Whiddon and Commissioner of Taxation (Taxation)
[2022] AATA 197
•10 February 2022
Whiddon and Commissioner of Taxation (Taxation) [2022] AATA 197 (10 February 2022)
Division:Taxation and Commercial Division
File Number: 2019/1278
Re:Glenn Whiddon
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member R Olding
Date:10 February 2022
Place:Perth
The respondent’s objection decisions dated 10 January 2019 in respect of assessments of income tax and administrative penalty for the 2011 income year are affirmed.
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Catchwords
TAXATION – INCOME TAX – whether gain on complex share exchange transaction revenue or capital in nature – where applicant conceded the transaction was a commercial transaction – whether applicant had not insignificant purpose of obtaining profit notwithstanding that the shares received were to be held for an extended period – held gain is income according to ordinary concepts – whether applicant a resident of Australia – where applicant handed back key to Monaco residence, returned to Australia but departed again for a temporary period ending after relevant time – held applicant a resident – decision affirmed
TAXATION – ADMINISTRATIVE PENALTY – whether applicant exercised reasonable care – where Commissioner initially adopted same position as applicant regarding whether the transaction was on revenue account – where there was little evidence regarding the conduct leading to the shortfall in the return - whether appropriate to remit penalty – decision affirmed
Legislation
Income Tax Assessment Act 1936, s 6(1) (‘resident of Australia’)
Income Tax Assessment Act 1997, ss 6-5, 995-1(1) (‘Australian resident’)
Taxation Administration Act 1953, s 14ZZK; Sch 1, ss 284-75(5), 298-20(1)Cases
Commissioner of Taxation v Addy [2020] FCAFC 135
Commissioner of Taxation v Pike [2020] FCAFC 158
Federal Commissioner of Taxation v Cooling [1990] FCA 297; (1990) 22 FCR 42
Federal Commissioner of Taxation v Miller [1946] HCA 23; (1946) 73 CLR 93
Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50
XPQZ, KYZC, DHJP and Commissioner of Taxation [2020] AATA 1014REASONS FOR DECISION
10 February 2022
WHAT IS THIS CASE ABOUT?
As part of a complex commercial arrangement, the applicant, Mr Whiddon, exchanged shares and options in CLNR Holdings Pty Ltd (‘CLNR Holdings’), a shelf company he incorporated for the purpose of the arrangement, for valuable shares and options in Rialto Energy Limited (‘Rialto Energy’).
On the alternative bases that he considered the benefit of approximately $13M so obtained to be capital in nature, and that he was not a resident of Australia at the relevant time, Mr Whiddon did not include the value of the benefit in his Australian income tax return.
The Commissioner of Taxation assessed Mr Whiddon to income tax on the footing that the gain was on revenue account and that he was a resident of Australia. The Commissioner also assessed an administrative penalty, initially at the rate of 50% of the shortfall in reported tax, on the basis that Mr Whiddon was reckless with his return, but reduced on objection to 25% for lack of reasonable care. The Commissioner also declined to exercise the discretion to remit the penalty either wholly or partly.
DECISION UNDER REVIEW AND BURDEN OF PROOF
It is the Commissioner’s decisions dated 10 January 2019, allowing only in part Mr Whiddon’s objection against the assessment of primary tax for the year ended 30 June 2011 and his objection in respect of the administrative penalty, that are before the Tribunal for review.
Mr Whiddon has the burden of proving the resulting assessments are excessive.[1] The Commissioner having agreed to confine the issues in dispute, Mr Whiddon will discharge that burden if he proves either that the gain was on capital account or that he was not a resident at the relevant time.
[1] Taxation Administration Act 1953, s 14ZZK.
If Mr Whiddon is unable to prove either of those contentions, the objection decision must be affirmed in respect of the primary tax assessment and it will fall to the Tribunal to determine whether the penalty assessment is excessive. That would require Mr Whiddon to prove he exercised reasonable care or persuade the Tribunal that the penalty should be wholly or partly remitted.
These reasons therefore address, in the following order, whether Mr Whiddon has discharged the burden of proving:
(a)that the gain on the disposal of the shares was not of a revenue nature (‘the disposal issue’); or
(b)
that Mr Whiddon was not a resident of Australia at the relevant time (‘the residency issue’);
and, if not, that:
(c)Mr Whiddon exercised reasonable care in preparation of his return (‘the base penalty issue’); and, if not, that:
(d)the penalty should be wholly or partly remitted (‘the remission issue’).
THE DISPOSAL ISSUE
The applicable principles and issue for determination
A gain on disposal of property acquired otherwise than in the course of a business but in a ‘business operation or commercial transaction’ for the purpose of disposal at a profit, by the means giving rise to the gain, is on revenue account and therefore ordinary income under s 6-5 of the Income Tax Assessment Act 1997.[2] It is not necessary for profit-making to be the sole or even dominant purpose; it is sufficient if it is a ‘not insignificant purpose’ of the acquisition.[3]
[2] Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199.
[3] Federal Commissioner of Taxation v Cooling [1990] FCA 297; (1990) 22 FCR 42, [54]–[56].
The exchange occurred pursuant to a share purchase and merger agreement dated 22 October 2009 (‘SP&MA’). Mr Whiddon accepts that the shares in CLNR Holdings were ventured in a commercial transaction and that the prospect of the disposal was contemplated by the terms of the SP&MA. I therefore confine my consideration to what Mr Whiddon submitted was the only question for the Tribunal in respect of the disposal issue: whether Mr Whiddon has shown that he did not enter into the SP&MA for the not insignificant purpose of profiting upon such a disposal.[4]
[4] Applicant’s Closing Submissions, [19].
It is common ground that the time for testing whether Mr Whiddon had the not insignificant purpose of profiting on the exchange of the CLNR Holdings shares was when those shares were ventured into the arrangement contemplated by the SP&MA. However, a controversy emerged regarding whether the Tribunal’s task is to determine whether the actual, subjective intention of the taxpayer was to obtain a profit,[5] as Mr Whiddon maintains or, as the Commissioner says, ‘it is an intention or purpose that is determined objectively, albeit that evidence of the taxpayer’s subjective intention or state of mind may be relevant’.[6]
[5] Applicant’s Note Concerning Intention or Purpose, [4].
