VMQD and Commissioner of Taxation (Taxation)
[2018] AATA 3147
•29 August 2018
VMQD and Commissioner of Taxation (Taxation) [2018] AATA 3147 (29 August 2018)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2016/5637 & 2016/5638
Re:VMQD
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Mr P W Taylor SC, Senior Member
Date:29 August 2018
Place:Sydney
I am of the opinion (see paragraphs 29, 30 and 63 of the accompanying reasons) that the following class of documents may be relevant to the review of the 19 August 2016 Objection decision by the Tribunal.
Accordingly, I require the Commissioner to lodge with the Tribunal within 28 days the prescribed number of copies of each of the class documents that is in the Commissioner’s possession or control:
The class of documents:- Correspondence (including attachments and produced documents) relating to the Australian Taxation Office’s 2003 review of the unwinding / termination of the Matrix fleet leasing transaction, between the ATO and FSA Oklahoma, Inc, their representatives, assignees or holding company entities.
.............................[SGD]...........................................
Mr P W Taylor SC, Senior MemberCATCHWORDS
PRACTICE AND PROCEDURE - lodging of documents with the Tribunal - application for an order that the respondent lodge additional documents - claim that the documents that may be relevant to the decision under review are in the possession of the respondent but have not been lodged - section 37 of the Administrative Appeals Tribunal Act 1975 as modified by s 14ZZF of the Taxation Administration Act 1953 - respondent obliged to produce documents which are considered necessary to the review - respondent to lodge documents
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth) ss 2A, 37
Administrative Appeals Tribunal Amendment Act 2005 No. 38 of 2005 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Property Law Act 1969 (WA) s 11
Taxation Administration Act 1953 (Cth) ss 14ZG, 14ZZF, 14ZZKTaxation Laws Amendment (No. 3) Act 1991 No. 216 of 1991 (Cth)
CASES
ACN 154 520 199 Pty Ltd v Commissioner of Taxation [2018] AATA 33
Binetter v Federal Commissioner of Taxation [2016] FCAFC 163; (2016) 249 FCR 534
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Hutchinson v Glover (1875) 1 QBD 138
IBM Australia Pty Ltd v State of Queensland [2015] QSC 342
Kennedy v Administrative Appeals Tribunal (2008) 168 FCR 566
Matrix Group Limited (in liq) v Oates [2016] FCA 1487
National Australia Bank Ltd v Idoport Pty Ltd [2000] NSWCA 8
Rawson Finances Pty Ltd v Federal Commissioner of Taxation (2013) 93 ATR 775
Re Cash World Gold Buyers and Commissioner of Taxation [2017] AATA 736
Re KLGL and QCYY and Australian Prudential Regulation Authority [2008] AATA 452
Re VLKG and Commissioner of Taxation [2011] AATA 915
Re Wertheim v Department of Health (1984) 7 ALD 121
Saunders v Federal Commissioner of Taxation (1988) 19 ATR 1289
Streetscape Projects (Australia) Pty Ltd (Subject to Deed of Company Arrangement) [2013] NSWSC 355
TPC v Arnotts Ltd (1989) 21 FCR 306; (1989) 88 ALR 90
Transport Accident Commission v Bausch [1998] 4 VR 249
Westina Corporation Pty Ltd v BGC Contracting Pty Ltd (2009) WASCA 213; 41 WAR 263
Zappia v Commissioner of Taxation [2017] FCAFC 185Zobory v Commissioner of Taxation (1995) 64 FCR 86
SECONDARY MATERIALS
Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, signed 7 December 1967, ATS [1968] No. 9 (entered into force 8 May 1968)
Supplementary Explanatory Memorandum, Taxation Laws Amendment Bill (No. 3) 1991 (Cth)
REASONS FOR DECISION
Mr P W Taylor SC, Senior Member
29 August 2018
VMQD disputes Notices of Assessment the Commissioner issued in December 2015, and substantially upheld in 19 August 2016 objection decisions. Those assessments related to the 2001 and 2002 tax years and involved substantial amounts of both primary tax and shortfall penalties – as the following table indicates.
Income and Tax 30-Jun-01 30-Jun-02 Total . . Assessable Income (return date) (14-May-04) (17-May-05) - As returned 0 0 0 - As assessed 6,302,640 10,586,248 16,888,888 Tax Shortfall 3,044,160 5,227,449 8,271,610 Penalty 2,283,120 4,704,705 6,987,825 Total (tax + penalty) 5,327,281 9,932,154 15,259,435
In pursuing the assessment dispute in the present review proceedings, VMQD contests the adequacy of the Commissioner’s document production to the Tribunal.
DOCUMENT PRODUCTION OBLIGATIONS POWERS AND PRINCIPLES
VMQD’s 14 October 2016 review application triggered the Commissioner’s document production obligation, and the Tribunal’s complementary production order discretion, under the Administrative Appeals Tribunal Act 1975 (Cth) (“AAT Act”) s 37 (as modified by s 14ZZF of the Taxation Administration Act 1953 (Cth)). The content of those statutory provisions is set out in Schedule 1 to these reasons. Their presently relevant effect can be summarised in the following propositions: -
(a)the Commissioner’s initial production obligation is limited to four specific documents (the relevant decision reasons and related notices), and those the Commissioner considers “necessary to the review” of the objection decision
(b)the Tribunal’s complementary power to require the Commissioner to make a more extensive production depends on a threshold opinion that particular documents (or those within a particular class of documents) “may be relevant” to the review of the decision by the Tribunal
(c)the discretion may be exercised by requiring the Commissioner to
(i)provide additional documents
(ii)provide a list documents the Commissioner considers relevant to the review of the objection decision
(d)notwithstanding the Tribunal’s threshold opinion of possible relevance, (and probably notwithstanding the inclusion of documents on any list the Commissioner has been required to provide) the Tribunal has a discretion whether or not to give a notice requiring the Commissioner to produce any documents other than those the Commissioner considers necessary for the review.
There is obviously some tension between the Commissioner’s initial exemption from the ordinary obligation to produce all documents relevant to the review proceedings and the Tribunal’s specifically conferred discretion to require the production of any document that “may be relevant” to that review. Implicitly relying on that tension, VMQD advanced a submission emphasising the proposition that the Tribunal’s default position in the exercise of its review jurisdiction was to ensure decision makers made all relevant documents available. This submission drew on observations to that effect in a number of Tribunal decisions – including Re Wertheim v Department of Health (1984) 7 ALD 121 at 154 (decision makers should “bring to the notice of the Tribunal all matters which the Tribunal ought take into account”); Saunders v Federal Commissioner of Taxation (1988) 19 ATR 1289 at 1296 (“the tribunal has before it all the material that was before the decision maker”); Transport Accident Commission v Bausch [1998] 4 VR 249 at 260 (material considered by a decision maker “should be squarely and unequivocally revealed to the tribunal”).
The general comments made in Wertheim and Saunders were either not made in the context of the review of taxation objection decisions or were made when review of those decisions was in fact subject to the ordinary operation of AAT Act s 37 (ie., prior to the introduction of TAA Act s 14ZZF – by the Taxation Laws Amendment (No. 3) Act 1991 No. 216 of 1991 (Cth). The comment in Bausch was made in the context of complaint about the decision maker’s failure to produce a document that was clearly necessary for the effective exercise of the review jurisdiction. Furthermore, the various comments all preceded the introduction of AAT Act s 2A (the Tribunal’s objective to pursue the objective of providing a mechanism of review that is fair, just, economical, informal and quick) by the Administrative Appeals Tribunal Amendment Act 2005 No. 38 of 2005 (Cth).
The reason for the introduction of s 14ZZF (with its basic production obligation of “necessary” documents) was outlined in the explanatory memorandum to the 1991 amendments. The explanatory memorandum noted that the then existing production obligation (under TAA Act s 14ZG) required the production of every document the Commissioner thought relevant to the review. The memorandum then continued: -
26.29 This practice led to many copies of documents being lodged with the AAT that were never referred to in the review or were otherwise unnecessary. Accordingly, Part IVC of the Principal Act modifies section 37 of the AAT Act in relation to relevant objection decisions in a slightly different way. The new will reduce the number of documents referred to the AAT when the application for review is made, without restricting the AAT’s power to obtain any documents it requires in particular cases.
