Starr and Anor and Commissioner of Taxation
[2005] AATA 797
•19 August 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 797
ADMINISTRATIVE APPEALS TRIBUNAL )
) No WT2003/31
TAXATION APPEALS DIVISION
) WT2003/33 Re DONALD ST CLAIR STARR &
GARY KEVIN HOPKINSApplicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Ms G Ettinger, Senior Member Date19 August 2005
PlacePerth
Decision The decisions under review are affirmed.
Ms G Ettinger
Senior Member
………………….
CATCHWORDS
Taxation - sections 224(2) and 226L of the Income Tax Assessment Act 1936 - whether tax avoidance scheme – Federal Court decision in Vincent case and further decision of the Full Court – objective or subjective considerations under section 224(2) argued - decisions under review affirmed.
LEGISLATION
Income Tax Assessment Act 1936 ss 222A, 224(2), 224(3), 227(3), 51(1), 226L, 177D
Taxation Administration Act 1953 s 14ZZK
Taxation Laws Amendment (Self Assessment ) Act 1992
CASE LAW
Vincent v Federal Commissioner of Taxation (2002) 50 ATR 20
Vincent v Commissioner of Taxation (2002) 124 FCR 350
Commissioner of Taxation v Sleight (2004) 136 FCR 211
Eastern Nitrogen v Commissioner of Taxation (2001) 108 FCR 27
Commissioner of Taxation v Hart and Another (2004) 206 ALR 207
Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235
Walstern v Federal Commissioner of Taxation (2003) 54 ATR 423
Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2003) 55 ATR 745
KrampelNewman v Commissioner of Taxation (2003) 126 FCR 561
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Federal Commissioner of Taxation v Trautwein (1936) 56 CLR 211
Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192
Allied Pastoral v Federal Commissioner of Taxation (1983) 44 ALR 607
McCormack v Federal Commissioner of Taxation (1979) 23 ALR 583
Eisner v Federal Commissioner of Taxation (1971) 2 ATR 3
Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402
REASONS FOR DECISION
19 August 2005 Ms G Ettinger - Senior Member 1. The decisions under review before the Tribunal were the decisions of the Commissioner of Taxation, (“the Commissioner”), the Respondent in these proceedings, in relation to the amended assessments for the year ended 30 June 1996 in relation to Mr Donald St Clair Starr and Mr Gary Kevin Hopkins, the Applicants in these matters.
2. The Respondent Commissioner had disallowed the objection of Mr Starr dated 15 October 2001, to the amended assessment dated 11 August 2000, in relation to a penalty by way of additional tax imposed by the application of section 226L of the Income Tax Assessment Act 1936, (“the ITAA”).
3. The Commissioner held as follows in relation to Mr Starr: “After having given consideration to any additional information or individual circumstances provided in your letter of objection we have decided it is still appropriate to maintain the flat rate of 10%.” The amount of the penalty imposed in relation to Mr Starr was remitted by the Respondent to 10% of the tax shortfall, that is $1,486.71.
4. On 14 May 2003, Mr Starr applied to the Tribunal for a review of the decision of the Commissioner in relation to the penalties imposed.
5. The Commissioner had also disallowed the objection of Mr Hopkins dated 18 September 2001, to the amended assessment dated 10 October 2000, in relation to a penalty by way of additional tax imposed by the application of section 226L of the ITAA.
6. The Commissioner held as follows in relation to Mr Hopkins: “After having given consideration to any additional information or individual circumstances provided in your letter of objection we have decided it is still appropriate to maintain the flat rate of 50%.” Fifty percent of the tax shortfall was $4,677.35.
7. Mr Hopkins’ also applied for review, but his application was undated. It appeared to have been received at the Perth Registry of the Tribunal on 15 May 2003.
8. The Applicants were represented at the Hearing by Mr F Wilson of Wilson & Atkinson, and the Respondent by Ms H Symon SC, of counsel, who appeared with Ms L Price, of counsel, briefed by the Australian Government Solicitor.
BACKGROUND
9. Messrs Starr and Hopkins form part of a cohort who invested in Active Cattle Management Pty Ltd, Stud Cattle Breeding Services, (“ACM”), the details of which were in a brochure tendered with the Applicants’ statements (Exhibits A3 and A4). The breeding project was initiated in early 1995, and offered, as the name of the brochure, (which was not a prospectus), claimed, to be for the breeding and managing of stud cattle for third party investors.
