The Magazine Company and Commissioner of Taxation
[2004] AATA 1173
•9 November 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 1173
ADMINISTRATIVE APPEALS TRIBUNAL )
) No NT2003/138-143
TAXATION APPEALS DIVISION ) Re THE MAGAZINE COMPANY Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Deputy-President J Block Date9 November 2004
PlaceSydney
Decision The objection decisions under review are affirmed. [SGN] Deputy-President J Block
CATCHWORDS
Superannuation contributions – superannuation legislative history – contributions to non-complying fund – loans back through a bank – deductibility under section 82AAC – deductibility of interest and charges under section 51(1) /8-1 – Part IVA – tax benefit – objective test – whether assessments for certain years out of time – evasion – intentional disregard in relation to additional tax – the objection decisions under review are affirmed
Income Tax Assessment Act 1936 - sections 51(1), 79E, 82AAC, 82AAR, 166, 166A, 170(2), 177A, 177C, 177D, 177F, 221AKA, 221AZI, 226J 264A, 267
Income Tax Assessment Act 1997 - section 8-1
Superannuation Guarantee Charge Act 1992
Harris v Federal Commissioner of Taxation 2002 ATC 4659
Prebble v Federal Commissioner of Taxation 2003 ATC 4770
Driclad Pty Ltd, Marine Plastic Co Pty Ltd, Rollason Pty Ltd v Federal Commissioner of Taxation (1968) 121 CLR 45
Raymor Contractors Pty Ltd v Federal Commissioner of Taxation 1991 ATC 4259
Federal Commissioner of Taxation v Roche 1991 ATC 5024
Walstern Pty Ltd v Federal Commissioner of Taxation 2003 ATC 5076
Bayton Cleaning Co Pty Ltd v Federal Commissioner of Taxation (1990) 91 ATC 4076
Essenbourne Pty Ltd v Federal Commissioner of Taxation 2002 ATC 5201
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359
Federal Commissioner of Taxation v Hart 2004 ATC 4599
Federal Commissioner of Taxation v Consolidated Press Holdings Limited (No.1) (1999) 91 FCR 524
Macquarie Finance Ltd v Federal Commissioner of Taxation 2004 ATC 4866
Federal Commissioner of Taxation v Sleight (2004) 55 ATR 555
Denver Chemical Manufacturing Co v Federal Commissioner of Taxation (NSW) (1949) 79 CLR 296
Vincent v Commissioner of Taxation 2002 ATC 4742
BCD Technologies Pty Ltd v Federal Commissioner of Taxation 2004 ATC 1071
Re Ryan and Federal Commissioner of Taxation 2004 ATC 2181
Federal Commissioner of Taxation v Ryan (2000) 201 CLR 109
East Finchley v Federal Commissioner of Taxation (1989) 90 ALR 457
Case D47 72 ATC 272
Case X16 1990 ATC 180
Federal Commissioner of Taxation v Munro; British Imperial Oil Company Ltd v Federal Commissioner of Taxation (1926) 38 CLR 153
Hayden v Federal Commissioner of Taxation 1996 ATC 4797
Harts Australia v Commissioner of Taxation 2001 ATC 4572REASONS FOR DECISION
9 November 2004 Deputy-President J Block
Part A: Introduction and General
1. The objection decisions under review are the decisions by the Commissioner of Taxation (the Respondent) made on 22 April 2003 disallowing objections by the Magazine Company (the Applicant) against an assessment dated 2 May 2001 (in respect of the 1994 year) and assessments dated 19 November 2001 (in respect of all other relevant years). The term “relevant years” means the years ended 30 June 1994 to 30 June 1998 (both years inclusive) and also the year ended 30 June 2000. Individual relevant years are referred to by reference to the actual years; for example the year ended 30 June 1994 is referred to as the “1994 year”.
2. The Applicant was represented by Mr R Gordon of Counsel, instructed by Mr Gray, an accountant. The Respondent was represented by Mr A Robertson SC and Mr Mark Richmond of Counsel, instructed by Mr D Morris of the Australian Government Solicitor.
3. The Tribunal had before it the T-Documents (in two volumes) lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with the following Exhibits:
(a) A1: Witness Statement by Mr Gray dated 29 January 2004
(b) A2: Witness Statement by Mr Gray dated 6 April 2004
(c) A3: Application for loan to the Hua Wang Bank Berhad dated 1 July 1999
(d) A4: Loan Facility Agreement between the Applicant and the Hua Wang Bank Berhad dated 1 July 1999
(e) A5: Witness Statement by Mr Lance dated 30 January 2004
(f) A6: Witness Statement by Ms Taylor dated 30 January 2004
(g) A7: Witness Statement by Ms Green dated 30 January 2004
(h) A8: Applicant’s Income Tax Return for the 1992 – 1993 financial year
(i) A9: Minutes of Meeting of directors of the International Retirement and Superannuation Services Limited dated 23 January 1995
(j) A10: Fax by Mr Lead to Mr Briggs dated 23 January 1995
(k) A11: Document entitled “Provisions of Western Samoan Legislation Governing Secrecy”
(l) A12: Letter by Mr Gray to the Australian Deputy Commissioner of Taxation dated 26 August 2004
(m) R1: Mr Gray’s reply to a summons to produce documents dated 6 April 2004
(n) R2: Summons to produce to Mr Lance dated 23 February 2004
(o) R3: Mr Lance’s reply to the summons to produce dated 6 April 2004
(p) R4: Letter by Hua Wang Bank Berhad to the Magazine Company dated 6 June 2001
(q) R5: Letter from Mr Lance to the Hua Wang Bank Berhad dated 8 June 2001
(r) R6: Summons to produce to Ms Taylor dated 23 February 2004
(s) R7: Ms Taylor’s reply to the summons to produce dated 6 April 2004
(t) R8: Summons to produce to the accounting firm dated 8 April 2004
(u) R9: Summons to produce to Ms Green
(v) R10: Letter from Ms Green to the Deputy Registrar of the Administrative Appeals Tribunal dated 6 April 2004
(w) R11: Witness Statement by Mr Lead dated 11 May 2004
(x) R12: Witness Statement by Mr Neil James dated 19 October 2004
A large Exhibit referred to as “KL” or the “Common Exhibit” is in fact an Exhibit to Mr Lance’s statement Exhibit A5.
4. This matter was heard in confidence and accordingly this decision must be written in terms which do not identify the Applicant. A decision in which names rather than letters are used is in my view easier to read. Accordingly and where relevant I intend to use pseudonyms in accordance with the provisions of this paragraph 4:
(a) The Applicant is referred to at the commencement of this definition as “the Magazine Company”; it is sometimes referred to in these reasons, and in particular in quoted material as “the Company”. At all relevant times its shareholders and directors were Mr Lance and Ms Taylor, they are partners also in that they live together. The Applicant until May 2001 published and distributed a magazine which focuses on a specialised subject; it is referred to as “the Magazine”. The Applicant conducted its business (the publication and distribution of the Magazine) from the home of Mr Lance and Ms Taylor. In referring to their home the name of the street in which their home is situated has been altered. Each of Mr Lance and Ms Taylor gave oral evidence before the Tribunal; they are collectively referred to in these reasons as “the directors”.
(b) Mr Gray and Ms Taylor are cousins. Mr Gray is a professional accountant; however clause 6 of Exhibit A1 sets out that Mr Gray is also the chairman and director of a listed company and that he is in addition involved in educational institutions. Mr Gray was a principal in a firm of accountants which includes his name (referred to as the “accounting firm”) which acted as the accountants for the Applicant for a number of years. His evidence was that he currently runs his own accounting practice under his own name of Gray from offices which are situated on the same floor of the same building in which the accounting firm conducts its practice. There was at times some confusion as to whether accounting or other advice or assistance was obtained from Gray or the accounting firm. So far as the directors were concerned there was never any doubt. Their accountant and advisor on whom they relied was Mr Gray and nobody else. The role played by Mr Gray in the whole of this matter is central and akin to that of an eminence grise or Svengali. No decisions were made without him and the manner in which the Applicant came to be involved with the Asiaciti Trust Group was orchestrated entirely and only by Mr Gray.
(c) In May 2001 the Applicant received its tax assessment for the 1994 year. (The assessments for the other relevant years were received in November 2001.) In June 2001, a new company (with a name very similar to that of the Applicant and with Mr Lance and Ms Taylor as shareholders and directors) was set up. That new company (referred to in these reasons as “Newco”) carried on the same business, that is, the publication and distribution of the Magazine. The basis upon which, and the reason why Newco became the publisher and distributor of the Magazine was the subject of considerable (and sometimes conflicting) evidence. Oral evidence was also given by Ms Green who was the part-time bookkeeper to the Applicant, and, since June 2001 the part time bookkeeper to Newco.
(d) Evidence for the Respondent was given by Mr Martin James (“James”) and (reluctantly) by Mr Richard Lead (“Lead”). The names referred to in this paragraph 4(d) are not pseudonyms.
(e) In June 1994 the Applicant entered into certain arrangements, (more fully referred to later in these reasons) with the Asiaciti Trust Group (“the Group”) which was based in Western Samoa, excepting only that the parent company, controlled apparently by a Mr Graeme Briggs, was based in Singapore. Put in very brief terms at this preliminary stage, an offshore trust (“the Offshore Fund”) was established in Western Samoa. The trustee of the Offshore Fund (referred to as “the Trustee”) was IRSS Nominees (16) Limited; the Trustee was at all relevant times a member of the Group; similarly Western Samoa Trust Company Limited, (“WST Co”) which employed Mr Lead from 1993 to 1995 was at all relevant times a member of the Group; in addition International Retirement Superannuation Services Limited (see Exhibit A9) was at all relevant times a member of the Group. Another company incorporated in Western Samoa figures largely in this matter. Hua Wang Bank Berhad (referred to in these reasons as “the Bank” or as “HWBB”) was at all relevant times a company incorporated in Western Samoa. Although the Applicant alleges that it was managed and controlled in Western Samoa this is entirely unclear, given that according to Mr Lead, its shares are owned by Mr Gray. Mr Gray denied that this is so. The Bank is regulated under the Off-Shore Banking Act 1987 of Western Samoa. While he was an employee of WST Co, Mr Lead was a director of the Bank. He said that he was a nominee director of the Bank and held an indemnity from the Group to act in such capacity
(f) Again in very brief terms at this preliminary stage, the Applicant made three payments (described as contributions) amounting in aggregate to $365 000 to the Offshore Fund in June 1994. The Applicant in its return for the 1994 year claimed a deduction for that aggregate amount of $365 000 under section 82AAC of the Income Tax Assessment Act 1936 (“ITAA”). In consequence of that claimed deduction, the Applicant, as appears from its balance sheet at the end of June 1994, had a deficit in shareholder funds of approximately $186 000. The Offshore Fund, having received the contributions deposited them with the Bank. The Bank made loans to the Applicant of three amounts of $120 000 each, two in late June 1994 and one in early July 1994. A loan agreement (“the first loan agreement”) between the Applicant and the Bank was executed on 1 June 1994 (T31) and guarantees (T32) were executed on the same day by the directors in favour of the Bank. In the relevant years which followed the Applicant made payments of interest and charges to the Bank. In accordance with the first loan agreement the Applicant was obliged to bear the withholding tax referable to the interest payments due by the Applicant to the Bank. The payments made by the Applicant to the Bank in respect of interest and costs were matched by further loans, in equivalent amounts, (but with an allowance for costs) to the interest and charges paid by the Bank to the Applicant. By 1999 the indebtedness of the Applicant to the Bank had increased to such an extent, having regard to the facility limit set out in the first loan agreement, that a further loan was required. On 1 July 1999 a further application for loan (Exhibit A3) was made by the Applicant to the Bank; on the same day a further loan agreement (“the second loan agreement”) was entered into between the Applicant and the Bank. In October 1999 (but not previously), the Applicant executed a fixed and floating charge (T64) over its assets in favour of the Bank.