The effect of that introduction was addressed in Kennedy v Administrative Appeals Tribunal (2008) 168 FCR 566. The decision in Kennedy was made in the context of review proceedings where the applicant had sought to challenge tax assessments on the basis of bad faith, disputed the Commissioner’s fraud and evasion opinion, and foreshadowed a challenge to the authenticity of primary documents the Commissioner had relied in determining the amount of the taxation assessment. The applicant’s production application related to additional documents he said were relevant to his authenticity challenge and to the fraud and evasion question. It appears that their contended relevance lay in explaining or outlining the process by which the Commissioner had acquired the primary documents (see paragraph [6] of the judgment). But that contention failed because (i) the principal issue in the review proceedings was the taxpayer’s ability to establish the amount of his assessable income, and not the accuracy of the Commissioner’s assessment or his reasoning:- see Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623; (ii) none of the additional documents (as distinct from the primary documents) had been relied on in the Commissioner’s opinions, and (iii) their relevance to the fraud and evasion opinion rested on bare assertion:- see paragraphs [9], [10] & [17] of the judgment). The critical passages of the Full Court’s judgment demonstrate that the application failed essentially because of the tendentious nature of Mr Kennedy’s argument about the asserted relevance of the additional documents. This appears from the following passages of the Full Court’s judgment:
[27] In the present case, Mr Kennedy’s allegation that the assessments were made in bad faith is made without any evidentiary basis or any pleadings to substantiate the claim in relation to specific documents. In substance, Mr Kennedy is seeking the additional documents in order to explore whether there is any possible foundation for raising such an allegation. The present application seeks to cast a wide net, without any foundation in the evidence, for the purpose of ascertaining if any basis exists on which to challenge the Commissioner’s assessment, and for this reason the request for documents should be refused: see Cosco Holdings Pty Ltd v Federal Commissioner of Taxation (1997) 37 ATR 432.
[28] … no process of reasoning had been forthcoming which supported the claim as to the relevance of the additional documents sought, and on the face of their description no such relevance is apparent. … Mr Kennedy must show how a particular document or category of documents may be relevant to specific issues of fact relating to the excessiveness of the assessments issued to him. That has not been shown. The intent of s 14ZZF of the TAA was clearly to narrow the class of documents which the Commissioner must produce to the Tribunal, and in the absence of demonstration … of the relevance of any additional documents, it is not appropriate to widen the class of documents which the Commissioner has already provided…
[30] The final observation to be made relates to the submission that Mr Kennedy will suffer procedural unfairness if the Commissioner is not required to lodge the additional documents. To establish this, Mr Kennedy must first explain how the right to a fair hearing is affected by the non-production of the documents sought or the Tribunal’s exercise of the process of disclosure contemplated by s 37 of the AAT Act. There is no evidence as to how any particular document or class of documents yet to be produced will bear on the issue of the authenticity or reliability of the documents already provided by the Commissioner. Mr Kennedy makes no specific allegations; does not identify any particular document which is inauthentic, unreliable or lacking in probative value; and frames his allegations as to relevance only in a vague and unsubstantiated way. In light of these deficiencies, there is no basis on which the Tribunal is required to exercise its power under s 37(2) of the AAT Act.
The decision in Kennedy emphasises that the additional production discretion conferred by AAT Act s 37(2) requires satisfaction of potential relevance based on a rationally articulated connection between the documents sought and the matters required to be determined in the review proceedings. That same view had previously been expressed, in a different context, in Re KLGL and QCYY and Australian Prudential Regulation Authority [2008] AATA 452 at [46].
The KLGL and QCYY decision involved a matter where drafts of the decision reasons had been prepared by legal advisers, and the applicant challenged the reality of the involvement of the statutorily authorised decision maker. The additional production sought included (i) communications between the lawyers and the decision maker and (ii) the documents disclosing the findings and reasons of the persons responsible for the findings contained in the decision drafts / recommendations. The Tribunal observed that whilst the concept of “relevance” for the purposes of AAT Act s 37(1) and 37(2) must be regarded as having an “expansive connotation” the opinion required to exercise the additional production discretion was “positive satisfaction of a sufficient relationship between the documents, or class of documents, whose production is in issue and the matters to be determined in the proceedings”: at [2008] AATA 452 [17]. In applying that approach to the exercise of the discretion, the Tribunal made two findings of present relevance. The first was that an apparent inadequacy in a decision maker’s expression of their reasons might, but did not necessarily, point either to the likelihood of additional documents or to the potential unfairness of not requiring their disclosure: (at [27]-[30]). The second finding was that whilst decision reason drafts may be thought to have some analogy with the accepted “adjectival” relevance of draft contracts and expert witness statements in ordinary court proceedings, they were unlikely to satisfy the “may be relevant” criterion in Tribunal proceedings where the “motives or credibility of the decision maker is essentially irrelevant to the Tribunal’s function”:- (at [43]-[45]).
That process of reasoning has a particular significance in the context of taxation objection review proceedings to which the burden provision in TAA Act s 14ZZK(b) applies. A taxpayer cannot discharge that onus by pointing to error in the Commissioner’s assessment reasons, or in the objection decision, or in any underlying fraud and evasion opinion: see Binetter v Federal Commissioner of Taxation [2016] FCAFC 163; (2016) 249 FCR 534 at [66]. None of those findings or reasons is binding on the Commissioner in the review proceedings:- Zappia v Commissioner of Taxation [2017] FCAFC 185 at [3]. The significance of that proposition, and the taxpayer’s burden was explained in Rawson Finances Pty Ltd v Federal Commissioner of Taxation (2013) 93 ATR 775 (at [111]):
[111] … The review process in a case to which s 14ZZK(b)(i) applies does not necessarily include the Tribunal in reaching any state of satisfaction that there is a proper basis for deciding that the facts as found by the Tribunal give rise to the amount of the liability in the impugned decision. The only state of satisfaction that the Tribunal is required to reach in a review subject to s 14ZZK(b)(i) is whether on the facts as found the applicant has proved that the assessment is excessive. If that state of satisfaction cannot be reached, the application for review must be dismissed irrespective of the Tribunal being satisfied or not satisfied that the facts as found by the Tribunal give rise to the amount of the liability in the impugned decision.
In Re VLKG and Commissioner of Taxation [2011] AATA 915 the taxpayer had sought to advance an essentially similar argument to VMQD’s broad general submission. VLKG sought to have the Tribunal exercise the limited additional production power (contemplated in TAA Act s 14ZZF(i)(b)(iii)) to require provision of a list of documents the Commissioner considered relevant to the review proceedings. The substantial basis for the application was that the “necessary” documents the Commissioner was required to produce were, as a matter of conceptual logic, a subset of the “relevant” documents – and the Tribunal should require the production of relevant documents. The Tribunal categorically rejected that argument, essentially because it failed to satisfy the AAT Act s 37(2) requirement of pointing to the potential relevance of “particular other documents” or “a particular class of documents”: see [2011] AATA 915 at [21].
When these various considerations are taken into account they preclude adherence, in taxation assessment review proceedings, to the general proposition that the Commissioner is obliged, or ought be required, to produce all relevant documents:- see Kennedy v Administrative Appeals Tribunal (2008) 168 FCR 566 at [19]-[21] and [28].
In Re Cash World Gold Buyers and Commissioner of Taxation [2017] AATA 736 the objecting taxpayer had obtained a schedule of documents from the Commissioner, in response to a Freedom of Information request for (i) documents “evidencing” the review involved in the objection decision, (ii) drafts of any review related determinations and (iii) documents the Commissioner intended to rely on. The taxpayer relied on the schedule to contend that all the documents in the schedule met the “may be relevant” criterion and should be produced. The contention involved propositions that (i) the FOI response itself indicated that the documents were related to the assessment, (ii) the fact that some of the documents had been compulsorily obtained by the Commissioner for the purposes of his audit itself bespoke their relevance, (iii) the entire background to the Commissioner’s audit process, including internal ATO communications about the audit and assessment, must be relevant.
