South Seas Holdings Pty Ltd (Trustee) v Commissioner of Taxation
[2025] FCA 848
•25 July 2025
FEDERAL COURT OF AUSTRALIA
South Seas Holdings Pty Ltd (Trustee) v Commissioner of Taxation [2025] FCA 848
File numbers: QUD 8 of 2020
QUD 9 of 2020
QUD 20 of 2020
QUD 326 of 2020Judgment of: COLVIN J Date of judgment: 25 July 2025 Catchwords: TAXATION - appeals brought under s 14ZZ of the Taxation Administration Act 1953 (Cth) in respect of objection decisions of Commissioner concerning related taxpayer entities - where taxpayers claimed deductions for interest and management fees incurred in particular tax years between 2001 and 2014 - where taxpayers also claimed deductions in respect of carried forward losses, prior year capital losses and deemed dividends - where taxpayers' case depended upon credibility of critical witness - held no reliance could be placed on version of events given by that witness - where certain appeal assessments were amended assessments issued under s 170 of the Income Tax Assessment Act 1936 (Cth) on the basis of Commissioner's opinion there was fraud or evasion - consideration of nature of appeal under s 14ZZ of the Taxation Administration Act and scope of the Court's powers on review - appeals dismissed
PRACTICE AND PROCEDURE - where affidavit deposed in earlier Family Court proceedings referred to in reasons - consideration of application of Part XIVB of the Family Law Act 1975 (Cth) - held no basis for suppression or redaction of part of reasons
Legislation: Corporations Act 2001 (Cth) s 1305
Evidence Act 1995 (Cth) s 69
Family Law Act 1975 (Cth) ss 114P, 114Q, 114S
Income Tax Assessment Act 1936 (Cth) ss 6, 99A, 109, 109C, 109RB, 170, 171A, Part IVA, Division 7A
Income Tax Assessment Act 1997 (Cth) ss 26-25, 202-45
Taxation Administration Act 1953 (Cth) ss 14ZQ, 14ZZ, 14ZZO, 284-30, 284-90
Cases cited: Addy v Commissioner of Taxation [2021] HCA 34; (2021) 273 CLR 613
Advanced Holdings Pty Limited as Trustee for The Demian Trust v Commissioner of Taxation [2021] FCAFC 135
Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971
APC v Mr B (No 2) [2024] NSWSC 1608
Australian Karting Association Ltd v Karting (New South Wales) Incorporated [2022] NSWCA 188
Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229
Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353
Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169
Brambles Holdings Ltd v Federal Commissioner of Taxation (1977) 138 CLR 467
CFB18 v Reader Lawyers & Mediators [2018] FCA 611
Commissioner of Taxation v Addy [2020] FCAFC 135; (2020) 280 FCR 46
Commissioner of Taxation v Cassaniti [2018] FCAFC 212; (2018) 266 FCR 385
Commissioner of Taxation v Roberts (1992) 37 FCR 246
Federal Commissioner of Taxation v Patcorp Investments Ltd (1976) 140 CLR 247
Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 43 FLR 217
Fitzroy Services Pty Ltd v Commissioner of Taxation [2013] FCA 471
Hinchcliffe v Commissioner of Police of the Australian Federal Police [2001] FCA 1747; (2001) 118 FCR 308
Hoh v Ying Mui Pty Ltd [2019] VSCA 203
Kolotex Hosiery (Australia) Pty Ltd v Federal Commissioner of Taxation (1975) 132 CLR 535
Sunlite Australia Pty Ltd v Commissioner of Taxation [2023] FCAFC 43; (2023) 296 FCR 600
The Queen v Howe (1978) 19 SASR 303
VL Finance Pty Ltd v Legudi [2003] VSC 57
Weyers v Commissioner of Taxation [2006] FCA 818
Whitton as Trustee of the Estate of John Emmanuel Rose v Regis Towers Real Estate Pty Ltd (In Administration) [2007] FCAFC 125; (2007) 161 FCR 20
Zappia v Commissioner of Taxation [2017] FCAFC 185
Division: General Division Registry: Queensland National Practice Area: Taxation Number of paragraphs: 730 Date of hearing: 23-26 and 30 September 2024 and 1-3, 8-11 and 16‑17 October 2024 Counsel for the Applicants: Mr A Kaufmann with Mr T Arnold Solicitor for the Applicants: Mark J Ord Lawyer & Consultant Counsel for the Respondents: Dr JE Jaques KC with Ms CT Ensor and Mr DH Southwood Solicitor for the Respondents: Australian Government Solicitor ORDERS
QUD 8 of 2020 BETWEEN: SOUTH SEAS HOLDINGS PTY LTD AS TRUSTEE FOR THE VR GOULD FAMILY SETTLEMENT SHARE TRUST
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
COLVIN J
DATE OF ORDER:
25 JULY 2025
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The applicant pay the respondent's costs of the appeal.
3.There be liberty to apply within 21 days to vary the order for costs by proposing the terms of a different order as to costs.
4.The liberty reserved by order 3 may be exercised by filing written submissions of no more than 5 pages specifying the order sought and any necessary affidavit in support.
5.Any responsive submissions of no more than 5 pages and any necessary affidavit shall be filed within 14 days of any submissions filed pursuant to order 4.
6.Unless otherwise ordered, any further issue as to costs shall be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
QUD 9 of 2020 BETWEEN: EDUCATION CORPORATION OF AUSTRALIA PTY LTD AS TRUSTEE FOR THE EDUCATIONAL GOLD TRUST
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
COLVIN J
DATE OF ORDER:
25 JULY 2025
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The applicant pay the respondent's costs of the appeal.
3.There be liberty to apply within 21 days to vary the order for costs by proposing the terms of a different order as to costs.
4.The liberty reserved by order 3 may be exercised by filing written submissions of no more than 5 pages specifying the order sought and any necessary affidavit in support.
5.Any responsive submissions of no more than 5 pages and any necessary affidavit shall be filed within 14 days of any submissions filed pursuant to order 4.
6.Unless otherwise ordered, any further issue as to costs shall be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
QUD 20 of 2020 BETWEEN: PHILADELPHIA INVESTMENTS PTY LTD
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
COLVIN J
DATE OF ORDER:
25 JULY 2025
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The applicant pay the respondent's costs of the appeal.
3.There be liberty to apply within 21 days to vary the order for costs by proposing the terms of a different order as to costs.
4.The liberty reserved by order 3 may be exercised by filing written submissions of no more than 5 pages specifying the order sought and any necessary affidavit in support.
5.Any responsive submissions of no more than 5 pages and any necessary affidavit shall be filed within 14 days of any submissions filed pursuant to order 4.
6.Unless otherwise ordered, any further issue as to costs shall be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
QUD 326 of 2020 BETWEEN: SOUTHSEA NOMINEES PTY LTD
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
COLVIN J
DATE OF ORDER:
25 JULY 2025
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The applicant pay the respondent's costs of the appeal.
3.There be liberty to apply within 21 days to vary the order for costs by proposing the terms of a different order as to costs.
4.The liberty reserved by order 3 may be exercised by filing written submissions of no more than 5 pages specifying the order sought and any necessary affidavit in support.
5.Any responsive submissions of no more than 5 pages and any necessary affidavit shall be filed within 14 days of any submissions filed pursuant to order 4.
6.Unless otherwise ordered, any further issue as to costs shall be determined on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
COLVIN J:
Four taxpayer entities associated with Mr Vanda Gould, a former tax accountant, claimed deductions for interest and management fees allegedly incurred in particular tax years between 2001 and 2014. Assessments were issued by the Commissioner of Taxation on the basis that the taxpayers were not entitled to the deductions claimed. On the basis of the Commissioner's opinion that there had been 'fraud or evasion' by the taxpayers, the Commissioner maintained that there was no applicable time limit in respect of the assessments. The taxpayers were assessed for penalties. The Commissioner also determined that shortfall penalties should not be remitted.
Three of the taxpayer entities were trusts. The Commissioner issued assessments to the trustee of each trust on the basis that the income earned (after disallowing the deductions) was assessable to the trustee under s 99A of the Income Tax Assessment Act 1936 (Cth) (ITAA36).
The taxpayers lodged objections to the income tax assessments, the penalty assessments and the decision not to remit shortfall penalties. After the objections were lodged, the Commissioner made determinations under Part IVA of the ITAA36 to the effect that the deductions, if otherwise allowable, should not be allowed because the tax benefits afforded by the claimed deductions had been obtained in connection with a scheme carried out for the dominant purpose of enabling the taxpayer to obtain that tax benefit.
In 2019, the objections of two of the taxpayers were wholly disallowed and the objections of the other two taxpayers were substantially disallowed.
In January 2020, the taxpayers exercised their statutory rights to appeal to this Court. Orders were made for the four appeals to be heard together with evidence in one proceeding being evidence in the others. The final hearing of the four appeals was conducted as a single hearing.
The income tax years for each of the four taxpayers ended at 30 June. In these reasons, I will identify a particular tax year by referring to the year in which the tax year ended. So, for example, I will refer to the income tax year that commenced on 1 July 2001 and ended on 30 June 2002 as the 2002 tax year. I will also use the description tax year to refer to a period ending on 30 June in the nominated year.
The scope of the appeals
The taxpayers say that there was a proper legal basis for the deductions in the form of valid and enforceable contractual arrangements. For the most part, those arrangements are said to have been put in place by Mr Gould acting as a director of both the entities who were party to the arrangement (in the case of trust entities, as a director of the corporate trustee of the trust). Consequently, Mr Gould is a critical witness in the appeal.
As to the claimed interest deductions, the taxpayers say that the interest was paid in respect of genuine loans that were made for business purposes and the amounts of interest paid were reasonable in that they represented less than the interest that would have been charged between parties dealing at arms' length. As to the claimed management fees, the taxpayers say that the fees were charged for services actually provided to the relevant taxpayer and were reasonable in amount. As to all the deductions for interest and management fees, they say that the entries in the relevant accounting records reflected those arrangements and should be accepted as evidence of them. They also contend that there was a proper basis for the other deductions.
The case for the taxpayers is put on the basis that imperfections, anomalies and inconsistencies in the evidence of Mr Gould were to be expected given the passage of time and the fact that the accounting records were not pristine was consistent with their authenticity.
The taxpayers also claim that the opinion held by the Commissioner to the effect that there had been fraud or evasion that justified assessments extending back to 2001 was formed without any proper foundation.
The Commissioner says that the taxpayers did not incur the interest and management fee obligations and that entries made in the books of account for the taxpayers (and related entries in the books of account for other entities) did not reflect the reality of underlying transactions. Rather, the disputed amounts are said to be no more than movements of funds between various entities under the control of Mr Gould with the funds being moved solely for tax purposes. Amongst other things, this is said to be supported by an analysis to the effect that many of the contentious amounts were a kind of balancing item that ensured there was little or no taxation liability (after allowing, in relevant cases, for enough income to ensure that all available franking credits could be offset against income). The descriptions of most of the contentious amounts in the accounts as 'interest' or 'management fees' is said to have been allocated subsequently and, in effect, to involve the application of contrived labels.
There are some further issues raised by the appeals. As to two of the taxpayers, it is also said that alleged tax losses in years before 2001 (calculated by taking into account alleged interest expenses) are not established and consequently are not a basis for any deduction in subsequent years. Also in dispute is (a) whether Mr Gould's family trust made losses in years prior to and including the 1997 tax year which could be applied to reduce net capital gains in the 2012 and 2014 years; and (b) whether the family trust received deemed dividends in the 2014 tax year and whether the Commissioner's decision not to exercise the statutory discretion to treat those deemed dividends as frankable can be overturned.
