in Maddocks’ Trust Account on 29 January 2003?
[150]-[162]	ISSUE 3: Is Lakes entitled to an income tax deduction in the 2003 income year for the amount of $3,410,252 being the write-off of advances (incorrect) made by Lakes to SLRA?
[163]-[171]	ISSUE 4: Is Lakes entitled to a deduction of $4,134,000 in the 2003 income year in respect of its obligations to undertake development works under cl 5.2 of the Loose Ends Agreement (too limited)?
[172]-[177]	ISSUE 5: Is Lakes entitled to a deduction of $1,275,800 in the 2003 income year for expenditure in relation to obligations under s 173 of the Planning and Environment Act 1987 (Vic) incurred under cl 5.2 of the Supplementary Agreement (too limited)?
[178]-[209]	Consideration: Issues relating to assessment of penalties
[210]	Decision
Attachment A: [211]	Chronology
Attachment B: [212]-[241]	Consideration: Preliminary issues
Attachment C: [242]-[260]	Consideration: Deductions under section 8-1
Attachment D: [340]	Index

THE LEGISLATIVE BACKGROUND

Assessable income

1. A taxpayer’s “assessable income” includes income according to ordinary concepts.  That is called “ordinary income’[3] and, for an Australian resident, includes ordinary income derived directly or indirectly from all sources, whether inside or outside Australia, during the income year.[4]  Assessable income also includes some amounts that are not ordinary income but are included by a particular statutory provision about assessable income.  That is statutory income.[5]  If an amount is neither ordinary income nor statutory income, it is not assessable income.[6]  Ordinary income or statutory income exempted from income tax under the Income Tax Assessment Act 1997 (ITAA97) or another Commonwealth law is exempt income.[7] If ITAA97 excludes, either expressly or by implication, ordinary income from being assessable income, it is also exempt income.[8]

   [3] Income Tax Assessment Act 1997 (ITAA97), s 6-5(1)

   [4] ITAA97, s 6-5(2)

   [5] ITAA97, ss 6-10(1) and (2)

   [6] ITAA97, ss 6-15(1) and (2)

   [7] ITAA97, s 6-20(1)

   [8] ITAA97, s 6-20(2)

General deductions

1. Each claim is made under the general deduction provisions of s 8-1 of the ITAA97 which provides:

   “(1)     You can deduct from your assessable income any loss or outgoing to the extent that:

   (a)it is incurred in gaining or producing your assessable income; or

   (b)it is necessarily incurred in carrying on a *business for the purpose of gaining or producing  your assessable income.

   (2)However, you cannot deduct a loss or outgoing under this section to the extent that:

   (a)it is a loss or outgoing of capital, or of a capital nature; or

   (b)it is a loss or outgoing of a private or domestic nature; or

   (c)it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

   (d)a provision of this Act prevents you from deducting it.

   (3)A loss or outgoing that you can deduct under this section is called a general deduction.”

1. As Ms Schilling submitted, s 8-1 is recognised as having two limbs: a positive and a negative limb. The positive limb, which actually comprises two subsidiary limbs, sets out the circumstances in which a deduction is allowable. The negative limb sets out the circumstances in which it is not.

1. Both of the subsidiary positive limbs require a connection to be made between two things.  The first requires a connection between the loss or outgoing’s being incurred and the taxpayer’s “gaining or producing assessable income”.  The second requires a connection to be made between a loss or outgoing and its being “necessarily incurred in carrying on a business …” which has a particular purpose.  It must be a “business for the purpose of gaining or producing …[the taxpayer’s] assessable income”.  The word “business” is defined so that it “… includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.”[9]   

   [9] ITAA97, s 995-1(1)

A qualification: trading stock

1. Section 70-25 of ITAA 97 qualifies the exception in s 8-1(2)(a) by providing that:

   “An outgoing you incur in connection with acquiring an item of *trading stock is not an outgoing of capital or of a capital nature.”

As the note to the section states, this means that s 8-1(2)(a) does not prevent an outgoing incurred in acquiring trading stock from being deducted as a general deduction under s 8-1(1).

A.Income year in which outgoing for acquisition of trading stock deducted

1. Section 70-15 of ITAA97 sets out the income year in which a deduction may be made for an outgoing incurred in acquiring an item of trading stock. If the item becomes part of a taxpayer’s trading stock on hand before or during the income year in which the outgoing is incurred, that outgoing is deducted in the year in which it was incurred.[10]  If it was not, a taxpayer may choose whether to deduct the outgoing in the first income year in which it becomes part of the taxpayer’s trading stock on hand[11] or the first income year for which an amount is included in a taxpayer’s assessable income in connection with the disposal of that item.[12]

   [10] ITAA97, s 70-15(2)

   [11] ITAA97, s 70-15(3)(a)

   [12] ITAA97, s 70-15(3)(b)

B.Working out the outgoing in a non-arm’s length transaction

1. Section 70-15 is drafted on the presumption that an item of trading stock has been acquired and there has been an outgoing in connection with its acquisition.[13]  Section 70-20 qualifies the amount that may be taken to be the outgoing when a taxpayer acquires trading stock in a transaction and incurs an outgoing directly attributable to its purchase or delivery and two other features are present.  The first is that the taxpayer and seller of the item “… did not deal with each other at arm’s length” and the other is that the amount of the outgoing is greater than the market value of what the outgoing was for i.e. the buying or obtaining delivery of the item. If this is the case, the amount of the outgoing is taken to be the market value for the purposes of the application of ITAA97 to both the taxpayer and the person selling the item to that taxpayer.

   [13] Section 70-30 deals with the situation in which a taxpayer already owns an item otherwise than as trading stock but then decides to hold it as trading stock.

1. Section 995-1(1) of ITAA97 provides:

   “In this Act, except so far as the contrary intention appears:

   …

   arm’s length: in determining whether parties deal at arm’s length, consider any connection between them and any other relevant circumstance.”

1. The term “market value” has a meaning affected by Subdivision 960-S of Division 960 of ITAA97.[14]  Section 960-405 provides for the effect of Goods and Services Tax (GST) on an asset’s market value and s 960-410 for the market value of non-cash items.  Under the latter, anything that would prevent or restrict the conversion of a non-cash benefit to money is disregarded when working out the market value of a non-cash benefit.  Apart from the modification, the expression “market value” is not defined.

   [14] ITAA97, s 995-1(1)

2. In MMAL Rentals Pty Ltd v Bruning,[15] Spigelman CJ, with whom Mason P and Hodgson JA agreed, considered the meaning of the expression “fair market value” but also summarised the essential principles relating to “market value”:

   “         A number of authorities suggest a distinction between a ‘market value’ test and a ‘fair value’ or ‘fair market value’ test. …   The overall context will be determinative.

   …

   A test of a ‘market value’, whether in a statutory or contractual context, usually invokes the test long established and frequently applied in Spencer v The Commonwealth of Australia (1907) 5 CLR 418 esp at 432 and 440-441 of a willing but not anxious purchaser and vendor, bargaining with each other. This approach was most recently expressed in a joint judgment of three judges of the High Court in Marks v GIO Australia Holdings Ltd [1998] HCA 69, (1998) 196 CLR 494 at 514:

   ‘ ... The value ... is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it.’

   It is convenient to refer to the Spencer’s case formulation as the exchange value test (Spencer supra at 431.5 per Griffith CJ, as did Gleeson CJ in Boland v Yates Property Corporation Pty Ltd [1999] HCA 64, (1999) 74 ALJR 209 at [79].)

   Where the focus of the valuation process is on a ‘market value’, even in a context, as so often occurs, where there is no or little trading history in the relevant property, the approach will usually be quite different to that which arises where a ‘fair value’ is required to be determined.  The range of relevant circumstances to be taken into account is not as wide and regard is not had to the particular history of the commercial or personal relationships between the prospective vendor and purchaser of the property to be valued.

   … A ‘fair market value’ may diverge from a ‘market value’ for numerous reasons, e.g. where property is thinly traded, or the parcel is small, or there exist market distortions.”[16]

   [15] [2004] NSWCA 451; 63 NSWLR 167; Spigelman CJ, Mason P and Hodgson JA

   [16] [2004] NSWCA 451; 63 NSWLR 167 at [53]-[58]; 177

1. As explained in Land Valuation and Compensation in Australia:[17]

   “… Thus the land valuer is obliged to visualise the ideal sale, where both parties to the transaction are prudent, well informed, and unaffected by any abnormal influence that would deprive the sale of weight as a criterion of value. …”[18]

   [17] RO Rost and HG Collins, 3^rd edition, 1984, reprinted 1996, Southwood Press Pty Ltd, Marrickville, Australia

   [18] At 37

C.Meaning of “trading stock”

1. The expression “trading stock” is defined in s 995-1 to have the meaning given to it in s 70-10 of ITAA97 as modified by ss 124ZO and 124ZQ of the Income Tax Assessment Act 1936 (ITAA36).[19]  Section 70-10 provides:

   “Trading stock includes:

   (a)anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a *business; and

   (b)*livestock;

   but does not include a *Division 230 financial arrangement.”

As I have noted earlier, a “business” “… includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee”.[20]

[19] These modifications relate to shares in a PDF or pooled development fund and are not relevant in this case.

[20] ITAA97, s 995-1(1)

D.Assessable income attributable to trading stock

1. A taxpayer’s assessable income includes certain amounts attributable to trading stock. Under s 70-35(2), it includes any excess of the value at the end of the income year over the value at the start of the income year. Section 70-35(3) permits a taxpayer to deduct any excess of the value at the start of the income year over the value at the end of the income year. The values at the start and end of income years are worked out in accordance with the provisions of Subdivision 70-C of ITAA97.

1. Sub-division 70-D is concerned with assessable income arising from the disposal of, among other assets, trading stock.  If a taxpayer disposes of trading stock in the ordinary course of business, the amount received for it is included in that taxpayer’s assessable income as ordinary income.[21] 

   [21] ITAA97, s 70-80(1)

1. If an item stops being a taxpayer’s trading stock for certain other reasons, an amount is generally included in that taxpayer’s assessable income to balance the reduction in trading stock on hand.  That is a transaction on revenue account.[22]  The certain other reasons for which an item may cease to be trading stock are: a taxpayer may dispose the trading stock outside the ordinary course of business; the taxpayer’s interests in it change; the taxpayer dies and the taxpayer stops holding it as trading stock.[23] 

   [22] ITAA97, s 70-80(2)

   [23] ITAA97, s 80-(3)

1. These reasons are expanded upon in Sub-division 70-D but only s 70-110 may have any relevance in this case:

   “If you stop holding an item as *trading stock, but still own it, you are treated as if:

   (a)just before it stopped being trading stock, you had sold it to someone else (at arm’s length and in the ordinary course of business) for its *cost; and

   (b)you had immediately bought it back for the same amount.”

