The Applicant and Commissioner of Taxation

[2005] AATA 47

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2005] AATA 47

ADMINISTRATIVE APPEALS TRIBUNAL

TAXATION APPEALS DIVISION            NT1996/374

Re: The Applicant

Applicant

And:Commissioner of Taxation

Respondent

DECISION

Tribunal:      P.J. Lindsay, Senior Member

Date:             18 January 2005

Place:           Sydney

Decision:     The tribunal affirms the decision under review in relation to the   inclusion of the sum of $1,228,500 in the applicant’s assessable   income for the year ended 30 June 1988, but in relation to penalty   remits the matter to the respondent with the direction that the   assessment for that income year be amended by remitting additional                    tax in full.

. . . . . . . . . . . . . . . . . . . . . . . .

P. J. Lindsay, Senior Member

©        Commonwealth of Australia          (2005)

CATCHWORDS

INCOME TAX – assessable income – applicant participates in joint venture to exploit an idea - receipt of amount pursuant to agreements for transfer of proprietary information – applicant’s participation in joint venture exploited for profit making – extraordinary transaction – profit making undertaking or scheme  - amount is assessable income – penalty tax remitted in full

Income Tax Assessment Act 1936 ss.25(1), 25A, 160U, 223, 227

Taxation Administration Act 1953 s.14ZZK

Kratzmann v FCT (1970) 1 ATR 827

McLaurin v FCT (1961) 104 CLR 381

Allsop v FCT (1965) 39 ALJR 201

Commissioner of Taxation v Cooling (1990) 22 FCR 42

GP International Pipecoaters Pty Limited v Commissioner of Taxation (1990) 170 CLR 124

Chandler Investment Company Limited (in voluntary liquidation) v Commissioner of Taxation (1993) 47 FCR 588  

Commissioner of Taxation v The Myer Emporium  Limited (1987) 163 CLR 199

S.P. Investments Pty Ltd and Perron Investments Pty Limited v Commissioner of Taxation (1993) 41 FCR 282

FCT v Harris (1980) 43 FLR 36

Westfield Limited v Commissioner of Taxation 91 ATC 4,234

Steinberg v FCT (1975) 134 CLR 640

Elsey v FCT 69 ATC 4,115

REASONS FOR DECISION

P.J. Lindsay, Senior Member,      

1. This matter relates to events that happened around twenty years ago. Following an audit, the Commissioner of Taxation (the respondent) on 24 June 1994 issued the applicant with an amended assessment for the year ending 30 June 1988. The amended assessment increased the applicant’s taxable income by $1,228,500 which was received by him in respect of a certain large infrastructure project (referred to herein as “the Project”). Additional taxes for an incorrect return were imposed. The applicant objected against the amended assessment but the objection was disallowed on 16 February 1996 for the reason that the amount was income according to ordinary concepts and assessable under s.25(1) of the Income Tax Assessment Act 1936 (the Act). In the alternative, the Commissioner considered the amount to be assessable under s.25A of the Act.

2. The hearing was conducted in private and the identity of the applicant is not to be disclosed. He was represented by Mr D Raphael of counsel and the respondent was represented by Mr R Quinn of counsel. The tribunal had before it the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (“T Documents”) and documents tendered at the hearing. The applicant’s affidavit sworn 19 February 2004 was accepted in evidence (exhibit A2) and the tribunal also heard oral evidence from him.

evidence

3.      The applicant has a Master of Building degree from the University of New South Wales.  In August 1984, when his involvement in the Project started, he was a self-employed builder, mainly of domestic dwellings. He also acted as a building consultant, providing reports and giving expert evidence in housing construction cases, and it was in that capacity he came to know Jones, a lawyer. Around 10 August 1984 Jones approached the applicant to discuss certain building and construction ideas and research documents that were to form part of the Project.  Although the applicant is not an engineer, Jones asked for his opinion about the viability and practicality of those ideas and for his assistance in developing a proposal through drawing preliminary plans, making estimates of costs and practical assessments. Jones also requested referrals to reputable engineers and other experts. Subsequent to the meeting Jones wrote the applicant on 13 August 1984: “As to our future commercial relationship, I would be pleased if you could let me have your views in due course. For my part, as the concept was originated and developed to this point, by myself alone, I would like to retain control of its use as far as possible, but to share the benefits, if any, with yourself if the project can be translated into something tangible.” (exhibit R1)  In cross-examination the applicant said that their’s was certainly a business relationship. He said that he and Jones were embarking on a venture and that it could be termed a business. He was excited by being involved in the Project and, if it were successful, it would make his name in the construction industry. He said he wanted to secure employment in the management of the Project and agreed he wanted to make some income out of it.

4.      The applicant agreed to Jones’ suggestion that they refer to themselves as the ’Brown Group’. The name ‘Brown’, which is the applicant’s family name, was well known in the construction industry. It was associated with an internationally acclaimed, iconic development that had been completed in the previous decade. Letters were written on letterhead of the applicant’s businesses as a chartered builder and strata inspection services, and the business names incorporated his family name. The applicant denied that ‘the Brown Group’ and ’Brown and Associates’, another name they used, were chosen to add credibility to the Project, asserting that Jones insisted on the name as a means of concealing his own involvement. They agreed that Jones would draft any letters required and the applicant would look after the practical side of things. 

5.      Around October 1984, the applicant introduced Jones to a firm of engineering consultants, Smith & Co. Their initial discussions were to obtain an evaluation from Smith & Co of plans and documents that Jones and the applicant had assembled. On behalf of the Brown Group, Jones wrote to Smith & Co on 16 November 1984 (exhibit R3). The letter noted that they had reached a consensus that they develop a proposal for the Project that they would take to the state government. The letter  began:

Further to our conference on 14th November 1984, I desire to confirm that a general consensus appears to have been reached whereby we may join together in an endeavour to see if some form of presentation may be able to be submitted in the near future to the State Government (and possibly also the Commonwealth Government) on the following basis:

1. There should be an ‘entrepreneurial fee’ of say three per cent (3%) of the total cost of the project, which fee might be split so that your Company would receive thirty per cent (30%) of such ‘entrepreneurial fee’, with our company to have not less that sixty percent (60%) thereof with the remaining ten per cent (10%) to be available for possible allocation to other interests as may be considered appropriate as the matter develops. …

2. That in addition to item I above, [the Brown Group] and your Company should be entitled to be involved, in their respective professional capacities, should the project proceed to fruition and in that respect, should be entitled to be remunerated at their normal rates of remuneration.

3. That we should now proceed to let your Company have such plans and documents as we have assembled to date in connection with the project, in order to assist you to evaluate the proposal. These additional documents are enclosed herewith …

In connection with item 1 above, bearing in mind the taxation implications involved in the receipt of any such ‘entrepreneurial fee’, it may be preferable to seek to negotiate a sale of the copyright in all documents which we have produced to date or which we may produce in the future, of the same order namely three per cent (3%) of the total cost of the project. …

Finally, the letter proposed that a shelf company be acquired and their respective interests be 70:30 in line with their shares of the entrepreneurial fee. Collectively the Brown Group and Smith & Co were later to refer to themselves as ‘the Initiators’ of the Project.

