Rowsthorn and Commissioner of Taxation (Taxation)
[2017] AATA 602
•5 May 2017
Rowsthorn and Commissioner of Taxation (Taxation) [2017] AATA 602 (5 May 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Numbers: 2015/4637 and 2015/4638
Re:Peter Rowsthorn
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President S A Forgie
Date:5 May 2017
Place:Melbourne
The Tribunal affirms the decision under review.
.........[sgd]...........................................................
Deputy President S A Forgie
Catchwords
TAXATION – deductibility of capital expenditure – applicant holder of a depreciating asset in form of a stallion - applicant established corporate structure – stallion used within that structure – whether applicant used stallion for a taxable purpose – whether for the purpose of gaining or producing his assessable income - applicant kept no records as to income and expenses of stallion - distinct legal entities – income of applicant as an individual is distinct from the income of a company – decision affirmed
Legislation
Income Tax Assessment Act 1936 ss 170(7),
Income Tax Assessment Act 1997 ss 8-1, 40-15, 40-25, 40-30, 40-95, 40-100, 40-102, 40-105, 40-110, 995-1
A New Tax System (Australian Business Number) Act 1999 s 8
A New Tax System (Goods and Services Tax) Act 1999 s 9-20
Taxation Administration Act 1953 s 14ZZK, and Schedule 1: ss 280-100, 280-160Cases
Dennis Willcox v Federal Commissioner of Taxation [1998] FCA 123; (1988) 79 ALR 267
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 R & D Holdings Pty Ltd [2007] FCAFC 107; (2007) 160 FCR 248
Federal Commissioner of Taxation v Reef Networks Pty Ltd [2004] FCAFC 275; 57 ATR 375
Federal Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402; [2009] ATC 20-100’ 72 ATR 120
Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81
Hobart Bridge Co Ltd v Federal Commissioner of Taxation [1951] HCA 33; (1951) 82 CLR 372
Kenneth A Summons Pty Ltd v Federal Commissioner of Taxation (1986) 86 FLR 408
Kennon v Spry [2008] HCA 56; (2008) 238 CLR 366
Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213; 11 ATR 276; 80 ATC 4542
Martin v Federal Commissioner of Taxation (1953) 90 CLR 470
Pettigrew v Commissioner of Taxation (1990) 92 ALR 261
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47
Quarries Ltd v Federal Commissioner of Taxation (1961) 106 CLR 310
Ryde Municipal Council v Macquarie University (1978) 139 CLR 633
Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1
Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63
Tweddle v Commissioner of Taxation (1942) 180 CLR 1Secondary Materials
REASONS FOR DECISION
Deputy President S A Forgie
1.A taxpayer must pay income tax for each financial year. Income tax is worked out by reference to a taxpayer’s taxable income for the income year. In this case, the income year equates with the financial year. Although particular provisions may introduce variations, in general terms, the amount of income tax that is payable is worked out by multiplying a taxpayer’s taxable income by the applicable rate of tax and deducting any tax offsets from the figure that results from that multiplication. A taxpayer’s taxable income is arrived at by first working out that taxpayer’s assessable income and deducting a figure for deductions.
2.At issue in this case is the amount that Mr Rowsthorn may claim a deduction equal in value to the decline in value of in respect of a depreciating asset. The depreciating asset was a stallion called Grey Swallow. More particularly, the issue is whether Mr Rowsthorn used Grey Swallow for a taxable purpose within the meaning of s 40-25(7) of the Income Tax Assessment Act 1997 (ITAA97) in the 2008 and 2009 years of income. It is common ground that, in the context of this case, Mr Rowsthorn has used Grey Swallow for a taxable purpose if he has used it for the purpose of gaining or producing his assessable income or in carrying on a business for the purpose of gaining or producing his assessable income.
3.I have decided to affirm the Commissioner’s objection decision dated 7 July 2015.
BACKGROUND
4.In this section of my reasons, I set out the facts that are not in dispute between the parties and that I am satisfied are established on the evidence.
Mr Rowsthorn’s registration for an Australian Business Number
5.Mr Rowsthorn had an Australian Business Number (ABN) in the 2008 and 2009 financial years. He held that ABN under the A New Tax System (Australian Business Number) Act 1999 (ABN Act). He was entitled to it under s 8 of the ABN Act if he was “carrying on an enterprise in Australia” or if, in the course or furtherance of carrying on an enterprise, he made supplies that are connected with Australia.[1]
[1]ABN Act; s 8(1)
6.The expression “enterprise” is defined in s 41 to have enterprise has the meaning given by section 9‑20 of the A New Tax System (Goods and Services Tax) Act 1999. In so far as it applies to an individual, s 9-20(1) provides that:
“An enterprise is an activity, or series of activities, done:
(a)in the form of a *business; or
(b)in the form of an adventure or concern in the nature of trade; or
(c)on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or
(d)-(h)…”
Certain activities are excluded from the meaning of “enterprise” by s 9-20(2) and I refer particularly to the exclusion of “… an activity, or series of activities, done: … as a private recreational pursuit or hobby”.[2]
[2]A New Tax System (Goods and Services Tax) Act 1999; s 9-20(2)(b)
7.In Federal Commissioner of Taxation v Swansea Services Pty Ltd,[3] McKerracher J considered what it is to do an activity or series of activities “in the form of a business”. His Honour said:
“… [T]he words ‘in the form of’ cannot be ignored. The Commissioner has also expressed the view (in Good and Services Tax Determination GST 2000/8 at para 7) that:
The words “in the form of” have the effect of extending the meaning of enterprise beyond entities carrying on a business. An enterprise will include entities that carry out activities that have ... the appearance or characteristics of business activities. (Emphasis added.)
Rather than these words supporting a suggestion that form alone may prevail over substance, they have the effect of extending the reach of ‘enterprise’ to those activities which are in the form of a business but would not, in the ordinary meaning of ‘business’ be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby. That this is so is clear from the exclusions to s 9-20 of the GST Act which, relevantly, rules out private recreational pursuits or hobbies or, in the case of individuals, (other than a charitable trustee) an activity or activities done without a reasonable expectation of profit or gain.”[4]
[3][2009] FCA 402; [2009] ATC 20-100; 72 ATR 120; McKerracher J
[4][2009] FCA 402; [2009] ATC 20-100; 72 ATR 120 at [98]-[99]; 9,589; 146-147
The purchase of Grey Swallow
8.I accept Mr Rowsthorn’s evidence that he purchased Grey Shadow for US$4 million in 2006.[5] Grey Swallow was a colt by Daylami out of Style of Life. Daylami had won seven Group 1 races between 1996 and 1999. He was European Horse of the Year and the US Champion Male Turf Horse in 1999. He and another horse were together rated the best horses in the world in that year. Grey Swallow was regarded as the best of his progeny at the time.
[5] Exhibit A at [5] See also the following documents which are part of Exhibit B: Tax Invoice dated 4 July 2006 regarding transport and veterinary costs; Preliminary Tax Invoice from International Racehorse Transport (IRT) dated 6 July 2006 re transport preliminary Tax Invoice re GST and entry and processing fees; and letter from International Racehorse Transport dated 28 August 2006 attaching original documentation including Australian Customs Entry for Home Consumption. Each of the documents was addressed to Mr Rowsthorn at his residential address. I note that a Tax Invoice dated 20 July 2006 and relating to the costs of insuring Grey Shadow is addressed to Mr Rowsthorn C/O Wadham Park at a postal address in Queensland. In light of the other evidence, I have not given the address any weight at all in deciding that Mr Rowsthorn bought Grey Shadow in his own name.
9.Before Mr Rowsthorn purchased him, Grey Swallow had won two Group 1 races in Ireland: the Irish Derby in 2004 and the Tattersalls Gold Cup in 2005. During his racing career in Ireland, the United Kingdom and the United States of America, Grey Swallow had run in 14 races with the following results: won two Group 1 being those I have already mentioned and four other races; been placed in the first three in three Group 1 races and fourth in two others; and been unplaced in three Group 1 races. At the time that he won the Irish Derby, Grey Swallow was ranked equal ninth in the inaugural World Thoroughbred Racehorse Rankings for 2004. His win in the Tattersalls Gold Cup led to his being ranked equal 21st in the 2005 rankings.
10.On his arrival in Australia in mid 2006, Grey Swallow raced in only one race: the Group 1 Tattersall’s WS Cox Plate at Moonee Valley in October 2006. He was injured before the start of the race but passed fit to run by the course veterinarian. Grey Swallow was placed last. Grey Swallow recovered from his injury in the first half of 2007. An outbreak of equine influenza in August 2007 restricted the movement of horses throughout Australia. Studs in Queensland and New South Wales closed down for the 2007 breeding season. Grey Swallow was retired to stud at that time.
The claims for deductions, assessments and objection decision
11.In respect of the income year ending 30 June 2008 (2008 year), Mr Rowsthorn claimed that he had a net non-primary production loss of $931,977 of which $512,146 was attributable to a deduction in respect of Grey Swallow. In the 2009 year, he claimed that he had a net non-primary production loss of $619,647 of which $435,324 was attributable to a deduction under s 40-25 in respect of Grey Swallow. The Commissioner issued notices of assessment to Mr Rowsthorne on the basis of the income tax returns that he had lodged. He did so on 12 June 2009 in respect of the 2008 year and on 15 June 2010 in respect of the 2009 year.
12.On 18 February 2015 the Commissioner issued two notices of amended assessment after Mr Rowsthorn consented under s 170(7) of the Income Tax Assessment Act 1936 (ITAA36) to his doing so. The Commissioner’s notice of amended assessment disallowed Mr Rowsthorn’s claimed non-primary production loss of $931,977 for the 2008 year. He also disallowed Mr Rowsthorn’s claimed non-primary production loss of $619,647 in respect of the 2009 year in a further amended assessment.
13.The notices of amended assessment also notified Mr Rowsthorn that he was liable to pay shortfall interest charge (SIC) of $130,099.45 in respect of the 2008 year and $73,266.69 in respect of the 2009 year. Those amounts were calculated after taking into account prior remissions including, and in particular, the shortfall interest charges. The remissions amounted to $59,748.12 in respect of the 2008 year and $26,639.73 in respect of the 2009 year.