FACTUAL BACKGROUND

1. At Attachment A, I have set out significant events in their chronological order.  In doing so, I have relied on the Commissioner’s chart of those events but have modified and added to it.  In this part of my reasons, I will look further into some of those events for they are relevant in resolving the issues raised by Lakes’ application for review.  They are uncontroversial but references to the evidence on which they are based are found either in the footnotes or against the relevant entry in Attachment A.

The Gasing Group

1. The Sanctuary Gasing Group (Gasing Group), which comprises some 70 companies, is a Malaysian based property developer experienced in developing prime commercial and residential real estate in Malaysia, North America, Europe, China and Australia.  Those developments often featured a lake and green surrounds as well as a golf club.  Champion Plastic Industries SDN BHD (Champion Plastics) was also a member of the Gasing Group.   

1. The Gasing Group had holding companies.  In Malaysia, it had established Exclusive Region Sdn Bhd (Exclusive Region) in 1993 and used this as the ultimate holding company.  In Australia, a company that was later to be renamed “Sanctuary Holdings Pty Ltd” (Holdings) was incorporated on 14 September 1995.[24]  Mr Kuok Ing Ting and Mr Yeow Khoon (Michael) Tan, both of whom were associated with the Gasing Group, held all of the shares in Holdings on trust for Exclusive Region. 

   [24] Originally, it was incorporated as Sanctuary Lake Pty Ltd but changed its name to Sanctuary Holdings Pty Ltd on 17 June 1996: ST documents, ST3 at 967-972

Incorporation of Lakes and Clubs

1. Sanctuary Lakes Pty Ltd (Lakes) is an Australian based member of the Gasing Group.  It was incorporated on 3 June 1996 with Mr Yuh Lin Lee, Mr Kuok Ing Ting and Mr Tom Kotsimbos as directors.  The two shares issued in Lakes were owned by Holdings.[25]

   [25] ST documents at 957-961

1. Sanctuary Clubs Pty Ltd (Clubs) was incorporated on the same day Mr Yuh Lin Lee, Mr Kuok Ing Ting, Mr Yeow Khoon (Michael) Tan and Mr Tom Kotsimbos as directors.  The two shares issued in Clubs were owned by Holdings.[26]

   [26] ST documents at 962-966

The concept of the Sanctuary Lakes Resort

1. The Sanctuary Lakes Resort is a residential development at Point Cook in Victoria offering a “resort style” of living to its residents.  What was encompassed in the concept of “resort style” varied over the years as work proceeded on the development and other problems and opportunities revealed themselves. 

Setting the corporate and personnel structure in place

1. On 23 November 1995, the Sanctuary Lake Unit Trust (Trust) was established as a vehicle for providing debt capital to the Australian operating entities.[27]  Its trustee was Sanctuary Nominees Pty Ltd (Nominees),[28] which is a subsidiary of Holdings. 

   [27] Exhibit A at Exhibit KT-6

   [28] Exhibit A at Exhibit KT-6

1. On 28 June 1996, agreement was reached among seven investors (including Champion Plastics), Holdings as the Australian holding company and Exclusive Region as the ultimate holding company.  The shares in Exclusive Region were held by the seven investors.  Champion Plastics and three other investors each held a 20% interest, one held 10% and two each held 5%.[29]

   [29] Statement of Mr Ken Tan, Exhibit A at [37]

1. While the Gasing Group was the overall project manager, it appointed Asset Solutions Group Pty Ltd (Asset Solutions) as its Australian project manager.  Asset Solutions was a land development consulting group.  Mr Stephen Head was a director of Asset Solutions and he and Mr Yuh Lin Lee were appointed to undertake the daily activities and decision-making in relation to the project. 

1. Mr Yuh Lin Lee reported to Mr Kenneth Tan, who has been a director and manager of the Gasing Group since 1995.  Mr Kenneth Tan had overall responsibility for the project.  His duties included liaising with Asset Solutions and other consultants, executive decision-making and financial review of the project.  He liaised with the investors and their management and reported also to the board of the Gasing Group.

1. Another consultant appointed in connection with the project was Mr David Rennick, who was a partner at the time in Maddock Lonie and Chisolm, which is now known as Maddocks.  Legal advice was sought principally from Maddocks although it was sought from other solicitors from time to time.  Other consultants were Mr David Hunter of Coomes Consulting, civil and structural engineers, in relation to the planning and construction of the lake and Mr Garth Greenaway of Greenaway and Katz Pty Ltd in relation to the planning and marketing of the property.  If there was “… an associated tax consequence to the transaction, then … [the Gasing Group] would probably have sought advice.”[30]

   [30] Transcript at 67

The land and the section 173 Agreement

1. The vendor of the land, Laverton Heights Pty Ltd (Laverton) that ultimately became the Sanctuary Lakes development had previously obtained planning approval to subdivide it. As part of the approval process, Laverton had entered a Planning Agreement with the City of Werribee, Melbourne Water Corporation, Melbourne Parks and Waterways, the Commissioners of the City of Hobsons Bay and the Roads Corporation under s 173 of the Planning and Environment Act 1987 (Vic) (PE Act) (Section 173 Agreement) in relation to various parcels of land situated at Point Cook.

2. Section 173(1) of the PE Act provides that a responsible authority may enter an agreement with an owner of land in the area covered by a planning scheme for which it is a responsible authority. Under s 8A(1) of the PE Act, a municipal council is a planning authority for any planning scheme in force in its municipal district. An agreement made under s 173 must bind the owner to the covenants specified in the agreement.[31]  It may provide for matters such as the prohibition, restriction or regulation of the use or development of the land or any matter intended to achieve or advance the objectives of the planning scheme.[32]

   [31] PE Act, s 174(1)

   [32] See generally s 174(2)

1. Section 181(1) provides that a responsible authority may apply to the Registrar of Titles (Registrar) to register an agreement under s 173 provided it does not relate to Crown Land. The Registrar must record it in the Register kept under the Transfer of Land Act 1958.[33]  Registration means that the burden of any covenant in the agreement runs with the land affected.[34]  The responsible authority may enforce the covenant against any person who derives title from the person who entered the covenant.[35]

   [33] PE Act, s 181(3)

   [34] PE Act, s 182(a)

   [35] PE Act, s 182(b)

1. Although I do not have any evidence of registration, I note that, under cl 21.3 of the Section 173 Agreement, Laverton agreed to do all things necessary to enable the City of Werribee, as the Responsible Authority, to enter a memorandum of it on the Certificate of Title under s 181. Under cl 21.1, both agreed that the agreement had been made under s 173 and that, during its term, “… the obligations imposed upon the Owner are intended to take effect as covenants which will be annexed to and run at law and in equity with the Land and bind the Owner.”

Purchase of land

1. On 25 September 1995, Champion Plastics Industries Sdn Bhd (Champion Plastics) (a member of the Gasing Group) entered a contract that either it or its nominee purchase various parcels of land at Point Cook from Laverton.  Champion Plastics paid a deposit of $2.175m.  Having been nominated by Champion Plastics as its nominees on 13 June 1996, Lakes and Clubs paid the balance of $12.325m on 30 June 1996 and became the registered proprietors of the various parcels of land. 

1. Lakes and Clubs purchased the land subject to the encumbrances shown in Item 1 of the Schedule to the contract. Among those encumbrances was the Section 173 Agreement annexed to the contract.[36] That agreement was the subject of cl 9 of the Special Conditions of the contract. Under that clause, the purchaser acknowledged that the land was subject to the Section 173 Agreement.

   [36] Contract, cl 1.1 and Item 7 of Schedule: Exhibit A, Exhibit KT-2

Development of residential properties and the golf course

1. Lakes’ primary role in the development was as the residential developer while that of Clubs was to develop the golf course, the club house and a limited amount of residential land that fell within the boundaries of the golf course. 

1. The success of the project as a whole depended upon its successful marketing.  That marketing focused on its golf course, its lake and its offering higher residential amenities than usual.  The golf course was designed by Greg Norman and this fact featured in the promotional material for Sanctuary Lakes.  The features that made Sanctuary Lakes attractive, required upkeep and two companies were incorporated to deal with that.  One was to focus on the golf course and its associated facilities and the other on the remaining facilities.

Sanctuary Lakes Residents Association

1. Services over and above those offered by the council at the Sanctuary Lakes development were provided by the Sanctuary Lakes Residents Association.  Those services related to landscaping, maintenance of the lake and general surrounds, sporting facilities, swimming pool and security.  Each resident contributed approximately $1,000 for those services over and above the amount paid for council rates.  In order to attract residents, Lakes had to ensure that those services were maintained as it was marketing the development as a prestigious and exclusive estate.  Initially, it established a separate body corporate for each stage of its development.  Difficulties arose because legislative restrictions meant that they could not spend money for services affecting property outside their geographical area of responsibility and so could not pool resources with other bodies corporate in the overall development. 

Sanctuary Lakes Residents Association Limited

1. On 28 April 2000, SLRA was incorporated as a public company limited by guarantee.  Mr Yuh Lin Lee, Mr Yeow Khoon (Michael) Tan and Mr Stephen Head were appointed as directors.[37]  It was established to overcome the difficulties encountered by the individual bodies corporate.[38]  Services it provided were directed to maintaining facilities other than those related to the golf course. 

   [37] ST documents, ST5 at 977-979

   [38] Exhibit B at [49]

1. Early modelling had recognised that its income would be small in the initial stages as a person was not liable to pay a fee to SLRA until he or she acquired a particular property.  Despite that, it had been assumed that there would be sufficient  funds from an early stage to cover necessary expenditure.  That did not prove to be the case and SLRA required further funding.  SLRA required assistance to overcome its funding shortfall and those funds were provided by Lakes on the basis that they were loans that had to be repaid[39] and to be used as working capital.[40]

   [39] Exhibit B at [50]

   [40] Evidence of Mr Kenneth Tan, Transcript at 156

Sanctuary Lakes Golf Club

1. Before the golf course had been completed, Clubs established an unincorporated association known as the Sanctuary Lakes Golf Club under its administration.  It sold memberships in the unincorporated association conferring a right to play on the course when it was completed.  The projected completion date was June 1999.[41]  Clubs promoted the golf course and membership of it.  Only a single class of membership was offered with an initial fee of some $28,000 to $30,000 followed by annual subscriptions.  All membership fees were deposited in Maddocks’ Trust Account.[42]

   [41] Statement of Mr David Rennick, Exhibit B at [37]

   [42] Exhibit B at [38]

1. Prospective members were reluctant to pay membership fees of that magnitude in exchange for what was effectively a licence to play granted by Clubs as one of the developers of the land.  They were concerned that, were the development to fail, or the golf course to be sold, they would have no recourse against subsequent owners to enforce their right to play on the course.[43]

   [43] Exhibit B at [39]

Sanctuary Lakes Golf Club Ltd

1. On 13 October 1998, Sanctuary Lakes Golf Club Ltd (SLGC) was incorporated as a public company limited by guarantee.  Much later, on 31 December 2002, it changed its name to Sanctuary Lakes Club Limited but I will refer to it throughout as SLGC.  On incorporation, its directors were Mr Yuh Lin Lee (then also a director of Holdings and Lakes), Mr Yeow Khoon (Michael) Tan (Chairman of Gasing Group and then also a director of Holdings, Lakes and Clubs) and Mr Stephen Head (a director of Asset Solutions (an independent contractor in the development of Sanctuary Lakes).[44]  Each had been proposed by Lakes.  Together, they comprised SLGC’s initial Board and were required to resign from office at the first Annual General Meeting arising after the expiration of two years from the date on which all memberships had been sold.[45]  After that time, only members of SLGC were eligible to be directors and their candidacy had to be proposed and seconded by a member.[46]  Other than the three proposed by Lakes, directors could be removed on a resolution passed by the members of SLGC at a General Meeting.  As no more than five directors could be appointed as the Board,[47] the three directors proposed by Lakes maintained control of the Board and so of the SLGC.