6.      Throughout, Smith & Co’s focus was on the engineering and structural design work. A letter from the Brown Group to Smith & Co, dated 19 November 1984 (exhibit R4), again refers to taxation matters in respect of the proposed transfer of copyright to the shelf company. The letter suggested that their relationship be one of client/engineer and that Smith & Co not become a shareholder in the shelf company. The shelf company would remain the vehicle for conducting discussions with the state government. Subsequently, they discussed presenting the proposal to government as a turnkey project, that is, with all the engineers, quantity surveyors, constructors, financiers and managers being offered as a package.

7.      By January 1985 there was a recognition among the three parties that they would not be able to secure an entrepreneurial fee for their efforts (exhibit R26). But they pressed on. “We therefore agree that the promoter must be strengthened by the retention of prestigious consultants at this stage.” In the next few months there were meetings with financial institutions, project managers, engineers and consultants with specialist construction expertise. Jones, however, found the prospect of sharing control of the Project posed difficulties for him.

8.      By February 1985 the applicant had become concerned about Jones’ “paranoia about control” which he thought could jeopardise the matter, so he wrote to him as follows:

I assume that you are fully aware that as a development and project manager for a number of substantial companies … I have had some extensive experience in negotiation and ‘setting up’ of successful projects. I have a background of success and possibly for this reason my contacts tend to respect the proposals that I present to them. …
The project, if handled correctly, is headed for enormous success and cannot fail. The project can further our careers beyond imagination. …
 If we cannot see and realise that the project is of such magnitude, complication and prestige that our totally essential and selected ‘partners’ can do nothing but be forced by their own ambitions to make it succeed (to our maximum benefit under a Vendors contract) then we have missed the whole point. The project will succeed on its own merit. … (exhibit R7)

The applicant said he had thought about the possibility that Smith & Co could takeover the Project, so his letter tried to re-assure Jones that if there were equal interests in a corporate vehicle held by the financier, the Brown Group, Smith & Co and two other consulting groups, Jones would not lose the level of control he wanted. The applicant’s letter proposed a Vendors Agreement for the Brown Group, which would provide for Jones to be appointed the legal adviser to the project’s corporate vehicle, payment to each of them of an immediate retainer in the sum of $20-25,000 and monthly amounts of $4,000 (exhibit R7).

9.      The applicant arranged for the incorporation of a company that had been proposed as the corporate vehicle for the project. He and his wife became the directors. Ultimately, the company did not commence any operations.

10.     A major bank expressed interest in the Project to the applicant in March 1985. This led the applicant, Smith &Co and representatives of project managers to propose forming an unincorporated joint venture, a proposition that was attractive to the bank (exhibit R14). Jones did not attend a meeting to discuss this proposed structure due to claimed ill health. By this stage the applicant thought that Jones seemed to be withdrawing from the applicant and Smith &Co, and suspending his co-operation in their activities. The applicant became increasingly concerned that Jones was approaching other groups of engineers and breaching the confidentiality that the applicant, Smith & Co and the other proposed joint venturers were keen to maintain at all costs. He wrote to Jones on 29 March 1985 about the need to ensure confidentiality but also to lift his spirits: ”There should be absolutely no reason why this matter cannot be thoroughly thought about in the immediate future and a total success made of this major project in the interests of all parties. It should be unnecessary to remind you … that in a project of this magnitude, where enormous input is required by a number of parties, the aspect of confidentiality cannot be isolated.” (exhibit A2).

11.     In cross-examination the applicant agreed that he did not want Jones to go off on his own. Jones’ new plans might fail to impress the government and the applicant would lose the time he had invested. That could possibly damage the work they had done to date because, as he explained, “down the track in the end you have got to get -  set yourself up in a position where you become successful … successful in every way” (transcript p 82). Later on in cross-examination the applicant was asked whether profit from the Project had never entered his mind, and he replied “I was hoping that I would certainly see a future out of that.” (transcript p85)

12.     Jones did withdraw co-operation. The applicant wrote to him on 1 June 1985 as follows “With your refusal on the 15^th May 1985 to proceed with this matter, you have placed me in an extremely embarrassing position with all of these parties as well as other organizations where my name was used to promote the project. I must therefore request that as a matter of urgency you provide me with full details of further action you have taken with the project over the last two months and also as to how my interests are being protected in any action taken by you.” (exhibit R16) 

13.     The applicant’s evidence was that he had a valuable right – “it was our future” -  that was being threatened by Jones’ erratic behaviour. He wanted to protect his future. He agreed that he was in business and wanted to make a future out of the project. In response to a letter from Jones, the applicant wrote back on 18 June 1985 that the Project could still proceed with co-operation from Jones. But the applicant was worried about Jones acting independently. He reminded Jones

1) No matter what the present position of the project, an agreement was entered into to promot [sic] the project and make a submission to the [state government], on behalf of a number of interested parties with an agreed shareholding in the project.

In all cases, the shareholding was agreed subject to certain clearly defined responsibilities and obligations of the parties involved. …

2) It is true that on several occasions I advised you that unless a fair and reasonable approach was to be taken in the promotion and submission of the project, then I was no longer prepared to waste my valuable professional time in long meetings that were achieving nothing.

At no time did I indicate that I would relinquish any of my entitlement. …

3) Although you state that ‘  … I informed you that the project was in a state of suspense. That remains the position.’ This in no way answers my request which was ‘What action have yourtaken [sic] with the project since our last contact in March and how have my interests been protected in any action taken by you?  (exhibit R19)

In a handwritten note at the end of the letter, the applicant wrote, “There is no room in this business for personal likes and dislikes. The aim is to submit a proposal and if possible receive some reward. Please let me know if you will co-operate in this fundamental aim NOW! I must make a decision as to what I do – I have wasted sufficient time & money already.”

14.     On 5 July 1985 the applicant’s solicitor wrote to Jones requesting information about any action Jones had taken in relation to the Project and to confirm that he would co-operate as agreed. The solicitor wrote “My client does not wish to suffer the financial losses which he will potentially suffer if the project does not go forward either in terms of lost profitability or the lost time (which is of considerable value) in respect of his past efforts.” (exhibit R20)

15.     Shortly later the applicant commenced a Supreme Court equity action against Jones and Smith &Co. Interim injunctions were granted in August 1985 restraining Jones and Smith &Co from preventing the applicant having access to assets of the joint venture, that he claimed existed between himself and Jones and Smith &Co, and restraining Jones from disclosing confidences of the joint venture, as well as other orders. The matter ultimately was settled. On 29 November 1985 by consent there were declarations that there was a joint venture agreement between the applicant, Jones and Smith & Co to devise and develop plans for the Project and that the applicant had a 35 per cent interest in the assets and income of the joint venture. There were declarations that the assets of the joint venture comprised plans, sketches, submissions, calculations and correspondence; copyright in those assets; and information contained in those documents. There were undertakings by each of the joint venturers that they would not permit any dealing with the assets of the joint venture by related corporations. There were undertakings not to engage in any activity inconsistent with a joint venture agreement that they entered into on 29 November 1985. The joint venture agreement (JVA) was the final outcome of litigation that he said had cost him $50 -60,000 and it became an annexure to terms of settlement of the Supreme Court action dated 29 November 1985 (exhibit A1).