[6] Respondent’s Note Concerning Intention or Purpose, [7].
Mr Wheelahan, who appeared with Dr O’Mahoney for the Commissioner, described the distinction as ‘nuanced’. That certainly strikes me as a fitting description. However, for the purposes of this matter, it seems to me that I do not need to enter into a lengthy discourse on the passages from various authorities cited to me by both parties. The appropriate course is to determine whether Mr Whiddon has discharged the burden of proving that he did not have a profit-making intention by considering his written statements and oral testimony, along with the surrounding circumstances. That approach is, in my view, consistent with the requirement in the authorities to determine whether the taxpayer had the requisite intention. Further, it is not inconsistent with either party’s submissions, both of which acknowledged that the taxpayer’s own evidence and the surrounding circumstances are relevant considerations.
Facts relevant to the disposal - in outline
Underlying the transaction was an interest in a petroleum asset off the west coast of Africa. The interest comprised shares in a company called C&L Natural Resources Ltd (‘C&L Resources’) that was a party to a Product Sharing Contract (‘PSC’) relating to rights to explore for and produce oil and gas over an area called Block CI-202.
However, as Mr Whiddon acknowledged, the transaction giving rise to the share exchange, as contemplated in the SP&MA, was complex and detailed. Mr Whiddon submitted, though, that the transaction need not be understood in all its complexity for any inferences to be drawn regarding his intention and purpose. Mr Whiddon submitted the description drawn from parts of his opening submissions would be sufficient.[7]
[7] Applicant’s Closing Submissions, [42].
The significant parts to which Mr Whiddon drew attention are included below:
61. Among other things the SP&MA contemplated:
(a) Lagral[8] acquiring 75% of the shares in C&L Resources;
[8] ‘Lagral’ is the shelf company acquired by Mr Whiddon which became CLNR Holdings.
(b) the purchase operating in 2 stages, with:
(i) the first stage involving, among other things, Lagral:
(A) advancing a secured convertible loan, totalling US$4,000,000, to C&L Resources;
(B) assuming and being solely responsible for various financial obligations associated with the Arrete, Block CI-202, the JOA and the PSC;
(ii) the second stage involving, among other things:
(A) Lagral acquiring 75% of the shares in C&L Resources for the consideration specified in the SP&MA;
(B) an “Exchange Agreement”, as contemplated by the SP&MA, being entered into in the future with an unknown entity termed “Shellco” in the SP&MA pursuant to which Shellco would acquire Lagral’s interest in C&L Resources and Lagral would receive shares in that entity;
(C) Shellco thus becoming a 75% shareholder in C&L Resources; and
(D) the shareholders of C&L Resources retaining the remaining 25% interest in C&L Resources;
62. Soon after the SP&MA was concluded, Mr Whiddon, through Lagral:
(a) opened an office in Abidjan;
(b) began assembling a team of professionals to work on the PSC and Block CI-202; and
(c) started to advance large sums of money to Lagral to pay for that work.
. . .
69. In due course, on 3 April 2010:
(a) an exchange agreement of the kind contemplated by the SP&MA was signed; namely the Exchange Agreement; and
(b) heads of agreement were entered into between Rialto Energy, on the one hand, and CLNR Holdings, Mr Whiddon, Med Alpha (40% shareholder in CLNR Holdings), on the other (Heads of Agreement).
. . .
71. The essential arrangements contemplated were as follows:
(a) Rialto Energy advancing an interest free convertible loan in the amount of AUD$1,000,000 to CLNR Holdings;
(b) Rialto Energy raising capital by share placements to fund completion and expenditure commitments under the PSC;
(c) Mr Whiddon and Med Alpha transferring all shares and options in CLNR Holdings to Rialto Energy;
(d) Rialto Energy re-imbursing Mr Whiddon and Med Alpha all sums they had loaned to CLNR Holdings in connection with CLNR Holdings’s acquisition of a 75% interest in C&L Resources (including loans and payments provided for in the SP&MA and amounts expended by CLNR Holdings and C&L Resources in fulfilment of the exploration and expenditure requirements under the PSC);
(e) Mr Whiddon and Med Alpha assigning to Rialto Energy their loans to CLNR Holdings;
(f) Rialto Energy issuing various:
(i) shares to the shareholders of C&L Resources (as contemplated in the SP&MA);
(ii) shares, options and performance shares to Mr Whiddon and Med Alpha; and
(iii) shares to consultants and advisors.
(g) Mr Whiddon and C&L Resources’s Mr Lebovits being appointed as directors of Rialto Energy; and
(h) Mr Whiddon agreeing to a voluntary escrow period of 12 months in relation to the Rialto shares he would acquire.
72. The above arrangements were to be subject to various conditions. These included obtaining approvals from the Republic of Côte d’Ivoire, and from Rialto Energy shareholders, and Rialto Energy raising sufficient funds to complete. The final arrangements were reflected in the Rialto Agreement itself.
73. As at 21 July 2010, when the Rialto Agreement completed, the shares and options issued to Mr Whiddon pursuant to that agreement had a value considerably higher than that of the shelf company, Lagral, which Mr Whiddon had incorporated in June 2009 [later changing its name to CLNR Holdings], thus giving rise to the [benefit that is the subject of this review].
Mr Whiddon’s first witness statement, which was relevantly unchallenged, contains a detailed description of the arrangement. The Appendix to these reasons, also extracted from the Applicant’s Opening Submissions, expands upon the overview of the transactions and the surrounding circumstances set out above.
Has Mr Whiddon discharged the burden of proving he did not have a ‘not insignificant’ intention of disposing of the shares in CLNR Holdings at a profit?