In rejecting the application Senior Member Lazanas principally focussed on two matters. The first was the potential relevance of the disparate categories of documents to the “taxable facts” concept at the heart of the assessment and review process. The second was the quality and sufficiency of the suggested relevance of particular documents. In relation to the first matter, after referring to Kennedy and Re KLGL and QCYY, Senior Member Lazanas said:-
[26] It is significant to note that s 37(2) is not a general discovery provision, nor does it authorise a “fishing expedition” … the words “may be relevant” in s 37(2) are to be interpreted to mean whether a document “could reasonably be expected to throw light on some of the issues in the principal proceedings” …. The test is not satisfied where a document only bears some correlation with the subject matter of, or evidence or issues in, the review proceedings: Re EME Productions No 1 Pty Ltd and Screen Australia [2010] AATA 839 at [17]; and Re KLGL at [17]. On the other hand, the test of “may be relevant” should not be interpreted to mean “is relevant”. In other words, the Tribunal must engage in a limited forensic exercise to determine whether a document “may be relevant” to the issues in the proceedings before making a direction under s 37(2). It cannot simply accept bare and unsupported assertions about the relevance of documents.
It is clear from the following passages of the reasons in Cash World that Senior Member Lazanas did not regard either the fact that documents had been required for, or were involved in, the Commissioner’s audit process as sufficient to demonstrate their potential relevance. More precise identification of the nature and purpose of the contentious additional documents was required. That greater degree of precision could come from the apparent subject matter of particular documents. That possibility was the second of the matters Senior Member Lazanas addressed, specifically in relation to transcripts of interviews with particular individuals. Explaining the reason for refusing to require their production Senior Member Lazanas said:-
[31] I … am satisfied that the documents that Cash World has identified and is seeking a direction in relation to, will not shed light on the issues before the Tribunal. I had some reservations with respect to the transcripts of interviews of approximately a dozen named persons that were referenced in the schedules but, as Cash World did not offer any explanation as to how the transcripts of the named persons may be relevant, including as to what were their roles and involvement, I am not prepared to speculate as to the utility of those documents for the review proceedings. …
The concept involved in the “may be relevant” criterion has two aspects. The first (for which the expression “substantive relevance” has been used) involves relevance in the sense of a having a rational capacity to affect the assessment of the probability of a matter in issue:- see Evidence Act 1995 (Cth) s 55(1). The second (to which the term “adjectival relevance” has been applied) involves relevance in the sense of having a capacity to “throw light” on the matters in contest:- Hutchinson v Glover (1875) 1 QBD 138; Streetscape Projects (Australia) Pty Ltd (Subject to Deed of Company Arrangement) [2013] NSWSC 355 at [5] – referring to TPC v Arnotts Ltd (1989) 21 FCR 306; (1989) 88 ALR 90 at 102-103. The idea involved in that concept is difficult to articulate but, at least in most contemporary forensic procedural contexts, does not extend to relevance in the sense of merely leading to or facilitating a “chain of enquiry”:- see National Australia Bank Ltd v Idoport Pty Ltd [2000] NSWCA 8. What is required is positive satisfaction of the existence of documents (or classes of documents) “that have the capacity to influence the determination of the proceedings”:- see KLGL and QCYY at [17]&[18]. That requirement of the “may be relevant” criterion is one of permissive generality, but not one that is capable of being satisfied by either bare assertions of relevance, or by the mere appearance of some relationship with matters likely to require consideration in the review process. Between the extremes of the obligation to produce documents that are patently necessary or material to the review decision, and the bare assertion of possible relevance, a nuanced and reasoned, but nevertheless impressionistic, assessment is required.
THE DOCUMENT PRODUCTION ISSUES
The Commissioner discharged his initial production obligation (according to the subjective “necessary” criterion) in November 2016. Prior to that VMQD had asked the Commissioner to provide all the documents referred to in the December 2015 and August 2016 decision reasons. He pursued that request in correspondence in October and November 2016, and first sought formal production directions from the Tribunal in December 2016. In February 2017, after the Commissioner took the view that he had provided the necessary documents and resisted further production, VMQD sought to have the Tribunal make the additional document production direction he had previously foreshadowed.
After some further controversy, partial compromise, and a not insignificant passage of time, VMQD currently pursues the further production application in relation to a limited number and categories of documents. I have listed those documents in Schedule 2 to these reasons, where they are grouped into six categories. In each instance I have included cross references to the submission documents that VMQD relied upon in support of his production request. (Those documents are referred to in the Schedule as “Argument Reference” and “Exhibit 5A”. The particular parts of “Argument Reference” document are referred to as “Step” and that reference is accompanied by the numerical identifier used in the submission document.)
THE CONTENTIOUS PAYMENTS AND THE ASSESSMENT HISTORY
The principal events underlying the contentious assessments were (i) the 2001 termination of contractual arrangements involved in the financing of the Western Australian government car fleet (and the proposed financing of the government bus fleet) and, (ii) four payments that Government made in connection with the termination. The arrangements had been made between 1996 and 1999, and were intended to have operated for about a decade. Their termination in 2001 was a consequence of various changes in the commercial environment - including (i) the apprehended adverse impact of proposed changes to the Income Tax Assessment Act 1936 (Cth) (ITAA36) s 59(2A), (ii) abolition of the sales tax exemption for second hand sale of State government operated vehicles, and (iii) the introduction of the goods and services tax.
The contractual arrangements in the fleet financing were complex and multi-party. So far as the parties to the fleet leasing transactions are concerned, the details in Schedule 3 of these reasons list some of the entities involved and outline their respective relationships. It is apparent from Schedule 3 that Matrix Group Ltd (“MGL” – in the table below), with a number of its associated entities, was a major participant in the arrangements. It is a convenient shorthand to refer to the collective arrangements simply as “the Matrix fleet leasing transaction”, and to use the term “Matrix” to refer indiscriminately to its group of associated corporate and trust entities.
The process involved in the termination of the Matrix fleet leasing transaction involved negotiations, payments and agreements that began some time in early 2001 and appear to have culminated in “standstill” and “release” agreements in September and November 2001. One of those agreements was between FSA Group and the Western Australian government, and involved an $11m settlement payment to FSA Group on 12 June 2001.
Other termination related agreements were between Matrix and the WA government. They appear to have been made between about 17 May and 12 June 2001, and at about the time of the November 2001 settlement. They resulted in four contentious termination related cheque payments the Western Australian government made to Matrix or its nominee. Each of the four payment amounts was promptly credited to the Singapore bank account of FSAI Inc. That was a company of which VMQD was one of two directors. (So far as presently appears, FSAI Inc played no part in the Matrix fleet leasing transaction, other than as a recipient of the four contentious payments.) The material details of the termination payment amounts, including their date and payee / recipient are indicated in the following table.
Matrix Group fleet leasing transaction termination payments
- deposits to FSA International Inc - bank a/c (Singapore)
WA Government payments YE Jun 2001 YE Jun 2002 nature of payment and payee Amount Date Amount Date (payee) (payee) Payments (Bus 1 & Car 2) cheque payee 2,517,980 18-May-01 4,286,249 23-Aug-01 (MGL) (FSAI) Payments (Car 1 & Car 3) cheque payee 4,250,000 15-Jun-01 6,500,000 30-Nov-01 (MGL) (SK trust a/c ) Totals (annual) 6,767,980 10,786,249 Total (all payments) 17,554,229
The 18 May 2001 payment appears to have been intended to compensate Matrix for costs it incurred in relation to the bus fleet component of the transaction. The other payments appear to have been made to Matrix either for assistance it provided in facilitating the termination arrangements or as part of the consideration in the November 2001 settlement. The $6.5m payment was in fact part of a larger amount of about $10.148m that was to be paid to Matrix under that settlement. Despite Matrix’s apparent status as the payee, none of the contentious payments was included in its financial statements or tax returns for the 2001 and 2002 tax years. (Documents that were prepared and lodged in May / June 2002 and September 2002.) However, part of the $10.148m amount ($2.726m) was included in the Matrix 2002 financial statements and tax return.