16.     Before setting out the terms of the JVA, it is necessary to note that, from the time of commencing the equity suit, the Project was driven by the applicant and Smith &Co. Although Jones was invited to attend meetings they had with their engineering and project design consultants he did not do so and, to the applicant’s mind, Jones had not been part of things since March 1985. The applicant and Smith & Co were eager to get the proposal before government before any publicity leaked out which the applicant was certain would be fatal to the government’s willingness to proceed. They were keenly aware, however, of the need for a major engineering company to handle the Project. Through an accountant, the applicant made contact with such a company, Build Co, a prominent Australian company. The applicant and Smith & Co agreed that the latter would concentrate their efforts “on the preparation of the basis for negotiating a commercial agreement with [Build Co]”” (minutes of joint venture meeting on 21 August 1985 – exhibit R25). Build Co agreed to participate in the Project if they could attract a foreign civil engineering and construction company, Eng Co, also to participate, which they managed to do.

17.     With these arrangements in place the parties entered into the JVA dated 29 November 1985, which was an agreement between the applicant, Smith & Co and Jones, on the one part (the Initiators), and Build Co and Eng Co separately. Recitals to the JVA (T3 in the documents lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975) read as follows:

A.        The Initiators own the property referred to in Schedule 1 herein in the proportions Smith & Co 30%, the applicant 35% and Jones 35%.

B.        The Initiators, Eng Co and Build Co hereby agree to enter into a joint venture ("the Joint Venture") to co‑operate and jointly prepare and submit to the Relevant Authorities all necessary applications, studies, reports and determinations necessary to receive all requisite Approvals for the Performance of the Works on the terms and conditions set out in this Agreement.

C.        The parties agree that if all such requisite Approvals are received by the Joint Venture then subject to the terms and conditions set out in this Agreement, the Performance of the Works shall be carried out by Eng Co and Build Co upon such terms and in such manner as Eng Co and Build Co mutually agree upon.

Clauses 2, 3 and 4 of the JVA read:

2.        The Initiators, Eng Co and Build Co hereby enter into a Joint Venture to co‑operate and jointly prepare and submit to all Relevant Authorities all necessary applications, studies, reports and determinations necessary to receive all requisite Approvals for the commencement of the Performance of the Works on the terms and conditions set out in this Agreement. Eng Co and Build Co shall have the right of access to Schedule 1 and may use it in accordance with the terms of this agreement.

3.        The parties agree that upon receipt of all such relevant Approvals for the commencement of the Performance of the Works, the parties will agree on some form of compensation to the Initiators and if they fail to agree within seven (7) days the consideration referred to in paragraph (ii) of Schedule 2 is payable immediately thereafter by Eng Co and Build Co to the Initiators and this Agreement shall continue to operate until the said consideration referred to in paragraph (ii) of Schedule 2 hereto is paid to the Initiators.

4.        Upon such payment to the Initiators this Agreement shall automatically terminate and the Performance of the Works shall be carried on by Eng Co and Build Co and all of the property of the Initiators referred to in Schedule 1 and any property of a like nature existing with the Joint Venture will pass to Eng Co and Build Co.

The JVA made provision for the establishment and composition of a management committee for the joint venture and the appointment of a project manager. Clause 9, headed ‘Initial Remuneration to the Initiators’ stated:

9.        In consideration of the work undertaken by the Initiators up to the date of and including the entrance into this Agreement by the Initiators, the parties hereto agree and hereby give to the Initiators the consideration referred to in paragraph (i) of Schedule 2 herein and that such consideration is to be paid for jointly by Eng Co and Build Co.

18.     The schedules to the JVA stated as follows:

Schedule 1

All that property of the Initiators being:

(a)       all plans, sketches, memoranda, submissions, reports, calculations,          drawings and correspondence and all other documents which:

(i)relate to or describe [the Project]; and

(ii)       which have been prepared or created in whole or in part by the   parties to these proceedings, or any one of   them or by any person or persons or   corporation or at the request of the parties to these   proceedings or any one or more of them;

(b)       all copyright existing in all or any of the above documents referred to                   in paragraph (a) above;

(c)       the information contained or depicted in any or all of such documents        together with information not depicted or reduced to writing but referred to or                   relating to means of achieving the completion of the proposal so described or   depicted.

Schedule 2

The consideration referred to in Clause 3 and Clause 9 respectively is a sum calculated as 1.5% of the FINAL ESTIMATED TOTAL COST of the Performance of the Works as calculated pursuant to Clause 7.4 or failing agreement between the parties then by reference to the figures and amounts given by the Joint Venture to the Government as being the final estimated total cost of the Performance of the Works with such adjustments that may be necessary to calculate the FINAL ESTIMATED TOTAL COST of the Performance of the Works. Notwithstanding the foregoing, the consideration shall not exceed $4,000,000 and shall be payable as follows:

(i)        upon the signing of this Agreement any or all of the Initiators have the right and may call upon the Joint Venture to pay forthwith to any or each of the Initiators a sum not exceeding $35,000.00 per Initiator PROVIDED NEVERTHELESS that in the event that one or all of the Initiators make a claim for the payment of the said sum not exceeding $35,000.00 then any payment due to that or those Initiators referred to in paragraph (ii) below will be reduced by the amount already paid.

(ii)       that within fourteen (14) days of the requisite Approvals to Perform the Works, the Joint Venture shall pay to the Initiators the balance of consideration due to each of them in the proportions Smith & Co 30%, the applicant 35% and Jones 35% subject to any adjustment necessary taking into account the provision of paragraph (i) above.

19.     The applicant received the amount of $35,000 on the execution of the JVA, which he referred to, in his evidence, as “the deposit”.

20.     Despite that payment, the applicant believed that Build Co were trying as best they could to get rid of him from the joint venture. He suspected Smith, a principal of Smith & Co, had come to a private arrangement with Build Co.

21.     Build Co was prominent in the talks with the state government. As the discussions unfolded, the government insisted on changes to the proposal that introduced a serious alteration to the Project as devised by the Initiators. Consequently, Build Co told the applicant that they wanted to reduce the Initiators’ fee by 50 per cent. The applicant said Build Co maintained that due to the major change to the Project brought about by the government’s demands, the Initiators had no intellectual property rights and were entitled to nothing.

