The Taxpayer and Federal Commissioner of Taxation
[2003] AATA 568
•18 June 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 568
ADMINISTRATIVE APPEALS TRIBUNAL )
) No. NT2000/154 - 159
TAXATION APPEALS DIVISION ) Re THE TAXPAYER Applicant
And
FEDERAL COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Deputy President, Mr J. Block Date18 June 2003
PlaceSydney
Decision Excepting only that the rate of additional tax imposed under section 223 of the Income Tax Assessment Act 1936 is reduced in respect of all of the relevant years to 30%, the objection decisions under review are affirmed.
(Sgd) Mr J. Block
..............................................Deputy President
CATCHWORDS
TAXATION - Deductions claimed in respect of partnership losses - whether companies were nominees - additional tax assessed - meaning of "tax properly payable".
Income Tax Assessment Act 1936: sections 91, 92, 222, 223, 227(3), 264
Taxation Administration Act 1953: section 8C
Acts Interpretation Act 1901
Explanatory Memoranda in respect of Taxation Laws Amendment act (No.2) 1995 and Taxation Laws Amendment Act 1989
Contract Reviews Act 1980 (NSW)
Tax Ruling 92/10 (now withdrawn)
Taxpayer and Commissioner of Taxation (2002) 68 ALD 143; (2002) 50 ATR 1038
Punin v DFCT [2000] ATC 4288
Creagh v Federal Commissioner of Taxation [1999] ATC 2193
Jones v. Dunkel (1959) 101 CLR 298
REASONS FOR DECISION
18 June 2003 Deputy President, Mr J. Block Part A: Introduction, background and general.
1. The objection decisions in this matter relate to the disallowance by the Respondent of objections dated 26 May 1999 against assessments dated 31 March 1999 in respect of each of the years ending 30 June 1987 to 30 June 1992 (both years inclusive). The tax years aforesaid are collectively referred to as the “relevant years” and each is a “relevant year”; in some instances a relevant year is referred to in brief by reference to its actual year, eg the 1991 year.
2. Mr. Charles Robinson of Counsel, instructed by Blake Dawson Waldron, solicitors, appeared for the Applicant while Mr D.B. McGovern S.C. of Counsel, instructed by Ms L. Wild of the Australian Taxation Office (“ATO”) appeared for the Respondent.
3. The Tribunal had before it, the T-Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (“AAT Act”) together with a large number of exhibits which are detailed in Annexure A.
4. This is a case in which the Applicant has been quite extraordinarily dilatory. After his objections were disallowed, he sought review by this Tribunal. The Applicant repeatedly and consistently failed to comply with directions by this Tribunal, culminating on 8 February 2002 in the dismissal of his applications by this Tribunal under section 42A (5) of the AAT Act.
5. The Applicant then sought reinstatement of his applications under section 42A (8) of the AAT Act. By a decision given by me on 28 June 2002 and reported at (2002) 68 ALD 143; (2002) 50 ATR 1038, I granted the reinstatement application. I held that in dismissing the applications on 8 February 2002, I was in error in that I could have allowed the Applicant to proceed on the documents then in existence. I should note that at the date of dismissal, the only witness statement in respect of the Applicant then before the Tribunal was Exhibit A2. That exhibit could aptly be described as brief hand-written notes only, rather than as a witness statement. In my decision in reinstating the applications, I noted that although on the papers and documents then before the Tribunal, it might have been difficult for the Applicant to discharge the onus of proof on him in relation to the merits proper, those papers and documents might have been sufficient for the purpose of determining the penalties question. The background against which the applications were dismissed was set out in the reinstatement decision in the following terms:
“Ms Rands on the first hearing date furnished the Tribunal with lengthy and helpful written submissions; they were helpful in particular because they contained a detailed chronology of ‘Relevant Facts’. Clauses 8 to 35 (inclusive) of the Respondent’s submissions (omitting clause 36 because its content is dealt with separately in these Reasons) are reproduced in these Reasons as follows:
Relevant Facts
8The facts in respect of the applications up to and prior to the directions hearing of 8 February 2002 are set out in the affidavit of David Morris dated 8 March 2002.
9 In summary the history of the applications is as follows:
10The Applicant commenced the proceedings in the Tribunal on 20 April 2000.
11The proceedings were listed for a telephone conference on 21 July 2000.
12On 17 July 2000 the Respondent filed its Statement of Issues in the Tribunal in these proceedings. The Applicant did not file a statement of issues prior to the first telephone conference.
13On 21 July 2000 Registrar Mussett of the Tribunal noted an agreement of the parties as to a timetable for the proceedings which required:
(a)the Applicant to file his Statement of Facts, and Contentions by 1 October 2000;
(b)the Respondent to file his Statement of Facts, and Contentions by 27 October 2000;
(c) the Applicant to file any evidence by 24 November 2000; and
(d) the Respondent to file any evidence by 15 December 2000
14On 1 October 2000 the Applicant failed to file and serve his Statement of Facts and Contentions.
15On 4 October 2000 the Tribunal listed this matter for a telephone conference on 10 January 2001.
16 On 6 October 2000 the Australian Government Solicitor (the “AGS”) wrote to the Applicant’s accountant asking when the Applicant’s Statement of Facts and Contentions would be served.
17On 10 November 2000 the Applicant served his Statement of Facts and Contentions and his Statement of Issues on the AGS.
18On 20 December 2000 the Respondent filed his Statement of Facts and Contentions.
19On 22 December 2000 the Applicant contacted the AGS and sought agreement to adjourn the telephone conference scheduled for 10 January 2001 to 1 March 2001.
20On 22 December 2000 the AGS forwarded a facsimile to both the Tribunal and the Applicant advising the basis on which the Respondent agreed to adjourn the preliminary conference. The facsimile read:
“…based on the assurance of the Applicant’s representatives that (The Taxpayer’s) evidence will be filed and served by late February 2001 the Commissioner consents to the preliminary conference being adjourned to 1 March 2001…”
21The Tribunal adjourned the telephone conference from 10 January 2001 to 12 March 2001.
22On 8 March 2001 the Applicant again sought to adjourn the telephone conference scheduled for 12 March 2001 on the basis that he wished to “ensure that a comprehensive Statement of Evidence is lodged prior to the telephone conference”.
23On 8 March 2001 the Tribunal notified that the telephone conference listed for 12 March 2001 had been vacated and was now set down for 2 April 2001 “to allow the ‘A’s rep. to prepare a comprehensive statement of evidence”.
24On 20 March 2001 the Tribunal by its own motion adjourned the telephone conference set down for 2 April 2001 to 17 April 2001.
25On 17 April 2001 the telephone conference was conducted by Registrar Richards, in attendance were Charles Robinson of Counsel and Don Page, accountant for the Applicant. Lyn Wild of the AGS appeared for the Respondent. Counsel for the Applicant asked for a further 28 days to file evidence and requested that the next conference be a face to face conference. The Applicant’s representatives were advised by the Registrar that if the evidence was not in on time the matter would be placed in the call-over list on 30 May 2001.
On 17 April 2001 the Tribunal forwarded a notice advising that the matter was set down for a conference on 25 May 2001 and callover on 30 May 2001. The notice also advised that all evidence to be relied upon by the Applicant was to be filed and served prior to the conference.
26The conference on 25 May 2001 and the call-over for 30 June 2000 were vacated by the Tribunal at the Applicant’s request. No evidence had been filed.
27On 5 June 2001 the Tribunal wrote listing the matter for directions hearing on 18 June 2001.
28At the directions hearing on 18 June 2001 attended by the Applicant’s accountant, the Deputy President directed the Applicant to file his witness statements within two months. The Respondent was directed to file his evidence within six weeks of receipt of the Applicant’s evidence. On 18 June 2001 Tribunal confirmed the directions in writing as follows:
“The Directions are issued by way of confirmation of directions given at a directions hearing on 18 June 2001 and in particular that:
1The Applicant must file the statements of any witnesses upon whose evidence he seeks to rely by no later than 20 August 2001;
2The Respondent must file the statements of any witnesses (if any) upon whose evidence he seeks to rely within 6 weeks of the Applicant’s compliance with Direction 1.”
29The Applicant failed to file his evidence by 20 August 2001 and on 21 August 2001 the AGS wrote to the Applicant advising that he intended to have the matter relisted before the Tribunal.
30On 4 October 2001 the Tribunal relisted the matter for a further directions on 18 October 2001.
31On 18 October 2001 Charles Robinson of Counsel and Don O’Brien, accountant appeared on behalf of the Applicant at the directions hearing. The Applicant was also present. The Deputy President was advised that the Applicant’s difficulties with his evidence were attributable inter alia to marital difficulties and certain other legal proceedings in which he was involved. In his written direction the Deputy President noted that “it was made clear to the Tribunal that the Applicant’s professional advisers were hampered by the Applicant’s failure to furnish instructions”.
The Tribunal directed, at the request of the Applicant’s counsel, to allow the Applicant a further opportunity within which time to comply with direction 1 given on 18 June 2001. Moreover the Tribunal decided again at the request of the Applicant’s counsel to allow the full period requested, namely, two months, notwithstanding that having regard to what has transpired, such period may appear unduly long.
The Deputy President advised that if the matter came before him again and there had been another failure to comply with the timetable he would consider any application for dismissal.
The Tribunal made the following directions:
1The Applicant must within two months of 18 October 2001, furnish the statements of all witnesses upon whom he intends to rely;
2The Respondent must furnish the statements of such witnesses (if any) upon whom he seeks to rely, within six weeks of compliance by the Applicant with Direction 1;
3The Tribunal made it clear to the Applicant that it would be reluctant to grant him, any further extensions or indulgences, and so that failure may, in the absence of good and proper cause such as severe illness in respect of which evidence is produced, result in dismissal.
32On 17 December 2001 the day before his evidence was due to be filed, the Applicant personally contacted Lyn Wild of the AGS and indicated that he had a draft statement available which he could either file or have settled by counsel. The Applicant requested more time in which to file and Ms Wild agreed to allow him until close of business on 20 December 2001 to file his evidence. Ms Wild advised the accountant representing [The Taxpayer] that she had been contacted by his client.