(g) The names in the preceding subparagraph in respect of the Group, entities within the Group, Mr Briggs, and the Bank, are their real names. Mr Gordon agreed that just as it was not necessary to disguise the names of Mr Lead and Mr James because their identities would not reveal the identities of the Applicant, it was also unnecessary to disguise the real names of the Group, entities within the Group, Mr Briggs and the Bank.
(h) All material quoted in these reasons and including extracts from the transcript, has been edited in conformity with this paragraph 4. In some instances I have altered quoted material so as to delete names (and deletions are indicated wherever relevant).
(i) Except that any reference to section 8-1 relates to the Income Tax Assessment Act 1997, all section references relate to ITAA.
(j) Although the T documents are in two volumes the pages are numbered consecutively. References to them in these reasons are references to a particular document; for example T1, or to a particular page; for example Tp1. In some of the quoted material both references are given; for example T1-p1 which is a reference to page 1 of document 1.
5. This hearing took place over four days, 18, 19, 20 and 21 October 2004 (“first hearing day”, “second hearing day”, “third hearing day” and “fourth hearing day” respectively). The transcript is not consecutively numbered; accordingly, references to it are preceded by a number which is 1, 2 or 3 and being, as the case may be, a reference to the first, second, or third hearing days respectively. Oral evidence was taken on the second and third hearing days and so that transcript references are generally references for to the transcripts for those days. The first hearing day was taken up by opening submissions by Mr Gordon; in addition, the Tribunal heard argument as to a number of preliminary applications and objections, some of which were resolved on the second hearing day. Although those arguments took up a good deal of time the Tribunal does not believe that it is necessary to do any more than refer to the determinations which were made in respect of them. The Tribunal heard closing submissions throughout the fourth hearing day.
6. The Applicant in its objection for the 1994 year included as clauses 1, 2 and 3 a contention that the assessment for the 1994 year was out of time. It did not however include a similar objection in its contention for the 1995 year and sought to amend its objection, at that late stage in order to do so. The Applicant sought leave also to amend its statement of facts and contentions so as to include additional paragraphs numbered 37A, 43A, 50A and 53. Those applications were granted on the basis that firstly Mr Gordon undertook that the Applicant would not in consequence seek to lead any additional evidence and secondly, that the Applicant would not seek to contend that the Respondent’s statement of facts and contentions was in any way deficient in consequence of the fact that it did not address those additional matters. However, the Respondent did file an amended statement of facts and contentions.
7. The Respondent furnished the Tribunal with a document (referred to during the hearing as the “aide memoire”) entitled “Respondent’s objections to Applicant’s statements.” Those objections were made on various evidentiary grounds; however the Respondent also objected to certain sentences contained in statements by Mr Gray and Mr Lance pursuant to section 264A(10). This arose from the fact that answers to notices under section 264A of the ITAA were often confined to brief statements such that later (and different) evidence could not be given without the Respondent’s consent which was refused. The Tribunal does not, again, think it necessary to deal in detail with the circumstances in which Mr Gordon (after consideration) conceded that the objections referable to sections 264A were well founded. In clause 22 of Exhibit A5 the last sentence was deleted; similarly, the last sentence of clause 3 of Exhibit A1 was deleted and a phrase in clause 17 of Exhibit A1 was deleted. The Tribunal does note in this context, although it does not consider it necessary to deal with these aspects in detail, that responses to section 264A notices were in a number of important respects unhelpful and evasive.
8. The Respondent in disallowing the objections made a finding as to the Applicant’s conduct constituting fraud or evasion. Mr Robertson sought and obtained an amendment to the Respondent’s statement of facts and contentions, so as to delete the words “fraud or” and so as to allege evasion only, on the basis that evasion, being a lesser hurdle, was sufficient for the Respondent’s purposes. As will be noted from later provisions of these reasons the Tribunal’s findings against the Applicant do (to the extent necessary) include a finding of evasion.
9. The documentation in this matter is very large indeed. Apart from the T-Documents which run to some 500 pages, the Exhibits run to many hundreds of pages. The term “Exhibits” in this context includes, as set out previously, a folder of documents marked “KL” and which is in fact an Exhibit to Exhibit A5 but, is also referred to in Exhibits A1 and A6 and, again as set out previously is referred to in these reasons as “KL” or the “Common Exhibit”. The Tribunal in addition was furnished with statements of facts and contentions by both parties and with comprehensive submissions. The Tribunal was furnished on the first hearing day with written submissions which were later replaced by amplified versions which included comment on the evidence. (The legal representatives of the parties clearly put in considerable effort in order to present submissions on the fourth hearing day amplified in this manner) The term “AS” refers to the Applicant’s submissions in their final form and similarly the term “RS” refers to the Respondent’s submissions in their final form; it is convenient for certain purposes to draw upon the submissions of the parties for the purposes of these reasons.
10. The documents referred to in paragraph 9 do not include a number of other submissions, applications for amendment, and similar documents. They also do not include a chronology submitted by the Applicant.
11. Ms Taylor’s oral evidence revealed that the Applicant’s costs have been funded by a “fighting fund”. Mr Lead’s evidence indicated that there were a number of similar schemes for clients of Mr Gray and others. It is conceivable that this decision will not end in this Tribunal. It is in these circumstances that I undertook that I would deal with all legal issues, even where not strictly necessary to do so because of other findings, and in case in respect of any of the latter findings I was in error.
12. A small carry forward loss of $97.00 arising from the year ending June 1993 (“the 1993 year”) was claimed by the Applicant. Mr Gordon noted that he did not press the matter. That he was correct to do so is clear having regard to the fact that in that year the Applicant derived a taxable profit of $464 00.
13. This is a case where in my view it is desirable to refer to the oral evidence in some considerable detail. Moreover, and in my view the import of that evidence can, in many instances, be best appreciated by references to the evidence itself and accordingly these reasons include excerpts from the transcripts.
Part B: Superannuation Matters Generally
14. Mr Gordon referred both in opening and closing submissions to certain relevant matters of a background nature in respect of superannuation. Although in my view, and having regard to my findings in this case, these matters are of limited relevance, I include (and also as background) Part 2 of AS up to and including the sentence reading “section 82AAE was repealed with effect from 1 July 2000”;
“The Super Contributions
Year ended 30 June, 1994
During the year ended 30 June, 1994 the tax deductibility of contributions by an employer to a superannuation fund for the benefit of employees was governed by the provisions of s82AAC of the 1936 Act, which then read:
“(1) Where:
(a) a taxpayer makes a contribution to a fund for the purpose of making provision for superannuation benefits for, or for dependants of , an eligible employee; and
(b) the fund is an eligible superannuation fund, within the meaning of Part IX, in relation to the year of income of the fund in which the contribution is made;
the amount of the contribution is an allowable deduction in respect of the year of income of the taxpayer in which the contribution is made.” (underlining added)
Section 82AAC as it was in the year ended 30 June, 1994, had stood in that form since 1 July, 1988
From 1 July, 1990 subsection (2) of s82AAC limited deductions under subsection (1) if contributions were made to more than two funds, except where subsection (2A) applied.
For the year ended 30 June, 1994, Part IX of the 1936 Act (which deals with the taxation of superannuation funds) defined “eligible superannuation fund” in s267(1):
“in relation to a year of income, means a fund that is a complying superannuation fund, or a non-complying superannuation fund , in relation to the year of income.”
Section 267(1) defined “complying superannuation fund”:
“in relation to a year of income, means a fund in respect of which:
(a) the Insurance and Superannuation Commissioner has given a notice under section 19 of the OSS Act stating that the Insurance and Superannuation Commissioner is satisfied that the fund satisfied the superannuation fund conditions in relation to the year of income; or
(b) The Insurance and Superannuation Commissioner has give a notice under section 13 of the OSS Act stating that the Insurance and Superannuation Commissioner is satisfied that the fund should be treated as if it had satisfied the superannuation fund conditions in relation to the year or income;
Section 267(1) defined “non-complying superannuation fund”:
“in relation to a year of income, means a fund that, at all times during the year of income when the fund is in existence, is:
(a) a provident, benefit, superannuation or retirement fund; or
(b) a superannuation fund within the meaning of the OSS Act;
but does not include a fund that is a complying superannuation fund in relation to the year of income.”
The “OSS Act” meant the Occupational Superannuation Standards Act 1987.
These definitions in s267(1) of Part IX had stood in that form since 1 July, 1988.
Prior to 1 July, 1988, section 82AAE had provided limits on the extent of deductions to superannuation funds available to an employer. From 1 July, 1988, s82AAE was repealed and the relevant limits were contained in the “reasonable benefits limits” in regulations 18B(5)-(9) to the OSS Act. Under the OSS Act a fund which accepted contributions for which deductions had been obtained under s82AAC, which exceed the limits would lose its complying status.
Until 1 July, 1994, s136(1) of the Fringe Benefits Tax Assessment Act 1986 excluded from the definition of “fringe benefit”:
“(j) a benefit constituted by –
(i)the making of a payment of money to ; or
(ii)the setting apart of money as,
a superannuation fund”
30 June, 1992 Announcement
On 30 June, 1992 the Treasurer made this “Security in Retirement” statement. On page 68 he announced that from 1 July, 1994 the definition of complying status under the OSS Act would be restricted to resident superannuation funds. On page 69 he announced that deductions would not be allowed for employer contributions to non-resident funds. On page 58 he announced age based limits would be applied to limit the amount of deductions in any one year e.g. a limit on deductibility of $62,000 p.a. for an employee aged 50 and over.
Thus the Treasurer was giving time for taxpayers to rearrange their affairs if necessary, rather than announcing changes with effect from the date of the announcement, which is often justified on the basis that the loss to the revenue of giving warning is too great.
30 June, 1994 Announcement
On 30 June, 1994 the then Treasurer issued Press Release No 76, wherein he released for public comment a Draft Bill to give effect to the former Treasurer’s announcement, but noting changes:
“It is now proposed that employers continue to be eligible for deductions for employer contributions to non-resident superannuation funds, but that they be subject to fringe benefits tax in respect of these contributions. This treatment will be applied to all non-complying superannuation funds, not just non-resident funds”.
The amendments were ultimately effected by Taxation Laws Amendment Bill (No 4) 1994, which became Act No 181 of 1994, with effect from 1 July, 1994.
From 1 July, 1994
Section 82AAC was amended by substituting the word “complying” for “eligible”.
The definition of “complying superannuation fund” in s267(1) was amended to read:
“has the meaning given by section 45 of the SIS Act”.