The essence of Mr Whiddon’s submission is that his intention in entering into the SP&MA was to obtain an effective interest in the PSC and Block CI-202 by ending up with shares in Shellco (later identified as Rialto Energy) and to maintain that interest. Because it was his intention to maintain the interest, it must be the case, Mr Whiddon says, that his intention was to maintain a long-term effective interest in the underlying asset and not to dispose of the shares in CLNR Holdings at a profit.
Mr Musikanth, who appeared with Mr Edwards for Mr Whiddon, pointed to numerous factors related to the terms of the SP&MA and Mr Whiddon’s subsequent retention of his shares in Rialto Energy even after they came out of escrow in support of this contention.
The difficulty for Mr Whiddon is, even accepting all that is said on his behalf in that respect – that is, that his intention was to obtain and maintain an effective interest in the underlying asset – that is in my view not sufficient to discharge his burden of proof. That is because the relevant question is not whether Mr Whiddon intended to retain his effective interest in the underlying asset through his shares in Rialto Energy. Nor is the relevant question whether Mr Whiddon intended to hold the asset obtained in return for his shares in CLNR Holdings on capital account. An asset received in return for personal effort or other commercial activity may be held on capital account, but that does not mean the transaction in which the asset is received is capital in nature. For example, the value of an asset provided in return for services rendered would be income even though the service-provider may intend to hold the asset indefinitely.
The relevant question is whether Mr Whiddon had an intention or purpose of disposing of his shares in CLNR Holdings at a profit. Mr Whiddon denied that he had such an intention. Mr Musikanth submitted that, because that evidence was largely unchallenged in cross-examination, and in light of other factors that he highlighted, I should accept Mr Whiddon’s evidence that he did not intend to profit from disposal of the shares. However, whether Mr Whiddon had a purpose of profiting from disposal of his shares in CLNR Holdings is the very question the Tribunal must determine. Mr Whiddon’s denial of this conclusion is relevant but so too is any inference that might properly be drawn from the essential features of the transaction.[9]
[9] Regardless of the extent to which Mr Whiddon was cross-examined regarding his purpose in entering into the transaction, there could be no doubt he was aware that the Commissioner challenged his assertions in that regard. This is not a case in which the taxpayer was not on notice that the Commissioner challenged his stated intention and thus was denied an opportunity to be heard on the issue. As the case was conducted, the question of Mr Whiddon’s intention or purpose in entering into and carrying out the exchange was the only contentious matter for determination in respect of the disposal issue.
In that regard, it was always going to be an outcome of the successful completion of the transactions contemplated by the SP&MA that Mr Whiddon’s shares of nominal value in CLNR Holdings would be exchanged for valuable shares in a listed company in effective possession of a valuable asset. So much was acknowledged in Mr Musikanth’s oral closing submissions.[10]
[10] Transcript of proceedings, 19 August 2021, P-118, ln 34 to P-119, ln 18.
A person must be taken to have intended the obvious and contemplated outcome of their actions. Where that outcome is the exchange of shares of nominal value[11] for valuable shares, how could it be accepted that an intended outcome was not a gain that is the difference in value between the valuable shares received and the nominal value of the shares for which they were exchanged?
[11] Applicant’s Closing Submissions, [57]. Transcript of proceedings, 20 April 2021, P-60, ln 39 – ln 43.
Obtaining that profit may not have been Mr Whiddon’s main objective. His main objective may have been, as he says, to acquire an effective interest in the underlying asset. But the authorities establish that it is not necessary for profit-making to be the main purpose of a transaction. It is sufficient if it is a not insignificant purpose. In a commercial transaction, an exchange of nominal value shares for shares in a listed company of substantially greater value, inevitably results in a profit. That is what the transactions contemplated and it must be concluded that Mr Whiddon intended such a profit would be obtained. The substantial effort and risk undertaken by Mr Whiddon were directed to obtaining those interests in an asset which was highly attractive to Mr Whiddon. The achievement of that aim, which was after all the whole purpose of the transactions, effort and risk-taking, delivered the highly valuable interests in exchange for shares of nominal value. It follows that it delivered, as it was intended to deliver, a substantial profit for Mr Whiddon in the form of the difference between the value of the interests obtained and the nominal value of the shares in CLNR Holdings. That Mr Whiddon intended to retain the shares and options does not detract from that conclusion. At the least, the obtaining of the increase in value was a not insubstantial purpose of the exercise and that, on the authorities, is all that is required.
That conclusion, which follows inexorably from the objective, uncontested facts, cannot be erased by Mr Whiddon denying that it was his purpose to obtain the profit that would be the consequence of his actions. All the more so in circumstances where Mr Whiddon put at risk substantial sums of money and invested his time and expertise for a purpose that included obtaining the very interest that resulted in the substantial gain.
For these reasons, I am not persuaded that Mr Whiddon has discharged the burden of proving that he did not have a profit-making purpose. It follows from this conclusion and the concessions outlined above that the gain arising out this commercial transaction is ordinary income.
THE RESIDENCY ISSUE
Statutory framework and issues for determination
Section 995-1(1) of the Income Tax Assessment Act 1997 defines ‘Australian resident’ as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (‘ITAA 1936’).
So far as relevant to the current matter, s 6(1) of the ITAA 1936 defines a resident of Australia in these terms:
(a) a person, other than a company, who resides in Australia and includes a person:
(i) whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia; . . .
The questions for consideration therefore become whether, in respect of the 2011 income year, Mr Whiddon has discharged the burden of proving that:
(a) he did not reside in Australia (the ‘resident under ordinary concepts issue’); and
(b) his domicile was not in Australia or, if it was, the Tribunal should be satisfied that his permanent place of abode was outside Australia (‘the domicile issue’).
If Mr Whiddon fails to prove either of those propositions, the assessment must be regarded as correctly treating him as an Australian resident.
Facts relating to residency[12]
[12] These findings are drawn from the largely uncontested evidence in the witness statements of Mr and Mrs Whiddon.
