XPQZ, KYZC, DHJP and Commissioner of Taxation (Taxation)
[2020] AATA 1014
•24 April 2020
XPQZ, KYZC, DHJP and Commissioner of Taxation (Taxation) [2020] AATA 1014 (24 April 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Numbers: 2018/4904, 2018/4905, 2018/4907
Re:XPQZ, KYZC, DHJP
APPLICANTS
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member R J Olding
Date:24 April 2020
Place:Sydney
The decisions under review are affirmed.
.................................[SGD].......................................
Senior Member R J Olding
CATCHWORDS
TAXATION – tax treatment of gains on sale and exchange of shares – whether gains income according to ordinary concepts or capital gains – where sole director and shareholder of trustee company that acquired the shares was a director of the company in which the shares were acquired – whether shares acquired in a business operation or commercial dealing pursued by the trustee and director – held gains are income according to ordinary concepts – application for review dismissed.
TAXATION – administrative penalties – recklessness – whether taxpayer’s position reasonably arguable – where limited evidence of circumstances surrounding preparation of returns – penalty upheld.
LEGISLATION
Administrative Appeals Tribunal Act 1975
(Cth), s 43 as modified by s 14ZZJ of the Taxation Administration Act 1953 (Cth)
Income Tax Assessment Act 1997 (Cth), s 6-5
Independent Commission Against Corruption Act 1988 (NSW)Taxation Administration Act 1953 (Cth), ss 14ZZK, 14ZZE, 14ZZJ; Schedule 1, ss 284-15, 284-75, 284-90, 284-220, 284-225.
CASES
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347
Commissioner of Taxes (SA) v Executor Trustee & Agency Company of Australia Ltd (1938) 63 CLR 108
Evans v Deputy Commissioner of Taxation (SA) (1936) 55 CLR 80
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212Federal Commissioner of Taxation v Cooke and Sherden (1980) 42 FLR 403
Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
Greig v Commissioner of Taxation [2020] FCAFC 25Hart v Commissioner of Taxation (2003) 131 FCR 203
Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148
Pell v The Queen [2020] HCA 12
Poole v Chubb Insurance Company of Australia Ltd [2014] NSWSC 1832
Ransley v Deputy Commissioner of Taxation [2018] FCA 1796R & D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50
Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1
SECONDARY MATERIALS
Parsons, RW, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company Limited, 1985)
REASONS FOR DECISION
Senior Member R J Olding
24 April 2020
INTRODUCTION
What is this case about?
This case is about whether gains on disposals of shares in two companies are subject to income tax as income according to ordinary concepts and, if so, whether the trustee of the trust that derived the gains, having treated them as capital gains in its income tax returns, is liable for an administrative penalty for the resulting shortfall and, if so, in what amount.
References to the parties
Exceptionally, a hearing of an application to review a taxation decision is, under s 14ZZE of the Taxation Administration Act 1953 (Cth) (“TAA”), held in private if the applicant so requests. The Applicants requested that this proceeding be held in private. Where that occurs, s 43 of the Administrative Appeals Tribunal Act 1975 (Cth) as modified by s 14ZZJ of the TAA requires the Tribunal to ensure, as far as practicable, that its reasons for decision are framed so as not to be likely to enable the identification “of the person who applied for review”: s 43(2D).
The Applicants are the trustee and beneficiaries of a trust. I refer to the parties as:
(a)“the Trustee” – the corporate trustee of the trust already mentioned (“the Trust”) (designated as KYZC in the proceedings);
(b)“the Beneficiaries” – collectively, the two beneficiaries to whom the Trustee distributed the net income of the Trust in the relevant income years (designated as XPQZ and DHJP).
That ensures as far as practicable that the particular persons/entities that are the Applicants are not likely to be able to be identified. However, because the background to the dispute is well known due to other proceedings and media attention, I was concerned that merely taking these steps would not prevent interested parties from identifying those associated with the Applicants, including their representative in this proceeding, Mr Andrew Poole (“Mr Poole”). It would be practically impossible to effectively anonymise the reasons, since the details of the transactions would be well known to those who take an interest in such matters.
Mr Poole advised that he would be content if relevant names did not appear in the title of the published reasons, which would be more likely to attract attention, and would not seek any further de-identification of these reasons. No doubt Mr Poole took this position with the knowledge that most of the background to this matter has already been published in the judgements in the Ransley and Chubb matters (discussed further below) and elsewhere.
The share transactions in summary
The dispute relates to shares in two companies: Doyles Creek Mining Pty Ltd (“Doyles Creek”) and NuCoal Resources Pty Ltd (“NuCoal”).
The Trustee acquired its shares in Doyles Creek by way of subscriptions in several tranches. However, the case was conducted on the basis that there was no relevant difference in the intention of the Trustee at the times of the various acquisitions.
Doyles Creek acquired land in the Hunter Valley in New South Wales and set about seeking to obtain an exploration licence by direct allocation – that is, without participating in a tender process. The request for the relevant Minister’s consent to the direct allocation of the exploration licence was supported by a proposal for an operating coal mine to serve as a “training mine”.[1]
[1] S37 Documents T38-744 , Letter of Application for an Exploration Licence to the relevant Minister, dated 15 February 2007, page 2 paragraph 10.
The objective of obtaining an exploration licence by direct allocation was central to the company’s plans. Those plans ultimately succeeded. The exploration licence was allocated to Doyles Creek. This had the effect of greatly increasing the value of Doyles Creek.
The Trustee subsequently disposed of shares in the two companies. In summary, the relevant disposals were:
(a)Doyles Creek shares –
(i)October 2009 – 173,655 shares were sold in four tranches for a total of $5,750,015; [2] and
(ii)February 2010 – 154,892 shares were exchanged for 48,455,585 shares in NuCoal, taken to have a value of 20 cents per share or $9,691,117, as part of a reverse takeover by which the entirety of the shares in Doyles Creek were exchanged for shares in NuCoal;[3] and
(b)NuCoal shares (which had been acquired in the reverse takeover) –
(i)June 2012 – 30,000,000 shares were sold for $7,800,000.[4]
[2] Appendix – Agreed Facts, paragraph 73.
[3] Appendix – Agreed Facts, paragraph 87. As NuCoal became a listed entity, Doyles Creek became, in effect, a listed entity without an initial public offering – a so-called “back door” listing, though no adverse inference should be drawn from that label.
[4] Court Book, volume 10, tab 514, Sell Confirmation – NuCoal Resources Limited Shares, dated 7 June 2012.
Representatives and witnesses
Mr Poole appeared as representative of the Applicants. Mr Poole was at all relevant times the sole shareholder and director of the Trustee, which held all the shares in the corporate beneficiary, DHJP. Mr Poole was also the sole director of DHJP and a director of Doyles Creek at relevant times.
Mr John Baxter of Westpac Bank, which provided financial accommodation to Doyles Creek, also gave evidence. His evidence was mainly focussed on a Westpac internal memorandum which contained what on its face appeared to be a summary of information provided by the “principals” of Doyles Creek.[5]
[5] S37 Documents ST5-55, Sponsor Memo & Credit Approval Summary prepared by Mr Baxter on 10 March 2008.
The only other witness was Mr Ben Mahoney, the accountant who prepared the relevant income tax returns. The individual beneficiary, XPQZ, did not give evidence.
Ms Cheesman SC appeared with Mr Cosgrove for the Commissioner of Taxation (“the Commissioner”).
BACKGROUND
Agreed facts
The background facts are largely agreed, although the inferences to be drawn from them are not.
The agreed facts are set out in the Appendix.
ICAC proceedings
The circumstances relating to the issue of the exploration licence without a tender process were the subject of an Independent Commission Against Corruption (“ICAC”) inquiry. Mr Poole gave evidence before ICAC and was cross-examined in the Tribunal in relation to this evidence.[6]
[6] Transcript of Proceedings, Monday 19 August 2019.
Initially, Mr Poole objected to this course primarily on the basis that, under s 37 of the Independent Commission Against Corruption Act 1988 (NSW) (“ICAC Act”), an answer given in an ICAC inquiry is not admissible in other proceedings. I allowed the cross-examination but noted that Mr Poole would have an opportunity to make submissions on the admissibility of the ICAC transcript and weight to be given to it if admitted. Mr Poole did not make any further specific submissions in this regard in his written submissions filed following the hearing, and in fact himself tendered the transcript of Mr Baxter’s evidence at ICAC. The Commissioner did not offer any further submissions on the topic, presumably because the matter was not pressed in Mr Poole’s submissions which were filed first.
Nevertheless, and particularly since Mr Poole is not legally qualified, I have considered whether I should have regard to the ICAC transcripts. I have concluded that s 37 of the ICAC Act does not render the transcripts inadmissible in these proceedings and, that being so and the evidence being relevant to the issues before me, I should have regard to them.
Sections 37(3) and (4) of the ICAC Act state:
(3) An answer made, or document or other thing produced, by a witness at a compulsory examination or public inquiry before the Commission or in accordance with a direction given by a Commissioner under section 35 (4A) is not (except as otherwise provided in this section or section 114A (5)) admissible in evidence against the person in any civil or criminal proceedings or in any disciplinary proceedings.
(4) Nothing in this section makes inadmissible--
(a) any answer, document or other thing in proceedings for an offence against this Act or in proceedings for contempt under this Act, or
(b) any answer, document or other thing in any civil or criminal proceedings or in any disciplinary proceedings if the witness does not object to giving the answer or producing the document or other thing irrespective of the provisions of subsection (2), or
(c) any document in any civil proceedings for or in respect of any right or liability conferred or imposed by the document or other thing.
It might be argued that the exception in s 37(4)(b) of the ICAC Act applies as Mr Poole apparently abandoned his objection. However, it is not necessary to rely on Mr Poole’s apparent abandonment of the issue, which I hesitate to do in the circumstances, because in my view s 37(3) is not engaged in these proceedings.
Section 37(3) of the ICAC Act only renders answers given in an ICAC inquiry inadmissible “against the person”. The “person” is plainly the witness mentioned earlier in s 37(3) who gave the answer. Relevantly, Mr Poole and Mr Baxter gave evidence before ICAC. As neither of those gentlemen are parties to these proceedings, the transcript evidence, if admitted, could not be said to be admitted “against” them.
The Chubb case
Mr Poole referred to the case of Poole v Chubb Insurance Company of Australia Ltd[7] in which he successfully sued his insurer under a director’s indemnity policy, for reimbursement of legal costs incurred in connection with the ICAC inquiry.