Section 45 of the Superannuation Industry (Supervision) Act 1993 is to the effect that a fund is a complying superannuation fund for the purpose of Part IX of the 1936 Act if the ISC had given notice to the trustee under s40 stating that the fund was a complying fund. To give such a notice the ISC had to be satisfied that the fund was a complying superannuation fund by complying with s42, which required that the fund was inter alia a “resident regulated superannuation fund”.
Section 10 of the SIS Act specified a “resident regulated superannuation fund” means “a regulated superannuation fund that is a resident superannuation fund within the meaning of subsection 6E(1) of the Income Tax Assessment Act 1936”.
Subsection 6E(1) required that the fund to be a resident, being either established in Australia, or have any asset of the fund situated in Australia, and that the central management and control of the fund be in Australia.
Section 82AAC(2A) also introduced age basis deduction limits e.g. $62,000 p.a. for an employee aged 50 and over
A new s82AAE was introduced:
“A deduction is allowable under this Subdivision in respect of an amount paid by a taxpayer as a contribution to a non-complying superannuation fund (as defined by subsection 267(1)) for the purpose of making provision for superannuation benefits for an eligible employee other than such an employee who is an exempt visitor to Australia for the purposes of section 517 in relation to the year of income in which the amount is paid.”
The definition of “fringe benefit” in s136(1) of the Fringe Benefits Tax Assessment Act 1987 was amended by the substitution of the exclusionary subpara (j) with the following:
"(j) a benefit constituted by:
(i) the making of a payment of money to a superannuation fund (as defined by subsection 6(1) of the Income Tax Assessment Act 1936) that the person making the payment had reasonable grounds for believing was a complying superannuation fund (as defined by subsection 267(1) of the Income Tax Assessment Act 1936); or
(ii) the making of a payment of money to a non-resident superannuation fund (within the meaning of section 6E of the Income Tax Assessment Act 1936) in respect of a person who is an exempt visitor to Australia for the purposes of section 517 of that Act in relation to the year of income in which the payment is made;".
Section 82AAE was repealed with effect from 1 July, 2000.”
15. AS sets out in clauses 5, 6 and 7 that the Applicant contributed to a complying Australian superannuation fund (referred to as “the Australian Fund”) and in broad terms so as to comply with the requirements of the Superannuation Guarantee Charge Act 1992. Clauses 5, 6 and 7 of AS read as follows:
[5] The company contributed prior to and after the year ended 30 June, 1994 to a complying superannuation fund, the Applicant Superannuation Fund formed 25 June, 1991 (“the Australian Fund”)[1]. The Australian Fund’s accounts for the years ended 30 June, 1994-1998 are at T42, T43, T44, T45, T46. The members’ accounts with the Australian Fund for the years ended 30 June, 1993 & 1999 are Exhibit KL at Tabs 7 & 8. From those documents the contributions made on behalf of each of the directors can be identified[2].
[1] James Exhibit NJ1 item (a); deed amended – James Exhibit NJ1 item (b)
[2] Gray # 11; Lance # 12; also see Taylor # 11
[6] Generally, the company has sought to pay superannuation contributions sufficient to avoid the charge under the Superannuation Guarantee Charge Act 1992 (“the Levy”), which is currently 9% of salary. Indeed, the Australian Fund was originally set up because of the need to comply with the Levy which had been foreshadowed for some time before it became operative[3].
[3] Gray # 12; Lance # 13; Taylor # 12; Green # 16
[7] In relation to its directors, it had paid the following contributions to the Australian Fund, which represent the below stated excess over (or amount under) the compulsory amount to avoid the Levy[4]:
[4] Gray # 13; Lance # 14
Year ended (levy %) Amount Paid Salaries $ Over Levy
30 June, 1991 (0%) $49,720 $40,000 not applicable
30 June, 1992 (0%) $406 $40,000 not applicable
30 June, 1993 (3%) $40,000 $100,186 $36,994.42
30 June, 1994 (3%) $3,000 $100,000 nil
30 June, 1995 (4%) $10,000 $100,000 $6,000
30 June, 1996 (5%) $5,000 $103,750 ($187.50)
30 June, 1997 (6%) $6,000 $100,000 nil
30 June, 1998 (6%) $6,000 $100,000 nil
30June, 2000 (7%) $27,500 $100,000 $20,500”
Part C: The Conversations in Early 1994
16. The conversations in question between Mr Lance and Mr Gray are referred to in some detail and in much the same terms in Exhibits A1, A5 and A6; those conversations are referred to also, in clauses 16, 17 and 18 of AS (pages 5 and 6 of AS) reading as follows:
“[16] At a family function some time in early 1994 Mr Lance asked Mr Gray about business matters, and their conversation moved from negatively geared real estate to superannuation. Mr Lance recalls having said specifically[5]:
[5] Lance # 15; also see Taylor # 13
“In about 1990 one of our main competitors sold his business, (name deleted), to a Swiss based publishing company run and owned by an American by the name of (name deleted) for about $700,000 which, if true, was a very good price.
“(Name deleted) was interested in purchasing our magazine as well, but at the time we were not planning to retire.
“Until desk top publishing came along in the last few years, I thought very little about retirement as I always thought that when the time came, Ms Taylor and I could sell out and live off the proceeds. We couldn’t spare the cash flow to make substantial super contributions. Also the way the Australian dollar has been depreciating against the Japanese Yen is adversely affecting our profitability and hence the value of the business”. When we started publishing, the exchange rate was about
Y180 to A$1. Now it is aroundY65 to A$1.”[17] Mr Gray’s recollection of the conversation was as follows[6]:
[6] Gray # 16; also see Lance # 15; also see Taylor # 13
Lance:
“I always thought we would be able to sell our business like a competitor recently did and that would give us capital to retire on. Unfortunately that is no longer true and Ms Taylor and I really don’t have any superannuation.”
Gray:
“Could you spare any funds to make a substantial superannuation contribution?”
Lance:
“We couldn’t spare the cash flow to make substantial superannuation contributions as our costs have risen and we don’t make much money at present.”
Gray:
“The problem with an Australian super fund is that is heavily taxed before it starts to earn any income. If you want to provide for retirement through a super fund, you should look at using an offshore fund. They are less heavily regulated, and are not subject to tax. In fact, the Treasurer has now made an announcement that they are going to limit the use of such a fund from 1 July, 1994, so we need to get move quickly whilst the opportunity to use such a solution exists. There is a Group in Western Samoa called Asiaciti who I have known for many years. I think you should consider setting up an offshore super fund using Asiaciti.”
[18] In or about May, 1994 Mr Lance rang Mr Gray and asked him to drop around to Lance/Taylor’s Golf Street house/office on his way home from work to further discuss the offshore super concept. Mr Gray had a meeting at Golf Street with Mr Lance and Ms Taylor soon thereafter. Mr Gray recalls the conversation[7]:
[7] Gray # 17; also see Lance # 16; also see Taylor # 14
Lance:
“As you know, Ms Taylor and I have virtually no super and we are nearing retirement and I don’t know that we could sell our business for a large sum now.”
Gray:
“It would be possible to make a large contribution to an offshore superannuation fund. I understand there is a bank within the Asiaciti Group who can lend to approved applicants to fund their offshore super”
Lance:
“We will rely on you to make this happen if you think it is appropriate.”
Taylor:
“Remember Gray, I am your cousin and we are doing it because we trust you. We don’t want anyone running off with our money.”
Gray:
“Whilst anything is possible, I do think that offshore superannuation is worth doing as it seems clear that it will be tax-effective and will go a long way to solving your long term financial problems and enable you to catch up to other people who have substantial sums accumulated in their superannuation funds.””
Part D: Facts Not in Dispute
17. Clause 2 of RS sets out in some detail, and helpfully, those facts which are not in dispute as follows:
“[2] The following facts are not in dispute:
(a)At all relevant times Ms Taylor and Mr Lance were the only directors and shareholders of the Company: Lance at [7]-[8] and [10].
(b)On 25 June 1991 Ms Taylor and Mr Lance entered into a Deed with the Company to establish the Applicant Superannuation Fund (“the Onshore Fund”). (The Tribunal here notes that the Onshore Fund as referred to by the Respondent and the Australian Fund as referred to by the Applicant are the same.)
(c)The Company paid the following amounts of superannuation contributions in respect of Ms Taylor and Mr Lance to the Onshore Fund between 1993 and 1998 and paid the following amounts of wages:
Year end
30 JuneCompany superannuation contributions made for Ms Taylor Company superannuation contributions made for Mr Lance Total Company Wages Reference 1993 20,000 20,000 100,184 T35-235, 236
T42-3291994 1,500 1,500 100,000 T35-235, 236
T42-3291995 5,000 5,000 100,000 T36-258
T43-3351996 2,500 2,500 103,750 T37-277
T44-3431997 3,000 3,000 100,000 T38-295
T45-3601998 3,000 3,000 100,000 T39-307
T46-371Total contributions by the Company to the Onshore Fund prior to the 1993 year were also small: see Lance at [14] and T42-329.
(d)In its 1993 tax return the Company returned taxable income of $464.[8]
[8] See Ex A8
(e)On or about 30 June 1992 the Federal Treasurer issued a statement entitled “Security in Retirement” which foreshadowed a number of significant changes to the taxation concessions relating to superannuation including (at pp.13 and 68-69) the amendment of the Income Tax Assessment Act 1936 (the “ITAA 1936”), with effect from 1 July 1994, to remove a deduction for contributions to a non-resident superannuation fund. Subsequently, on 30 June 1994 the Federal Treasurer issued a press release entitled “Release of Draft Bill on the Taxation Measures Relating to Overseas Superannuation Funds” (No.76) which stated:
“There have been two changes to the proposed measures announced in the “Security in Retirement” Statement. It is now proposed that employers continue to be eligible for deductions for employer contributions to non-resident superannuation funds, but that they be subject to fringe benefits tax in respect of these contributions. This treatment will be applied to all non-complying superannuation funds, not just non-resident funds.”
The amendments referred to in the Press Release were effected by Taxation Laws Amendment Act (No. 4) 1994 (No. 181 of 1994).
(f)In early 1994, International Retirement and Superannuation Services Ltd, a member of the Asiaciti Trust Group, began marketing to accountants in Australia, including Mr Gray, an arrangement which was described as follows:
(i)an Australian resident company would make contributions to a superannuation fund established in Western Samoa for the benefit of its employees;
(ii)the fund, being a non-complying fund for Australian purposes, would not be subject to restrictions on the manner of investment of its funds and it would in effect make a loan back to the members or the sponsoring employer of an amount equal to the contributions made by the sponsoring employer;
(iii)the fund would not be subject to tax in Western Samoa or elsewhere;
(iv)the Australian resident company which acted as the sponsoring employer would claim a deduction for the contributions made to the fund provided they were made before 1 July 1994.
See Lead at [13]-[14] and Ex RFL2 at pp.15-20; Gray (1) at [15].
(g)Mr Gray advised the Company to enter into such an arrangement: see Gray (1) at [16]-[17].
(h)Following the advice provided by Mr Gray, the Company entered into a series of transactions which are described below.