In September 2001 FSAI Inc paid $200,000 from the Singapore account to Mr Tyne’s wife. A year later, in September 2002, FSAI Inc paid amounts totalling more than $15m to a Hong Kong company that was the sole shareholder in a UK corporation of which VMQD was a director. Thereafter, those funds were provided to entities associated with a company listed on the London Stock Exchange, and then effectively on lent (first, by way of a “Medium Term Note”) to “Credit and Commercial Finance Pty Ltd” (a company of which VMQD was the sole shareholder) and then to the Pegela Trust. Other payments were made from the FSAI Inc bank account to (i) VMQD, (ii) his wife, and (iii) other entities associated with VMQD.
The Commissioner’s December 2015 assessments were made under ITAA36 ss 167(b) and 171A(1)&(2). The former section permits the Commissioner to make a default assessment where either (i) a person has not lodged an income tax return, or (ii) the Commissioner is not satisfied with their return. The latter section permits the Commissioner to make an assessment for tax years prior to 2004-2005, contingently on having formed an opinion of relevant fraud or evasion.
In an 8 December 2015 opinion the Commissioner had expressed such an opinion. That opinion was essentially based on the view that VMQD (i) had never treated the contentious payments as Matrix’s assets, (ii) had personally obtained the benefit of the preponderance of the payments and, (iii) had intentionally not disclosed the contentious payments in the 2001 and 2002 tax returns he lodged – in May 2004 and 2005. The Commissioner concluded that this intentional non-disclosure involved “evasion” – for the purposes of ITAA36 s 171A(1)&(2). That view provided the threshold basis for the December 2015 Assessments and, ultimately, the Commissioner’s 19 August 2016 objection decision. The assessment and objection decisions considered that the four payments were part of VMQD’s assessable income on the basis that they constituted:
(a) ordinary income – for the purposes of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) s 6-5
(b) statutory income – for the purposes of ITAA 1936 s 26(e)
(c) statutory income (as dividends from “Matrix”) - for the purposes of ITAA 1936 s 44(1).
The essential reasons for the Commissioner’s characterisation of the contentious payments were that:-
(a)VMQD “had arranged or directed” the manner and destination of the payments
(b) the payments had the character of fees paid to VMQD either as a director of Matrix or because of his employment by (or provision of services to) Matrix
(c) the preponderance of the payment amounts had been transferred to various entities and bank accounts associated with VMQD.
The Commissioner’s view of intentional nondisclosure by VMQD led to the further conclusion, relevant to the penalty assessments, that VMQD had intentionally disregarded a taxation law.
VMQD’S PRINCIPAL OBJECTION CONTENTIONS
The FSA Group alienation contention:- VMQD’s 18 February 2016 notices of objection claimed that (i) FSA Group’s insurance obligations arose under an agreement with Matrix and, (ii) following the WA government’s negotiated termination of the Matrix fleet leasing transaction, Matrix and FSA Group entered into an “assignment agreement”. The asserted effect of this agreement was that FSAI Inc held the contentious payments for the benefit of FSA Group during each of the 2001 and 2002 tax years. This contention is broadly consistent with the substance of the explanation that VMQD is described as having given in an interview (conducted under ITAA 1936 s 264) in November 2013. In that interview VMQD asserted that he / Matrix had advice that, because Matrix had no beneficial interest in the moneys held by FSAI Inc during the 2001 and 2002 tax years, Matrix was not required to include them in its financial statements or tax returns.
VMQD’s alienation contention was put somewhat differently in statements originally proffered to support the additional production application and in his October 2017 contention statement. In the latter document VMQD appeared to acknowledge that FSA Group’s insurance obligations arose under an agreement with Westfleet (rather than Matrix). The contention document went on to assert that FSA Group’s dissatisfaction with the proposed termination of the fleet leasing transaction led it to foreshadow claims, against Matrix and the Western Australian government’s State Supply Commission, relating to the reliability of pre-transaction information it had been given. The contention document goes on to assert the existence of an arrangement under which, conditionally on all of the contentious termination payments being deposited to the FSAI Inc bank account, Matrix agreed to (i) accept liability for FSA Group’s claimed loss, and (ii) negotiate on FSA Group’s behalf the termination settlement terms with the Western Australian government. The context of the matters raised in the contention document suggests that this arrangement was made prior to both FSAI Inc’s 17 May 2001 name change, and the 12 June 2001 payment by the Western Australian government to FSA Group:- see Schedule 3 Item 2(c) & paragraph 21 above. The character of the deposit to the FSAI Inc bank account was said (with imprecisely asserted alternatives) to have been by way of (a) assignment, (b) agreement to assign, (iii) pledge or (iv) “otherwise” alienation, to the FSA Group.
VMQD’s further contention (in the October 2017 contention statement) was that, at various times before and after 30 June 2002, FSA Group decided to abandon its termination related claims against Matrix, and released the funds FSAI Inc held in its Singapore bank account. The timing of this asserted abandonment leads on to VMQD’s contention that, irrespective of the efficacy of the asserted alienation to FSA Group, the amounts had in fact been paid to the Matrix and were not in fact available to him (or perhaps alternatively for distribution by Matrix) until the 2003 tax year.
The contentions advanced in the October 2017 contention statement do not sit entirely comfortably with contents of a defence VMQD filed in earlier (pre March 2011) proceedings involving the contentious termination payments. As summarised in Matrix Liquidator’s 12 May 2014 response to the Commissioner, the defence indicates that (i) all of the contentious payments were paid by Matrix to FSAI Inc as “re-insurance premiums”, (ii) the payments were made as part of arrangements to create a “re-insurance reserve fund”, (iii) that fund, owned by FSAI Inc, would be pledged to FSA Group, and (iv) Matrix would be entitled to the residual fund balance, if that balance exceeded FSA Group’s actual losses from the Matrix fleet leasing transaction.
Other matters on which VMQD seeks to rely are (i) the 2008 Settlement Agreement between (amongst others) the ATO and the Western Australian Government and, (ii) the assessments the Commissioner issued to Matrix Group Ltd in 2014. I address those matters in the following paragraphs.
The 2008 ATO / WA settlement:- This is one of two matters on which VMQD seeks to rely, despite not having been raised in the objection notices. (It was common ground that, for the purposes of the present matter, it was appropriate to assume the Tribunal would permit VMQD to rely on it at the substantive hearing:- see Taxation Administration Act s 14ZZK.)
In the October 2017 contention statement VMQD asserts that under the Matrix fleet leasing transaction documents the WA government provided indemnities to Matrix in relation to taxation liabilities (of a kind not detailed in the statement). VMQD further asserts that this potential taxation indemnity obligation survived the termination related agreements Matrix made with the Western Australian government.
After the termination of the Matrix fleet leasing transaction the Commissioner conducted a review of the termination arrangements and payments. This review ultimately gave rise to a contentious tax liability, primarily of the Western Australian government entities involved in the transaction. That tax liability contention was ultimately resolved between the Commissioner and the Western Australian government in January 2008. Under that agreement the Commissioner agreed to accept a payment of $14 million as full and final settlement.
The effect of that settlement had been noted in the 9 March 2010 Western Australian Legislative Assembly Hansard. The Parliamentary description of the January 2008 settlement as involving “full and final settlement of tax matters relating to the termination of the Matrix Fleet leasing transaction” is said by VMQD to be probative of the Commissioner’s “release of all income tax liabilities potentially arising from” the Matrix transaction. The contention is that VMQD would be entitled to the benefit of such a release, even if he was not a party to the settlement, because of the potential application of the Property Law Act 1969 (WA) s 11(2) In support of that contention VMQD relies on a passage in the judgment in Westina Corporation Pty Ltd v BGC Contracting Pty Ltd (2009) WASCA 213; 41 WAR 263 at [43].
The 2014 Matrix Group Ltd assessment:- It is plain from the Commissioner's 19 August 2016 objection decision reasons that he characterised the contentious payments as amounts to which Matrix had been entitled, and were in the nature of either directors fee or dividend payments by Matrix to VMQD. Consistent with those alternative characterisations, in 2014 the Commissioner had issued assessments that included the four payments in Matrix’s assessable income.