10. I do not find it necessary for purposes of this matter to give great detail about ACM, which was in fact detailed in two cases before the Federal Court, appealed by another ACM investor, Ms Julie Vincent (Vincent v Federal Commissioner of Taxation (2002) 50 ATR 20, and before the Full Federal Court, Vincent v Commissioner of Taxation (2002) 124 FCR 350), (”Vincent”). An adequate summary was also given by the Commissioner in paragraphs 1 – 15 (T2) of Exhibits R1 and R2.
11. However I have noted from the promotional material that investors were offered the opportunity of participating in the ACM cattle breeding project; the material also outlined the financial benefits, including the availability of loans. The promotional material indicated that investors could use their own funds, or enter into loan agreements with a finance company, TEI Finance Pty Ltd, a company closely connected with ACM. The information in the brochure indicated that ACM was not qualified to give taxation advice, and did not undertake to do so, but added that: “Having said that, we believe all expenses are fully deductible provided you are engaged in the business of cattle breeding with the intention of making a profit. You are engaging us to assist you to do this. We make no apologies for making profit for our clients.”
12. Mr Peter Jacobsen, the originator of ACM, died in 1998. I have noted from the decision of the Full Federal Court in Vincent (supra), that ACM, the related finance company, and other related companies subsequently went into voluntary administration, and that ACM then entered into a Deed of Company Arrangement.
13. In the first Vincent case, an appeal to the Federal Court arising out of the ACM Project, French J held that ACM was a Scheme for the purposes of section 177A of Part IVA of the Income Tax Assessment Act 1936, (“ITAA”). His Honour, found, at first instance, that the Scheme had not been commercially viable, and that a lack of operating capital was the primary cause of the Project’s failure.
14. The Applicants (in their Outline of Facts and Contentions dated 4 March 2005 before this Tribunal), stated that they accepted:
· The Applicants’ participation in ACM was, by the making of the various Scheme arrangements, and the various steps and transactions carried out pursuant to the Scheme arrangements, a Scheme for the purposes of section 177A of Part IVA of the ITAA.
· Because of the $23,888. project costs that Mr Hopkins incurred, and the $35,832. project costs which Mr Starr incurred, which were claimed as deductions, and were not held to be allowable deductions under section 51(1) of the ITAA, the Applicants had a tax shortfall within the meaning of section 222A of the ITAA.
· For the purposes of section 226L of the ITAA, the tax shortfall was caused by each of the two Applicants, in a taxation statement (section 222A of the ITAA), treating an income tax law as applying in relation to the Scheme in a particular way.
· For the purposes of section 226L of the ITAA, none of the scheme sections as defined by section 222A applies in relation to the Scheme.
15. Mr Wilson told me that all the investors had their claimed deductions disallowed by the Commissioner, and penalties imposed pursuant to section 226L of the ITAA.
16. I have already noted also that the Respondent’s disallowance of deductions from participation in ACM was not only the subject of litigation in the Federal Court of Australia between Ms J Vincent and the Commissioner, which resulted in a decision by French J, (Vincent v Federal Commissioner of Taxation (2002) 50 ATR 20), but was appealed to the Full Court of the Federal Court, and was followed by the decision at Vincent v Commissioner of Taxation (2002) 124 FCR 350. Relevantly the Federal Court had determined that in investing in ACM, Ms Vincent was not carrying on a business, the fees she paid in regard to ACM were outgoings on capital account, and a deduction pursuant to section 51(1) of the ITAA therefore did not apply. The Full Court agreed that ACM was a Scheme as defined in Part IVA.
ISSUE BEFORE THE TRIBUNAL
17. The issue I had to decide was whether the appeal by Messrs Starr and Hopkins against the Commissioner’s objection decisions in relation to the tax year ending 30 June 1996, which included penalties by way of additional tax imposed pursuant to section 226L of the ITAA, should result in the Commissioner’s decisions being affirmed, set aside or varied.
18. The Applicants contended that they were not liable to pay penalty by reason of the operation of section 226L of the ITAA, because, for the purposes of section 226L(c), the Scheme was not a “tax avoidance scheme within the meaning of section 224(1)”, in particular the specific definition of “tax avoidance scheme” in section 224(2).
19. Accordingly, in deciding whether the ACM Scheme was a “tax avoidance scheme”, I had to consider whether ACM was “a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax.”