14.The Commissioner issued the amended notices of assessment because he was not satisfied that Mr Rowsthorn held Grey Shadow for the purpose of producing assessable income, and so for a taxable purpose. If he did not, he was not entitled to a deduction in respect of Grey Shadow’s cost as a depreciating asset in each of those years.
15.When Mr Rowsthorn objected to the amended assessments and to remission decisions in respect of the SIC, the Commissioner disallowed those objections in an objection decision dated 7 July 2015. Mr Rowsthorn applied for review of that objection decision, which is a reviewable objection decision.
The Wadham Group
16.Following his retirement in 2002 after a career in senior management and then as a director and Chairman of a publicly listed company, Mr Rowsthorn set up a corporate structure comprising a number of privately owned companies which were incorporated between 2003 and 2006. Those companies were part of a group of private companies known as the “Wadham Park Group” together with another company that Mr Rowsthorn had incorporated many years before in 1973. I accept Mr Rowsthorn’s evidence about the following six companies that were part of the group and find:
(1)Wadham Nominees Pty Ltd (Wadham Nominees)
(a)Registered: 19 April 1973;
(b)Mr Rowsthorn is a director;
(c)Mr Rowsthorn is a shareholder; and
(d)Wadham Nominees is the trustee of the Peter Rowsthorn Settlement of which Mr Rowsthorn is the primary beneficiary.
(2)Wadham Park (Vic) Pty Ltd (Wadham Park)
(a)Registered: 23 July 2004;
(b)Mr Rowsthorn is the sole director and secretary;
(c)Wadham Nominees is the sole shareholder of Wadham Park; and
(d)Wadham Park carried on horse training and agistment operations.
(3)Wadham Park Thoroughbreds Pty Ltd (WP Thoroughbreds)
(a)Registered: 2 April 2003;
(b)Mr Rowsthorn is the sole director and secretary;
(c)Wadham Park Pty Ltd is the sole shareholder;
(d)WP Thoroughbreds is trustee of the Wadham Park Thoroughbreds Property Unit Trust;
(e)WP Thoroughbreds owned a property in Seymour Victoria (Seymour property), which it held as trustee for the Wadham Park Thoroughbreds Property Unit Trust; and
(f)WP Thoroughbreds leased the Seymour property to Wadham Park.
(4)Wadham Park (Vic) Property Pty Ltd (WPV Property)
(a)Registered: 5 August 2004;
(b)Mr Rowsthorn is the sole director and secretary;
(c)Wadham Park is the sole shareholder;
(d)WPV Property is the trustee of the Wadham Park (Vic) Property Unit Trust;
(e)WPV Property owned a property in Trentham Road, Tylden (Trentham Road property) as trustee of the Wadham Park (Vic) Property Unit Trust; and
(f)WPV Property leased the Trentham Road property to Wadham Park.
(5)Woodside Park Stud Pty Ltd (WPS)
(a)Registered: 19 April 2006;
(b)Mr Rowsthorn is currently the sole director and secretary;
(c)Wadham Nominees is the sole shareholder; and
(d)WPS carried on horse breeding operations.
(6)Wadham Park Stud Pty Ltd (Wadham Park Stud)
(a)Registered: 14 February 2016;
(b)Mr Rowsthorn is the sole director and secretary;
(c)Wadham Nominees is the sole shareholder;
(d)Wadham Park Stud is the trustee of the Wadham Park Stud Property Unit Trust;
(e)Wadham Park Stud owned a property in Central Road, Tylden (Central Road property) as trustee of the Wadham Park Stud Property Unit Trust; and
(f)Wadham Park Stud leased the Central road property to WPS.
17.I also accept Mr Rowsthorn’s evidence and find that, in the 2008 and 2009 income years, Wadham Park carried on its horse training and agistment operations as well as other horse-related activities at the Trentham Road property. Mr Rowsthorn had funded the acquisition of the land and the building of the training facility. WPS carried on its breeding operations at the Central Road property, which was known as the “Woodside Park Stud”. In earlier years, the Wadham Park Group had carried out its training and racing operations in Queensland but was no longer doing so in the 2008 and 2009 income years.
Peter Rowsthorn Trust
18.On 27 April 1973, a Deed was made between Mr Jon McCready, as Settlor, and Wadham Nominees, as Trustee (Peter Rowsthorn Settlement). Wadham Nominees agreed to hold a sum of money given to it by Mr McCready on the trusts and subject to the powers and provisions set out in the Deed. The sixth paragraph of the Preamble to the Deed stated:
“The Settlor desires that the trustee shall have the greatest possible discretion in relation to the administration of the trust property and in the distribution of the income and capital thereof and desires further that the trustee may from time to time and at any time vary the trusts and provisions hereof in the manner herein provided but not further.”
19.Clause 2 of the Deed is concerned with Wadham Nominee’s power to apply income. I will set out only 2(a)(i) as it gives a flavour of 2(a)(ii) to (iv). Clause 2(b) sets out Wadham Nominee’s obligations on the date of distribution i.e. a date that is the 80th anniversary of 27 April 1973.[6] Clause 2 provides:
[6] Deed; cl 1(b): ST documents; ST1 at 866
“SUBJECT to Clause 5 hereof the trustee shall during the income period hold the trust property UPON TRUST as follows:
(a)To apply such part of the income arising during the income period as the trustee thinks fit between the beneficiaries and spouses in such proportions and in all respects as the trustee thinks fit as follows:
(i)by paying so much of the income as the trustee thinks fit to any beneficiary or spouse or to a bank account in the name of any beneficiary or spouse (whether solely or jointly with that of any other person including the trustee) and such payment shall with or without execution of a receipt by such beneficiary or spouse or any person on his behalf constitute a full and final discharge therefor to the trustee in relation to the trusts of this Deed;
(ii)-(iv)…
(b)Subject to the provisions of Clause 5 hereof the trustee shall at the date of distribution pay and apply as well the capital as the income of the trust property to such one or more of the children of the said Peter Rowsthorn as the trustee thinks fit or if there are no such children still alive to such one or more of the beneficiaries as the trustee thinks fit and such payment or application may be made in the manner as provided for payment in sub-paragraph (i) of paragraph (a) of this Clause 2 or in any other manner and no receipt need be given by any beneficiary in order to discharge the trustee.”
20.Clause 2(b) gives the trustee power to vary any of the provisions of cl 6, relating to its investment powers, and cl 7, relating to its powers more generally. Clause 2(a) provides:
“NOTWITHSTANDING anything contained herein the trustee may at any time or times and from time to time as it thinks fit:
(a)by Deed appoint that in lieu of the trusts declared in Clause 2 hereof of the trust property and income therefrom shall be held on such trusts in favour of the beneficiaries or any one or more of them as the trustee thinks fit and/or that the income from the trust property shall be held on such trusts in favour of the beneficiaries and spouses or any one or more of them as the trustee thinks fit PROVIDED ALWAYS that no exercise of this power of appointment shall:
(i)affect any interest in corpus already vested;
(ii)affect the right of any beneficiary or spouse to income once applied for his benefit pursuant to Clause 2 hereof; or
(iii)postpone the distribution of the trust property beyond the day of distribution.”
21.Clause 1(e) of the Trust Deed provides that the expression “as the trustee thinks fit”:
“… shall give the trustee the widest and most absolute discretion including a power to prefer one or more of the beneficiaries to the exclusion of any one other or others.”
LEGISLATIVE BACKGROUND
22.Part 2.10 of the Income Tax Assessment Act 1997 (ITAA97) sets out rules about the deductibility of capital expenditure. I am concerned particularly with Division 40. Its objects are:
“(a) to allow you to deduct the *cost of a *depreciating asset; and
(b)to spread the deduction over a period that reflects the time for which an asset can be used to obtain benefits; and
(c)to provide deductions for certain other capital expenditure that is not otherwise deductible.
Note 1:This Division does not apply to some depreciating assets: see section 40-45.
Note 2:The application of this Division to a life insurance company is affected by sections 320-200 and 320-255.”[7]
[7]ITAA97; s 40-15
23.The meaning of the expression “depreciating asset” is found in s 40-30.[8] Section 40-30(1) provides that:
“A depreciating asset is an asset that has a limited *effective life and can reasonably be expected to decline in value over the time it is used, except:
(a)land; or
(b)an item of *trading stock; or
(c)an intangible asset, unless it is mentioned in subsection (2).”
[8] ITAA97; s 995-1(1)
24.There is no suggestion that Grey Swallow is excluded from the definition. The “effective life” of a depreciating asset is worked out under ss 40-95, 40-100, 40-102, 40-105 and 40-110 of ITAA97.[9] A taxpayer may choose to use an effective life determined by the Commissioner under s 40-100 or work out an effective life for himself or herself under s 40-105.[10] Grey Shadow’s effective life is not in issue between the parties.
[9] ITAA97; s 995-1(1)
[10] ITAA97; s 40-95(1)
25.Section 40-25(1) provides that:
“You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a *depreciating asset that you *held for any time during the year.
Note 1:Sections 40-70, 40-72 and 40-75 show you how to work out the decline for most depreciating assets. There is a limit on the decline: see subsections 40-70(3), 40-72(3) and 40-75(7).
Note 2:…
Note 3…”
The owner of Grey Shadow is its holder.[11]
[11] ITAA97; ss 995-1(1)and 40-40, Item 10
26.Having calculated the decline in value of the depreciating asset in order to work out the amount of any deduction to which the holder is entitled, s 40-25(2) directs the taxpayer to:
“… reduce your deduction by the part of the asset’s decline in value that is attributable to your use of the asset, or your having it *installed ready for use, for a purpose other than a *taxable purpose.
Example:
Ben holds a depreciating asset that he uses for private purposes for 30% of his total use in the income year.
If the asset declines by $1,000 for the year, Ben would have to reduce his deduction by $300 (30% of $1,000).”
27.A “taxable purpose” is, as defined in s 40-25(7):
“(a) the *purpose of producing assessable income; or
(b)the purpose of *exploration or prospecting; or
(c)the purpose of *mining site rehabilitation; or
(d)*environmental protection activities.