VMQD’s October 2017 contention document asserts that Matrix had significant tax losses in its pre 2001 and 2002 tax years. The availability of these losses, to offset any income represented by the contentious termination payments, is said to be inconsistent with VMQD having engaged in fraud or evasion in connection with his treatment of those payments.
THE OBJECTION AND REVIEW APPLICATION ISSUES
Prior to the April 2017 further production application, the parties had lodged statements of issues. Each was framed, less than helpfully for present purposes, as a statement of the ultimate matters requiring decision - namely (i) VMQD’s taxable income in each tax year and, (ii) his penalty liability for any tax shortfall.
Subsequently, in various affidavits and in their respective statements of contentions, the parties addressed various contentions (not always consistently expressed) relating to the disputed assessments. VMQD’s issue contentions were advanced in
(a)a 16 February 2017 witness statement by a solicitor employed by the legal practice he had retained
(b)submissions dated 21 April 2017 and 4 May 2017
(c)a 10 October 2017 statement of contentions. (This document provides an apparently comprehensive explanation of the commercial background to both the origin and the termination of the Matrix fleet leasing transaction.)
(d)the “Argument Reference” document to which I earlier referred:- see paragraph 18 above.
Ultimately the parties appear to have settled (at least for the purposes of addressing the current further production application) on an identification of the following issues
(a)the ordinary income issue:- raising the question whether the circumstances of the payments permit them to be characterised as payments to (or relevantly directed by) VMQD
(b)the statutory income issue - raising the related question whether the circumstances of the payments permit them to be characterised as payments to (or relevantly directed by) VMQD
(c)the dividend issue:- raising the question whether the payments were dividends for the purposes of ITAA 1997 s 44)
(d)the statutory income issue - raising the question whether (and to what extent) VMQD was entitled (for the purposes of ITAA 1997 s 97) to a share of the Matrix unit trust’s 2001 and 2002 net income
(e)the evasion issue - raising two (apparently alternative) questions whether there was a proper basis for finding evasion if VMQD (i) had not given any relevant direction, and (ii) had adequately disclosed the payment circumstances to the Commissioner in the course of the 2003 review
(f)the 2008 settlement issue - raising the question whether the 2008 settlement (apparently between the ATO and the Western Australian government) result all of the outstanding tax liabilities of entities associated with the matrix fleet leasing transaction (or at least those liabilities of Matrix Group entities and VMQD)
(g)the Matrix Group claim issue – raising the question of Matrix Group Ltd’s entitlement to the payment amounts, tax liability in relation to them and the implications of such a claim (or liability) for the propriety of the Commissioner’s contentious assessments of VMQD
(h)the double taxation issue – raising the question whether VMQD, as a UK resident for the tax years from 2002 to 2011, is entitled to the benefit of the UK Australia Double Tax Agreement 1967.[1]
(i)the penalties issue – raising the question whether VMQD intentionally disregarded his income tax obligations
[1]VMQD would require leave to raise this issue in the review proceedings – because it was not relied on in the objection.
The critical factual question underlying all of these issues appears to be whether or not VMQD relevantly diverted the payments – in the sense of causing them to appear to have been paid to FSAI Inc. There is perhaps a related question about the precise stages and character of the payments made from the FSAI Inc account:- see paragraph 24 above.
THE LIQUIDATOR’S RESPONSES – SCHEDULE 2:ITEM 1
This document is described in the liquidator’s 12 May 2014 response to the Commissioner’s Preliminary Audit Findings (“PreAudFs”) document of 14 April 2014. The letter describes the PreAudFs document as having been based on information the liquidator had provided in March 2011. It goes on to report that the Liquidator had subsequently obtained additional documents. Appendix A is then described as containing (i) a schedule of footnote references contained in the PreAudFs, (ii) some “additional comments” and, (iii) reference to additional documents.
The date and description of Appendix A, when read with the content of the liquidator’s 12 May 2014 letter convey the impression that it is an inherently peripheral document. The PreAudFs already contained the substance of the view that the contentious termination payments had not been included in Matrix 2001 and 2002 tax returns. That view has been subsequently maintained in the December 2015 evasion opinion and audit report, and in the objection decision. There is no adequate basis to be satisfied that the comments and references in Appendix A have any substantive relevance. The possibility that, as the views of the Liquidator in relation to the significance / sufficiency of the Commissioner’s PreAudFs, footnotes, they may have some adjectival relevance to any of the foreshadowed issues in the review proceedings is either speculative or extremely questionable. That view is rather confirmed by the fact that Appendix S of the 12 May 2014 response document appears to contain the detailed substance of the Liquidator’s responses to the PreAudFs document, and the Commissioner’s provision of that document to VMQD is no longer contentious.
I am not satisfied that Appendix A “may be relevant” to the review proceedings. Even if I were of the view that it “may be relevant” I would not require its production, because I regard it as likely to be a peripheral document unlikely to make any material contribution to the resolution of the review proceedings.
THE EVASION AND OBJECTION DECISION DOCUMENTS - SCHEDULE 2:ITEM 2
Reference to Schedule 2 shows that this production request is directed at documents that were “before” the Commissioner’s decision making personnel, not referred to in the opinion / decision reason documents, and that “may be relevant” to (most of) the issues described in paragraph 42 above. This formulation of the request involves an element of circular logic. VMQD appears to seek the production of documents that “may be relevant” without satisfying the threshold criterion of satisfying the Tribunal that there are any particular documents that merit that classification.
In substance VMQD’s request simply re-states the general submission that I have rejected earlier in these reasons:- see paragraphs 5 to 12 above. It also engages in the essentially “speculative” enquiry that was disapproved of in Kennedy, Re KLGL and QCYY, and Cash World:- see paragraphs 7, 9 and 13 above. For those reasons alone the production request should be rejected. The request is not related, in any meaningful way, to particular documents. Nor is the width of the request properly to be regarded as describing a particular class of documents. Much less is there an available reasoning that overcomes the conceptual circularity evident in the terms of the production request.
It is appropriate, however, to address aspects of VMQD’s submissions that did involve some greater degree of particularity. One proposition was that the process of reasoning in the Commissioner’s evasion opinion does not provide any clarity about the actual basis for the opinion. In the absence of that clarity being expressed in the evasion opinion reasons, VMQD asserts that the Commissioner’s withholding of documents on which he must have relied in forming the evasion opinion potentially involves a denial of procedural fairness.
That contention seems have its principal emphasis in relation to two matters. The first is the basis for the Commissioner having concluded that VMQD “directed” the contentious payments being made to FSAI Inc. The second is the obscurity (or perhaps imprecision) of the payments from the FSAI Inc bank account in September 2002 detailed in the evasion opinion, and the justification for the characterisation of VMQD having derived the funds personally. The contention is that a complete and accurate understanding of the actual sequence of payments, and the available documents explaining them, is at least potentially relevant to the accuracy and reliability of the evasion opinion.
There is no substance in the first point. The account that VMQD gave in the November 2013 s 264 interview hardly admits of any conclusion other than that VMQD directed the contentious payments to be made to the FSAI Inc bank account. What is yet to be established is whether or not those payments were made pursuant to the various contention arguments I canvassed earlier:- see paragraphs 29 to 32 above. In relation to that argument it seems to be abundantly clear from the various reason statements that the Commissioner has no documents that tend to substantiate that proposition. On the contrary he has some information (whose production is uncontentious) that tends to be inconsistent with it (namely the reports of the June 2001 settlement between FSA Group and the Western Australian Government, and the Liquidator’s response information). In those circumstances there is no basis for satisfaction that the Commissioner has any additional documents that may be relevant to the question of the payment direction.
The second point tends to involve the same issue that was addressed in Re KLGL and QCYY about perceived inadequacies in statements of reasons, and whether or not they tended to be probative of the existence of additional (previously unproduced) documents. It is fair to say in the present matter that none of the Commissioner’s reasons statements minutely detail the sequence and circumstances of FSAI Inc’s payments from the bank account:- see paragraph 24 above. But it seems to me that the basic thrust of the reasoning is to rely on the circumstantial connection between the apparent origin of the termination payments, the problematic function of FSAI Inc, VMQD’s director status (of Matrix and FSAI Inc) and the ultimate destination of the funds. That reasoning may not be compelling, but I do not regard the contents of the various reasons as conveying a basis for satisfaction that the Commissioner has additional documents relating to the steps, stages and circumstances of the various payments. And in any event, I do not regard the description of the documents sought in this Schedule Item as capable of being directed at any particular such documents or classes of documents.