Mr Whiddon, and his wife, Mrs Jane Whiddon, gave evidence, which I accept, that for extended periods in their marriage they lived apart due to the demands of Mr Whiddon’s work and for family reasons relating to the education of their children.
The family moved to Monaco at the end of 2005. At that time, it was Mr Whiddon’s intention to live in Monaco indefinitely to be closer to his business interests in Europe. Indeed, he did so until 2010 when he returned to Australia, although in the later part of this period he also spent substantial time living in the home occupied by his family during his regular return trips to Australia.
As part of the family’s move to Monaco, Mr Whiddon notified the Australian state and federal electoral authorities; shipped some belongings to Monaco and put others in storage in Australia; sold the family’s motor vehicles; closed unnecessary bank accounts and cancelled their Australian medical insurance and took out health insurance in Monaco.
While in Monaco, the family lived in long-term rented accommodation. They did buy an apartment in 2007, though a company, but later received an unsolicited offer which resulted in the apartment being sold before the family could renovate and move into the apartment as their home.
In 2006, Mr Whiddon established a business called Transport & Commodities Management SARL (‘T&C’) with a local citizen and conducted through a locally registered corporation.
The children initially attended school in Monaco. However, in 2008, out of concern that they were losing their English skills, they were moved to an international school in Nice.
By late 2008, Mrs Whiddon, who made the decisions about the children’s education, had decided to return with the children to live in Perth. This decision was motivated by continuing concerns about the children’s education and because Mrs Whiddon wanted to be closer to her parents.
Mrs Whiddon and the children moved to Perth in January 2009. Mr Whiddon helped Mrs Whiddon and the children settle into a rental property.[13]
[13] A controversy arose regarding whether communications between Mrs Whiddon and a school at which she sought to list the children for enrolment evidenced an intention at this time that the whole family, including Mr Whiddon, would return to Australia. As Mr Whiddon was not cross-examined on this topic, I have not relied upon these communications in forming the view regarding Mr Whiddon’s residency outlined in these reasons.
Mr Whiddon then returned to Monaco. He left the apartment he had shared with his family. The lease was expiring and the landlord proposed a substantial increase in rent. Mr Whiddon moved into the mixed-use apartment T&C had used as its office. To allow this to happen, the T&C office was shifted to another location in Monaco. In accordance with local requirements, Mr Whiddon registered his change of address, and that of T&C, with the authorities, updating his Carte de Sejour (residency permit) to reflect the change.
When it expired in June 2009, Mr Whiddon renewed the lease on this apartment for six months. He did not at that time intend to move back to Perth but renewed the lease for only six months because rents in Monaco, which were fluid, were falling.
Mr Whiddon had decided to leave Monaco by April 2010, but he had not formed an intention to return permanently to Australia. He had been making arrangements to facilitate a move to Singapore, and even put a deposit on an apartment for the family (which was later forfeited) and obtained residency permits for the family. But by mid-May 2010 Mr Whiddon had decided not to live in Singapore and to return to Australia.
In his witness statement, referring to the apartment previously occupied by T&C, Mr Whiddon stated:
I considered this apartment my home from when I moved into it until I shipped my possessions back to Perth in June 2010.
Mr Whiddon had returned the key to the apartment by the time he left Monaco on 20 June 2010. Mr Whiddon had social ties in Monaco, built around common interests. This included membership of a yacht club; during his time in Monaco he owned a yacht, which he later sold, and purchased a motor boat. Mr and Mrs Whiddon returned to Monaco for a few days at the beginning of July 2010 to say goodbye to friends, staying in a hotel. They then flew to New York, returning to Australia on 27 July 2010.
Mr Whiddon also maintained connections with Australia, including directorships of Australian companies, throughout his time in Monaco. In the 2009/10 year, he was in Australia for 174 days[14] and spent more time in Australia than anywhere else.[15] In the previous year, Mr Whiddon was in Australia for 102 of the 155 days in the period from 27 January 2009 to 30 June 2009.[16]
Resident under ordinary concepts issue
[14] Transcript of proceedings, 20 April 2021, P-61, ln 30.
[15] Transcript of proceedings, 20 April 2021, P-64, ln 46 – ln 47.
[16] Transcript of proceedings, 20 April 2021, P-61, ln
Applicable principles
The principles for determining whether a person is a resident of Australia are well established.[17] They include:
[17] See, for example, Commissioner of Taxation v Addy [2020] FCAFC 135, [73] (Derrington J); Commissioner of Taxation v Pike [2020] FCAFC 158.
(a) To ‘reside’ in a place for Australian income tax purposes means ‘to dwell permanently or for a considerable time, to have one’s settled or usual place of abode, to live in or at a particular place’.[18]
[18] Federal Commissioner of Taxation v Miller [1946] HCA 23; (1946) 73 CLR 93, 99 (Latham CJ).
(b) The reaching of a conclusion as to where a person resides requires consideration of not just physical elements but also intention.
(c) Thus, a person does not necessarily cease to reside at a place because they are physically absent. It is necessary to consider whether the person has maintained a continuity of association with the place with an intention to return and an attitude that the place remains their home.
(d) This is a question of fact involving consideration of such factors as:
(i) the degree of physical presence at the place;
(ii) nationality;
(iii) history of residences and movements;
(iv) habits and ‘modes of life’;
(v) frequency, regularity and duration of visits to the place;
(vi) purpose of visits and absences;
(vii) family and business ties to the place and another place;
(viii) whether a place of abode is maintained at the place.
(e) A person may reside at more than one place.
No single factor is likely to be determinative. All relevant circumstances must be considered.
Was Mr Whiddon a resident according to ordinary principles?
It may be that Mr Whiddon was a resident of both Monaco and Australia during the period leading up to his departure from Monaco. In any case, by late May 2010 Mr Whiddon had:
(a)departed from Monaco;
(b)returned the key to his apartment in Monaco;
(c)decided not to live in Singapore;
(d)decided to live in Australia;
(e)had his belongings shipped to Australia;
(f)intended to live with his family in their home in Australia.