33No evidence was filed or served by the Applicant by close of business on 20 December 2001.
34On 8 January 2002 the AGS sent a facsimile to the Tribunal advising that the Applicant had not complied with the directions of 18 October 2000 (sic) and sought to have the matter relisted. The AGS also advised that the Respondent would at the next directions hearing seek an order that the proceedings be dismissed pursuant to Section 42A(5) of the Act. A copy of the facsimile was sent to the Applicant’s accountant.
35On 9 January 2002 the Applicant’s representative was served with a copy of the affidavit of David Morris and again advised that the Respondent would be seeking to have the applications dismissed.
…”
In dismissing the applications on 8 February 2002, I commenced by setting out the content of an affidavit by David William Morris dated 8 January 2002, and then went on to say:
“I do not propose to read into the transcript the annexures, save and except, the direction dated 18 October 2001, which reads:
A direction hearing was held on 18 October 2001, at the request of the respondent. Counsel for the applicant accepted and advised the Tribunal accordingly that the applicant has failed to comply with direction 1, given by the Tribunal on 18 June 2001, and requiring the applicant to furnish the statements of all witnesses upon whose evidence he intends to rely by not later than 20 August 2001. The Tribunal was advised that the applicant's failure was attributable inter alia to marital difficulties in certain proceedings, not specified in the Federal Court. It was made clear to the Tribunal that the applicant's professional advisers were hampered by the applicant's failure to furnish instructions. It was noted also that the objection decision in question relates to the 1987 to 1992 tax years. The Tribunal decided at the request of his counsel to allow the applicant a further opportunity within which to comply with direction 1, given on 18 June 2001. Moreover, the Tribunal decided again, at the request of the applicant's counsel, to allow the full period requested, namely 2 months, notwithstanding that having regard to what has transpired, such period might appear to be unduly long. Accordingly, the directions of the Tribunal are:
1.the applicant must within 2 months of 18 October 2001 furnish the statements of all witnesses upon who he intends to rely;
2.the respondent must furnish the statements of such witnesses, if any, upon whom he seeks to rely within 6 weeks of compliance by the applicant with direction 1;
3.the Tribunal made it clear to the applicant that it would be reluctant to grant him any further extension for indulgences and so that a further failure may, in the absence of good and proper cause, such as severe illness, in respect of which medical evidence is produced, result in a dismissal.
The applicant appeared in person today. He advised the Tribunal that his counsel is not available. He said that he had certain documents which were nearing completion, and he also informed the Tribunal as to certain criminal proceedings, in which apparently he was successful. However, he did not advance any reason of the nature set out in direction 3 of the direction dated 18 October 2001, as to why he should be granted yet further extensions, more particularly having regard to the fact that he has a history of failing to comply with directions by this Tribunal, going back for a very lengthy period indeed.
I note in particular that on 18 October 2001, when the applicant was represented by counsel and as set out in the direction, I made it clear that I would grant one further and final extension of a very lengthy period, namely 2 months, within which the applicant could comply with the direction. Again, as set out in that direction I made it perfectly clear that in the absence of a very good reason I would be disinclined to grant any further extensions. It is my view that this Tribunal has already been over-indulgent to this applicant, who has failed not once, but repeatedly, to comply with directions of this Tribunal.
The respondent has applied for the dismissal of this application pursuant to the Administrative Appeals Tribunal Act and it appears to me that this is a proper case for dismissal in all the circumstances. Accordingly, it is dismissed pursuant to section 42A(5) of the Administrative Appeals Tribunal Act. The Tribunal is adjourned.”
6. As set out in brief previously, I noted in the reinstatement decision that for the Applicant to proceed on the documents then before the Tribunal might have been sufficient to enable the Applicant to contest the penalties assessed against him. The relevant clause in that decision reads as follows:
“The Applicant had repeatedly sought extensions of time within which to furnish written statements. I dismissed the applications under subsection (5) of section 42A of the Act in the exercise of discretionary powers, and having regards to the Applicant’s repeated and consistent failures detailed earlier in these Reasons. It might be thought that the Applicant deserved dismissal in all the circumstances in the light of those consistent failures, and having regard to the altogether cavalier manner in which he treated directions by this Tribunal. But there is another view; it is arguable that it would have been preferable for me to offer the Applicant the opportunity of proceeding to a hearing on the papers before me, and being of course the T documents. There is a possibility that he would have accepted; as to whether he could have run his case on the basis of the T documents alone, and having regard to the nature of the issues as described to me by Mr. Robinson, is another matter. The Applicant was self-represented and deserving of special consideration; the fact that this offer was not made may have resulted in prejudice (and a denial of natural justice) to the Applicant, and constituted, in my view, and on reflection, an error.”
7. Having succeeded in achieving the reinstatement of his applications, the Applicant continued to be dilatory. His own witness statement in the form of an affidavit was handed to the Respondent on 2 December 2002 (a Monday and the first hearing day). That statement (Exhibit A1) was in fact the final form of a draft which had been produced to the Respondent in a somewhat different form at about 5:00 p.m. on the preceding Friday. Moreover, on 25 November 2002, the Applicant caused summonses to produce to be issued against the Bank and the Respondent. Those summonses will be dealt with in more detail later in these reasons.
8. The hearing of this case took place during 5 hearing days and being 2, 3 and 4 December 2002 and 30 and 31 January 2003. The 2 December 2002 date is referred to as the “first hearing day” or “1st hearing day” or “1st day”; similar references are used for the succeeding hearing days. References to the transcript (which was not numbered consecutively) and which commenced for each hearing day with page 1 are referred to by the numeral referable to the hearing day followed by TS, to distinguish references to the transcript from references to the T- Documents.
9. On the 5th day and final day, a timetable for written submissions dealing with the evidence and containing the submissions of the parties was agreed. Under that agreed regime, the Applicant had until the end of February 2002, with the Respondent being granted 2 weeks to reply and the Applicant a further 2 weeks thereafter to respond. I should in fairness make it clear that I said that I would not expect strict compliance with the timetable and would allow some degree of latitude. In March 2003, the Applicant sought and obtained an extension until 3 April 2003. In fact, the Applicant did not comply by that latter date or thereafter and on 20 May 2003, the Respondent filed his submissions with the request that the matter be dealt with by the Tribunal, on the documents and evidence before it and without further delay. However, a few days later, the Applicant did file submissions; they came under cover of an apology by Mr Robinson but with no explanation for the delay, which, it must be said, fell well outside the latitude contemplated when the timetable was agreed on the 5th day.
10. The submissions of the parties (albeit belated in the case of the Applicant) are of such relevance that I have decided to attach them as Annexure B in the case of the Respondent’s submissions and Annexure C in the case of those of the Applicant. Each set of submissions has been edited to preserve confidentiality on the basis set out in paragraph 11 below. Similarly, extracts from the transcript have been edited in the same manner.
11. The actual name of the Applicant has been replaced by a simple reference to the Applicant. The four companies have been assigned names in replacement for their real names and in each case so as to utilise the same first initial. Thus the names used are Apple Holdings Pty Limited, Ripe Pty Limited, Pope Pty Limited and Number Holdings Pty Limited. The alleged partnerships have been renamed correspondingly and so that the first word of each company name refers, as the context requires, to the relevant company or the relevant partnership.
In respect of each of Ripe and Pope, the participants were the Applicant, two brothers (John and James) and Stephen. John and James (who are collectively referred to as the “Brothers”) were in fact two of four brothers involved in a refrigeration business. Stephen was involved in a different business altogether.
In respect of Number, the participants were the Applicant and Messrs Bland and Hunt. Bland was a prominent person in a public area. An even more prominent person in the public area and who is referred to as Adams became involved at a later stage as a participant in Number.
I use the term “Bank” to refer to a major commercial bank from which and through one of its suburban branches (“Branch”), substantial amounts were borrowed by each of Ripe, Pope and Number.
The term “Auditors” refers to a major accounting firm in which the Applicant was until 1985, a manager and in which Jane was and is a senior employee and in which Peter was and is a partner. Each of Jane and Peter gave evidence as did Michael, a former employee of the Auditors. Lily and Mary, both former employees of the Applicant also gave evidence.
“Brighton” refers to a suburb in Sydney and also the name of a street in that suburb in which Ripe purchased real property in 1985 and thereafter. “Maryland” refers to a country town in New South Wales in which Pope purchased real property. Number acquired real property in Brighton and also in two other suburbs in Sydney; their real names have been altered so as to refer to Westville and Eastville respectively and the street names referable to those suburbs have been altered correspondingly.
In some cases, real first names (but only where they are common) have been used. Where identification might be possible because of connections (e.g. in relation to persons in the firm of Auditors), alterations to the first names have been made. The parties and their advisers will find it easy to make the appropriate connection in respect of a person or company because in all cases, save one, the first initial has been retained; this is not so in the case of Adams. In a number of cases, I have deleted a word or a reference and with a notation as to deletion, but without any substitution, simply because it was felt that the inclusion of the reference might perhaps endanger the confidential nature of this decision. In all cases, I have used names in the belief that this has the effect that the decision is easier to read than would be the case were they to be referred to by letters.
12. I have not so far referred to yet another relevant entity. Apple or Apple Holdings Pty Limited refers to yet another enterprise. There was throughout the hearing some uncertainty as to whether the Applicant intended to pursue his claim in respect of losses sustained by Apple. Mr Robinson made statements in this regard which were to some (very minor) extent contradictory. However, clause 8 of Annexure C makes it clear that I need not be further concerned in relation to Apple. I note in any event that as originally conceived, Apple was to involve a family trust associated with the Applicant and so that in any event, the Applicant would not have been entitled to a deduction for a share of Apple’s losses.