   [44] ST documents, ST 4 at 974-975

   [45] SLGC’s Constitution at [38.1.1]; T documents, T3 at 106-107

   [46] SLGC’s Constitution at [38.3]; T documents, T3 at 107

   [47] SLGC’s Constitution at [37.1]; T documents, T3 at 106

1. The membership of SLGC comprised the Initial Members (i.e. the initial members at the time of incorporation), the Original Applicants (i.e. those persons who had applied for membership before incorporation and had paid or arranged to pay membership fees) and every other person admitted by the Board to membership.[48]

   [48] SLGC’s Constitution at [7.1]; T documents, T3 at 86

1. Clause 7 of the Constitution of SLGC provided for membership of the club. Apart from the three initial members, who were to be private members, membership was divided into two categories: Private Membership and Honorary Membership. Private Membership was limited to 1,000 members and, unless SLGC determined otherwise, Honorary Membership was limited to ten. The Memberships might be divided into any categories as SLGC determined. Other than Honorary Members, each member was required to pay annual Subscription Fees for the class of membership to which he or she belonged. That was the effect of cl 9.3 of the Constitution. Clause 9.2 provided for Membership Fees payable by applicants for membership.

1. Clause 43.1 of SLGC’s constitution provided that “The control and direction of the Club and the management of its property and affairs is vested in the Board.” The Board might exercise all of SLGC’s powers provided they did not have to be exercised by the club in a General Meeting provided for in the Constitution.

1. On the basis of an exchange between Ms Schilling and Mr Kenneth Tan, I find that “By and large” SLGC “… conducted their own independent business activities without input in relation to those activities …”[49] but that did not mean that they operated without regard to considerations affecting the development of Sanctuary Lakes as a whole.  I find on the basis of a subsequent exchange between them that Lakes was kept very much informed of what SLGC intended in relation to its business activities.  Lakes would be advised, for example, if SLGC proposed to have a restaurant or a spike bar.  That was inevitable given that one of SLGC’s directors was a director of Lakes and another a director of Clubs.

   [49] Transcript at 174-175

1. Membership and Subscription Fees were intended to provide a source of revenue for SLGC together with green fees, sales of food and drink from two outlets located in the Club House, functions and, to some extent, activities in the golf shop.  This was the evidence of Mr Kenneth Tan.[50]  The recitals to the subsequent agreement between SLGC and Lakes confuse this evidence a little.  I find that the sale of memberships turned out to be weaker than had been expected despite extensive promotion of the course as a Greg Norman designed golf course.[51]  SLGC also had to turn to Lakes for funding.  As with SLRA, funding was provided on the basis that it was to be repaid.  At this stage, there was no written agreement to that effect but I find on the basis of the evidence of Mr Kenneth Tan that Lakes advanced funds to SLGC for the purposes of providing working capital.[52]

   [50] Transcript at 172-173

   [51] Transcript at 69

   [52] Transcript at 75

SLGC enters sale and purchase/ management agreement with Clubs

1. SLGC reached an agreement with Clubs on 30 June 1999 to purchase the land on which the golf course was being built but was, at the time, incomplete.  The purchase price was $6.5 million.[53]  The purpose of Clubs’ disposing of its interest was:

   “The disposal of the Site to the Principal is intended to provide a means for the Construction Manager to manage and conclude the development of the Site and to enable the Construction Manager to transfer the responsibility for the management and operation of the Golf Course to the Principal.”[54]

   [53] T documents, T4 at 127

   [54] T documents, T4 at 118

1. At the same time, SLGC agreed with Clubs that Clubs would be appointed as an independent contractor in the role of construction manager to manage and conclude the construction of the golf course by 1 December 1999 or another date agreed upon.  Clubs provided its services for a fee which, under cl 6.3, would be “… the proceeds from the sale of 1000 memberships in the Sanctuary Lakes Golf Club less the purchase price payable pursuant to the Land Sale Contract.”  That fee was payable only after SLGC had paid the purchase price of the land.[55]  The purchase price of the land was paid with an initial deposit of $1.00 followed by payment on 1 December 1999 of the amount held in Maddock’s trust account on behalf of SLGC members as club membership fees and then by instalments as memberships were sold.  Each instalment was equal to the membership fee paid by each new member and was payable to Clubs within seven days of receipt.[56]

   [55] T documents, T4 at 123

   [56] T documents, T4 at 127-129

Actuarial valuation of membership sales

1. Lakes commissioned NSP Buck Pty Ltd (Buck) to prepare an actuarial valuation of the SLGC membership sales.  Buck undertook the valuation on 1 July 2000 on the basis of discussions with Asset Solutions and relevant data it provided.  It also discussed the matter with another valuer. [57]

   [57] It was proposed that Lakes and Clubs would absorb the cost of the GST after that tax was introduced on 1 July 2000 in relation to the next 100 Gold and 100 Silver Memberships sold.  The price of Diamond memberships were to be increased by 10% for GST from 1 July 2000: T documents, T 6 at 151.

1. At the time, Buck recorded, the sale of the memberships and their playing rights together with their sale price before and after 1 July 2000 were:[58]

   [58] T documents, T6 at 151  Amendments made to SLGC’s constitution increased the total number of memberships to 1,700; see [57] below

Membership Category	Description	Sold                31 May 2000	Unsold             31 May 2000	Pre-GST Price $	Post-GST Price $
Diamond	One person to play 7 days per week plus one person to play 5 days per week	286	14	30,000	33,000 2000/01 33,000 2001/02
Gold	One person to play 7 days per week	8	692	18,000	18,000 2000/01 19,800 2001/02
Silver	One person to play 5 days per week	6	694	12,000	12,000 2000/01 13,200 2001/02
Total	300	1400

A total of $975,000 in membership fees was outstanding as at 31 May 2000.  The majority of that sum was due from pending memberships allocated to two developers independent from the Sanctuary Lakes group.  No GST was payable on those memberships.  From 1 July 2000, it was proposed that the price of the Diamond membership would be increased from 1 July 2000 with those for Gold and Silver to follow with an increase of 10% on the pre GST price.

1. For the purpose of the valuation, Buck assumed that SLGC would not repay the advances made to it by Lakes.[59]  It regarded each Diamond membership as a unit.  A Gold membership was 0.6 of a unit and a Silver membership, 0.4 of a unit.  On that basis, Buck found that, in the period from October 1996 to May 2000, the monthly sales ranged from zero to 18.  The peak was reached when the golf course was opened in June 1999.  Over the entire period, the average sales of memberships amounted to 6.7 per month.  The 12 month moving average showed average sales of five to nine memberships each month.[60]

   [59] T documents, T6 at 153

   [60] T documents, T 6 at 154

2. As to future sales, Buck assumed that it was appropriate to assume that seven Gold and Silver memberships would be sold each month and that six of the remaining 14 Diamond memberships would be sold each year.  It determined a discount rate intended to reflect the return expected from an investor having regard to the level of risk associated with receiving revenue from future membership sales.  Buck found it difficult to quantify that risk as there was no similar investment available for comparison.  It noted that the success of the membership sales depended on the successful operation of SLGC and the reputation of the golf course and that “A positive aspect is the continued involvement of the Developer who has a significant interest in the success of the Golf Club.”[61]  Buck decided that a discount rate in the order of 20% was consistent with assumptions used for sales and prices and the risk associated with future membership sales.  It attributed a figure of 10% to those that had already been sold as at 31 May 2000 as there was a lower risk of the membership fees’ not being received.

   [61] T documents, T6 at 157

1. The conclusion reached by Buck was that the actuarial value of future membership sales was $8,173,000 but, given the uncertainty of predicting sales, it also prepared a valuation based on lower and higher levels of sales and the consequent variation in the dates on which all of the memberships would be sold:[62]

   [62] T documents, T6 at 158

Gold and Silver Membership Average Sales per month	Last Membership Sold	Capital Value 1 July 2000      $
5 (Low)	December 2011	6,353,000
7 (Central)	September 2008	8,173,000
9 (High)	November 2006	9,487,000

SLGC attempts to boost interest in its memberships

1. By 2000, SLGC’s membership sales had not improved.  Various options were considered to change that situation.  In February 2000, SLGC amended its constitution to introduce new categories of membership.[63]  The number of memberships in each category was limited as before.  Existing members now became Diamond members and their number was limited to 300.  There would be 700 Gold members and 700 Silver with ten or more, as determined, Honorary members.[64]  The membership fees were set at approximately $18,000 for Gold and $12,000 for Silver with more restricted playing rights than those enjoyed by members holding Diamond memberships.[65] 

   [63] Exhibit A, Exhibit KT12

   [64] Exhibit A, Exhibit KT12, cl 7

   [65] Exhibit B at [54]

1. The constitution provided for the transfer of memberships in accordance with cl 16.  A person wishing to transfer a membership to another had to seek the approval of the Board which could give, or refuse to give, its approval.  The Board was also bound by cl 16.4.1 which provided that:

   “Until such time that all of the Memberships have been issued, the Board will only nominate a Transferee in preference to Memberships not yet issued after the sale of the three unissued Memberships in respect of each notice served under clause 16.2, from the date such notice is received by the Board.”

SLGC was entitled to a fee from the member transferring membership.  The amount of that fee was to be determined by the Board provided it did not exceed 10% of the greater of following: the current membership fee payable for unissued memberships (or the last membership fee paid if all have been issued); or the market value of the membership as determined by the Board.[66]

[66] Exhibit A, Exhibit KT12, cl 16.6

1. Membership sales did not improve.  By the end of May 2000, 286 of 300 Diamond, 8 of 700 Gold and 6 of 700 Silver memberships had been sold.[67] 

   [67] Actuarial Valuation of Membership Sales by NSP Buck Pty Limited (Buck report), 1 July 2000; T documents, T 6 at 151

1. The management of SLGC was changed at some time before 6 August 2001 and probably in 2000 so that its Manager became Mr Stephen White.  Asset Solutions also engaged Australian Resort Management Pty Ltd (ARM) to manage SLGC and SLRA.  ARM was effectively administered by Mr Head of Asset Solutions[68] but day to day responsibility for Lakes and Clubs lay with its General Manager, Mr Anthony Gurry and with Mr Stephen White, who had been appointed as Manager.[69]  New promotional strategies were implemented but sales did not improve and SLGC required continued financial support.