22.     The applicant received a letter dated 2 February 1987 from Build Co confirming the scope of the changes to be made to the Project as initially planned, and informing him that the cost of the feasibility study, that was borne only by Build Co and Eng Co, had increased from $2m to over $3m. The letter noted that the relevant government department refused to include a ‘success fee’ in the Project’s budgeted capital cost and had reduced the overall capital cost, thereby substantially reducing the margins predicted by Build Co and Eng Co and increasing their risk. Those companies feared there would be further cost reductions imposed by government. The letter noted (exhibit A2) “Notwithstanding the above comments, I confirm on behalf of the Joint Venture that [Build Co and Eng Co] intend to honour their commitments under the agreement with the Initiators of 29^th November 1985. However, in view of the developments outlined above, we seek from the Initiators a significant reduction in their fee. In return we will use our best endeavours to arrange for an ‘up front’ payment to be made on, say, the issue of a Letter of Intent by [the government] with the balance paid on the execution of project documentation.” In evidence, the applicant said that Build Co did everything within their power to get rid of him with nothing.

23.     Jones refused to accept a reduction and sued Build Co and Eng Co. He succeeded in receiving full payment under the JVA, that is 35 per cent of $4m.

24.     For his part, the applicant pursued negotiations with Build Co through his solicitor. He said there were considerable arguments and problems. There was a suggestion that he receive payments over a few years. At one stage, he said he was going to be given a position as part of the Project if it proceeded. Eventually he did agree to a reduction in the fee. This led to his and Smith & Co’s signing two deeds with Build Co and Eng Co dated 13 July 1987. Pursuant to the Joint Venture Deed of that date, the applicant was paid $978,500 and Smith & Co was paid $798,500. They each received $250,000 under the Deed of Indemnity.

25.     The Joint Venture Deed dated 13 July 1987 (the JV deed) between the applicant and Smith & Co, on the one part, Build Co and Eng Co (hereafter the construction companies) recited that the construction companies proposed to commence the works (the Project) and that they had settled the action that Jones had brought against them. It was further recited that the applicant and Smith & Co (referred to as the Remaining Initiators) and the construction companies “ …now intend  to resolve all other remaining consequential or residual matters between them in relation to the Joint Venture Agreement” and accordingly they were entering into the JV Deed and the Indemnity Deed. The recitals noted that the deeds were supplemental to the JVA.

26.     The JV deed reads:

NOW THIS DEED WITNESSES THAT in consideration of the mutual covenants and agreements herein contained the parties hereto expressly covenant and agree with one another as follows:

1.        The terms of the Joint Venture Agreement are hereby incorporated and shall be read in conjunction with the terms of this Deed and the terms of the Indemnity Deed. The Joint Venture Agreement, this Deed and the Indemnity Deed constitute the entire, final and concluded agreement between the parties and supersede all prior arrangements, agreements, understandings and representations, whether oral or in writing, in relation to the subject matter of the Joint Venture Agreement and the matters which have arisen out of the Joint Venture Agreement, including the claims and demands made by [Jones] against [the construction companies] and the proceedings brought by [Jones] against [the construction companies]. In the event that there is any inconsistency between the terms of the Joint Venture Agreement on the one hand and the terms of the Deed and the Indemnity Deed on the other hand in interpretation or operation then the terms of this Deed and the Indemnity Deed shall take precedence and operate in substitution for the relevant terms of the Joint Venture Agreement.

2.        Notwithstanding clauses 3 and 9 and Schedule Two of the Joint Venture Agreement, the Remaining Initiators agree that the consideration which takes the form of compensation to the Initiators set out in Schedule Two of the Joint Venture Agreement shall no longer apply and payment to the Remaining Initiators shall be made under this Deed at the time of the execution of this Deed of the sums specified in Table 1 (the receipt whereof of the said sums is hereby expressly acknowledged by each of the Remaining Initiators).

…

The applicant and Smith & Co warranted that subject to the rights of the construction companies and others that Jones may have dealt with, they are the sole owners of certain proprietary rights and proprietary information. The proprietary rights referred to, included the copyright in certain documents and information relating to the Project, and rights of confidentiality, patents and designs in respect to proprietary documentation, which was described as including documents, information, studies, reports and determinations necessary to obtain approvals for the Project.

27.     Clause 4.2 of the JV deed stated:

The Remaining Initiators hereby unconditionally assign and transfer to [the construction companies] as tenants in common their respective worldwide right, title and interest in and to the Proprietary Rights and the Proprietary Documentation for the duration of the relevant rights and shall whenever reasonably required to so by [the construction companies], execute and deliver to [the construction companies] appropriate assignments in writing, deeds agreements under hand and other instruments in favour of [the construction companies] or their nominee or nominees effective to vest the Proprietary Documentation in [the construction companies] or  their nominee or nominees, as the case may be, and shall do any other thing that may be reasonably necessary to vest the Proprietary Rights in and to transfer the Proprietary Documentation to [the construction companies] or their nominee or nominees as the case may be, at the expense of [the construction companies].

28.     As noted above, Jones had commenced Supreme Court action against the construction companies under the JVA and those companies were concerned to extinguish any liability they may have at the suit of Jones in consequence of terms of settlement of those proceedings. Recitals to the Indemnity Deed (exhibit A2) stated as follows:

H. [The construction companies] have required [Smith & Co] and [the applicant] to provide the acknowledgments, covenants and releases hereunder contained so as to extinguish or reduce the liability which [the construction companies] might incur at the suit of [Jones] in consequence of the terms of settlement filed with the Supreme Court of New South Wales in the proceedings brought by [Jones] against [the construction companies]. [Smith & Co] and [the applicant] have agreed to provide the same in consideration of the payments set out herein.

NOW THIS DEED WITNESSES THAT in consideration of the acknowledgements, the mutual covenants and agreements and the releases herein contained the parties hereto expressly covenant and agree with one another as follows

1.        The terms of the Joint Venture Agreement are hereby incorporated and shall be read in conjunction with the terms of this Deed and the terms of the Joint Venture Deed.  ….

2.        The Remaining Initiators and [the construction companies] agree that the acknowledgments, covenants and releases agreed to and given hereunder by [Smith & Co] and [the applicant], and in particular the undertaking and covenant referred to in Clause 4.1 hereof, are agreed to and given in consideration of the payment to each of [Smith & Co] and [the applicant] of the sum of two hundred and fifty thousand dollars ($250,000), the receipt whereof of the said sum is hereby expressly acknowledged by each of the Remaining Initiators.

3.        The Remaining Initiators jointly and severally expressly acknowledge that [the construction companies] had authority to deal separately with [Jones] with respect to arrangements relating to the Joint Venture Agreement and in particular with respect to any separate dealing with [Jones] including the compromise of any proceedings commenced by [Jones] and payments made by [the construction companies] to [Jones] pursuant thereto.