13. This case generated a large quantity of evidence both oral and in writing, many exhibits (in part being voluminous documentation furnished by the Bank in answer to the summons), lengthy T-Documents and the submissions of the parties; there are however in reality only two issues. The first issue (the “merits issue”) requires me to consider whether three companies were in fact companies in the sense that they were the legal and beneficial owners of real and other property, or whether and by contrast they were merely nominees for partnerships. The former contention is made by the Respondent and the latter by the Applicant. The second issue (the “penalty issue”) concerns the additional tax assessed under sections 222 and 223 of the Income Tax Assessment Act 1936 (“ITAA”) and remitted in part under section 227 (3) of ITAA.
14. The merits issue arises simply from the fact that Ripe and Pope to a very large extent and Number to a lesser extent were unsuccessful and incurred losses. If in each case, the losses were sustained by partnerships then through the operation of section 92 of ITAA, the participants as partners would be entitled to deductions for their respective shares of those losses. If by contrast, those entities were in fact companies owning their assets beneficially, then the losses would be locked up in the companies themselves and capable of giving rise to carry-forward losses. At an early stage, at least in respect of Ripe, the Applicant and the other participants in Ripe contemplated a unit trust structure; if in any case, Ripe had held on trust for a unit trust, the losses would be have been locked into that trust.
15. I have previously referred to the summons to produce issued in late November against the Bank. During the afternoon of the 1st day, the Bank produced a very large body of documentation (nine large folders) which was of necessity considered by the parties that night. The Bank subsequently produced further documents. The Applicant’s evidence was that a formal written partnership agreement was entered into in respect of each of Ripe and Pope and that those agreements were produced to the Bank who retained copies of them. The Applicant’s evidence was also that no such formal written partnership agreement was entered into in respect of Number. The evidence in respect of Number was quite remarkably complex and at times difficult to comprehend. Although Number commenced as a real property owning enterprise, it diversified into a large-scale agricultural business and in consequence of which real property was sold. Bland and Hunt at some point went out of Number and the participants in Number came to be the Applicant and Adams. The Applicant said that he is now on very bad terms with Adams. Adams was not called to give evidence; nor for that matter were Bland, Hunt, John, Stephen or the personal representative of James who died in 1993.
16. In respect of the first five relevant years (the 1987 year to the 1991 year, both years inclusive), the Applicant’s tax returns were filed in August 1992, and then only after an audit of his affairs by the ATO had commenced and after the ATO had given him a deadline within which to do so. In respect of the first relevant year, the Applicant’s return was about 5 years late. The Applicant’s tax return for the last relevant year (the year ending 30 June 1992) was submitted in 1995.
17. The Applicant was at all relevant times a qualified accountant. By 1985, he was a manager in the Auditors and he had previously become a tax agent, as was required of managers in the Auditors. To become a tax agent requires an aspirant to establish knowledge and experience of tax matters over a broad spectrum. On his evidence before the Tribunal, the Applicant would have found it difficult to qualify as a tax agent. In essence, the Respondent contended (contrary to the Applicant’s assertion) that each of Ripe, Pope and Number were corporate entities and in which the alleged “partners” were in fact shareholders. The Respondent’s contention was that the assertion by the Applicant that Ripe, Pope and Number were in fact partnerships was very much of an afterthought dreamed up only when he was compelled to file returns (belatedly), and after the entities in question had incurred substantial losses. It was on this basis, so the Respondent contended, that it was only in 1992 that the Respondent first sought to claim his share of losses as an alleged partner. Of course the onus was always upon the Applicant to establish that each of Ripe, Pope and Number was in fact a partnership and not a corporate entity.
18. The Applicant said that in respect of Ripe, it was originally contemplated that the relevant entity would be a unit trust with a corporate trustee, and indeed an attempt was made to obtain a certain name for the trust and the corporate trustee. That name proving unavailable, the company was styled "Ripe". The Applicant said that the Brothers were interested primarily in preserving their anonymity and confidentiality both in relation to the world at large and also in relation to their other two brothers with whom they were associated in another (unrelated) real property venture. Stephen too was concerned about this aspect. All of them wanted to use one entity for the purpose of acquisition, borrowing, leasing and similar or related acts. He said that although they originally contemplated the use of a unit trust the parties changed their minds in favour of a partnership structure after he, the Applicant, consulted Peter. The Applicant said that Lily prepared the partnership agreements for Ripe and Pope and that for this purpose, use was made of a standard short-form partnership agreement precedent given to him by Peter. Indeed, it was so simple, that it required only the insertion of the Bank's account details. Peter, in his evidence, confirmed that it was a short precedent and talked of a "one-pager". The precedent tendered as Exhibit A12 is certainly very brief; indeed, in double or wide spacing, it is a little over 3 pages, but it does require rather more than the simple insertion of the Bank's account details. Moreover, the precedent, tendered on the basis that it was used for the purpose of preparing partnership agreements, was in my view defective in one important respect, in that the nominee company is not a party to it or even mentioned in it; there is thus nothing to connect the relevant company (alleged to be a nominee) and the alleged relevant partnership. Where a partnership employs a nominee to hold property for it, it would be usual, in my experience, for the nominee to seek certain indemnities from the participants (in respect of liabilities lawfully incurred) and to grant indemnities in respect of any acts in breach of its obligations; there might similarly be provision for the removal of the nominee and its replacement. Peter, in his evidence, said that he would expect the trust to be dealt with in a separate declaration of trust; the stamp duty consequences of such a declaration at the relevant time of involving the parties might perhaps have been adverse.
19. The Applicant was at all times firm about the fact that the partnership agreements in respect of Ripe and Pope were prepared and executed and that copies were given to the Bank. It was common cause that notwithstanding the fact that the Bank produced many volumes of documents it did not produce any partnership agreements. In respect of all real property acquisitions, mortgages and loan documentation, the Bank documentation made no mention of any partnership, but was rather in all cases framed on the basis that the relevant company was the borrower and legal and beneficial owner of the relevant property; guarantees by the participants were required and furnished. Focussing on Ripe and Pope, the Applicant, the Brothers and Stephen executed a standard form guarantee. There is no suggestion anywhere in the Bank documentation that the Bank was dealing with any partnership and indeed were this the case, the “partners” would, as a matter of law, be personally liable and responsible for the partnership debts and in consequence of which personal guarantees would not be necessary. The documentation could take a different form and in which the “partners” could acknowledge their liability as primary debtors. The Applicant contended that the documents were drawn in this “vanilla” fashion as a matter of convenience. Such a contention cannot be tenable more particularly having regard to the action instituted by the Bank against, inter alia, the guarantors and including the Applicant. His defence was firstly a denial that he executed the guarantee coupled with a claim for Contract Reviews Act 1980 (NSW) relief (in particular on the basis that he was denied access to independent advice) and there was no suggestion anywhere in the defence that the Bank was aware that the true position was that it had lent to partnerships.
20. The preceding clauses in this Part A include comments of a general nature and in particular as to the evidence of the Applicant. His evidence is dealt with in more detail in later parts; separate parts have been used to take account of the fact that other witnesses were interposed during his evidence, and so that his evidence was given, so-to-speak, in tranches.
21. The transcript reveals that most of the evidence at the hearing related to Ripe and Pope with comparatively little evidence in respect of Number, although what evidence there was on Number was usually complex. A substantial part of the losses claimed relate to Ripe and Pope; having regard to the fact that the participants in Ripe and Pope were the same, the borrowings of these two entities from the Bank were cross-collateralised.
22. During the 5 hearing days, there was considerable evidence before me as to purchases of real property by Ripe and Pope and the circumstances in which the investments were made, and in some cases the reasons why they failed and thus resulting in losses. Particularly in relation to Pope, real property in Maryland was purchased from and leased back to an anchor tenant and without obtaining any personal guarantees. The failure of the anchor tenant to perform its lease obligations in respect of premises specially fitted out for it was to have serious consequences for Pope and also, because of the cross-collateralisation arrangements, Ripe. At an early stage of the hearing, there was a discussion of whether there might be an issue of whether the losses were on capital or income account. In fact, this issue was not, during the hearings, raised again and there was no evidence as to how the losses arose. It became clear that the merits issue requires a decision purely as to whether the Applicant had established that there were in fact partnerships. Nor does the merits issue require me to have regard to the actual nature of the properties acquired, the prices paid, the finance taken and the amounts (where relevant) realised on sale.
23 (a) During the course of a brief opening address, Mr Robinson advised me that the entities were structured as partnerships to give the participants the benefits of negative gearing (1TS20). In fact, Mr McGovern elicited in cross-examination that during the period from 1985 to 1987, the benefits of negative gearing were severely limited. The Applicant said that the first Ripe property was purchased prior to the coming into force of the relevant legislation. This may have been true of the first property purchased, but not of properties purchased thereafter.
(b) Mr McGovern noted (1TS23) that until 5:00 p.m. on the preceding Friday (29 November 2002), the evidence of the Applicant consisted of the handwritten notes which are Exhibit A2. As I have noted, the Respondent received an incomplete draft of Exhibit A1 which in its final form was different in some respects, and so that the Respondent (so I was informed) first received a complete witness statement for the Applicant on the morning of the 1st day.
Part B: the evidence of the Applicant.
24. The Applicant commenced his evidence in chief by confirming the truth of his witness statement, Exhibit A1 (1TS26).
25. In 1985, the Applicant was working in the Parramatta office of the Auditors. The Brothers were clients of the Auditors; so for that matter was Stephen a client of the Auditors. The four of them took a decision to invest in real property; as originally envisaged, the Applicant was to have a 10% carried interest but in the result the four participants participated equally in each of Ripe and Pope. The Applicant left the employ of the Auditors in 1985.
26. The Applicant originally thought that a unit trust structure would be appropriate. Confidentiality was important (1TS32) and in addition, the participants wished to contract though one entity. A discussion with Peter resulted (according to the Applicant) in a change to a partnership structure.
27. The first enterprises were referable to Ripe and Pope. As regards the alleged partnership agreement, I refer to the following extract from 1TS33:
“After following that conversation you did something about putting the
arrangement into place? --- Yes, I did.You have mentioned to the Deputy President that you entered into a
partnership agreement with your partners? --- Yes, we did.Do you have that document here today? --- No, I don't.