(i)On 1 June 1994 the Company entered into a loan agreement with an entity named Hua Wang Bank Berhad (“HWBB”), a Western Samoa company which held a “B” class offshore banking licence under the Offshore Banking Act 1987 of Western Samoa: see T31-165; Gray (2), Annexures A and B. The loan agreement provided for a facility of up to $500,000 repayable on 30 June 1999 (subject to renewal) at an interest rate of LIBOR plus 5% per annum. The only security provided to HWBB for the facility was a deed of guarantee and indemnity entered into by Ms Taylor and Mr Lance: see T32-170. Notwithstanding the reference in clause 2 of the Loan Agreement to the potential requirement for security to “support” the deed of guarantee and indemnity, no such security was provided. The Charge at T64-441 was not entered into until 1 October 1999.
(j)On 14 June 1994:
(i)the Company and IRSS Nominees (16) Limited (“Trustee”), a Western Samoa company, entered into a Deed to establish a fund also called the “Applicant Superannuation Fund” (“the Offshore Fund”): see T34-182;
(ii)on the application of Western Samoa International Trust Company Limited, the Offshore Fund was registered as an international trust under the International Trusts Act 1987 of Western Samoa: see T34-179, 180.
(k)On 24 June 1994 Ms Taylor and Mr Lance made applications for membership of the Offshore Fund: T34-225 and 226.
(l)The Company made the following payments to the Offshore Fund and borrowed the following amounts from HWBB:
Date Payments Loan drawdown Reference 17 June 1994 $125,000 T57-398 21 June 1994 $120,000 T57-399
Lance at [26]22 June 1994 $120,000 T57-399 27 June 1994 $120,000 T57-400
Lance at [26]28 June 1994 $120,000 T57-400 11 July 1994 $120,000 T57-403
Lance at [26]
As confirmed by the payments made, there was an understanding that the Company could fund the payments made to the Offshore Fund by loans made to it by HWBB: see T71-509 (question 1) and T73-519 (response). The fact that the loans funded the payments made to the Offshore Fund was conceded by Mr Gray in oral evidence: see Transcript pp 37-38.
(m)The making of the payments referred to above funded by loans from HWBB resulted in the Company having negative shareholders equity of $186,828 for the 1994 year: see T35-231. The position did not improve in subsequent years: see T36-246, T37-265, T38-284 and T39-301.
(n)In its 1994 income tax return the Company claimed deductions of $365,000 for superannuation contributions to the Offshore Fund, $4,027 for superannuation contributions to the Onshore Fund and $97 for prior year losses: see T4-27.
(o)In the years ended 30 June 1995, 30 June 1996, 30 June 1997, 30 June 1998, 30 June 1999 and 30 June 2000 the Company paid amounts of interest to HWBB (net of withholding tax paid to the Commissioner) and borrowed amounts from HWBB. The following table indicates amounts of interest paid to HWBB, amounts borrowed by the Company from HWBB and the dates on which the payments were made:
Date Amount of Interest paid Amount of borrowing Reference 25 Aug 1995 48,033 T57-404 3 Oct 1995 44,000 T57-405 16 Aug 1996 46,065 T57-406 28 Aug 1996 42,500 T57-407 8 May 1998 54,662 T57-408 5 June 1998 49,986.28 T57-409 16 Feb 1999 52,672 T57-410 12 Apr 1999 50,000 T57-411 22 Feb 2000 58,396 T57-412 28 Feb 2000 54,994 T57-413 15 May 2001 69,671 T57-414 23 May 2001 64,994 T57-415 As confirmed by the payments made, the Company had an arrangement with HWBB that amounts paid by way of interest could immediately be redrawn under the loan facility: see T58-416 and Transcript p87.
(p)The Company claimed deductions for interest and fees paid to HWBB in the amounts and in the years of income set out below:
Year ended 30 June Deduction claimed Reference 1995 53,108 T5-30 1996 51,023 T6-33 1997 48,725 T7-36 1998 54,271 T8-39 1999 63,344 T9-43 2000 69,646 T10-47 (q)On 1 June 1999:
(a)the trust deed for the Offshore Fund was amended in certain respects, including the insertion of provisions conferring on HWBB (as “protector”), in place of the Company, the power to remove the trustee and the power to amend the trust deed: see T63-439.
(b)a new loan facility agreement was entered into between the Company and HWBB (Ex A4).
(r)On 1 October 1999 the Company appears to have entered into a Charge in favour of HWBB (T64-441).”
Part E: The Contributions Totalling $365 000 in June 1994, the Loans Made in June and July 1994 and Related Matters
18. Clause 2(l) of RS quoted in the preceding paragraph gave rise to considerable argument (based on the dates of the relevant contributions and loans respectively). The Applicant claimed that the fact that the amounts were contributed in point of time prior to the receipt of loans entitled it to claim, in respect of one amount at least, that it borrowed for working capital purposes. This arose in particular from the fact that on the date of the first contribution of $125 000, made on 17 June 1994, the Company had sufficient funds in its banking account to enable it make that payment. As to how the Company came to have so substantial an amount in its bank account at that time is unclear given that at all relevant times its financial position was rather precarious. Mr Gray did not accept a suggestion that the payments were circular; however he accepted (2TS37/38) that the loans funded the payments. Indeed the same admission was made in Exhibit R1 and being a response to the summons to produce (see also Tp 509 and Tp 519).
19. That the interest payments and the loans referable thereto were closely linked is illustrated by a fax by Ms Taylor to the Bank (Tp 416). The payments and the loans referable to those payments referred to in clause 2(o) of RS are not precisely the same the difference being presumably administration or other costs. Tp416 reads (relevantly) as follows:
“With regard to invoice no 599 we arranged to have the payment by telegraphic transfer on Friday 16 August 1996 for A$46 065.
As per previous arrangements please ensure that the funds are returned as soon as possible.”
20. As set out in clause 2(m) of RS, the Applicant at the end of June 1994 had negative equity of $186 828. The accounts of the Applicant in respect of the 1993 year reflected a minimal positive amount. In the relevant years following the 1994 year, the accounts in the T-Documents revealed, in stark terms, that the financial position of the Applicant did not improve.
21. An analysis of the accounts of the Offshore Fund and the accounts of the Applicant contained in the T-Documents, indicate moreover that there was over the relevant years, a very close correlation between the amount owing by the Applicant to the Bank and the assets of the Offshore Fund. Mr Lead’s evidence was revealing in this context; he said that he did not know whether the Offshore Fund received payments of interest on its deposits with the Bank and quite plainly did not think that this was a relevant issue. His evidence was that Mr Gray owned the shares in the Bank (an allegation denied by Mr Gray) and that in certain respects it dealt only with Mr Gray’s clients. Put succinctly his evidence was that the Group was not concerned as to how the Bank conducted its affairs.
Part F: The First and Second Loan Agreements and Related Matters
22. In accordance with the first loan agreement, the interest rate specified is LIBOR plus five per cent. The precise definition in the first loan agreement (T31) reads as follows:
“Interest Rate: Five per centum over LIBOR rate.”
23. It was put to Mr Gray that LIBOR is essentially a floating rate calculated at a specific time on a specific day by reference to a specified currency, (and an amount of specified currency) and for a specified term. His answer was that interest was payable annually in arrears at the end of each year and by reference to the rate applicable at the end of that year, and not on the date of the advance. (The first loan agreement does not contain any provision supporting this allegation.) His answer has the effect then that if this were true the Bank lent money to the Applicant at a rate which would be calculated approximately a year later. Such an explanation is inherently improbable. The manner in which the interest is calculated bears no resemblance to the manner in which LIBOR is conventionally used in loan documentation. The second loan agreement entered into on the same day as the application for the relevant loan refers as regards interest to LIBOR plus five per cent in much the same way. Mr Lead thought that LIBOR was an overdraft rate. It is unnecessary for the Tribunal to deal with the two loan agreements in any detail. However it may be noted (notwithstanding the threat contained in Exhibit R4 referred to more fully later in these reasons) that the termination date has occurred without any action by the Bank for payment of the amount due to it either against the Applicant (or if relevant Newco) or against the directors under their guarantees. It may be noted also that the fixed and floating Charge (T64) defines LIBOR simply as “London Inter Bank Offer Rate applicable as notified annually by Hua Wang Bank” (T64-p447).
24. Mr Robertson referred to evidence on the part of the Applicant as “shadowy”; that is a kind way of putting it. It can be said however that much of the evidence was either vague or incomplete. Even more to the point is the fact that relevant evidence which might have been expected (and was in fact necessary) was not presented at all.
25. Mr Gray’s evidence was that the Applicant in 2001 found itself in a position where it might be involved in litigation with its printer, and that, in case that litigation went against it, it was decided that it should cease publishing the Magazine on the basis that Newco would do so thereafter.
26. Mr Gray was asked whether in that event the Applicant sold its business to Newco and if so the terms applicable. Mr Gray was uncomfortable with this line of questioning and his answers were evasive in this context, as in other respects. In this particular context, his answers indicated that there was no written agreement whatever between the Applicant and Newco, that nothing was paid by Newco to the Applicant, that Newco acquired some few assets from the Applicant, at book value and without goodwill for the Magazine, but that it took over and assumed liability for the, by then, substantial debt owing by the Applicant to the Bank. It was substantial of course because interest over the intervening years had been capitalised and had accumulated. If this is so, the financial position of Newco from the outset would presumably have shown negative equity. However, no accounts for Newco were produced. Nor for that matter was there any documentation of any kind indicating that Newco acquired any assets or assumed any debt. The position adopted by the Bank in these circumstances is, if this were possible, even odder. It might be thought that the Bank who after all had (apart from guarantees from the directors) a fixed and floating charge over the assets of the Applicant, would have taken action to enforce its security or at the very least insist on similar security from Newco but this did not occur. Indeed the fixed and floating charge was taken in October 1999 some four months approximately after the date of the second loan agreement. The Bank, according to the Applicant, required the Applicant to close on the basis that its business would be conducted subsequently by another company (and being of course Newco). Ms Green’s evidence was that the Bank forced the Applicant to close its business, and that the Applicant having realised its assets and repaid the Bank, was then wound up. As to how she thought that the Applicant’s assets (apart from those made over to Newco) could possibly have realised anything like the amount of the debt to the Bank is entirely unclear. That evidence was in any event in conflict with that of Mr Gray because Mr Gray in his evidence said that it might be possible if circulation of the Magazine increased, to fund the repayment of the amount due to the Bank. I refer also to certain remarks by Mr Gordon in opening and recorded at 1TS31 reading as follows:
“THE D.PRESIDENT: Has this fund accumulated a substantial
superannuation fund for these two people?
MR GORDON: Well, I need to take instructions, Deputy President. What
I am instructed so far is that the fund continues to exist and the debt, as I
understand, continues to be outstanding to the - - -
THE D.PRESIDENT: So the fund continues to exist?
MR GORDON: Yes.
THE D.PRESIDENT: And you still run out of Western Samoa?
MR GORDON: Yes.
THE D.PRESIDENT: And the deed continues to exist? (The Tribunal notes that “deed” should read “debt”.)
MR GORDON: Yes.
THE D.PRESIDENT: And is presumably mounting?
MR GORDON: Yes.
THE D.PRESIDENT: Because every year the interest is capitalised.
MR GORDON: Yes, I would have to get instructions but that's - further
instructions, but that is my understanding.”