The Ransley case
[7] [2014] NSWSC 1832.
Ms Nera Ransley also held and disposed of shares in Doyles Creek and NuCoal. Her husband, Mr Craig Ransley, was the managing director of Doyles Creek at relevant times.
The Commissioner assessed Ms Ransley on a similar basis to that on which he assessed the Applicants. Mr Poole gave evidence in Ms Ransley’s unsuccessful Federal Court appeal against her income tax assessments. His evidence was discussed in Jagot J’s judgement.[8]
[8] Ransley v DCT [2018] FCA 1796. Jagot J, sitting concurrently as a Deputy President of the Tribunal, also affirmed the Commissioner’s decision on a related objection against assessments of administrative penalties.
THE DISPUTED ASSESSMENTS
The Trustee treated the gains on disposal of the shares as on capital account and therefore taxed in the hands of the Beneficiaries on a discounted basis under the capital gains tax provisions of the income tax law. Taking the view that the gains on the share disposals are income according to ordinary concepts, and on the basis that the Beneficiaries were presently entitled to the net income of the Trust (which is uncontroversial), the Commissioner issued notices of amended assessments of income tax to the Beneficiaries, and a notice of assessment of an administrative penalty to the Trustee, as follows:
(a)XPQZ – income tax assessment for the 2010 income year – calculated on the basis that gains on disposals of shares in Doyles Creek totalling $15,073,342 were ordinary income rather than discounted capital gains as returned by the Trustee;[9]
(a)The Trustee – assessment of administrative penalty for the 2010 income year –calculated at the rate of 50% of the shortfall assessed to XPQZ as above;[10] and
(b)DHJP – income tax assessment for the 2012 income year – calculated on the basis that the gains on disposals of shares in Doyles Creek totalling $1,751,100 were ordinary income rather than discounted capital gains as the returned by the Trustee.[11]
[9] S37 Documents, T21-385, notice of amended assessment for the 2010 income year dated 10 September 2014.
[10] S37 Documents, T19, notice of amended assessment of shortfall penalty for the 2010 income year, dated 8 September 2014.
[11] S37 Documents, T20-381, notice of amended assessment for the 2010 income year, dated 8 September 2014.
The relevant taxpayer in each case objected against these assessments. The Commissioner wholly disallowed each objection. Each taxpayer applied to the Tribunal for review of the relevant objection decisions.[12] The three applications for review were heard together.
[12] S37 Documents T4-129, T5-165 and T6-199, Decisions under Review, dated 26 June 2018.
BURDEN OF PROOF
The Applicants have the burden of proving on the balance of probabilities that the assessments are excessive and in what amounts the assessments should have been made.[13]
[13] Taxation Administration Act 1953 (Cth), s 14 ZZK.
I approach consideration of whether the Applicants have discharged this burden with the following principles in mind:
(c)Facts may be found on the basis of oral evidence alone. There is no barrier to a fact being found on the uncorroborated evidence of a witness. There is no requirement that direct evidence by oral testimony may only be accepted if corroborated, for example, by documentary evidence.
(d)However, self-serving statements should be given close scrutiny.
(e)Nevertheless, evidence of a taxpayer is not to be regarded as prima facie unacceptable.[14]
(f)If the taxpayer succeeds in “weighing down [the] scales ever so slightly in his favour then he has discharged the burden he carries”.[15]
THE INCOME TAX ASSESSMENTS
[14] For this and the preceding propositions, see, for example: Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148, 155; and Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212.
[15] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212, [88].
Income or capital? – summary of the applicable principles and issues
The Commissioner does not assert that the Trustee carried on a business. This concession was, with respect, properly made. The activities of the Trust related to the subject shares do not display the usual indicia of a business. In particular, it is not alleged, and there is nothing in the evidence to suggest, that the Trustee was a share trader.
However, it is well established that gains 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 gains, are on revenue account and therefore ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (Cth).[16] 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.[17]
[16] Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199.
[17] Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42, [54]–[56].
For reasons upon which I elaborate below, it is relatively clear that the Trustee acquired the shares for the purpose of, or at least for purposes that included a significant purpose of, disposal at a profit.
I also accept that the gains were realised by the means contemplated at the time of their acquisition. In this regard, the Ransley case stands for the proposition that the Trustee’s intention and purpose at the time of the acquisitions need not include the precise means by which the profits were ultimately obtained. The requisite level of generality or specificity to be applied to the concept of the means giving rise to the profit depends on the nature of the business operation or commercial transaction being pursued.[18] For the reasons indicated below, the level of specificity in the purpose I have found suffices for this element of the test.
[18] [2018] FCA 1796, [248].
The question whether the acquisitions were acquired in a “business or commercial operation”, which has been described as “an elusive factor”,[19] is more difficult. There is an acknowledged ambiguity in the concept of disposal of property acquired in a business or commercial transaction and cognate expressions.[20] It is clear that such expressions are used in contradistinction to the disposal of an asset acquired in a private, recreational or non-business activity. A purchase of property for long-term investment, without more, does not have the quality of a business operation or commercial transaction even if there is a hope or expectation of eventual gain on sale. Where, as here, a taxpayer is not carrying on a business, for a gain on disposal of an asset to be income, the acquisition must have been made in a business operation or commercial dealing.
[19] Parsons, RW, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company Limited, 1985), 2.498, cited in Greig v Commissioner of Taxation [2020] FCAFC 25, [241].
[20] Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355, 378.
After the hearing of this matter, the Full Federal Court handed down its judgment in Greig v Commissioner of Taxation [2020] FCAFC 25. As Steward J observed, previous authorities “tended to focus on the existence of the required profit-making purpose rather than upon the need for there to be a “business operation or commercial transaction”’.[21] The Full Court judgements in the Greig case focus in detail on the latter requirement for the first time. I therefore gave the parties an opportunity to make further submissions regarding the application of this case in relation to the concept of an acquisition being in a business operation or commercial dealing.
[21] [2020] FCAFC 25, [227].
In Greig, Steward J, with whom Kenny J agreed, adopted, as “an adequate expression of the content of the test”, Professor Parsons’ formulation that:
“ . . .the transaction must be the sort of thing a business person or person of trade does . . .”[22]
[22] [2020] FCAFC 25, [241], [242].
Steward J acknowledged that where shares are acquired by an individual for the purposes of obtaining a dividend yield and for long-term growth, any gain on a subsequent sale of the shares is likely to be an affair of capital. However, his Honour went on to observe that:
“. . . some profit-making schemes can take many years to complete. . .It is not antithetical to a profit-making undertaking for a taxpayer to wait for the profit to become realisable, so long as that was the profit the taxpayer planned to secure. Waiting, without more, will not convert the profit eventually realised into an affair of capital.”[23]
[23] [2020] FCAFC 25, [246].
In summary, to succeed in proving the income tax assessments are excessive, the Applicants must affirmatively prove that the shares were not acquired in business operations or commercial transactions for a not insignificant purpose of subsequent disposal at a profit.
There are two limbs to this question: was there a profit-making intent for the acquisitions and did they occur in a business operation or commercial transaction? Although the evidence relating to each limb is inter-related, it is convenient to consider them separately. The Applicants’ submissions also raised some additional issues which I address separately below.
Have the Applicants discharged the burden of proving that the Trustee did not acquire the shares for the purpose of disposal at a profit?
After two days of oral evidence, assisted by a Court Book for which the index alone ran to some 60 pages and contained some 15 folders of documents; over 170 pages of written submissions; much debate about alleged inconsistencies in testimony in various forums; and inferences to be drawn from investment plans, other documentary evidence and profit-making modus operandi, all primarily directed to this issue, its resolution is, in my view, relatively straightforward.
Mr Poole says that he did not have as his state of mind, when the Trustee acquired the shares, an intention that they be disposed of at a profit. Rather, he says that:
“I simply saw [Doyles Creek] as a long-term and speculative play, with the initial aim of getting the Exploration Licence in exchange for the provision of a Training Mine to minimise upfront consideration and then to see where the exploration and proving of the resource would develop”.[24]
[24] Statement of Andrew Poole dated 10 May 2019, adopted in oral evidence, paragraph 14.
But a “long-term and speculative play”, described in the way articulated by Mr Poole, is not inconsistent with an intention that shares be disposed of at a profit where the activities designed to increase shareholder value to obtain the profit are ones which inevitably require an extended period. As the passage from Greig cited above confirms, a profit-making scheme may take many years to complete, especially where, as here, the planned activities include the acquisition of suitable land; the development of the training mine proposal; the obtaining of the exploration licence; and, potentially, the proving of the resource.
The Trustee acquired the shares with the knowledge that Doyles Creek was embarking upon a course of action designed to increase shareholder value by, at the least, seeking to obtain an exploration licence by direct allocation and, potentially, proving the resource. Mr Poole was aware that the value of Doyles Creek would substantially increase if the exploration licence could be obtained and that a further substantial increase could be expected if the resource were to be proved. There is no evidence that the Trustee received any projections of returns by way of dividends and nor that any were paid.
Additionally, Mr Poole had made statements to ICAC that he had no intention of “hanging around” to operate a coal mine which he confirmed in evidence he gave in the Chubb case, as discussed further below.
In those circumstances, it would defy common sense to suggest that Mr Poole or the Trustee had no contemplation at the time of the Trustee’s acquisitions that the shares would be disposed of at a profit at an opportune time once the value of Doyles Creek had been increased through pursuit of the activities planned when the shares were acquired. Mr Poole might have intended, as he said, that the Trustee would wait and see “where the exploration and proving of the resource would develop”, but that does not mean that the Trustee had no objective of making a profit on disposal of the shares. There is no evidence that the Trustee hoped to benefit by way of dividends. The clear and undisputed plan was that the value of the companies would be substantially increased by the obtaining of the exploration licence and potentially the proving of the resource. The inference that the Trustee at the time of acquisition of the shares had a purpose that was at least a not insignificant purpose of disposing of the shares at a profit is, in my view, inescapable.
Accordingly, I find I that at the least Mr Poole and the Trustee contemplated at the time of the acquisitions of the shares that, all going well, substantial profit would be extracted after the exploration licence was obtained and potentially the resource being proved by the Trustee disposing of the shares. That was at least a not insignificant purpose of the share acquisitions.