Is it in your possession anywhere? --- No, it is not.
Have you any idea where it is? --- The partnership agreement was given
to the [Bank Manager] at [Branch] around about late
1985 or early '86. At that stage we had identified a property to
purchase. I remember I procured a shelf company which was [Ripe
Pty Limited]. In the first instance I acquired the company consistent with
I think the minutes that I was authorised to do so that we had looked at
before. In the first instance I set the account up as a trustee account
because it was just supposed to hold some funds together for us to look
at opportunities. When we got to acquiring a property and having
passed on the information to the partners that this is what I had heard
from [Peter] and I put it to them that this was a way that they
could avail themselves of what they wanted with their wishes and
basically remain behind another legal entity. I then got their
concurrence and went to the [Bank] and changed the bank account.
Within a matter of months I would suggest from the initial bit to
[Ripe Pty Limited] nominee account.”
28. There was considerable evidence before me as to the manner in which cheques were drawn and issued by Ripe and Pope. There was in particular evidence as to accounts originally described as trustee accounts which were later changed to refer to nominee accounts.
29. In respect of all of the real property acquisitions, moneys were borrowed from the Bank; those moneys constituted a part of the purchase price of each parcel of real property. The balance (and legal costs and duty) was contributed by the participants. There were no books of account of any kind in evidence before me which would inform me as to how moneys contributed by the participants were recorded. There are of course a number of possibilities and including share and/or loan capital in the books of the companies or by way of capital contribution to partnerships. In particular, no books of account of any kind in respect of the alleged partnerships were produced in evidence before me.
30. I have previously noted, in respect of Ripe, that the Applicant’s evidence was that the four natural persons were themselves the participants, or so the Applicant alleges, the partners. However, and in respect of Pope, the Brothers elected to participate through their respective family trusts and not personally and so that the four participants would have been the Applicant, Stephen and the family trusts referable to the Brothers (1TS38). Personal guarantees were given for each of the Ripe and Pope loans and all of the loans were cross-collateralised (1TS38). The Applicant was asked why in fact two nominees were needed and he answered that “it was cleaner for our purpose.”
31. After the Applicant left the Auditors, he set up an office of his own. He engaged Lily as a secretary to work in the office. I asked him why he needed a full-time secretary; I refer to the following extract from 1TS40:
“--- I took a room right at the front.
And you engaged some staff? --- Yes, I did.
Who was that? --- I engaged a secretary basically, [Lily] to
basically help me with the office.
Do you recall what you and [Lily] did about the formalities
required for the - for one thing, for your tax affairs? --- Lily had a legal
background. I basically got her on board to help with a lot of
administrative things that were required. Dealing with the Bank's
requirements. There was certainly correspondence that they required
this and that, copies of leases. Just the usual reporting things and part
of her brief was to just basically look after the Bank and look after
correspondence. If someone wrote in and said, I want this or that, to
make sure she kept it all abreast.
THE D.PRESIDENT: There doesn't really seem enough to do. You
have only got two properties, right? There are only the two properties.
In the one property there are five leases altogether. In [Maryland] there is
one lease altogether. So that is six leases and yet [Lily] is
employed on a full-time basis. What was she going to do? --- She came
on - she basically had to assist with that side which was the day-to-day
side of leases, collections, common areas, cleaners. There was just that
side of it. But also we were still looking at other properties as well. So
in evaluating and getting together other proposals she was going to assist
me in that.
There was you - you are now working on this on a full-time basis are
you? --- Yes, I was.
There is you in an office in the [Brighton] building doing everything on a
full-time basis. You will forgive me, [Mr Applicant], if I say that
this is the sort of work which might take half an hour a day, if that.
What on earth did you need [Lily] for? You are trained accountant
so you can deal with this. The collection of rents would be once a
month, or perhaps once a fortnight, but not more? --- We were just
starting. Not just doing that. We were starting an on-going business
relationship to look at, to do that, get refurbishments, get approvals.
How plans for [Maryland] expanded to look at adjoining properties which
we also bought through [Pope] with a few of doing redevelopments on
these properties. Now, to get council approvals, forms, chase up just
the procedural things we were quite happy to cut that cost and keep
abreast of what we wanted to develop.”
(Lily when she came to give evidence, said that she worked for the Applicant on 1 or 2 days each week and for the refrigeration business, referable to the Brothers, for either 3 or 4 days each week).
32. The Applicant was firm as to the fact that the partnership tax file numbers (“TFNs”) were obtained. See 1TS42 as follows:
“MR ROBINSON: [Mr Applicant], I asked you about the work
undertaken by [Lily], earlier on. In particular I referred to
formalities or obligations of the taxation system. Do you recall
instructing [Lily] to do anything in that regard? I am talking about
the early days? --- Yes, I did. She set up a system to basically record our
incomes and expenses and whatever from the relevant tenants. In
particular I asked her to get a tax file number for each of the
partnerships. I remember instructing her, because there was a series of
questions about filling in the forms to do with partner's names and tax
file numbers which had to be submitted too in those application forms at
the time.Do you recall ever seeing anything recovered from the Australian
Taxation Office in relation to those applications? --- Yes, to my
recollection there was partnership tax file numbers issued. They were
eight digit as against nine digit tax file numbers. They were the file
numbers that I was aware existed for those partnerships.Do you have any records in your possession which indicate those
partnership tax file numbers were ever issued? --- I don't physically have
them right now but I was aware that we had a tax file number because at
the time we had to use the tax file number for the prescribed payments
tax system which was also introduced around about that time.THE D.PRESIDENT: What prescribed payments system is that? What
are you talking about? --- In 1986, I think, I don't know the precise date
when we dealt with any sub-contractors, cleaners, repair men and
whatever, and on the refurbishment works the prescribed payments
system was introduced and you had to submit a monthly return and also
give the contractor a slip with your details on them. We used the
[Ripe] and the [Pope] partnership number on those documents.MR ROBINSON: Were partnership returns ever prepared for either the
[Pope] or [Ripe] partnerships? --- There were draft returns prepared.
We got into a state with the Bank at I think round about 1988/1989 that
they required accounts which we prepared draft accounts, gave it to the
Bank and we had a whole series of events which then triggered. It was
the regime where interest rates were being tightened up in the late
1980s. Their comfort margins were reviewed annually, I think, without
being disrespectful to their processes and they formed the view that they
wanted to tighten up their equity ratios. For that we had to prepare at
different stages both evaluations and tenancy schedules and so on.
33. Ripe also acquired a half interest in a restaurant in Queensland. Its 50% partner (“Paul”) was experienced in restaurant management and no written agreement was entered into with Paul. I refer to 1TS45 as follows:
“I take it the partner was actually running the business? --- Yes, the other
partner.Presumably there was some form of agreement with the other
partner? --- We just had a simple partnership agreement.Is it amongst my papers? --- No, not that I am aware of.
What is the name of your partner? --- [Paul], initial C.
No doubt you picked him because of his expertise in running
restaurants? --- He was previously in Sydney running restaurants. He re
located to the Gold Coast to live and he looked at these proposals and
contacted [Stephen]. He was a close friend of [Steve's] and put up
a proposal and we took a half interest in it.When you draw up partnership agreements are you always using the
same model for your partnership agreements. Were you drawing them,
or was [Lily] drawing them, or did you solicitors? --- We just used.
It was, from memory, about a seven or eight page document and we
didn't - we just whited it out. There were only three things that we
added on. There was, from memory, the date. The schedule of
partners and in which I use a bank account X. I think we varied that
because we used a bank in Queensland for the day-to-day banking.Even for the retail business you were prepared to be a partnership. You
were prepared to go into the restaurant business as partners. Thus with
unlimited liability if something went wrong? --- That's right. Well, I
think we were equally encouraged by the fact that [Paul] was
equally exposed.For only half and you were the other half. I mean if you think about it
all sorts of things can happen to a restaurant. A claim by someone who
alleges that he has suffered food poisoning. and you will be liable joint
and severally as partners? --- That's what we understood.Did you consider this at the time? --- Not in the context you've just put it
and with 20/20 hindsight maybe we could have had a different view but
that's what we did at the time.But taking the real property acquisition separately you were so certain
that they were good that you were happy to take personal responsibility?
If things went wrong you were going to be personally responsible not
only to the bank but any other creditors.
……….”
34. The Applicant said the partnership agreements used for each of Ripe and Pope were seven or eight page documents and for which purpose it was necessary only to insert the name of the partners, the date and the Bank account details. See 1TS45.
(In fact and as I have indicated, Exhibit A12 is a very short document indeed, being just over 3 pages in very wide-spaced typing; it is in fact aptly characterised as very simple form indeed.)
35. The Applicant’s evidence as to the state of his knowledge of law in general and tax law in particular was decidedly odd. Although he was a manager of a leading firm of Auditors, and although he was a tax agent, his returns for the first five relevant years were lodged well out of time (in 1992) and only after the ATO commenced an audit and insisted that the returns be submitted. The Applicant said (on more than one occasion) that he had paid the tax due through salary PAYE deductions and that his partnership loss deductions in fact entitled him to large refunds. He also said (more than once) that in these circumstances, he was under no legal obligation to put in tax returns.
If the Applicant was in fact entitled to large refunds, one can only wonder at his failure to put in his returns and so as to receive refund cheques. It was, it must be remembered, during this period that the Applicant came under financial pressure from the Bank and so that tax refund cheques of substantial size would surely have been useful to him. His statement to the effect that he was not legally obliged to file returns was of course ludicrous. It was also put to him that the use of a trust structure would have locked losses into the trust. (Mr Robinson pointed out in this context that interest incurred in order to fund the acquisition of units in a unit trust might in certain circumstances be deductible to the borrower; I consider that there may perhaps be some merit in this suggestion but it is unnecessary for me to deal with it further).