4.1      The Remaining Initiators undertake to and covenant with [the construction companies] that they shall not make or bring any claim, demand, suit, proceeding or action whether at law or in equity against [Jones] with respect to or arising out of the arrangements referred to in Clause 3 above.

4.2      [The construction companies] jointly and severally agree and confirm that the Terms of Settlement of the proceedings referred to in Clause 3 above do not contain the grant of any right of action as against the Remaining Initiators at the suit of any person.

5        Conditional upon the payment of the sum of two hundred and fifty thousand dollars ($250,000) having been made by [the construction companies] to each of the Remaining Initiators, at the time of the execution of this Deed and subject to this Deed, the Joint Venture Deed and the continued operation of Clauses 12 and 13.1 of the Joint Venture Agreement, each party hereto releases each other party hereto from all claims, duties and obligation of every kind and description under the Joint Venture Agreement whether at law or in equity completely and absolutely and AND FURTHER each party hereto undertakes to and covenants with each other party hereto that subject to this Deed, the Joint Venture Deed and the continued operation of Clauses 12 and 13.1 of the Joint Venture Agreement he or it shall not make or bring any claim, demand, suit, proceeding or action against any other party hereto with respect to or arising out of the arrangements referred to in Clause 2 above.

consideration and findings

29.     At the hearing the matter was argued on the following bases:

·whether the sum of $1,228,500 is assessable income under either ss.25(1) of 25A of the Act;

·alternatively, whether the sum of $978,500 is assessable income under either ss.25(1) of 25A of the Act;

·alternatively, whether the sum of $250,000 is taxable under the capital gains tax provisions in Part IIIA of the Act.

30.     The thrust of the applicant’s case was that the amounts of $978,500 and $250,000 were received pursuant to the terms of the JV deed and the Indemnity deed, not the JVA. The intellectual property, being the idea for the Project, came into being well before the commencement of Part IIIA of the Act, 20 September 1985.  Intellectual property rights were vested in the applicant as a consequence of his arrangements with Jones in 1984. Those rights became properly described as proprietary documentation and proprietary rights in the JVA.  The rights are deemed by s.160U(6)(b) of the Act to have been acquired by the applicant at the time of commencement of work on or in the creation of the assets.  In relation to s.25A, the applicant submitted that any profit arose not from the commencement of a profit making undertaking or scheme, but from the abandonment thereof. Thus it was submitted that the profit arose not from the scheme but from abandoning the scheme, and reference was made to the High Court’s judgment in Kratzmann v FCT (1970) 1 ATR 827. Counsel submitted that the respondent’s case, at its highest, concerned a receipt that included the $250,000 as part of the overall consideration, but as the amount was of mixed income and capital, according to the principle established in Allsop v FCT (1965) 39 ALJR 201 and McLaurin v FCT (1961) 104 CLR 381 the receipt was an affair of capital.

31.     For the respondent, it was submitted that the amount was a reward for the applicant’s services that he agreed to perform as a party to the joint venture; clause 2 of the JVA. It was submitted that the JVA primarily related to services, being the applicant’s co-operation and participation in preparing and submitting reports and obtaining approvals. The creation of any property in connection with the services was incidental. Alternatively, the amount of $1,228,500 represented income as proceeds of a profit making venture. Part IIIA would apply if the sum of $250,000 was not considered to have been derived from a profit making scheme. In the Commissioner’s submission, the applicant had a right to sue for his full entitlement under the JVA, but agreed to dispose of that right for $250,000.  

32. Relevantly, ss.25(1)and 25A(1) of the Act provide as follows:

s.25(1) The assessable income of a taxpayer shall include –

(a) where the taxpayer is a resident –

the gross income derived directly or indirectly from all sources whether in or         out of Australia …

which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of subdivision AA.

s. 25A (1) The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from carrying on or carrying out of any profit-making undertaking or scheme.

33.     In reaching its decision, the tribunal has taken into account the written and oral evidence and submissions made at the hearing. The tribunal finds that the applicant presented as a witness who tried his best to recall events and discussions that happened many years ago.

34.     The general principles to be applied in determining whether a receipt is income or capital are stated by Bowen CJ in FCT v Harris (1980) 43 FLR 36. The most essential proposition is that “Whether any particular receipt is an income receipt falls to be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the Income Tax Assessment Act 1936 provides otherwise (see Scott v. Commissioner of Taxation (1935) 35 S.R. (N.S.W.) 215 per Jordan C.J. at p.219).” (at 39) Then after addressing the potential assessability of a gift, his Honour says:

It is not easy to formulate a simple test. Some guidance is afforded by decisions of the High Court. It is clear that the whole of the circumstances must be considered (Squatting Investment Company Ltd. v. Federal Commissioner of Taxation (1953) 86 C.L.R. 570 at p.627; on appeal (1954) 88 C.L.R. 413). Whether or not a particular receipt is income depends upon its quality in the hands of the recipient (Scott v. Federal Commissioner of Taxation (1966) 117 C.L.R. 514 at p.526). The motives of the donor may be relevant but are seldom, if ever, decisive (Scott v. Federal Commissioner of Taxation, supra, at p.526; Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47 at p.55). The regularity and periodicity of the payment will be a relevant though generally not decisive consideration (Federal Commissioner of Taxation v. Dixon (1952) 86 C.L.R. 540 at p.568). A generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any revenue producing activity carried on by him (Squatting Investment Company Ltd. v. Federal Commissioner of Taxation, supra, at p.633; Hayes v. Federal Commissioner of Taxation, supra, at pp.56-57; Scott v. Federal Commissioner of Taxation, supra, at pp.527-528; cf. Commissioner of Taxes (Vic) v. Phillips (1936) 55 C.L.R. 144;; A.L. Hamblin Equipment Pty. Limited v. Federal Commissioner of Taxation (1974) A.T.C. 4001 at p.4010).(at 40)

35.     Attention must also be given to subsequent authorities, including Commissioner of Taxation v The Myer Emporium  Limited (1987) 163 CLR 199, which held, among other things, that not every payment received from a person’s participation in a commercial relationship will have the character of income. That proposition, as well as associated principles are contained in this passage from Myer Emporium:

Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income.  But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case.  Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business.  Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income (Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. (1982) 150 CLR 355, at pp 366-367, 376). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. (at 209-210)

36.     It is well established that in determining the character of a receipt for income tax purposes, the entire context or factual matrix of which a written agreement formed part, may be considered (Commissioner of Taxation v Cooling (1990) 22 FCR 42, at 53 per Hill J). Also relevant to the task at hand of characterising a receipt, the High Court said in GP International Pipecoaters Pty Limited v Commissioner of Taxation (1990) 170 CLR 124:

To determine whether a receipt is of an income or of a capital nature, various factors may be relevant.  Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.  The factors relevant to the ascertainment of the character of a receipt of money are not necessarily the same as the factors relevant to the ascertainment of the character of its payment. (at 138)

37.     Clause 2 of the JV deed states that the provision made in the JVA for a consideration to be paid to the applicant was no longer to apply and that payment shall be made pursuant to clause 4.2 of the JV deed. In oral submissions counsel for the applicant argued that the applicant’s right to the consideration received, arose solely from the JV deed and the Indemnity deed. Under the JV deed, the applicant received a consideration for the sale of proprietary rights and proprietary information. 