   [68] Exhibit B at [56]

   [69] Exhibit B, Exhibit DIR-2 at 3

2. SLGC’s accounts were prepared by Mr Jim Hammer, who was SLGC’s Manager after Mr Stephen White resigned as Manager in November 2001.  Mr Hammer reported to Mr Anthony Gurry.  SLGC’s accounts were audited by Stannard Colbourn & Angelini.[70]  They were dealt with separately from those of Lakes and Clubs.[71]

   [70] Transcript at 175

   [71] Transcript at 175

Loan agreement between SLRA and Lakes

1. On or about 18 August 2000 or some time later[72] but certainly “…after the advances to Residents Association for that matter, the golf club, reached a scary level, a concerning level”,[73] Mr Kenneth Tan gave instructions to Maddocks to prepare a loan agreement between Lakes and SLRA.  In that agreement, they acknowledged that Lakes had previously lent funds to SLRA for the purposes of the operation and management of the Common Property in the development and that it agreed to do so in the future.  SLRA agreed to repay the sums borrowed with interest five years after the sums were advanced.[74]  That repayment day was repeated in a report prepared by NSP Buck Pty Limited regarding the valuation of the memberships as at 1 July 2000.  It reported that the proposed repayments would be made on the basis of SLGC’s capacity to pay.  SLGC’s then current cash flow predictions as provided by Asset Solutions suggested that the first of the repayments could be made in 2006.[75]

   [72] An unexecuted copy of the Loan Agreement shows “180800” as part of its reference.  Mr Rennick gave evidence that this indicates the day that the document was created, varied or printed: Transcript at 210-211.  Reference is made to the GST legislation and so that would suggest execution after it came into operation on or after 1 July 2000; Transcript at 214-215. 

   [73] Transcript at 157

   [74] T documents, T 5 at 137-148

   [75] Buck report at 4; T documents, T6 at 153

Loan agreement between SLGC and Lakes

1. On the basis of the evidence of Mr Tan, I find that Lakes had intended to support SLGC initially but not indefinitely.[76]  Its intention had been to limit its operating subsidy to SLGC to an amount of $5 million.  The final instalment of that amount was to be paid in the 2000/2001 income year.[77] 

   [76] Transcript at 72

   [77] Buck report at 4; T documents, T6 at 153

1. At about the same time as Lakes entered the loan agreement with SLRA, it entered an agreement on similar terms with SLGC.[78]  Mr Kenneth Tan’s evidence, which I accept, was that:

   “The Investors of course were looking to maximise the overall return on their investment.  They wholly owned all the entities undertaking the development, and while each existed separately in a legal sense, they were all inextricably linked and economically interdependent, and in effect comprised a single economic entity.  We therefore decided to structure Lakes’ advances to the Golf Club as loans to preserve the possibility of repayment to Lakes on commercial terms in the future when the Golf Club had cleared its commitments.”[79]

   [78] T documents, T 17 at 625-637

   [79] Exhibit A at [76]

1. In his oral evidence, Mr Kenneth Tan discussed the basis on which the agreement was prepared and entered.  The following extracts represent his evidence:

   “…because it was important for us to try and capture what was already happening between the entities, in some form of referenceable document. …  there ought to have been an overarching document to guide the transactions …”

   “… I think that when we put this agreement together, it followed basic format for loan agreements.  That includes provisions as to interests, as to time period on there …”

   “… it is intended to have effect.  It provides – it provides that over-arching structure.”

   “… The ability of the golf club to repay the loan would not have come out of sales.  It could, for example, have come out of an increase of public traffic.  So long as the club could generate operating profits which is not inclusive of sale – the membership sales proceeds, then, yes, we would have attempted to call back the loan with interest.”[80]

   [80] Transcript at 75-77

Meeting of the investors on 6 August 2001

1. The Sanctuary Lakes project was discussed at a meeting of the investors on 6 August 2001.  The investors questioned various aspects of the development including SLGC and SLRA.  They queried costs and performance of the project generally.  The minutes of the meeting record that three options were considered in broad terms by the investors.  The first was to continue as things were but to target low debt,  payment of low dividends or a mix of debt reduction and smaller dividends.  The second was to sell down by selling the whole project, super lots or equity with the object of reducing liability.  The third was a balanced strategy to reduce debt to a level of between $6 million to $10 million but yet retain a level of debt that was not detrimental to the project as a whole.  Consideration was still to be given to the sale of super lots “as a backup plan”.[81]

   [81] Exhibit A at Exhibit KT-14 at 8-10

1. On the basis of Mr Kenneth Tan’s oral evidence, I find that the investors were concerned to ensure that any changes in ownership did not create problems in the day to day operations of the project such as land sales, construction, the provision of services to residents and golf club members and the payment of trade creditors.  Various offers came to be considered including one from Westbrook working with Mirvac and another from Stockland.[82]   

   [82] Transcript at 57 and see also Exhibit A at [96] and Exhibit KT14 at 8-10

Ongoing funding issues for SLRA and SLGC in 2001 and 2002

1. By 19 November 2001, the number of memberships sold in SLGC numbered 289 (286 in May 2000) Diamond, 56 (8) Gold and 11 (6) Silver.[83]  Despite that, there were still concerns about the reliance placed by SLRA and SLGC on subsidies.  Mr Gurry was concerned to provide certainty to their regular suppliers and to the Australian Taxation Office (ATO).[84]  Mr Gurry reported to Mr Kenneth Tan on the staffing changes and then advised that he had been spending most of his time on issues relating to SLGC and SLRA for three reasons:

   “*       The concerns and unrest caused by the ‘selling due diligence process’ which un-nerved residents and members.

   *         The need to work through a program to give more certainty in the subsidy scenario of the SLGC and SLRA as you discussed with Stephen Head.

   *         The continuing reform in culture and systems to reduce the subsidy reliance.

   You would have seen the circular to you two weeks ago re the initiatives to implement and I am moving to implement once we receive the formal approval.”[85]

   [83] Exhibit A, Exhibit KT-15

   [84] Exhibit A, Exhibit KT-15

   [85] Exhibit A at Exhibit KT-15

1. Mr Head expressed his concern about similar issues in his email to the directors of SLGC, SLRA, Mr Kenneth Tan, Mr Hammer and Mr Gurry on 28 February 2002.  He had received a notice from the ATO demanding that he and the other directors of SLGC, personally pay its outstanding taxation liabilities.  Mr Head attributed the problems of SLGC and SLRA to continual difficulties in forecasting the revenue they would generate.  Those difficulties had, in turn, been caused by the developer’s not selling memberships and residents’ not building as quickly as forecast.  Strategies had to be put in place, Mr Head continued, to ensure that both companies were solvent and trading lawfully, that certain persons were responsible for ensuring that was so and being accountable to the Board of each.  Services should be contracted out, SLGC restructured as an unlisted public company so that its members become shareholders and have an investment, SLRA’s fees become payable regardless of when land is built upon and residents encouraged to use food and beverage outlets.[86]

   [86] Exhibit A at Exhibit KT-16

1. Mr Gurry developed these points in his email of 2 April 2002 to Mr Head, Mr Yuh Lin Lee, Mr Rennick, Mr Michael Tan and Mr Cheah Min Loong.  He sought to achieve various aims including those of efficiencies and economies from the use of plant, equipment and labour, contribution by SLRA members to SLGC as they enjoyed amenities provided by SLGC other than the golf course, removal of reliance on Lakes to fund ongoing operating losses, SLRA and SLGC’s achieving solvency and SLGC’s offering investment grade products.[87] 

   [87] Exhibit A at Exhibit KT-17 at 1

1. The proposal involved the formation of a new company to replace SLGC.  Shares in the new company would be offered to existing members of SLGC in exchange for their current memberships, transfer of SLGC’s assets to a new unlisted public company, Sanctuary Lakes Club Pty Ltd (SLCA), cancellation of all loan agreements between SLGC and the developer in exchange for shares in SLCA and the reconstitution of SLGC as a golf club in the traditional sense with an elected committee and Captain.  On the basis of the memberships purchased to that time, shares based on its holding 1,321 memberships would be issued to the developer and shares based on 434 memberships issued to existing members.[88]  Mr Gurry noted that PGA LINKS Pty Ltd (PGA Links), which is a management company jointly owned by the Professional Golfers Association of Australia and LINKS Group Holdings had agreed to facilitate the creation of SLCA at no cost to SLGC, SLRA or the developer.

   [88] Exhibit A at Exhibit KT-17 at [5]

1. Under the proposal, SLCA would become the operator and agent of SLRA.  Changes would be made to the fee structure.  The existing debt between SLRA and the developer would remain but future amounts would be paid by the developer as body corporate fees and be structured as tax deductible expenditure.[89] 

   [89] Exhibit A at Exhibit KT-17 at [6]

1. The new company, SLCA, would formally approach SLGC, SLRA and the developer and propose the issue of shares in SLCA to members of SLGC in exchange for all their current memberships, amendment of SLGC’s constitution to ensure that SLCA was either the sole member or all of SLGC’s assets were transferred to it and that SLGC be reconstituted as a golf club in the traditional sense.  In addition, SLCA would propose:

   “Cancellation of all loan agreements between SLGC and the Developer in exchange for the issue of shares in SLCA (i.e.: a debt for equity swap)”.[90]

   [90] Exhibit A at Exhibit KT-17 at [4]

1. In relation to SLRA, it was proposed that:

   “As part of the SLRA changes, it is proposed that the constitutional amendments will provide for the owner of the ‘undeveloped residential land’ at Sanctuary Lakes Resort to abide by specific infrastructure development standards and contribute a ‘body corporate fee’ in lieu of providing SLRA loans/ subsidies.  This will remove the ongoing legal obligations of the developer to fund operating deficits. …

   The existing debt between SLRA and the Developer will remain.  Future ‘body corporate fees’ paid by the developer will be structured as tax deductible expenditure of the Developer.”[91]

   [91] Exhibit A at Exhibit KT-17, [6]

Sale of two parcels of land to Sunland

1. On 26 June 2002, Lakes and Clubs entered contracts with Marington Pty Ltd (Marington), which is one of the companies in the Sunland group of companies (Sunland) for the sale and purchase of parcels of land.[92] 

   [92] T documents,T10 and T11 at 229-506

Deed of Arrangement between SLGC and Lakes

1. SLGC[93] and Lakes entered a Deed of Arrangement.[94]  The copy of the document in the T documents is undated.  Its effective date, as prescribed in cl 1, is 1 September 2002.  SLGC would issue 527 memberships (246 Gold and 281 Silver) under its constitution to Lakes in full satisfaction of the amount of $10,236,191.68 then owing under the Loan Agreement between them. 