As events transpired, the Trustee realised a substantial profit after Doyles Creek obtained the exploration licence. Whether the Trustee through Mr Poole contemplated at the time of their acquisition that the shares would be disposed of when the exploration licence had been obtained as the Commissioner maintains, or that the shares would be held until after the resource was proved as Mr Poole’s statement suggests, in my view is beside the point. That level of specificity is not necessary to identify a significant purpose at the time of acquisition of the shares that they would be disposed of at a profit when the company’s strategy had been executed. The contemplated profit would arise after activities designed to substantially increase the value of Doyles Creek were undertaken. The shares were acquired with the clear understanding that Doyles Creek would seek to obtain an exploration licence by direct allocation; that if successful in that objective the value of the company would increase; and that its value would further increase if the resource were to be proved.
Similarly, that the timing of the disposals that realised the gains may have been determined or influenced by a desire to “rebalance” the Trust’s investments[25] and/or to enable capital to be injected into another entity to meet liquidity issues or facilitate the introduction of a “cornerstone” investor, as Mr Poole asserted, is also beside the point. The shares were disposed of at a profit after Doyles Creek pursued and achieved its objective of obtaining an exploration licence by direct allocation, thereby greatly increasing its value. Consistent with the inference I have drawn, disposal of the shares at a profit after contemplated activities to increase the value of the shares, which included the obtaining of the exploration licence by direct allocation, was a significant purpose of the Trustee when the shares were acquired. The timing of the disposals may have been affected by a variety of circumstances, but nevertheless they caused a gain to be realised that was in contemplation when the Trustee acquired the shares.
[25] In any case, the perceived need for a “rebalance” would have been predictable as a consequence of the increase in the value of the Doyles Creek shares which inevitably would affect the value of the Doyles Creek shareholding relative to the Trust’s other assets.
As with the Federal Court’s analysis of the activities of Mr and Ms Ransley, the objective was, or included, to “increase the value of the shares to enable them to be sold at a profit at the most opportune time and in the most opportune manner”.[26] The gains were duly realised by the means contemplated from the outset – disposal of the shares at an opportune time after execution of a strategy designed to substantially increase the value of Dolyes Creek.
[26] Ransley v Deputy Commissioner of Taxation [2018] FCA 1796, [248].
The analysis above is sufficient to conclude that the Applicants have not discharged the burden of proving that the shares were not acquired with an intention of disposal at a profit and that the gain arose by the means contemplated when the Trustee acquired the shares.
The parties’ approach to the evidence in the case set up a contest between the Commissioner’s assertion that it was always intended that the gains would be realised after the exploration licence was obtained and Mr Poole’s assertion that the shares were acquired as a long-term speculative play. It is clear from the evidence, especially the transcripts of Mr Poole’s evidence in the ICAC proceedings and the Chubb case, that whatever his intention may have been in relation to the obtaining of the exploration licence, Mr Poole did not intend to “hang around” to operate a coal mine. Reference to the ICAC transcript makes it undeniable that Mr Poole’s hope was to enjoy substantial gains if the coal reserves could be proved, as this evidence illustrates:
“Yeah, my, my intention or my thought process was far more along developing the thing, proving up the resource and getting an asset actually worth something and then floating it or having a trade exit then, perhaps a sale to a large operator.[27]
And a little later:
But it’s inconsistent with an intention to actually run a training mine, isn’t it? - - -Yeah, I said – maybe I didn’t say it correctly, I never had any intention of hanging around to run a training mine”.[28]
[27] ICAC transcript, 14 May 2013, page 8174, lines 18-22.
[28] ICAC transcript, 14 May 2013, page 8177, lines 1-3.
Mr Poole gave similar evidence in the Chubb case.[29]
[29] Chubb Transcript, 1 September 2014, page 646, lines 45-49, continuing at page 647, lines 1-2.
On the view that I have taken, it matters not whether the Trustee contemplated disposal of the shares once the exploration licence was obtained or later if or when the resource was proved. Either way, at the time of acquisition of the shares, a finite profit-making venture had been embarked upon which would, if successful, see substantial value added to the shares. In circumstances where there is no evidence of the Trustee contemplating a return by way of dividends, I have indicated that I would infer that the Trustee intended when it acquired the shares to dispose of them at a profit. That the profit may have been realised at the earlier time after the exploration licence was granted does not change the characterisation of the transactions.
However, since much of the focus in the hearing was upon the Commissioner’s assertion that Mr Poole, and therefore the Trustee, at the time of their acquisition contemplated disposal of the shares when the exploration licence was obtained, I discuss this issue further below by reference to various matters which are the subject of evidence and submissions.
Mr Poole’s evidence
The most direct evidence is, of course, Mr Poole’s written and oral testimony. In written submissions filed after the hearing, the Commissioner asserted that Mr Poole’s evidence “was argumentative and characterised by a propensity to prevaricate after parsing previous concessions and seeking to revisit and recast his evidence progressively”.[30]
[30] Respondent’s closing submissions dated 4 November 2019, paragraph 64.
While fully cognisant of the subjective nature and limitations of demeanour-based judgements,[31] having observed Mr Poole giving evidence and extensively cross-examined, and reviewed the transcript, I do not accept that characterisation of Mr Poole’s evidence. I found Mr Poole to be a straightforward witness. He steadfastly maintained his evidence that he did not contemplate disposal of the shares once the exploration licence was obtained. My impression was that he was careful to ensure that he understood the questions asked and in his answers. There were various occasions when, once he had clarified a question, he readily accepted propositions that did not assist the Applicants’ case and which a less honest witness may have sought to evade or deny. I formed the impression that he did his best to answer honestly the questions that were put to him.[32]
[31] Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at 129 [31] per Gleeson CJ, Gummow and Kirby JJ
[32] Having reached this view, I noted that in the Chubb case Stevenson J reached a similar view and similarly rejected adverse submissions regarding Mr Poole’s credit following six days of what his Honour accepted was exhaustive and unrelenting cross-examination: Poole v Chubb Insurance Company of Australia Ltd [2014] NSWSC 1832, [106]-[111].
However, that is not to say that I should accept Mr Poole’s central premise, that he never contemplated that the shares or the mining assets would be disposed of when the exploration licence was obtained. As Jagot J observed in Ransley:[33]
“ . . . insofar as Mr Poole’s evidence is concerned, it is a well-known phenomenon that recall of past discussions is deeply imperfect. The clearest expression of this fact remains the statement of McLelland CJ in Equity in Watson v Foxman (1995) 49 NSWLR 315 at 319:
...human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”
[33] [2018] FCA 1796, [195], cited in Pell v The Queen [2020] HCA 12, [49].
The same may be said of a belief as to an intention said to have been formed a considerable time ago, when there was nothing to bring the particular character of that intention into focus at that time. That the precise nature of what Mr Poole now believes to have been his state of mind at the relevant times – namely, that disposal of the shares after substantial value had been added by obtaining the exploration licence never crossed his mind - may have been subconsciously constructed would not be surprising in the circumstances.
Mr Poole’s primary contemplation may have been to look to realise a gain after the reserves were proved. However, for the reasons that follow, I would not accept that was the only intention and would conclude that an earlier disposal once the exploration licence was secured must have been contemplated:
(a)The events occurred over a decade ago, but the significance of Mr Poole’s precise state of mind only became significant in a practical sense later. Mr Poole’s belief, now firmly and honestly held, may have formed subconsciously over time after that significance came into focus.
(b)Mr Poole understood that obtaining the exploration licence would have a value to Doyle’s Creek.[34] In any case, that is self-evident, since the whole foundation of Doyles Creek’s plans rested on avoiding the significant and prohibitive cost of obtaining an exploration licence by tender. That being so, it is improbable that realising the substantial increase in value by disposal after the exploration licence was secured was not regarded as at least a possible exit point.
(c)That is what in fact happened. The gains on the Doyles Creek shares were realised within a relatively short time after the exploration licence was secured. Subsequent actions are evidence of intended actions. Further, Mr Poole participated in discussions about ascertaining the value of the licence shortly after it was granted.
(d)The “Baxter” memorandum discussed below, although I give it limited weight, is consistent with the conclusion that exiting at that point was at least one contemplated option.
(e)For the reasons discussed below, I do not find the contra indicators raised by Mr Poole – such as the Trust’s investment plan and the escrowing of most of the Trust’s NuCoal shares issued in return for the Trust’s Doyles Creek shares - to be persuasive.
(f)The unexplained entry by Doyles Creek into an option agreement for the sale of the exploration licence within a matter of months of the exploration licence being obtained, as discussed below, is consistent with the contention that early disposal of the exploration licence must have been contemplated as a means of realising substantial gains in the value of Doyles Creek.
[34] ICAC transcript, 14 May 2013, page 8167, lines 20-29; page 8169, lines 1-4..
Mr Poole drew attention to the fact that his evidence to ICAC was given on 14 May 2013, which was only about a month after he was notified that the Australian Taxation Office (“ATO”) would be undertaking a “Comprehensive Risk Review”[35] and well before the ATO flagged any audit issues, including in respect of the issue the subject of these proceedings. The implication is that he would not have tailored his evidence, consciously or unconsciously, in a way that favoured his tax position because the issues had not emerged at that time.
[35] Court Book, volume 11, tab 568, Notification of Comprehensive Risk Review for Mr Poole from the ATO, dated 11 April 2013.
However, with Mr Poole’s understanding of tax principles as noted below and having regard to the magnitude of the gain, it does not follow that he would have been unaware of the potential for the revenue/capital issue to arise and, if so, for the implications to be potentially significant given the size of the gains. Further, an intention to exit early, before any training mine was established, would have been a matter of potential interest to ICAC.
The “Baxter” memorandum
A Westpac document entitled “Sponsor Memo & Credit Approval Summary” prepared by Mr Baxter has been the subject of scrutiny before ICAC and in the Ransley and Chubb cases. It relevantly states:
“The principals of Doyles Creek Mining Pty Limited have made application to the NSW Government for a mining exploration licence in respect of specific land at Jerry’s Plains with the view to establish what they are loosely calling a ‘training mine’.
The said mining exploration licence has some 140 million tonne of terminal coal and the said land provides the best site for pit-top, etc. The mine could commence in approx. 2 years. The principals of Doyles Creek Mining have however no long term intention of operating a coal mine and it is likely the land and exploration licence and training status would be sold to a large Operator for significance (sic) financial gain. The line adjoins an Xstrata mine site . . .”[36]
[36] S37 Documents ST5-55, Sponsor Memo & Credit Approval Summary prepared by Mr Baxter on 10 March 2008.