EVIDENCE
20. No oral evidence was given.
21. However, documents tendered at the Tribunal included those lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, which were Exhibit R1 in relation to Mr Starr, and Exhibit R2 in relation to Mr Hopkins. The Respondent’s other documents before the Tribunal were the decisions in Vincent v Federal Commissioner of Taxation (2002) 50 ATR 20 as Exhibit R3, and Vincent v Commissioner of Taxation (2002) 124 FCR 350 as Exhibit R4.
22. The Applicants’ documents tendered in evidence were as follows:
Affidavit of K Sleight 3 March 2005 Exhibit A1
Affidavit of R Delcarlo 3 March 2005 Exhibit A2
Affidavit of D Starr with 8 March 2005 Exhibit A3
Attachment - Active Cattle 19 April 2005
Management Pty Ltd, Stud Cattle
Breeding ServicesAffidavit of G Hopkins - 9 March 2005 Exhibit A4
Same Attachment as for D StarrDocuments pursuant
to Direction 2 of the Tribunal
of 24 February 2005 Exhibit A5RELEVANT LEGISLATION
23. The relevant legislation in this matter is the ITAA, in particular sections 222A, 224(2), 224(3), 227(3) and 226L.
24. Section 224(2) and (3) provide:
“SECT 224
Penalty tax where certain anti-avoidance provisions apply
…
(2) In subsection (1), tax avoidance scheme means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax.
(3) In subsection (1):
penalty percentage means:
(a) subject to paragraph (b) – 50%; or
(b)if it is reasonably arguable that the provision or provisions under which the step described in paragraph (1)(b) or the action described in paragraph (1)(c) was taken to not apply to include the amount or disallow the deduction or rebate – 25%.”
25. Section 227(3) provides:
“SECT 227
Assessment of additional tax
…
(3)The Commissioner may, in the Commissioner’s discretion, remit the whole or any part of the additional tax payable by a person under a provision of this Part, but, for the purposes of the application of subsection 33(1) of the Acts Interpretation Act 1901 to the power of remission conferred by this subsection, nothing in this Act shall be taken to preclude the exercise of the power at a time before an assessment is made under subsection (1) of the additional tax.
Note:Section 204 sets out when the additional tax is payable and the consequences of not paying it on time.”
26. Deductibility pursuant to section 51(1) of the ITAA was not relevant because the Applicants accepted, on the basis of the decisions in Mrs Vincent’s case, that the expenditure on the ACM Scheme was capital.
SECT 51
Losses and outgoings
(1AA) Subsection (1) does not apply to the 1997-98 year of income or a later year of income.
Note: Section 8-1 of the Income Tax Assessment Act 1997 sets out rules for working out what losses or outgoings an entity can deduct for the 1997-98 year of income and later years of income.
(1)All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.
….”
27. Section 226L was inserted into the ITAA by the Taxation Laws Amendment (Self Assessment) Act 1992. It penalises at the same rates of penalty as the “scheme sections”, that is sections 224 and 225 of the ITAA in respect of specific anti-avoidance provisions, and section 226 in respect of the general anti-avoidance provisions in Part IVA.
“SECT 226L
Penalty tax where unarguable position taken about scheme
Subject to this Part, if:
(a)a taxpayer has a tax shortfall for a year; and
(b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and
(c) the scheme was a tax avoidance scheme within the meaning of subsection 224(1); and
(d)none of the scheme sections applies in relation to the scheme;
the taxpayer is liable to pay, by way of penalty, additional tax equal to:
(e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct—25% of the amount of the shortfall or part; or
(f)in any other case—50% of the amount of the shortfall or part.”
28. Section 177D follows as relevant.
“SECT 177D
Schemes to which Part applies
This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:
(a)a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b)having regard to:
(i) the manner in which the scheme was entered into or carried out;
(ii) the form and substance of the scheme;
(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).”
SUBMISSIONS AND CONCLUSIONS
29. In coming to a decision, I am mindful that pursuant to section 14ZZK of the Taxation Administration Act 1953, Messrs Starr and Hopkins bear the onus of proving their claim.
30. I am mindful also that the ACM Scheme was defeated by the operation of section 51(1) of the ITAA, because in the first Vincent case, French J concluded that Ms Vincent, in her capacity of participating in the Scheme, was not carrying on a business.
31. Their Honours stated in the decision of the Full Court which followed:
“For present purposes …. It is clear that where a person not carrying on a business acquires an asset for the purpose of sale other than sale in the course of a business, that asset could not be trading stock, although the sale of the asset might give rise to a profit being assessable income. Further the acquisition of that asset would be an acquisition on capital account.”