As will emerge, there is a considerable degree of obscurity in Mr Gould's own account of what occurred in the conduct of the financial affairs of the taxpayers and other entities controlled by him. In part, this is due to the deliberate and elaborate steps taken by Mr Gould to conceal the extent of his involvement in various offshore entities. His explanation for this conduct was to the effect that he wished to avoid the aggravation. In effect, his position was that he would rather keep the arrangements secret than try and justify them to the Commissioner.
Claims and findings
Throughout these reasons I will identify those parts which are reciting claims made by the taxpayers or simply recording the account given by a particular witness or other aspects of the evidence. Unless I qualify what is recorded in that way, I should be taken to be making findings to the effect recorded.
Mr Vanda Gould
Mr Gould was a chartered accountant. He specialised in tax law and had a particular interest in international taxation. Throughout the relevant period (being the 2001 to 2014 tax years), Mr Gould conducted his own accounting practice through Melbourne Corporation of Australia Pty Ltd. Melbourne Corporation shared office space with Gould Ralph & Company (a tax accounting practice of which Mr Gould had been a partner until 1996). On Mr Gould's account, aspects of his personal affairs were intertwined with those of his clients. At times, he sought to explain certain dealings on the basis that they were being conducted on behalf of a client rather than in his personal interest. It will be necessary to consider whether that was the case.
Mr Gould was also involved as a founder of Continental Venture Capital Limited (now known as CVC Limited), an investment company and fund manager. Continental Venture Capital also shared office space with Gould Ralph and Melbourne Corporation. The staff who worked for Continental Venture Capital were employed by CVC Investment Managers Pty Ltd (later renamed Leagou Pty Ltd, being the name I will use to refer to the company in these reasons). Leagou was said to have provided staff and management services to Continental Venture Capital in return for management fees. Mr Gould's account was that, during the relevant period, he was also involved in the provision of those management services, particularly supervising accounting staff undertaking work for Continental Venture Capital.
Also involved in founding Continental Venture Capital was Mr John Leaver, a stockbroker and long-time business associate of Mr Gould. Mr Gould's accountancy staff did the tax and accountancy work for Mr Leaver's private business interests, first through Gould Ralph (where Mr Gould had handled those matters as a partner) and later through Melbourne Corporation.
The taxpayers
Three of the taxpayers have been assessed as trustees. The relevant tax law applies to the trusts as if each was a legal entity: Sunlite Australia Pty Ltd v Commissioner of Taxation [2023] FCAFC 43; (2023) 296 FCR 600 at [14]‑[24] (Colvin, O'Sullivan and Feutrill JJ). The trusts are (a) the Gould Family Trust; (b) the VR Gould Family Settlement Share Trust; and (c) the Educational Gold Trust. The fourth taxpayer is Philadelphia Investments Pty Ltd.
By reason of the status of the trusts as legal entities for tax purposes, in these reasons I will generally refer to the various trusts as entities even though it would be more accurate to refer to the trustee of the trust as conducting the affairs of the trust. Context should indicate where, as a matter of law, the dealings would be conducted by the trustee of the trust with tax law recognising the affairs of the trust as an entity for tax purposes and tax liability for the affairs of the trust falling on the trustee. I approach matters in this way on the basis that nothing turns on the legal distinctions in the circumstances of the present case where it is the taxation liabilities of the three trust entities (and Philadelphia) that are in issue.
The Gould Family Trust
During the relevant period, the trustee of the Family Trust was Southsea Nominees Pty Ltd and Mr Gould was a director of Southsea Nominees.
The VR Gould Family Settlement Share Trust
During the relevant period, the trustee of the Share Trust was South Seas Holdings Pty Ltd. The sole shareholder of South Seas Holdings was Morning Star Fiduciaries Pty Ltd. Mr Gould was the sole director of South Seas Holdings and one of his associates was the sole director of Morning Star such that Mr Gould controlled both entities in the relevant period. Mr Gould described the Share Trust as having been established as a sub-trust of the VR Gould Family Settlement Trust (a different trust to the Family Trust). By that description, he seemed to refer to it being established as a distinct fund of investments held and managed by South Seas Holdings as trustee on the terms of the Settlement Trust and for its beneficiaries. There are various contemporaneous records to support the establishment of the Share Trust as comprising a portfolio of investments to be managed by South Seas Holdings as trustee for the Settlement Trust. Separate accounts were maintained for the Share Trust. It has its own tax file number. However, there is no trust deed for the Share Trust.
The trustee of the Settlement Trust at all relevant times was Fennelltown Pty Ltd.
In what follows, I will eschew the nomenclature sub-trust adopted by the parties to describe the Share Trust. The peculiarities of the relationship between the two trusts can be ignored because the Share Trust had its own trustee (South Seas Holdings), had its own set of accounts and was a separate tax entity.
The Educational Gold Trust
During the relevant period, the trustee of the Gold Trust was Education Corporation of Australia Pty Ltd. Broadly speaking, the Gold Trust was conducted for the joint benefit of interests associated with each of Mr Gould and Mr Jim Raptis (a long time client and business associate of Mr Gould).
Philadelphia Investments Pty Ltd
Philadelphia was not a trustee company. Since 2004, its sole shareholder has been Southsea Nominees (the trustee of the Family Trust and Share Trust). At relevant times, Mr Gould was a director of Philadelphia.
Other entities
The dealings that were said to give rise to the deductions claimed by the taxpayers involved a number of other entities. These other entities will be introduced and their relevance explained as these reasons unfold.
Onus on the taxpayer
The taxpayers have the onus. They must prove that the assessments are excessive: s 14ZZO of the Taxation Administration Act 1953 (Cth). Although the Commissioner has raised various affirmative reasons as to why the deductions should not be allowed, at the end of the day the taxpayers will fail if they have not affirmatively established the factual and legal basis for the deductibility of the amounts claimed.
There is no special burden upon the taxpayer. The degree or standard of proof is that which applies in civil proceedings generally: Commissioner of Taxation v Cassaniti [2018] FCAFC 212; (2018) 266 FCR 385 at [88] (Steward J, Greenwood and Logan JJ agreeing).
Ordinarily, discharge of the onus born by the taxpayer on a statutory appeal after assessment and unsuccessful objection will require the taxpayer to prove the extent of assessable income as well as all deductions claimed, including their deductibility as outgoings incurred for a business purpose (as well as any other amounts affecting the assessable income). However, to the extent that there is an issue as to income in the present case it is the subject of agreement reached between the parties during the hearing. The terms of that agreement are described later in these reasons. One aspect of that agreement is that where deductions for interest paid by the taxpayers were not upheld then corresponding amounts recorded as income earned (whether paid or accrued) by any of the taxpayers who were said to have earned that income is not to be included in the taxpayer's income.
Beyond that, there was no issue between the parties as to the other amounts in the accounting records of the taxpayers affecting the taxation payable by them in the relevant years (save for the capital gains tax issues and the issue about carried forward losses to which I have referred).
Therefore, the main issue on which the parties are joined is whether the deductions for interest and management fees had been properly claimed by each of the taxpayers. In addressing that question it may be relevant to consider whether the interest earned was recorded as assessable income by any party and in what circumstances because that would be relevant to whether there was a genuine borrowing in respect of which interest was paid. Otherwise, the income side of the taxation affairs of the four taxpayers is not in issue.
During the relevant period, the affairs of the taxpayers were tied up with those of other Australian entities controlled by Mr Gould as well as other Australian entities controlled by Mr Leaver (noting that, in the case of the Gold Trust, Mr Raptis had an interest). In addition, there were also dealings with overseas entities. The extent to which those overseas entities were conducted at the direction of Mr Gould in his own interests is contentious. The significance of these wider dealings is that they are relied upon by the taxpayers to support the claimed deductions and by the Commissioner to challenge the credibility of Mr Gould's version of events concerning the affairs of the taxpayers. In effect, the Commissioner says that regard to those dealings when taken together with other aspects of the evidence casts very considerable doubt upon Mr Gould's account, which was to the effect that there were both loans on which the taxpayers had incurred interest and a proper basis to charge management fees.
The Commissioner has no burden to demonstrate what actually occurred. If the taxpayers fail to discharge their burden by reason of the unreliability of the account given and the absence of other evidence as to what was actually going on in the relevant dealings then the taxpayers' appeals must fail.
The evidence for the taxpayers
The taxpayers sought to discharge their onus by evidence from Mr Gould and from the contents of accounting statements received as business records. As to the latter, whilst the tax accounts for the taxpayers were in evidence as well as general ledger information, there was little by way of any contemporaneous records as to the dealings which were said to provide the basis upon which interest charges had been raised or management fees charged. As to the basis for the interest charges and the management fees, as well as the alleged business purposes that were said to justify those deductions, all depended upon the account given by Mr Gould.
Evidence was also given by Mr Benjamin Jones, a lawyer who had worked under the supervision of Mr John Hyde Page, a barrister who had acted for the taxpayers. Mr Jones undertook an analysis based upon the accounting records. He was not a participant in any of the historical events that bear upon the taxation liabilities of the taxpayers. The analysis sought to demonstrate that relevant amounts deposited into the bank accounts of the taxpayers had been used to conduct their affairs. The evidence was relied upon to support a contention that the interest charges had been imposed on principal amounts that had been used for income‑producing purposes.
The taxpayers also called in aid expert reports from Mr Paul Hyde Page and Mr Russell Good (in addition to the evidence of Mr Jones) to support submissions to the effect that the interest amounts charged were reasonable. However, that evidence is only of relevance to the taxpayers' case if the assumed foundation for that evidence is established, namely that there were actually loans in place, that the loan amounts were used for income-producing purposes and that the amounts paid were bona fide interest payments. As to the reasonableness of the management fees, the only evidence was from Mr Gould.
In written opening submissions, a case was put to the effect that the accounting entries in the records of the taxpayers were a sufficient basis to conclude that there were loan contracts in existence and that the amounts claimed as interest were deductible. However, in closing, counsel for the taxpayers accepted that in order to succeed (that is, in order to discharge the onus born by the taxpayers) it was necessary for the Court to be persuaded to accept both Mr Gould's evidence and the accounting records. The concession was properly made. The accounting records as to interest and management fees claimed as deductions were obscure. The charges were made at irregular intervals. For the most part, they were implemented by end of year adjustments supervised by Mr Gould. The only evidence as to the basis upon which those adjustments were made came from Mr Gould. This was not a case where the books and records were demonstrated to contain entries as to interest claimed and management fees that were recorded in the ordinary course of keeping the accounts for a business and of a kind that may be said to speak for themselves. The only evidence to support the claim that the interest and management fees were outgoings incurred for a business purpose came from Mr Gould.
Therefore, the whole of the case of each of the four taxpayers depended upon the credibility of the testimony of Mr Gould.
The Commissioner undertook a measured and detailed attack on Mr Gould's credibility. Mr Gould was cross-examined on his account over eight days. Key aspects of the Commissioner's case were put to Mr Gould in specific terms. He was taken through the documentary records relied upon by the Commissioner to impeach his account. The credibility of virtually the whole of his account of what had occurred was challenged. He was given ample opportunity to respond. In closing, the Commissioner relied upon different aspects of Mr Gould's testimony to support a submission that he was not a witness of credit and his testimony could not be relied upon. I will return to those matters in due course.
THE OVERALL STRUCTURE OF THESE REASONS
In these reasons, I will begin by considering some submissions advanced for the taxpayers concerning the approach to be taken when considering the accounting records received in evidence in the proceedings. After that I will address briefly the authorities relied upon by the taxpayers as to the deductibility of interest.
