Saunders, B. v Brown, S.E

[1987] FCA 142

Re: BARRY SAUNDERS and GERARD FRANCIS SHEEHAN
And: S.E. BROWN S.M. and PHILLIP GEORGE CURRY
No. VG312 of 1986 Administrative Law

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Jackson J.

CATCHWORDS

Administrative Law - committal proceedings before Magistrate for conspiracy to defraud the Commonwealth and defeat execution of a law of the Commonwealth - application for an order of review - whether it need be decided that a scheme is efficacious - whether the Commissioner has interim rights - effect of a stripping process taking place after default assessment.

Administrative Decisions (Judicial Review) Act 1977 s.5

Crimes Act 1914 ss.86(1)(b), 86(1)(e)

Income Tax Assessment Act 1936

Magistrates (Summary Proceedings) Act 1975 s.56(1)(b)

Vereker and Ors. v. Rodda and Anor. (VG 296 of 1986)

Forsyth v. Rodda and Anor. (VG 297 of 1986)

Scott v. Metropolitan Police Commissioner (1975) AC 819

Lamb v. Moss (1983) 49 ALR 533

HEARING

SYDNEY

#DATE 1:4:1987

ORDER

The decision of the first respondent be set aside.

The matter be remitted to the first respondent for further consideration in accordance with the reasons for judgment herein.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The applicants are each charged with conspiracy:-

(a) to defraud the Commonwealth contrary to s. 86(1) (e) of the Crimes Act 1914; and

(b) to prevent or defeat the execution or enforcement of the Income Tax Assessment Act 1936, contrary to s.86(1) (b) of the Crimes Act.

1. The first respondent is the Magistrate before whom the committal proceedings on those charges have taken place and on 21st July 1986 the first respondent intimated that, being satisfied, in terms of s.56(1) (b) of the Magistrates (Summary Proceedings) Act 1975:-
   
   

(a) that the evidence was sufficient to put the applicants on trial for those offences; and

(b) that the evidence for the prosecution raised a "strong or probable presumption of the guilt" of the applicants in respect of those charges;

she proposed to read the charges again to each applicant and to caution them in the terms set out in s. 56(1) (b). Each of the applicants has applied for an order of review of that decision pursuant to s.5 of the Administrative Decisions (Judicial Review) Act 1977.

1. The charges concerned the application to 45 companies of taxation schemes which had been devised by the applicants who, as the first respondent said in her reasons for decision, "are accountants who at the relevant time carried on a business as promoters of tax minimization schemes" and had done so for some time. Although, as I have said, 45 companies were involved, by agreement between the parties the proceedings before the first respondent dealt in detail with the affairs of four companies which it was agreed would be treated as sufficiently representative of the position with all the companies.

2. The scheme in question, according to the first respondent's reasons for decision, involved four phases described for brevity as the "acquisition", "treatment", "stripping" and "liquidation" phases.

3. The phases are conveniently outlined in the first respondent's reasons and I shall use the descriptions which she gave.

4. The acquisition phase involved transactions whereby:-
   
   

"Eighty-five per cent of the worth of the company was returned to the vendor shareholders as free tax capital by the use of a round robin of cheques, all fully documented, one of which involved the target company lending a sum equal to its cashed up value to Morla Pty. Ltd. which on lent the money (less the 15 per cent) to other companies which in turn purchased the shares in the target company from Corporate Clearing House Traders Pty. Ltd. which had that day bought them from the vendors. On certain occasions an Employees Trust, the trustee of which was Baleshare Pty. Ltd, was created by the defendants' organisation and interposed in the acquisition cycle." . . . At the end of the acquisition phase the shares were held by a company owned and operated by the defendants, called Searchmont Pty. Ltd."

The treatment phase was:-

" . . . an attempt to create artificial deductions which could be offset against the current year profit of each target company and, if successful, result in it not being liable to pay any income tax for the year ending 30 June 1979. One of two treatment schemes was used for each company, either a pre paid interest scheme (23 companies) or a section 59AA scheme, (22 companies) the latter creating allegedly deductible losses from a series of plant hiring partnerships."