Note:…”
28.The expression “purpose of producing assessable income” is defined in s 995-1(1) of ITAA97 when it provides:
“… something is done for the purpose of producing assessable income if it is done:
(a)for the purpose of gaining or producing assessable income; or
(b)in carrying on a *business for the purpose of gaining or producing assessable income.
Note:Section 32-15 (about using property in providing entertainment) treats use of property as not being for the purpose of producing assessable income.”
The word “business” “… includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.”[12]
PRINCIPLES RELATING TO INTERPRETATION AND APPLICATION OF PROVISIONS
“Purpose of producing assessable income”
[12]ITAA97; s 995-1(1)
A.“for the purpose of gaining or producing assessable income”
29.The expression “use for the purpose of gaining or producing assessable income” was considered by the Full Court of the Federal Court in Pettigrew v Commissioner of Taxation[13] (Pettigrew) when it appeared in s 54 of the Income Tax Assessment Act 1936 (ITAA36). Section 54 was the predecessor of s 40-25 of ITAA97. Also relevant in the Court’s consideration was s 51, which finds its modern expression in s 8-1 of ITAA97. Both permit a taxpayer to deduct from his or her assessable income any loss or outgoing to the extent that it is “incurred in gaining or producing the assessable income” or is “necessarily incurred in carrying on a business for the purpose of gaining assessable income”. The expression “incurred in gaining or producing the assessable income” (emphasis added) means incurred “in the course of” gaining or producing that assessable income.[14] In order to meet that criterion:
“… it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. …”[15]
[13] (1990) 92 ALR 261; Lockhart, Neave and Hill JJ
[14] Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ
[15](1949) 78 CLR 47 at 57
30.In his judgment, Hill J first adopted a passage from the judgment of Brennan J in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation[16] explaining that:
“ ‘Motive means … the reason a taxpayer decides to incur the expenditure. Purpose may be either a subjective purpose – the taxpayer’s purpose – where it means the object which the taxpayer intends to achieve by incurring the expenditure; or it may be an objective purpose, meaning the object which the incurring of the expenditure is apt to achieve. Both motive and subject purpose are states of mind and they are to be distinguished from the objective purpose, which is an attribute of a transaction. An objective purpose is attributed to a transaction by reference to all the known circumstances; whereas subjective purpose and motive, being states of mind, are susceptible of proof not by inference alone but also by direct evidence, for a state of mind may be proved by the testimony of him whose state of mind is relevant to a fact in issue.’
In contrast to s 51(1), however, the purpose of which s 54 speaks is the purpose of the use to which the plant or other article is put in the year of income. In so providing, s 54 produces a quite different regime to that applicable in s 51(1). It is clear that in the latter section purpose is not a criterion of deductibility, although as the High Court pointed out John v FCT (1989) 83 ALR 606; 63 ALJR 166 at 169 it will not necessarily be irrelevant.
Section 54 is not concerned with motive. If an item of plant be used by a partnership for the purpose of producing assessable income it will matter for the purpose of s 54 that the partners who so used it joined together, motivated to obtain a tax deduction. As such, subjective purpose will not be relevant to the issue under s 54. In the ordinary case, the purpose which s 54 requires will be determined by reference to the use to which the item of plant is put. If the item is, for example, a tractor employed in a farming business, the requisite purpose will be ascertained from the purpose of the business itself. Where the item is put out for hire, the circumstances of the hire and the terms of hire will determine whether the purpose of the hire being the only use of the goods will be for the production of assessable income. But an item may properly be said to be used for the purpose of producing assessable income if it is held by a taxpayer carrying on a business of hiring such articles waiting to be taken on hire by a prospective customer. There the nature of the activity of the taxpayer taken with the subjective purpose of the taxpayer that that that business activity will continue provides evidence of the purpose of which the section speaks.”[17]
[16] (1980) 33 ALR 213; 11 ATR 276; 80 ATC 4542
[17] (1990) 92 ALR 261 at 278-279 (citations omitted)
31.A differently constituted Full Court of the Federal Court referred to the Pettigrew case in Federal Commissioner of Taxation v Reef Networks Pty Ltd[18] (Reef Networks):
“… We agree with the primary judge when he said that the depreciation provisions are concerned with the amortisation of capital rather than with working outlays, and allow amortisation deductions if the outlays were for the purpose of gaining assessable income or carrying on a business to produce assessable income. As Hill J said in Pettigrew (at ATR 1850; ATC 4138; ALR 279), the depreciation provisions (then s 54 of the ITAA 1936) produce a quite different regime from that in s 51(1). …”[19]
[18] [2004] FCAFC 275; 57 ATR 375; Hill, Sundberg and Kenny JJ
[19] [2004] FCAFC 275; 57 ATR 375 at [21]; 382
32.Further principles established by the authorities include:
(1)“It is of course clear that a taxpayer uses an item which is put out to hire notwithstanding that some other person may also have use and possession of that item …”.[20]
(2)“ A person who owns land may be said to use it for his own purposes notwithstanding that he permits someone else to occupy it, even under a lease. That is almost beyond argument when the owner’s purpose is to acquire income. In the ordinarily accepted meaning of the word a building is ‘used’ for the purpose of acquiring income if rents are derived from it, and an owner of the premises who leases them is making use of those premises by employing or applying them for the purpose of letting … But that is not the only way in which an owner of land may use it by letting it to someone else. An employer who provides premises in which he requires an employee to live so that the employee may perform more efficiently the duties of his position is in my opinion himself using those premises. That this is so is clear when the employee occupies them under a licence rather than under a lease. …”[21]
(3)“… The critical question is concerned with the purpose for which they were used by the taxpayer. …”.[22] That requires an understanding of the way in which the asset is used. Would, for example, it have been possible for the taxpayer to carry on its business without the relevant asset?
(4)“… Plant may be used by a taxpayer for the requisite purpose even though it does not generate assessable income. …”.[23] Again, the use to which the plant is put must be seen in its context. In Federal Commissioner of Taxation v Reef Networks Pty Ltd, the taxpayer had installed a 12 fibre optic cable beside the railway line between Brisbane and Cairns under an agreement it had with Queensland Rail. In order to do so, the taxpayer paid certain fees to Queensland Rail and allowed Queensland Rail to use four of the fibres for no further fee. Under licence, the taxpayer permitted Optus to use the remaining eight fibres for a fee. The taxpayer claimed that all 12 fibres were used for the purpose of producing assessable income. At first instance, the Federal Court found that, had the four fibres not been made available to Queensland Rail, it would have been impossible for the taxpayer to license the other eight fibres for reward. Therefore, all eight were used for the purpose of carrying on a business and the whole of the cable could be depreciated; not simply three quarters.[24]
[20] (1990) 92 ALR 261 at 279 (citation omitted) per Hill J
[21]Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 at 638 per Gibbs ACJ
[22]Quarries Ltd v Federal Commissioner of Taxation (1961) 106 CLR 310 at 317
[23] Federal Commissioner of Taxation v Reef Networks Pty Ltd [2004] FACFC 275; (2004) 57 ATR 375; Hill, Sundberg and Kenny JJ
[24] Although decided in the context of s 8-1, the same point is made by the High Court in Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1; French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ. The issue was whether management fees paid by two football players to a manager to negotiate contracts with a new football club could be deducted from their assessable income on the basis either that it was incurred in gaining or producing the assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The High Court held that the players were engaged in the business of commercially exploiting their sporting prowess and associated celebrity for a limited period. Neither was exclusively an employee of his club but had well established businesses before the management fees were incurred. Even if the management fees had been paid solely for acquiring the service of negotiating the playing contracts, the service and the management fees were productive of both playing income and non-playing income which flowed to the business of each player. There existed a sufficient connection between the outgoing, the management fees and the gaining or producing of assessable income from the business of exploiting sporting prowess and associated celebrity for the management fees to be regarded as having been incurred in the course or gaining or producing income from each player’s business. They were deductible under s 8-1(1)(a).……
B.“in carrying on a *business for the purpose of gaining or producing assessable income”
B.1 “Business”: general principles
33.The word “business” has been considered both in the context of s 8-1 and of s 40-25 and of their predecessors. Principles established by various authorities include:
(1)“ The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative … Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of the activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner ...