   [93] By now known as Sanctuary Lakes Club Limited

   [94] T documents, T17 at 617-637

Board meeting of Holdings on 18 November 2002

1. On 18 November 2002, the Board of directors of Holdings met.  They recorded that 400 memberships had been sold at that time.  Of those, 295 were Diamond, 92 were Gold and 13 Silver.  The Board expressed concern for the funding of the annual subscriptions due on those that had not been sold.  It discussed whether they should be disposed of en bloc to a third party and noted a proposal by PGA Links that it settle the annual subscriptions on their behalf in exchange for their being able to dispose of the memberships at any price they deemed fit.  Mr Cheah Min Loong and Mr Harry Tan had previously rejected this proposal.  It considered leasing memberships with a view to the lessees’ purchasing memberships in the future.  The Board considered a proposal to market the memberships and to commit an advertising budget to it and requested Mr Lee Yuh Lin to implement it on his return to Melbourne.

1. At the same meeting, the Board noted that the proposal to convert their memberships to shares had been presented to the members of the SLGC.  The proposal had generally been well received.  The Board also noted that the members of the SLGC were also told that:

   “… the said shares to be ‘paid’ to the Malaysian investors were accompanied with assurances that the investors will not wantonly dump these shares, thereby reducing the value of the memberships.

   Kenneth Tan reported that, from the shareholders’/investors’ perspective, this conversion is beneficial as it severs the old relationship and moral obligation to provide subsidies.  Post-conversion, the shareholders/investors will become mere members and be only responsible for the subscription of the following golf memberships:

   Available memberships (and respective value) to be taken over by the shareholders:

5 Diamond	A$33,000
598 Gold	A$19,500
678 Silver	A$12,500”[95]

[95] T documents, T13 at 543-544

Deed of variation between SLGC and Clubs

1. The Deed of Variation executed by SLGC and Clubs on 30 June 2003 related to the management agreement they executed on 30 June 1999.[96]  It recited the terms of the earlier agreement and stated that the current level of membership and subscriptions was insufficient to meet the ongoing funding requirements of SLGC.  As a consequence, SLGC had considered reducing the price of its memberships in order to attract additional members but had decided that would have an impact on the return ultimately made by Clubs.  Therefore, the recital concluded, SLGC and Clubs had decided that SLGC would pay the fees payable to Clubs in full by issuing to it 768 memberships being 5 Diamond, 356 Gold and 407 Silver memberships.[97]

   [96] T documents, T18 at 638-648

   [97] This meant that, between them, Lakes and Clubs held 5 (of 300) Diamond, 602 (of 700) Gold and 688(of 700) Silver memberships.

Development Lease over remainder to Links

1. Mr Head is a director of Links Sanctuary Lakes Pty Ltd (Links).  On 16 August 2002, Lakes and Clubs entered an agreement with Links.[98]  Lakes and Clubs agreed to lease to Links the land comprised in the project other than land in Stage 23 of the development, land subject to the sale to Sunland and land already sold in earlier developments.  The land was shaded red and shown on the plan at Annexure B to the agreement.  A colour copy was also provided.[99]  On the basis of that copy and insofar as I can read it, I find that the land comprised land that had been designated as belonging to Stage 28 and bordering Stage 23 extended south along the border of the land running along Skeleton Creek to its southern boundary.   Although difficult to read, I find that among the Stages included in that land are Stages 29, 30, 32 and 38.  Some of them are bounded by the Lake and what appear to be Stages 42 and 43 protrude into that Lake.  South of the Lake appear to be Stages that include Stages 11, 44 and 47. 

   [98] T documents, T16 at 507-536

   [99] Exhibit B

1. Links was required to carry out the development works on the leased land in a manner generally consistent with the existing operation at the Sanctuary Lakes Resort.[100]  The development works comprised the creation of allotments and their subsequent sale.[101] Links assumed all of Lakes’ and Clubs’ obligations in respect of any agreement under s 173 of the PE Act relating to the land in so far as it could be said that the agreement touches upon issues directly or indirectly relating to the works carried out by Links.[102]  It was required to use the land for the use specified in item 9 and, under item 7.3, was required to comply with all laws and any requirements of any authority in connection with the land and Links’ use and occupation of it. 

   [100] Development Lease at cl 5.2; T documents, T12 at 515

   [101] Development Lease at cl 14.1; T documents, T12 at 518

   [102] Development Lease at cl 10.2; T documents, T12 at 518

1. Clause 9.1 permitted Links to deal with its interest in the land at its complete discretion including assigning the lease.[103]  As each allotment was sold, it was agreed that the consideration received represented consideration for the freehold and consideration for the benefit of the leased land attributable to that allotment.  The consideration was apportioned so that $1.00 was attributed to the freehold and the balance to the assignment of the lease.[104]

   [103] Development Lease at cl 9.1; T documents, T12 at 517

   [104] Development Lease at cl 9.2; T documents, T12 at 517

1. Links agreed to pay Lakes and Clubs rent in the manner specified in Clause 8 and a Lease Premium as specified in Annexure C.[105]  Annexure C provided that the Lease Premium was the sum of $28 million[106] and Item 7 in the Schedule provided that that the rental was $1.00 each year for 100 years.[107]  Links paid the Lease Premium in or about October 2002.[108]  Lakes also agreed to pay to the SLRA an annual sum calculated on the basis that it would pay $10,000 for each developable area of land (i.e. not that land set aside for lakes and other public services and amenities) that is still registered in the name of Lakes and Clubs and that is not yet the subject of an executed contract of sale.[109]

   [105] Development Lease at cl 3.1.2; T documents, T12 at 514

   [106] Development Lease at Annexure C, item 1; T documents, T12 at 529

   [107] Development Lease at Schedule, item 1; T documents, T12 at 511

   [108] Exhibit A at [115]. Clause 1 of Annexure C provided that the sum was not payable until Links had received a letter of offer from the financier referred to in cll 19 and 20. The agreement was subject to Links’ receiving a formal letter of offer from a financier by 31 August 2002 and its terms and conditions being acceptable to both Links and Lakes and Clubs. Clause 19 provided that Links could mortgage the land for the purpose of enabling Lakes and Clubs to repay its existing loans to the National Australia Bank or assisting Links to pay the Lease Premium or obtaining working capital.

   [109] Development Lease at cl 10; T documents, T 12 at 517

1. Under the Development Lease, Links also agreed to undertake, at its own cost and expense, the Staged Works[110] required for the settlement of various contracts of sale executed in respect of Stage 23 land and the Sunland land.  Lakes and Clubs agreed that it would remit the first $7 million to Links, retain the next $24 million (which included $14 million) from the sale of the Sunland land and remit any further amounts received to Links as compensation for costs it incurred to complete the Staged Works.  If sales were not to proceed at a pace that allowed Lakes and Clubs to be paid within 12 months of the commencement of the agreement, they could excise allotments to the value of the amount owed to it.[111]

   [110] Staged Works are the design and construction of all civil and service works in relation to Stage 23 land and Sunland land to a standard acceptable to the City of Wyndham so that it may issue a Statement of Compliance in relation to individual allotments; Development Lease at [1]; T documents, T12 at 513

   [111] Development Lease at cl 14.6; T documents, T 12 at 519

1. Mr Kenneth Tan’s evidence was that, although the Development Lease referred to the Sunland land, Links was never intended to undertake the development works.  The sum of $7 million remitted to Links was intended to cover the cost of its developing Stage 23 and the sum of $24 million included the proceeds of $14 million from the sale to Sunland.[112]

   [112] See [75] above

Deposit of $1 million in Maddocks’ Trust Account

1. On 29 January 2003, the sum of $1 million was deposited in Maddocks’ Trust Account.  This is the subject of [90(4)] below.  In its return for the 2003 income year, Lakes declared it as income.[113]  The sum of $1 million is recorded in Lakes’ Balance Sheet for the 13^th period of the 2003 income year against the entry “Investments … Solicitors Trust A/c – Sunland’.[114]  The same amount with the same description is recorded for the same period of the 2004 income year.[115]

   [113] T documents at 737-772

   [114] ST documents, ST8 at 1011 and repeated at ST8 at 1036

   [115] ST documents, ST8 at 1017

1. Links directed that $538,105.50 be paid out in 2004 and a further $16,848.35 be paid out in 2005.[116]  Lakes has not claimed a deduction in respect of the funds disbursed in each of those years[117] but the Commissioner allowed a deduction in the 2004 income year for disbursements from the fund amounting to $528,609.[118]  He determined that Lakes had failed to account for interest of $7,479 on the $1 million held in the fund and imposed a penalty of $525.75 being 25% of the shortfall for failure to take reasonable care.

   [116] T documents at 841

   [117] T documents at 841

   [118] Respondent’s Revised Statement of Facts and Contentions at [80]

Mr Kenneth Tan’s notes of meeting with Links

1. Mr Kenneth Tan’s notes of his meeting with the Links Group on 2 May 2003 dealt with a number of subjects. Among them were those relating to the SLRA debt then in the order of $3.4 million, s 173 agreement obligations, proposal to buy the SLGC memberships and the obligations to Melbourne Water with regard to the lake.[119] 

   [119] Exhibit B, Exhibit KT-18

1. With regard to the SLRA debt of $3.4 million owed to Lakes, Mr Kenneth Tan noted:

   “-        Gurrie advised that residents have raised concerns about indebtedness of SLRA to SL P/L

   -            Head opined that probability of repayment is very slim

   -Exco will consider forgiving loans, subject to SLGC membership proposal from Head.”[120]

   [120] Exhibit A at Exhibit KT-18, [20]

Proposal by Links to Lakes and Clubs on 7 May 2003

1. The proposal put by Links to Lakes and Clubs in a letter dated 7 May 2003 dealt with several matters: lease payments, SLGC memberships, club plant and equipment, outstanding civil and landscaping works, s 173 obligations, SLRA debt and documentation:

   (1)It was noted that the Stage 23 lots should be ready for settlement by late May or early June.  Links would forward the sum of $10 million to Lakes and Clubs from Stage 23 settlements, which would conclude Links’ major financial obligations to them in respect of the lease.

   (2)Links would pay $1 million cash at the same time as Stage 23 settled and Lakes and Clubs would transfer all memberships to Links.  At the same time, Lakes and Clubs would pay Links the total amount they then owed to SLGC for the annual subscriptions on the memberships.  Links would assume responsibility for past, present and future payments of the annual subscriptions.  Links would pay a further $1 million to Lakes and Clubs one year after it had received the memberships and another $1 million a year later than that.

   (3)“You will pay us at the same time as Stage 23 settles $4.321 million … and we will then assume all your responsibilities for the construction and general installation of outstanding civil and landscaping works. …”[121]

   (4)When Stage 23 settled, Lakes and Clubs would pay Links a further $1.227 million and Links would assume full responsibility for their s 173 agreement obligations other than those relating to the first lake. Despite that, and on the understanding that it would not assume responsibility, Links agreed to assist Lakes and Clubs financially in respect of the rectification and improvement of the first lake if the works exceeded $1 million. Lakes and Clubs had set that amount aside in trust.