38.     I must also be mindful of the following qualification as the following passage from Chandler Investment Company Limited (in voluntary liquidation) v Commissioner of Taxation (1993) 47 FCR 588 (where Hill J is discussing his judgment in Cooling) makes clear:    

In considering the entire context in which the payment was made and that context included the relationship between the firm and its service company, I expressed the view that the character of the payment in the hands of the recipient as income was not to be determined by focusing upon the words of the letter of the payer to the exclusion of all surrounding circumstances.  My judgment in this respect was agreed to by the other members of the Court, Lockhart and Gummow JJ.  But to accept that the circumstances in which a payment is made will be relevant to a determination of the character of that payment in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in a case (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it.(at 598)

39.     Counsel for the applicant in written submissions argued that to characterise the payments received by the applicant as disguised payments for profits and the like, is to say the JV deed and the Indemnity deed are shams. It was submitted that the deeds were the sole source of the applicant’s receipts, and the consideration given by him was the transfer of his interest in intellectual property and his entry into the Indemnity deed and giving releases of certain fiduciary obligations under the JVA. Counsel submitted that the reality of the matter was that the payments arose from nothing that preceded them. I do not accept that submission. I see no contradiction between the terms of the JV deed and the Indemnity deed, and the circumstances surrounding the applicant’s actions in becoming an Initiator, helping to develop the concept for the Project. By that I mean, it was from those acts and efforts, that the payments of $978,500 and $250,000 ultimately came to be made. The payments were made at the end of a chain of events and circumstances in which the applicant succeeded in keeping alive his objective for the Project, by getting Build Co and Eng Co involved. I find that entry into the deeds was the culmination of arms length negotiations between the applicant and Build Co and Eng Co (and presumably by Smith & Co), which had grown out of earlier discussions and actions by the applicant in approaching Build Co to join the venture. Those discussions were successful and led to the making of the JVA. Put another way, it would be placing a disproportionate emphasis on the form of the documentation, if the character of the receipts was determined without regard to all the circumstances of the making of the payments (S.P. Investments Pty Ltd and Perron Investments Pty Limited v Commissioner of Taxation (1993) 41 FCR 282 at 295, Hill J).

40.     At the time of the JVA, the parties agreed to “co‑operate and jointly prepare and submit to all Relevant Authorities all necessary applications, studies, reports and determinations necessary to receive all requisite Approvals for the commencement of the Performance of the Works on the terms and conditions set out in this Agreement”. Had things gone according to plan, government approvals obtained and the second stage payment been made under the JVA, being the applicant’s 35 per cent of $4m less the $35,000 already received, the Initiators would then play no further part in their arrangements with Build Co and Eng Co and, importantly, “ … all of the property of the Initiators referred to in Schedule 1 and any property of a like nature existing with the Joint Venture will pass to Eng Co and Build Co”. But the fundamental change to the nature of the Project, as originally devised by the Initiators, and Jones’ decision to sue Build Co and Eng Co under the JVA, resulted in the two later deeds coming into existence. The payments under those deeds reflect the denouement in the applicant’s defending his interest in the Project, from his court action against his fellow Initiators, then the urgent approach to Build Co, and later his negotiations with them. I find that the applicant, with the assistance of his solicitor, negotiated with a view (as he said) to get the best arrangement he could so he could get the matter finalised. The payments brought to an end his involvement in the Project. It is necessary therefore to examine the evidence regarding that involvement.  

41.     Jones first approached the applicant for his advice and assistance about the feasibility of an idea or concept that had eluded others who had looked into solving a major civic problem. At that juncture, the applicant was fully occupied as a building consultant, working seven days a week. The applicant’s own initial assessment as a builder, was that the idea or concept could work. Quite understandably, he was, as he said in his evidence more than once, excited by his involvement in a proposal that gathered momentum once it received the endorsement from the engineers and structural designers, Smith & Co. I have no reason to doubt that his primary emotional response was one of excitement.

42.     Equally, however, I am satisfied that he hoped to find work in the Project once it received the government’s approval and work was commissioned and contracts let. He said in evidence that he was keen to make some income from his participation, as did Jones whose legal practice was not flourishing. He saw this proposal as offering him the opportunity to make a name for himself in the industry. But the applicant’s intention extended to more than the prospect of securing employment. I find that from the start, he had an intention of making money from the work and effort he, with Jones and then Smith & Co, put into the concept. He acknowledged that his involvement with Jones, and by inference, the joint venture as it extended to include Smith & Co, was a business.

43.     That this was a commercial arrangement between the Initiators is evident from the nature of the correspondence between them, for instance the very first letter from Jones to the applicant referred to their future commercial relationship. The contact or invitation sprang from their business association. The applicant’s own correspondence to Jones (exhibit R7, 24 February 1985) referred to their benefiting from the venture by way of a vendor’s contract. I am satisfied that the very use of the applicant’s family name was to foster their credibility among the consultants they approached. Much of the documentary evidence prior to the applicant’s commencing his court action, weighed up potential structures for successfully taking the concept forward to the stage of the government’s commissioning works. Almost from the start, the venturers were alive to the taxation implications of alternative structures for their joint venture.

44.     It is clear to me that the venturers did not view their participation in developing the concept as a hobby. They would communicate important matters to one another by letter. Minutes were kept of their meetings. The applicant arranged for the incorporation of a company that at the time was proposed as the vehicle that would be employed to take the Project to government. At first Jones and later, the applicant, were very conscious of protecting, if not controlling their concept. The applicant was quick to record that he was prepared to look after his “interest” or his “entitlement” as an Initiator. He of course commenced litigation to restrain actions that might have been inimical to his future role in the joint venture. His solicitor advised him in relation to the JVA and represented him in subsequent discussions with Eng Co and Build Co when they were trying to terminate their relationship. How he would turn that investment of time and effort into money was a matter that ultimately proved difficult to predict. However, throughout the course of his involvement, that is from August 1984 until July 1987 he zealously defended his involvement as an Initiator. 

45.     I find therefore that the applicant was involved in trying to exploit what he and the other Initiators regarded to be a commercially valuable concept. Although his efforts were directed to an activity that was outside his usual business as a building consultant, I am satisfied that his was a commercial or business-like approach to exploiting what he perceived was something of value. From these circumstances I infer that it was his intention not only to get work in the future from the Project, albeit a remote prospect having regard to the highly specialised nature of the engineering and construction required for the Project and his lack of relevant experience, but also to turn to profitable account as best he could, his interest in the joint venture and the work he had done in developing the concept into a proposal for government approval.