Where it is determined that a taxpayer is conducting a business, the next question will be the ‘scope’ of that business … It may be that the taxpayer pursues two separate fields of endeavour, which are properly described as two separate businesses or a business and some other non-business activity. … On the other hand, a taxpayer may pursue separate income-producing activities as part of a single business … The question is one of fact, turning upon the degree of connection and interdependence between the activities. One must consider ‘the whole of the operations of the business concerned in determining questions of deductibility’ … To determine whether a taxpayer is conducting a business and the scope of that business, as said in a different context, ‘it is necessary to make both a wide survey and an exact scrutiny of the taxpayer’s activities’ …”[25]
[25] Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1 at [59]-[60]; 19-20 (citations omitted)
(2)“… There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit making, in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial. …”[26]
(3)“… [T]here is no single factor or group of factors that points to a betting or racing business in any case in which it appears. Many factors might be common to the activities of two individuals, and yet, because of the presence of other factors, a different conclusion might properly be reached in respect of those persons by the same court. The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.”[27]
(4)“ There remains the question of Winlaton. It is all farming land. The purchase price was £6,700. The appellant has spent over £5,500 of borrowed money to adapt the farm for stud purposes. The usual steps, including frequent exhibitions at shows are being taken to establish the reputation of the stud. … The number of stud horses is being steadily increased. … The animals are being used for the purpose of breeding and sale according to the usual manner in which similar stock would be used for such purposes on any other stud farm. It is being managed by an experienced farmer, whose instructions are to make the place pay. Mr Connors, an experienced expert, said that the country is suitable for a stud farm and that the improvements which the appellant has made do not exceed what is required to work the property. … The appellant will probably not be unduly disappointed if he has to carry on at a loss in the future, so long as he can, as he said, obtain a change of business from the routine and monotony of Flinders Land, make a name for himself as a stud-master and help the country of his adoption by improving the quality of some of its stock. It is not essential that a person who engages in business should do so with the motive of making a profit for himself … It is notorious in that in many businesses, as for instance an insurance or newspaper business, serious losses are usually suffered during the establishment stage. To breed and sell stock is to carry on a business …”[28]
(5)“… It is to be borne in mind, however, when weighing the relevant factors, that there is usually a distinction between the pursuit of a pastime, even if the pursuit is vigorous, and the carrying on of a business: Martin v Federal Commissioner of Taxation (1953) 90 CLR 470, at 479, per curiam.”[29]
(6)“ Carrying on a business … was not a matter of owning an asset, but of engaging in a course of conduct. In July 1997, and indeed from 1990, Chapel Road was the legal owner of the mortgaged land, but was not in possession of it and carried on no business. It could make no decisions about such matters as engaging tenants or carrying out repairs and maintenance.”[30]
(7)“ It is not suggested that it is the function of income tax Acts or of those who administer them to dictate to taxpayers in what business they shall engage or how to run their business profitably or economically. The Act must operate upon the result of a taxpayer’s activities as it finds them. If a taxpayer is in fact engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not entitled to say he must close down the unprofitable business and cut his losses even if it might be better in his own interests and although it would certainly be better in the interests of the Commissioner if he did so … If the appellant succeeds and makes a profit it will plainly be taxable, and it is difficult to see how his activities could at that moment of time be transmogrified from an indulgence in a somewhat unusual form of recreation into the carrying on of a business. I am satisfied that the appellant is seeking to establish himself at Winlaton as a recognized breeder of high class stud stock, and that while he is prepared to make losses to achieve this ambition he has a genuine belief that he will be able eventually to make the business pay. Indeed, unless he can do so, his experience will hardly be an encouragement to others to emulate his example.’[31]
[26] Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 at 314 per Bowen CJ and Franki J (citations omitted) and see also Tweddle v Commissioner of Taxation (1942) 180 CLR 1
[27]Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 at 474 per Webb J
[28]Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 at 5-6 per Williams J
[29]Woods v Deputy Commissioner of Taxation [1999] FCA 1589 at [34] per Sackville J
[30] Federal Commissioner of Taxation v R & D Holdings Pty Ltd [2007] FCAFC 107; (2007) 160 FCR 248 at [63]; 259 per Heery and Edmonds JJ Chapel Road was a wholly owned subsidiary of R & D Holdings Pty Ltd and, in 1989, had acquired land. It obtained finance and built an office block on the land in 1990 but, when it could no longer meet the repayments on the loan, the mortgagee entered into possession in 1991. The mortgagee sold the building in 2000.
[31] Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 at 7 per Williams J
B.2“Business”: relevance of other entities
34.Regard must be had to the activities of all of the entities that have a part to play in the activities undertaken by the taxpayer. Spriggs provides an example. Mr Spriggs was an Australian Rules footballer playing in the competition conducted by the Australian Football League (AFL). He was contracted to play for two clubs in succession. In each case, he was contracted to play AFL football on a full-time basis under an AFL Standard Playing Contract between him, the relevant club and the AFL. The High Court found this to be a contract of employment but a contract which permitted Mr Spriggs to engage in other paid activities provided he complied with certain conditions. In considering whether he could claim as a deduction the management fees that he incurred in negotiating a new contract, the High Court observed:
“… [The] question of whether the management fees were incurred in ‘gaining or producing’ the assessable income of Spriggs turns upon the characterisation of the tripartite arrangement between Spriggs, his club and the AFL. The answer to the question is not to be found by isolating in those arrangements a contract of employment of the player.”[32]
[32] [2009] HCA 22; (2009) 239 CLR 1 at [44]; 15
35.A taxpayer may be found to be carrying on a business even though he or she is not necessarily personally undertaking the physical tasks essential for the conduct of the business. In a case such as Tweddle v Federal Commissioner of Taxation, it is clear that the taxpayer, Mr Tweddle, had engaged an experienced farmer to manage the property at Winlaton and to develop it as a stud farm. Mr Tweddle owned the property, bore the expenses, reaped what few rewards there were and directed the farmer if only “to make the place pay”. There was a clear separation of roles between Mr Tweddle and the farmer and Williams J was satisfied that he, Mr Tweddle, was engaged in the business of farming at Winlaton as well as in a separate business of farming at another location. The Court examined the roles of each of the participants in the activities said to constitute the business just as it did in Federal Commissioner of Taxation v R & D Holdings Pty Ltd in determining whether the mortgagor, Chapel Road, or the mortgagee, which had taken possession, was carrying on the business that was centred on the leasing of the building.
36.In Ferguson v Federal Commissioner of Taxation, Mr Ferguson was even less physically present in the activities of the business than Mr Tweddle. The facts are summarised in the headnote:
“ The taxpayer was a member of the Royal Australian Navy. In anticipation of his retirement in three years, he leased five Charolais cows and entered into an agreement whereby a management company agreed to agist, breed from, and otherwise care for and manage the cows. The taxpayer intended, on his retirement, to acquire a grazing property and to raise beef cattle thereon, and the present arrangements were made with a view to building up a herd of cattle. The cows in fact gave birth to heifers and bulls, some of which he sold. The taxpayer took a keen interest in the development of the herd, received monthly reports as to their progress and maintained a card index system for his leased cows and their progeny.
The taxpayer claimed to be entitled to a deduction pursuant to s. 51 of the Income Tax Assessment Act 1936 in respect of expenditure on leasing and agistment of the cows and other similar outgoings. The commissioner disallowed the claim on the basis that, at the time the outgoings were incurred, the taxpayer was not carrying on a business.”[33]
[33] (1979) 37 FLR 310
37.In their joint judgment, Bowen CJ and Franki J noted that:
“… there is evidence of considerable system and organization in relation to the breeding scheme itself. It is true that most of this was done by the manager. On the other hand, the appellant paid for the manager’s services. In return for the fees he paid these things were done for him.
The application and results of the system and organization maintained by the manager were communicated to the appellant in the form of a monthly report covering the breeding programme, a timely livestock report and calving report and general reports as to market conditions. The appellant read these reports and also subscribed to and read periodicals relating to primary production. Since July or August 1973 he had maintained a card index system in which he recorded particulars as to date of birth, type, sire and dam, date of artificial insemination in relation to each behest or natural mating, and calving. He also maintained a ‘ledger’ as a record of his receipts and payments.
The appellant spent a fair amount of his spare time on maintaining familiarity with the progress of the cattle through received reports and through reading periodicals. He was overseas for a period of two years and two months from January 1974 to March 1976 and continued his activities while abroad, although there is some evidence on the taxpayer having remained ignorant for sixteen months as to whether one of the heifers had fallen pregnant or not. A significant proportion of the appellant’s income was applied by him under the two agreements.
Receipts were obtained from the sale of bull calves, although due to a number of factors these receipts were insufficient in the relevant years to cover his outgoings.
On the face of it, he was conducting his activities on a commercial basis and was, it would seem, carrying on a business.
…
… In our opinion, the proper conclusion is that his activities in advance of carrying out his ultimate intention were such as to constitute a business. …”[34]
[34] (1979) 37 FLR 310 at 315-316
38.In a separate judgment reaching the same conclusion, Fisher J said:
“ Admittedly the majority of the activities were carried on by the management company. But this company was acting on behalf of the taxpayer and performing these functions as his agent. It had no interest other than in the provision of services, and certainly no interest in the stock whether leased stock or the progeny of that stock. The activities themselves appear to me to have been performed in a systematic and commercial manner and would not be likely to be significantly different if the taxpayer has leased fifty rather than five heifers.”[35]
[35] (1979) 37 FLR 310 at 324
ONUS OF PROOF
39.On his application for review, Mr Sinclair has the burden of proving that the Commissioner’s assessment is excessive and, in the case of SIC, should not have been imposed or imposed at a different rate.[36] The principles that the courts have developed over the years include:
[36] Taxation Administration Act 1953, s 14ZZK(b)(i) and (iii)
(1)“ The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190 (b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.
… There is nothing inherently unfair in a provision which places the onus on a taxpayer to prove his case when the purpose for which an asset was acquired depends so much on his intentions and circumstances of which he, rather than the Commissioner, has comprehensive knowledge.”[37]
[37] Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 at 89 per Mason J
(2)“... the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer.
In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.”[38]
(3)“... It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed ... unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.”[39]
(4)“... The burden may be discharged by drawing inferences from the evidence. In some cases in which all the relevant facts are known, and there is no material upon which it might properly be concluded that the property was acquired for the relevant purpose, the inference may properly be drawn that the property was not acquired for the relevant purpose. But it is not enough, even when all the facts are known, that there is no material upon which it may be concluded that the property was acquired for the purpose mentioned in s. 26(a). If a taxpayer can succeed, simply because there is no evidence from which it can be concluded that the relevant purpose existed, that must mean that the burden of proving the existence of that purpose lies on the Commissioner. That in my respectful opinion would be to invert the onus of proof. The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property the appeal must fail.”[40]
(5)“... mere error in the formation of that judgment by the Commissioner does not warrant the setting aside of the amount assessed. Given the validity of the exercise of the power to make an assessment ..., the ultimate question is whether the amount of the assessment is excessive. The amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous. ...”[41]
THE EVIDENCE
[38] Trautweinv Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63; Latham CJ, Starke, Dixon and Evatt JJ at 87 per Latham CJ
[39] Federal Commissioner of Taxationv Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [8]; 621; 344; 1373; 168; 4091 per Brennan J
[40] 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 at [11]; 303; 597; 443; 622; 4,121 per Gibbs J. In assessing Mr McCormack he Commissioner had treated the net profit from the sale of a property as assessable income on the basis that it arose from the sale of a property she had acquired for the purpose of profit-making by sale within the meaning of s 26(a) of ITAA36 as it was then in force.