   (5)“You will release the Residents’ Association from its obligations to repay to you the current debt.  This release recognises the practical reality that the Association will not ever be in a position to repay.  We understand it also creates a tax deduction for you.”[122]

   [121] Exhibit B, Exhibit KT-19 at [4]

   [122] Exhibit B, Exhibit KT-19 at [6]

Meeting of Executive Committee of Lakes on 14 May 2003

1. Mr Cheah Min Loong and Mr Harry Tan were the members present at the meeting of the executive committee on 14 May 2003.  Mr Kenneth Tan and Mr Tan Kuen Kuen were also present.  The committee resolved to send copies of the minutes of this meeting and of the previous meeting on 22 April 2003 to the Investors by 19 May 2003.[123] 

   [123] Exhibit B, Exhibit KT-20 at [1]

1. Among the matters reviewed was the proposal that had been made by Links and that was dated 7 May 2003:

   “3.      Proposal by Links

   Item 1:Agreed with proposed lease payments of $10 million from Stage 23 settlements

   Item 3:Lee Yuh Lin to pursue offer for construction equipment from Links.

   Item 4:Further tidying up/explanations required for outstanding civil and landscaping works.

   Item 5:Agreed to S 173 obligations of $1,275,800.

   Item 6:Investors to decide later on the debts due from Resident Association.  This item should be independent from ‘wrap up’ with Links.

   Item 2Golf Club Memberships – Noted that as at 31/3.2003 the unsold memberships comprise of 2 Diamond, 588 Gold and 697 Silver.

   Action: Before Investors’ meeting on Monday, 19 May to determine a) how much is owing in subscriptions & b) how much is yet to be received for the sale of club membership which we can use to offset the subscription.

   Meanwhile, to request for a higher consideration of $4.0 million for the unsold club membership

   Action: Ken to draft reply for Mr Harry Tan to approve and to forward reply to Links on the same day of this meeting, based on the following:

   To thank Stephen Head for his letter, to accept certain items, to concede to letting him have the maintenance equipment and to request for a higher value for golf membership.  To inform that Resident Association debt be dealt with separately.

   4.Deeds of Variation and Arrangement

   In the Deed of Arrangement, to replace the section on golf membership with that narrated in the Deed of Variation.”

Response by Mr Head

1. On 15 May 2003, Mr Head sent an email to Mr Harry Tan stating:

   “I have now read your May 14 response to my proposal.  To assist things through (and make life easier for all of us), I accept your point in relation to the Golf Club membership payment.  I therefore agree to the figure being $4 million over three years.

   Please understand Harry, the increase in this payment now forms part of the ‘overall package’ offer I have forwarded.  Please try to explain to your Board that it is a package deal which means it will be very difficult to reconcile if it is separated into individual items.  I would therefore urge the Board to accept the whole package to avoid us having to go back to the drawing board and reconsider individual items.

   …”[124]

   [124] Exhibit B, Exhibit KT-21

Supplementary agreement between Links and Lakes and Clubs

1. Links and Lakes and Clubs executed an agreement referring to their earlier Development Lease agreement and reciting that some matters had not been addressed in it (Supplementary Agreement).[125]  It bears the date “6/5/2003” and what appears to be initials appear below the “6”.  The numbers “6” and “5” appear to be written over numbers “30” and “6” respectively. 

   [125] T documents, T15 at 550-601

1. Among the matters addressed in the Supplementary Agreement, was the obligation Links had assumed under the Development Lease agreement in relation to Lakes’ and Clubs’ obligations under the Section 173 Agreement.[126]  Those obligations were set out in cl 4.2 in relation to the land that was subject to the agreement.  They reflect the obligations assumed by Lakes and Clubs when purchasing the land to undertake various works in relation to the wetlands and their maintenance, drainage, physical infrastructure, open space requirements and site rehabilitation works.

   [126] See Supplementary Agreement at cll 4.2 and 4.3; T documents, T15 at 556-557 and see [31]-[34] above as to Lakes’ and Clubs’ assuming those obligations.

2. It was agreed between Lakes and Clubs and Links that:

   “5.2.1             Sanctuary Lakes and Sanctuary Clubs remain responsible for the obligations of the owner as per the specific obligations outlined in Clause 4.2 .1 to 4.2.8 above up to the amount of $1,275,800.

   5.2.2 the amount referred to in clause 5.2.1 shall be paid by Sanctuary Lakes and Sanctuary Clubs to Links on the balance of sale proceeds from the Stage 23 Land.

   5.2.3 The parties acknowledge and agree that in addition to the amount referred to in clause 5.2.1 Maddocks shall hold the sum of $1,000,000 on behalf of Sanctuary Lakes and Sanctuary Clubs, which shall be applied at the direction of Links towards the satisfaction of the Sanctuary Lakes and Sanctuary Clubs obligations pursuant to the section 173 agreement, including but not limited to the ongoing maintenance requirements of Melbourne Water with respect to the Lake. 

   5.2.4 The balance of such monies referred to in clause 5.2.3 (if any) shall be released upon the issue of a Certificate of Completion of each of the items set out in clause 14 of the section 173 Agreement or upon confirmation by Links that the monies are no longer required to be held.”[127]

   [127] T documents, T15 at 557

1. In looking at those arrangements:

   “... the court was not bound by the description, such as `price of goods,’ attached to it in the taxpayer’s own accounts or in a particular contract, if upon an analysis of the contractual arrangements taken as a whole under which the payment was made it appeared that its true legal character did not accord with that description.”[383]

   [383] [1976] 1 WLR 464 at 472

1. In the Battery Makers’ case, Gibbs ACJ expanded upon the passage I have just quoted and said that:

   “Their Lordships could not have meant to suggest that in every case the character of an outgoing must be determined by having regard only to the contractual or other legal rights that the taxpayer acquired in return for it.  That would indeed have been inconsistent with the principle stated by Dixon J. in Hallstrom’s Case, and with cases too numerous to mention in which payments made ‘voluntarily and on the grounds of commercial expediency’ (to use the words of Viscount Cave L.C. in British Insulated and Helsby Cables Ltd v. Atherton [1926] AC 205, at p.212) have been held deductible as outgoings of a revenue kind although the taxpayer obtained no legally enforceable rights in return for them. However it is unnecessary for the decision of the present case to consider whether the second Europa Case ([1976] 1 WLR 464; [1976] 1 All ER 503) laid down a principle in terms too wide to be applied to s.51. ... If on the other hand that statement needs qualification so far as Australia is concerned, the decisions in the Europa Cases, and indeed the dissenting judgments in those cases, support the conclusion that it is the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer that is relevant in determining the character of the expenditure, ...”[384]

   [384] (1978) 140 CLR 645 at 659-660

1. Hill J summarised the effect of the previous authority in the field when, in Goodman Fielder Wattie Ltd v Federal Commissioner of Taxation,[385] he said:

   “The judgment in Sun Newspapers case makes it clear that it is necessary to consider carefully the nature of the business which carried on, so as to be able to distinguish between recurrent expenditure, that is to say `expenditure which is made to meet continuous demand’ (per Rowlatt J in Ounsworth v Vickers Ltd [1915] 3 KB 267-273) and that expenditure which is made once and for all. A pharmaceutical company, the business of which includes continuing research and development as part of the continuous or constant demand for expenditure in its business, does not each time that expenditure is incurred make an outlay of capital or of capital nature. Its business, when properly analysed, includes its research and development, at least in the ordinary case. No doubt, there are matters of degree involved and in a particular case the research and development may be concentrated on a product so far removed from the day to day products of the taxpayer, that the expenditure cannot be properly seen as part of its working expenditure.”[386]

   [385] (1991) 91 ATC 4438

   [386] (1991) 91 ATC 4438 at 4,449

1. Shortly before the Battery Makers’ case was decided, the Full Court of the Federal Court had considered the issue in Federal Commissioner of Taxation v Cliffs International Inc[387] and had said:

   “In determining whether an outgoing is of a capital nature, it is necessary to determine what it is incurred for.  Sometimes one consideration may point clearly in one direction, while the other, and vaguer indications, point in a contrary direction.  It has been said ‘it is a common-sense appreciation of all guiding features which must provide the ultimate answer’ (B.P. Australia Limited v. F.C. of T. (1966) A.C. 224 at p.264).

   A test frequently quoted is that of Lord Cave in British Insulated and Helsby Cables Limited v. Atherton (1926) A.C. 205. His Lordship (at pp.213-214) said:-

   But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or advantage for the enduring benefit of a trade, I think there is very good reason (in the absence of special circumstances leading to an appropriate conclusion) for treating such an expenditure as properly attributable not to revenue but to capital’.

   This statement places emphasis on what is acquired as well as upon the character of the expenditure.  It is a positive statement.  It does not follow that the negative furnishes a test of what is not capital (see John Fairfax & Sons Limited v. F.C. of T. (1959) 101 C.L.R. 30 at p.36).”[388]

   [387] (1977) 77 ATC 4,564; Bowen CJ, Franki and Brennan JJ

   [388] (1977) 77 ATC 4,564 at 4,573. The Full Court’s judgment was reversed by a majority of the High Court on appeal but not in relation to this statement of principle: Cliffs International Inc v Commissioner of Taxation [1979] HCA 8; (1979) 142 CLR 140; 24 ALR 579 ATR 507; 53 ALJR 321; Barwick CJ, Jacobs and Murphy JJ; Gibbs and Stephen JJ dissenting.

2. In Federal Commissioner of Taxation v Rothmans of Pall Mall (Australia) Ltd,[389] Lockhart J considered whether a levy paid by a manufacturer of tobacco products to an industry association was deductible under s 51(1). The expenditure by the manufacturer was to defeat the passage of the legislation which would curtail sales and advertising of tobacco products and probably result in a loss of its market share. The legislation did not pose a threat to the existence of its business or to any of its capital assets. The Commissioner argued that the levy paid was a payment of capital expenditure as the taxpayer was seeking to obtain an enduring advantage, in the sense of the right to advertise in the manner in which it chose or, alternatively, as the payment was made to preserve the taxpayer’s business.

   [389] (1992) 92 ATC 4508

1. After considering a number of cases including the Sun Newspapers case, to which I have referred, Lockhart J concluded:

   “A company which manufactures and supplies tobacco products these days is under fire.  Community attitudes towards smoking have changed considerably in recent times.  Pressures are exerted upon legislatures, both Federal and State, to prohibit or reduce the sale and consumption of tobacco products.  On the other hand, the market for the consumption of tobacco products is large.  Pressure groups are at work.  As legislatures react to public and scientific opinion there are repercussions on the business of the tobacco producers and suppliers.  But this is today an ongoing part of the setting in which those companies carry on business.  Expenditure of the kind with which this case is concerned is on revenue account.  The capital of Rothmans’ business was in no way increased by the expenditures in question.  The expenditure arose from Rothmans’ commercial activities in the course of carrying on its business.  It was incidental to the carrying on of Rothmans’ business.  There is a clear relation between the expenditure and the carrying on of that business.  It was incurred in carrying on its business and was not of a capital nature.”[390]

   [390] Federal Commissioner of Taxation v Rothmans of Pall Mall (Australia) Ltd (1992) 92 ATC 4508 at 4,514

1. Mr Sest drew a comparison between the current case and that of B.P. Australia Limited v Commissioner of Taxation of the Commonwealth of Australia.[391]  B.P. Australia (BP) paid to certain service station owners lump sums to assist them to defray some of their expenditure or generally to assist them.  In return, the service station owners promised to sell only BP’s brand of petrol for a set number of years.