27. The evidence of Mr Lance would suggest that the “transfer” to Newco arose not only from problems with the printer but rather and also the receipt of the assessment for the 1994 year in May 1994. Problems with the printer referred to in vague terms would not necessarily have resulted in a liability on the part of the Applicant such that it would be thereby be forced into liquidation, since resolution of the problem with the printer, whatever that problem may have been (and there was no concrete evidence as to what or how serious that problem was) might not have resulted in a liability by the Applicant to the printer.
Part G: The Group
28. It was always clear that the evidence of the Group, and in particular the Trustee would be important. (Equally evidence by the Bank was bound to be important.) Mr Gray said that Mr Briggs and the Group refused to be involved. That statement is doubtful having regard to exhibits A9 and A10 which are indicative of contact between Briggs (in Italy) and Mr Gray in June 2004. Even more to the point is that there was no evidence of any kind by the Bank. Mr Lead’s evidence (which is to be preferred to that of Mr Gray where there is conflict) is that the Bank is controlled by Mr Gray.
29. As noted at the hearing I must draw an inference that any such evidence was not furnished because it would not have assisted the Applicant’s case.
Part H: The Conversations in 1994 Revisited
30. The Tribunal is asked to believe that the directors being concerned about their ages and accumulated superannuation benefits in 1994, through Mr Lance consulted Mr Gray as to how they could increase their superannuation entitlements. After considering negative gearing (of surely limited, if any, relevance to persons in the position of the directors with salaries of approximately $50 000 per annum each) Mr Gray came up with the idea of Offshore superannuation. At that stage he had been contacted by the Group (in the person of Mr Lead) who had advised him of the advantages of Offshore superannuation and indeed his form of marketing letter (plagiarised, so Mr Gray said, from a letter from the Group) sent to his clients (and annexed to Exhibit A1) sets out in clear terms the precise nature of the arrangement. In particular it sets out that the contributions could be funded by borrowings without adverse tax consequences.
31. The conversations to which I have referred make it clear that neither the Applicant nor the directors had the resources necessary to make a substantial contribution to superannuation. In his submissions, Mr Gordon referred more than once to the fact that the Applicant had a choice; it could make contributions to the Australian Fund or it could make contributions to the Offshore Fund. That claim was made in order to suggest that it was not possible to hypothesise that if the contributions to the Offshore Fund had not been made, the relevant monies would have been used in any particular way (see Re Ryan and Federal Commissioner of Taxation [2004] AATA 753).
When one analyses that proposition it becomes clear that it does not make sense. The Applicant did not have $365 000 or anything like it to be paid into the Australian Fund. In fact, in the 1994 year (and in addition to the alleged “contributions” to the Offshore Fund) small amounts were paid on behalf of the directors to the Australian fund by the Applicant, and in amounts which were consistent with payments in other previous years. A similar arrangement (that is, similar to the arrangement in respect of Offshore superannuation) with the Australian Fund (assuming that the Australian Fund would have been prepared to enter into it at all, and which is doubtful) would have had the effect that the Australian Fund became a non-complying fund. The only possible arrangement was one which involved matched borrowings and contributions and moreover in broad terms as between the same entities.
Part I: Notices under Section 264A of the ITAA
32. I have previously noted that the manner in which section 264A notices were dealt with was unsatisfactory. One example only will suffice. Tp 502 (a notice under section 264A) contained questions 11 and 15 as follows:
“11. All Bank, branch and account numbers issued by;-
a) the Offshore Fund;
b) the Trustee
. . .
15. Whether HWBB is part of the Asiaciti Trust Group”
The answer (Tp519) to question 11 was “Unknown. Provided that details of an account of HWBB are shown on invoices already provided to you”.
The answer (Tp519) to question 15 was “Unknown. Provided it is believed there are common directors between the two entities”.
33. Mr Gordon sought to argue that question 11 at least was vague. His contentions (see 2TS15, 16 and 17) were without foundation.
Part J: The Evidence of Mr Gray
34. I have previously dealt with some of the evidence by Mr Gray. In this Part J, I deal further with his evidence.
35. Mr Gray commenced by noting two minor corrections to his written statements; it is unnecessary to detail those corrections.
36. Mr Gray said at 2TS22 that he did not draft the notice of objection but that one of his staff members would have done so. He said that he had a “responsibility” an “overall moral sense”. I refer in this context to 2TS22 and 2TS23 as follows:
“MR ROBERTSON: Now, Mr Gray, you have been in the Tribunal room
throughout the hearing so far? --- I have.
You were in the Tribunal room throughout yesterday's hearing? --- Yes.
You practise now in the name of Gray, Chartered Accountant.
Is that right? --- I do.
Has that been the position since 1996? --- Yes.
Your office is on the same floor as the office of the firm, (the accounting firm)? --- No, (the accounting firm).
the accounting firm, I beg your pardon? --- Yes.
……….(The Tribunal notes that this latter question and answer arose from the fact that the accounting firm bears the names of two natural persons, one of them Gray, and in the question the names were put in the wrong order.)
MR ROBERTSON: The office of Gray is on the same floor as
the office of the firm (the accounting firm). Is it true to say that you, Mr Gray,
have had the carriage of these proceedings brought by Applicant in the Tribunal since the inception of the proceedings? --- I would
have had the ultimate responsibility. That would be correct.
On behalf of the taxpayer? --- Correct. I mean, one of the taxpayers is a
cousin of mine and they would rely on my advice.
May I take it that you drafted the notices of objection? --- No, I would not
have drafted the notice of objection. One of my staff members would have.
You would have had ultimate responsibility for the notices of objection? --- I
mean, I can't really answer that. I mean, where the notices of objection
were lodged under (the accounting firm) or lodged by me personally, I'd need to
have a little look but, I mean, you know, in an overall moral sense, yes, I'd
have a responsibility.
May I take it that you would have seen the notices of objection before they
were lodged with the Commissioner? --- Not necessarily. It would be
probably unlikely that I would. I mean, they're not so critical as they used
to be and normally I'd had a competent person who would have drafted
them and I'd have relied on their competency.
THE D.PRESIDENT: So what is your answer? I don't understand that
answer at all. Did you or didn't you read the notices of objection before
they went in? --- What I'm saying is that it's unlikely that I would have. I
would have relied upon the professional who did it.
So it is unlikely that you - - -? --- Would have read the notice of objection.
Even though one of these people is your cousin? --- Correct.
"I had a competent person who has prepared them"? --- Yes, I'd be - based
upon their competency, would have - and experience - I mean, the person
who would have probably drafted these is a very experienced tax
practitioner. He'd be the senior partner in a large firm of chartered
accountants and knew what he was doing.
So you say is a very serious - - -? --- You know, he'd been the tax partner at
(name of firm deleted)
MR ROBERTSON: Is it fair to say, Mr Gray, that your memory of those
events isn't particularly clear? --- Yes.
We are talking about events, notices of objection, in what, 2001? --- I have
no - I mean, I cannot answer that question without looking at the objection,
the actual dates.
Now, did you draft the taxpayers statement of facts, issues, and contentions
in these proceedings before the Tribunal? --- No.
Did you settle the drafts? --- I would - it's possible I would have read them
but I certainly - what do you mean by "settle"?
Well, can I ask you this question? When you say it is possible that you
would have read them, you mean it is possible you would have read them
before they were lodged with the Tribunal? --- Correct.
Seeing that you were, overall I think you said, at least in a moral sense
responsible for the proceedings - - -? --- Correct.
- - - you would have approved those statements before they were filed,
would you not? --- Yes, I think that's a fair statement.
Now, you are aware that in these proceedings, various summons have been
issued by the Tribunal to produce documents? --- I am.
Did you participate in drafting the answers to the summons? --- Yes, I would
have had some involvement in that, I would have thought.
Your recollection is not particularly clear? --- Well, no. I mean, I'm dealing
with thousands of matters and the - I just can't basically go back to this
matter and isolate, you know, what actually I did do and fundamentally, I
mean, in modern times, I'm really running a large number of public
companies and, sort of, my practice is quite small.”
37. Mr Gray said also that he did not draft the statement of facts and contentions for the Applicant, although he admitted that it was possible that he had read them. He also thought that he would have been involved in the drafting of replies to the summonses to produce.
38. When asked whether he participated in the drafting of Exhibit A5 or Exhibit A6 he said “essentially no”. He went on to say that they were drafted by the witnesses, Mr Lance and Ms Taylor, with counsel. He said that he had read them during the preceding weekend and when asked whether he had not done so previously replied “not that I can recall”.
39. The following exchanges are taken from 2TS26 and 2TS27:
“THE D.PRESIDENT: Your own statement you would have drafted
yourself, wouldn't you? --- With counsel's assistance.
Well, explain to me what happens. Do you start with a draft, send it up to
counsel or do you go to counsel and he does it? --- No. Normally it would
be sent down - I think it's possible I would have, perhaps, done a brief
outline. I can't - I just presently can't recall whether - how we did it but,
certainly, it was done - you know, we did it conjointly.
Mr Gray, what your witness statement sets out is that the lady - - -? --- Yes.
- - - is a cousin of yours? --- Correct.
They set out that she relied on you - - -? --- Correct.
- - - and this whole structure, the whole transaction - - -? --- Yes.
- - - was orchestrated by you right from the word go? --- Yes.
Every single aspect of it. Now, are you telling me that when it came to the
crunch, when the matter got into, how shall I put it, a conflict situation that
your involvement was as limited as you have just described? --- No. In terms
of the statement, I mean clearly everything in it I am satisfied is correct but
actually, you know, in the volume of things that one could say, a lot of
things that I would have thought would be relevant are just irrelevant for
present purposes, so in the end you have to have someone who makes a
selection of what material is put before the Tribunal.
MR ROBERTSON: I will ask you this, Mr Gray. When you read, as
you have told the Tribunal, for the first time Mr Lance's statement over
the weekend and Ms Taylor' statement over the weekend just passed, did
you not notice great similarities of the language between their statements
and your statement? --- No. The basic gist is, essentially, I agree with.
That's what happened.
You refer to counsel. Is that Mr Gordon you are referring to? --- Correct,
yes.
THE D.PRESIDENT: So you did not notice great similarities of
language? --- Well, if you - what I'm saying is the gist of the - - -
You were asked by Mr Robertson: did you notice - the question was: did
you notice great similarities of language? --- The answer is no.
MR ROBERTSON: Mr Gray, your first sworn statement was in January,
2004? --- Mm.
You refer in it - I don't want you to go to it for the moment - to events of
1994? --- Correct.
Which, you will agree with me, is 10 years before the date of your
statement? --- I will.
Could you tell the Tribunal, doing the best you can, what was said to you
by Mr Lance and what you said to him in early 1994 about
superannuation? --- Yes.
Could you do so? --- I will. We were at a family function, and Mr
Lance raised the issue with me about superannuation. He said that
previously - or he'd always thought that ultimately they'd be able to sell
their business, perhaps for a substantial profit, and that would thereby
provide a lump sum for their retirement but that it now became apparent,
due to the changes in the trades and other issues, that that was no longer
going to be possible and he said to me, you know, is there any solution -
or, you know, the question that came up was: is there a solution to this
problem? How do we actually get adequate superannuation? I suggested to
them that they - that it was possible to have - make an investment in an
offshore superannuation fund which would, at least, start to get them on
track with an adequate sum for their retirement. At that time, I think they
had around $39,000 in their superannuation fund accounts and by the
process I outlined to them, it was possible to go part of the way to start
providing something of a serious sum for their retirement.