A further argument that VMQD advanced in relation to the evasion opinion concerned the content of the disclosures that were made to the Commissioner in connection with the 2003 review. That matter is addressed later in these reasons when I deal with Schedule 2 Item 4.
THE AUDIT REASONS DOCUMENTS - SCHEDULE 2:ITEM 3
VMQD’s application in relation to this item was ultimately in the same terms, and supported on the same grounds, as the production request in relation to the evasion opinion and the objection decision. Accordingly it is rejected for the same reasons.
THE 2003 REVIEW DOCUMENTS - SCHEDULE 2:ITEM 4
In August, September and December 2003 the Commissioner wrote to the accountants who had acted for MatrixFacMan (Williams Hatchman & Kean) and Westfleet (Deloitte Touche Tohmatsu). The Commissioner informed them that he was undertaking a review of the 2001 termination arrangements. The Commissioner requested the production of transaction related documents. The overall effect of the request was for the production of
(a)“all documents” between June and November 2001 relating to the “retirement of the debt component of the Transaction” and “the termination of the transaction”
(b) documents that “would allow the reconstruction of the financial aspects of the … transaction from its commencement to its termination”
(c) documents that would explain Westfleet’s tax treatment of the various termination related payments.
In January 2004 Deloitte complied with that request. At the same time, they gave VMQD an itemised list of 16 documents they had provided to the ATO. (Those documents included the documents in Schedule 2:Items 4(b) & (c).) In April 2004 Deloitte wrote again to the Commissioner providing additional information about aspects of the Matrix fleet leasing transaction. (The 28 April 2004 letter is referred to in Schedule 2: Item 4(a)(i).)
VMQD contends that the evasion opinion cannot be sustained if the contentious payments were “fully disclosed” to the Commissioner in the course of the 2003 review. The contention is that the material provided to the Commissioner in 2003 is potentially relevant to the evasion opinion because it will tend to establish (i) what was disclosed and, (ii) the true character / identity of the entity that received / was entitled to the payments. An additional aspect of VMQD’s contention in relation to these documents is that they are potentially relevant in establishing Matrix’s tax position and more particularly the potential for Matrix to have taken advantage of carried forward tax losses in each of the 2001 and 2002 tax years. (I deal with this matter later in these reasons in relation to Schedule 2: Item 6.)
VMQD’s contentions have no apparent relevance to the matters in Schedule 2 Item 4(c). All but the last of those matters address the financial situation of Westfleet. Their connection with either the contentious termination payments, or the payments from FSAI Inc’s bank account is far from apparent. Their only conceivable relevance is in relation to Matrix tax affairs, rather than those of VMQD personally. That conceivable relevance is not sufficient to lead to the opinion of potential relevance necessary to contemplate a discretionary production requirement under AAT Act s 37(2).
The various documents in Schedule 2: Items 4(b)(i) and 4(c)(vi) are all sought to be the subject of an additional production direction to address the contingency that they may show there was full disclosure of all relevant matters in the course of the 2003 audit review. The difficulty with this contention is that the 28 April 2004 Deloitte letter referred to in Item 4(b)(i) makes clear that the Commissioner was told the contentious payments had not been included in Matrix financial statements because they represented “payments made under direction to the residual value insurers”. Given that this explanation is at least arguably consistent with the principal objection contention VMQD maintains in the present proceedings, there is no adequate basis for satisfaction that the contents of the documents are potentially relevant to the review proceedings. The critical matter for the purposes of assessing their potential relevance is not their consistency with the current contention, but whether or not they have the capacity to lend substance to that contention. In addressing that question, against the context of the Commissioner’s reasons which indicate that he has no information that tends to substantiate that asserted reality, it is in the realm of speculation to invite enquiry into the contents of these documents. This is particularly the case where, as the matters in paragraph 55 above (and the 28 April 2004 letter) show, the focus of attention at that time was on the accounting treatment of the contentious termination payments by Matrix, rather than by VMQD personally.
The Schedule 4: Item 4(a)(ii) communications were asserted by VMQD to be relevant partly because of the same issues that Deloitte had addressed in the 28 April 2004 letter. (The letter suggested it was a composite response that had been prepared with contribution from both the accountants referred to in paragraph 55 above.) In that respect, it is in the same category as Item 4(a)(i) – and not shown to be potentially relevant.
In another respect, the Item 4(a(i) correspondence was suggested as potentially relevant because of the contents of a draft 21 May 2001 draft letter prepared by the Western Australian government’s solicitors. That draft letter canvassed a number of difficulties involved in effecting the Matrix fleet leasing transaction termination. One particular item of discussion was the commercially opposed interests of Matrix and the Western Australian government. Those respective interests were in obtaining a release or indemnity in relation to Matrix’s termination related payments. The Western Australian government wanted to avoiding incurring any such tax related indemnity obligation. Matrix had a commercial interest in obtaining such an indemnity.
The submission made on VMQD’s behalf was that this discussion increased the likelihood that the 2008 settlement agreement did in fact contain a tax indemnity in favour of Matrix. That contention is best addressed in the context of the VMQD’s application for production of the 2008 settlement agreement:- see Schedule 2: Item 5. I address that matter in the corresponding section of these reasons, and conclude that the 2008 settlement agreement has not been shown to be potentially relevant. It follows that the correspondence production sought in relation to Item 4(a)(i) has similarly not been shown to be potentially relevant.
The remaining matter to address is Item 4(a)(iii), which seeks communications with FSA Group in relation to the termination of the Matrix fleet leasing transaction. It is readily apparent from VMQD’s principal objection contention (see paragraph 29 above) and from the Commissioner’s reliance (in the objection decision) on the apparent significance of the June 2001 settlement between FSA Group and the Western Australian government (see paragraph 30 above) that the underlying reality of the termination arrangements with FSA Group is critical to VMQD’s objection grounds. For that reason, and notwithstanding that it is unclear whether any such correspondence occurred (see ACN 154 520 199 Pty Ltd v Commissioner of Taxation [2018] AATA 33 at [75] & [102]), it is appropriate to require production of this class of documents.
THE 10 JANUARY 2008 SETTLEMENT AGREEMENT – SCHEDULE 2:ITEM 5
The decision in Westina Corporation Pty Ltd v BGC Contracting Pty Ltd (2009) WASCA 213; 41 WAR 263, on which VMQD’s submissions relied, in fact offers little support for the potential relevance of the 2008 Settlement Agreement. Westina involved the scope of a contractual indemnity by a vehicle supplier to a corporate hirer. The issue arose when the vehicle was damaged in a collision with another vehicle driven by one of the hirer’s employees. The decision held that the corporate hirer, but not its employee, was entitled to the benefit of the contractual indemnity. The employee was excluded from the scope of the indemnity because he was not identified expressly or impliedly, with either particularity or as within a class or category of persons, in the contract. The Full Court held that any doubt about the scope of the indemnity had to be resolved in favour of Westina, as the indemnifier:- see [2009] WASC 213 at [49], [52] & [83].
The decision in Westina provides no basis for opining that, as a matter of construction, the Parliamentary reference to “full and final settlement of tax matters relating to the termination of the Matrix Fleet leasing transaction”, should be regarded as intended to benefit persons who were neither parties to, nor identified in, the Agreement. VMQD’s contention about the apparent relevance of this settlement agreement is a most unlikely, essentially speculative, and in some respects an irrelevant, hypothesis. There is nothing to suggest that either Matrix’s tax liabilities, or those of VMQD, were in contemplation at the time of the Settlement with the ATO. The facts that (i) neither were parties to the Settlement and (ii) no contention has been shown to have existed in 2008 about their tax liabilities, tends to suggest that they were not. In that context, it would be novel in the extreme, notwithstanding the WA Property Law Act provision, for such a contractual release to be construed as operating to release liabilities that were neither in contemplation at the time nor involved entities that were not parties to, or described in, the contract:- see IBM Australia Pty Ltd v State of Queensland [2015] QSC 342 at [45].