36. As I have noted there was very little evidence as regards Number; however the Applicant said at 1TS59 and 60:
“Could we just turn to this other company [Number]? This started in
1988; is that correct? --- I'm not sure of the precise date but it was around
about that time.This again was a partnership you said concerning [Hunt] and
[Bland]? --- That's correct.Could you just tell the Deputy President what brought you
together? --- [Bland] and [Hunt] were known to me from the
meat business that my family was in. They were customers of theirs at
[deleted]. They approached me probably a year before, maybe even
longer, a year to two years before we had any involvement together.
They were looking to acquire some property. They had a long-standing
business called [Bland and Hunt Pty Limited] and there was basically
two partners who knew me, knew of me, knew what I did and they
approached me to basically look around and go into a property deal.All right. What did you do? --- I met with them at my office on
numerous occasions for the normal business of the meat trade. They
were aware - I had pointed out to them what properties we had on
[Brighton] Road including the one that they were physically in and across
the road at that stage, that had been completed, and I looked at three
further properties along [Brighton] Road which I put to [Bland] and to
[Hunt]; one was the old [Bank] on the corner of [Brighton] Road
and - it's the second block below the railway station. I looked at the old
[deleted] store on the top side of the railway station and another
premises that was on the market that we looked at right next to [Brighton]
opposite [deleted]. In the end there was offers made over a period of time for all three and the first one was - sorry, the one that was accepted and was acquired was the old [deleted] store at the top end
of [Brighton] Road.Through what structure was it acquired? --- The identical structure to
what [Ripe] and [Pope] was. I explained to them how it would
work. We purchased a shelf company called [Number Pty Limited].
We then changed its name to [Number Holdings Pty Limited]. Initially
the shareholding was set up as 40 per cent, 40 per cent, 20 per cent.
That's all I could afford at the time and we acquired that first property.”
37. I have previously noted that the Applicant filed his returns for the first five relevant years only after an ATO deadline and demand: 1TS74.
38. As to the Applicant’s failure to file tax returns, I refer to 1TS75 and 76 as follows:
“One more question before I stop interrupting you, Mr Robinson. Why,
you're an accountant, a trained accountant what's more, and at the [Auditors]
what's more, why haven't you filed returns? --- My personal
returns?Of all people on the whole face of this earth accountants know that
you've got to file tax returns, why didn't you? --- Mr Deputy President
- - -By the time you filed them you were about 6 years in
arrears? --- Mr Deputy President, I was and I still am of the belief that I
was due a refund on my returns or had losses.That's not the question I asked you, [Mr Applicant]. You are a
trained accountant and you actually managed to pass all your exams and
they're not all that easy. You were at the [Auditors]. You got into the [Auditors] which therefore argues that you have some credibility. The
one thing you know is that you've got to file a return every year. The
fact that you may or may not be in a refund situation is beside the point.
Why did you not file your returns? You know that as well as I
do? --- Yes, I do, Mr Deputy President.So; what's the answer? The years go by and what happens? We started
in '86 and you don't file that one, or '87, that's June 1987. And a year
goes by and now you're in arrears with '87 and '88, and finally after Mr [deleted] comes to see you and he gives you a deadline you file
these returns. Now, based on what you've told me you have absolutely
nothing to fear; on the contrary you are owed money, you say? --- My
wife kept on reminding me.Either you're a fool or you're not but surely if you're owed money by
the Tax Department and all it requires is filing of returns, and you've
already told me they were simple returns and they sound like they were
simple returns, what could be easier than you're sitting down one
evening preparing your returns and sending them in and sitting back
happily awaiting your refund cheques? Try to explain it to me? --- I don't
have a simple answer for you, Mr Deputy President.Well, give me a complex answer? --- In the earlier - - -
Give me four complex answers but explain to me why if you're owed
money by the ATO and you're not exactly a charitable institution and
you were under pressure from the [Bank] to pay the
money that you owe them, why don't you collect your tax refunds? --- Mr
Deputy President, for the first two years, '87 and '88, I was remiss in
not filing the returns. I was of the understanding I was to get a refund
and I just didn't do it. In respect of the '89 year, '88/'89 year onwards,
and certainly it became evident in 1991, from 1991 - and just to give
you a specific example, the 1992 returns which I'm told were lodged in
August, those particular returns were leaked if that's the right term in
Canberra and they were leaked in Canberra by Senator [name deleted] no less, and were the subject of discussion. Now the one - - -Sorry, 1992 returns were sent in August? --- Yes.
And did they go together with the returns for the previous years? --- Yes,
they did.It was sent in in August 1992 and they were accompanied by the arrear
returns, that is '87 to '91? --- That's correct.”
39. The Applicant’s answers at 1TS78 were in the same vein as follows:
“MR ROBINSON: You filed returns on August 1992 for the years up to
30 June 1991. At that time were there tax officers still in your
[deleted] office, do you know? --- Sorry, can you repeat that, sorry.You filed your income tax returns for the year, up to the year ended
1991, relevant returns up to 30 June 1991. At the time you filed those
returns do you recall whether there were still tax officers at your
[deleted] office? --- I don't specifically remember them but they were
in and out, yes.You were interviewed twice I think by officers of the Tax Office once in
1994 and subsequently in 1995? --- I certainly am aware of being
interviewed, I don't remember the exact dates.Do you recall whether the audit proceeded up until that time? --- It was
continuing as far as I was aware.Look, insofar as the failure to lodge returns is concerned, what's your
understanding of your obligation to file an income tax return, what is it
that obliged you to file a return, do you know? --- My understanding was
that if you earned assessable income and you owed the tax man money
you'd file a return. My belief was that having substantial reductions
which would have entitled me to a refund I did not file a return for that
reason. On my salaried income I knew that my tax had been paid.
With respect to the partnerships I had an ongoing battle with the [Bank]
because the [Bank] clearly saw me after this deal in 1991 as the partner
that they had a chance to recoup money from. I still hold that view
because the [Bank] did have that view right through until 1996 and 1997.
It was only after having a very private and aggressive conflict with
them, after the sale of the [deleted] and after the court case with the
Indonesians which basically undid the transaction in 1996, that the [Bank]
pulled back and was prepared to talk settlement. That was my worst
turmoil because by 1995 onwards it became very clear to me that I was
left holding the baby so to speak and Mr Adams had moved on and I
was the one left to bear the liability.”
40 I have so far dealt with the transcript for the 1st hearing day. At the end of the first hearing day, the parties had an opportunity to consider the 9 box files of documents furnished by the Bank and from which it became clear that the Bank had produced no partnership agreements.
41. In addition to his summons to produce dated 25 November 2002 addressed to the Bank, the Applicant issued a summons of the same date on the ATO calling on it to produce the following documents:
“1.All documents, including without limitation, all correspondence, diary notes, file notes of telephone discussions ……[part omitted]…………. ………… relating to an application for a tax file number for any one or more of [Ripe Pty Limited], [Pope Pty Limited], the [Ripe Partnership] and the [Pope Partnership] made in the period between 1985 and 1988 inclusive.
2. All income tax returns lodged by any one or more of the [Ripe Partnership], the [Pope Partnership], [Ripe Pty Limited] and [Pope Pty Limited] for the period between 1984 and 1995 inclusive.”
In answer to that summons, the Respondent produced one document which was tendered as Exhibit R1 and which reads as follows:
“Pope Pty Limited
(address deleted)
Taxpayer company is a non-lodger who has not lodged a return. It is requested that a Tax File Number be allocated so that audit action may be taken.”
The subsequent evidence made it clear that neither of Ripe Partnership or Pope Partnership ever applied for a TFN or ever rendered any returns. The summons to produce was deservedly criticised in strong terms.
42. It was at the beginning of the 2nd day that mention was made of the fact that it did not seem as if any of the alleged partners in any of the alleged partnerships was to be called. Mr Robinson informed me that Hunt had brought a private fraud prosecution against the Applicant; he said that the principle in Jones v. Dunkel (1959) 101 CLR 298, was relevant so far as he was concerned: 2TS10.
43. James, who was one of the Brothers, died in 1993. The Applicant said that his relationship with James was good until his death. However, John, who is still engaged in defending the action brought by the Bank against Ripe, Pope, John, Steven and the Applicant said that “it was in his best interests to take his legal advice and not really have a relationship with me.” (2TS14).
44. The Applicant said also that Stephen had settled with the Bank but that Stephen’s wife and daughter were very upset with him. I refer to his evidence at 2TS14.
45. The Applicant said that Adams had been particularly aggressive towards him: 2TS15.
46. At the beginning of the 2nd day, the Respondent reverted to the question of why the Applicant did not file his returns; his answers are recorded in 2TS17 as follows:
“……….I asked you yesterday whether - what was the reason for
you failing to put in your income tax returns until 1992. I would just
like you to address that once more. Can you do that? --- I can and -
sorry, why I didn't?Why did you not lodge your income tax returns, your personal income
tax returns, until - for the period '88 - '87, I'm sorry, to 30 June 1991.
Why did you not file your returns until August 1992? --- I think I've said
this yesterday, but from '88, '89 onwards, when I basically stepped out
into a political connection - if - I just want to say, my way. I stepped
out and I was in business for myself. I was looking to grow a
consultancy, certainly in the areas of property, of getting together deals
and - and expanding them, refurbishing - growing them out, and just
growing them. From 1987, late '87 onwards, I started a dialogue with
Mr [Bland] and Mr [Hunt] through business - through the family
business, and that is when I basically started aggressively looking at
these options. From those early years, for the year '87, or even for the
year '88, and I think as I said to the Deputy President yesterday - I think
- sorry, not I think - I know, from my own recollection, I was remiss in
not lodging those returns, but my position was that I was - my
understanding was, I was entitled to a refund anyway, so I didn't believe
that I was the one that was losing out by not lodging them. From
August '88 onwards - - -Can I just stop you there? You corrected yourself just then, didn't you,
to say, "I believe that I was the one losing out", not "I didn't believe
that I was"? --- Well, I was losing out because by not lodging as the
Deputy President said yesterday, I wasn't getting my assessment and my
refund. However, to me, the greatest pressure that I had was on the one
side, having the bank pressuring things from the expiry of '88 when the
first facility matured and the interest rates had gone completely haywire
quickly, and the rentals weren't covering the situation, I had the ability
to roll into a bigger deal with [Bland] and [Hunt] group deal which
involved a far more substantial business, and it was an opportunity to
actually grow with it and hopefully get my guarantee exposure
minimised. The higher - and I think I used the same words yesterday,
that commenced at that point in time, was that the responsibility for
running these, fell completely on to me when [Hunt] took ill.