1. The first respondent's reasons for decision described the stripping phase in the following way:-
   
   

"The third stage was the effective stripping of each target company's assets. This was done in two steps, both of which in fact occurred after the Australian Taxation Office issued default assessments for each company on 29 November 1979. The first was the declaration by each target company of a dividend to Searchmont Pty. Ltd, which although in certain cases far in excess of the requirements of Division 7 left sufficient assets of the company's books to meet its tax liability, in the event it had one. The second was the purchase by the target company of shares in one of three companies owned and operated by the defendants, which were subsequently rendered worthless as a result of those companies themselves becoming insolvent, which in turn was engineered by the defendants. This was achieved by locking 44 of the target companies together with 4 other companies into what the prosecution has called a collapsing triangle; the ground work was done in the early months of 1980 and the triangle finally collapsed on 24 April 1980. By then the defendants were directors of all companies involved. At that time the shares in the target companies were owned by another company owned and operated by the defendants called Bronzite Brass Foundry Pty. Ltd. The target companies owned shares in either Carneus Pty. Ltd. (formerly Hermal Holdings Pty. Ltd), Pectinatus Pty. Ltd. (formerly Pejar Pty. Ltd) or Hansen Pty. Ltd. Bronzite Brass owed these three companies approximately $7.018 million. This resulted in the worth of the target companies depending entirely on the worth of Carneus Pty. Ltd, Pectinatus Pty. Ltd. and Hansen Pty. Ltd. which in turn depended on the recoverability of their loan to Bronzite Brass Foundry Pty. Ltd, which in turn depended for its ability of (sic) pay the three companies on the worth of the shares which it owned in the target companies."

1. Finally the first respondent's description of the liquidation phase was as follows:-
   
   

"The fourth stage was the voluntary liquidation of the target companies, the two steps in the stripping stage resulting in its insolvency. By this stage Bronzite Brass Foundry Pty. Ltd. owned all the shares in the target company as trustee of the Righi Unit Trust. A friendly liquidator was appointed over the opposition of the Australian Taxation Office which although it was a creditor owed the most money did not have the numbers, the liquidator accepting proofs of debt of very small amounts (being administration fees) claimed by people and companies associated with the defendants. Twenty-five of the target companies went into liquidation on 26 November 1980, and the remainder between 26 February 1981 and 10 August

1983. Paul O'Reilly was the liquidator in most but not all cases."

1. I should also add that the first respondent's reasons make it clear that the summary which I have quoted was "a simplification of a very complex and ingenious scheme".

2. This case was heard before me immediately after the hearings in Vereker and Ors. v. Rodda and Anor. (VG296 of 1986) and Forsyth v. Rodda and Anor. (VG297 of 1986) in which I have given judgment today. Some of the issues which were argued in this case were argued in those cases also and it is accordingly unnecessary to set out at length my reasons on those points.

3. As in those cases the first respondent did not express a view on the question whether the schemes had been effective to create allowable deductions. She did consider the question whether the transactions involved were shams but took the view that they were not, with the exception of part of the transaction involving an acquisition of shares by Baleshare Pty. Ltd. as trustee of an employees' trust (on the occasions when Baleshare Pty. Ltd. was used in the transactions). What effect the finding of a partial sham had upon the efficacy of the remainder of the scheme was not further explored.

4. The approach taken by the first respondent was that the Commissioner of Taxation, both prior to the issue of the default assessments to which reference was made, and certainly thereafter, had interim rights to payment of such tax as might be, or had been, assessed.

5. For the reasons which I have given in the judgments I have delivered today Vereker and Ors. v. Rodda and Anor. and Forsyth v. Rodda and Anor. I do not regard those "interim" rights as being within the concept to which the House of Lords, per Viscount Dilhorne, referred in Scott v. Metropolitan Police Commissioner (1975) AC 819 at 840. In consequence the consideration of the matter before the first respondent has proceeded on an incorrect basis in relation to the charge of conspiracy to defraud. I also consider and again for the reasons which I gave in those cases that the consideration of the matter has proceeded on an incorrect basis in relation to the charges under s.86(1)(b). I should add that I do not regard the fact that the stripping phases took place after default assessments had issued as requiring that a different view be adopted. The making and issue of assessments, whether default assessments or not, does not mean that the schemes were not effective to create allowable deductions.

6. In these circumstances, I regard the case as one where in terms of the approach referred to in Lamb v. Moss (1983) ALR 533 it is appropriate to make an order of review in order that the first respondent may consider the evidence with a view to considering the application of s.56(1)(b) in the light of the approach which I have indicated in the other cases.

7. I shall order that the decision of the first respondent to which I have referred be set aside and the matter be remitted to her for further consideration in accordance with these reasons.