Even if there were some apparent substance in the hypothesis that the 2008 Settlement Agreement somehow conferred an indemnity benefit on Matrix, it is difficult to see its relevance to VMQD personally. The 2015 Assessments proceed on the basis that VMQD received the contentious payments from Matrix and that they constituted income in his hands. There is no basis in any of the material or submissions for regarding any tax indemnities that may have been involved in the Matrix fleet leasing transaction documents as extending to VMQD’s personal tax liabilities. Still less is there any justification for surmise that the 2008 settlement arrangements between the Commissioner and the Western Australian government were intended to address, or in any sense did address, VMQD’s personal position.
VMQD’s pursuit of these documents is an exercise in speculation. I am not satisfied that the threshold criterion of potential relevance has been met in relation to the 2008 settlement.
THE MATRIX GROUP LTD DOCUMENTS - SCHEDULE 2:ITEM 6
VMQD points to the dividend issue, and to the reference in the judgment in Matrix Group Limited (in liq) v Oates [2016] FCA 1487 to the Commissioner having lodged a $15.7m proof of debt in the liquidation of Matrix Group Ltd. That proof of debt is said to tend to establish that the Commissioner has included the contentious payments in Matrix Group Ltd’s assessable income for the 2001 and 2002 tax years.
The argument underlying this aspect of VMQD’s production application is not altogether easy to formulate or understand. As variously advanced, it appears to involve propositions that:-
(a)Matrix assigned the contentious payments to “FSA Oaklahoma” and it was beneficially entitled to them in the 2001, 2002 tax years
(b)If the assignment to “FSA Oaklahoma” was defective, Matrix was entitled to the funds on a resulting trust, and again they had not been relevantly derived by VMQD
(c)Based on the views of Matrix’s liquidator, VMQD misappropriated Matrix’s funds, in breach of his fiduciary obligations as a director, and held them as constructive trustee. This is said to demonstrate that Matrix derived the contentious payments and that they cannot constitute his assessable income. (This argument draws on Zobory v Commissioner of Taxation (1995) 64 FCR 86 at 89.)
The proposition that the payments form part of Matrix’s assessable income is essentially irrelevant to the question of VMQD’s liability. The basis of the assessment decisions is (as VMQD’s primary arguments made clear) his conduct in diverting the payments from Matrix to FSAI Inc, and ultimately to entities with which he was personally interested. It may be that, down the track, the Commissioner will encounter a difficulty if he were, on proper analysis, shown to be attempting a double recovery of the same tax liability. But that is not a question that arises in the present proceedings.
The context of VMQD’s arguments involves, as it currently appears, a positive assertion that Matrix was entitled to the funds, and that he did not do anything to divert them from Matrix. That assertion is, as it seems to me, quite distinct from the question of Matrix own tax liability in relation to the amounts involved in the payments. Accordingly, I am not satisfied that the Matrix documents in Schedule 2: Item 6 may be relevant to the assessment and objection decisions.
CONCLUSION AND DECISION
In the light of the matters addressed in paragraphs 29, 30 and 63, I am of the opinion that the following class of documents may be relevant to the review of the 19 August 2016 Objection decision by the Tribunal. Accordingly, I require the Commissioner to lodge with the Tribunal within 28 days the prescribed number of copies of each of the class documents that is in the Commissioner’s possession or control:
The class of documents:- Correspondence (including attachments and produced documents) relating to the Australian Taxation Office’s 2003 review of the unwinding / termination of the Matrix fleet leasing transaction, between the ATO and FSA Oklahoma, Inc, their representatives or assignees.
I certify that the preceding 72 (seventy-two) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member
...................................[SGD].....................................
Associate
Dated: 29 August 2018
Date(s) of hearing: 2, 3, and 4 May 2018 Counsel for the Applicant: R Seiden SC and A Russoniello Solicitors for the Applicant: Speed and Stracey Lawyers Counsel for the Respondent: A Stewart SC and G O'Mahoney Solicitors for the Respondent: MinterEllison
SCHEDULE 1 – THE PRODUCTION OBLIGATIONS AND POWERS
(Reasons paragraph 3)
Administrative Appeals Tribunal Act 1975
37 Lodging of material documents with Tribunal
…
37(1) Subject to this section, a person who has made a decision that is the subject of an application for review (other than second review) by the Tribunal must, within 28 days after receiving notice of the application (or within such further period as the Tribunal allows), lodge with the Tribunal a copy of:
(a) a statement setting out the findings on material questions of fact, referring to the evidence or other material on which those findings were based and giving the reasons for the decision; and
(b) subject to any directions given under section 18B, every other document that is in the person’s possession or under the person’s control and is relevant to the review of the decision by the Tribunal.
…
37(2)Where the Tribunal is of the opinion that particular other documents or that other documents included in a particular class of documents may be relevant to the review of the decision by the Tribunal, the Tribunal may cause to be given to the person a notice in writing stating that the Tribunal is of that opinion and requiring the person to lodge with the Tribunal, within a time specified in the notice, the specified number of copies of each of those other documents that is in his or her possession or under his or her control, and a person to whom such a notice is given shall comply with the notice.
Taxation Administration Act 1953
14ZZF Modification of section 37 of the AAT Act
14ZZF(1)Section 37 of the AAT Act applies in relation to an application for review of a reviewable objection decision as if:
(a)the requirement in subsection (1) of that section to lodge with the Tribunal such numbers of copies as is prescribed of statements or other documents were instead a requirement to lodge with the Tribunal such numbers of copies as is prescribed of:
(i) a statement giving the reasons for the decision; and
(ii) the notice of the taxation decision concerned; and
(iii) the taxation objection concerned; and
(iv) the notice of the objection decision; and
(v) every other document that is in the Commissioner’s possession or under the Commissioner’s control and is considered by the Commissioner to be necessary to the review of the objection decision concerned; and
(vi) a list of the documents (if any) being lodged under subparagraph (v); and
(b) the power of the Tribunal under subsection (2) of that section to cause a notice to be served containing a statement and imposing a requirement on a person were instead:
(i) a power to make such a statement and impose such a requirement orally at a conference held in accordance with subsection 34(1) of the AAT Act; and
(ii) a power, by such a notice, to make such a statement and impose a requirement that the person lodge with the Tribunal, within the time specified in the notice, a copy of each of those other documents that is in the person’s possession or under the person’s control; and
(iii) a power, by such a notice, to make such a statement and impose a requirement that the person lodge with the Tribunal, within the time specified in the notice, a copy of a list of the documents in the person’s possession or under the person’s control considered by the person to be relevant to the review of the objection decision concerned.
14ZZF(2)Paragraph (1)(b) does not affect any powers that the Tribunal has apart from that paragraph.
14ZZF(3)The imposition of a requirement covered by subparagraph (1)(b)(iii) does not prevent the subsequent imposition of a requirement covered by subparagraph (1)(b)(ii).
Note:- Since the Administrative Appeals Tribunal Amendment Act 2005 No. 38 of 2005 (Cth), the reference in s 14ZZF(1)(b)(i) should be to a conference held in accordance with s 34A(1) of the AAT Act.
SCHEDULE 2 – THE CONTENTIOUS DOCUMENTS
(Reasons paragraph 18)
The Liquidators Responses - {Argument Reference:- Step 3:1:1}:- PPB Advisory - Liquidators 12 May 2014 Response to Preliminary Audit Findings - (Appendix A)
The evasion opinion and objection decision documents - {Argument Reference:- Step 3:1:5 & Ex 5A}:- All documents that
(a)were before officers of the Commissioner who made the 8 December 2015 (T 48) evasion opinion, and
(b)were before officers of the Commissioner who made the 19 August 2016 (T 2) objection decision, and
(c)were not referred to in either the evasion opinion or the objection decision, and
(d)may be relevant to
(i)the assignment of any of the contentious payments to FSA
(ii)the characterisation of the payments as “ordinary income” VMQD for the purposes of ITAA 36 s (26(e)
(iii)characterisation of the payments as statutory income of VQD (eg., as trust distributions)
(iv)characterisation of the payments as dividend payments (by Matrix Group Limited)
(v)the taxable income of Matrix Group Limited
(vi)the 8 December 2015 evasion opinion
(vii)the 2008 settlement between the ATO and the Western Australian government.