[41] Federal Commissioner of Taxationv Dalco [1990] HCA 3; (1990) 168 CLR 614; 90 ALR 341; 20 ATR 1370; 64 ALJR 166; 90 ATC 4088 at [11]; 623; 345; 1374; 169; 4092 per Brennan J
Mr Rowsthorn’s Strategic Plan
40.A document entitled “Peter Rowsthorn – Strategic Plan 2005 – 2009” is dated January 2005. The document began with a statement that Mr Rowsthorn:
“… is the primary beneficiary of the Peter Rowsthorn Settlement, with a vast amount of input taxed investments as the main sources of income. …
PETER ROWSTHORN has majority to 100% ownership of a group of privately owned companies providing services to the Australian and international thoroughbred racing industries. The companies are known as the Wadham Park Group. …
…
PETER ROWSTHORN’s core belief is to:
1.Develop and grow Wadham Park Pty Ltd so that it is a profit producing entity reliant on external parties for its income source for the long term benefit and success not only for him personally and his immediate family but also for his team of employees and in the future for shareholders. Peter Rowsthorn believes he can achieve the same success with Wadham Park as he did with Toll Holdings, which not only created personal wealth for him and a number of shareholders and team members but also created many work opportunities for the wider community and helped stimulate the economy.
2.Along side this he wants to develop his own success by investing in a number of horses individually. Peter Rowsthorn feels if he shows belief in his own created product and the horse industry as a whole then external parties will have greater trust in his future objectives. Peter Rowsthorn believes if he is willing to back the industry with his own money, it will generate greater public interest to use the services of the Wadham Park group
3.STRATEGIC INTENT & OBJECTIVES OF
PETER ROWSTHORN
Further to the targets relating to Wadham Park set out in Wadham Park’s Strategic Plan, Peter Rowsthorn is endeavouring to achieve personal success.
Peter Rowsthorn is to invest in:
‘Wadham on Track’ – one share which represents 11.1% shareholding.
(refer to separate information relating to investment project and objective set out below)
Development of current shareholdings in horses and acquisition of new shareholdings in additional horses (current list attached).
Purchase of stallion during the 2006 financial year (talks currently underway for ‘Grey Swallow’).
Upon success of initial purchase of stallion, purchase additional stallion during the 2006 – 2009 period.
Continue to race horses in individual name with a view to producing stallions and broodmares which will stand at Stud at retirement.”[42]
[42] Exhibit A; Annexure PR-9
41.The Strategic Plan was updated in 2010 but the pages following the cover sheet seem to be scanned copies of the first three pages of the original document including the original description of “Peter Rowsthorn – Strategic Plan 2005 – 2009”.[43]
Wadham Park’s Business, Marketing and Strategic Plans
[43] T documents; T10 at 159-162 and T14 at 273-277
A.Suggested Marketing Plan
42.A document entitled “Draft Discussion Paper No. 1” is dated 5 December 2004.[44] It referred to the construction at the Tylden property, which I have referred to as the Woodside Stud or Woodside Park. It was hoped that the construction would be finalised by the time of the Melbourne Spring Racing Carnival in 2005. Plans were made to develop a low profile, but sustained, marketing programme to attract prospective clients.
[44]T documents; T14 at 390
43.Reference was made to efforts made to promote Wadham Park at Canungra in Queensland by attracting large numbers of “heads in bins” as quickly as possible. That had been the correct approach at the time but some disadvantages had been identified in the strategy. Mediocre quality horses had been attracted and success on the track was slow in coming. The marketing of the Woodside Stud could be pitched at attracting higher quality horses now that the bona fides of the business had been firmly established.
B.Wadham Park’s Business Plan
44.Wadham Park’s Business Plan (WPB Plan) is undated but it would seem to have been prepared at some point in time after April 2005 and before September 2005. That follows from its reference to Building Approval’s having been given for work at what was to become the Woodside Stud in March 2005 and earthworks’ having commenced in April 2005 with a planned completion date of September 2005.
45.The WPB Plan noted that 55 hectares of grazing land at Tylden had been located in July 2004 and final settlement of the purchase had taken place in November 2004. Contact had been made with the local council:
“A working relationship was established with executives and elected representatives of Macedon Ranges Shire Council in order to:
¨convince them of the company’s intention to build a world class facility;
¨publicise the economic benefit such a development would bring to the region;
¨appease any concerns the local residents may have on how their lifestyles may be affected;
¨and to expedite the planning process.”[45]
The Business Profile stated that the purchase and capital expenditure was funded by Wadham Nominees.
[45]T documents; T14 at 329-330
46.A SWOT Analysis sets out strengths, weaknesses, opportunities and threats that had been identified. A then lack of first class horses was one of the weaknesses identified. The Summary of the SWOT Analysis included the statement that:
“Success on the race track is critically important, in order to continually attract quality horses to our stables.”[46]
[46]T documents; T14 at 332
C.Meeting of Directors held on 22 August 2005
47.The Minutes of the Meeting of Directors of Wadham Park held on 22 August 2005 and attended by Mr Rowsthorn reflect a discussion of a possible future stud:
“PR sees the fact we will not go out and buy a stallion however if one of the WP horses shines then we can look at the possibility of having that horse service the mares. When you have a stud, you also provide agistment facilities for the mares that have been served.
Figures dictate the following:
4 stallions servicing 120 mares
Need 1 acre per mare.
Board want DS to look at cost of setting up a stud, and report by next meeting. But at this stage, the stud will most likely develop through the fact that one of our horses may become a stallion. At that point in time, WP may look at setting one up.”[47]
[47] T documents; T14 at 292
D.Wadham Park’s 2006 Strategic Plan
48.A document entitled “Wadham Park – Strategic Plan 2006-2009 Wadham on Track” and shown as “Draft 1.0” is dated 4 November 2005 (2006 Wadham Park Strategic Plan). It described the core services provided by the group of privately owned companies known as “Wadham Park” in the following terms:
“· Bloodstock services – currently the purchasing, preparation and on-selling of thoroughbreds;
·Training services – including breaking, pre-training, and training;
·Agistment – Wadham Park has state-of-the-art facilities in Queensland and Victoria;
·Rehabilitation – Wadham Park has established Australia’s most advanced veterinary facility (including hospital and rehabilitation facilities) at its Queensland property, and will replicate this facility in Victoria.
In just two years of operation the Wadham Park group of companies has made substantial progress in establishing an integrated services business model, successfully combining low risk/low margin businesses (such as training and agistment) with high risk/high margin businesses (such as bloodstock). …”.[48]
The state of the art facility in Victoria was to be opened in December 2005.[49]
[48]T documents; T4 at 53
[49]T documents; T4 at 53
49.The 2006 Wadham Park Strategic Plan identified Wadham Park’s then competitive advantages. They included its industry leading facilities in Queensland and Victoria, its integrated business model, the thoroughbred management skills and experience of its Managing Director, Mr Dale Sutton, and his staff, the recent achievement of some small on-track success in races approaching the upper echelons of the industry and the potential of the Wadham Park brand to be a premium brand. The document went on to identify Wadham Park’s key disadvantage which it stated was:
“… reflected in the appraisal of the brand as potential premium, and indicates the industry assessment that while Wadham Park has the best possible facilities and infrastructure, and has performed acceptably given its relative newcomer status, it must produce results in the next three to five years if its potential is to be realised. Sustained-on-track performance at high level is therefore key to:
-achieving above normal returns across all facets of the business, and consequently reaching a level of profitability that will support acceptable returns on investment;
-building a strong premium brand as the foundation for developing high profit breeding business in the future.”[50]
[50]T documentsl T4 at 54
50.The members of Wadham Park’s Board of Directors met on 22 January 2006 at WPS at Tylden in Victoria. The record of the meeting summarises the Manager’s Report:
“As per last meeting current position of training, pre training, and agistment has not altered. Currently still well down.
Again as discussed in previous meeting, PR wants board to discuss strategic plan going forward. WP simply needs to get number of horses up, but more importantly, at higher rates. DS is implementing Strategic Plan prepared by TM’s [Terence Mallon’s] office, and board understands it will take 2 years to see results of that plan bear fruit.
KPI Report:
P Rocke is concerned about the numbers we need to achieve. P Rocke brought up the discussion of accepting horses to train of ‘lesser’ quality. He feels that it should not deter from our strategic plan, and there is no ‘shame’ in WP training ‘country’ racehorses, and that it is still quite a good achievement to have good horses at Gold Coast, Caloundra and so on.
TM acknowledges what P Rocke is putting forth as a suggestion, but it really is up to DS to make that call. DS simply does not want horses that are of no better than ‘country’ quality, because he feels that it would be a step backwards, for the purposes of filling the stables. Whilst it may be cash flow positive for WP in the short term, it may take longer to achieve our city on track success.
…”[51]
[51]T documents; T14 at 373
Bloodstock Acquisition Project
51.Wadham Park issued a document in February 2006 outlining its Bloodstock Acquisition Project and providing a preliminary overview to enable potential investors to decide whether they would like to participate in it. Between January and April 2006, Wadham Park intended to purchase 40 premier yearlings for a total of $6,200,000 and a further 20 yearlings at a cost of $400,000, which will be prepared for Ready to Run sales. The total cost of training, racing and agisting the 60 horses was estimated to be in the vicinity of $1,400,000 in the first year. Therefore, the total capital required to fund the Bloodstock Acquisition Project was $8,000,000. The ratio of colts to fillies would be 1:7. The emphasis on fillies was intended to ensure that there was a residual value in respect of the overall bloodstock acquisitions and:
“In addition, the purchase of fillies provides the potential to engage in breeding activities at an appropriate future stage.”[52]
[52]T documents; T5 at 68
52.Wadham Park planned to coordinate a group of 10 investors, each of whom would invest $800,000. It expected the value of their investment to increase by a minimum of $1,474,500 or 18.4% within two years but a number of scenarios could see the value of the bloodstock increase by a multiple in the range of one to four. Investors were asked to advise of their intent to participate. They were advised that:
“… the principal of Wadham Park Mr Peter Rowsthorn and Wadham Park Bloodstock Pty Ltd has committed to invest $2,400,000 in relation to the project. Accordingly, as at today’s date, 30% of the funds required for the project have been attained.”[53]
[53]T documents; T5 at 68
As at 28 February 2006, the Bloodstock Acquisition Project had acquired 18 horses for a total price of $3,341,000 and $NZ465,000. They were listed by their sire and dam as well as their sex, purchase price and classification. They were not named.[54]
[54]T documents; T5 at 78
WPS and the Woodside Stud
53.On 19 April 2006, WPS was registered as a company limited by shares. A Business Plan dated May 2006 was prepared for Woodside Stud (or Woodside Park as it is also known). The Executive Summary to the document described Woodside Stud as:
“… an integral phase in the overall strategy to establish the Wadham Park group as one of Australia’s premier thoroughbred racing and breeding operations.