Then I will address key respects in which Mr Gould's evidence concerning the claimed deductions for interest and management fees lacked credibility. I do not seek to be exhaustive. There is no need to be. Mr Gould's evidence was lacking in credibility at almost every turn. For reasons that follow, I find that no reliance can be placed on any aspect of his version of events. That finding is sufficient to dispose of the taxpayers' appeals concerning the deductions claimed for interest and management fees. It also has significance for other aspects of the appeals.
Although strictly unnecessary given my view as to the evidence given by Mr Gould, I will then deal briefly with the evidence of other witnesses. I will first explain why the analysis of Mr Jones was flawed. I will also explain why the expert evidence is of no assistance in reaching conclusions as to whether the various interest deductions claimed by the taxpayers were reasonable in amount.
After that I will deal with the issue raised in respect of two of the taxpayers concerning carried forward losses. I will then outline the issues concerning capital losses and deemed dividends. I will also deal with a trivial issue, not yet mentioned. It concerns an alternative claim that an interest expense of $8,000 is not deductible because interest withholding tax was not paid.
Having dealt with those matters, I will summarise the consequences for the individual deductions claimed by the taxpayers.
As the taxpayers have failed to establish the deductions claimed there is no need to consider the case relied upon by the Commissioner in the alternative to the effect that there was a Part IVA scheme which meant that the deductions could not be claimed (which was advanced by the Commissioner only if any of the deductions were otherwise found to be valid). Claims of the existence of a Part IVA scheme are difficult to deal with in the alternative in cases where they rely upon the characterisation of events and dealings that have unfolded over many years and, as here, require the Court to posit different conclusions to those which have been reached. For those reasons, even if the concession had not been made by the Commissioner, having regard to the conclusion I have reached as to the deductions, in the interests of overall efficiency and avoidance of further delay in delivery of these reasons, I would not have addressed the Commissioner's alternative claim.
I will then deal with the claim that the Commissioner's opinion that there had been 'fraud or evasion' by the taxpayers was not validly formed.
Finally, I will address the aspects of the appeals that sought to challenge the penalties imposed.
THE REQUIRED APPROACH TO ACCOUNTING RECORDS
The case advanced for the taxpayers relied to a considerable extent upon matters recorded in the general ledger and end of year financial statements for the taxpayers and other Australian entities controlled by Mr Gould. The taxpayers relied upon s 69 of the Evidence Act 1995 (Cth) and s 1305 of the Corporations Act 2001 (Cth) in respect of those financial records.
Those statutory provisions allow for 'business records' or certain 'books' kept by a body corporate to be received in evidence. The records themselves are received as evidence of the truth of the matters they represent: Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345 at [69] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). However, the provisions do not confer any particular evidentiary status upon those records. In particular, resort to s 1305 does not make the contents of records admitted under the provision conclusive in the absence of evidence to the contrary: Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [396]‑[400] (Austin J); and Whitton as Trustee of the Estate of John Emmanuel Rose v Regis Towers Real Estate Pty Ltd (In Administration) [2007] FCAFC 125; (2007) 161 FCR 20 at [59] (Buchanan J, Marshall and Tracey JJ agreeing), noting the possibility of tension in the authorities of other courts: Hoh v Ying Mui Pty Ltd [2019] VSCA 203 at [193] (Beach and Hargrave JJA and Sifris AJA). Like any evidence, records admitted under the statutory provisions must be weighed and considered with other evidence.
The position was explained in Advanced Holdings Pty Limited as Trustee for The Demian Trust v Commissioner of Taxation [2021] FCAFC 135 at [169] (Logan, McKerracher and Perram JJ) in the following way:
A court may be entitled to accept at face value for all purposes, including the underlying transactions, those documents admitted under the statutory provisions. But it is not obliged to do so. In circumstances where there are factors which may mitigate against the prima facie acceptance of such records as, for example, where there are other findings of fact firmly adverse to the quality of corporate management by a sole director (as there were in this case), a court is not obliged to accept at face value and for all purposes, the existence and efficacy of challenged underlying transactions referred to in a company minute. This may present a sobering bookkeeping reminder to directors of small companies, but the evidentiary rules established under these statutory provisions were not intended to circumvent the need to establish the efficacy of all the underlying transactions recorded in a company's minutes in all cases. In this case, those underlying transactions were squarely in issue and their efficacy open to being doubted.
As the Victorian Court of Appeal said in Hoh at [193]:
In any case where a party to a legal proceeding relies upon financial statements of a company as proof of a contested fact, the court is required to consider all the evidence and attribute such weight to the entries in the financial statements as is appropriate in the context of the evidence as a whole.
The reasoning in Hoh was applied in Australian Karting Association Ltd v Karting (New South Wales) Incorporated [2022] NSWCA 188 at [136].
Relatedly, the taxpayers relied upon authorities to the effect that the existence of a loan may be inferred from conduct or the nature of dealings in a particular case. Consequently, so it was submitted, matters recorded in the financial statements and general ledgers received into evidence in the appeals could form the basis for conclusions as to the existence of loans giving rise to obligations to pay interest. Particular reliance was placed upon reasoning by Nettle J in VL Finance Pty Ltd v Legudi [2003] VSC 57. In that case, loans were allegedly made by a family company to family members to purchase shares in another family company. A contention was raised to the effect that the loans, though recorded in the accounts, did not exist. Nettle J dealt with that aspect of the case and its resolution in the following way (at [29]‑[30]):
In the end, very little of the defendants' case at trial was devoted to the contention that the debts do not exist. In effect it amounted to no more than assertions of the defendants from the witness box that the loans transaction was just book entries conceived by Charles Legudie and Mr Curwood and that there could not have been any loans in reality because not one of the family members got any cash in their hands. But Mr Stark, who appeared for the defendants, did not seek to make anything of the witnesses' assertions. In the course of his final submissions he contented himself with the observation that the gist of his non-existence case was really the product of his unconscientious advantage argument.
In the circumstances I think it suffices to say of the book entries point that, in the absence of any suggestion of sham, there is no reason why loans agreed to [be] made by a family company to members of the family cannot be created orally or by conduct and sufficiently evidenced by book entry, and that it is enough to dispose of the consequences of the lack of cash in hand contention to observe that it has been the law since Spargo's case that obligations may effectually be set off one against another, leaving a net balance due, without any money changing hands.
(footnotes omitted)
It can be seen that his Honour was dealing with a claim that was little more than an assertion. Significantly for present purposes, VL Finance was not a case where there was a concerted attack upon the credibility of the person who had been responsible for directing the relevant entries to be made in the accounts as to whether they reflected genuine loans. In the present case, as will emerge, there was a very detailed attack upon the credibility of Mr Gould and the foundation that he advanced for relevant entries in the accounts. In short, the case for the Commissioner was to the effect that Mr Gould simply directed flows of funds through the various companies all of which were under his control and that most of the relevant entries in the general ledgers of the companies were end of year adjustments directed by Mr Gould for tax purposes. The very different circumstances of the present case mean that the observations of Nettle J are of no present assistance.
THE DEDUCTIBILITY OF INTEREST
Most of the deductions in issue in the appeals were deductions claimed by the taxpayers for alleged interest. The following propositions advanced by the taxpayers may be accepted:
(1)interest on a loan that is incurred for business purposes is an allowable deduction and '[t]he circumstance that each item of expenditure cannot be traced to a particular item of income does not prevent the deduction of the expenditure': Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 43 FLR 217 at 224 (Lockhart J, Northrop and Fisher JJ agreeing); and
(2)a refinancing of a borrowing takes on the same character for income tax purposes as the original borrowing 'and gives to the interest incurred the character of a working expense': Commissioner of Taxation v Roberts (1992) 37 FCR 246 at 257 (Hill J).
However, as will emerge, the main field of forensic engagement in the present case was as to whether there had been any loans at all. There were also issues as to whether a business purpose had been demonstrated for the funds and as to whether dealings that were alleged to be the refinancing of borrowings were in fact no more than the direction of funds by Mr Gould to create the impression that there had been a refinancing. There were also secondary issues about the use to which the alleged borrowings had been put by the taxpayers.
Therefore, the general principles as to interest deductions advanced by the taxpayers were outside the territory in which the issues were joined.
THE LACK IN CREDIBILITY OF MR GOULD'S ACCOUNT
Overview of Mr Gould's case as to deductibility of interest
I will begin by seeking to extract from his inconsistent account, Mr Gould's version as to what went on when it came to the loans that financed the business activities of the taxpayers (and other entities with which Mr Gould was involved). It is the credibility of this overall account that is at the heart of the interest deductions claimed by the taxpayers. To be clear, in this section I am recording Mr Gould's version of events. I am not to be taken to be making findings (save to the extent that I identify various entities or expressly identify matters as either not being in issue or agreed by Mr Gould).
It was said for the taxpayers that since the 1970s, Mr Gould and entities with which he was associated provided accounting, financial and investment services. Over time, he established various private entities including the taxpayers.
Mr Gould, together with Mr Leaver, arranged finance for their various Australian private entities. Funds were borrowed from the Cheung Wah Bank Ltd in Samoa and Swire Investments Limited in the United Kingdom. From about March 1995, their overseas borrowings were consolidated through an Australian in-house financing entity that was said to operate as a private banker for the private interests of each of Mr Gould and Mr Leaver.
During the relevant period, there were four offshore entities that, at various times, were said to be the source of funds for business activities undertaken by Mr Gould through Australian entities controlled by him. Those offshore entities were Chemical Trustee Limited, Normandy Finance and Investments Limited, Hua Wang Bank Berhad and Derrin Brothers Properties Limited (together, the Offshore Funders). By the time of trial, there was no issue that each of those entities was ultimately controlled by either or both of JA Investments Limited and MH Investments Limited, companies incorporated in the Cayman Islands.
Mr Peter Borgas was the person ostensibly conducting the affairs of JA and MH. At all relevant times, a company controlled by Mr Borgas operated a corporate services business based in Neuchatel in Switzerland. Mr Gould agreed that he was introduced to Mr Borgas because Mr Borgas offered a service of providing directors and shareholders for offshore companies for clients. He also agreed that when he first dealt with Mr Borgas that was the nature of the service that he sought from him.
A significant issue in the proceedings was the extent to which Mr Borgas acted at the direction of Mr Gould when it came to the affairs of JA and MH (as well as the various entities, including the Offshore Funders, that were controlled by those two companies). As will emerge, Mr Gould's evidence was to the effect that Mr Borgas 'owned' the Offshore Funders and controlled those entities for Mr Borgas' own benefit and for the benefit of Mr Borgas' family. Mr Gould maintained that his own interest in JA and MH, described as the 'appointor', was a tenuous one which enabled him to suggest what should occur in the conduct of the companies, but always subject to Mr Borgas' ultimate ownership and control. Mr Gould also gave evidence to the effect that his close personal friendship with Mr Borgas meant that he made suggestions to Mr Borgas that were accepted by him, but Mr Gould maintained that Mr Borgas could ignore those suggestions and, on the account given by Mr Gould, there were times when he did. However, as will emerge, Mr Gould's evidence as to the nature and extent of his involvement in the affairs of JA, MH and the Offshore Funders was far from consistent.
Each of Chemical Trustee, Normandy Finance and Derrin Brothers were entities that were administered by Lubbock Fine, a London firm that provided administration services for companies. A key person at Lubbock Fine was Mr Hasmukh Vara.
It is common ground that Mr Gould had considerable dealings over many years with each of Mr Borgas and Mr Vara. Mr Gould maintained that he did so on behalf of clients of his accounting practice or in circumstances where he made requests of Mr Borgas to arrange finance for the private business activities in Australia of Mr Gould and his associates which was then provided through the Offshore Funders.
As to Hua Wang Bank, it was based in Samoa and was managed through an offshore corporate service provider called Asiaciti Trust Group headquartered in Singapore with offices in other jurisdictions including Samoa. Hua Wang Bank did not have shareholders. It was a creditor-controlled entity. Under local law, it was controlled by the holder of a security rather than shareholders. The holder of that security was JA.