This document is internal to Westpac. It is accepted that it relates to funding for Doyles Creek’s activities and that “the principals” referred to are Mr Ransley and Mr Poole, although Mr Ransley had more dealings with Mr Baxter than Mr Poole. However, it is not disputed that its contents were not confirmed by Mr Ransley or Mr Poole.
Mr Poole categorically denies telling Mr Baxter that it was likely the assets would be sold after the exploration licence was obtained.
I have considered Mr Baxter’s evidence and examined extracts of the ICAC transcript highlighted by the Applicants and the Commissioner, and the references to this memorandum in Ransley and Chubb. The parties’ submissions subjected individual responses to microscopic examination, highlighting those that favoured their view of the inferences to be drawn. I have not found any of these particularly compelling.
While on its face the document suggests that obtaining the exploration licence would be the exit point, Mr Baxter in evidence before ICAC in 2013 merely expressed his understanding as that it was “more likely than not” that the operation would be sold before a mine was constructed.[37] Further, and more particularly, Mr Baxter in the same evidence referenced an entry in Westpac’s records that “the strategy of the clients was to buy land and establish a training mine”.[38]
[37] ICAC Transcript, 14 April 2013, page 6463, lines 8-11.
[38] ICAC Transcript, 14 April 2013, page 6461, lines 7-9.
Mr Poole noted that in the Chubb case in the Supreme Court of New South Wales, Stevenson J was not prepared to conclude that provenance of the Baxter memorandum was Mr Poole. However, that was in the context that neither Mr Ransley nor Mr Baxter gave evidence in that case and the focus of that statement was a controversy regarding the contemplated tonnages of coal reserves rather than the expectation of sale.[39] The judgment in the Chubb case does not assist in the current context.
[39] Poole v Chubb Insurance Company of Australia Ltd [2014] NSWSC 1832, [310].
In the end, the best that can be said of the memorandum is that it provides some evidence that Doyles Creek had an intention of exiting the project if value could be obtained through the grant of an exploration licence by direct allocation rather than proceeding with the establishment and operation of a training mine. It is certainly consistent with the conclusion that there was no intention on the part of Mr Poole to operate a coal mine. The absence of contemporaneous corroboration of its contents by Mr Ransley and, in particular, Mr Poole means that I give it only limited weight in determining the Trustee’s intention, at the time of the share acquisitions, once the grant of the exploration licence had been achieved.
The ICAC evidence
In Mr Poole’s evidence before ICAC, he consistently maintained that he did not contemplate realising gains once the exploration licence was obtained and denied saying otherwise to Mr Baxter. However, he also acknowledged that he hoped to make significant gains if the reserves were proved and that he had no long-term intention of retaining the assets, but rather would look to exit when the reserves were proved, which might occur before any mine existed.[40]
[40] See, also, for example, ICAC Transcript 14 May 2013, page 8175.
The Trust’s investment plan
Mr Poole emphasised the long-term, high-growth features of an investment plan the Trust established with professional assistance. The plan’s objectives were to maximise Mr Poole’s retirement through a high growth strategy taking advantage of capital gains tax concessions with investments for a minimum five-year term and benchmark return targets.
I find this evidence to be of little assistance. The Doyles Creek exercise was of such magnitude and with such significant upside if successful that it would not be surprising if different considerations applied in respect of these shares. This was not a mere passive investment; Mr Poole was actively involved in the operations of Doyles Creek. Further, the investment adviser was not called to give evidence and documents produced from the adviser under summons did not reveal any reference to the Doyles Creek shares.
In any case, holding an asset for five years is not inconsistent with its acquisition being in a business operation where, as already noted, the venture required the obtaining of land, development of the training mine proposal, obtaining the exploration licence in unusual circumstances and potentially proving the resource.
The “modus operandi” and “corporate morph”
In the course of his former employment, Mr Poole had enjoyed substantial benefits from a successful IPO.[41]
[41] Initial Public Offering.
With the benefit of this experience he entered into ventures with Mr Ransley, the aims of which were to buy up and consolidate companies into a single entity of scale for sale at a profit. The first involved the TESA group. The company ROSA, which became ResCo, was another. A third involved the Chairman 1 company.
In his evidence to ICAC, Mr Poole had agreed that this was their modus operandi.[42] The Commissioner’s submissions suggested that this pattern of embarking upon ventures of this kind with Mr Ransley – before and after the Dolyes Creek venture - supported the Commissioner’s characterisation of the Doyles Creek exercise as one which Mr Poole always intended the Trust would exit at an early point.
[42] ICAC transcript, 14 May 2013, page 8176, lines 36-42
However, Mr Poole emphasised what he called a corporate “morph” in which the company formerly known as ResCo, now Doyles Creek, came to have as its sole focus the acquisition of the exploration licence and related activities and not the provision of services as contemplated by ResCo. I accept that this was a different type of exercise to the “roll-up” strategy engaged in by Mr Ransley and Mr Poole.
The consolidation or roll up ventures had a relatively short-term focus with a view to disposal of the rolled-up ventures at a profit. To that extent, they may be said to be broadly consistent with an intention not to hold the Doyles Creek assets or shares for the long term. However, the character of each set of circumstances must be determined on its own facts and the Doyles Creek venture was otherwise materially different to these roll-up ventures.
In his evidence at ICAC Mr Poole linked his acknowledgement that it was his and Mr Ransley’s modus operandi to acquire assets, increase their value and then sell within four to five years, to his evidence that he “never had any intention of hanging around to run a training mine”.[43]
[43] ICAC transcript, 14 May 2013, page 8177, lines 1-3
This evidence supports an intention not to retain the shares after the reserves were proved but is not inconsistent with Mr Poole’s contention that he did not contemplate sale at the point when the exploration licence was secured.
The option agreements
Some controversy arose during the hearing concerning an option agreement for the sale of the exploration licence. Mr Poole had maintained that it was not permissible for the exploration licence to be sold. The Commissioner drew attention to an option agreement for the sale of the exploration licence executed on behalf of Doyles Creek. This agreement was undated but based on a fax header notation it is apparent that it was executed no later than August 2009. I infer that it was executed on 29 August 2009, the date of an option agreement referred to in clause 3.5 of the subsequent option agreement for the sale of Doyles Creek shares.
It was apparent from Mr Poole’s reaction to being shown this agreement that he was taken by surprise. I accept that Mr Poole was not aware of this option agreement at the time he gave his earlier evidence to the Tribunal. He was not a signatory to the agreement, which was signed on behalf of Doyles Creek by Mr Ransley and the then managing director, Mr Lewis.
Nevertheless, it seems most unlikely that, as a director of Doyles Creek, Mr Poole would not have been aware of the option agreement being executed at or around the time that occurred. It was after all an agreement for the potential sale of the company’s key asset the acquisition of which had been central to its plans. With the effluxion of time and its significance overtaken by the execution later that year of an option for NuCoal to purchase the shares in the Doyles Creek, Mr Poole may have forgotten about this earlier option agreement. For the reason stated, I infer that he was aware of the option agreement at or around the time it was executed.
Within a matter of months of obtaining the exploration licence, Doyles Creek had granted an option to sell it. The possibility of realising the value of the exploration licence within such a short time remains unexplained and supports the contention that realisation of a gain once the exploration licence was obtained was a significant possibility in contemplation from the outset.
Share escrows
Most of the Trustee’s shares in NuCoal received in return for its shares in Doyles Creek were escrowed for a period of approximately two years. Mr Poole points to his acceptance of the escrow as evidence of the Trustee’s initial and continuing intention to hold the shares on a long-term basis.
The escrow was imposed as a condition of the listing of NuCoal shares because Mr Poole became a director of NuCoal. Shareholdings associated with others who became directors of NuCoal were similarly escrowed. In contrast, Mr Ransley did not become a director of NuCoal and his associated shares could be sold immediately. As Mr Poole correctly points out, he too could have declined to become a director of NuCoal and the Trustee’s shares would not have been escrowed.
There are two points that can be made in this connection. First, Mr Poole’s acceptance of a directorship is consistent with continuation of the “business operation” of the Trust as discussed below, in that it allowed Mr Poole to continue to influence the Doyles Creek operations. Secondly, the Trustee subsequently sold some 30,000,000 of the escrowed shares within a relatively short time, in the context of the Doyles Creek venture, a little over two years after they were acquired and within months of the expiry of the escrow.
For these reasons, I consider that the escrow arrangements add little to the Applicants’ case.
Preserving the assets of the trust
Mr Poole mounted an argument based on the duty of a trustee to preserve the trust’s assets. Thus, so the argument went, the Trustee had a duty to sell some Doyles Creek shares where it took the view that the inclusion of strategic investors in Doyles Creek was necessary to allow needed capital to be raised. I need make no observation on the veracity of these claims because, as already observed, it is the intention at the time the shares were acquired that is determinative, not the reason for the timing of their disposal.
Intention on acquisition of the NuCoal shares
Mr Poole submitted that when the Trustee acquired the NuCoal shares in return for its Doyles Creek shares it had no intention of “cashing out” and, as indicated above, pointed to the escrow arrangements as evidence of this. For the reasons given, I do not find the argument regarding the escrow of the NuCoal shares persuasive. The fact is the Trustee did cash out in a significant way, soon after the expiry of the escrow in 2012.
The acquisition of the NuCoal shares being in exchange for the Doyles Creek shares, and consistently with Mr Poole’s assertion that he would see how the proving of the reserves developed, can be seen as a continuation of the profit-making exercise embarked upon when the Trustee acquired the Doyles Creek shares. In the absence of other persuasive evidence, I consider that the Trustee has not discharged the burden of proving that the NuCoal shares were not acquired with the intention of disposal at a profit.
In summary, consistent with the conclusion in Ransley regarding Ms Ransley’s shares, I am not persuaded that the Trustee has proven on balance that it did not have a not insignificant intention at the time the shares were acquired that they would be disposed of at a profit at an opportune time after their value had substantially increased as a consequence of activities entered into from the outset with that intention.
Have the Applicants discharged the burden of proving that the Trustee did not acquire the shares in a “business operation or commercial transaction”?