32. The Full Court held that although Ms Vincent contracted to obtain six calves, she was not carrying on a business of breeding cattle, and selling the progeny. Accordingly the six calves were not trading stock, but rather, assets acquired on capital account. Accordingly, they were not deductible pursuant to section 51(1) of the ITAA. The Applicants before me accepted that this applied also to them.
33. Additionally it was not in dispute that for the purposes of section 226L(d), of the ITAA, none of the scheme sections applies in relation to the participants in the Active Cattle Scheme.
34. However, schemes defeated under the primary provisions of the income tax legislation still have to satisfy the conditions of section 226L before a penalty by way of additional tax applies. One of those conditions, and the one most relevant in this case, is that the particular scheme was a “tax avoidance scheme” for the purposes of section 226L(c) of the ITAA. Pursuant to section 226L, the rates of penalty that apply are 50% of the amount of primary tax applicable to the adjustment, or if it is reasonably arguable that the deduction claimed was correctly allowable, 25% of the primary tax applicable to the adjustment.
35. In Mr Starr’s case, the Commissioner held as follows:
“After having given consideration to any additional information or individual circumstances provided in your letter of objection we have decided it is still appropriate to maintain the flat rate of 10%.”
36. In Mr Hopkins’ case, the Commissioner held as follows:
“After having given consideration to any additional information or individual circumstances provided in your letter of objection we have decided it is still appropriate to maintain the flat rate of 50%.”
WHETHER ACM IS A TAX AVOIDANCE SCHEME
37. I am mindful that Mr Wilson conceded on behalf of the Applicants that ACM was a Scheme within the meaning of Part IVA, and accordingly within the terms of section 177A of the ITAA.
38. However in order to determine whether ACM was a tax avoidance scheme, I had to consider section 224(2) of the ITAA which states that:
“- SECT 224
Penalty tax where certain anti-avoidance provisions apply
…
(2) In subsection (1),
tax avoidance scheme means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax.”
APPLICANT’S SUBMISSIONS
39. Submissions made on behalf of the Applicants indicated the Applicants had invested in ACM to achieve returns, and not for the sole or dominant purpose of enabling them to pay no tax or less tax.
40. Mr Wilson submitted that the following was plain from the ordinary meaning of the words in section 224(2):
· The section is defining a scheme by reference to the purpose for which it was entered into or carried out;
· The section does not specifically identify the person or persons whose purpose is relevant;
· Unlike Part IVA, the section does not specify any objective criteria by which the purpose of the relevant person is to be determined, and in these circumstances the actual or subjective purpose of the relevant person is relevant;
· Once a scheme falls within the definition of a tax avoidance scheme under section 224(2) of the ITAA, section 226L of the ITAA operates against those taxpayers who have claimed deductions in relation to the scheme.
41. Mr Wilson submitted that, accordingly, what was relevant in determining whether the Scheme was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax, was consideration of the purpose of the promoters, “the creators, architects devisers” of the scheme. It was they, he submitted, who were common to all the investors, and created, devised and operated a scheme. “To disregard their purpose would make no sense”, he submitted.
42. Mr Wilson also referred to the judgment in Commissioner of Taxation v Sleight (2004) 136 FCR 211, (paragraph 96), submitting that the Court there had held that the promoter’s purpose, objectively or subjectively, could not have been to obtain tax benefits for people, but profits for themselves.
43. Mr Wilson also submitted that the evidence of the taxpayers in the present cases as put forward in their affidavits, (Exhibits A3 and A4), had not been challenged, so that their subjective purposes in investing in ACM, that is to achieve returns, should be accepted. Mr Wilson submitted further, that as they approached retirement, (referring in particular to Mr Starr), their purpose was to achieve returns from the investment in ACM rather than to pay no tax or less tax. He submitted that this was supported by the evidence of the Applicants’ financial advisors, Messrs Del Carlo and Sleight.
44. Mr Wilson submitted that there were other sections of the ITAA where the purpose of the taxpayer was the relevant inquiry to make, and where the Courts had looked to determine the purpose of the taxpayer by reference to his or her subjective purpose. He referred me to Allied Pastoral v Federal Commissioner of Taxation (1983) 44 ALR 607, McCormack v Federal Commissioner of Taxation (1979) 23 ALR 583, Eisner v Federal Commissioner of Taxation (1971) 2 ATR 3, and Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402.