As has been mentioned, on Mr Gould's account, throughout the relevant period there were arrangements in place whereby an Australian company controlled by him acted as a form of private banking entity for various business activities that were conducted in Australia by each of Mr Gould and Mr Leaver. Initially, the private banking entity was said to be CVC Fund Managers Pty Limited (CVC I). Later, the relevant entity was allegedly changed by novation of the loans to CVC Investment Nominees Pty Ltd which came to be renamed Sub Prime Nominees Pty Ltd in 2008 (CVC II). There were no documents for the novation, just accounting entries which were said to reflect the novation of the loans. Finally, it was said that a number of years later there was a further novation to a different company with the same name as the first (CVC III). By that time, CVC I had been deregistered. In what follows in these reasons, I will at times refer to the CVC entity as a generic term to ascribe to the entity that, on Mr Gould's version of events, from time to time, was undertaking the private banking function. Where it is necessary to identify which of the three entities was involved, I will enumerate which entity.
Mr Gould's case was that the CVC entity was from time to time owed debts by private entities controlled by Mr Gould and also by Mr Leaver's own Australian private entities. His evidence was that he acted on the understanding that loan arrangements could be made and changed orally between senior people making agreements to that effect. Mr Gould's affidavit evidence was to the effect that there were various loans between the Australian private entities controlled by each of Mr Gould and Mr Leaver and 'it was common for these loan arrangements to be re‑organised between the entities'. On Mr Gould's account 'these loan arrangements were created and managed … through oral agreement between the relevant persons'. However, Mr Gould's oral evidence about the alleged loan arrangements and the changes made to them was to the effect that he directed the affairs of his Australian entities and that the alleged loan arrangements as between those entities were matters that he decided. In effect, he made the arrangements by acting in different capacities and those arrangements were what came to be recorded in the accounts.
As to these matters, in oral opening submissions, counsel for the taxpayers referred to the alleged loans that were said to give rise to interest obligations as often involving decisions rather than actual conversations. It was said that references to agreement being 'oral' should be understood on that basis.
As to the amount of interest paid under the alleged loans, Mr Gould's evidence was to the effect that he and Mr Leaver would discuss the inter-company debts and orally agree on how much interest was payable and any novation of debts. He said this occurred shortly prior to 30 June of each year. Indeed, he was emphatic that this was the case because, on his version, he needed to arrange the cash to pay the interest to the Offshore Funders. On his affidavit account, the accounting staff were told of the agreed arrangements which they implemented by updating the accounts and effecting transfers of funds. These matters reinforce the foundational significance of the credibility of Mr Gould's account for the taxpayers' appeals.
In his affidavit evidence, Mr Gould said that his approach as to these loan arrangements was that the CVC entity needed sufficient funds to meet its own obligations and 'each of John Leaver's and my Australian private entities would make payments of interest to the group banking entity by reference to the sums our respective entities had borrowed'.
It was Mr Gould's evidence that towards the end of the 2001 income year, he decided to simplify the intra-company debts within his private companies. He said that, at that time, debts owed to CVC II by various entities within his private group of companies were all novated so that they were owed to the Family Trust. The Family Trust took on the debt that had been owed by those companies to CVC II. In consequence, his case was that from that point there were amounts due by Mr Gould's private entities to the Family Trust and a single debt owed by the Family Trust to CVC II. Thereafter, on Mr Gould's version of events, the Family Trust operated as the lender to private companies associated with Mr Gould. Over the relevant period he claimed that the extent of the loans provided by the Family Trust to his Australian private entities increased to the tens of millions. However, beyond generalities, there was a distinct lack of evidence about the use to which those funds were put.
The arrangements between the Family Trust and the private companies were undocumented. The arrangements between the Family Trust, the CVC entities and the Offshore Funders were said by Mr Gould to have been documented, although certain key documents were not produced in evidence. Mr Gould said that those documents had been in existence but could not be found.
It was Mr Gould's evidence that, at the end of each tax year, he determined the amount of interest to be paid to the Family Trust by his private companies. His evidence as to how that overall amount was determined was not entirely consistent. In broad terms he said that he needed to make sure there were enough funds in the Family Trust to meet the payments to be made to the Offshore Funders and that he had regard to (a) the capacity of each of his private entities to pay; (b) the amount of interest that was fair and reasonable for each entity to pay in the circumstances; and (c) the tax effectiveness within the group of a particular entity paying an amount of interest. At times he said that he determined the rates. At other times he said that the rates were set after discussion with his staff.
There was no suggestion that there were established terms as to the rate of interest or the time for payment of interest. In effect, on his account, after agreeing matters with Mr Leaver, Mr Gould's share of the interest obligations to the Offshore Funder at the time was met by the Family Trust charging interest to certain of the private companies controlled by Mr Gould in amounts that were determined by Mr Gould each year. The evidence of Mr Gould as to the way in which this occurred was vague and generalised. He maintained that the amounts involved were reasonable but offered no evidence as to their calculation or the method by which the interest amounts had been ascertained. He simply insisted, in general terms, that they were reasonable and reflected a reasonable charge for the use of the funds which had been obtained through the CVC entity from overseas. He gave no details of how that assessment was undertaken. Again, these aspects of the case expose why the credibility of Mr Gould's account is key.
Mr Gould also said that when CVC II was replaced by CVC III, new overseas funding was arranged with Derrin Brothers. On his account, CVC III used the funds that it borrowed from Derrin Brothers to make a loan to CVC II. He said that CVC II then used those funds to repay its debt to Normandy Finance and that CVC II repaid its debt to CVC III by novating its receivables (which were payable to CVC II by Mr Gould and Mr Leaver's Australian private entities) to CVC III. On Mr Gould's version of these events, by those dealings CVC III became the private banker in place of CVC II and the source of the overseas funding from Normandy Finance was replaced by funding from Derrin Brothers.
The case with respect to Education Corporation as trustee of the Gold Trust was different. That is because its borrowings were not through the Family Trust but came directly from Chemical Trustee. However, Mr Gould's evidence was to the effect that there were genuine loan arrangements in place and the amounts claimed as interest deductions were determined by him. This version of events was also challenged. It is only the evidence of Mr Gould that was advanced to support the claim that there was a genuine loan for business purposes in place.
It was said that the Gold Trust invested in and received rental income from commercial property. The case for the Gold Trust was opened on the basis that in 2001 Mr Gould asked Mr Borgas of Chemical Trustee for a loan of $1 million to purchase real estate in Surfers Paradise. The loan was provided and interest was paid.
It was also said that in November 2008 there was a further loan of $15 million. It was said to have been sought and advanced in the same way as the $1 million loan and was also for the purchase of a commercial property in Surfers Paradise. Mr Gould deposed that he decided that the Gold Trust should invest in the property and that he thought it would be possible to get a loan from Chemical Trustee. He said that he contacted Mr Borgas who said that Chemical Trustee could lend the money and a cash transfer was arranged to the solicitors for the Gold Trust. Mr Gould deposed that the investment did not proceed and that as a result he decided to repay the funds to Chemical Trustee in November 2009 (a year later).
Mr Gould also said that in February 2009, Chemical Trustee advanced a further $900,000 in relation to the prior purchase of a property in Broadbeach. The property was said to have been purchased in 1999 using funds borrowed from St George Bank. Again, Mr Gould said he contacted Mr Borgas to borrow funds to pay out the St George Bank loan. Mr Gould said he spoke to Mr Borgas and asked for a further advance of $900,000. He said that Mr Borgas said that Chemical Trustee would lend the Gold Trust the money and a cash transfer was organised.
The same form of dealing was said to have occurred in 2010 to obtain funds from Chemical Trustee to repay a loan that had been provided by Suncorp Metway. Mr Gould said he made the call to Mr Borgas who agreed that Chemical Trustee could lend the money and a cash transfer was arranged.
On the basis of those matters deposed to by Mr Gould, he maintained that the interest deductions claimed for monies paid by the Gold Trust to Chemical Trustee were for loan advances that had been used for income producing purposes.
It can be seen that the case for the Gold Trust depends upon Mr Gould's evidence as to what occurred in relation to the amounts received from Chemical Trustee.
It was accepted by the taxpayers that the relevant loan arrangements had features of informality, a characteristic which was said to be unremarkable in any instance where the relevant entities had common controllers or were closely held. Examples were given of the kinds of 'informality'; specifically, there being no written loan agreement, common changes to the loans (such as by novation) and changes to interest rates and amounts. It may be accepted that loans and obligations to pay interest may be created in an informal way and that dealings between related entities may explain a lack of documentation. However, the issue in these proceedings is not so much about informality but rather whether there were any real loans at all, even allowing for the legal possibility of effective loans being brought into existence in an informal way.
Overview of Mr Gould's case as to management fees
The case advanced by the taxpayers as to the management fees that were charged was very opaque. There was no consistent charging of management fees. The deductions claimed as management fees were ad hoc and were sought to be justified by reference to Mr Gould's account of what had occurred. It was said that the fees were charged to give effect to end of year decisions made by Mr Gould. His evidence as to how and when that occurred and his evidence as to the extent to which staff acting under his supervision were involved was not consistent. Mr Gould made references to working papers. Despite the management fees being effected by end of year adjustments there were no annotations in the accounts as to the basis for those adjustments. There was no evidence in the affidavits of Mr Gould suggesting there had been some form of documented basis for the fees.
The written opening submissions for the taxpayers were to the effect that there was 'less documentary evidence for the management fees than for the loans and interest liabilities', but that it was 'plain' that the payments made were compensation for the management of each entity. There was no indication in the submissions as to the nature of the services that might have been charged for by one entity to another. As will emerge, Mr Gould gave a generalised account about the management fees. In his account, there was no suggestion of any basis for the determination of the amounts that had been charged. There were no management fee agreements. There was no coherent explanation as to why fees were charged in particular years and not others.
The initial affidavit evidence of Mr Gould about management fees was vague and generalised. He said that during the period 2001 to 2014 he personally performed work in relation to the Australian private entities that he controlled. Some of that work was said to be accountancy but a great deal of it involved making decisions as a company director. He also said that he supervised work done by the accounting staff in his accounting practice that related to the activities of the Australian private entities. As to this work by him personally, Mr Gould claimed that it was appropriate for a fee to be charged as the work was being done in a corporate or trust capacity. He said that he referred to these fees as management fees. However, it 'was not the case that these fees invariably related to management fees as such'. Rather, Mr Gould said they were for 'everything I did in connection with the entity that was charged a fee'.
Mr Gould's affidavit evidence was that as he was in a position to bind both entities and 'at certain points' he made a decision either to transfer funds from one entity to another 'intending that the transfer would satisfy the amount of the fee' or inform his accounting staff to enter the fee into the accounts. Precisely how it might be that one entity might be entitled to charge such a 'management fee' to another for things done by Mr Gould in respect of the affairs of that other entity was not described.
Mr Gould also deposed that when the fees were charged his motive went beyond ensuring that his work was remunerated and said that: 'Frequently an aspect of my motivation would be to create the rationale for moving a sum of money between two of my Australian private entities so that it would be available to the recipient entity'.
A number of the management fees claimed by the taxpayers were charged by Melbourne Corporation. Mr Gould described Melbourne Corporation as an entity that he had used 'from at least the 1980s as an entity which invested in Australian property' and shares quoted on the Australian stock exchange. Those fees were charged to the Family Trust and, in one instance, to Philadelphia.
The accountancy work that Mr Gould did after he retired from Gould Ralph in 1996 was generally done through Melbourne Corporation. From the 1990s, the staff of Mr Gould's accountancy practice were employed by Melbourne Corporation.