[Bland] was nowhere to be seen, and the pressure was also
personally horrific because I had a situation of creditors and the bank on
one side, and the bank - particularly on the one side with their pressure,
and also the trading responsibilities. Now, I knew nothing of running
the farm. I didn't know anything at all, but I had to make decision
about staff, about employees, about marketing decisions, and that was
something that preoccupied me 8 days a week, to the extent of actually
.having to live away from home to try to get a handle on it………………...”
47. The next extract from the transcript is from 2TS34 and the cross-examination by Mr McGovern:
“……………Now, by, I think in August 1992, the 4 and 7 August 1992, they were the dates when you lodged your income tax returns for the years ended
30 June 1987, through to 1991, that we have heard a lot about this
morning. Isn't that right? --- I believe that is the date.So as of - I want to suggest to you, as at August 1992, when you came
to prepare your income tax returns for those past years, you were very
well aware of the fact that the [Pope] entity had substantial losses.
Correct? --- I knew before that, but certainly, that is correct.And I want to suggest to you that you were well aware of the fact that
the [Ripe] entity had substantial losses also? --- That is correct.And I want to suggest to you that you then saw an opportunity for
yourself to somehow utilise those losses by claiming them as partnership
losses because there was no income to off-set them against - with the
Bank taking all of the money? --- That is not - - -That is what you did, isn't it? --- No, that is not correct.
Well, then, can I just ask you this? You had a preliminary interview
with the Tax Office on 27 July 1994, didn't you? --- I had an interview
with them, yes.And then I think you had a subsequent interview with the officers of the
Tax Office, including Mr Johns, on 8 November 1995. Did you not? --- I
had an interview. I don't remember the date - exact date.For the purposes of this case, so that I understand the position - for the
purposes of this case, have you had an opportunity of looking through
the T documents for yourself? --- I - I haven't gone through the T
documents.Right. Have you had an opportunity, or have you had occasion to look
at the notes of the interview that were undertaken between you and Mr
Johns that are recorded in the T documents that deal with the interviews
in November 1995 and I think, in 1994 - in July 1994? --- I recollect
reading the 1994 one some years ago.”
48. During the course of his evidence, the Applicant made mention of the delay between rendition of returns and the assessments. There was evidence before me as to interviews with the ATO and correspondence with the ATO (and including a position paper by the ATO to which the Applicant did not respond.) There was also a prosecution of the Applicant under section 8C of the Taxation Administration Act1953 for failure to furnish information required under a notice pursuant to section 264 of ITAA. The Applicant’s evidence in this regard was particularly evasive; I can best illustrate the nature of his evidence by an extensive quote from the transcript: 2TS37 to 49 as follows:
“And they were questions that were directed to seeking an understanding
of the basis upon which you were lodging your claims. Isn't that
right? --- That was - - -You understood that to be the position? --- Yes, I did.
You were prosecuted, weren't you, for failing to comply with the
section 264 notice? --- Yes, I was.Now, you didn't tell us anything at all about that in your evidence-in
chief, did you? --- No, I didn't.Did you think that that was a relevant consideration when you were
looking at explaining to the Deputy President, the basis upon which
there was some delay in assessments issuing to you? --- I don't think that
was relevant.You thought that was irrelevant, did you? --- No, because I didn't have
the information, as I said at the time, to comply with the notice.You were found guilty of an offence under section 8C of the Taxation
Administration Act in June 1996, weren't you, for failing to comply
with the section 264 notice? --- I was found guilty because I admitted it to
the judge.Well, you appealed in relation to that decision from the [deleted] Court
to the District Court? --- That is correct.You appealed on all grounds, didn't you? --- Yes, I did.
Would you like to revise the answer you just gave under oath that you
have admitted it to the judge? --- Yes, I - I admitted the evidence that I
didn't comply. I could hardly say that I didn't by the due date, but I
was putting forward my reasons.You lodged an "All grounds appeal" in relation to your conviction at
Liverpool, didn't you? --- I - - -MR ROBINSON: Well, I object.
THE D.PRESIDENT: Why?MR ROBINSON: Just relevance at this stage.
MR McGOVERN: Why? I can answer the question of relevance very readily. One of the complaints that is made about the applicant - it
seems to be going to be somewhere in the forefront of the submission, is
that because of the fact that there has been inflection of time, that that
should have some bearing upon the degree to which one might be
satisfied on the onus. Now, I want to be able to prove conclusively,
that this witness is deliberately engaged in a process of evading his fiscal
responsibilities, and if that is the explanation for the delay.[part omitted]
MR McGOVERN: Well, I put to you, [Mr Applicant], you were
prosecuted under the Taxation Administration Act, weren't you?
Section 8C of the Taxation Administration Act? --- I don't remember the
relevant section. I know that I went to [deleted] Court, unrepresented
at the time. I went there. I said that I could not comply and I was
given - and I requested some additional time. As I recollect, I then went
out, represented, and I was convicted on the fact that I just had not
complied with the Time notice. On legal advice - and I'm not a lawyer
to - to address that, I was advised to appeal the grounds that was
prepared by the legal representative, and I remember going to [deleted]
Court and then that matter was finally determined in Sydney.Well, let me start again? --- Fine.
You appeared at the [deleted] Court in answer to a charge under
the Taxation Administration Act of failing to provide information under
section 264, didn't you? --- Yes.Now, were you or were you not, pleading guilty or not guilty on that
occasion? --- I don't remember.Were you or were you not represented on that occasion? --- The first
occasion I was not, but I then went and got a solicitor to act for me, as I
remember.Are you suggesting that you were represented or not represented in the
Local Court? --- I said that I was represented on the second occasion that
I remember going there.So you went to the Local Court at [deleted] twice, did you? --- As far as
I remember.And were you represented by Mr [deleted] --- I don't remember the
name.Well, do you remember that Mr [deleted] was prosecuting the matter on
behalf of the DPP and Mr [deleted] was your representative? --- I don't
remember, no.Well, you do remember that you were represented at the Local Court on
the second occasion? --- Yes, I do.I'm pursing the point that you made a little earlier, that you said, under
oath, that you had admitted the matter. Remember saying words to that
effect? --- I said that to my legal representative, yes.I see, you admitted it to your legal representative, did you, that you had
failed to comply? Is that what you meant to convey? --- I meant it was
obvious to me that if I hadn't met the time-table, I could hardly say that
I had met it - that I had met it.Did you plead guilty or not guilty in the Local Court on the occasion of
your appearing there before the Magistrate, Mr [deleted], on 17 June
1996? --- Sorry, whereabouts?The Local Court at [deleted]. Have you got - - -? --- At [deleted], yes.
- - - a memory loss now, have you now Mr - - -? --- No, I do not have a
memory loss.Right, well, just attend to my question. On 17 June 1996, did you plead
guilty or not guilty before a Magistrate, Mr [deleted], being represented
by Mr [deleted] - I'm sorry, by [deleted]? --- I don't remember the
exact plea.I want to suggest to you that you pleaded not guilty to that offence, and
you were in fact, convicted by the Magistrate? --- I don't remember the
date, but on the first occasion I may have pleaded that. But then I went
and got a lawyer.So when you got a lawyer, you remember now, do you, that you
pleaded not guilty? --- No, I don't remember that.You have just got no memory one way or the other as to whether or not
you pleaded guilty or not guilty before the Magistrate? --- I don't
specifically remember, but I remember having a discussion with the
lawyer about it.And when you had the discussion with the lawyer, are you suggesting
that you told the lawyer that you couldn't comply? --- I certainly did that,
even before I went there.So you told the lawyer, did you, that you were guilty of the charge? Is
that what you want to say?MR ROBINSON: Look, I object to this.
THE D.PRESIDENT: Why?
MR ROBINSON: Because purely to credit, and that it is going on
beyond - - -THE D.PRESIDENT: Credit is what this case is about. I will allow
these questions, Mr Robinson.
MR ROBINSON: If it please you, Deputy President.
MR McGOVERN: Are you suggesting that you - - -
THE D.PRESIDENT: Let me just explain. Mr Robinson, this case is
about nothing but credit. [Mr Applicant] claims that a certain factual
situation exists. You yourself, in your opening address, told me that
although returns were filed in 1992, assessments were only issued in
1999. This cross-examination is then directed to credit and it is
imminently reasonable to allow it. It will be grossly unreasonable for
me to disallow it.And as for it going on and on, well, I think I need to say no more than
that his opening answer, as I've noted it was, "I admitted it". Well, he
did admit, because otherwise, he wouldn't have been - he wouldn't have
appealed and he wouldn't have been found guilty and then appealed. At
least, that is the way I understand the cross-examination to be going.MR McGOVERN: [Mr Applicant], are you suggesting - this is your
opportunity to disclose, if you wish to - are you suggesting that you told
your legal representative before you actually had the hearing at the
Local Court at [deleted], that you had, in fact, failed to comply and
that you were guilty? --- I'm sure I would have told him that. I wouldn't
be here if I had complied.I want to suggest to you, you appealed to the District Court and came
before [deleted] J in the [deleted] District Court on 27 March 1997, didn't
you? --- I - well, I don't remember the date, but I said I went to [deleted].Right. This is after you had admitted to your lawyer prior to the Local
Court case that you were guilty. I want to suggest to you, you appealed
on all grounds to the District Court? --- I appealed - - -You contested the case in the District Court both on the grounds of
penalty and on the grounds of guilt, didn't you? --- I don't remember the
grounds, but I took the advice that was given to me.Well, are you suggesting that the advice that was given to you was that
you should plead not guilty even though you had said that you were
guilty? --- I only had one reason to pursue the - - -No, answer my question, please? --- What was your question?