Relevance of Mr Poole’s activities as director of Doyles Creek
The question of whether the acquisitions were undertaken in a business operation or commercial dealing raises an issue regarding whether or to what extent the actions by the Trustee, controlled by Mr Poole as sole shareholder and director of the Trustee, should be taken to be business operations or commercial dealings by reference to Mr Poole’s activities in his capacity as director of Doyles Creek (and later, NuCoal).
Where private companies are engaged in commercial activities designed to increase shareholder value, it does not necessarily follow that acquisitions of shares in the companies for a purpose that includes subsequent disposal at a profit would be made in a business operation or commercial dealing. If that were so, most private investments in shares with the hope of eventual disposal at a profit would be regarded as business operations or commercial transactions.
However, the Commissioner says that in this case the intentions of the Trustee were aligned with the intentions of the companies as Mr Poole, who controlled the Trustee, was also actively involved in the companies’ pursuit of their objectives. Looking at Doyles Creek, and accepting for current purposes that the directors of the company (or at least Mr Poole) were pursuing an objective of obtaining an exploration licence to increase the value of the company’s assets rather than long-term operation of a coal mine, and that Mr Poole was heavily involved in the relevant decision-making as a director, is that sufficient to stamp the Trustee’s acquisition with the requisite commercial character?
Without the benefit of the judgement of the Federal Court in the Ransley case, I would have been inclined to the view that to do so would, as Mr Poole submits, wrongly conflate the actions of the Trustee acquiring and disposing of shares with the actions of Mr Poole in his capacity as director of Doyles Creek. Surprisingly, the parties were not able to direct me to any other case where the issue of whether the character of a gain from isolated dealings in shares in a private company may be considered by reference to the intentions of associated directors of the company had been discussed directly.
Of course, there is an element of artificiality in the distinction, since Mr Poole is the controlling mind of the Trustee. But companies are artificial constructs and, as such, separate entities to their shareholders and directors. The Trustee being a separate entity, I would, but for Ransley, hesitate to conclude that the acquisitions and disposals of shares by the Trustee were anything more than isolated transactions of the Trustee which, albeit entered into for purposes that included disposal at a profit, did not exhibit the features of a business operation or commercial transaction.
In that regard, accepting that the activities of Doyles Creek were of a commercial nature, what actions of the Trustee, considered in isolation from Mr Poole’s activities as a director, mark out the acquisitions as commercial dealings? Subscribing for shares with a view to sale at a profit is not sufficient to give the acquisitions the character of a business operation or commercial dealing. However, the same question could be asked in respect of the gains enjoyed by Ms Ransley which the Federal Court concluded were income according to ordinary concepts.
As Ms Cheeseman confirmed, the judgement in Ransley is not binding on me. I must decide the current matters by reference to the evidence before me. However, the reasoning in Ransley is consistent with the Commissioner’s submissions on this issue. Regardless of whether the reasoning strictly creates ratio decidendi that would resolve this issue in the current matters, I must and do give the judgement great respect. In that regard, I have concluded that to decide the issue of whether the shares were acquired in a business operation or commercial dealing without regard to Mr Poole’s activities as director would be inconsistent with the underlying premise of the reasoning in Ransley. I shall explain why.
In Ransley, the issue was similarly whether Ms Ransley acquired shares in Doyles Creek in a commercial dealing for the purpose of disposal at a profit. Ms Ransley’s husband as the managing director of Doyles Creek at the relevant times was actively involved in the process of obtaining the exploration licence and other aspects of the company’s affairs.
The Court dealt with the matter in this way:
“210. I consider that a large number of objective contemporaneous circumstances support the inference that Ms Ransley acquired all of the relevant shares as part of a business or commercial operation in which she and Mr Ransley were both involved as equal partners. The essence of the relevant business or commercial operation or transaction to which Ms Ransley was a party was a scheme to establish a company or companies in which Ms Ransley was a shareholder and Mr Ransley a director and manager, and in which Mr Poole also was involved or to be involved as a director, for the purpose of the company or companies obtaining directly allocated exploration licences. This would be achieved on the basis of a proposal that the mine would function as a commercial mine funding a training mine, thereby increasing the value of Ms Ransley’s shares in the company and enabling that profit to be realised by sale as and when and in the manner most opportune.
. . .
213. . . . I accept the Commissioner’s submissions that Mr Ransley and Ms Ransley were a team in relation to the business ventures into which they entered who played different roles, Ms Ransley’s role being the holder of the shares in the relevant companies. As the Commissioner submitted the objective circumstances support the inference that:
Ms Ransley’s activities in acquiring shares in DCM [Doyles Creek] and later NuCoal were not an exercise in passive investment entered into with a mere hope of making a profit. She, with her then husband, was engaged in the conduct of a business, or an overarching commercial transaction or dealing or a series of commercial transactions or dealings, one of the purposes which was contemplated was to build up the DCM business venture and to sell out of the venture to realise a profit if a suitable opportunity arose to do so.
214. I also accept the Commissioner’s submission that:
The evidence demonstrates that the relationship between Mr and Ms Ransley was not limited to that of a director and a shareholder at arm’s length. Mr Ransley was one of the key persons involved in the DCM business venture, Ms Ransley, was his wife and a lawyer, by agreement with him was the stakeholder of the Ransley interest in the ventures. She was privy to many conversations with Mr Ransley in which they made decisions together in relation to their common pool of funds and the business ventures with which they were concerned. Each considered the other’s interests. It is artificial to make findings through the lens of the director/shareholder relationship when the evidence demonstrates that the Ransleys were acting as a “team” in the business venture throughout.”
(Emphases added.)
It will be seen that the Court concluded that Ms Ransley, as shareholder, and Mr Ransley, as managing director of Doyles Creek, acted as “a team” in a commercial transaction or series of commercial transactions. The Court had no apparent difficulty in considering together the activities of Ms Ransley as shareholder and Mr Ransley as director, for the purposes of determining the character of Ms Ransley’s share acquisitions. This is analogous to considering the activities of the Trustee together with Mr Poole’s activities as director of Doyles Creek. Indeed, the connection is closer, as the controlling mind of the Trustee and Mr Poole are one and the same.
It is true that Mr Poole did not control Doyles Creek but nor did Mr Ransley. It cannot be denied that Mr Poole influenced the decisions of the Doyles Creek board regarding the obtaining of the exploration licence and related matters. I therefore take into account the activities of Mr Poole as director in determining whether the Trustee’s share acquisitions were in a business operation or commercial transaction, taking the content of the test to be, as Steward J articulated in Greig, whether the transactions were the sort of thing a business person or person in trade would do.
Were the transactions the sort of thing a business person or person in trade would do?
Consistent with the approach and conclusion in Ransley, the activities of Mr Poole as a director of Doyles Creek (and subsequently NuCoal) in influencing and executing that company’s pursuit of its objectives distinguishes the transactions from those of a person who merely acquires shares with the hope of subsequent sale at a profit where the hope is informed by careful examination of the company’s prospectus and other available information.
In his written submissions following the Full Federal Court decision in the Greig case, Mr Poole sought to distinguish his circumstances from those of Mr and Ms Ransley. Mr Poole drew attention to the analysis of the Ransley case in the dissenting judgement of Derrington J in Greig, in particular his Honour’s reference to the “extensive involvement”[44] of Ms Ransley in the development of the Doyles Creek investment. Mr Poole sought, by contrast, to characterise his involvement as “simply an unpaid Non-Executive Director”.
[44] [2020] FCAFC 25, [114].
This may have distinguished Mr Poole’s position from Mr Ransley’s but the distinction is not determinative. It does not mean that Mr Poole was not influential in the key decisions and activities of Doyles Creek. A director shares with other members of the board responsibility for the governance and direction of the company. Mr Poole influenced the board’s decisions and there is no evidence to suggest that the board acted contrary to his wishes. He was involved in discussions with the financier, Westpac. Mr Poole’s activities as a director were not insignificant - on his own evidence, Mr Poole would have spent between one hour and one day per week on Doyles Creek activities. All in all, it cannot be accepted, as Mr Poole would have it, that he was but a “passenger” in the Doyles Creek venture.
Consistent with the approach in Ransley, on the basis of the evidence in this matter of Mr Poole’s active role as a director of Doyles Creek (and subsequently NuCoal) as it pursued its objectives to increase the company’s value, I conclude that the Trustee and Mr Poole together embarked upon a business operation in a similar way to Mr and Ms Ransley. Mr Poole’s actions in becoming and engaging as a director of Doyle’s Creek directed to enhancing the value of the Trust’s shareholdings, by execution of the plan to obtain the exploration licence, which was the goal from the outset and to which Mr Poole directed not insignificant time to achieving, were the sorts of things a business person would do.
Financial “intertwining”
For completeness, I note that the Commissioner referred to the “intertwining” of the Trust and other entities by way of various financial securities provided by the Trustee to Westpac, including a guarantee and indemnity and a mortgage over the Trust’s Doyles Creek shares, securing amounts owing by various entities associated with Mr Poole including ResCo.
However, there is no suggestion that the moneys secured by these securities included obligations of Doyles Creek. By the time they were provided in October 2009 the corporate “morph”, upon which it was henceforth Doyles Creek and not ResCo that pursued the exploration licence proposal, had occurred. Further, it was not a case where the securities provided by the Trustee, by securing obligations of ResCo as the holding company of Doyles Creek, might be said to have put ResCo in a position to support Doyles Creek. The securities were given after shares in Doyles Creek had been issued to Ms Ransley, the Trustee and others.
I accept that, as the Commissioner submitted, these securities are evidence that dealings of the Trustee generally are not separate emanations of Mr Poole’s will. However, they do not indicate any financial connection or risk-sharing or support between the Trust and Doyles Creek.
Viewed in the way discussed above, I am not persuaded that the acquisitions by the Trustee are not properly characterised as made in a business operation or commercial dealings.
Other issues raised by the Applicants
“Detachable profits”
The Applicants argued that, because most of the NuCoal shares received as consideration for the Trust’s shares in Doyles Creek were escrowed for two years, there were no “detachable profits” on disposal of the Trust’s shares in Doyles Creek. The point the Applicants seek to make seems to be that, because the escrow prevented the immediate sale of the shares, the gains on disposal could not be income, as they were incapable of being converted immediately to money.