By borrowing the amount they proposed to deposit? --- Correct.
Having that amount go in a circle? --- That's your words. The sum didn't go
in a circle.”
40. 2TS29 relates to the summons to produce issued to Mr Gray. He denied that he recognised it. He was then shown the printed document on his own letterhead dated 6 April 2004 addressed to the Deputy-Registrar of the Tribunal. See 2TS pages 29 and 30 as follows:
“MR ROBERTSON: Could I show you this document, Mr Gray? --- I had it
in my home, six officers of the tax office showed up with a subpoena and I
had 12 people in my office came - getting documents for the Hugh Wang
Bank. So if that is what you are talking about - but that was a 264, 263
sort of notices, is that what you are talking about?
Perhaps if I can ask the questions and we will get on better? --- Okay.
Can I show you a document. Summons to produce documents to Mr Victor
Gray, 8 April 2004. Do you recognise that? --- At that time I was in - - -
Do you recognise it, Mr Gray? --- No, no, no, I don't.
Could I show you another document? --- Hang on - because at the time I was
living in Singapore.
THE D.PRESIDENT: It would be nice if you actually answered the
questions. Do you recognise it and the answer is "no"? --- No.
Is that right? --- Yes, correct.
MR ROBERTSON: I have just shown you a document under the printed
heading ". Gray"? --- Yes.
Chartered Accountant, 6 April 2004, addressed to the Deputy Registrar of
the Administrative Appeals Tribunal. Could I ask you to turn to page 2. I
am told by Mr Richmond these documents are in the Tribunal but - - -
………………t?
Mr Gray, on the second page of the document that I have just handed to
you, is that your signature? --- It is the application of my signature, it is not
my - because I was in Singapore at this time and my secretary signed it.
Did your secretary discuss the answers or the responses to the summons
issued to you dated 8 April 2004 with you? --- I mean it is possible - at the
time I was involved in a matter in the High Court of Singapore and I was
up there - I was involved as the chairman of a company - the managing
director had stolen $30 million and I was very preoccupied with that
litigation. It went on for many months in the court and no doubt during the
course of that time, different documents had to be submitted. I have no
specific recollection of these responses or the document in the first instance.
What authority does your secretary have to apply your signature to
documents of this nature, that is answers to summonses to produce
documents in the Tribunal? --- Well, I would have given permission for it.
And what would the terms of that permission have been? Any summons
that comes from any court or tribunal, you answer it? --- I am not saying
that. I'm saying that if you are asking me: do I recall this matter, the
answer is no, I don't. That is not saying that basically at the time my
secretary didn't send me a fax of the draft of the outline of the proposed
responses. I probably would have seen, most certainly would have seen it
and said: okay, send it off.
So you are not suggesting, are you, Mr Gray, to the Tribunal, that the
answers do not have your authority? --- No, no, I am not suggesting that at
all.”
41. Mr Gray was next referred to clause 12 of Exhibit A1. He denied that he had any documents in respect of the Australian Fund or any documents referable to the establishment of the Offshore Fund.
42. Mr Gray was then referred to clause 19 of Exhibit A1 and asked whether he had any documents file notes or other written material relating to the shareholders and directors of the Trustee. His answer was that he did not have anything other than the search set out in Annexure D to his statement. He agreed that it did not specify who the directors or shareholders were. It was put to him also that he had no documents as to the place of management and control of the Trustee and his answer was simply that the Annexure referred to its principal place of business.
43. Mr Gray’s attention was then drawn to T38-p292 and also to page 58 of the Common Exhibit; he agreed that the loan at 30 June 1997 was $446 500 which was the same amount reflected as held at that date by the Offshore Fund.
44. Mr Gray agreed, after being pressed, (2TS38) that in a pragmatic sense the borrowings funded the contributions.
45. Mr Gray was next referred to clause 10 of Exhibit A1 in which he referred to T64 and to the fact that he had stated that the borrowings were secured by a fixed and floating charge. It was then put to him that the charge was executed only in October 1999. He said that he had no memory at all. He said (2TS40) that it was his understanding that there was an obligation to provide the charge at the outset.
46. Mr Robertson then questioned Mr Gray as to how the loan could possibly be repaid. See 2TS40-2TS42 as follows:
“MR ROBERTSON Now, Mr Gray, what I want to suggest to you is this, that in 1994, in May
or June 1994, it does not matter which, you recommended to Mr Lance
and Ms Taylor that the company, the Magazine Company, borrow money in
order to invest in an offshore superannuation scheme. Is that right? --- I
think that is a fair assumption. I was the party who was responsible for
advising them to take that course of action.
What I want to suggest to you, Mr Gray, is that at that time, you were
aware that the company had no prospect of servicing that loan from its
assets? --- I would disagree with that.
May I suggest to you that the company has never been able to service the
loan from its assets? --- It is true that the company has, over the past 10
years, traded very poorly but they have always - certainly in 1994 - had
expectations of the business being in a far more substantial than actually
was achieved.
Can I suggest to you that you were aware, in June 1994, that the company
had no prospect of repaying the loan from its assets? --- I disagree with that.
Was it not the position, to your knowledge, in June 1994 that the two
directors, Lance and Taylor, would be required to give personal
guarantees to the lender? --- Correct, that was always part of the
arrangement.
The lender being HWBB? --- The Hugh Wang Bank, yes, the bank, yes.
It is the fact, isn't it, that the only security for the loan in 1994 through to
the middle part of 1999 was the guarantee given by the directors, Lance
and Taylor, on 1 June 1994? --- In terms of formal security, that probably is
correct.
Could I ask you to look at page 231 of the T documents? That is a balance
sheet for the Magazine Company as at 30 June 1994? --- Correct.
That is a balance sheet that you would have seen some time in 1994, Mr
Gray? --- It is probably I would have, yes.
That shows, for example, does it not for 30 June 1994, at the foot of the
page, total shareholders equity of a negative amount of $186,828? --- That is
correct.
What I want to suggest to you, Mr Gray, is that you knew in June of 1994
that the company's assets, the Magazine Company Pty Ltd assets,
were not increasing and the two directors were obliged to pay the principle and interest on the loan
if the company could not? --- I disagree with you. There was, you know,
two parts to your question. At that point of time, the two directors had
confidence that their business would expand. They were very hopeful the
magazine would be able to be sold offshore and the - so that I - you know,
so there was not - it was not apparent to me that the trading future years
would be as poor as it subsequently turned out to be, far from it.
Mr Gray, in the conversations that you deposed to in March or
thereabouts, April, May 1994 in your statement, exhibit A1, there is
nothing said, is there, about the hope or expectation on the part of the
directors of selling their business offshore? Isn't that right? --- But that is
just irrelevant. I'm not talking about sale of the business.
I'm asking you a question, Mr Gray? --- No, no, but my point - - -
Would you answer my question? --- Well, you haven't - the point is that the
business - we are not talking about selling the business, we are talking about
magazines, individual items. Whilst it may not be possible to successfully
sell the overall business, it didn't mean the business itself couldn't be
expanded by an increasing sale of magazines offshore.
Mr Gray, there is nothing in your statement of 29 January 2004, exhibit
A1, which refers to your being told in 1994 or at any other time that the
directors intended or hoped to sell more magazines, is there? --- That is
correct.
What I was putting to you before was that not only were the company's
assets not increasing but, as at the end of 30 June 1994, its liabilities
exceeded its assets and there was a deficit of approximately $187,000. Is
that right? --- That is right.
That was something that you were aware of at or about that time, were you
not? --- Correct, I probably would have seen those accounts.
Did you accept before my proposition that the two directors, Lance and
Taylor, would be obliged to pay the principle and interest on the loan if
the company, the Magazine Company Pty Ltd, could not? --- Correct.
The effect of what happened before the end of 30 June 1994 and thereafter
was that any superannuation benefit brought with it, so far as the directors
were concerned, a contingent but very real liability for them
personally? --- That is correct.
It follows, does it not, that the more immediate benefit was the tax
advantages for the company and not the superannuation benefit for the
employees? --- That is incorrect.”
47. As to the Bank’s demand which led to Newco taking over the Magazine, see Mr Robertson’s cross-examination of Mr Gray at 2TS47 and 2TS48 as follows:
“And this particular printer - the print quality was so poor that virtually none
of the advertisers would pay Applicant - - -
That doesn't explain to me why you need a new company? --- Hang on, hang
on. And the upshot of it was, the printer was claiming payment which was,
you know - one of the biggest expense side into this company is the printing
costs. And so they faced the prospect of going into liquidation because they
couldn't pay the printer and it was just, you know, the legal costs and all
the rest of it. So that the issue was conveyed to the Hugh Wang Bank and
they just said: look, rather than get into arguments with liquidators over
sort of what assets are - we can claim and, you know, you know what
happens in a liquidation - just start a new company. So that was the
catalyst for it.
You mean you just started a new company- there is no sale by old co to
new company? --- There would be a sale of old co to new company - - -
Of what? --- Of whatever business - whatever the assets in the business are.
You are the person that these two people trust? --- Yes.
One of them is your cousin and they apparently consult you for important
financial advice? --- Yes.
So you are called in to advise in 2001? --- Mm.
Now remember there is a fixed and floating charge over the company's
assets so as you correctly surmise the company - the asset - the consent of
the bank is going to be required? --- Correct.
Now, did - and I will use these terms just for the moment for convenience:
old co sell the business to new company and, if so, on what terms? --- I can't
presently tell you the terms but, essentially, the assets and liabilities were
taken over by new company from old co.
Well on what basis - - -? --- Just - in book value - - -
The major asset of old co would have been the magazine, what did new company
pay for the magazine? --- It took over essentially assets at book value, but
nothing - there was no goodwill, if that is what you are really asking, was
ascribed to the value of the magazine at that time, I would think.
Now, new company - - -? --- Yes.
- - - took over the debt from old co? --- Correct.
Where is that documented? --- In the accounts of the relevant companies.
So there was no deed of novation, the bank didn't say: look here, we're
getting a new debtor, we want a covenant to pay and we want new
guarantees and what is more we want a fixed and floating charge over your
assets? --- No, that - I think you will find all that was done so that they - a
fixed and floating charge - - -
It is not for me to think anything at all, Mr Gray - was it done? --- It was
done.
Where? --- It is in the companies offices.
So would it be fair to say then that in 2001 the tax payer has got problems
with its printer which may result in its liquidation? --- Correct.
That is if the printer is right and they are not? --- Correct.
As a result of which, you say, the bank told them just to start a new
co? --- Correct. They said we - look, rather than go into all the arguments
about it we would be - you know, they directed them to do that because
they didn't - - -
They directed them, who is "they"? --- The bank. Whoever the official at the
bank was at that time.
And who is that? --- I can't tell you without looking at the correspondence.”
48. At 2TS52 Mr Gray drew attention in relation to page 58 of the Common Exhibit that the Offshore Fund Trust did in fact have slightly more than $446 500; Mr Gray referred in particular to an amount of $1688.99 and being cash at bank but agreed that it was likely that it represented costs awaiting collection.