My question was, did you take the advice to plead not guilty when you
in fact, had told your lawyer that you were in fact, guilty? Is that what
you are saying? --- No, I'm saying that I was advised to - to be able to
put my reasons why I couldn't comply, we had to go through that
process that the lawyer undertook.Now, the proceedings that you took to the District Court were an appeal
against the conviction for failing to comply with the section 264 notice,
wasn't it? --- If that is what it was, yes.And you were then required, in December 1996, as a consequence of
the appeal being determined, you were required to comply with the
notice by the order of [deleted] J, weren't you? --- That is correct.And [deleted] J gave you a further 3 months from December 1996, to
provide the information that was sought in the notice, didn't he? --- I
don't remember specifically, but I provided the information.Well, you provided the information in 1997 after a notice issued to you
in October 1995. That was very prompt compliance with the notice,
wasn't it?
MR ROBINSON: I object to that.MR McGOVERN: I'm entitled to put it to him.
(part omitted)
MR McGOVERN: Perhaps I could just indicate this, that if my friend
is prepared to concede that no submission will be made that - as to the
effect that the Commissioner is engaged in some form of delay, which
therefore alleviates the burden, or makes it a lesser burden for the
applicant to discharge because of delay that can be visited to the
doorstep of the Commissioner, then I'm prepared to not press on in this
line. But I'm doing this directly in response to what I perceive to be a
basis that was being referred to both in opening and also in the course of
the evidence that was led in-chief from [Mr Applicant]. So would
invite my friend to indicate - - -THE D.PRESIDENT: What do you say, Mr Robinson? If you need
time to confer with Mr Wiseman and your accountant, of course I will
allow it.MR ROBINSON: Well, perhaps before I - - -
THE D.PRESIDENT: In your opening, you did not emphasise it, you
did not say it, and of course the Commissioner took a tremendously long
time over all of this, thus in effect, suggesting that he wasn't all that
confident about his case. But nevertheless, I did gain the inference that
there might be something of that sort in the air.After all, 7 years is an enormously long time from return to assessment.
In fact, quite unprecedented in my experience. Now, Mr McGovern is
explaining it and you complain. You have an answer. If you say: I
will make no further point of this. Apparently this cross-examination
ends along this line, anyway.MR ROBINSON: May I say it this way, and my friend obviously can
do as he chooses, subject to what you say, of course. The point that I
made at the outset of the date of the issue of the assessment went to the
passage of time, yes, but any submission I was going to make in that
regard, was rather concerning the framing of the - it is part of the
framework in which the applicant's evidence has to be considered, not -
it wasn't - I didn't intend to cast an aspersion of dilatoriness towards the
Tax Office, rather that the weight you are going to have to put on the
evidence of matters which occurred almost 20 years ago, is a
consequence of these - this matter coming before you now.
(part omitted)MR McGOVERN: Perhaps if I could just say this, that in the light of
what my friend said, I think some of the - I understand what he is going
to submit and I think I've dealt with the matter in a way that is almost
sufficient for my purposes. I've got just a couple of other things to raise
with the witness. I think - - -MR ROBINSON: I'm obliged to my learned friend.
(part omitted)
MR McGOVERN: I think there was actually a question and an
objection, but I think I will probably find it easier just to move on.What I want to put to you, sir, was that in the period after - I'm sorry, I
withdraw that. The information that you were asked to provide in the
section 264 notice, was in your own appreciation of things, information
which would have been such as to enable the Commissioner to
understand the case that you were putting in your tax returns. Do you
agree with that? --- No, not completely.You were asked to provide information about your assets, were you
not? --- Which I did.And well, which you did after about 18 months during the course of
which you had gone through the Local Court and appeal to the District
Court, correct? --- What you failed to disclose, Mr - - -Well, don't worry about what I've - - -? --- No, no. You want to hear
my - - -No, no, let me - - -? --- My answer is this.
Let me put the questions - - -? --- As I recollect the judge - - -
- - - please? --- The judge varied the 264 notice because he said, from
memory: three or four of the components were inappropriate. And that
was the basis why I got up at [deleted] and asked him for clarification.
Now, the notice - and please check your file there, was varied by the
judge himself. On the varied notice, I answered every question.
Now, he would not have varied the notice if he didn't think that I had
some case for variation.All right. Well, thank you very much [Mr Applicant] - - -? --- And it
is a disadvantage for my counsel not to even know about that.(part omitted)
Now, you continued to have some dealings with Mr Johns, the Tax
Auditor, after the 264 notice was issued and after you responded.
Correct? --- What particular dealings are you referring to?Well, in relation to the claims that you were making that you said you
were entitled to claim partnership losses. Do you not remember that Mr
Johns served upon you what he called a Position Paper in 1998, which
listed all of the bases upon which the Commissioner was asserting that
you weren't entitled to those losses? --- Yes.Now, did you read the Position Paper at the time in 1998? --- Yes, I did.
You didn't condescend to provide one piece of information either in
64.Of course, messrs Stephen and John both had very good reason to disavow the partnership/nominee arrangements once they were being pursued by the Bank on the guarantees. In admitting liability as primary debtors they would be deprived of any defences available to a surety and passive shareholder. Certainly in the case of John it is manifest that his record of interview in May 1996 must contradict his statements to the Commissioner in the income tax returns in which he claimed a share of partnership losses. That is plain from the evidence of Jane who was not present when John was interviewed (TR 30/01/03 p 15 at .7) and who ceased to act for him after the death of James in 1993.
65.It is unlikely that Jane knew that her client had changed his position, but Mr Johns did. He had been told by Jane of the partnership losses claimed, and he interviewed John and Stephen, himself.
66.The Respondent's case was essentially directed at the credibility of the Applicant and his version of the facts. The attack on his credit was made in large part on the basis of information obtained from the Applicant's partners. Mr Johns was the tax auditor investigating these issues and who made the assessment decisions.
67.Lodged tax returns of Australian taxpayers are a documentary record peculiarly within the care, control and knowledge of the Respondent. It would seem inconceivable that Mr Johns did not check the individual returns of the partners to establish the veracity or otherwise of the information given to him in interview.
68.It would appear therefore that Mr Johns was not called in order that he might not be exposed to examination by and before the Tribunal in relation to these matters. Consequently the Tribunal should draw the inference that his evidence in that regard would not have assisted the Respondent in its case.
69.In relation to the Stephen affidavit (R7), the Tribunal admitted this document into evidence subject to weight. In fact this document should be given no weight. To the extent that it purports to set out or is consistent with, an investment structure different from that said by the Applicant to have existed, the deponent guarantor’s interest in doing so is manifest. In the absence of the deponent to be cross examined on the matters deposed to, the evidence must therefore be suspect. This uncertainty is heightened by the evidence of Jane and Peter that the deponent’s partners, the Brothers, had proceeded to claim deductions as partners, John subsequently adopting the same position as Stephen.
70.Had there been any other credible evidence that the Applicant was inventing the partnerships/nominee structure after the event, the Tribunal can assume that it would have been led by the Respondent. After all that is the Respondent’s case.
71.At page 12 of the T documents (T1 p 12) under the heading “Evidence” at point 2, there is a reference to “records of interview with other partners...” and “..conclusions drawn thereon”. These records relied upon by the decision maker to disallow the objections were not part of the T documents and presumably these are the records of interview excluded from Ex R9 which only came to light in cross examination of the Applicant.
72.In summary, I submit that all of the oral evidence taken by the Tribunal is consistent with the Applicant’s evidence as to the events and investment structure involving Ripe and Pope. There is no merit in the proposition that the Applicant only adopted the partnership/nominee arrangement in retrospect.
73.Furthermore, although an appalling record keeper and perhaps having an imperfect understanding of legal matters, the Applicant himself presented as a credible witness who clearly did his best to recall relevant events within a very complex broader history. There was no serious reason established by the Respondent to doubt that the Applicant was truthful in his evidence. His evidence before the Tribunal was consistent with that recorded in his records of interview in 1994 and 1995 (T9 & T10)
Contextual evidentiary considerations
74.The Tribunal should consider the whole of the evidence in light of two further contextual matters. The first matter is the likelihood, given the prevailing circumstances, that the Applicant would have entered into the partnership/nominee structure rather than any other.
75.At the simplest level, an investment in rental property could be made directly by a group of individuals in partnership, through a trust or a through a company. However, if the investors are to have access to income tax deductions under s.51(1) of the Act, for revenue expenses such as interest, those expenses must be incurred by the investor personally . Thus, if investing through a company or a unit trust, the investor wishing to claim a deduction for interest on borrowings used to acquire income producing property, would ordinarily borrow the funds personally and conTribunalute to the structure by taking up share or unit equity or perhaps lending the funds at interest to the trustee or company.
76.Conversely where the investors are to be personally liable for net losses due to insufficient income to meet the outgoings on the investment, if nothings else, as a matter of prudence the investor would require access to the deductions for those losses. Clearly it would be a commercial disaster for the investor to be obliged to meet a shortfall of funds due on revenue account without a corresponding deduction.
77.Logically this need for parity between the payment of net losses and the availability of a deduction for those payments, is all the more acute where the investors guarantee debt performance, and the investment is negatively geared.
78.Consequently in circumstances where investors such as the Applicant and his partners, all men with some business acumen, are to be personally liable for the net revenue losses on their investments by virtue of guarantees given, and who intend or expect from the outset that the investment will be negatively geared to some degree, it is more likely that they would adopt a structure such as a partnership with a nominee company, to make their investment.
79.The structure which the Respondent contends was that actually adopted in the circumstances is the most inept and hence least likely structure for investors to adopt.
80.The second contextual matter which should be considered, is the source of the evidence. The concept of a nominee acting for an investor is a relationship of the barest trust and agency, and it is a relationship exclusively between the nominee and the beneficial owner. Although it is the nominee's name which appears, the actions are those of the true owners by whom the investment revenue is derived and the expenses are incurred. The nominee acting as such is indemnified for its actions by the principals/owners . This relationship need not be disclosed.