   [391] (1965) 112 CLR 386; Lord Reid, Lord Morris of Borth-y-Gest, Lord Pearce, Lord Upjohn and Lord Wilberforce

1. Lord Pearce, who delivered the judgement of their Lordships, noted that, in 1951, there had been considerable changes in the way in which petrol was marketed in Australia.  Apart from the war years, various brands of petrol were sold in competition with each other at each service station.  Each producer owned particular tanks and pumps at each service station and let them to the retailer at a nominal figure.  In 1951, the Shell Company suddenly announced its intention of securing economy of distribution by introducing the “solo site service station plan” whereby it would supply petrol to service stations on the basis that those stations would deal exclusively with Shell.  Within a few months of Shell’s introducing its plan, BP had been asked to remove its pumps from over a quarter of the service stations it had previously supplied.  BP then embarked on the arrangements I have outlined in the previous paragraph.

1. Lord Pearce noted that considerable emphasis had been placed on the fact that BP’s whole existence was threatened by the events that had occurred during 1951 and continued:

   “But this is not a decisive factor.  Whenever a business finds that its trade rivals are getting ahead of it, its existence is threatened.  The seriousness of the situation has, however, this much relevance, that it provided ample justification for capital expenditure in the reorganization of its business structure if that should be necessary or desirable.  It demolishes any argument that the occasion was too trivial or too ordinary to enable counter-measures in the means of marketing to assume the structural quality of capital expenditure.  But it still leaves unanswered the question whether the steps which were taken to meet the crisis were in fact of a capital or of a revenue nature.”[392]

   [392] (1965) 112 CLR 386 at 393-394

1. His Lordship continued:

   “Where a trader buys out a rival in order to secure his goodwill or to suppress it and so provide or maintain a clear field for his own enterprise over a substantial period, there is a definite prima facie towards a capital payment.  But in the present case B.P. was not achieving a monopoly nor buying off competition nor obtaining any substantial area for its own domain.  Although one retailer was tied to B.P., the retailer next door could still buy some other brand and the passing motorist could do likewise.”[393]

   [393] (1965) 112 CLR 386 at 395

1. Lord Pearce considered this aspect further in relation to the advantage which B.P. sought to obtain when he said:

   “The advantage which B.P. sought was to promote sales and obtain orders for petrol by up-to-date marketing methods, the only methods which could now prevail.  Since orders were now and would in future be only obtainable from tied retailers, it must obtain ties with retailers.  Its real object however was not the tie but the orders which would flow from the tie.  To obtain ties it had to satisfy the appetite of the retailers by paying out sums for a period of years, whose amount was dependent on the estimated value of the retailer as a customer and the length of the period.  The payment of such sums became part of the regular conduct of the business.  It became one of the current necessities of the trade.”[394]

   [394] (1965) 112 CLR 386 at 398

1. On this aspect, he later said:

   “The benefit was to be used in the continuous and recurrent struggle to get orders and sell petrol.  The agreements were not strictly `bundles of orders’ but they were the basis of them and made orders inevitable.  The retailer was bound to sell none but B.P.’s petrol and to increase the sale of its products to the best of its ability.  This means that in practice he was bound to give orders for petrol which B.P. was bound to supply.  Although the price and time of delivery were not specified these would be implied by law as reasonable.  No fresh consensus between the parties was necessary.  All that was needed was that the retailer should specify from time to time what quantity he required.  Thus the agreements merged in and became part of the ordinary process of selling.  These facts point to the expenditure being a revenue item.”[395]

   [395] (1965) 112 CLR 386 at 405

1. As in the other cases, Lord Pearce proceeded to look at the whole of the arrangements entered into and their purpose before concluding that, on balance, the relevant considerations tilted the scales in favour of the expenditure’s being revenue and not capital outgoings.

1. The contrary conclusion was reached, but in quite different circumstances, by Gummow J in W Whebe Pty Limited v Federal Commissioner of Taxation.[396]  The question he had to decide was whether legal expenses incurred in respect of proceedings taken by the taxpayers in the Federal Court under the Petroleum Retail Marketing Franchise Act 1980 were in the nature of capital or revenue expenditure.

   [396] (1993) 27 ATR 172

1. Gummow J found that the franchise agreements gave the taxpayers all the means necessary to carry on a business as a Caltex service station at two particular sites.  At the time of the dispute between them and Caltex, the taxpayers had never carried on a business at either of the sites as anything other than as a Caltex service station.  Gummow J concluded:

   “In a sense, one might broadly have described the businesses of the taxpayers as that of service station operator.  But the arrangements with Caltex in each case gave the taxpayer the vital means for the conduct of such a business.  This was not merely the supply of product but the means of visible association with the goodwill and reputation of a major player in the petroleum industry.  The business which existed under the aegis of the relevant agreements and the protection of the Franchise Act were two Caltex Service Stations and it was the severe threat to the continuation thereof which precipitated the litigation in this court.

   Indeed, in the case of Chullora, what was at stake was the occupation of the site itself.  Here Caltex had set about bringing to an end any business association between the taxpayer and that site on which its only operations were conducted.  It is true that the Bankstown site itself was not in jeopardy and that arrangements later were made with BP Australia Ltd. But the business of the taxpayer as a Caltex Service Station was in jeopardy and the object of the expenditure here was, at the very least, to preserve that business and thereby avoid the need to replace it with another service station business.

   Accordingly, the expenditures were of a capital nature, being in relation to the very business structures of the taxpayers.”[397]

   [397] (1993) 27 ATR 172 at 180

1. In view of the principles in these cases, I must determine the character of an outgoing by determining the character of the advantage sought and must do so in light of all relevant matters including the nature of the taxpayer’s business and the particular circumstances in which that outgoing was incurred.

Cost of trading stock is not an outgoing of capital

1. The effect of s 70-25 is that an outgoing incurred in connection with acquiring trading stock is not an outgoing of capital or of a capital nature. Section 8-1(2)(a), therefore, does not prevent the outgoing from being a general deduction under s 8-1. This is relevant in considering the first issue relating to the sale of the golf memberships.

A.Trading stock

1. The term “trading stock” was previously defined in s 6(1) of ITAA36 in similar terms to those currently used. The definition:

   “… operates ‘cumulatively upon the ordinary meaning’ of trading stock … .  What is important … is that it does not restrict that ordinary meaning.  If goods are within the ordinary meaning of ‘trading stock’, they are, in the absence of a contrary intention, trading stock for the purposes of the Act. …”[398]

   [398] Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277; Gibbs CJ, Wilson, Deane and Dawson JJ; Brennan J dissenting at 281per Gibbs CJ, Wilson, Deane and Dawson JJ

1. The majority continued by considering the ordinary meaning given to the term “trading stock”:

   “         The ordinary meaning of the term ‘trading stock’ upon which s 6(1) builds is that which is attributed to it by legal and commercial people for accounting and other purposes.  That ordinary meaning has been held to include shares purchased and held for resale by a share trader … and land which a dealer holds as an object of his dealing … It is not necessary for present purposes however to explore the outer limits of the area covered by that ordinary meaning of the term.  Its traditional and narrower denotation still lies at the centre of that meaning and is adequate for present purposes.  That denotation is of goods held by a trader in such goods for sale or exchange in the ordinary course of his trade.  When used in relation to ‘a business’ … that central meaning comprehends the goods held on hand in the business for the purpose of sale or exchange in the ordinary course of trade.  The fact that the particular goods may not have been paid for or may not be owned by the trader does not preclude their being trading stock on hand in relation to his business if, notwithstanding lack of payment or ownership, they are legitimately held in the possession of the trader or as part of the body of stock to be sold or exchanged in the ordinary course of the trade of that business.”[399]

B.Whether person acquiring item claimed to be trading stock is engaged in trading items of that nature not irrelevant

[399] (1985) 157 CLR 277 at 281-282

1. The ordinary meaning of “trading stock” was referred to by the majority of the High Court in John’s case who then considered the person dealing in that trading stock:

   “… The definition looks to the nature of goods that may constitute trading stock and posits that they will constitute trading stock if acquired for any of the specified purposes, including sale.  It presupposes that the person by whom they are produced, manufactured, acquired or purchased is or will be engaged in trade in those goods.  But it does not render an enquiry into whether or not the person is or will be engaged in that trade irrelevant.  A single transaction does not render a person a trader, although, of course, a single transaction may constitute an adventure in the nature of trade.  Nor, we think, is a single item acquired for the purpose of manufacture, sale or exchange an item of trading stock, unless the purchaser is or will be engaged in trading goods of that nature.  Thus it is relevant to inquire whether the person who acquires an item claimed to be trading stock is a trader in the sense that he is engaged or will be engaged in trading goods of the nature of the item acquired. … A person may be a trader notwithstanding that his business is described in more general terms.  So much is implicit in the definition of ‘trading stock’.  A person’s business may be that of manufacturer or producer yet he may be a trader in the goods manufactured or produced.  Thus the relevant issue is not the nature of the business carried on, but rather whether the person is a trader in the goods which are claimed to be trading stock.

   Whether or not a person is a trader seems to us to be a question of fact, albeit that in some cases the determination of that fact may depend on questions of impression and degree.  If trading has not commenced or if there is no discernible trading pattern, the question of intention or purpose may be relevant in the sense that if there is an absence of intention or purpose to engage in trade regularly, routinely or systematically then the person may well not be a trader.  A fortiori if some contrary or inconsistent intention or purpose is present.  But if trading has commenced and the activities reveal a discernible trading pattern, then it seems to us that the motive for undertaking the activities or for undertaking a particular transaction cannot serve to characterize the person engaging in those activities as a non-trader, or as a non-trader in relation to a particular transaction.”[400]

   [400] (1989) 166 CLR 417 at 429-430

1. John’s case concerned, as I have said at [….] above, a partnership which bought and sold shares and whose activities could also be ascribed to a desire to obtain a taxation advantage.  As a share trader, the bonus shares issued to them constituted trading stock if they were acquired for the purpose of sale.  The majority explained that:

   “         The definition of ‘trading stock’, in speaking of the ‘purposes of manufacture, sale or exchange’, clearly predicates that one such purpose shall attend the acquisition of the item in question.  The definition does not require that the relevant purpose be the sole or even the dominant purpose.  In the present case the acquisition of the bonus shares was attended with the purpose, evident from the pre-arrangements made, that the shares should later be sold.  That purpose having been present, the bonus shares were trading stock as defined in the Act, notwithstanding that the transaction may have been attended by another purpose.  As such, by force of s 51(2) of the Act, the loss or outgoing incurred in relation to the shares cannot be characterized as an outgoing of capital or of a capital nature and hence non-deductible on that account.”[401]

[401] (1989) 166 CLR 417 at 430

C.Arm’s length trading

1. In Granby v Federal Commissioner of Taxation,[402] Lee J reviewed authorities considering the meaning of the expression “at arm’s length” concluding:

   “         The expression ‘dealing with each other at arm’s length’ involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction.  What is asked is whether the parties behaved in a manner in which parties at arm’s length would be expected to behave in conducting their affairs.  Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm’s length the inference may be drawn that they did not deal with each other at arm’s length.”[403]

   “         Whatever the meaning of the expression may be in equity…; the term ‘at arm’s length’ means, at least, that the parties to a transaction have acted separately and independently in forming their bargain.  Whether parties not at arm’s length have dealt with each other at arm’s length will be a matter of fact.  As Hill J stated in Furse^[[404] at 4015, determination of the manner in which parties not an arm’s length have dealt  with each other requires ‘an assessment whether in respect of that dealing they have dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining’.”[405]

   [402] (1995) 129 ALR 503; 30 ATR 400

   [403] (1995) 129 ALR 503; 30 ATR 400 at 506; 403

   [404] Trustee for the Estate of the Late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) ATC 4007

   [405] (1995) 129 ALR 503; 30 ATR 400 at 507; 403

1. In ACI Operations Pty Ltd v Berri Ltd,[406] Dodds-Streeton J summarised the principles to be drawn from a number of previous authorities when considering the meaning of the expression “bona fide arm’s length” offer in a contract for the supply of packaging:

   “223    The above authorities indicate that an arm’s length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which might: (a) enable either party to influence or control the other; or (b) induce either party to serve that common interest in such a way as to modify the terms on which strangers would deal.