From late May 2010, it could only be said that Mr Whiddon’s residence was in Australia where he had spent much of the period leading up to May 2010; where his family lived and where he usually lived with them when in Australia; and where he intended to reside on his return from his overseas commitments.
While he was out of Australia on business and on holidays with Mrs Whiddon and the family from 11 June 2010 until his return to Australia on 27 July 2010,[19] it is clear that since late May 2010 Mr Whiddon had not resided in Monaco or anywhere else other than Australia. He had returned the key to his apartment and had his belongings shipped to Australia. He was in Australia from 26 May 2010 until his temporary departure on 11 June 2020. From 26 May 2010 at the latest, there was nowhere else Mr Whiddon could call home.
[19] Witness Statement of Glenn Whiddon, 25 October 2019, [285].
For these reasons, I conclude that Mr Whiddon has not discharged the burden of proving that he was not a resident of Australia by 21 July 2010. This conclusion makes it unnecessary to determine whether Mr Whiddon was a resident under the domicile test, but in case I am wrong in respect of the residency under ordinary concepts issue, I turn to briefly consider the domicile issue.
The domicile issue
It follows from the discussion above that I am also not satisfied that Mr Whiddon had a permanent place of abode outside Australia by 21 July 2010. Therefore, the only issue for determination is whether Mr Whiddon was domiciled in Australia for the 2011 income year.
It may well be that Mr Whiddon obtained a domicile of choice when he moved to Monaco. I do not need to decide that because it is clear that before the start of the 2011 income year, if Mr Whiddon had acquired a domicile of choice in Monaco, he had abandoned that domicile.
By late May 2010, Mr Whiddon had formed an intention to reside in Australia indefinitely. He had arrived in Australia and was living with his family. He had no intention to live elsewhere.
That is sufficient to establish that during the 2011 income year Mr Whiddon was domiciled in Australia. A short, temporary departure from Australia for business and personal reasons does not end a domicile of origin or a domicile of choice. It is unrealistic to maintain that Mr Whiddon did not commence residing in or obtain a domicile in Australia until his return on 27 July 2010, when he had already commenced living in Australia in late May 2010 and could not identify any other place as his place of residence by that time.
Mr Whiddon has not discharged the burden of proving that he was not a resident of Australia at the relevant time. He was, in my view, a resident under either ordinary concepts or on the basis of his domicile.
It follows from this conclusion, and that in respect of the disposal issue, that Mr Whiddon has not discharged the burden of proving that the primary tax assessment is excessive. I therefore turn to consider the penalty issues.
THE PENALTY ISSUES
The evidence
Mr Whiddon is entitled to have the penalty assessment set aside if he establishes that reasonable care was exercised in the preparation of his return.[20] However, the evidence regarding preparation of his return is minimal.
[20] Taxation Administration Act 1953, Sch 1, s 284-75(5).
Mr Whiddon’s 2011 tax return was prepared by an accountant. However, the accountant did not give evidence or provide a witness statement. Nor did Mr Whiddon provide any substantive evidence regarding any advice provided by the accountant in relation to the issues arising in this review.
Mr Whiddon’s evidence in relation to preparation of the return mainly comprises this statement in his witness statement:
285. I did not declare any gain in relation to the Rialto [Energy] shares and options I received on completion of the Holdings Share Sale Agreement in my 2011. The reason I did not declare any gain is that I believed the gain from the receipt of the shares and options was capital in nature. Also, I believed that I did not become a resident for tax purpose until I returned to Australia on 27 July 2010. I believed I remained a resident of Monaco until I left my apartment there and did not become an Australian resident for tax purposes until I returned.
Evidence of Mr Whiddon’s belief, even if accepted, in itself says little about the degree of care he or his accountant exercised in preparing the return.
Mr Musikanth sought to overcome this difficulty by arguing that the views Mr Whiddon formed were ‘objectively reasonable’ in the circumstances. It may be doubted whether objective reasonableness is a basis on which to consider a conduct-based test of reasonable care. The submission seems to be an invitation to infer that Mr Whiddon must have taken reasonable care because his conclusion was (it is said) reasonable. That is more akin to a submission that Mr Whiddon adopted a reasonably arguable position which is a different basis for a base penalty not to apply that was not agitated on Mr Whiddon’s behalf. Further, in the context referred to below, I am not persuaded that these views were objectively reasonable.
I do not accept that merely forming such views is sufficient to satisfy the Tribunal that Mr Whiddon (or his accountant) exercised reasonable care. Whether the care taken is reasonable must be considered in its context. Here, that context is a highly complex transaction involving substantial loans and professional commitments by Mr Whiddon and the engagement of a team to assist in achieving the outcomes; the derivation of a gain of some $13M in a matter of weeks; and a claim to not be a resident of Australia in circumstances where Mr Whiddon had returned the key to his Monaco residence and returned to Australia before the beginning of the income year (albeit departing again for a brief period). At the least, Mr Whiddon’s views would have been highly contestable.
Reasonable care in those circumstances involves more than merely forming a view. The difficulty for Mr Whiddon is that there is no evidence of the care actually taken in preparing his return. The Tribunal has no evidence regarding the extent to which Mr Whiddon or his accountant engaged with these issues or the basis on which the views were formed. In those circumstances, there is no evidentiary foundation on which I could conclude that Mr Whiddon or his accountant exercised reasonable care.
The remission issue
The Tribunal’s task
The task of the Tribunal is to determine, having regard to the evidence, what were the circumstances surrounding the failure to exercise reasonable care on the part of Mr Whiddon and/or his accountant that might explain the conduct and what circumstances, on the evidence, ought to be taken into account in determining as a matter of discretion whether the base penalty ought to be reduced in whole or in part.
The question is simply whether, having regard to the particular circumstances, I am satisfied that it is appropriate to remit the penalty in whole or in part. Examples of reasons why the base penalty might be remitted identified by the courts include where the outcome would otherwise be unreasonable, unjust or unduly harsh.