45. Referring to the first Vincent case, Mr Wilson submitted that French J had found that although Ms Vincent’s subjective or actual intention was not to obtain a tax benefit, her dominant purpose, as determined by the objective criteria set out in section 177D of the ITAA, was to obtain a tax benefit. He submitted, referring to paragraph 100 of the Full Court judgment in Vincent (supra), that their Honours had made a significant finding, notwithstanding it was obiter. What the Court said, follows:
“It is clear both from the language of section 177D and the decision of the High Court in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 179 ALR 625 that a determination can be made if there is any person, be it the taxpayer, a promoter of a tax scheme or a legal or accounting adviser of whom it would be concluded that he, she or it entered into or carried out the scheme or any part of it for the dominant purpose of securing for the taxpayer a tax benefit. In considering the question of purpose by reference to the promoter, his Honour did not err. We may doubt, however, whether we would be inclined to the view that the dominant purpose of the promoter here was to obtain the profits that clearly would have flowed to the various companies associated with him. However it is not necessary to reach a concluded view on this question.”
RESPONDENT’S SUBMISSIONS
46. Ms Symon submitted that in determining that ACM was a tax avoidance scheme, it was necessary to refer to the language of the section, which requires a consideration of the objective facts and circumstances of entering into or carrying out a scheme. She referred to 224(2) of the ITAA, submitting that the words of section 224(2) were “crystal clear and what they direct the Tribunal to is a consideration of the objective facts and circumstances surrounding the scheme in question.”
47. Ms Symon emphasised that in subsection (1), “tax avoidance scheme” means a scheme within the meaning of Part IVA that was entered into or carried out (emphasis added), for the sole or dominant purpose of enabling a person to pay no tax or less tax. She emphasised that the use of the word “that” in section 224(2) of the ITAA, refers back to “a scheme within the meaning of Part IVA”, and one that was “entered into or carried out”, as part of the Part IVA scheme, effectively linking into it. Ms Symon submitted that the wording of the section did not refer directly to those entering into or carrying out the scheme, although they were obviously in contemplation, and their activities may be examined, thus pointing to the determination of objective purpose, that is enabling a person to pay no tax or less tax.
48. Ms Symon submitted further, that section 224(2), in referring to “a scheme within the meaning of Part IVA”, is, like Part IVA, expressed in indirect speech, and clearly intended to be construed consistently with Part IVA. She indicated that similarly, section 177D(b) of the Act employed the same form of words “it would be concluded that”, which the authorities have concluded requires objective consideration of the facts and circumstances in order to arrive at a conclusion about purpose. In that regard, Ms Symon referred to the cases of Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, Eastern Nitrogen v Commissioner of Taxation (2001) 108 FCR 27, Commissioner of Taxation v Hart and Another (2004) 206 ALR 207 and Commissioner of Taxation v Sleight (2004) 136 FCR 211, Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235, in particular at paragraph 95.
49. Ms Symon submitted on behalf of the Respondent that, if it was accepted that the objective facts and circumstances were relevant, and matters of subjective purpose, not, then the only understanding the Tribunal has of the scheme is that derived from the Vincent case. She submitted that there, “on a consideration of the objective facts and circumstances, it was determined that the scheme was entered into and carried out for the purpose of obtaining a tax benefit, which … for these purposes translates to purposes of reducing the amount of tax which is payable, echoing the words of section 224(2).”
THE TRIBUNAL
50. Having considered the two Vincent cases, other case law and submissions of the parties, I was mindful that in deciding whether the Commissioner’s decision in regard to Messrs Starr and Hopkins should be affirmed, set aside or varied, I had to decide whether the ACM Scheme was a “tax avoidance scheme”, within the meaning of section 224(1) of the ITAA, because following the two Vincent cases, the Applicants had conceded that:
· their project costs which had been claimed as deductions pursuant to section 51(1) of the ITAA would, as in Vincent (supra), not be allowable deductions, and that the expenditure was capital; (Ms Vincent was found, in relation to the ACM Scheme, not to be carrying on a business); and
· the Applicants had a tax shortfall within the meaning of section 222A of the ITAA, caused, (for purposes of section 226L of the ITAA), by the Applicants treating an income tax law as applying to the Scheme in a particular way; and
· for the purposes of section 226L of the ITAA, none of the scheme sections as defined by section 222A applied in relation to the ACM Scheme.
51. In deciding therefore whether ACM was a Scheme “that was entered into or carried out for the sole purpose or dominant purpose of enabling a person to pay no tax or less tax”, meant a consideration of sections 224(2) and 226L of the ITAA.