There were also modest fees charged by Golden Investments Pty Limited to the Family Trust late in the relevant period.
The management fees claimed by the taxpayers to be deductible were as follows:
(1)a fee of $5,000 (2009 tax year) charged by the Share Trust to the Family Trust;
(2)a fee of $50,000 (2005 tax year) charged by Melbourne Corporation to Philadelphia;
(3)a fee of $100,000 (2009 tax year) charged by the Family Trust to Philadelphia;
(4)a fee of $44,000 (2004 tax year) charged by Philadelphia to the Family Trust;
(5)a fee of $15,000 (2006 tax year) charged by CVCII to the Family Trust;
(6)fees of $235,000 (2006 tax year), $87,500 (2007 tax year), $250,000 (2008 tax year), $145,000 (2009 tax year) and $200,000 (2010 tax year) charged by Melbourne Corporation to the Family Trust; and
(7)fees of $5,000 (2013 tax year) and $5,500 (2014 tax year) charged by Golden Investments to the Family Trust.
There were no management fees claimed by the Gold Trust.
It is apparent that in some years within the relevant period there were no management fees and there is no consistency in the fees charged.
Mr Gould supplemented his initial affidavits with additional affidavit evidence about management fees. He said that the work that he performed in connection with his Australian entities 'were services and could have been recorded as a "service fee"'. He said that the term 'management fee' was used by him as an 'all inclusive term' that included fees for when (a) an entity provided security for a loan by offering unencumbered property as security; (b) accountancy work was performed by my staff and himself; and (c) the management of the business of the relevant entity.
Mr Gould's supplementary evidence was to the effect that he decided what the fee should be in May or June each year after discussion with his staff. He claimed that he would then generally make or ask a member of his staff to make a record in the books and records, but that the 'actual financial statements or tax returns would usually be finalised many months later'. Mr Gould also gave additional evidence concerning each of the management fees which sought to explain the basis for the fees.
Mr Gould's account as to the way in which claimed deduction amounts were determined
Mr Gould's oral evidence was to the effect that he had a practice of establishing interest and management fees prior to the end of each financial year. His affidavit evidence was to the effect that he had conversations with Mr Leaver about those matters shortly prior to 30 June of each year. He resisted the proposition that any discussion about those matters occurred after 30 June when the assessable income and allowable deductions apart from interest and management fees were known.
Early in his oral evidence, Mr Gould said that it was absolutely essential for interest to be charged to various Australian entities before 30 June each year because the major debt 'coming into' the CVC entity 'was always due to be paid by 30 June'. That is to say, on Mr Gould's account the CVC entity had an obligation to pay interest to the relevant Offshore Funder by 30 June each year and, consequently, the CVC entity needed to be put in funds in order to meet that obligation. (Mr Gould's account concerning the Gold Trust borrowing from Chemical Trustee was somewhat different and has been addressed above).
Mr Gould said that after agreeing with Mr Leaver the share of those charges that was to be charged to Mr Gould's Australian entities, he arranged for interest to be charged to his Australian entities so that there would be cash to pay the interest. He described the 'dominant purpose' of the interest charges as being to address the 'fundamental problem' that he had which was that he had to 'get the money together to pay the interest'.
Further, Mr Gould's account was to the effect that it was necessary to work out 'where we were going to get the money from' to meet the annual interest obligation to the relevant Offshore Funder. On his version of events, it was the extent of that obligation and its pressing nature that determined how much had to be charged to Australian entities by way of interest and when those amounts were determined. He said that 'the amount we had to find to pay was basically sort of determined by reference to what the obligation was [that is, the obligation of the CVC entity to the Offshore Funder]'. Further, he said that 'the rate of interest broadly was determined by the amount of interest which was ultimately payable to [the Offshore Funder]' and gave him 'sort of a guide as to what would be fair and reasonable in terms of each of the companies that were involved in paying some proportion of that obligation'.
Mr Gould said that sometimes some companies paid more than other companies so there were 'slightly different rates applicable'. He rejected the proposition that a considerable part of what was said to be interest payable by the CVC entity to the Offshore Funder was actually funded by drawdowns on other sources of overseas funds. His response was to the effect that there would be an occasion when that occurred 'to actually pay debt' but maintained that by the interest charges to the various Australian entities including the taxpayers he was looking to meet the obligations to pay interest to the Offshore Funder.
Therefore, Mr Gould's evidence was to the effect that, broadly speaking, the interest obligation on the part of the CVC entity to the Offshore Funder was passed through to those Australian entities who had the use of those funds in their business activities. That is to say, the interest charges claimed by the taxpayers as deductible expenses reflected actual interest charges by the Offshore Funder to the CVC entity (being the entity acting as the private banking entity for the companies who had the use of the funds) allocated to those Australian entities who sourced their funds from the private banking entity with the charges to the Australian entities being reasonable in amount.
In the case of the Gold Trust, Mr Gould said that there were obligations to pay interest to Chemical Trustee (one of the Offshore Funders) when invoices were provided. On his account, Chemical Trustee was an arms' length party who had advanced funds by way of loan and there were interest charges paid by the Gold Trust on those borrowings.
Later, during his cross-examination, Mr Gould gave a different account of how the interest to be paid by the various Australian entities was determined. It was in the following terms:
Well, then, basically, I would, you know, talk to my staff and say, 'What funds have we got available to make our share' - 'to pay our share of the interest?' And they - there would be discussion along those lines, and I would say, 'Well, let's then charge' - 'let's, looking at the quantums, the interest' - because, obviously, some of the entities have no cash. Some of the entities are essentially long-term investments which don't produce immediate cash, so some of the other investments would have to carry the totality of the debt or - sorry, not the totality - they have to carry, perhaps, a larger share of the debt than might otherwise be, you know, by strict apportionment, applicable. So then we would work out, and then I would sort of look at and say, 'Well, I don't' - you know, looking at the amount of, let's just say, with the share trust, assuming it had the cash. The share trust can afford to pay maybe 7 or 8 per cent, 10 per cent, on each share, even though the interest we're paying offshore is, basically, maybe, sort of 6 per cent, something like that, but - so one of my entities would probably pay a larger share than the actual amount of interest which was applicable from the original - from the offshore debt. That's, sort of, the sort of discussion we would have, then I would have a look at it and make sure it was reasonable. The unfortunate thing is that, because of the length of time that has gone by, we don't have the working papers which would go with these individual companies, and, you know, the different calculations that got done.
This revised version was to the effect that before 30 June each year Mr Gould was looking to find entities under his control that could pay cash to cover the interest due to the Offshore Funder and then he looked to how much interest that entity could pay. Then, after that was done, he would 'have a look at it and make sure it was reasonable'. Precisely how that reasonableness assessment was undertaken was never indicated by Mr Gould. As has been mentioned, at times he said that there would have been working papers showing the calculations but those papers were no longer available. I will say more about this aspect of Mr Gould's evidence later in these reasons. However, it was not the specific calculations that Mr Gould was being asked to provide. Rather, it was some evidence of the process or methodology by which the interest was determined to be reasonable. Given the detail of his evidence about other aspects of the financial affairs of the taxpayers (and other companies) the absence of any specific evidence about how the amount of interest charges and management fees were calculated was stark. The inconsistencies in his account also caused me to doubt its reliability.
Having recanted his initial evidence to the effect that the rate of interest payable to the Offshore Funder was used as a sort of guide, Mr Gould gave no indication at all as to the sources used for rates or by what standard or rubric he identified whether the rate of interest was reasonable. That was so even though his revised version was to the effect that much higher rates (and very different rates) were used for different Australian entities. The only explanation proffered by Mr Gould for that course seemed to be the fact that some entities were able to pay more than others. That is no foundation for establishing that the rates were reasonable, especially in the context of evidence that the amounts were not charged with any type of consistency and, in those years when they were charged, they were charged at levels that had the consequence that little or no taxation was required to be paid.
In due course I will refer to the expert evidence of Mr Good which demonstrated the extreme variability in the effective interest rates that were reflected in the interest charges when applied to the debt balances shown in the accounts for the taxpayers.
In substance, Mr Gould did not dispute the fact that the amount of the interest charges consistently operated to ensure that there was little or no tax liability in the tax year in which they were claimed. In particular, he did not suggest that there might be other aspects of the financial affairs of the taxpayers which explained why the tax returns might consistently indicate little or no tax was payable despite the fact that interest was paid in some years and not in others and the amount of interest that was charged varied considerably. Nor did Mr Gould dispute that the tax consequences were part of the equation when considering the amount of those interest charges. Rather, he insisted that the interest liabilities were in respect of financial accommodation genuinely provided to the taxpayers and that they were reasonable in amount. In those circumstances, the claimed tax outcomes for all the taxpayers over a number of years counts strongly against the credibility of Mr Gould's version of events concerning the way in which the amounts of interest were established.
There were further problems with Mr Gould's revised version. Some of the interest charges were incurred on an accruals basis and therefore did not generate any cash that could be used to pay the alleged interest obligations to the Offshore Funders. Mr Gould also accepted, eventually, that some of the alleged interest due to Offshore Funders was paid by increasing the overall loan amount said to be due. Accordingly, Mr Gould's evidence to the effect that the interest was charged to ensure there was cash to meet 30 June interest obligations to Offshore Funders did not accord with the financial records that were relied upon by the taxpayers.
Mr Gould's evidence as to when the interest was determined (and the way in which that was done), namely in order to find cash to pay the Offshore Funders before 30 June each year, assumed particular significance because it was deployed repeatedly by Mr Gould to reject the Commissioner's position as to when the interest amounts were determined. Part of the case advanced for the Commissioner was that the interest charges (and management fees) were set well after 30 June each year at a time when the tax returns for the Australian entities were being determined and that the interest amounts (and management fees) were simply labels given at that time to amounts that were required as deductions in order to ensure that no tax was payable. That is to say, the Commissioner contended that the charges or fees were not real but were amounts that were determined by reference to the extent of the tax liability that would arise if there was no available deduction. Mr Gould maintained that the interest was determined before 30 June each year because there was a need to obtain that cash to be able to pay interest to the Offshore Funders. As has been explained, that evidence did not square with the taxpayers' own records.
Mr Gould gave a general account about sharing the costs of providing accounting and management services. His evidence in this regard was most unconvincing and appeared to be an attempt, after the event, to provide some form of general explanation to justify the management fees.
As to management fees, Mr Gould's evidence was that they were charged to reimburse Melbourne Corporation for costs that it was incurring for the benefit of all companies in the group. As he said: 'every one of these companies was actually enjoying benefits which were being provided by Melbourne Corporation' and the costs of providing those benefits had to be reimbursed. In providing that answer he said that 'the issue of taxation would have been a factor in my mind, of course'. Mr Gould was asked to explain what he meant by that statement. He responded:
Well, when you're looking at an individual company - I mean, obviously, I would have - I would have been, you know, aware that it would be desirable, if we could, to actually move that company down to a zero point, but fundamentally I'm looking at what's fair and reasonable, in terms of charging management fees, and I believe all the management fees we did charge were fair and reasonable.
Amongst the many difficulties with that version of events is that beyond the general assertion that the fees were fair and reasonable there was no evidence to support that claim. There was simply no evidence of any form of assessment or estimate or record of time spent by staff of Melbourne Corporation to provide any basis for the fees charged.
Another difficulty is that a number of the management fees claimed by the taxpayers were not fees paid to Melbourne Corporation.
Mr Gould's evidence concerning the Offshore Funders
At the heart of Mr Gould's account to support the interest charges was his evidence that the Offshore Funders (controlled by JA and MH) provided arms' length funding with an obligation to pay annual interest by 30 June of each year that had to be met through funds raised by interest being charged to the taxpayers (and his other Australian entities).