The business concept comprises the establishment of a full scale thoroughbred breeding facility/stud farm.
The facility will be established on a recently purchased parcel of land of 321 acres at Tylden (‘Woodend region’), an established area of Victorian thoroughbred breeding. …
It is envisaged that the operation will provide the following services:-
·Stallion services;
·Broodmare and foal agistment;
·Weaning and yearling sales preparation.
In addition, the business will invest in stallions and broodmares for the purpose of breeding and trading bloodstock.”[55]
[55]T documents; T14 at 352
54.The strategy for Woodside Stud would begin with the purchase of 321 acres at Tylden in Victoria to be:
“… developed into a world class breeding facility, however, the capital expenditure relating to the infrastructure will be kept to a minimum to reduce the likelihood of the facility being over capitalised.
The business will take possession of the property in May 2006. …
The infrastructure will include fencing, stallion barn, stabling, covering barn, veterinary room, foaling box/shelters, irrigation and landscaping. Projected cost $4,000,000.”[56]
[56]T documents; T14 at 356
55.Mr Rowsthorn said that he funded both the acquisition of the land at Trentham Road, Tylden, in Victoria and the building of the training facility on that land.[57] He bought the land in May 2006. Under the “2006/2007 Income Assumptions” is written:
“· Capital contribution from shareholders for working capital and bloodstock - $1,200,00.
·Loan for purchase of land and fencing - $3,000,000. It is envisaged that this loan will be subject to an interest rate of 7.5% per annum.
·Bloodstock sales - $1,600,000.
…”[58]
[57]Exhibit A at [17]
[58]T documents; T14 at 359
The “Expenditure Assumptions” include an item for the “Purchase of land - $2,000,000.” and another for “Interest – loan $225,000.”[59] The Income Assumptions for 2007/2008 include a loan of $3,000,000 for infrastructure with interest predicted to be 7.5% per annum.[60]
[59]T documents; T14 at 359
[60]T documents; T14 at 360
56.It was planned that Woodside Stud would acquire two stallions, which would commence stud duties for the 2008 season. In addition, 40 broodmares (in foal) would be purchased during 2006 (June) in order to streamline the reproductions cycle and enable Woodside Stud to sell yearlings during 2008. Additional broodmares (in foal) would be purchased during 2007 and 2008. Empty mares would return 40% of their original purchase price but those sold in June 2009 would be served by Woodside Stud’s resident stallions and sold in foal. Therefore, they would return 80% of their original purchase price. Retained broodmares will be served by resident stallions or by other farms’ stallions on a barter basis.
57.The acquisition of two stallions was addressed at cl 6.2 of Woodside Stud’s Business Plan:
“Stallion Services
It is planned that two stallions will be purchased to commence stud duties for the 2008 breeding season. It is envisaged that the value of the stallions will be $7,000,000 i.e. $5,000,000 and $2,000,000, with an initial service fee of $30,000 and $10,000 respectively. 50% or each stallion will be sold to external investors.
Suggested Stallion Syndication Model
It is envisaged that each stallion will be syndicated into 50 shares. Woodside Stud will retain 25 shares and sell 25 shares to external investors. Each shareholder will be permitted three serves per share for the first three years and one share [sic] per year thereafter. This strategy will maximise income and the number of mares being served by each stallion during the initial three years of stud duties.
It is planned that the stallions will be financed (see page 16 – financial notes).
The above model will provide 85 service nominations for the business to utilise and/or sell per annum during the first 3 years.
The operation will also investigate opportunities relating to the purchase of additional stallions and shuttle stallions.”[61]
[61]T documents; T14 at 356
58.In cross-examination, Mr Rowsthorn said that he had given Grey Swallow to the Woodside Stud to use. That was just another form of financial support for the Wadham Park group. In that way, the Woodside Stud did not need to acquire a second stallion in addition to Econsul. Initially, he had not expected Grey Swallow to return a surplus of income over expenses and there had never been any modelling projecting the length of time that it would take to return a surplus of income.
Insurance of Grey Swallow
59.Grey Swallow was insured for $4.1 million for the period from 20 June 2006 to 20 June 2007. The Tax Invoice for the premium was issued to Mr Rowsthorn c/o Wadham Park. It showed that Grey Swallow would be used for flat racing and as a future stud. He was all insured for all risks including permanent total impotency, infertility or inability to serve as a stallion. The Bloodstock Insurance Brokers sent the Tax Invoice to the Manager of Wadham Park together with Tax Invoices detailing the covers placed, and the premiums payable, for three mares in the name of WPS.[62]
[62]Exhibit A; Annexure 23
Wadham Park’s review and assessment of strategy
60.At the meeting of the Wadham Park Directors held on 3 November 2006, a Director, Mr Peter Rocke, wanted:
“... to know what the marketing strategy is going to be moving forward. PR says that a meeting should be scheduled in the next month, with DS to submit a spreadsheet showing financial outcomes, coupled with a plan on how it will be achieved. PR continues to maintain that without on track success, WP will not attract outside clients with large number of horses, if has to be achieved ‘internally’.”[63]
[63] T documents; T14 at 295
61.On the same day, 3 November 2006, the Directors of Wadham Park Bloodstock Pty Ltd met. The report of the meeting included a note regarding the Bloodstock Acquisition Project:
“Update on Horse Trading Activities and Bloodstock acquisition strategy:
No further $800k club sale of shares have been sold. Board extremely disappointed with this. DS is working on new strategy as speak. In short, the new stud will take up remaining 6 shares in $800 club.
…”[64]
[64]T documents; T14 at 324
62.The Directors also addressed the financial position of Woodside Stud:
“DS wants WPB [Wadham Park Bloodstock Pty Ltd] to discontinue purchasing horses to trade and re-sell at ready to run/breeze up sales. The last 2 years trading results have been disappointing; hence DS wants to instead concentrate on developing a relationship with countries such as Korea, who will ‘order’ horse from WPB. WPB has sold two horses to Korea who have won ‘black’ type listed races. DS thinks we should only purchase horses for re-sale on the proviso that WPB has an undertaking from the Koreans that they will purchase them from us. Board is happy for DS to strike a relationship with the Koreans, on the proviso that it is all handled in a professional and ethical manner. DS will have a meeting with David Chester of ‘Magic Millions’ and formulate relationships with overseas buyers. DS is adamant that WPB will not buy horses for speculative purposes, but instead on ‘order’.
DS to produce a detailed plan to be presented to the board within the next month on what the strategy for the entire WP group will entail over the next 5 years.[65]
[65]T documents; T14 at 324
63.Mr Rowsthorn said that he had intended to race Grey Swallow in the Spring Carnival in 2007 and to retire him to stud in 2008. In the first half of 2007, various options were being considered, Mr Rowsthorn said in his statement and referred to the reports of the Board Meetings of Wadham Park and Woodside Park (WPS) by Mr Rodney Rae in support of his statement.
64.The Directors of Wadham Park met on 20 April 2007. They noted the Performance Review for 2006/2007:
“Even though WP Vic has provided outstanding facilities, we have not been able to attract quality outside clients. Hence, the strategic plan that has been put in place to build success from within the company on track, by having Woodside Park Stud purchase yearlings to supply WP Vic with sufficient numbers to make the company profitable.”[66]
[66] T documents; T15 at 410
65.Mr Rae was the General Manager Operations of the Wadham Group and he began his February 2007 Board Report with the statement:
“The following report is tabled in order to detail the status of initiatives/projects being undertaken by Rodney Rae for Wadham Park and Woodside Park (as at 12 February 2007) …”[67]
[67]Exhihit A; Annexure PR-16 at 1
66.At [5] in his report, Mr Rae deals under “Administration” with matters relating to the purchase, insurance and marketing of Econsul (NZ). The purchase had been made at some time early in 2007. Mr Rae wrote that he had been working on two marketing plans for Econsul. One related to his syndication. Twenty two shares priced at $40,000 each would be marketed. The object was to sell all 22 shares by 30 April 2007. The other marketing plan involved Econsul’s promotion to Australian and New Zealand brood mares. The plan was to sell 75 services by 31 July 2007. Each service would be priced at $9,000. A list of yearlings that had been purchased for sale or syndication was said to be attached but was not.
67.A reference to the development of the WPS Business Plan follows before Mr Rae turned to Grey Swallow reporting:
“2008 Northern Hemisphere Breeding Season
It is advised that I have identified 4 interested parties in relation to standing Grey Swallow (IRE) at stud for the 2008 Northern Hemisphere breeding season i.e.
…
It is recommended that negotiations commence immediately with … in order to have Grey Swallow (IRE) placed for 2008.
2007 or 2008 Southern Hemisphere Breeding Season
As previously advised, it is Dale’s intention to race Grey Swallow (IRE) during the 2007 Spring Carnival. On that basis, he would not be in a position to go to stud in 2007.
In respect of 2008, the option exists for him to stand at Woodside Park. However, discussions have also been initiated with … in New Zealand as a secondary option.”[68]
[68]Exhihit A; Annexure PR-16 at 4
68.Mr Rae’s April 2007 Board Report was in similar terms[69] as was his report for June 2007.[70] He reported that 25% of the horses had been sold to one outside group for $165,000. The Minutes of the Meeting of Directors of Wadham Park held on 3 September 2007 records, in part:
“DS and PR have decided to retire him [Grey Swallow] to stud. A small article was placed in the ‘Winning Post’ and DS says that the phone was running hot last Friday (31st Aug). 11 mares have been confirmed to be served by GS. … David Chester from Magic Millions has advised DS to lower the service Fees, so that GS can serve more Mares which will mean he will have more foals that have a chance of racing …
DS and PR have yet to decide beyond the next month or two, which strategy to go with, since there have been a number of offer [sic] on the table form [sic] overseas and Australia. Decision to be made in the next month or so.”[71][69]Exhihit A; Annexure PR-17 at 2
[70]T documents; T15 at 415-416
[71]Exhibit A; Annexure 18 “DS” is a reference to Dale Sutton, who is a Director of Wadham Park
69.In cross-examination, Mr Rowsthorn agreed that the suggestion to lower Grey Swallow’s fees had been made and that Magic Millions is one of the largest sales houses for thoroughbred yearling sales in Australia. He could not recall whether David Chester’s advice had been followed or not but there was nothing unusual about people giving advice. The fact was that David Chester was right and the fees were then lowered but, by then, Grey Swallow had become an unpopular stallion.