Two cases are cited in the Applicants’ submissions in support of this proposition[45]: Evans v Deputy Commissioner of Taxation (SA) (1936) 55 CLR 80 and Commissioner of Taxes (SA) v Executor Trustee & Agency Company of Australia Ltd (1938) 63 CLR 108. Neither is particularly helpful in the current context. The former refers to “detachable profits” but does not contain a detailed discussion of the meaning of that expression. The latter refers to the need for a gain to be in a “realised or immediately realisable form” but was decided in the rather different context of whether amounts relating to unpaid medical fees, that it was accepted would be income upon derivation, were derived.
[45] Applicant’s Closing Submissions, 3 October 2019, page 16, paragraph 64.
It is clear that for a benefit to be income it must be in the form of money or in money’s worth and a benefit that cannot be converted to a pecuniary amount is not income according to ordinary concepts: Federal Commissioner of Taxation v Cooke and Sherden (1980) 42 FLR 403. Thus the benefit of holidays provided to Cooke and Sherden which were not transferable was held not to be income according to ordinary concepts. The principle may be founded on the view that a benefit not in monetary form does not have an ascertainable value capable of being brought to account as income if it cannot be sold and thus converted to money.
Here, though, the NuCoal shares allotted to the Trustee were able to be sold, just not immediately. They were plainly of substantial value, 30,000,000 of the shares being sold for $7,800,000 shortly after the escrow expired, and there was no evidence that a value could not be attributed to them, notwithstanding the escrow. Neither party drew my attention to any authority in which an asset received as consideration for the transfer of another asset was determined to be not income on the basis that the asset so received, although saleable, could not be sold forthwith. Recalling that the escrow was only imposed because of Mr Poole consenting to be a director of NuCoal, it would be an odd result if a gain upon receipt of a substantial allotment of shares that would otherwise be income were held not to be income solely on the basis that the shareholder by its own actions, as Mr Poole himself described it “voluntarily”[46], submitted itself to an escrow arrangement.
[46] Statement of Andrew Poole dated 10 May 2019, adopted in oral evidence, paragraph 9; Transcript of Proceedings, 19 August 2019, page 67, lines 39 – 40.
In the absence of authority directly on point, I am not persuaded that the temporary restriction on converting the otherwise highly valuable NuCoal shares to money during the escrow period renders what would otherwise be income incapable of being so characterised. The NuCoal shares were vested in the Trustee and were capable of being converted to money on expiry of the escrow. To exclude the profit on the disposal of the Doyles Creek shares in return for the NuCoal shares would not in my view give a “substantially correct reflex of the [Trust’s] true income”.[47]
[47] Commissioner of Taxes (SA) v Executor Trustee & Agency Company of Australia Ltd (1938) 63 CLR108, 154-155.
Calculation of the gain – net income issue
In written submissions, Mr Poole submitted, with respect correctly, that it could only be the profit, not the gross value received on disposal of the shares, that could be brought to account as income according to ordinary concepts.[48]
[48] Applicant’s Closing Submissions, 3 October 2019, page 15, paragraph 62; page 69, paragraph 222.
In response, the Commissioner asserted that only the net amount, being the sale price or value of the NuCoal share less the cost of acquiring the relevant shares, is brought to account in the amended assessments. This is consistent with the calculations set out in the ATO’s audit finalisation letters and appears to have been accepted by Mr Poole as the issue was not pursued in his reply submissions.
Calculation of the gain – value of NuCoal shares issue
Mr Poole also submitted that the value of the NuCoal shares received for the Trust’s Doyles Creek shares would be less, because of the escrow restrictions, than NuCoal shares unencumbered by an escrow and therefore the amount adopted in the Commissioner’s calculation (20 cents per share, as adopted in the company’s annual report) overstates the gain.[49]
[49] Applicant’s Closing Submissions, 3 October 2019, page 16, paragraph 63; page 39-40, paragraph 136.
If the actual value was less than the 20 cents per share adopted for the purposes of the assessment calculations the assessments would to that extent be excessive. However, in the absence of evidence of the actual value of the escrowed NuCoal shares, there is no evidentiary foundation on which the Applicants could discharge the burden of proving that the assessments were excessive in this respect, and certainly not what the correct amount to be assessed should be. Again, this appears to have been accepted by Mr Poole as the issue was not addressed further in his reply submissions.
CONCLUSION IN RELATION TO INCOME TAX ASSESSMENTS
On the basis of the forgoing analysis, I am not persuaded that the Trustee did not acquire the shares for a significant purpose of disposal at a profit by the means by which the profit was obtained, nor that the acquisitions were not in business operation or commercial dealing.
It follows that I am not persuaded that the income tax assessments are excessive or that in any case the Applicants have discharged the burden of proving in what amounts the assessments should have been made.
ADMINISTRATIVE PENALTY
The Commissioner assessed the Trustee to an administrative penalty on the shortfall between the calculation of XPQZ’s income tax liability for the 2010 income year on the basis that the gains distributed by the Trustee were on revenue account and the amount disclosed by the Trustee which was calculated as if the concessional capital gains tax provisions applied. The penalty was assessed at the rate of 50% of the shortfall for recklessness as to the operation of a taxation law.[50] No penalty was assessed in respect of the 2012 income year.
[50] TAA, Sch 1, s 284-90(1), item 2.
Preparation of the income tax returns
The Applicants engaged Mr Mahoney, an experienced chartered accountant and registered tax agent, to prepare their income tax returns. Mr Poole provided instructions to Mr Mahoney on behalf of each of the Applicants.
The Commissioner points to the following regarding the circumstances in which Mr Mahoney came to prepare the returns in the way that he did, treating the gains as on capital account:
(a)Mr Mahoney gave evidence that he “would’ve” had a discussion with Mr Poole regarding the Trustee’s intentions in relation to the shares, but had no specific recollection of doing so, nor any notes of a discussion. Mr Mahoney’s working papers did not contain any notes regarding the character of the gain, nor were the transactions identified on his checklist as “contentious”.
(b)Mr Poole did not obtain written advice from Mr Mahoney regarding the tax treatment of the gains or obtain a second opinion.
(c)There is no evidence that Mr Poole asked Mr Mahoney to take him through the basis for treating the gains as on capital account.
(d)There is no evidence that Mr Mahoney undertook any research relevant to whether the gains would be on capital or revenue account.
(e)There is no evidence that Mr Mahoney advised Mr Poole to obtain a private ruling in relation to the tax treatment of the gains or looked up any public rulings.
Mr Mahoney did not prepare the income tax returns for Doyles Creek and Mr Poole freely admitted that he did not recall giving Mr Mahoney information regarding the intentions of Doyles Creek in relation to seeking the exploration licence but with no long-term intention to operate a mine. Consistent with his position that it is the intention of the Trustee, and not his activities as a director of Doyles Creek, that is relevant to the characterisation of the gains, Mr Poole stated in evidence:
. . .I don’t know why I would’ve discussed what Doyles Creek Mining was up to with Mr Mahoney. I certainly discussed with him what [the Trustee] was up to. The long-term intention of operating a mine was a Doyles Creek operational thing. I just can’t think why I would’ve discussed that with him. He didn’t do the tax return for Doyles Creek.[51]
[51] Transcript of Proceedings, 19 August 2019, page 84, lines 23-30.
Does the “safe harbour” provision apply?
Section 284-75 in Schedule 1 to the TAA provides protection from penalties where taxpayers rely on a registered tax agent to prepare their taxation returns.
However, the protection is only available if the taxpayer provides all relevant information to the tax agent. In view of the conclusion I have reached based on underlying premise of the Ransley case, that would include providing relevant information regarding Mr Poole’s activities as director of Doyles Creek which did not occur. Additionally, an understanding of the activities of Doyles Creek would have been necessary context to appropriately test any statement by Mr Poole regarding the intentions of the Trustee.
Accordingly, this so-called “safe harbour” does not apply.
Was the Trustee reckless?
If the Trustee was reckless when lodging its return by treating the gains as on capital account, a “base penalty” of 50% of the resulting shortfall applies, subject to any remission by the Commissioner (or the Tribunal standing in place of the Commissioner).[52]
[52] TAA, Sch 1, s 284-90(1), item 2.
“Recklessness” as to the accuracy of a statement in a return has been explained in this way:
“Recklessness in this context means to include in a tax statement material on which the [relevant tax laws] are to operate, knowing that there is a real, as opposed to fanciful, risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true or correct, and that a reasonable person in the position of the statement-maker would see there is a real risk that the [relevant tax laws] may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the prescribed conduct is more than mere negligence and must amount to gross carelessness”.[53]
[53] BRK (Bris) Pty Ltd v Federal Commissioner of Taxation (2001) 46 ATR 347, 364, cited with approval in Hart v Commissioner of Taxation (2003) 131 FCR 203, [43].
The Commissioner submits that the Trustee was reckless because it did not seek written advice or a ruling or provide Mr Mahoney with sufficient information to identify potential issues.
As the extract above indicates, whether behaviour is properly characterised as reckless must be considered in the context of a person in the position of the statement-maker. Relevant circumstances in that regard include that Mr Poole is not unsophisticated, being a qualified certified practising accountant and experienced financial accountant. He was not an expert in tax, but had what Mr Mahoney described as a strong appreciation of the tax issues applicable to his circumstances.[54] Significantly, the relevant transactions were the largest the Trust had entered into and gave rise to substantial gains amounting to in excess of $15,000,000.
[54] Transcript of Proceedings, 20 August 2019, page 113, lines 43-45.
On the other hand, it is understandable that a person in the position of Mr Poole, with a reasonable appreciation of relevant tax principles but not a tax expert, might have considered the activities and intentions of the Trustee as a separate entity to be separate from those of Doyles Creek and Mr Poole as a director of that company.
In that regard, assessment of penalties should not be approached with the benefit of hindsight. When the returns were lodged the judgement in the Ransley case had not been handed down and nor had there been any other judicial decision drawn to my attention where a taxpayer had been found to have acquired shares or other assets in a business operation or commercial dealing by reference to the activities and intentions of a director of the company in which the shares were held, as in this and the Ransley case.
However, Mr Mahoney did not indicate that he prepared the returns in the way that he did because he thought the activities of Mr Poole as a director of Doyles Creek were irrelevant to whether the Trust’s share acquisitions were made in a business operation or commercial dealing for profit-making purposes. Indeed, Mr Mahoney accepted that the activities and intentions of Doyles Creek would have been relevant to the characterisation of the gains.