52. In that regard, I noted that Mr Wilson argued that unlike Part IVA, section 224(2) does not specify any objective criteria by which the purpose of the relevant person is to be determined, and that accordingly, the actual or subjective purpose of the Applicants in investing in ACM, which was to achieve returns, should be accepted.
53. Ms Symon argued that the words of section 224(2) were “crystal clear”, and that the interpretation of the section required consideration of the objective facts and circumstances of entering into or carrying out a scheme.
54. In considering whether the relevant sections of the ITAA require consideration of the objective facts and circumstances of entering into or carrying out a scheme, by way of background, and for guidance, I turned first to Part IVA, which of course contains the general anti-avoidance provisions of the income tax law, and is mentioned in section 224(2), and the definition of tax avoidance scheme. I noted that Part IVA requires an objective purpose, clearly indicated from the language i.e. section 177D which applies when the tax payer has obtained a tax benefit, and the words, “it would be concluded that the person or one of the persons who entered into or carried out the scheme … did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.”
55. In that connection, I noted that Hill J stated at paragraph 67 of Commissioner of Taxation v Sleight (2004) 136 FCR 211:
“There have by now been a number of cases, both in the High Court and in this court [Full Federal Court] where the provisions of Pt IVA have been considered. The propositions which may now be taken as decided may be summarised as follows:
(1) Part IVA does not authorise consideration of evidence of the subjective purpose or motivation of a particular person. The subjective state of mind of a person is not a matter listed in s177D(b) to which regard may be had. Rather the section requires consideration of the eight matters listed in s 177D(b) and no other matters. The subjective state of mind of a person is not such a matter. Hence the section seeks to establish the conclusion which would be reached by reference to what may be referred to as objective factors, that conclusion being however a conclusion as to the purpose of a person who entered into or carried out the scheme: Federal Commissioner of Taxation v Zoffanies Pty Ltd (2003)77 ALD 518; 2003 ATC 4942 at [53] – [54] per Hill J, with whom, on this point, Hely and Gyles JJ agreed; Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27 at 44 …”
56. I was mindful that in Federal Commissioner of Taxation v Consolidated Press Holdings (supra), at paragraph 95, the Court said:
“In some cases, the actual parties to a scheme subjectively may not have any purpose, independent of that of a professional advisor, in relation to the scheme or part of the scheme, but that does not defeat the operation of s 177D.
…
One of the reasons for making s 177D turn upon the objective matters listed in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer.”
57. At paragraph 122 of the first Vincent decision, French J stated:
“In that case, [FCT v Consolidated Press Holdings (supra)], the Court was considering the attribution of the purpose of a professional adviser to one or more of the taxpayers entering into a scheme. It acknowledged that in some cases the actual parties to a scheme subjectively might not have any purpose, independent of that of a professional adviser, in relation to the scheme or part of the scheme, but that would not defeat the operation of s 177D.”
58. French J also stated in paragraph 123 of the first Vincent case:
“In my opinion, whatever the subjective purpose of Ms Vincent and her state of knowledge about the true nature of the scheme into which she entered, a reasonable person would conclude, having regard to the eight listed factors, that those taxpayers who entered into the project did so with the dominant purpose of obtaining a tax benefit in connection with it. From an objective point of view there was little other benefit to be derived.”
59. I also considered Ms Symon’s submissions made on behalf of the Commissioner in relation to certain sections of the ITAA, such as section 82 and various of its sub-sections which deal with specific activity resulting in the disallowance of deductions. I am mindful that those sections have no direct application in this case, but that they were emphasised because the language employed in them, in particular the definitions, is in the same indirect speech as in Part IVA, section 177D, and section 224(2). The use of the language in all those sections of the ITAA leads one to the view that a consideration of the objective facts and circumstances of entering into or carrying out a scheme is the correct approach, but before finally deciding, I had to take into account further case law.
60. In that connection I noted the case of Krampel Newman v Commissioner of Taxation (2003) 126 FCR 561, in particular paragraphs 100, 104 and 107. Ryan J stated there at paragraph 99 that the combined effect of the matters enumerated in section 177D(b) of the ITAA “supports the conclusion that the dominant purpose of each investor was to obtain a tax benefit in connection with the scheme identified by the Commissioner.” His Honour then went on to refer to section 82. In paragraph 107, his Honour referred to the definition of tax avoidance agreement pursuant to section 82KH(1F). In paragraphs 120 and 121, his Honour referred to the applicable penalty pursuant to section 226L, and the intention of the Parliament in that regard as expressed in the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992.