Although these proceedings concern interest deductions claimed by the taxpayers (each taxable Australian entities), the nature of the Offshore Funders (and their source of funds) assumed considerable significance because of the pivotal part they played in the account given by Mr Gould as to how the alleged interest deductions arose. On Mr Gould's evidence, borrowings to fund the business activities of the Australian entities controlled by him (including the taxpayers) came from the Offshore Funders. On his version of events, the obligation on the part of the CVC entity to pay interest to the Offshore Funders gave rise to the need to charge interest to those Australian entities who ultimately received the benefit of those funds. Further, as has been explained, at times, Mr Gould indicated that the interest charged to those Australian entities who ended up with the use of the funds broadly reflected the extent of the charges incurred by the CVC entity.
In the case of the Gold Trust, as has been explained, the interest claimed was said to be the subject of invoices issued by Chemical Trustee, a party that was allegedly being conducted at arms' length, to Mr Gould and Mr Raptis.
Mr Gould accepted that the Offshore Funders were controlled by JA and MH. No case was advanced by the taxpayers to the contrary. Rather, the focus of the contest concerning JA and MH was on whether Mr Gould directed the conduct of those entities in his own interest. Of course, if Mr Gould directed the affairs of JA and MH in his own interest then issues would arise as to the character of the funds available to those entities that were provided to the CVC entity and to the Gold Trust, particularly as to whether they were funds under the control of Mr Gould and held for his benefit that were simply directed by him to be paid into his Australian entities.
Significantly, the taxpayers made no attempt to explain the interest deductions on the basis of some form of borrowing by the taxpayers that arose independently of the character of the funds sourced from the Offshore Funders. Put another way, the allegation that funds had been borrowed at prevailing rates of interest from the Offshore Funders as entities that were not conducted by Mr Gould in his own interest was an essential plank in the case advanced by each of the taxpayers as to why there were genuine loans by the taxpayers on which they had been charged interest.
If these aspects of the case advanced by the taxpayers are not accepted then that supports the Commissioner's contention to the effect that the funds that came into the CVC entity and the Gold Trust from the Offshore Funders were simply overseas funds at the disposal of Mr Gould that were being funnelled into his Australian entities. However, it is not necessary for me to make affirmative findings as to whether that was so or indeed to reach conclusions as to all of what actually occurred in relation to JA and MH when it came to the provision of funds. It is enough if I reject Mr Gould's account. If I do so, the taxpayers have not established the basis upon which they contend I should conclude that the alleged interest amounts are deductible. There being no other alternative basis advanced by the taxpayers upon which to sustain those deductions, their appeals as to those amounts must fail.
Mr Gould maintained that the conduct of the affairs of JA and MH and the various offshore entities under their control was entirely a matter for Mr Borgas. He maintained that Mr Borgas was the beneficial owner of those entities.
Mr Gould accepted that he provided suggestions to Mr Borgas as to what might be done in conducting the affairs of the various offshore entities and sometimes Mr Borgas accepted those suggestions. However, the main thrust of his account was that these communications reflected their long-standing friendship and the confidence that Mr Borgas placed in Mr Gould and did not indicate that the relevant offshore funds were under the control and direction of Mr Gould.
It was not in issue that both JA and MH were established with Mr Gould being the 'appointor', an office referred to in the articles of association of each of the companies (which, for present purposes, were expressed in the same terms). Much attention was focussed upon the nature and extent of the authority conferred upon the appointor when it came to the conduct of the affairs of JA and MH. Mr Gould's version was that the appointor's office was held at the whim of the shareholders in each company (when they became companies with share capital). Initially, the sole shareholder was a nominee company controlled by Mr Borgas. Later, Mr Borgas was the shareholder. At all times, Mr Borgas and members of his family were the directors of each of JA and MH.
Mr Gould explained his involvement in the affairs of JA and MH in different ways. The account was not consistent nor was it coherent or logical, for reasons I will explain. Although Mr Gould's evidence was often given by reference to the arrangements that pertained to JA, he accepted that the same arrangements applied to MH as those that applied to JA (and the case for the taxpayers was conducted on that basis).
The business conducted by Mr Borgas
Mr Gould agreed that at all material times Mr Borgas lived and worked in Switzerland where he was the principal of a business and that 'fundamentally' he provided corporate services that included providing the directors and shareholders for offshore companies. The business was called Anglore SARL. Mr Gould gave evidence that Mr Borgas was not an Australian resident (though he was originally from Australia) and had been admitted as a solicitor in the United Kingdom (but had not practiced there). Mr Gould accepted that Mr Borgas charged his usual fees for holding offices for JA and MH.
The section concluded with the following under the heading 'Summary' (paras 274‑275):
The Commissioner maintains his opinion that there was fraud and/or evasion in the years ended 30 June 2001 to 30 June 2004, 30 June 2007 and 30 June 2008. As such the Commissioner was able to issue assessments for these years at any time.
The Commissioner was within time to issue an assessment for the year ended 30 June 2011 and accordingly did not turn his mind to the question of Fraud or Evasion.
Therefore, as was the case in relation to the Philadelphia objection, the reasons for decision on the Family Trust objection also contained a statement that confirmed the Commissioner's original opinion that there was fraud or evasion.
The submissions
I have set out these matters in some detail because the position of the Commissioner on the appeals was to rely upon the original opinions, not upon any opinions that might be taken to have been expressed in the reasons on the objections. The opening submissions for the taxpayers focussed upon the matters expressed in the reasons for objection.
In closing submissions for the taxpayers, the case concerning fraud or evasion was put by reference to the reasoning in Fitzroy Services Pty Ltd v Commissioner of Taxation [2013] FCA 471 (Edmonds J). In that case, the assessment had been issued on the basis of the fraud or evasion provision in s 170 of the ITAA36. On that occasion, the case for the Commissioner in relation to fraud or evasion was put in the following terms (as quoted at [51]):
The facts before the Commissioner as confirmed by the evidence before the Court will support the conclusion that the applicant has not shown that the Commissioner's opinion was unreasonable, or legally erroneous.
Edmonds J quoted relevant parts of the reasons on the objection (at [52]). They included the following:
During the audit it was determined that there was evidence of evasion based on the factors described in paragraphs 33 to 36 above. It is considered that there was sufficient basis for the Commissioner to form this opinion and the Commissioner was therefore able to amend your assessment for the 2004-05 financial year at any time.
It appears that one of the contentions for the taxpayer on the objection was to the effect that it did not engage in fraud or evasion. As to that contention, the quoted passage from the reasons on objection included the following:
In your objection you contend that you have not engaged in fraud or evasion. However, you have not provided any evidence or information in your objection to establish that evasion did not occur.
Therefore, the reasons for decision on the objection did not appear to contain the expression of the Commissioner's opinion for the purposes of s 170 of the ITAA36. Rather, that opinion was formed during the audit and the conclusion reached on the objection was that there was a sufficient basis for the formation of that opinion.
Edmonds J then reasoned that '[i]n the absence of further elaboration, [there was] no alternative but to assume that' the matters stated in the reasons on the objection 'alone found[ed] the basis of the Commissioner's opinion' (at [53]). On the basis of his Honour's own conclusions in the case that the matters referred to in the reasons on the objection had been demonstrated by the taxpayer, Edmonds J concluded that the Commissioner's opinion as to fraud or evasion was 'flawed and infected with legal error' and 'the Commissioner had no power to issue the amended assessment': at [54].
Conclusion
The submission advanced for the taxpayers in the present proceedings was to the effect that if the taxpayers' contentions as to the deductions were upheld then, applying the reasoning in Fitzroy Services it must be concluded that the opinions formed by the Commissioner were infected with legal error as there was no basis for the opinions. For reasons I have given, the taxpayers' contentions have been rejected. It follows that their case as to fraud or evasion must also be rejected.
Ultimately, other claims made in the appeal statements to the effect that there had been a form of unreasonableness or other kind of legal error in the formation of the relevant opinions were obscurely expressed. In the result, they were not pressed and need not be addressed.
However, having regard to the way in which the case for the taxpayers was mounted, namely that the relevant opinions were expressed in the reasons on the objections, I should not be taken to accept that such an approach was open for the following reasons.
It is first necessary to return to the nature of an appeal under s 14ZZ of the Taxation Administration Act. Amongst other things, s 14ZZ provides for an appeal to this Court against an objection decision. The 'assessment, determination, notice or decision against which a taxation objection may be, or has been, made' is a 'taxation decision': s 14ZQ. A taxpayer bringing an appeal under s 14ZZ against an objection decision in respect of a 'taxation decision' has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been: s 14ZZO(b)(i).
As we explained in Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169 at [47]:
Although s 14ZZ provides for an 'appeal', it confers an original jurisdiction to determine a review claim 'against the decision' by the Commissioner on an objection. The Court is to determine the claim on the evidence presented to it in accordance with its usual practice and procedure for applications in its original jurisdiction. The onus is on the appellant to prove that the assessment the subject of the objection decision was excessive or otherwise incorrect and what the assessment should have been. As stated by Dowsett J in Weyers v Commissioner of Taxation [2006] FCA 818 at [146], '[t]he Commissioner need not justify the decision, save in response to an appropriate attack upon it'. The grounds that may be relied upon are confined to those raised before the Commissioner in the objection, unless the court otherwise orders. So, the evidence that may be led to discharge the onus is likewise confined. It is a matter for the parties whether they stipulate the correctness of factual matters before the Commissioner. However, in the absence of such matters being agreed or such matters being presented as evidence of the truth of those matters without objection, it is for the appellant to provide the necessary evidence on the hearing before the court on the 'appeal'. The court does not simply receive the record before the Commissioner on the objection and make its decision on that basis. Nor does it consider whether there has been error demonstrated in the decision by the Commissioner. Even less so does it consider whether an amended assessment issued after the objection decision is correct.
Therefore, on an appeal under s 14ZZ, the taxpayer must establish the facts upon which the taxation liability depends (or must agree those facts with the Commissioner for the purposes of the appeal): Zappia v Commissioner of Taxation [2017] FCAFC 185 at [3] (Pagone J, Robertson and Bromwich JJ agreeing). The Court will then determine the relevant law concerning the applicable taxing provisions and apply that law to the facts as established on the appeal.
However, complexities arise where any taxation liability depends upon the formation of a subjective state of mind by the Commissioner. There are many different ways in which liability to taxation may depend upon the formation of an opinion or a state of satisfaction or some other view by the Commissioner. In such cases, an issue arises as to the extent to which a taxpayer can contend on an appeal against an objection decision that the opinion or state of satisfaction was wrongly formed or invite the Court to reach a conclusion as to the taxation payable on the basis that some different opinion or state of satisfaction should have been reached.
In Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353, the taxpayer brought an appeal to the High Court (of a kind provided for in the income tax legislation applicable at the time). The appeal concerned an assessment based upon the application of a provision that did not allow a loss to be an allowable deduction unless a particular specified circumstance had been established to the satisfaction of the Commissioner: at 354-355.
In deciding the appeal, Dixon J began the analysis by observing that it was for the Commissioner to be satisfied that the particular specified circumstance had been established. As to the extent to which the Commissioner's decision in forming that opinion was examinable, his Honour said (at 360):
[The Commissioner's] decision, it is true, is not unexaminable. If he does not address himself to the question which the sub-section formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review.
A description of the nature of the appeal in those terms resonates with modern notions of jurisdictional error. It confines the extent to which a taxpayer can challenge the relevant state of mind on the appeal.
In Avon Downs the taxing provision itself operated on the basis of the state of satisfaction of the Commissioner as to whether particular circumstances existed. The loss was only deductible if the Commissioner had formed the required state of satisfaction. It was a taxing provision that operated by reference to the subjective views of the Commissioner, lawfully formed.