The audit reasons documents - {Argument Reference:- Step 3:1:5A}:- All documents that
(a)were before the officers of the Commissioner’ who made the 21 December 2015 audit findings
(b)were not referred to in the audit decision
(c)may be relevant to the issues before the Tribunal.
Note:- The Argument Reference document was originally expressed in this way. By the end of VMQD’s submissions, however, the submitted wording for both Items 2 and 3 was substantially the same, subject to the difference in the name of the decision / reason / opinion concerned.
The 2003 Review documents - {Argument Reference:- Step 3:1:7}:- Two - categories of documents - comprising
(a)Correspondence (including attachments and produced documents) relating to the Australian Taxation Office’s 2003 review of the unwinding / termination of the Matrix fleet leasing transaction, between the ATO and
(i)Mr Jack Thomas of Deloitte (apparently including letters dated 4 December 2003 and 28 April 2004)
(ii)Williams Hatchman and Kean (apparently relating to a draft letter of 21 May 2001 and the termination of the Matrix fleet leasing transaction)
(iii)FSA Oklahoma, Inc or their representatives
(b)The following specifically identified letters and emails - {Argument Reference:- Step 3:3:3}
(i)6 August 2001 fax from Mr Brian Graham to Mr Jack Thomas [VMQD 16.01.2004 email: 14]
(ii)16 August 2002 email from VMQD to Mr Jack Thomas [VMQD 16.01.2004 email: 12]
(iii)19 August 2002 email from Mr P Cinque to VMQD [VMQD 16.01.2004 email: 8]
(iv)21 August 2002 email from Mr Graham to K Lo [VMQD 16.01.2004 email: 7]
(v)23 August 2002 email from Mr Cinque to VMQD [VMQD 16.01.2004 email: 10]
(vi)9 September 2002 email from Mr Graham to Mr Thomas [VMQD 16.01.2004 email: 6]
(vii)18 November 2002 fax from Mr Graham - [VMQD 16.01.2004 email: 5]
(viii)4 and 5 March 2003 email exchange involving Mr Graham [VMQD 16.01.2004 email: 3]
(ix)7 March 2003 letter to Mr Brian Graham [VMQD 16.01.2004 email: 2]
(x)18 March 2003 letter to Mr Scott Tyne [VMQD 16.01.2004 email: 1]
(c)The following documents - {Argument Reference:- Step 3:3:3}
(i)the Deloitte working paper relating to West Fleet for the 2000 income tax return [VMQD 16.01.2004 email: 15]
(ii)the West Fleet trial balance for 2000 [VMQD 16.01.2004 email: 16]
(iii)the West Fleet tax return for the 2001 income year [VMQD 16.01.2004 email: 11]
(iv)the West Fleet tax return for the 2002 income year [VMQD 16.01.2004 email: 4]
(v)a 20 June 2002 West Fleet working paper [VMQD 16.01.2004 email: 9]
(vi)any report, position paper or finalisation letter the ATO may have issued to bring the 2003 review to a conclusion.
The 10 January 2008 settlement agreement - {Argument Reference:- Step 3:1:10}:- The settlement agreement, announced in the Western Australian Parliament on 28 February 2008, apparently resolved issues concerning (i) contentious income tax liabilities of two banks that were parties to the matrix fleet leasing transaction, and (ii) the indemnity obligations of the Western Australian to the Banks in relation to those tax liabilities. Presumably the Western Australian government, the ATO and the two banks were parties to the settlement agreement.
The Matrix group Ltd tax documents - {Argument Reference:- Step 3:1:12}- Documents relating to the 2001 / 2002 assessment Matrix Group Limited (in liquidation) and specifically
(a)a 14 April 2014 statement of Preliminary Audit Findings
(b)any final audit findings, position paper or reasons for decision for the issue of the assessments and penalty assessments to Matrix Group Limited
(c)copies of the notices of amended assessment (both tax and penalty) issued to Matrix Group Limited for the 2001 and 2002 tax years
(d)any documents recording any decision relating to the interest charge liability, or remission of such a liability, of Matrix Group Limited - “if relevant to penalties”
(e)notification of interest charges to Matrix Group Limited As a Result of the 2001 and 2002 assessments - “if relevant to penalties”.
SCHEDULE 3 - ENTITIES INVOLVED IN THE MATRIX FLEET LEASING TRANSACTION
(Reasons paragraph 20)
Parties to the 30 November 2001 Deed of settlement and release
(a)State Supply Commission (of Western Australia) - the Western Australian government entity that was the proposed vendor, and subsequent hirer, of the fleet vehicles.
(b)Investor banks - Bank of Western Australia Ltd & ABN Amro Facilities Australia Ltd. The investor banks provided significant funding for the transaction.
(c)Matrix Facility Management Pty Ltd – (“MatrixFacMan”) the facility manager in relation to the financial aspects of the transaction. It was a wholly owned subsidiary of Matrix Group Ltd. By August 2003 it had been renamed Office Fit-Out Leasing Services Pty Ltd.
(d)Matrix Group Limited – formerly Matrix Finance Group Ltd, a trustee of the Matrix Finance Group Unit Trust (“MFGUT”) and user of the trading name “Matrix Finance Group”.
(e)Westfleet Pty Ltd - a special purpose company owned by “Matrix Group” and the purchaser of the fleet under ”the Matrix fleet leasing transaction”.
Other relevant names and entities
(a)Credit and Commercial Finance Pty Ltd - a corporation of which VMQD was the sole shareholder, a director and company secretary
(b)FSA Group:- a group of corporate entities including
Financial Security Assurance of Oklahoma, Inc - a USA incorporated insurer of Westfleet. Its liability appears to have related to any shortfall in the sale proceeds of vehicles. In early June 2001 FSA Group received an $11m payment from the Western Australian government, reflecting an “actuarial adjustment” for the consequences of the early termination of the Matrix fleet leasing transaction. VMQD contends FSA Oklahoma claimed against Matrix Group and the WA government as a result of the termination of the transaction. VMQD appears to acknowledge that the claims against the WA government were resolved by the June 2001 settlement agreement, but contends the claims against Matrix Group were resolved by an assignment arrangement relating to the contentious termination payments that were deposited to the FSAI Inc bank account.
(ii)FSA Insurance Company (“FSAIC”) - the November 1998 assignee of the insurer’s rights and obligations under the Matrix fleet leasing transaction documents.
(iii)Financial Security Assurance Holdings Ltd (“FSAAH”) – the holding company of the FSA Group
(iv)Dexia SA – a Franco Belgian financial group that acquired FSAAH in July 2000.
(c)FSA International Inc - a Cayman Islands entity incorporated on 28 July 1999 as MFG Investor Services (No 2) Inc. It was renamed on 17 May 2001, and opened an ANZ bank Singapore bank account at the same time. The company’s directors (after 26 June 2001) were VMQD and Mr Scott Tyne. All four of the contentious termination payments were deposited to FSAI Inc’s ANZ bank account in Singapore. The company was de-registered on 30 June 2003.
(d)Skea, Hager & Co – solicitors for the Western Australian government in relation to the transaction
(e)Pajiti Pty Ltd:- the corporate trustee of a trust which held units in the Matrix Finance Group Unit Trust and of which VMQD was an eligible beneficiary
(f)Pegela Pty Ltd:- the corporate trustee of another trust that held units in the Matrix Finance Group Unit Trust and of which VMQD is an eligible beneficiary
“Matrix Group” - an association or succession of entities that operated a business using a unit trust entitled the Matrix Finance Group Unit Trust of which Matrix Financial Services Pty Ltd, and later Matrix Group Limited, was the trustee
Tyne, Mr S - former director of Matrix Group Ltd (from 1994 to 2006) and a director of FSA International Inc at the time of the contentious payments.
VMQD:- an investment banker, eligible beneficiary of the “Pajiti” and “Pegala” trusts, a director of Matrix Group Ltd (from 1993 to 22 June 2002) and a director of FSA International Inc at the time of the contentious payments.
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