“120 A step in the making of each amended assessment in the present case consisted of a claimed deduction for the amount of the deferred liability said to have been incurred under the PID not being allowable. That step did not involve the Commissioner's formation of, or refusal or failure to form, an opinion, his attainment of, or refusal or failure to attain, a state of mind, his making or refusal or failure to make a determination or his exercise of, or refusal or failure to exercise, a power to treat a matter or thing in a particular way in relation to a tax avoidance scheme. Nor could it be said that the Commissioner in issuing the amended assessments exercised the discretion conferred by s 177F(1). I therefore consider that s 226L was the applicable penalty provision. I am reinforced in that view by the reference which Counsel for the applicants furnished to the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 at pp 90 - 91 which indicated, Counsel said,
‘... that s 226L is intended to apply the same level of penalty as s 224, 225 and 226 for schemes entered into for the sole or dominant purpose of avoiding tax, but in respect of which the Commissioner has not applied any of the anti-avoidance provisions because the schemes are ineffective under the ordinary provisions of the ITAA e.g s 51.’
121 I consider that, in the present case, a "tax shortfall" arose which was caused by each taxpayer treating Div 10B or s 51(1) as applying in relation to the scheme identified earlier in these reasons by allowing the full liability incurred under the PID to be deductible in (in most cases) the tax year ended on 30 June 1994. In my view, it is sufficient for the shortfall to have arisen by the taxpayer's having treated an income tax law as applying to a tax avoidance scheme of the kind to which s 224(1) applies. It is not necessary for the Commissioner to have disallowed the deduction by invoking Pt IVA or to have formed an opinion or engaged in any of the other conduct specified in s224(1)(c). It follows that the only remaining question to be resolved in the application of s 226L is whether, at the time when the taxation statements were made, it was reasonably arguable that the way in which the application of the law was treated as allowing a deduction in the tax year ended on 30 June 1994 for the whole of the liability incurred pursuant to the PID was correct. The concept of the correctness of the treatment of the application of a law being "reasonably arguable" is governed by s 222C which provides, so far as is relevant;
(1) For the purposes of this Part:
(a) the correctness of the treatment of the application of a law; or
(b) another matter;
is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied or the other matter, it would be concluded that what is argued for is about as likely as not correct.
... ... ...”
(emphasis added)
61. In FCT v Spotless Services Ltd (1996) 186 CLR 404 at 421-422 and 424, the Court placed emphasis on the phrase “it would be concluded that”, as indicating that the conclusion reached as to the dominant purpose of a person is the conclusion of a reasonable person:
“In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme.”
62. This was followed also in Eastern Nitrogen v Commissioner of Taxation (2001) 108 FCR 27 per Carr J at paragraphs 80 – 84 (and particularly at paragraph 81), as also in Federal Commissioner of Taxation v Hart (2004) 206 ALR 207, which was of course a High Court case.
63. I noted also Mr Wilson’s reference to the following cases, Allied Pastoral v Federal Commissioner of Taxation (1983) 44 ALR 607, McCormack v Federal Commissioner of Taxation (1979) 23 ALR 583, Eisner v Federal Commissioner of Taxation (1971) 2 ATR 3, Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402. He raised them in connection with his submissions that the subjective purposes of the taxpayers was what was required to be taken into account in considering the application of section 224(2) in the present cases before the Tribunal.
64. I noted in Allied Pastoral v Federal Commissioner of Taxation (supra), Hunt J held that the state of mind of a company must be found in the persons who are really the directing mind and will of the company. He stated at 610: “The inquiry is thus into the state of mind of these men at the time the land was acquired.” Burden of proof was also at issue. However in summary, the issues and the legislation in this case were very different from those in the cases before this Tribunal.
65. In McCormack v Federal Commissioner of Taxation (supra), the Court stated at 596, in a case arising under former section 26(a) of the ITAA, that it would test the evidence of the taxpayer to see if it could rely on his evidence as to the purpose for which a property was bought. The issues and the legislation in this case were very different from those in the cases before this Tribunal.
66. In Eisner v Federal Commissioner of Taxation (supra), the appeal of the Appellant was allowed, the Court holding that the land was not acquired by him for the purpose of profit making by sale. Walsh J stated at 8: “In the present case, some of the statements of which I allowed evidence to be given were not statements by the appellant referring directly to the intention with which he bought the land but were statements as to his intention as to the nature of the project for which it was to be used.” This was also a case where the former section 26(a) of the ITAA, applied.