46.     In Westfield Limited v Commissioner of Taxation 91 ATC 4,234 theFull Court provided an analysis of the High Court’s judgment in Commissioner of Taxation v The Myer Emporium Limited (1987) 163 CLR 199 as it relates to a profit from a transaction that is not an activity in the ordinary course of business, but nevertheless was a profit from a commercial transaction that was entered into for the purpose or intention of making a profit. I find that neither the applicant’s business as a building consultant, the evidence being that he maintained the business while working on the proposal, nor his strata inspection services, extended to the activities he was undertaking as an Initiator. In this context, the following passage from Hill J, who delivered the leading judgment in Westfield, is instructive:

Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition.   What is meant by "profit-making" in this context?

…  where a transaction falls outside the ordinary scope of the business, so as not to be a part of that business, there must exist, in my opinion, a purpose of profit-making by the very means by which the profit was in fact made.  So much is implicit in the decision of the High Court in Myer.  There may be a case, the present is not one, where the evidence establishes that the taxpayer has the purpose or intention of making a profit by turning an asset to account, although the means to be adopted to generate that profit have not been determined: cf Steinberg v Federal Commissioner of Taxation (1972-75) 134 CLR 640.  Steinberg was a case decided under the second limb of the then s.26(a) of the Act. The taxpayer had, having obtained an option to purchase some land (The Rockingham land), caused a company to be incorporated, the shareholders of which included his family and himself, intending to turn the land to account in the most advantageous way, in particular, either by selling the shares in the company, or liquidating the companies, distributing the assets in specie, and then selling those assets.  It was the latter course that was taken.  The court by majority held, affirming Mason J at first instance, that it was not necessary to fall within the second limb, that every step which culminates in the making of a profit should be planned or foreseen.  In the words of Mason J (at 670):

"In a business transaction of this kind where property is acquired with the intention that a profit should be made out of its anticipated appreciation in value by whichever means prove most suitable, it matters not that that the particular means by which the profit is to be made are left for subsequent decision." (at 4243)

47. Here, the evidence is that the applicant did everything in his power to ensure that he retained an interest in the joint venture and even more so, after Jones withdrew. The applicant’s profit making scheme was to retain his interest in the joint venture at all costs and then try to exploit it as best he could, whether by entrepreneurial fee; his expectation of “rewards and renumeration” [as he idiosyncratically spelt ‘remuneration’ in a few of his written communications] (his letter of 30 January 1985 to Smith & Co exhibit R13); his “maximum benefit under a Vendors contract” (exhibit R7);”if possible to receive some reward” (his handwritten note on a letter to Jones on 18 June 1985, exhibit R19); or for his and Jones’ mutual profit (exhibit R20, letter from the applicant’s solicitor to Jones dated 5 July 1985). He referred to these alternatives and must have contemplated other likely scenarios for payment. I am satisfied that his intention was to gain or profit from his interest as an Initiator and the work he had done, more than merely securing employment. He was trying to secure his “maximum benefit” and “success in every way”. Unlike Jones, the applicant was prepared to enter into an incorporated joint venture vehicle because that would have enabled him (and Smith & Co) to realise some profit from his efforts. In my view that profit making scheme did not relevantly alter, even after the letter from Build Co in February 1987 (exhibit A2) that there would have to be a reduction to the fee payable under the JVA. I have referred above to his oral evidence that he and his solicitor negotiated for the best payment possible they could, to get him out of the matter. I am satisfied that his efforts in negotiating with Build Co and Eng Co from February 1987 to July 1987 were still directed at the most advantageous reward, through turning that interest to account as best he could. That type of profitable outcome is one of the alternatives that I infer the applicant would have contemplated for the profitable realisation of his interest. I find therefore that the amount of $1,228,500 is income according to ordinary concepts and assessable under s.25(1) of the Act, as it comes within the principle established in Myer Emporium (as explained in Westfield in the passage beginning “There may be a case …”).  

48.     In relation to s.25A(1), this matter is concerned with the second limb thereof. For the reasons stated above I find that the applicant had a profit making scheme of participating in the development of the concept for the Project and exploiting or turning to account his interest in the joint venture for gain. Counsel for the applicant submitted that s.25A(1) is inapplicable because the profit making scheme was abandoned (Kratzmann’s case). Counsel emphasised the change in the Project that was confirmed in the letter from Build Co early in 1987. It was submitted that the applicant’s assets or interest in the joint venture related to something else; plans for a different proposal.

49.     As I have noted, there was a major change to the concept that made it significantly different from that planned and promoted by the Initiators. That of itself is not fatal since every step in the scheme does not need to be planned or foreseen before the scheme is put into operation (Steinberg v FCT (1975) 134 CLR 640). I do not accept the applicant’s submission because I find the profit making scheme did not come to an end or fail, as was submitted. The profit making scheme was the conscious exploitation of the concept or idea for the Project, however that could be achieved, whether by entrepreneurial fee, vendors agreement or some other means of realising a profit from his work on the concept. The applicant did not cease to carry out the scheme. In the end he made a profit from his participation as an Initiator, as he had intended, despite the intervening events brought about by the government’s decision. The applicant’s purpose remained the same: exploit the concept by attracting a large organisation to take it under its wing and receive a payment for, in effect, introducing them to the concept.

50.     There was insufficient evidence before me to establish whether the plans or diagrams in which the applicant had an interest, and were committed to the profit making scheme, had any value and if so, what that value was. Accordingly, there is no opportunity to take such a value into account by way of reducing the applicant’s profit of $1,228,500 (cf Elsey v FCT 69 ATC 4,115). I am satisfied, for the reasons set out above, that the scheme was carried out for the purpose of profit making. Moreover, the applicant has not adduced evidence sufficient to discharge the onus of proof (s.14ZZK of the Taxation Administration Act 1953) that the assessment under s.25A (1) is excessive. 

51. I find, therefore, that the receipt of $1,228,500 is the applicant’s profit from carrying on or carrying out the profit making scheme and is included in his assessable income by s.25A(1), as an alternative to s.25(1). Given these findings, the issue whether the $250,000 received under the Indemnity deed is assessable under Part IIIA does not arise.

52.     The respondent issued an amended assessment in respect of the 1988 income year on 24 June 1994. The amount of $1,228,500 was included in assessable income and there was a resulting increase in tax payable of $601,965 and additional medicare levy of $15,356.25. The sum of these amounts represents the total increase in the tax properly payable, $617,321.25 (exhibit A5). Additional tax by way of penalty was imposed at the flat rate of 30 per cent, an amount of $185,196.37, and in addition there was an annual component payable. The upshot was that the amended assessment imposed a total amount of $586,858.75 in additional tax for an incorrect return.