70.An undated document written on Wadham Park letterhead is headed “Preamble to Budget and Strategic Plan 2007-2008” and bears Mr Rowsthorn’s name at its end. It began:
“Wadham Park Pty Ltd is not to shift its strategy from the breaker, pretrainer, trainer agister and rehabilitator to the racing industry.
To breeder, breaker, pre trainer and trainer of its own stock.”[72]
Mr Rowsthorn then set out the reasons for the change and its expected financial impact and the purchase of fillies in Victoria. He then turned to the Stud Operations at Woodside Stud:
“Planning of the stud ensued. Two prospective sires were purchased. ‘Econsul’ who had a short but celebrated career in Australia and ‘Grey Swallow’ who is a highly performed racehorse in the northern hemisphere. Both of these horses are the nucleus of Woodside Park Stud, great interest has been shown in both horses. These two sires will produce with our recently purchased 50 mares (this includes outside sires); we envisage this will give us enough quality yearlings beyond 2009 to satisfy current needs.
In 2008 we will purchase 40 yearlings. In the ensuing years an estimate of 10 yearlings each year will be sufficient. The better performed will continue to race on. The remainder will go to stud; to later be sold in foal.”[73]
[72]T documents; T15 at 491
[73]T documents; T15 at 492
71.Mr Peter Rocke, a Director of Wadham Park wrote to Mr Dale Sutton and Mr Domenic Tempone on 14 June 2007 regarding the Budgets for WPS, Wadham Park, Wadham Park Pty Ltd Queensland, Equine Rehabilitation Centre Pty Ltd and Wadham Park Bloodstock Pty Ltd. He set out an assessment of the future of the group:
“The 2007/2008 is a watershed for the consolidation of the Victorian and Queensland training operations, together with the establishment of the Victorian stud, so the setting of realistic and attainable financial goals becomes critically important to accurately estimate the long term viability of an investment in property and livestock currently in excess of $61m.
The major future source of revenue is now dependent on the profitability of the stud which is a new venture and these expected revenues can only be based on comparable sale figures which does inject a considerable degree of uncertainty into the outcomes.
The impact of Econsul on the breeding industry and results of the January 2008 Magic Millions yearling sales will be a litmus test for the success of the stud in its formative years.
…”[74]
[74] T documents; T15 at 549
91.What is also clear from Mr Rowsthorn’s Strategic Plan, and I find, is that he also wanted to develop the Wadham Park group of companies. He saw his individual success with his own horses as being an essential part of the strategy towards the development of the Wadham Park as a profit producing entity. Investment in his own horses would encourage members of the public to use the services of the Wadham Park group, which would be dependent on their doing so for its long term productivity. Mr Rowsthorn saw his success and that of his immediate family tied closely with the fortunes of the Wadham Park group and of its shareholders and employees.
92.The various Business, Marketing and Strategic Plans prepared on behalf of Wadham Park show the development of its hopes and aspirations to expand beyond its original investment in Canungra in Queensland to become part of the racing industry in Victoria. The decision to move Wadham Park’s central operations to Victoria was made in 2004, if not before, and the acquisition of land and construction of facilities at what was to be taken over and run by WPS as the Woodside Stud was undertaken in 2005. Various facilities were constructed for the training, rehabilitation and agistment of horses as well as for servicing mares. They have been described in the evidence as Australia’s most advanced facilities.
93.The facilities were one thing but the generation of income from those facilities was another. Various strategies were adopted. At Canungra, Wadham Park had focused on attracting large numbers of owners and their horses to generate income. With the move to the Woodside Stud, the focus was readjusted to attract smaller numbers of horses but horses of a higher quality than those that had been attracted to Canungra. Higher quality horses, it was thought, would enhance their success on the track and success on the track would attract better quality mares, and so greater service fees, when stallions were retired to stud. Woodside Stud and its facilities were marketed to owners of quality horses but they were slow to come.
94.The Bloodstock Acquisition Project was another strategy. The documents show that it was a strategy developed by Wadham Park. They also show that Mr Rowsthorn and Wadham Park Bloodstock Pty Ltd had made a commitment to invest $2,400,000. The Preliminary Information made available to prospective investors in the project did not show the allocation of that commitment between Mr Rowsthorn and Wadham Park Bloodstock Pty Ltd. As at 28 February 2006, an amount of $3,341,000 and $NZ465,000 had been spent on 18 horses, all of which were shown on a document headed “Wadham Park Bloodstock Pty Ltd”. No mention was made of Mr Rowsthorn’s investment. As they were only identified by reference to their sire and dam and not named, it is not possible to trace what became of them from the documents. It is not possible from the documents whether Mr Rowsthorn’s financial commitment to the Bloodstock Acquisition Project was used to pay for all or any of those 18 horses. The documents that I have do not reveal whether all or any of the 18 horses were sold and what, if any, moneys were received for them and by whom.
95.A third strategy was to acquire two stallions to stand to stud for quality mares. One was Econsul but the documents do not specify whether he was purchased by Wadham Park or by WPS. He was clearly meant to stand to stud at the Woodside Stud and reference is made to him in the documents relating to the service fees he attracted for WPS. On the basis of Mr Rowsthorn’s evidence, I find that he gave Grey Swallow to the Woodside Stud to use. He did so as another form of financial support for the Wadham Park group. In that way, the Woodside Stud did not need to acquire a second stallion in addition to Econsul.
96.The evidentiary material does not acknowledge the loan[95] made by Mr Rowsthorn. There is nothing that indicates any conditions to which the gift might have been subject. Conditions might have included the time for which Mr Rowsthorn was prepared to let the Wadham Park group or WPS use Grey Swallow. There is no evidence of Mr Rowsthorn’s appointing WPS, Wadham Park or any other person as his agent in relation to Grey Swallow’s use. On the material that I do have, Grey Swallow appears as one of the two stallions used by the Woodside Stud and included in the general strategy of Wadham Park and the Woodside Stud without any attribution of Mr Rowsthorn’s ownership of him.
[95] I do not find that Mr Rowsthorn made a gift of Grey Swallow to WPS for the sale documents are in his name. The fact that insurers issued a Tax Invoice for the insurance premium payable with respect to Grey Swallow on 27 September 2007 in the name of Woodside Park Stud rather than that of Mr Rowsthorn is not inconsistent with his retaining ownership: Exhibit B. The Bloodstock Insurance Policy showed the “insured” as Woodside Park Stud rather than Mr Rowsthorn but WPS would have had an insurable interest given that the role that Grey Swallow was intended to play in generating income for the Woodside Stud.
97.On the basis of Mr Rowsthorn’s written statement, I find that costs of Grey Swallow’s agistment and other expenses were invoiced to WPS and not to him. Apart from the initial purchase price he paid for Grey Swallow and its first year of insurance, Mr Rowsthorn did not incur any costs and he did not, as he said, receive any income from him. Any net income Grey Swallow did generate was received by WPS and WPS did not account to Mr Rowsthorn regarding Grey Swallow’s income or expenses. Although Mr Rowsthorn said that he had expected to be paid any excess of service fees over expenses, I find that he did not keep any records of either the fees or of the expenses so that he could ascertain if and when that occurred. I am not satisfied that WPS or the Wadham group generally kept records of that sort for the purpose of accounting to Mr Rowsthorn. From the records that I do have, I find that Wadham Park charged WPS agistment fees of $6,141 and an insurance premium of $100,000 in the 2008 income year. At the same time, it received service fees of $109,800. On the documents that I have, there is also an excess of the service fees of $140,002.50 over recorded agistment costs of $132 for the 2009 income year. As Mr Rowsthorn said, he was not paid the difference between the income generated by Grey Swallow and the expenses incurred in respect of his keep and care.
98.Certainly, Mr Rowsthorn was aware of what was happening with Grey Swallow but that was in the context of his activities at the Woodside Stud and in the context of the activities of WPS and the Wadham group generally. On the evidence, I am not satisfied that there was any accounting of Grey Swallow’s activities to Mr Rowsthorn personally as his owner.
99.The arrangements that Mr Rowsthorn had with WPS and the Woodside Stud regarding Grey Swallow were consistent with any contribution that he had made to the Bloodstock Acquisition Project. He effectively saw the companies that formed the Wadham group and their projects as another manifestation of himself. He said as much when he said that, putting aside horses he owned personally, all of the horses at the Woodside Stud were owned by WPS “which was Peter Rowsthorn anyway”.
100.WPS is, however, an entity separate from Mr Rowsthorn. It used Grey Swallow for the purpose of producing assessable income. Mr Rowsthorn used Grey Swallow by lending it to WPS for the purpose of WPS’s producing assessable income. He gave WPS and the Woodside Stud unlimited standing rights. In the absence of any agency agreement or other agreement between him and WPS, I am satisfied that WPS’s purpose in using Grey Swallow was for producing assessable income for itself, WPS, and not for Mr Rowsthorn.
101.Even when it is remembered that Mr Rowsthorn was the sole director and secretary of WPS, it cannot be said that WPS’s purpose in carrying out its activities was that of producing assessable income for him personally either by using Grey Swallow or more generally. It was for the purpose of enabling WPS to produce assessable income for itself. WPS and Mr Rowsthorn are separate legal entities and one cannot be the alter ego for the other. Even if he had been the sole shareholder in WPS (which he was not as Wadham Nominees is the sole shareholder) his being so would not have led me to conclude that WPS’s use of Grey Swallow for the purpose of producing assessable income became Mr Rowsthorn’s use of him for that same purpose. As the sole shareholder, Mr Rowsthorn would have been entitled only to income in the form of any dividend declared by the directors of WPS if its assets exceeded its liabilities and the payment of the dividend had not materially prejudiced its ability to pay its creditors.[96] He would not have been entitled to receive whatever net income WPS generated let alone any net income it generated in relation to Grey Swallow. His purpose in lending, and so using, Grey Swallow could only have been to enhance WPS’s prospects of producing assessable income and so enhance his prospects of WPS’s declaring a dividend of which he would be the recipient. That is a purpose too remote from his using Grey Swallow for the purpose of producing assessable income and so for a taxable purpose.