In exercising the discretion, I must have regard to the evident object of the provision under which the penalty is imposed to encourage due care in the preparation of tax returns, but recognising the great degree of flexibility conferred upon the Commissioner and the Tribunal standing in his shoes to remit penalties in appropriate circumstances.[21]
[21] Taxation Administration Act 1953, Sch 1, s 298-20(1); Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50, [249].
Should the base penalty be remitted?
Mr Whiddon submitted that the base penalty should be remitted in full. He based this submission on the same grounds of alleged objective reasonableness. For the reasons already given, I do not accept that objective reasonableness in the context of these issues is established.
In his submissions, Mr Musikanth also noted that the Commissioner initially took the view that the gain was on capital account. In those circumstances, it was submitted it must be appropriate to remit the penalty.
It does not follow as a matter of logic that, because the Commissioner initially took a position, that position must be objectively reasonable or otherwise found a basis for remitting the penalty. That is tantamount to a submission that a conclusion by an officer in the employ of the Commissioner, and perhaps that officer’s supervisor, must necessarily be reasonable. Self-evidently, ordinary human fallibility means that will not always be so.
More to the point, I was not invited to review the factual assumptions underlying the earlier decision against the facts that emerged from the evidence before the Tribunal. Tax cases notoriously turn upon their individual facts. That is especially so in respect of the revenue/capital distinction where highest authority instructs that the outcome depends very much on the particular circumstances.[22]
[22] Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199, [14].
For these reasons, I respectfully reject the submission that the Commissioner’s earlier position should lead to a remission of penalty.
As to whether there are other circumstances that warrant full or partial remission of the base penalty, the difficulty I face is the absence of any substantial evidence regarding the circumstances surrounding the preparation of the return or otherwise that would provide a basis on which to remit the penalty. It may well be that Mr Whiddon’s accountant was instructed fully regarding the relevant facts, engaged fully with the issue and reached a considered view. I simply do not know.
I found myself in a similar situation in XPQZ, KYZC,DHJP and Commissioner of Taxation,[23] where I observed:
155. The evident object of the penalty provisions is to encourage due care in the preparation of tax returns. That object would not be served if, in the context of exceptional transactions realising very substantial gains which on any view were very significant in the context of the relevant return, a taxpayer could come to the Tribunal with no real evidence of the basis or circumstances in which an erroneous position was adopted and have the penalty, which the Parliament has determined which would otherwise apply, reduced or remitted in full.
156. If the facts were known, it may be that it would be determined that a 50% penalty [here 25%] is unduly harsh or otherwise inappropriate in the circumstances leading to the position adopted in the return. Those circumstances conceivably could range from a careful and reasoned consideration reasonably leading to the adopted position to an acceptance of [the taxpayer’s] assertion of his subjective intention untested by reference to objective circumstances, or even calculated or reckless risk-taking. The difficulty for the [taxpayer] is that, in the absence of relevant evidence, there is no basis on which I could make relevant factual findings. Again, there is insufficient evidence of facts relating to the circumstances surrounding preparation of the returns or even of facts which I would regard as a sufficient foundation upon which to draw any relevant inference.
[23] [2020] AATA 1014.
To be clear, I do not suggest that the conduct in this case was towards the adverse end of the spectrum of possible conduct. I simply have no way of knowing.
In the absence of any basis in evidence or otherwise on which I could determine that it is appropriate to remit the penalty wholly or partly, I conclude that Mr Whiddon has not discharged the burden of proving the penalty assessment is excessive.
DISPOSITION OF REVIEW
As Mr Whiddon has not discharged the burden of proving the primary tax or penalty assessments are excessive, the objection decisions must be affirmed.
I certify that the preceding 74 (seventy-four) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding
........[SGD]................................................................
Associate
Dated: 10 February 2022
Dates of hearing: 20 & 21 April 2021, 19 August 2021 Date final submissions received: 24 August 2021 Counsel for the Applicant: A Musikanth SC with J Edwards Representatives for the Applicant: Ernst & Young Counsel for the Respondent: E Wheelahan QC with G O’Mahoney Solicitors for the Respondent: Australian Government Solicitor APPENDIX – MORE DETAILED OVERVIEW AND BACKGROUND FACTS[24]
[24] This overview and background information are extracted from the Applicant’s Opening Submissions. Footnotes to the relevant sections of documents in evidence have been removed to simplify the presentation of these findings, along with some statements of a conclusionary nature.
Overview
At the heart of the case, is an interest in a petroleum venture off the west coast of Africa.
The interest comprised shares in a company called C&L Natural Resources Ltd (C&L Resources) that was a party to a Production Sharing Contract (PSC) with the government of the Republic of Côte d’Ivoire and its state-owned entity, Petroci Holding, Societe Nationale d’Operations Petrolieres de la Côte d’Ivoire (Petroci).
Under the PSC and a related Joint Operating Agreement (JOA), C&L Resources had rights to explore for and produce oil and gas over an offshore area called Block CI-202. Under these arrangements C&L Resources owned 85% of the oil and gas produced on Block CI-202.
The PSC and JOA required C&L Resources to carry out certain exploration activities and to expend a minimum amount within a three-year exploration period.
Mr Whiddon saw an investment opportunity in the PSC and Block CI-202. He did not have sufficient funds available to carry out all the exploration activities by himself. He intended to acquire an interest in the PSC and Block CI-202 in such a way that other investors would share the risks and the substantial costs associated with the exploration activities.
After two earlier attempts at acquiring an interest in 2009, Mr Whiddon successfully negotiated an agreement with the shareholders of C&L Resources whereby he agreed to buy 75% of the shares in C&L Resources (through a shelf-company called Lagral Energy Ltd (Lagral)) [later named CLNR Holdings] and to arrange a merger between C&L Resources and a listed company to be identified. Mr Whiddon was also later a party to an agreement by which Rialto Energy bought all the shares in Lagral (and thereby Lagral’s 75% interest in C&L Resources). This was the merger contemplated. Mr Whiddon changed the name of Lagral to CLNR Holdings in February 2010.