   224      The concept of an arm’s length relationship is distinct from that of an arm’s length dealing or transaction, despite the potential overlap.  Unrelated parties may collude or otherwise deal with each other in an interested way, so that neither the dealing nor the resultant transaction may properly be considered arm’s length.

   225      Where the parties are not in an arm’s length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm’s length.  It may further be inferred that the resultant transaction is not arm’s length.

   226      Related parties may nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristic of strangers, applying independent separate wills.  The circumstances of the impugned transaction may be such that, despite the parties’ connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm’s length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common.”

   [406] [2005] VSC 201; (2005) 15 VR 312

1. In Commissioner of Taxation v AXA Asia Pacific Holdings Ltd,[407]  Dowsett J approved this passage and said:

   “24      The learned primary Judge also referred to the decision of Gyles J in Baxter v Commissioner of Taxation (2003) 196 ALR 519, identifying the proposition that the fact that a transaction is devised in a certain way so as to obtain a revenue advantage does not mean that the transaction is not at arm’s length. I accept that the offer and acceptance of a proposal which has a tax-related attraction for the offeree may not necessarily lead to the conclusion that the transaction is not at arm’s length. For reasons which I have given, the offer may well have been motivated by the offeror’s self-interest. However, there will be cases in which one side accommodates the other simply because it is able to do so without loss or inconvenience to itself, or because there are extraneous reasons for wanting so to do. I use the word ‘extraneous’ in lieu of the word ‘ulterior’ used in Granby, but with the purpose of describing a motivation other than that of facilitating the proposed transaction.

   25       Gyles J found difficulty with the proposition that parties at arm’s length might become involved in transactions which were not at arm’s length.  I suspect that his Honour meant that the very fact of entering into a non-arm’s length transaction means that the parties are not at arm’s length for the purposes of that transaction.  I agree with that proposition.”[408]

ATTACHMENT D

INDEX

340.

[407] [2010] FCAFC 134; (2010) 189 FCR 204; Dowsett, Edmonds and Gordon JJ

[408] [2010] FCAFC 134; (2010) 189 FCR 204 at [24]-[25]; 213

Paragraphs

Heading

[1]-[2]

Introductory paragraphs

[3]

The Issues

[4]-[19]

Legislative Background

[5]-[7]

General deductions

[8]-[19]

A qualification: trading stock

[20]-[109]

Factual Background

[21]-[22]

The Gasing Group

[23]-[24]

Incorporation of Lakes and Clubs

[25]

The concept of the Sanctuary Lakes Resort

[26]-[30]

Setting the corporate and personnel structure in place

[31]-[34]

The land and the section 173 Agreement

[35]-[36]

Purchase of land

[37]-[38]

Development of residential properties and the golf course

[39]

Sanctuary Lakes Residents Association

[40]-[41]

Sanctuary Lakes Residents Association Limited

[42]-[43]

Sanctuary Lakes Golf Club

[44]-[49]

Sanctuary Lakes Golf Club Ltd

[50]-[51]

SLGC enters sale and purchase/ management agreement with Clubs

[52]-[56]

Actuarial valuation of membership sales

[57]-[61]

SLGC attempts to boost interest in its memberships

[62]

Loan agreement between SLRA and Lakes

[63]-[65]

Loan agreement between SLGC and Lakes

[66]-[67]

Meeting of the investors on 6 August 2001

[68]-[74]

Ongoing funding issues for SLRA and SLGC in 2001 and 2002

[75]

Sale of two parcels of land to Sunland

[76]

Deed of Arrangement between SLGC and Lakes

[72]-[78]

Board meeting of Holdings on 18 November 2002

[79]

Deed of variation between SLGC and Clubs

[80]-[85]

Development Lease over remainder to Links

[86]-[87]

Deposit of $1 million in Maddocks’ Trust Account

[88]-[89]

Mr Kenneth Tan’s notes of meeting with Links

[90]

Proposal by Links to Lakes and Clubs on 7 May 2003

[91]-[92]

Meeting of Executive Committee of Lakes on 14 May 2003

[93]

Response by Mr Head

[94]-[99]

Supplementary agreement between Links and Lakes and Clubs

[100]-[105]

Loose Ends Agreement

[106]-[108]

Lakes’ records of loans to SLGC and SLRA

[109]

Clubs’ records of dealings with SLGC

[110]-[177]

Consideration: Issues relating to the assessment

ISSUE 1: Is Lakes entitled to claim a deduction in the 2003 income year for a loss of $8,436,342.00 incurred on the sale of memberships in SLGC?

[110]

Summary of parties’ submissions

[111]-[141]

Consideration

[111]

A.         Regard to be had to the whole context

[112]-[127]

B.         The context

[128]-[134]

C.         The purpose for which Lakes held the memberships

[135]-[141]

D.         The memberships as trading stock

ISSUE 2: in 2003 income year, is Lakes entitled to deduct all or any of the sum of $1 million deposited in Maddocks’ Trust Account on 29 January 2003?

[142]-[145]

Summary of parties’ submissions

[146]-[149]

Consideration

ISSUE 3: Is Lakes entitled to an income tax deduction in the 2003 income year for the amount of $3,410,252 being the write-off of advances (incorrect) made by Lakes to SLRA?

[150]-[153]

Summary of parties’ submissions

[154]-[162]

Consideration

ISSUE 4: Is Lakes entitled to a deduction of $4,134,000 in the 2003 income year in respect of its obligations to undertake development works under cl 5.2 of the Loose Ends Agreement (too limited)?

[163]-[164]

Summary of parties’ submissions

[165]-[171]

Consideration

ISSUE 5: Is Lakes entitled to a deduction of $1,275,800 in the 2003 income year for expenditure in relation to obligations under s 173 of the Planning and Environment Act 1987 (Vic) incurred under cl 5.2 of the Supplementary Agreement (too limited)?

[172]-[173]

Summary of parties’ submissions

[174]-[177]

Consideration

[178]-[209]

Consideration: Issues relating to penalties

[179]

The Commissioner’s decision

[180]-[196]

Liability to an administrative penalty

[183]-[188]

A.         Statement false of misleading in a material particular: the law

[189]

B.         Statement false of misleading in a material particular: consideration

[190]-[195]

C.         Statement not reasonably arguable: the law

[196]

D.         Statement not reasonably arguable: consideration

[197]-[207]

The amount of the administrative penalty

[198]

A.         Working out the base penalty: the shortfall amount - the law

[199]

B.         Working out the base penalty: the shortfall amount - consideration

[200]-[202]

C.         Working out the base penalty: the amount – the law

[203]-[207]

D.         Working out the base penalty: the amount - consideration

[208]-[209]

Remission

[208]

A.         The law

[209]

B.         Consideration

[210]

Decision

Attachment A

[211]

Chronology

Attachment B

[212]-[241]

Consideration: Preliminary issues

[214]

The whole context

[215]-[241]

Credit and submissions referring to evidence

[215]-[219]

A.         General approach to evidence

[220]-[230]

B.         The rule in Browne v Dunn

[231]-[238]

C.         Mr Rennick’s evidence

[239]-[241]

D.         The rule in Jones v Dunkel

Attachment C
[242]-[260]

Consideration: Deductions under section 8-1

[242]-[244]

The scope of and distinction between the two limbs of section 8-1(1)

[245]

Relevance of recitals in contracts, agreements, deeds and the like

[246]

Corporate structures

[247]-[248]

Characterisation depends on actual facts and not rearrangement of facts

[249]-[251]

The Tribunal’s task

[252]-[260]

Burden of proof

[252]

A.         Statutory provisions

[253]

B.         Standard of proof unaltered: balance of probabilities

[254]-[257]

C.         How a taxpayer may satisfy the burden

[258]-[260]]

D.         No burden of proof on Commissioner and no obligation to put forward material establishing a particular view

[261]-[308]

Authorities relating to the positive limb: section 8-1(1)

[261]-[277]

“incurred in gaining or producing”

[261]-[262]

A.         Must be incurred in course of gaining or producing assessable income

[263]-[265]

B.         Must be incidental and relevant to gaining or producing assessable income

[266]-[277]

C.         The loss or outgoing must have “incurred”

[278]-[283]

What is encompassed in “assessable income”?

[284]

Establishing the connection one of characterisation

[285]-[289]

Determined by reference to circumstances and character of advantage sought by taxpayer

[290]-[297]

The relevance of the taxpayer’s motive or purpose

[298]-[305]

Regard is to be had to the whole context in which loss or outgoing incurred

[306]-[308]

The timing of the expenditure for which deduction is claimed

[309]

Authorities relating to the negative limb: section 8-1(1)

[310]-[331]

Distinction between outgoings of a capital nature and of a revenue nature

[332]-[339]

Cost of trading stock is not an outgoing of capital

[333]-[334]

A.         Trading stock

[335]-[336]

B.         Whether person acquiring item claimed to be trading stock is engage in trading items of that nature not irrelevant

[337]-[339]

C.         Arm’s length trading

Attachment D

[340]

Index

I certify that the preceding three hundred and forty paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,

Signed:      ....................................................................
                 Leah Berardi              Associate

Dates of Hearing  7 to 9 November and 20 December 2011

Date of Decision  29 June 2012

Counsel for the Applicant  Mr P Sest

Solicitor for the Applicant  Mr R Hocking

Maddocks Lawyers

Counsel for the Respondent  Ms M Schilling

Solicitor for the Respondent  Ms S Singh

ATO Legal Services

“(1)       All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.

(2)        Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature.”