[96]Corporations Act 2001; s 254T
102.The strict separation of Mr Rowsthorn and WPS as well as any other company in the Wadham group is consistent with the principles set out by Jenkinson J, with whom Woodward and Foster JJ agreed, in Dennis Willcox v Federal Commissioner of Taxation:[97]
“ Neither the circumstance that a company is completely subject to the ownership and direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways which minimise the manifestations of the company’s separate legal identity will justify, in my opinion, a conclusion that acts in the law formally done by the company are to be regarded, for the purposes of the kind here in question in relation to Australian income tax law, as acts in the law done by that other person. …”[98]
[97][1988] FCA 123; (1988) 79 ALR 267
[98] [1988] FCA 123; (1988) 79 ALR 267 at [14]; 274 and see also Hobart Bridge Co Ltd v Federal Commissioner of Taxation [1951] HCA 33; (1951) 82 CLR 372 at [24]; 385 per Kitto J and Kenneth A Summons Pty Ltd v Federal Commissioner of Taxation (1986) 86 FLR 408 at 437 per Ormiston J
103.As matters stand, Mr Rowsthorn is not a shareholder of WPS at all. The sole shareholder is Wadham Nominees of which Mr Rowsthorn is the sole director and a shareholder. Even if WPS declared a dividend in the 2008 and 2009 income years, and there is no evidence that it did, it would have been payable to Wadham Nominees as its sole shareholder. That would not lead to the conclusion that Wadham Nominees would make a distribution to Mr Rowsthorn in the 2008 or 2009 income years. Certainly, Wadham Nominees is the trustee of the Peter Rowsthorn Settlement and Mr Rowsthorn is named as one of its beneficiaries. Other beneficiaries include his children, grandchildren and more remote issue including adopted children and grandchildren as may be living. The trustee held the property upon trust to, among other matters “… apply such part of the income arising during the income period as the trustee thinks fit between the beneficiaries and spouses in such proportions in all respects as the trustee thinks fit …” by paying, investing or accumulating all or part of the income in the manner specified in cl 2 of the Trust Deed. A reading of cll 1(e) and 2 show that the trustee, Wadham Nominees, was given a very broad discretion as to the manner in which it could make a distribution. Mr Rowsthorn is one of the beneficiaries to whom Wadham Nominees may choose to distribute income from the Peter Rowsthorn Settlement but he is not the only beneficiary to whom it may decide to make a distribution. It might be that Wadham Nominees decided not to make a distribution at all. His rights in the Peter Rowsthorn Settlement extended only to his, along with the other beneficiaries, having:
“… a right to compel the trustee to consider whether or not to make distribution to him or her and a right to the proper administration of the Trust. In Gartside v Inland Revenue Commissioners, Lord Wilberforce put it thus … [[1968] AC 553 at 617-618]:
‘ No doubt in a certain sense a beneficiary under a discretionary trust has an ‘interest’: the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient by the trustees and a right to have his interest protected a court of equity. Certainly that is so, and when it is said, and when it is said that he has a right to have the trustees exercise their discretion ‘fairly’ or ‘reasonably’ or ‘properly’ that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund’s income: it may be a right, with some degree of concreteness or solidity, one which attracts the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be taxed.’
…”[99]
[99]Kennon v Spry [2008] HCA 56; (2008) 238 CLR 366 at [74]; 393 per French CJ
104.It follows that the link between his lending Grey Swallow to WPS to use to produce assessable income at the Woodside Stud and Mr Rowsthorn’s receiving any income at all by way of the declaration of a dividend by WPS and a distribution by Wadham Nominees is far too tenuous to satisfy me that he lent the horse for the purpose of producing assessable income for himself. I am not satisfied that any distribution to him by the Peter Rowsthorn Settlement could be described as assessable income produced as a result of his use of Grey Swallow.
105.Even if Mr Rowsthorn thought that his lending Grey Swallow to the Woodside Stud would lead to his producing assessable income for himself and not by way of his being a beneficiary of the Peter Rowsthorn Settlement, I find that he did not take any action to ensure that he kept track of Grey Swallow’s income and expenses or enquire why he was not being paid any difference between that income and those expenses. He produced no records to show that he was doing that. His maintaining a general eye on Grey Swallow’s progress as part of the activities of WPS and the Woodside Stud do not equate in this case with his doing so for the purposes of producing assessable income on his own account rather than on account of WPS. It matters not whether Grey Swallow actually produced any assessable income and it matters not if Grey Swallow was Mr Rowsthorn’s only horse, which he was not, but it does matter that Mr Rowsthorn did not, either personally or through his accountant, produce any records regarding Grey Swallow and the income he produced and the expenses incurred in relation to them. The records that there were all indicate that those expenses were incurred by entities other than Mr Rowsthorn and that his purpose in using Grey Swallow was not to produce assessable income for himself but for others. He could not be said to be carrying on a business for the purpose of gaining or producing assessable income. All that he was doing was lending a horse to another entity to help it to gain or produce assessable income or for the purpose of gaining or producing assessable income.
106.It follows that I am not satisfied that Mr Rowsthorn used Grey Swallow for a taxable purpose. As he did not do so, he was required by s 40-25(2) of ITAA97 to reduce by 100% the deduction he might otherwise have claimed for Grey Swallow’s decline in value as that decline in value was not attributable to his using the horse for a taxable purpose.
SHORTFALL INTEREST CHARGE
Legislative framework
107.Liability to pay a shortfall interest charge (SIC) arises under Subdivision 280-B of Schedule 1 to the Taxation Administration Act 1953 (TA Act). Section 280-100(1) provides:
“You are liable to pay *shortfall interest charge on an additional amount of income tax that you are liable to pay because the Commissioner amends your assessment for an income year.”
108.Sections 280-100(2) and (3) provide for the period in respect of which the liability arises. A taxpayer’s liability arises regardless of whether he or she is liable to pay any penalty. [100] The amount of the SIC is calculated by multiplying the rate worked out under s 280-105(2) by, in this case, the sum of the additional amount of income tax. The rate is:
[100]TA Act; s 280-103(1)
Base Interest Rate for the day
+3 percentage points Number of days in the
calendar year
109.Subdivision 280-C is concerned with remitting the shortfall interest charge. Section 280-160 provides that:
“() The Commissioner may remit all or part of an amount of *shortfall interest charge you are liable to pay if the Commissioner considers it fair and reasonable to do so.
(2)Without limiting subsection (1), in deciding whether to remit, the Commissioner must have regard to:
(a)the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the *shortfall interest charge; and
(b)the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.”
110.The Commissioner has remitted the three percentage points provided for in s 208-105(2) of Schedule 1 to the TA Act for the following periods:
(1)from 12 June 2011 to 28 March 2013 for both the 2008 and 2009 income years as that period reflected his delay in commencing an audit;
(2)beyond 12 June 2013 in respect of the 2008 income year and 18 June 2014 for the 2009 year in recognition that Mr Rowsthorn had consented to extend the period of review beyond the dates that would otherwise have applied under s 170 of ITAA36;
(3)for the period from 31 May 2013 to 15 November 2013 for the 2008 year (to the extent not already remitted for that period) and for the 2009 year, being a period during which Mr Rowsthorn had sought and been granted extra time in which to respond to audit requests; and
(4)for the period from 31 May 2014 for the 2009 year because the ATO had not completed the audit by anticipated completion date notified in the Audit Management Plan.
Consideration
111.Mr Nicholas submitted that the amount of the SIC should be remitted to Nil. He did not elaborate on his submission. I have started my consideration from the foundation position established by s 280-100(1) i.e. that a taxpayer is liable to pay SIC on an additional amount of income tax that he or she is liable to pay because the Commissioner amends his or her assessment for an income year. The rationale for this position is explained in the Commissioner’s Practice Statement Law Administration PS LA 2006/8:
“2A. Taxpayers have a responsibility to lodge, report correctly and pay their tax debts on time. GIC and SIC are intended to encourage timely payment of tax. They also deny late payers, including people who have paid late because they reported too little in tax or claimed too much, an advantage over those who pay on time. Taxpayers who have underpaid have had the use of those moneys.
2B. Interest charges also serve to compensate the Australian Government and the community for the impact of late payments.
…
4A. Interest charges are intended to restore a fair balance between taxpayers, as mentioned above. They apply regardless of whether or not the taxpayer is liable to any administrative penalty, and do not depend upon, nor imply, culpability on the part of the taxpayer.”
112.In view of the remissions to base rate that have already been made by the Commissioner and the grounds on which they have been made and in view of the rationale for the imposition of the SIC, I am not satisfied that the SIC should be further remitted. The circumstances do not justify the Commonwealth’s bearing any further share of the cost of carrying the additional amount of income tax that the Commissioner assessed Mr Rowsthorn was liable to pay. He should bear the share of the cost that remains in the form of the SIC as remitted by the Commissioner. This is not a case in which Mr Rowsthorn identified the error and advised the Commissioner before being told of an examination of his taxation affairs. I do not have any evidence that Mr Rowsthorn has paid the shortfall amount either before or while he quite properly pursued the avenues of review available to him.
DECISION
113.For the reasons I have given, I affirm the Commissioner’s objection decision dated 7 July 2015.
I certify that the preceding one hundred and thirteen paragraphs are a true copy of the reasons for the decision herein of Deputy President S A Forgie
.......[sgd].............................................................
Associate
Dated: 5 May 2017
Date(s) of hearing: 2 May 2016 Counsel for the Applicant: Mr P D Nicholas Solicitors for the Applicant: Rodda Legal Counsel for the Respondent: Ms M Baker Solicitors for the Respondent: Australian Taxation Office
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