A significant part of the disposal issue relates to a series of activities which occurred between 16 June 2009 and 21 July 2010, though the issue arises principally in the context of:
(a) Mr Whiddon having acquired the share capital of Lagral on about 16 June 2009;
(b) a memorandum of understanding having been entered into between the shareholders of C&L Resources Ltd, as vendor, and Lagral as purchaser, also in June 2009 (MOU);
(c) the SP&MA having been entered into between Lagral and the shareholders of C&L Resources on 22 October 2009;
(d) an exchange agreement having been entered into between the shareholders of C&L Resources, Rialto Energy and CLNR Holdings on 3 April 2010 (Exchange Agreement);
(e) the Rialto Agreement having been entered into between Mr Whiddon, Med Alpha SA, CLNR Holdings and Rialto Energy on 29 April 2010; and
(f) the subsequent completion of the Rialto Agreement.
Further background
The ultimate subject matter underpinning the relevant transactions was a petroleum asset located off the West Coast of Africa in one of the most geologically attractive petroleum basins at the time.
The asset effectively comprised a contract between C&L Resources, the Republic of Côte d’Ivoire and Petroci. The contract, entered into on 10 May 2006, was the PSC.
The JOA, subsequently entered into between C&L Resources and Petroci on 21 June 2006, established a commercial joint venture.
The PSC and the JOA relevantly related to a 675 km2 offshore area forming part of the territory of the Republic of Côte d’Ivoire known as Block CI-202 located approximately 30 km southeast of the capital, Abidjan.
Block CI-202 was in an area known as the Ivorian Basin, which was in turn part of a larger geological structure called the West African Transform Margin.
There are large petroleum fields in the Ivorian Basin.
At the time of entry into the PSC, petroleum had already been discovered on Block CI-202. Five of the discoveries were un-appraised, thirteen exploration wells had already been drilled and there was existing seismic data.
In accordance with the PSC and JOA, C&L Resources had been:
(a) afforded exclusive exploration authorisation for a “first exploration period” of 36 months (first exploration period) in respect of, relevantly, Block CI-202,22 with provision for second and third exploration periods of 18 months each; and
(b) appointed by the Government of the Republic of Côte d’Ivoire as operator under the JOA and granted an 85% ownership interest in, among other things, petroleum products produced on Block CI-202.
Among those terms and conditions was a requirement, during the first exploration period under the PSC, for C&L Resources to:
(a) acquire and re-process existing 3D and 2D seismic data, integrate it with geological data, acquire 500km2 of 3D seismic survey and drill two exploratory wells (one firm well and one optional well); and
(b) spend a minimum of US$15,000,000 to carry out this exploration work.
However, C&L Resources had insufficient cash to meet its expenditure commitments under the PSC.
The first exploration period, which is relevant to events that later took place, ended on 10 May 2009. According to the PSC the exploration period could not be renewed for a second and third time unless the exploration work commitments in each period were fulfilled. The PSC provided that the first exploration period could be extended. By May 2009 C&L Resources had not fulfilled the exploration work commitments and an extension of this period was necessary.
Rialto Energy's involvement with C&L Resources and Block CI-202 predates Mr Whiddon's. Rialto had been trying to acquire an interest in Block CI-202 since late 2007.30 Mr Whiddon played a small part in the engagement between Rialto and C&L Resources between late 2007 and late 2008. At the request of Rialto Energy's CEO, Brett Woods, Mr Whiddon attended a meeting in Paris with Mr Woods and two represenatives from C&L Resources, Chaim Lebovits and Gad Cohen. This meeting occurred around the time that Mr Whiddon resigned as a director of Rialto Energy.
In early 2009, Mr Whiddon saw an opportunity to acquire an effective interest in Block CI-202 and, through that interest, to gain exposure to the long-term revenue streams which he hoped the block would generate by the production of oil and gas.
Mr Whiddon's first attempt to acquire an effective interest in Block CI-202 is evidenced by the Offer Principles Agreement dated 19 May 2009. This was an agreement between a partnership involving Mr Whiddon (Lagral scp), associates of Mr Whiddon and Rialto Energy. Essentially, the terms of this agreement provided that Mr Whiddon and his associates would work with Rialto Energy to acquire interests in petroleum blocks including CI-202.
The Offer Principles Agreement also contained non-compete and confidentiality clauses that become relevant in September 2009.36 Neither Mr Whiddon nor Rialto Energy acquired an interest in Block CI-202 under the arrangements contemplated in this agreement.
Mr Whiddon's second attempt to acquire an effective interest in Block CI-202 is evidenced by the MOU. The date of the MOU is 12 June 2009. At around the same time Mr Whiddon acquired the share capital Lagral. Lagral was a shelf company incorporated in the British Virgin Islands. Mr Whiddon acquired the share capital of Lagral for the purpose of being a party to the MOU and to acquire an effective interest in Block CI-202 by the transaction contemplated in it.
Entry into the MOU and Mr Whiddon’s acquisition of Lagral appear to have occurred within days of each other. Among other things the MOU contemplated:
(a) Lagral acquiring 100% of the shares in C&L Resources;
(b) certain payments being made to the shareholders of C&L Resources in exchange for those shares;
(c) Lagral assuming future responsibilities and liabilities relating to C&L Resources’s interest in the PSC;
(d) Lagral using its best endeavours to procure the approval of the Board of Railto Energy to an assignment of the whole or a part of Lagral’s rights to acquire the shares in C&L Resources; and
(e) the shareholders of C&L Resources extinguishing all liabilities owed by C&L Resources and its subsidiaries.