49. In re-examination Mr Gray said that the Bank was not a “Gray related company so to speak”.
50. Mr Gray denied that the written evidence presented on behalf of the Applicant indicated a great deal of similarity as regards the conversations; in fact it is clear that the witness statements for Mr Gray, Mr Lance and Ms Taylor in this regard do indeed refer to the conversations in terms which are very much the same.
51. Mr Gray’s evidence was evasive and in my view untruthful. I do not accept that he played so limited a role in the documentation in this case. It is far more likely that he was intimately involved from the beginning. And this is so in particular having regard to his relationship with Ms Taylor. As the person who brought the Applicant into the Offshore structure in the first place, he would, it might be thought, have felt obliged to do his best to extract them from the problems which then ensued in relation to that structure.
Part K: The Evidence of Mr Lance
52. Mr Lance’s evidence overall indicates that however competent he may be at the field covered by the Magazine he has little knowledge of, or interest, in or understanding of matters of business.
[20] The Respondent submits that the Company has failed to establish that the first requirement is satisfied. In particular, in order for the payments to be characterised as “contributions” to a “fund” of the relevant kind, it is necessary for Ms Taylor and Mr Lance to have been members of the Offshore Fund when the contributions were made. The first two “contributions” were made before they applied to become members of the Offshore Fund. More importantly, while there is evidence that they each applied to become members of the Offshore Fund on 24 June 1994 (T225 and T226), there is no evidence that the Trustee accepted their applications for membership. Hence, there is no evidence that on 30 June 1994 they were “members” of the Offshore Fund or that a trust in their favour under clause 6.1 of the trust deed for the Offshore Fund had arisen by that date: see the definition of “member” in clause 1.1 read with clause 2.5 of the trust deed.
Second requirement: for purpose of provision of superannuation benefits
[21] The second requirement of section 82AAC(1) is that the contribution was made for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee. Ms Taylor and Mr Lance were eligible employees of the Company, being directors of it, so the issue is whether the contributions were made for the requisite purpose.
[22] It is necessary for the Company to establish that the contribution was made for the sole purpose of making provision for superannuation benefits for Ms Taylor and Mr Lance: see Driclad Pty Ltd v FC of T (1968) 121 CLR 45; Raymor Contractors Pty Ltd v FC of T 91 ATC 4259; FC of T v Roche 91 ATC 5024 at 5030-5031; Walstern Pty Ltd v FC of T 2003 ATC 5076 at [65]. The taxpayer’s purpose may be inferred from the objective facts: see Raymor at 4260 and 4270.
[23] The Respondent submits that the Company has not established that the payments made to the Offshore Fund were made for the sole purpose of making provision for superannuation benefits for an eligible employee. In all the circumstances, it should be concluded that the sole purpose or at least one of the purposes of the Company was to obtain a tax deduction for the payments. The matters supporting this conclusion include the following:
(c)the fact that the “contributions” by the Company to the Offshore Fund were effectively returned to the Company by way of loans by HWBB (see paragraph 3(a) above);
(d)the “contributions” to the Offshore Fund were significantly greater than the contributions made by the Company to the Onshore Fund both before and after the 1994 year (see paragraph 2(c) above);
(e)at the time the “contributions” to the Offshore Fund were made the Company had no realistic prospect of being able to repay the loan by HWBB, and the transaction effectively rendered the Company insolvent;
(f)the apparent lack of knowledge of Mr Lance and Ms Taylor of any of the details of the arrangements;
(g)Ms Taylor and Mr Lance had a contingent liability for repayment of the loan by HWBB which rendered any potential superannuation benefit largely illusory.
[24] The Company appears to contend (Applicant’s Outline of Submissions, Part 2, p.6) that the fact that the Offshore Fund effectively loaned back the “contributions” to the Company is not significant or relevant because complying superannuation funds were permitted to invest up to 10% of their assets in “in house assets” (which would include loans to the sponsoring employer). This contention cannot be accepted. It is inconsistent with Driclad at 67-68 and Raymor Contractors at 4261-2 and 4270.”
96. As regards clause 20 of RS I have some difficulty only with the allegation that there was no evidence that membership applications were accepted by the Trustee in the form required under the Trust Deed. It is true that there is in fact no such formal evidence before the Tribunal, but at the same time this allegation was not put to either of the directors. But otherwise clauses 12 to 24 inclusive of clause 9 of RS are in my view correct. I include them in these reasons in this form largely in the interests of completeness. The Applicant was entitled to a deduction only if the contributions were made for the sole purpose of making provisions for superannuation benefits for the directors. On the evidence before me they were not. On the evidence before me there is not, and never has been any superannuation benefit available for either of them.
Part R: Section 51(1) of ITAA and section 8(1) of the Income Tax Assessment Act 1997
97. If the Applicant was not entitled to a deduction under section 82AAC(1) in respect of the 1994 year it cannot be entitled to a deduction under section 51(1) of the ITAA under either of the positive limbs of section 51(1) or in the alternative must be of a capital nature; see section 82AAR(1) and Case X16, 90 ATC 180 (affirmed on appeal, sub nom Bayton Cleaning Co Pty Ltd v Federal Commissioner of Taxation (1990) 91 ATC 4076); Essenbourne Pty Ltd v Federal Commissioner of Taxation 2002 ATC 5201 at [34]-[36].
98. Mr Gordon conceded (correctly) that the characterisation of the interest and charges in the other relevant years would follow the characterisation of the contributions in the 1994 year. On that basis then the Applicant is not entitled to any deductions claimed in respect of interest and charges in any of the subsequent relevant years. Section 51(1) of ITAA and section 8-1 of the 1997 Act are of course in substantially the same form. Each allows a deduction for a loss or outgoing if it is within either of the two positive limbs and is not excluded by any of the negative limbs. The character of an outgoing on borrowed funds is generally determined by the use to which the borrowed funds are put, here the borrowed funds were used to re-finance the payments totalling $365 000 made to the Offshore Fund. If those funds do not have the character of business or working expenses, the interest will not have the character of an outgoing incurred in gaining or producing the assessable income, see Federal Commissioner of Taxation v Munro; British Imperial Oil Company Ltd (1926) 38 CLR 153 at 171, 197, 204 and 217-218; Hayden v Federal Commissioner of Taxation 1996 ATC 4797 at 4804.
Part S: Part IVA of the ITAA
99. The provisions of this Part S apply in case I am incorrect as to the availability to the Applicant of the deductions claimed. If they are not available the decision in Vincent v Federal Commissioner of Taxation 2002 ATC 4742 is authority for the proposition that Part IVA does not apply because there would in such event be no tax benefit.
Part IVA of ITAA will apply where:
(a) there is a “scheme”;
(b) a taxpayer derives a “tax benefit” (as defined in section 177C) in connection with the scheme; and
(c) having regard to the eight criteria set out in section 177D(b) it can be objectively determined that the sole or dominant purpose of a person who entered into or carried out the scheme was to enable the taxpayer to obtain the tax benefit.
100. The Respondent has particularised the relevant scheme in his statement of facts and contentions as follows:
“a) In relation of the amount of $365 000 paid to the Offshore Fund in accordance with the facts set out at clauses 11 to 14 and 16 to 18 of the Respondent’s statement of facts and contentions or alternatively paragraphs 11 to 14 and 16 of Respondents statement of facts and contentions.
b) In relation to the interest and charges paid to HWBB in accordance with clauses 11 to 14 and 16 to 18 of the Respondent’s statement of facts and contentions as set out above.
[11] On 1 June 1994 the company entered into a loan agreement with an entity named Hua Wang Bank Berhad (“the lender”), a company which held a “B” class licence under the Offshore Banking Act 1987 of Western Samoa.
[12]On 14 June 1994:
(a) the company and IRSS Nominees (16) Limited, a Western Samoa company, entered into a Deed to establish a fund also called the “Magazine Company Superannuation Fund” (“the Offshore Fund”); and
(b) on the application of Western Samoa International Trust Company Limited, the Offshore Fund was registered as an international trust under the International Trusts Act 1987 of Western Samoa.
[13] On 24 June 1994 Ms Taylor and Mr Lance made applications for membership of the Offshore Fund.
[14] The company then made the following payments to the Offshore Fund and borrowed the following amounts from the lender:
Date
Payments
Loan drawdown
17 June 1994
$125,000
21 June 1994
$120,000
22 June 1994
$120,000
27 June 1994
$120,000
28 June 1994
$120,000
11 July 1994
$120,000
[16] In its 1994 income tax return the company claimed deductions of $365,000 for superannuation contributions to the Offshore Fund, $4,027 for superannuation contributions to the Onshore Fund and $97 for prior year losses.
[17] In the years ended 30 June 1995, 30 June 1996, 30 June 1997, 30 June 1998, 30 June 1999 and 30 June 2000 the company paid amounts of interest to the lender (net of withholding tax paid to the Commissioner) and borrowed amounts from the lender. The following table indicates amounts of interest paid to the lender, amounts borrowed by the company from the lender and the dates on which the payments were made:
Date
Amount of Interest paid
Amount of borrowing
25 Aug 1995
48,033
3 Oct 1995
44,000
16 Aug 1996
46,065
28 Aug 1996
42,500
8 May 1998
54,662
5 June 1998
49,986.28
16 Feb 1999
52,672
12 Apr 1999
50,000
22 Feb 2000
58,396
28 Feb 2000
54,994
15 May 2001
69,671
23 May 2001
64,994
[18]The company claimed deductions for interest and fees paid to the lender in the amounts and in the years of income set out below:
Year ended 30 June
Deduction claimed
1995
53,108
1996
51,023
1997
48,725
1998
54,271
1999
63,344
2000
69,646
It is clear that each is a scheme within section 177A; see FC of T v Hart (2004) 78 ALJR 875.”
101. Section 177C defines a tax benefit as follows:
“Section 177C(1) [Obtaining a tax benefit]
. . .
(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out.”
102. As to what would have been expected to be allowable requires a prediction as to what would have happened if the relevant scheme had not been carried out and that prediction must be sufficiently reliable to be regarded as reasonable, see Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 385. What is required is the making on reasonable grounds of what may be termed the “alternative hypothesis”: see Federal Commissioner of Taxation v Consolidated Press Holdings Limited (No.1) (1999) 91 FCR 524 at [86]; Macquarie Finance Ltd v Federal Commissioner of Taxation 2004 ATC 4866 at [81].
If the scheme were effective there would of course have been two tax benefits, they are:
(a)an allowable deduction under section 82AAC of the ITAA 1936 in respect of the contribution to the Offshore Fund in June 1994;
(b)an allowable deduction for interest paid to HWBB in the years ended 30 June 1995 to 30 June 2000 inclusive.
103. The Applicant has contended that in this case the alternative hypothesis is that if the scheme had not been entered into it would or might reasonably be expected to have contributed $365 000 to its Australian Fund. Such an alternative fails having regard to the fact that put quite simply the Applicant did not have the means with which to do so. If the Applicant had entered into such an arrangement with the Australian Fund, the Australian Fund would have ceased to be a complying fund. Such a possibility was never contemplated. It is relevant moreover that in the 1994 year, the Applicant contributed $1500 to the Australian Fund for each of its directors; these two amounts are vastly less than the amount of $365 000 alleged to have been contributed to the Offshore Fund.