Care must be taken in simply extrapolating the approach in Avon Downs as if it applied in a general way to any issue raised by a taxpayer in an appeal pursuant to s 14ZZ concerning the formation of a subjective view by the Commissioner. The issue in the present case is about an opinion that had to be formed in order for the Commissioner to have the statutory authority to issue an assessment. Once that power was enlivened, the liability to taxation was then determined by the application of the taxing provisions to the circumstances of the taxpayer. That is to say, in the present case, the relevant opinion did not form part of the operation of the taxing provision. However, it did affect the liability to taxation.
In Kolotex Hosiery (Australia) Pty Ltd v Federal Commissioner of Taxation (1975) 132 CLR 535, the High Court applied (or appeared to recognise the applicability) of the views of Dixon J in Avon Downs in a case concerned with the same taxing provisions: at 541 (Barwick CJ), 574‑575 (Gibbs J), 576, 578 (Stephen J). There is a reference in the reasoning of Barwick CJ to the significance of the Commissioner's state of satisfaction at the time of assessment and to the possibility of the Court treating the Commissioner as not having been satisfied if it is shown that on the material before the Commissioner at the time of assessment the Commissioner could not have been so satisfied.
The approach in Kolotex treats the requisite state of satisfaction at the time of assessment as one of the matters in issue at the time of the appeal to the Court. It appears that on the appeal the facts that bear upon whether the Commissioner might properly be satisfied are only relevant to the extent that they may call into question whether the state of satisfaction was formed according to law.
In Brambles Holdings Ltd v Federal Commissioner of Taxation (1977) 138 CLR 467, Gibbs J said (at 476):
The extent of the powers of the Court in cases where the allowance of a deduction from assessable income has depended upon the Commissioner being satisfied of certain matters has been considered in such cases as Avon Downs Pty. Ltd v. Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353 and Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation [1975] HCA 5; (1975) 132 CLR 535. Under s. 16T the position is different - the requisite satisfaction is a condition of a disallowance of a rebate, and not of the allowance of a deduction. It may be that the powers of the Court are wider in an appeal involving s. 16T than in cases such as Avon Downs and Kolotex, but for present purposes it is not necessary to decide whether that is so.
(footnotes omitted)
It is an observation that indicates the importance of considering the nature and role of the statutory provision that invokes a subjective state of mind on the part of the Commissioner for the alleged taxation liability.
The reasoning in Kolotex and its consequences received detailed consideration by Derrington J in Commissioner of Taxation v Addy [2020] FCAFC 135; (2020) 280 FCR 46. His Honour concluded at [167] (see also, [181]) that:
On the face of the reasons given by the majority in Kolotex, no discernible principle emerges that where a provision relevant to an assessment is conditioned upon the Commissioner's state of mind, the court may substitute its own opinion or state of satisfaction where it has detected error in the Commissioner's.
In separate reasons, Steward J addressed the taxpayer's proposition that 'in a Pt IVC tax appeal a Court, once satisfied of the presence of error in the attainment by the Commissioner of his state of satisfaction, can decide for itself whether or not the Commissioner should on the evidence before the Court be so satisfied'. His Honour concluded that the proposition was not correct: at [312].
All of which is to expose the importance of clear conceptual analysis of provisions that operate by reference to the Commissioner's state of mind when it comes to appeals under s 14ZZ.
I note that there was a successful appeal but not as to the above aspects of the reasoning: Addy v Commissioner of Taxation [2021] HCA 34; (2021) 273 CLR 613.
Section 14ZZ is confined to an appeal in respect of the taxation decision the subject of the objection decision. It does not empower the Court to substitute its own view for a subjective state of mind of the Commissioner on which the operation of a taxing provision depends. Further, as the circumstances in the present case expose, issues may arise as to whether the subjective state of mind has been formed outside the scope of that process. Issues may also arise as to whether the subjective state of mind that provided the basis for the assessment has been replaced by a subjective state of mind formed in the course of the objection decision.
If the operation of a relevant taxing provision depends upon the Commissioner's subjective state of mind, then, on an appeal under s 14ZZ, the taxpayer is confined to demonstrating a defect of the kind described in Avon Downs (which appears to include any kind of defect that would amount to jurisdictional error). If such an error is demonstrated then it appears that the Court may reach a conclusion as to whether the taxpayer has discharged the onus to show that the assessment is excessive or otherwise incorrect and what the assessment should have been on the basis that the subjective state of mind has not been validly formed. Whether that may be the consequence will depend upon the nature of the provision.
Otherwise, any attack upon the validity of the formation of the opinion with taxation consequences (but not by operation of a relevant taxing provision) must be raised by judicial review proceedings with separate relief being sought.
Finally, as to some of the assessments, the Commissioner advanced an alternative case that they were the original assessments or were issued within the usual four year time period and therefore it was not necessary for there to be fraud or evasion in order for there to be power to issue the assessments. No issue was raised by the taxpayers as to the factual basis for that claim. Given the conclusion I have reached on the issue of fraud or evasion it is not necessary to consider the alternative claim but I make the following findings as to matters that were not put in issue by the taxpayers:
(1)as to the Share Trust, all the assessments were original assessments;
(2)as to the Gold Trust, save for the assessment for the 2003 tax year, all the assessments were original assessments; and
(3)as to the Family Trust, all the assessments were original assessments.
PENALTIES
The submissions as to penalties advanced for the taxpayers assumed that the conclusion had been reached (contrary to the main case for the taxpayers) that the deductions claimed were not allowable. In those circumstances, no submission was advanced for the taxpayers to the effect that there were no false or misleading statements as to material particulars. Rather, the submissions for the taxpayers as to penalties accepted that there was a shortfall amount and focussed upon the amount of the penalty that was appropriate in all the circumstances.
In the case of the Share Trust and the Gold Trust the relevant income was assessed to a beneficiary. Even so, penalties were imposed by the Commissioner upon the trusts because the relevant provisions deem the trustee to have the same shortfall amount as was caused in the hands of the beneficiary: see s 284-30 of Schedule 1 to the Taxation Administration Act.
The base penalty amount is worked out according to the provisions of the table in s 284-90(1) of Schedule 1 to the Taxation Administration Act (noting that a slightly different version of the provision applied from 9 June 2010). Where the shortfall amount, or part of the amount, resulted from intentional disregard of a taxation law, the base penalty amount is 75%. Where the shortfall amount, or part of the amount, resulted from recklessness, the base penalty amount is 50%.
The submission for the taxpayers was that the appropriate penalty amount was 50%. The Commissioner contended that 75% was apposite.
As to uplift penalty amounts, there was no dispute about the 20% uplift applying in second and subsequent years where there was also a shortfall amount. It is established that the uplift provisions apply even where the notices of assessment in respect of second and subsequent years issue on the same day as the notice of assessment for the first year: Bosanac at [147‑[149].
In order for there to be intentional disregard there must be actual knowledge that the statements being made are false. There must be an understanding of the tax liability and a deliberate choice to ignore the law. These matters may be established by direct evidence or inference: Weyers v Commissioner of Taxation [2006] FCA 818.
The submission advanced for the taxpayers concerned the state of knowledge and awareness of Mr Gould. No issue was taken about whether Mr Gould was the relevant guiding mind for the purposes of the application of the penalty provisions. Nor was there any attempt to distinguish between the circumstances applicable to different taxpayers or at different times. Nor was any point taken as to whether the liability of the taxpayers was on the basis that Mr Gould controlled the entities or was their tax agent. Rather, what was put was that great care was to be taken not to base a finding of intentional disregard upon a lack of documentation or infelicity in the documentation.
What was contended in closing submissions for the taxpayers was that a lack of reasonable care or an idiosyncratic view as to what may amount to an allowable deduction was not enough to support a finding of intentional disregard. Further, it was said that Mr Gould took advice on matters when he thought it appropriate to do so and discussed deductions with his staff.
Reliance was placed upon the reasoning of Logan J in Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971, a case which also concerned a company controlled by Mr Gould. As to Mr Gould's evidence in that case, his Honour said at [23]-[24]:
My mind has truly fluctuated as to whether Mr Gould's evidence about management fee, interest and other deduction claims was actively dishonest or just the result of his closing his eyes to the obvious and operating on a belief held at the time when particular deductions claimed, and still held, that he could equate deduction pretence with reality …
A tempering consideration in relation to a conclusion of dishonesty or fraud in relation to Mr Gould is that he is not by training or experience a lawyer. He is, however, a well-qualified and experienced chartered accountant and, as I have already indicated, displayed a good knowledge of the taxation consequences of particular transactions.
Justice Logan was not persuaded that Mr Gould was 'actively dishonest', having expressed his conclusion as to that aspect in the following way (at [26]):
I was left with the strong and distinct impression that, for all of his knowledge and experience, he had convinced himself that it was possible, in relation to entities which he controlled and by an act of will on his part, to designate, after the end of an income year, that those entities had been in a particular relationship, and incurred particular liabilities in particular amounts, during that income year. That act of will then seemed to have been carried over into entries in general ledgers. I am not persuaded that he was actively dishonest. However, given his knowledge and experience and understanding of tax consequences of particular expenditures, I am quite sure, even allowing for the strictures of s 140(2) of the Evidence Act, that, again and again, he has closed his eyes to the obvious to the point of wilful blindness.
I refer to these matters not because they bear upon the findings that should be made in the present case based upon the evidence received (and the conclusions I have reached about the evidence of Mr Gould), but because they place in context the conclusions reached by Logan J as to penalties in the passages relied upon by the taxpayers in the present case.
As to penalties, Logan J reasoned at [472] as follows:
The conclusion which I have reached concerning an absence of active dishonesty by Mr Gould precludes, in my view, a finding of intentional disregard for penalty purposes. In some circumstances in relation to criminal liability, wilful blindness can supply the requisite element of knowledge. However, the text of item 1 in the table in s 284-90(1) of sch 1 to the TAA is against a like conclusion in relation to penalty and suggests that there must be an actual intention, not an equivalent of one.
Further, his Honour found at [475]:
In my view, Mr Gould was at least grossly indifferent as to whether expenditures claimed by the AA Trust as deductions were truly incurred or incurred in the amounts claimed. A reasonable person in his position would have seen there was a real risk that the deductions claimed were not allowable to the AA Trust under a taxation law. Fiscally, his conduct was, objectively, outrageous, much more than just a failure to take reasonable care …
His Honour ultimately found that the appropriate characterisation of Mr Gould's conduct in that case was that it was reckless and that the appropriate penalty rate was 50%. On that basis, the taxpayer succeeded in proving that the penalty assessments of 75% were excessive.
On the basis of the above reasoning in Anglo American it was contended for the taxpayers that findings of wilful blindness, gross indifference or conduct that was objectively outrageous would not sustain a finding of intentional disregard. Implicitly, the submission recognised that findings of that character were open having regard to the evidence given by Mr Gould. That implicit recognition (though not a concession) was appropriate in my view because I would characterise the findings I have made concerning the many respects in which Mr Gould's account was not credible as sustaining general findings to that effect. In any event, the contentions for the taxpayers as to penalty accepted that there had been recklessness. Therefore, it is not necessary to consider precisely what may be required to sustain a conclusion of recklessness.
Otherwise, the submissions for the taxpayers were to the effect that it was not open to find that there had been the 'active dishonesty' determined by Logan J to be necessary in order to find intentional disregard. The submission approached the matter on the basis that the issue in relation to penalties was whether the Court could itself make an affirmative finding of dishonesty. That does appear to be the approach that was adopted by his Honour in Anglo American. It appears to reflect the way in which that case was argued.