However:
(a)(a) on 28 August 2009, the MOU was terminated;
(b)(b) on 25 September 2009, the Offer Principles Agreement was terminated, along with restraints and non-compete provisions imposed under a confidentiality agreement, thus freeing both Mr Whiddon and Rialto Energy to negotiate with other parties;44 and
(c)(c) by the end of September 2009, the then-managing director and CEO of Rialto Energy, Mr Woods, considered that Rialto Energy’s efforts to obtain an interest in Block CI-202 “were over” and that the company had fired its “last shot”.
Soon afterwards, on 5 October 2009, the Government of the Republic of Côte d’Ivoire issued an exceptional extension of the first exploration period under the PSC to C&L Resources for a further 36-month period (Arrete).
The Arrete required C&L Resources to undertake the following additional work during the (now extended) first exploration period:
(a) reprocessing and inverting existing 3D seismics for a minimum cost of US$2,851,000; and
(b) boring one exploration well for a minimum cost of US$20,000,00
Among other things the SP&MA contemplated:
(a) Lagral acquiring 75% of the shares in C&L Resources;
(b) the purchase operating in 2 stages, with:
(i) the first stage involving, among other things, Lagral:
(A) advancing a secured convertible loan, totalling US$4,000,000, to C&L Resources;
(B) assuming and being solely responsible for various financial obligations associated with the Arrete, Block CI-202, the JOA and the PSC;
(ii) the second stage involving, among other things:
(A) Lagral acquiring 75% of the shares in C&L Resources for the consideration specified in the SP&MA;
(B) an “Exchange Agreement”, as contemplated by the SP&MA, being entered into in the future with an unknown entity termed “Shellco” in the SP&MA pursuant to which Shellco would acquire Lagral’s interest in C&L Resources and Lagral would receive shares in that entity;
(C) Shellco thus becoming a 75% shareholder in C&L Resources; and
(D) the shareholders of C&L Resources retaining the remaining 25% interest in C&L Resources.
Soon after the SP&MA was concluded, Mr Whiddon, through Lagral:
(a) opened an office in Abidjan;
(b) began assembling a team of professionals to work on the PSC and Block CI-202; and
(c) started to advance large sums of money to Lagral to pay for that work.
The sums spent by Lagral included:
(a)Individual consultants including geologist Greg Shannon and geophysicist Charlie Nieto: AU$159,303.59
(b)Consulting firms Rock Solid Images, Gustavson and
Tricon Geophysics: AU$840,841.20
(c)Opening an office in Abidjan and associated expenses: AU$42,784.14
(d)Communication expenses: AU$35,599.95
(e)Miscellaneous expenses: AU$9,068.16
Total: AU$1,087,561.04
These and other expenses were incurred in connection with compliance with the conditions under the PSC and the Arrete which, in turn, facilitated securing Mr Whiddon’s proposed underlying investment. The sums were in addition to those loaned by Lagral to C&L Resources under the SP&MA.
However, considerably more funds were necessary. They included the minimum sum of US$20,000,000 which was required be spent under the Arrete during the (extended) first exploration period on an exploration well.
A vehicle through which it was hoped the further capital might have been invested was “Shellco”; so called because its identity was unknown at that time.
A “Shellco” was subsequently identified; namely, Rialto Energy, with whom Mr Whiddon re-engaged sometime during late 2009.
In February 2010 Mr Whiddon changed the name of Lagral to CLNR Holdings.
In due course, on 3 April 2010:
(a) an exchange agreement of the kind contemplated by the SP&MA was signed; namely the Exchange Agreement; and
(b) heads of agreement were entered into between Rialto Energy, on the one hand, and CLNR Holdings, Mr Whiddon, Med Alpha (40% shareholder in CLNR Holdings), on the other (Heads of Agreement).
The Exchange Agreement and the Heads of Agreement were both executed some 26 days before the Rialto Agreement.
The essential arrangements contemplated were as follows:
(a) Rialto Energy advancing an interest free convertible loan in the amount of AUD$1,000,000 to CLNR Holdings;
(b) Rialto Energy raising capital by share placements to fund completion andexpenditure commitments under the PSC;
(c) Mr Whiddon and Med Alpha transferring all shares and options in CLNR Holdings to Rialto Energy;
(d) Rialto Energy re-imbursing Mr Whiddon and Med Alpha all sums they had loaned to CLNR Holdings in connection with CLNR Holdings’s acquisition of a 75% interest in C&L Resources (including loans and payments provided for in the SP&MA and amounts expended by CLNR Holdings and C&L Resources in fulfilment of the exploration and expenditure requirements under the PSC);
(e) Mr Whiddon and Med Alpha assigning to Rialto Energy their loans to CLNR Holdings;
(f) Rialto Energy issuing various:
(i) shares to the shareholders of C&L Resources (as contemplated in the SP&MA);
(ii) shares, options and performance shares to Mr Whiddon and Med Alpha; and
(iii) shares to consultants and advisors.
(g) Mr Whiddon and C&L Resources’s Mr Lebovits being appointed as directors of Rialto Energy; and
(h) Mr Whiddon agreeing to a voluntary escrow period of 12 months in relation tothe Rialto shares he would acquire.
The above arrangements were to be subject to various conditions. These included obtaining approvals from the Republic of Côte d’Ivoire, and from Rialto Energy shareholders, and Rialto Energy raising sufficient funds to complete. The final arrangements were reflected in the Rialto Agreement itself.
As at 21 July 2010, when the Rialto Agreement completed, the shares and options issued to Mr Whiddon pursuant to that agreement had a value considerably higher than that of the shelf company, Lagral, which Mr Whiddon had incorporated in June 2009, thus giving rise to the benefit the subject of these proceedings.
Mr Whiddon’s first disposal (by sale) of Rialto Shares was in April 2013, which was some 22 months after the shares came out of voluntary escrow under the Rialto Agreement.
Following his resignation as a director of Rialto Energy in March 2012, between April 2013 and May 2015, Mr Whiddon sold about half the shares he had acquired under the Rialto Agreement.
As at 15 October 2019, Mr Whiddon held a little over 14,000,000 Rialto shares and value of that holding then was AUD$126,670.25.
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