104. The conclusion to be reached in relation to the matters in section 177D(b) relates to the dominant purpose of a person who either entered into or carried out the scheme or a part of it. The Respondent has particularised each of the following as the persons who had the requisite purpose:
(a) the Applicant
(b) Ms Taylor
(c) Mr Lance
(d) Mr Gray
(e) the Trustee
(f) WST Co
(g) The Bank
105. Section 177D reads as follows:
Section 177D SCHEMES TO WHICH THIS 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).
106. It is clear having regard to the Federal Court decision in Federal Commissioner of Taxation v Sleight (2004) 55 ATR 555 that the test is an objective test and not to be determined by the subjective intentions of the taxpayer. Hill J said in clause 67:
“[67] There have by now been a number of cases, both in the High Court and in this Court where the provisions of Part 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 s 177D(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 ATC 4942 at paras 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 per Carr J, with whom Sundberg J agreed.
(2) The reference to dominant purpose in a case where more than one purpose is present is a reference to the "most influential and prevailing or ruling" purpose: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 423.
(3) The conclusion as to dominant purpose may be reached not only with respect to the dominant purpose of the taxpayer, it may be reached by reference to the dominant purpose of any other person or persons so long as they are persons who entered into or carried out the scheme or any part of it: Spotless (at 418). Likewise, the purpose of an adviser may be attributed to the taxpayer in an appropriate case: Federal Commissioner of Taxation v Consolidated Press Holdings (2001) 207 CLR 235 at 264.
(4) It is possible to arrive at the conclusion as to purpose by making a global assessment of the facts, so long as it is clear that the relevant eight factors are taken into account: Consolidated Press Holdings at 263.
(5) Some of the eight factors (there is clearly some overlap among them) may point one way, others may point in the opposite direction, and some may be neutral: it is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers: per Hill J in Peabody v Federal Commissioner of Taxation (1993) 93 ATC 4104 at 4113-4. Nothing said on the appeal at (1994) 181 CLR 359 would cast doubt on this proposition.
(6) There is no inconsistency between a finding that the purpose of a person lay in the pursuit of commercial gain in the course of carrying on a business and a finding that the dominant purpose was to enable the relevant taxpayer to obtain a tax benefit: per Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ in Consolidated Press Holdings Ltd at (para 96).”
107. As regards section 177D(b)(i) the Tribunal notes that the scheme was indeed circular in the manner set out previously in these reasons. The circularity of the scheme together with the manner in which the Applicant sought to disguise its true nature are relevant factors.
108. In respect of section 177D(b)(ii) the form differs from the substance. The substance involved payments and loans back, and it is clear enough and indeed admitted that the linking was integral.
109. In respect of section 177D(b)(iii) it is significant that the contributions totalling $365 000 were made in June 1994 just prior to amendments to section 82AAC which would have removed certain of the advantages (and being tax advantages) of the scheme.
110. In relation to section 177D(b)(iv) the result would, if section 82AAC was satisfied, and if Part IV A did not apply, be that the Applicant would have received substantial deductions.
111. As regards section 177D(b)(v) the financial benefit to the Applicant is that in respect of the 1994 year, and instead of being obliged to pay tax, it generated a substantial carry forward loss which had a flow-on effect of the same nature in the subsequent relevant years.
112. In respect of section 177D(b)(vi) the Tribunal notes that it would appear that it is necessary to consider the positions of Mr Lance, Ms Taylor, Mr Gray, the Trustee and the Bank. There is no improvement in the financial improvement of Mr Lance or Ms Taylor because if they are entitled to benefits from the Offshore Fund they are correspondingly obliged in respect of the loan under their guarantees. In my view, and as I have said, there are no benefits, and if the directors claimed anything from the Offshore Fund they would be asked what possible superannuation benefits there could be. At the same time their lack of concern or anxiety as to possible claims by the Bank in respect of the loan (justified in my view having regard to the fact that the Bank has never on the evidence sought to enforce repayment of its claim, and indeed made itself party to the effective nullification of its own charge) leads me to infer that they also do not (and again with justification) seriously fear a claim by the Bank. It must be remembered that the Bank is probably controlled by Mr Gray. As regards Mr Gray and the Trustee the benefit would consist of fees or remuneration. Those benefits may, since Newco commenced publication of the Magazine, have ceased. As to the Bank, it owes an amount to the Offshore Fund and has a claim supported by guarantees by the directors against the Applicant. It may be that the Bank could not recover its claim, but then on the evidence it does not anticipate any claim by the Offshore Fund.
113. In respect of section 177D(b)(vii) there do not appear to be any other relevant consequences.
114. As regard section 177D(b)(viii) the connection would appear to be that Mr Gray controlled the Bank and that Ms Taylor is his cousin. The Trustee and the Bank had and may still have directors in common.
115. In conclusion and on an objective analysis, the only possible benefit was the tax benefit; Mr Gray was the adviser to and agent of the Applicant and the directors and his motives must be imputed to the Applicant.
Part T: The Assessment was out of time for the 1994 year
116. The applicability of this Part T depends upon my being in error as to findings made earlier in these reasons.
117. BCD Technologies Pty Ltd v Federal Commissioner of Taxation 2004 ATC 1071 assuming it is correct as a matter of law (and I note that that decision has been appealed) is not relevant in relation to the legislation in the form in which it appeared in the 1994 year.
118. The decision of Heerey J in Harts Australia v Commissioner of Taxation 2001 ATC 4572 stands as authority for the proposition that in those circumstances there was no deemed assessment. Heerey J said at [53]:
“Section 166A as it stood in 1992 did not give rise to a deemed assessment where the taxpayer lodged a nil return. The section operated to create a deemed assessment in the amount of income tax payable according to the return furnished by the entity. The date of the deemed assessment is the date on which the specified amount of income tax is due, unless instalments already paid exceed the income tax payable: section 221AZD. Like the analogous provision of section 170(3) considered by the High Court in Federal Commissioner of Taxation v. Ryan (2001) 201 CLR 109, such a provision has no point of reference when no tax is due and payable. Such a deeming provision has no operation beyond the precise circumstances to which it is expressed to apply, and is to be construed strictly: East Finchley v. Federal Commissioner of Taxation (1989) 90 ALR 457 at 478.”
119. This being so, the assessment was an original assessment under section 166. Section 166A and section 170(2) did not apply. If however I am incorrect and section 170(2) did apply, there was in my view evasion within section 170(2).
120. As regards evasion I accept the contentions of the Respondent as contained in clauses 64, 65, and 66 of RS and reading as follows:
“[64] The test of what is “evasion” in s.170(2) is stated by Dixon J in Denver Chemical Manufacturing Co v FC of T (1949) 79 CLR 296 at 313 as being “some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible”.
[65] Here the blameworthy act or omission comprises the claiming of deductions for “contributions” to the Offshore Fund in circumstances where, by reason of the matters set out in sub-paragraphs (a) to (e) of paragraph 23 above, there was no realistic prospect that a deduction would be allowable. This was, at best, a “paper scheme”. To claim a deduction for the “contributions” under such a scheme without disclosure of the true nature of the scheme to the Respondent is “evasion”.
[66] In Case D47 72 ATC 272 the taxpayer failed to disclose to the Commissioner before the original assessments were issued that he had derived certain amounts of interest income. The derivation of these amounts was a fact within his knowledge. The question arose as to whether the amended assessments issued by the Commissioner were out of time under s.170(2). The No.2 Board Review held that the amended assessments were not out of time because there had been an avoidance of tax (which meant nothing beyond the levying of less tax than ought to have been paid) and that avoidance of tax was due to evasion in the Denver Chemical sense. After referring to what Dixon J said in Denver Chemical, the Board said (at 294):
It was in the financial years 1960 and 1961, as explained earlier, that the first transfers from the trust account to the suspense account system occurred. The matter of the transfers was not disclosed to the Commissioner at the time of lodging the relevant returns and there is no evidence to suggest that this omission resulted from mere inadvertence or anything of that nature. We are prepared to take the view that the taxpayer considered the assessability of the amounts in question and concluded that they did not represent income derived during the years in which the transfers took place but would represent income at some future time. Nevertheless, the taxpayer’s knowledge and experience are such that he must be taken to have realised that a different view was tenable and that the Commissioner or a tribunal might well decide that the amounts were assessable in the year of transfer. His failure to disclose the matter at best falls squarely within the last sentence of the above quoted dictum of Dixon J. In respect of these omissions, we are of the opinion that the avoidance of tax was due to evasion.”
Part U: The Assessments were out of time for the 1995 Year.
121. Mr Gordon conceded that the Applicant was, in the 1995 year, within division 1C and not division 1B of Part VI of the ITAA. Once again the applicability of this Part depends upon my being in error as to findings made earlier in these reasons.
122. The Applicant was no longer a relevant entity within Division 1B. Accordingly section 166A(2) applied and section 166A(1) did not and so that section 170(2)(b)(ii) and not section 170(2)(b)(i) did not. The result is that the relevant time period of four years runs from the date upon which the tax became payable under the assessment which was issued in November 2001. In respect of section 221AZI, no tax was payable; accordingly the decision in Federal Commissioner of Taxation v Ryan (2000) 201 CLR 109 applies.
123. It is important to remember that pursuant to section 221AKA, Division 1B does not apply if Division 1B does. And Division 1C did apply as Mr Gordon conceded.
124. BCD Technologies (supra) did not contain any analysis of the question of whether Division 1B or Division 1C applied and its relevance is doubtful.
125. Again, and if necessary I would find in any event that there was evasion.
Part V: Penalties
127. I should here note that the Respondent having originally made findings as to fraud or evasion, elected to rely only on evasion as the lesser hurdle. Moreover, the Respondent did not contend that the arrangement was a sham and I thus do not make findings as to either fraud or sham. I note however that the evidence before me leads me to think that if those allegations had been made they might have been sustainable.
128. Penalties were imposed at the rate of 75 per cent of the tax shortfall under section 226J of ITAA on the basis that the tax shortfall was caused by intentional disregard. In my view the Respondent was altogether correct in that there was undoubtedly intentional disregard. The manner in which this scheme was orchestrated and organised indicates that at the very least there was intentional disregard. The penalties imposed are in my view, and in all the circumstances altogether appropriate and should not be disturbed. As I have indicated Mr Gray was the mastermind throughout. As to how much was understood by the directors is not clear to me but they must have known, at the very least, that in the 1994 year a substantial deduction was claimed for a “contribution”, and where that description was not apt. In any event Mr Gray, who was at all times aware of all of the implications was the agent of and adviser to the Applicant and the directors.
Part W: Conclusion
129. On the evidence before me, and putting it at its very best for the Applicant, the Applicant has failed to discharge the onus upon it.
130. It follows that the objection decisions under review must be affirmed.
I certify that the 130 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy-President J Block
Signed: Melinda Di Condio
AssociateDate/s of Hearing 18, 19, 20 and 21 October 2004
Date of Decision 9 November 2004
Counsel for the Applicant Mr R Gordon
Counsel for the Respondent Mr A Robertson SC and Mr M Richmond
Solicitor for the Respondent Mr D Morris, Australian Government Solicitor
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