53.     The applicant’s 1988 income tax return included the following information at item 23 ‘Sale or other transfer of Property’:

The taxpayer was part of a syndicate which developed the concept of the [project] back in 1983. They intended to develope [sic] the venture in their own right. The syndicate sold their interest in the concept and as it was not created with any intent of resale at a profit and was commenced prior to 19 September 1985, any surplus on the sale has been treated as a capital surplus. [T6-32].

54.     Section 223 of the Act is the source of the respondent’s power to impose additional tax. It provides:

223(1) Where –

(a) a taxpayer –

(i) makes a statement to a taxation officer, or to a person other than a                 taxation officer for a purpose in connection with the operation of this                    Act or   the regulations, that is false or misleading in a material   particular; or

(ii) omits from a statement made to a taxation officer, or to a person   other than a taxation officer for a purpose in connection with the   operation of this Act or the regulations, any matter or thing without                   which the statement is misleading in a material particular; and

(b) the tax properly payable by the taxpayer exceeds the tax that would have       been payable by the taxpayer if it were assessed on the basis that the    statement were not false or misleading, as the case may be,

the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess.

…

223(7) [Omission of assessable income from return] Where a person omits from a return furnished under or pursuant to this Act or the regulations, being a return of income derived by the person, a partnership or a trust estate during a period, any assessable income derived by the person, the partnership or the trust estate, as the case may be, during the period, the person shall, for the purposes of this section, be taken to have made a statement in the return to the effect that the person, the partnership or the trust estate, as the case requires, did not derive the assessable income during the period.

55.     The provisions of section 227 of the Act are also relevant to this matter, in particular subsection (3):

SECTION 227 ASSESSMENT OF ADDITIONAL TAX

227(1) [Commissioner to assess] The Commissioner shall make an assessment of the additional tax payable by a person under a provision of this Part.

227(2) [Notice of assessment] Nothing in this Act shall be taken to preclude notice of an assessment made in respect of a person under sub-section (1) from being incorporated in notice of any other assessment made in respect of the person under this Act.

227(3) [Commissioner’s discretion to remit] 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 sub-section 33(1) of the Acts Interpretation Act 1901 to the power of remission conferred by this sub-section, nothing in this Act shall be taken to preclude the exercise of the power at a time before an assessment is made under sub-section (1) of the additional tax.

56.     The applicant’s written submissions on penalty referred to the rulings by the respondent that set out the respondent’s view of the operation of the false or misleading concept in s.223 (IT2141) and the remission of additional tax (IT2517). Counsel acknowledged that the applicant’s 1988 return enclosed neither the joint venture deed nor the indemnity deed, nevertheless it was submitted that there had been appropriate disclosure by way of a statement in the return that money had been received. In the respondent’s statement of facts and contentions dated 6 June 1997, it was contended that the applicant had made a false or misleading statement by omitting the sum of $1,228,500 from his assessable income. Accordingly, additional tax was payable by virtue of s.223 of the Act. Further, the respondent contended that he had correctly exercised his discretion under sub-section 227(3) to remit the additional tax to $586,858.75 and no further remission was warranted in the circumstances.

57.     Where a taxpayer omits an item of assessable income from their return, s.223(7) deems the taxpayer to have made a statement in their return to the effect that they did not derive that item of income. The provision applies in this matter.

58.     The respondent has provided guidelines to his officers in relation to the exercise of the discretion to remit additional tax in respect of a false or misleading statement (IT 2517). The guidelines refer to various acts or omissions that have resulted in the false or misleading statement and suggests a differential scale of penalty for consideration, depending on the nature of those acts or reasons for the omissions. One such category is the ’contentious item’. IT 2517 states that a ‘contentious item’ refers to an area of the law that is unsettled or there is a serious question about the application of established principles to the particular case. The ruling included a schedule that was meant to guide officers in setting the level of additional tax by reference to the particular act or omission that resulted in the false or misleading statement. For instance (at par 41) the following appeared:

REASON FOR THE FALSE OR MISLEADING STATEMENT	ADDITIONAL TAX “Per annum”  “Culpability” component  component
Deliberate evasion (without aggravating factors) … Inadvertent error, honest mistake, dependent on the degree of care … Contentious item …	YES YES YES	45 0-5 0-5

59.     I find that there are mitigating circumstances present in this matter that should be taken into account on review in the exercise of the discretion in s.227(3) to remit additional tax:

-the income tax return was prepared by a tax agent (T6-30). I infer that the treatment of the receipt as non assessable and the level of disclosure in the return was made having regard to professional advice;

-the assessability of the receipt was a contentious issue. So much, I consider, is evident from the course of this matter and the two day hearing where both parties were represented by experienced members of the tax bar.

60.     The applicant referred me to the following passage from par 14 of IT 2141:

A statement as to a particular view of the proper operation of the law is not false or misleading even though it may be inaccurate. In context, and as a matter of the proper interpretation of the expression "false or misleading statement", it is clear that the legislature is directing its attention to statements of fact that are false or misleading and not to statements as to the application or interpretation of the law. …

and also to par 19 of IT 2141:

In the case of a statement the substance of which is clearly arguable as a matter of law, no penalty would, as a general rule, be imposed, even though the statement may be found, again as a matter of law, to have been inaccurate. ..

61.     I accept the applicant’s submission that this transaction or dealing is one that falls into the clearly arguable category. I also accept that his income tax return gave the respondent some information about the transaction and this should be contrasted with the situation where there is a total omission of any reference to the particular transaction. Having regard to the policy of encouraging accuracy and completeness of returns that is embodied in s.223, but being cognisant also that the discretion has been introduced to mitigate potential harshness resulting from the imposition of penalty under s.223(1) being double the amount of tax avoided, I am satisfied that this is an appropriate case in which to remit the culpability component of the penalty in full.   In relation to the per annum component, it is relevant to note that the respondent consented to the matter being held in abeyance for a number of years pending the finalisation of proceedings brought by Jones, extending to his appeals to the High Court. I consider it appropriate that any per annum component be remitted for the entire period from the date of issue of the amended assessment.

62.      The result is that tribunal affirms the decision under review in relation to the inclusion of the sum of $1,228,500 in the applicant’s assessable income for the year ended 30 June 1988, but in relation to penalty remits the matter to the respondent with the direction that the assessment for that income year be amended by remitting additional tax in full.

I certify that the 62 preceding paragraphs are a true copy of the reasons for decision herein of P. J. Lindsay, Senior Member:

Signed:         
          ..................................................................................……………………………….

Associate

Dates of Hearing  18 & 19 November 2004

Final written submissions from applicant             24 December 2004 

Final written submissions from respondent         29 November 2004

Date of decision  18 January 2005     

Applicant’s counsel  D Raphael

Respondent’s counsel  R Quinn