67. In Pascoe v Federal Commissioner of Taxation (supra), Fulllagar J stated at 403 that: “Where a person’s purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the ‘best’ evidence, but … they must be tested most closely…”. Once again, the relevant legislation there, did not apply to the cases before me.
68. The Court in each of the four abovenamed cases, could in general terms, in coming to a decision, be said to have referred to the subjective views and purposes of the taxpayer. However, they were not dealing with anti-avoidance provisions as such, and the relevance of those cases as authorities in the matters before me, was very limited.
69. I turned then to the language of section 224(2) of the ITAA, which refers first of all to Part IVA, shown in Sleight (supra), and other cases mentioned above to require a consideration of the objective facts and circumstances of entering into, or carrying out a scheme. The same form of indirect speech is used in section 224(2) as used in Part IVA, and section 177D. The words of section 224(2), “a scheme that was entered into or carried out...” do not inquire as to the subjective motives of the taxpayer, and do not, as in other sections of the ITAA referred to above in the cases emphasised by the Applicants, depend upon the fiscal awareness and intentions of the taxpayer.
70. I then considered the construction of Part VII, sections 224(2), 226L and the definition of “reasonably arguable” as used in section 226L(e) of the ITAA. Part VII also requires an objective consideration of the facts, and it is only when the discretion to remit penalty arises, pursuant to section 227(3) of the ITAA that any subjective intention of the taxpayer can be taken into account by the Commissioner. I was mindful of Ms Symon’s submissions, referring to Federal Commissioner of Taxation v Trautwein (1936) 56 CLR 211 and Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192, and emphasising that it was not the Commissioner, but the legislature which imposed penalties, submitting that the Commissioner’s role and the question of individual circumstances only became relevant to questions of remission of penalty.
71. Having reviewed the case law as cited above, I accepted the submission of the Respondent that the language of section 224(2) of the ITAA, in its terminology, “that was entered into …” indicated that an examination of the objective facts and circumstances surrounding a Scheme was necessary, and that this tied in with the objective inquiry required in Part IVA.
72. Notwithstanding the submissions made on behalf of the Applicants that their sole or dominant purpose, and that of the promoters, was to achieve returns, and not to pay no tax or less tax, I find that the ACM Scheme was a tax avoidance scheme in terms of section 224(2) of the ITAA. The ACM Scheme was a tax avoidance scheme entered into or carried out with the sole or dominant purpose of enabling the participants, and indeed the Applicants in this case, to pay no tax or less tax. In that regard I also adopt the figures and arrangements with the various companies associated with ACM as outlined in the Commissioner’s statements at T2 in Exhibits R1 and R2. The fact that the Full Court in the case of Mrs Vincent expressed some doubt about the purpose of the promoters has been noted, but does not affect the decision which I have to make.
73. In conclusion, I was satisfied that the Applicants did not provide any evidence that their involvement in the ACM Scheme was objectively different from the objective facts and circumstances ruled upon by the Federal Court in the case of Mrs Vincent. Accordingly the Applicants have not discharged their onus.
74. I have noted that sections 226L(e) and (f) are relevant provisions in relation to the calculation of the penalties imposed. The sections 226(e) and (f), follow:
“Sect 226L
…the taxpayer is liable to pay, by way of penalty, additional tax equal to:
(e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct—25% of the amount of the shortfall or part; or
(f)in any other case—50% of the amount of the shortfall or part.”
75. I have noted that once again, the language in this part of section 226L is the same indirect form of speech used in section 224(2) in the definition of tax avoidance scheme, in section 177D, and in Part IVA, being objective rather than depending on the subjective or fiscal knowledge or intentions of the taxpayer. The relevant words are “it was reasonably arguable that the way in which the application of the law was treated…” have been held by various authorities to involve an objective test, including Walstern v Federal Commissioner of Taxation (2003) 54 ATR 423 per Hill J at 108 and Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2003) 55 ATR 745 per Merkel J at 118.
76. Accordingly, the Applicants through their participation in the ACM Scheme fall within section 226L of the ITAA, and are due to pay penalties as imposed.
DECISION
77. The decisions under review in relation to Messrs Star and Hopkins are affirmed.
I certify that the 77 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger Senior Member
Signed: ....................(Sgd. L Feely).................................
AssociateDate/s of Hearing 19 April 2005
Date of Decision 19 August 2005
For the Applicant Mr F Wilson of Wilson & Atkinson
For the Respondent Ms H Symon SC of counsel
Ms L Price of counsel
Solicitor for the Respondent Australian Government Solicitor
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