In the present case, the submissions for the Commissioner emphasised the significance of the onus when it came to penalties. The submission advanced orally in closing was that the taxpayers 'have not discharged their burden of showing that there was no intentional disregard of taxation law by the respective applicant or by its agent'. In my view, it is correct to approach the issue of penalties on the basis that the taxpayer must prove the facts on which the penalties are to be based. The appeal concerns the assessments. The amount of the assessments includes penalties. In order to discharge the onus imposed by s 14ZZO of the Taxation Administration Act, the taxpayers must establish that the assessments are excessive. In the present case, those assessments are based upon the shortfall amounts and penalties at 75% (plus the 20% uplift for all successive years). Having failed as to the shortfall amounts, they must establish the factual and legal basis for the Court to conclude affirmatively that a 75% penalty is not to be applied. To do that, the taxpayers must establish that there was no intentional disregard of taxation law by the taxpayers (relevantly by Mr Gould as the guiding mind).
The taxpayers seek to demonstrate an absence of intentional disregard by Mr Gould's account. In effect, they argue that Mr Gould's account about how he formed the view that the deductions could be made must be accepted as credible or possibly that a conclusion of that kind should be drawn from the accounts themselves. For reasons I have already given, the nature of the accounting records, particularly the extensive use of year accounting adjustments and the irregularity of entries that are said to support the deductions are such that they do not support any inference about the basis for the adjustments without some support or explanation. Mr Gould is the only possible source of that explanation.
The findings I have made demonstrate that Mr Gould's account was so inconsistent and so lacking in credibility that it could not sustain a finding that the taxpayers, by Mr Gould, did not deliberately ignore the law. In many respects, the cross-examination of Mr Gould exposed what was a less than complete and frank account of the relevant aspects of the accounting affairs of the taxpayers and the other entities controlled by Mr Gould. At certain points, evasiveness gave way to explanation which itself lacked credibility. Some aspects of Mr Gould's account, for example his evidence concerning 'Beer' and the contents of his affidavit in the Family Court proceedings, were exposed as being so flawed that it appeared that Mr Gould was being deliberate in his failure to give a truthful account.
For reasons that have been given, Mr Gould's evidence as a whole was entirely lacking in credibility, including as to those aspects which might disavow intentional disregard of the taxation law. Mr Gould was confronted with many documents that were inconsistent with his account but persisted with explanations that lacked any credibility. Evidence of that kind could not rise to discharge the onus on the taxpayers to demonstrate that Mr Gould did not intentionally disregard the taxation law.
I do not go so far as to find affirmatively that the Commissioner has demonstrated active dishonesty by Mr Gould. In closing submissions, the Commissioner advanced a submission to the effect that the Court should be satisfied that each of the taxpayers had actual knowledge of the falsity of the statements made in their income tax returns as to the claiming of deductions and the returning of income. A case of that kind would depend upon a finding as to that state of mind on the part of Mr Gould. However, a case in those terms was not put to Mr Gould. Nor was it supported by detailed references to the evidence that might support such a finding.
There was a suggestion in very general terms to the effect that all of the overseas funds were under the control of Mr Gould. It was also put in very general terms that the accounting entries were made at the direction of Mr Gould and did not reflect the actual circumstances. Certain specific aspects of Mr Gould's account were challenged as untrue. On one occasion, it was put to Mr Gould that he was paid to hide people's money offshore to deceive others including the Australian Taxation Office. It was also put to Mr Gould that when it came to the Offshore Funders they were under his control and he could direct them as to what they charged for interest and as to when the funds they provided had to be repaid.
However, no specific case was put to Mr Gould that there had been dishonesty on his part or intentional disregard of the taxation law when it came to the relevant deductions. For example, it was not suggested that he knew that the deductions claimed were not allowable. Mr Gould gave confused, illogical and inconsistent evidence about the basis for those deductions. He also failed to articulate with any coherence the basis for the alleged interest liabilities or management fees. As I have explained, in certain respects his evidence appeared to be deliberately misleading as to the extent of what it disclosed. These are all reasons why his account cannot be accepted. These are also reasons why, viewed objectively, his conduct was reckless. However, having regard to the way in which the case was run, it is not open to the Court to make an affirmative finding of intentional disregard.
Further, in my view, the limited matters pointed to by the Commissioner in closing submissions to support an affirmative finding, though substantially reflected in the findings made in these reasons, are not sufficient to support an affirmative finding of dishonesty. The submissions were put on the basis that it could be found that Mr Gould (a) knew that the amounts were not deductible if they were not management fees or interest; (b) knew that they were not management fees or interest; and (c) claimed deductions for those amounts anyway. Propositions in those terms were not put to Mr Gould.
I accept that Mr Gould as a tax accountant of many years' standing who gave the explanations for deductibility that he gave in his evidence knew that the amounts were not deductible if they were not truly amounts for management fees or interest. The real issue is whether there was a basis to find that he knew subjectively that they were not of that character and, consequently, that he was the mind by which the taxpayers intentionally disregarded the taxation law. Such a finding must be made with due regard to its seriousness. The rejection of the credibility of the elaborate and inconsistent narrative that Mr Gould gave as to why he thought the various amounts were deductible is not sufficient. Nor are the particular aspects of his account that I have found to be unsatisfactory, being matters that were not concerned with the deductions themselves. This is not a case where an inference can be drawn from the failure to provide any explanation as to why the amounts were thought to be deductible.
For those reasons, I find that the taxpayers failed to discharge their onus of demonstrating that there was no basis for the 75% penalties and consequently the appeals as to penalties must fail.
The above reasoning does not result in the imposition of penalties at the 75% level without an affirmative finding. The nature of the present appeals must be placed in context. The basis upon which the Commissioner has found there to be an intentional disregard of the taxation law has been stated. It was set out in the decisions on the objections which provided the foundation for the assessments the subject of the present appeals. As an exercise of statutory power to make the findings necessary to support the quantum of the assessments that related to penalty amounts, there was no challenge to their validity. Therefore, as the taxpayers have not discharged their onus on their appeal insofar as it concerns the penalty amounts, the assessments must stand insofar as the amounts include penalties. They do so on the basis of the findings by the Commissioner in the valid exercise of statutory power to make those findings.
REMISSION
The Commissioner exercised his discretion not to remit the penalties. It was accepted that, by reason of the nature of the decision as to remission, the taxpayers had to demonstrate an error of law. Submissions were not advanced as to the nature of the error alleged. The Commissioner submitted, in effect, that remission involved the exercise of an administrative discretion that was entrusted to the Commissioner and no power was conferred by s 14ZZ to exercise that discretion. The Commissioner also submitted that there was no 'appellable error'.
In the absence of any substantive articulation of the basis upon which the Court might intervene on the question of remission, I conclude that the taxpayers have failed as to that aspect of their appeals.
FAMILY COURT PROCEEDINGS
These reasons refer to certain parts of the contents of an affidavit deposed by Mr Gould in Family Court proceedings that occurred many years ago. Those parts are confined to Mr Gould's own explanation of aspects of his financial circumstances at the time. These reasons do not refer to any other aspect of those Family Court proceedings.
Part XIVB of the Family Law Act 1975 (Cth) contains provisions which make it an offence to communicate an 'account' of proceedings brought under the Family Law Act if the account identifies parties or other people involved in the proceedings: see s 114Q. The provision does not apply if the communication is in accordance with a direction of, or otherwise approved by, 'a court': s 144Q(2). The term 'court' is defined in the legislation 'in relation to any proceedings' to mean, in effect, those courts with jurisdiction in family law proceedings and proceedings concerned with child support payments. Regard only to those provisions suggests that the reference to 'a court' in relation to the publication of an account of proceedings under the legislation means 'a court' as defined. In terms of purpose, a confined meaning of that kind would ensure that any orders that might be made allowing an account of proceedings brought under the Family Law Act are supervised by courts with a proper understanding of the nature of those proceedings and the basis for the offence provision.
However, s 114S lists a number of categories of communications that are not a communication to the public for the purposes of s 114Q. They include:
(b)a communication of a pleading, transcript of evidence, or other document for use in connection with any of the following proceedings, to a person concerned in those proceedings:
(i)proceedings in a court;
(ii)proceedings before an officer of a court investigating or dealing with a matter in accordance with this Act, the regulations or the applicable Rules of Court;
(iii)proceedings in a tribunal established by or under a law of the Commonwealth or of a State or Territory;
The term 'tribunal' is not defined in the legislation. Its inclusion in the above exclusion suggests that the documents referred to in the provision might be disclosed to 'a person concerned in' any tribunal proceedings. It would seem to be odd if that would be the case for any tribunal but not for any court. It would also appear to be unnecessary to provide for such an exception in relation to the conduct of proceedings in 'a court' as defined. Therefore, at least in the case of the exception provided for by s 114Q, 'court' must refer to any court. On that approach, there is an exception for the provision of Mr Gould's affidavit to the Commissioner, a person concerned in the present proceedings.
However, there remains an issue as to whether the terms of that exception indicate that the word 'court' was also intended to have a broader meaning in s 114Q(2) such that this Court could approve the communication of an 'account'. There is some support for such an interpretation: The Queen v Howe (1978) 19 SASR 303 at 308‑309. Nevertheless, I will proceed on the basis that s 114Q(2) does not confer jurisdiction on this Court to direct or approve the communication of an account of family law proceedings.
On the basis I have just outlined, it may be accepted that this Court has no jurisdiction to make an order authorising a person to communicate to the public an account of any part of family law proceedings. However, the offence provision does not apply to the Court. Its terms could not limit the discharge of the Court's constitutional responsibility to provide reasons for decision. Even so, the fact that an account would otherwise come within the terms of s 114Q may be a persuasive reason why the Court would make a non-publication order or otherwise anonymise proceedings: CFB18 v Reader Lawyers & Mediators [2018] FCA 611 at [1]‑[4]; and APC v Mr B (No 2) [2024] NSWSC 1608 at [367]-[371] (Schmidt AJ).
References to 'proceedings' in Part XIVB includes part of proceedings: s 114P.
An 'account' is a narrative, description, retelling, or recital of such proceedings: Hinchcliffe v Commissioner of Police of the Australian Federal Police [2001] FCA 1747; (2001) 118 FCR 308 at [53] (Kenny J).
In these reasons, I have made no reference to any aspect of the Family Court proceedings other than the relevant parts of the affidavit previously deposed by Mr Gould. As I have mentioned, those aspects are confined to Mr Gould's own financial circumstances. Otherwise, they do not deal with any matters personal to Mr Gould or any other person. They concern matters of direct relevance to the contents of affidavits that Mr Gould himself has deposed in support of the appeal proceedings brought by the taxpayers each of whom are emanations of Mr Gould. They relate to matters that occurred decades ago.
I raised the possible relevance of Part XIVB in the course of the hearing. I afforded the parties an opportunity to put on submissions as to the legal principles. No party sought any form of order.
In all the circumstances, in order to provide reasons for decision in these proceedings it is necessary to refer to aspects of the matters deposed by Mr Gould in his affidavit in the Family Court proceedings. The issue that arises is whether, in light of Part XIVB it is appropriate for this Court to limit the publication of references to the contents of the affidavit in these reasons. I am not persuaded that the circumstances of the present case justify the making of any form of non-publication order or some form of anonymisation of the proceedings.
CONCLUSION
For reasons that have been given, the appeals by each of the taxpayers must be dismissed. Given that the Commissioner has been successful on all issues, I am presently of the view that there should be a costs order in favour of the Commissioner. In the circumstances, I will make that order but as the question of costs was not specifically addressed by the parties in their submissions, I will reserve liberty to apply to vary the order as to costs.
I certify that the preceding seven hundred and thirty (730) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin. Associate:
Dated: 25 July 2025
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