Not surprisingly, so many years later, Mr Mahoney had no specific recollection of discussing the matter with Mr Poole. Nor, though, notwithstanding the size of gains and consequent tax implications, could he produce any notes of relevant discussions with Mr Poole or consideration of the basis for treating the gains on disposal of the shares on capital account.
In the absence of Mr Mahoney or Mr Poole having any specific recollection of discussions about the tax treatment of the substantial gains and any contemporaneous documentary evidence relevant to the degree of care exercised in the preparation of the returns, there is no evidentiary foundation upon which I could conclude that the Trustee has discharged the burden of proving that the penalty assessment is excessive insofar as the base penalty was assessed at 50% of the shortfall. In particular, there are insufficient facts able to be found on the basis of the evidence from which any relevant inference might be drawn.
Should the base penalty be remitted wholly or in part?
The Commissioner maintains that there should be no remission of penalty. Mr Poole submitted that the penalty should be remitted in full.
The task of the Tribunal is to ask, having regard to the evidence, what were the circumstances surrounding the recklessness and failure to exercise reasonable care on the part of the Trustee and Mr Mahoney 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 Trustee’s 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 or unjust. In exercising the discretion, I must have regard to the evident object of the particular 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.[55]
[55] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50, [249].
In urging the Tribunal to remit the penalty, Mr Poole submitted that these factors should be taken into account:
(a)The shortfall, if it arose (which of course he denied) was not because of non-disclosure but because of mischaracterisation of the gains.
(b)The Trust has a demonstrated history of meeting its tax obligations and Mr Poole co-operated fully with the ATO. To not recognise these factors by way of remission would be to treat the Trust’s position as equivalent to that of an entity that did not have a good compliance history and did not co-operate with the ATO.
(c)The Trust adopted a reasonably arguable position which should weigh heavily in favour of remission.
Mischaracterisation
The February 2008 capital raising, under which the Trustee obtained 60,096 shares, raised $240,600.
The acquisition land on Jones Reserve Road and the May 2008 capital raising
The minutes of a Board Meeting held on 24 December 2007 for Doyles Creek note that “land at Jerry’s Plains (comprising Lots 120-124 and 175-177 Jones Reserve Road) … would be appropriate for future operations”. It was resolved that negotiations for the purchase proceed and Mr Ransley conduct them.
At a Board meeting for Doyles Creek on 15 February 2008, negotiated terms of contract for Lots 120- 124 and 175-177 Jones Reserve Road were tabled (see paragraph 32 above). It was resolved to approve the contract and that Mr Ransley be appointed to acquire the land, and to do so on trust for Doyles Creek.
On 18 March 2008, Mr Maitland, as Chairman of Doyles Creek, sent to the Department a letter seeking the Minister's consent under s 13(4) of the Mining Act 1992 for the grant of an Exploration Licence to Doyles Creek. The letter enclosed a submission in support of the request for consent entitled "Training Mine Facility Submission" which contained details of the training mine proposal.
Following the issue of a capital raising notice in March 2008 (being a capital raising open to existing shareholders), and an acceptance in relation to that notice, the Trustee acquired 110,559 additional shares in Doyles Creek at $1 each in May 2008:
a.On 26 March 2008, Doyles Creek issued a capital raising notice, stating the funds “…will be used … to complete the purchase of approximately 230 acres of freehold title to an area of land in the Doyles Creek area for construction of mine infrastructure and training facilities”. This land was Lots 120-124 and 175-177 Jones Reserve Rd, referred to at paragraph 32 above.
b.On 27 March 2008, XPQZ (as shareholder) nominated the Trustee to be issued with shares as per the capital raising. On or about the same time Mr Poole (on behalf of the Trustee) signed the capital raising acceptance notice to acquire 110,559 from Doyles Creek at $1 per share. On 27 March 2008, Mr Poole, acting for the Trustee, issued and signed a cheque to Doyles Creek for $110,559. The 110,559 shares were allotted to the Trustee on 5 May 2008.
On 14 April 2008 Mr Ransley acquired the following land, as trustee, for $734,000:
a.Lot 120 Jones Reserve Road Jerrys Plains NSW 2330.
b.Lot 122 Jones Reserve Road Jerrys Plains NSW 2330.
c.Lot 123 Jones Reserve Road Jerrys Plains NSW 2330.
d.Lot 124 Jones Reserve Road Jerrys Plains NSW 2330.
e.Lot 175 Jones Reserve Road Jerrys Plains NSW 2330.
f.Lot 176 Jones Reserve Road Jerrys Plains NSW 2330.
g.Lot 177 Jones Reserve Road Jerrys Plains NSW 2330.
The minutes of a Board meeting held on 1 May 2008 for Doyles Creek record that the company “[i]s considering the purchase of freehold title to a further 110 acres of land in the Doyles Creek area, comprising Lot 1861 Piribil Street, Jerry’s Plains, for construction of mine infrastructure and training facilities”. Doyles Creek resolved that negotiations for the purchase proceed and Mr Ransley conduct the negotiations and be nominated as the purchaser under the contract as trustee for Doyles Creek.
On 5 May 2008, the Trustee acquired the 110,559 shares in Doyles Creek referred to at paragraph 35.
The May 2008 capital raising, under which the Trustee obtained 110,559 shares, raised $485,817.
The acquisition of land on Piribil Street and the June 2008 capital raising
Doyles Creek had decided to acquire Lot 1861, Piribil St, Jerry’s Plains: see paragraph 37 above.
Following the issue of a capital raising notice in May 2008 (being a capital raising open to existing shareholders), and an acceptance in relation to that notice, the Trustee acquired 101,352 additional shares in Doyles Creek at $1 each in June 2008:
a.On 9 May 2008, Doyles Creek issued a capital raising notice, stating the funds “…will be used by the Company to complete the purchase of a further 110 acres of freehold title to an area of land in the Doyles Creek area for construction of mine infrastructure and training facilities (Proposed Use). If the Proposed Use does not proceed for any reason, the Directors intend to use the funds for the working capital of the Company”. The land referred to is Lot 1861 Piribil St, Jerry’s Plains, discussed at a board meeting of 1 May 2008 (see paragraph 37).
b.On 22 May 2008, XPQZ (as shareholder) nominated the Trustee to be issued with shares as per the capital raising. On or about the same time Mr Poole (on behalf of the Trustee) signed the capital raising acceptance notice to acquire 101,352 shares in Doyles Creek at $1 per share. On 22 May 2008, Mr Poole (on behalf of the Trustee) issued and signed a cheque for $101,352 to Doyles Creek. The 101,352 shares were allotted on 25 June 2008.
In late June 2008, Lot 1861, Piribil St, Jerry’s Plains was acquired by Mr Ransley for $390,000. (The title to that lot was later transferred by Mr Ransley to Doyles Creek for $10, in mid-2009.)
On 13 May 2008, Mr Allan Coutts (the Deputy Director General of the Department) wrote to Mr Maitland advising him that the “proposal” – presumably, Doyles Creek’s licence application (see paragraph 34) – required further examination and referral to the Minister.
On 10 June 2008 at a meeting of the board of directors for Doyles Creek, Mr Poole resigned as company secretary and Mr James Stevenson was appointed company secretary. Mr Poole continued in his office as director of the company until 27 November 2009: see paragraph 78 below.
At a Board meeting on 25 June 2008, Doyles Creek resolved to issue new shares to shareholders in accordance with their respective capital raising acceptance notices. These notices related to the capital raising notice dated 9 May 2008 which is referred to in paragraph 40 above. In addition to the issue of 101,352 shares to the Trustee (which is also referred to at paragraph 40 above), shares were to be issued to, relevantly (1) Mautalant; and (2) one or more entities associated with Mr or Ms Ransley.
The June 2008 capital raising, under which the Trustee obtained 101,352 shares, raised $428,174.94.
The acquisition of land on Jones Reserve Road and Piribil Street and the September 2008 capital raising
The minutes of a Board meeting of 2 July 2008 record that “land of 40 hectares (comprising 51 Jones Reserve Rd … and Lots 110 & 110 Pribil Street, Jerry’s Plans) … would be appropriate for future operations”. Doyles Creek resolved that the company proceed with the purchase of those properties, and that the purchaser should be Mr Ransley as trustee for the company. Furthermore:
a.The minute records the need for additional funding to complete those purchases.
b.It was resolved to issue notices of capital raising to shareholders.
Following the issue of a capital raising notice in July 2008, and an acceptance in relation to that notice, the Trustee acquired 101,352 additional shares in Doyles Creek at $1 each in September 2008:
a.In July 2008, Doyles Creek issued a capital raising notice stating the funds “…will be used by the Company to complete the purchase of freehold title to an area of land of approximately 40 hectares in the Doyles Creek area for construction of mine infrastructure and training facilities (Proposed Use). If the Proposed Use does not proceed for any reason, the Directors intend to use the funds”.
b.On 2 July 2008, Mr Poole signed the capital raising acceptance notice to obtain 63,709 shares for the Trustee at $1.44 per share. On 17 July 2008, Mr Poole (acting for the Trustee) signed a cheque for $91,741. The 63,709 shares were allotted on 9 September 2008.
On 21 August 2008, the Minister sent a letter to Mr Maitland, which invited him, in his capacity of chair of Doyles Creek, to apply for an exploration licence over the Doyles Creek area (subject to a supplementary submission; and that any consent would be given under “the NSW Government Guidelines for Allocation of Future Coal Exploration Areas (March 2006).”.
On 27 August 2008, the following land was for $465,000:
a.Lot 69 Jones Reserve Road Jerrys Plains NSW 2330.
b.Lot 116 Jones Reserve Road Jerrys Plains NSW 2330.
c.Lot 117 Jones Reserve Road Jerrys Plains NSW 2330.
d.Lot 118 Jones Reserve Road Jerrys Plains NSW 2330.
e.Lot 119 Jones Reserve Road Jerrys Plains NSW 2330.
It appears that those lots comprise 51 Jones Reserve Rd, Jerry’s Plains. The land was presumably acquired by Mr Ransley, as a trustee, in accordance with the minutes referred to at paragraph 47.
The Commissioner assumes that Lots 110 and 111 of Piribil St, Jerry’s Plains were also acquired on or about 27 August 2008, by Mr Ransley, as trustee. Those lots and 51 Jones Reserve Rd were land that the board of Doyles Creek decided to buy at a meeting on 2 July 2008 (referred to at paragraph 48 above).