81.In this case the Applicant and his partners set out to borrow relatively modest sums for commercial investment from a suburban branch of the Bank. The assets, over which the Bank took its security were to be held in the name of a company. The Bank could not rely for its security upon the nominee relationship which is a relationship of personal obligation between the investors and the nominee.
82.It is not surprising therefore in the market in which the Applicant and his partners were borrowing funds, that the Bank would require personal guarantees as if the nominee were the beneficial owner of the assets, even if the Bank were in possession of the partnership agreement and were aware of the nominee/ partnership relationship either in fact or constructively (eg T11) concerning the relevant assets.
83.From the perspective of the Bank in these circumstance, a plain vanilla loan with mortgages and directors' guarantees is the easy and clean option maximising the Bank's comfort in any borrowing involving a company. One might ask why should a Bank tailor securities and loan documentation to reflect private arrangements and obligations between the borrowers and their company, thereby adding any attendant risks in possible enforcement by the Bank of the debt obligations? On the other hand, with the guarantees in place, from an economic point of view it is irrelevant to the Bank what the relationship is between the partners and the company.
84.Presumably the standard loan documentation was ready and available to be filled out. After all in this end of the market, if the investor wants the money he/she simply has to meet the Banks requirements.
85.Consequently the loan and related security documents produced from the records of the Bank taken alone, are consistent with a corporate structure, but they should also be taken to reflect its requirements for its own comfort. The documents are also consistent with the relevant company acting as a nominee borrower for the partners and consequently, alone this part of the evidence cannot be taken as determinative of the existence or otherwise of the partnership/nominee arrangement.
Conclusions
86.Taken as a whole the evidence is consistent with the Applicant's case that there were, from 1985, two partnerships for which Ripe and Pope acted as nominees. On the other hand given the relative unlikelihood that the Applicant and his partners, would adopt a structure which would obviously prevent them having access to deductions for revenue expenses which would potentially come from their own pockets, the Tribunal would require more positive evidence of the existence of this uncommercial structure which the Respondent says prevailed. The Bank records do not do this and are at best equivocal.
87.There was little evidence concerning Number other than from the Applicant and in those documents referred to above to corroborate the Applicant's evidence. However the Tribunal should find in relation to this investment by the Applicant on the same basis for Ripe and Pope.
88.The objections should be allowed and the assessments set aside.
Part 2
The penalties issue89.If the Tribunal finds against the Applicant in relation to Part 1 there remains the issue of whether the penalties have been properly imposed.
90.There is no real dispute between the Parties that the deductions claimed by the Applicant were referrable to very substantial expenses incurred in connection with each of the property investments referred to in his returns. It is apparent from the Statement of Claim issued by the Bank in the Supreme Court (T11 167-174) for the outstanding capital and interest that these expenses were very real and ultimately the Applicant together with his partners, was held personally liable for them.
91.Also, even if the Tribunal finds that the structures in fact adopted by the Applicant and his partners, interposed the relevant company in each case, the bulk of the oral evidence supports the fact that they had a genuine belief at the time, that they were putting in place and operating under, an arrangement which ensured their access to the deductions in question.
92.From the perspective of the Applicant the effect of an adverse finding by the Tribunal is that while liable to fund net revenue losses directly from his own resources, his salary was taxed without taking account of revenue outgoings incurred, albeit indirectly from his income producing investment.
93.There is no dispute that the PAYE deductions were made from the Applicant's salary and that in total these amounts exceeded the total primary tax calculated on the taxable income assessed, before the imposition of any penalties.
94.The Respondent has imposed penalties under ss. 222 and 223(1) of the Act calculating those penalties on the "tax on taxable income" component of the assessments (T18) without first giving a credit for the PAYE collections in the relevant years of income.
95. Section 223 as it applied prior to 30 June 1992 was repealed in relation to statements after that date. In so far as is relevant, s.223 provided:
"(1) Where-
(a) a taxpayer-
(i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or
(ii).......; and
(b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess."
96.The Applicant's primary submission is that the Commissioner should apply the Applicant's PAYE tax instalments, paid in the relevant year of income as a credit against the tax ascertained on taxable income for that year, in order to determine the tax properly payable and if there is any excess.
- In Re Creagh and Federal Commissioner of Taxation the Tribunal said:
"The Tribunal considers that the respondent's method of formulation is correct up to a point. The starting point should indeed be tax on taxable income (Tab A). Having regard to the AAT decision previously referred to in these Reasons, it is also correct to add Medicare levy (Tab O). To deduct Rebates (Tab G) appears to the Tribunal to be eminently fair given that the enquiry is directed towards the tax properly payable, and rebates necessarily affect the calculation. But it appears to the Tribunal that it is then both illogical, and unfair to ignore Tab E which relates to tax already paid, since to do so necessarily distorts the nature of the enquiry.
It is true of course that the term "credit" is defined without reference to amounts already paid. It is also fair to say that tax paid is at least in one sense a credit in that it is deductible. But it is also correct to say that it is in reality an automatic set-off. The plain legislative intent was to allow review only where the additional tax exceeds the threshold. But an essential (and indeed the essential) element in the calculation is the tax properly payable, and to construe "tax properly payable" and "proper tax" so as to include rebates and to exclude tax already paid, appears to me to be so manifestly absurd that it cannot have been intended. And in any event, the legislation in question does not prohibit an interpretation which would allow a deduction for tax already paid."
- In Creagh's case the Tribunal had regard to the earlier decision of AAT CASE 10,532 (1995) concerning whether the medicare levy was to be included in determining the "proper tax payable" in s.223. In passing, in the course of his reasons Senior Member Beddoe noting an absence of definition in the law for "tax properly payable" referred to the definition of "proper tax" in s.222A.
- It should be noted however that s.222A did not exist concurrently with s.223 as enacted above and was part of those provisions enacted to replace the relevant form of s.223. Consequently there is no relevant definition to assist the Tribunal determine the meaning of "proper tax payable".
- With respect, the approach adopted in Creagh is neither prohibited by the legislation as it was then in force, is clearly open to the Tribunal and is in fact correct. Furthermore the use of the expression "tax properly payable" in s.223 can be contrasted with "tax payable" in s.222 (and elsewhere in the Act). While in most cases the amounts may well be the same, an amount of tax "properly" payable on assessment must mean what remains for the taxpayer to pay.
- The Applicant's secondary submission is that in the circumstances the penalty otherwise imposed should be further remitted. The Tribunal has an unfettered power to remit penalties imposed under ss.223 and 222.
102.The Respondent imposed additional tax under s.223 for the years of income ending 30 June 1987 to 1991 at the rate of 40% and for the year ended 30 June 1992, at the rate of 50%.
103.The Respondent has also imposed additional tax under s.222 for failure to lodge, at the rate of:
20% per annum, for the 1987 return;
25% per annum for the 1988 return: and
20% per annum for the 1990 return.104.Apparently because there was no net tax payable (presumably after taking account of the PAYE credits ?) in years ended 30 June 1989, 1991, and 1992 no penalty under s.222 was imposed.
105.First, in so far as the penalty under s.223 is concerned, the amounts of 40% and 50% respectively are manifestly excessive (T18 308-320):
i.In the 1987 assessment primary tax assessed was $9,174 (net of medicare). The PAYE credit in this year was $9,199. In this first year of error the Commissioner imposed $3,812 for incorrect return.
ii.In the 1988 assessment primary tax assessed was $15,713. In this year the PAYE credits were short of the primary tax payable, however total penalty in this year was $11,784 of which s.223 penalty was $6,518.
iii.In the 1989 assessment primary tax assessed was $24,728. The taxpayer had paid by way PAYE deductions, $34,006. Notwithstanding the obvious advantage to the Revenue in this year of recovering $10,000 more than the Applicant's liability, the Respondent imposed s.223 additional tax of $10,216.
iv.In the 1990 assessment primary tax was $41,150 and exceeded the PAYE credit by only $133. However the Respondent imposed s.223 penalty of $16,970.
v.In the 1991 assessment primary tax assessed was $42,804. This was exceeded by the PAYE Credit of $44,809. However in this year the Respondent imposed s.223 penalty of $17,659.
vi.In the 1992 assessment primary tax assessed was $41,353. Again this was exceeded by the PAYE Credit of $44,738. However in this year the Respondent imposed s.223 penalty of $21,335.
106.It is apparent that the Respondent has failed to have regard or proper regard, to the fact that in large part, the primary tax assessed was in the hands of the Respondent through the PAYE collections before the end of the relevant year of income.
107.Moreover this is not a case of deliberate evasion such as the making of a claim for a fictitious expense. The expenses were real, albeit incurred by another taxpayer. In addition the expenses claimed were a real liability for the Applicant and that liability was undertaken solely for the purposes of the Applicant deriving income.
108.Consequently the effect of the Tribunal having found that the losses were locked up in the companies, is that the Respondent has had a windfall in retaining the primary income tax, which might otherwise have been sheltered by the deductions claimed, as a consequence of the Applicant's error in structuring the investments.
109.For the purposes of s.223, the authorities say that it is enough that the statement is wrong for it to be "false and misleading" in the relevant sense. The Applicant's error was made while under a genuine belief that he with his partners would have access to the losses. There is nothing to suggest that the error was not an honest error.
110.The Applicant's returns for the years of income 1987 to 1991 are consistent in claiming deductions for the partnership losses. They were however lodged together in the course of a tax audit. In these circumstances they should not each attract such a substantial "culpability" component in each year. Rather they should be seen as a single error for the purposes of s.223 and s.227.
111.In the circumstances s.223 additional tax imposed in those years where because of the PAYE credits there is no primary tax to pay should be remitted to nil.
112.In relation to s.222 the additional tax of $5,266 imposed in the 1988 return is manifestly excessive and should be remitted.
Key Legal Topics
Areas of Law
-
Taxation Law
Legal Concepts
-
Statutory Interpretation
-
Compensatory Damages
-
Taxation Law
0