On 9 September 2008 at a meeting of the board of directors for Doyles Creek, it was recorded that the company resolved to issue shares to shareholders including the Trustee (63,709 shares), as well as, relevantly, to one or more entities associated with Mr or Ms Ransley (55,562 shares).
On 9 September 2008, the Trustee acquired the 63,709 shares in Doyles Creek referred to at paragraph 48.
The September 2008 capital raising, under which the Trustee obtained 63,709 shares, raised $494,887.68.
Further activities to obtain, and the grant of, an exploration licence
On 29 September 2008, Doyles Creek lodged an application for an exploration licence over the Doyles Creek area under Part 3 of the Mining Act 1992.
In or about October 2008, ResCo engaged Sparke Helmore to draft an Operating and Maintenance contract to be entered into by ResCo Underground Services Pty Ltd (a subsidiary of ResCo) with Doyles Creek for the training mine.
On 28 October 2008, Mr Gregory Barns was appointed as a director of Doyles Creek.
On 5 December 2008, a “Ministerial letter” was provided to the Minister with a recommendation that he consent to the exploration licence application, in accordance with a consent he previously gave.
On 5 December 2008, the Minister made an offer of an exploration licence to Doyles Creek.
On 10 December 2008, the Department advised Doyles Creek that notice of its exploration licence application must be placed in the Land Newspaper.
On 12 December 2008, a Ministerial briefing was prepared recommending that Mr MacDonald grant an exploration licence to Doyles Creek subject to the terms and conditions specified in the licence.
On 15 December 2008, Doyles Creek was granted Exploration Licence EL 7270 through direct allocation process by Mr MacDonald, which gave the company a right to prospect on the Doyles Creek site for a term of four (4) years. The grant was subject to conditions.
A minute of a Board meeting of 23 December 2008 of Doyles Creek records:
a.The company is required to pay $1.1 million in equal instalments over the next four (4) years.
b.The first instalment of $275,000 was due in January 2009. Mr Poole had negotiated a three (3) month loan with Westpac to pay the first instalment.
c.The company was overdrawn by about $50,000 and it was approximately $750,000 in red.
d.Discussions are continuing with Chinese companies for an equity stake in Doyles Creek.
In January 2009 a technical report about the Doyles Creek Exploration Area was prepared by ResCo Undergroup Services Pty Ltd.
A minute of a Board meeting of 27 February 2009 for Doyles Creek records:
Potential Investors
[Mr Poole] tables a report of his visit to China … Generally accepted that both the visit to China and subsequent activities involving potential Chinese investors were disappointing.
Xstrata has indicated they would wish to drill more test holes before being involved in any serious discussion regarding a potential investment.
[Mr Ransley] reported that he was reviewing the possibility of a back-door listing for the Company (and possibly Springsure) and tabled a term sheet from a Perth based financial institution.
It was RESOLVED (unanimously) that [Mr Ransley] pursues this opportunity and report back to the Board on its progress.
On 8 April 2009, Mr Ransley was appointed the new Chairman of Doyles Creek, replacing Mr Maitland. However, Mr Maitland continued to hold a role as a director of Doyles Creek.
Various share sales or transfers and a “merger” with NuCoal by way of a scrip for scrip exchange
On or about 10 July 2009, Mr Maitland resigned as a director of Doyles Creek.
At a board meeting for Doyles Creek on 24 August 2009, an engagement letter from “Tridentcapital” was tabled. The letter was “associated with the merger of Doyles Creek … to Supersorb Environmental NL”. The “[k]ey aspects” of the engagement included the following:
a)“The injection of $2,500,000 cash in Doyles Creek Mining in return for 5.2% equity in Doyles Creek Mining by Monday 7th September.”
b)“The continuing assessment of international and national interest in the Doyles Creek project.”
c)“The back door listing of Doyles into Supersorb and additional capital raising”.
At that meeting, it was resolved that the engagement letter be signed on behalf of Doyles Creek.
Supersorb Environmental NL was the previous appellation for NuCoal (referred to in paragraph 2).
A minute of a Board meeting on 14 October 2009 of Doyles Creek recorded the transfer of 8,069 shares in Doyles Creek from the Trustee to Ms Ransley. Those shares were transferred for nil consideration. (The dispute before the Tribunal does not concern the taxation treatment of this disposal by the Trustee). The transfer was undertaken after a conversation between Mr Ransley and Mr Poole in which it was agreed that, because they founded ResCo and Doyles Creek together, their shareholdings should be roughly equal, and the transfer of 8,609 shares brought their shareholdings broadly into balance.
On 15 and 26 October 2009, the Trustee disposed of Doyles Creek shares as follows:
Date
Shares sold
Price per share ($)
Amount ($)
Total shares held, following disposal
15 October 2009
150,239
33.28
5,000,000
156,453
26 October 2009
1,561
32.03
49,999
154,892
26 October 2009
18,733
32.03
600,018
306,962
26 October 2009
3,122
32.03
99,998
325,425
Total
173,655
$5,750,015
154,892
On 23 October 2009, NuCoal (then called Supersorb Environmental NL) entered into an Option Agreement with each shareholder in Doyles Creek. This agreement granted NuCoal the option to acquire all the shares in Doyles Creek in return for the shareholders being issued shares in NuCoal in proportion to their Doyles Creek shareholdings. The agreement also required Nucoal to raise at least $10 million in share capital; and that Nucoal would be re-listed on the Australian Stock Exchange.
On 12 November 2009, drilling of hole 1 (“DCM001”) commenced.
At a board meeting on 17 November 2009 of Doyles Creek, the then managing director (Mr Gordon Galt, who had been appointed on 15 October 2009) reported inter alia that “3 drilling identified”; and that a “[d]rill rig arrived from Tasmania”. An Option Agreement was also discussed (see below).
On 23 November 2009, NuCoal (then called Supersorb Environmental NL) was granted an option to acquire 1,502,391 shares in Doyles Creek in return for the issue, by NuCoal, of 470,000,000 shares in itself to Doyles Creek shareholders. This option could not be exercised until it changed its name to NuCoal Resources NL and had raised $10,000,000 from share subscriptions in the NuCoal entity.
On 27 November 2009, Mr Ransley resigned as Director of Doyles Creek.
On 2 December 2009, by prospectus, NuCoal shares were offered as follows:
a.50,000,000 shares to the public (at $0.20 per share to raise $10,000,000).
b.15,575,000 shares to Trident Capital Pty Ltd and Blue Saint Pty Ltd.
c.470,000,000 shares to shareholders.
d.4,000,000 shares to creditors.
e.5,000,000 shares to directors of NuCoal.
f.15,000,000 shares to note shareholders.
In January 2010, the Trustee held 154,892 (10.31% of the total) shares in Doyles Creek.
Subject to an ASX listing for NuCoal, some of the shares to be issued by NuCoal to Doyles Creek shareholders would be classified as “restricted securities”. As a result, in January 2010, the Trustee volunteered to escrow 47,681,128 shares it would receive, preventing their disposal for two years.
On 11 January 2010, drilling of DCM001 was completed.
On 25 January 2010, drilling of hole 2 (“DCM002”) commenced.
In February 2010, NuCoal floated on the ASX with a value of approximately $100 million.
On 3 February 2010, Ms Ransley acquired 39,520,843 in NuCoal for consideration of $155,291.
On 5 February 2010, Mr Poole was appointed as non-executive director of NuCoal.
In February 2010, NuCoal acquired all of the issued shares in Doyles Creek following the exercise of the option and in exchange, issued new shares to the existing shareholders of Doyles Creek. In exchange for the Trustee’s 154,892 shares in Doyles Creek, the Trustee received 48,455,585 shares in NuCoal. These shares were valued at $0.20 per share according to NuCoal’s annual report for the year ended 30 June 2010. As above, the Trustee agreed to place 47,681,128 of these shares in escrow.
On 22 February 2010, drilling of DCM002 was completed.
On 1 March 2010, drilling of hole 3 (“DCM003”) commenced.
On 26 March 2010, the managing director of NuCoal stated that if the mine went ahead, NuCoal's value will probably jump to between $500 million and $800 million.
On 30 March 2010, drilling of DCM003 was completed.
In April 2010, Mr Maitland or an entity associated with Mr Maitland sold $1.13 million worth of NuCoal shares.
On 8 April 2010 drilling of hole 4 (“DCM004”) commenced.
On 21 April 2010, the Minister stated in Parliament that he received a recommendation from the Department that the Doyles Creek training mine go ahead.
On 22 April 2010, Ms Ransley disposed of 8,480,330 shares in NuCoal for consideration of $2,262,048.48.
On 17 May 2010 drilling of DCM004 was completed.
On 4 June 2010, Mr MacDonald resigned from the Ministry.
On 24 June 2010, NuCoal released a statement predicting a 70 percent increase in expected coal reserves from Doyles Creek.
On 10 July 2010, drilling of hole 5 (“DCM005”) commenced.
On 27 July 2010, drilling of DCM005 was completed.
The disposal of NuCoal shares by the Trustee and related events
On 17 December 2010, Mr Maitland or an entity associated with Mr Maitland sold $3.78 million worth of NuCoal shares.
On or around January 2012, the escrow period in relation to 47,681,128 shares held by the Trustee in NuCoal expired.
On 26 April 2012, Mr Poole ceased being a director of NuCoal.
On 7 June 2012, the Trustee disposed of 30 million NuCoal shares for $7,800,000.
On 9 August 2012, Mr Poole ceased being a director of Doyles Creek.
Resolutions by the Trustee
By resolution dated 30 June 2010, the Trustee relevantly resolved that:
Distribution of Income: It was resolved, pursuant to clause 4 of the Trust Deed and any other power enabling the Trustee, to pay, apply or set aside the income for the Trust for the year ended 30 June 2010 to or for the benefit of the beneficiaries and in respect of the classes or categories, amounts and/or proportions set out in the table below:
Income Entitlement Net capital gain: the first $5,000 discounted capital gain ($10,000 gross capital gain) to [Redacted]
the next $3,000 discounted capital gain ($6,000 gross capital gain) to [Redacted]
the balance to XPQZ
Franked dividends: all to XPQZ and including any attached imputation credits All other net income not included above: all to XPQZ
By resolution dated 30 June 2012, the Trustee relevantly resolved that:
Other income distribution: It was resolved, pursuant to clauses 4, 5 and 6 of the trust deed, to appoint the distributable income, excluding the above specific entitlements for the income year to the beneficiaries:
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