Young and Commissioner of Taxation
[2007] AATA 2091
•21 December 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 2091
ADMINISTRATIVE APPEALS TRIBUNAL )
) No NT2005/172, 175, 282-283
TAXATION APPEALS DIVISION )
Re: Bernadette YOUNG
Sheldon YOUNG
Warwick YOUNG
Applicant
And: Commissioner of Taxation
Respondent
DECISION
Tribunal Mr Julian Block, Deputy President Date21 December 2007
PlaceSydney
Decision The objection decisions under review are affirmed.
[SGD]
Mr Julian Block
Deputy President
CATCHWORDS
INCOME TAX – aloe vera project – whether deduction permitted under s 8-1 of the 1997 Act- Part IVA of the 1936 Act…
RELEVANT ACT/S
Income Tax Assessment Act 1997; s 8
Income Tax Assessment Act 1936; Part IVA
CITATION/S
Re Barham and Commissioner of Taxation [2007] AATA 1824
Re Wood and Commissioner of Taxation [2007] AATA 1802
Vincent and Commissioner of Taxation of the Commonwealth of Australia [2002] FCAFC 291
Re Brody and Commissioner of Taxation [2007] AATA 1764
REASONS FOR DECISION
21 December 2007 Mr Julian Block, Deputy President PART A: introduction and background
1. The objection decisions which are under review in this matter are the disallowance of deductions claimed by the Applicants in relation to an aloe vera project (“the Project”), in respect of Messrs Warwick and Sheldon Young, for the tax years ending June 1998 and June 1999, and in respect of Mrs Bernadette Young in respect of the tax year ending June 1998 only. (It is perhaps relevant to note that Mrs Young also participated in the Project in the 1999 year but for reasons which were not fully explained, did not object in respect of the 1999 year.)
2. There are then three Applicants whose applications were, by consent, heard together. Mr Warwick Young (who is referred to as “Mr Young”) appeared on his own behalf and also on behalf of his son, Mr Sheldon Young (referred to as “Sheldon” or as “the son” or “his son”) and his wife, Mrs Bernadette Young (who is referred to as “Mrs Young” or “the wife” or “his wife”). The Respondent was represented by Ms D. Harding of counsel instructed by Mr Dusan Uglesic of the Australian Government Solicitor.
3. The Tribunal had before it in respect of each of the Applicants both generic T documents (in four volumes together with a further supplementary volume and making five volumes in all) and also individual T documents, all lodged in accordance with s 37 of the Administrative Appeals Tribunal Act 1975. The T documents in respect of each Applicant and in aggregate are thus very lengthy indeed. Mr Young also produced a large volume of his own documentation described (inaccurately) as “Generic T documents” and that volume was admitted as an exhibit but subject to the proviso that Ms Harding reserved the Respondent’s rights of objection in relation to that set of documents, and also other exhibits tendered by or on behalf of the Applicants. This aspect will be dealt with in more detail later in these reasons.
4. The Exhibits which were accepted into evidence, subject to relevance in many cases and subject also to the proviso that Ms Harding reserved the Respondent’s rights of objection in respect of some of them, are as follows:
Exhibit A1:Witness statement of Warwick Young dated 15 June 2007;
Exhibit A2:Amended Statement of Facts & Contentions of Warwick Young dated 16 October 2006;
Exhibit A3:Applicants’ Generic T Documents;
Exhibit A4:Witness statement of Sheldon Young dated 14 June 2007;
Exhibit A5:Statement of Facts & Contentions of Sheldon Young dated 16 October 2006;
Exhibit A6:Witness statement of Bernadette Young dated 15 June 2007;
Exhibit A7:Statement of Facts & Contentions of Bernadette Young dated 13 October 2006;
Exhibit A8:Letter from Australian Aloe Limited dated 2 November 1999 with annexures;
Exhibit A9:Licensee Tax Statements of Sheldon Young from Aloe Management & Marketing Limited for 1998, 1999 & 2000;
Exhibit A10: Print out from board diagram by Sheldon Young;
Exhibit A11: Financial Report of Australian Aloe Marketing Limited for year ended 30 June 1999;
Exhibit A12: Financial statements for one day to 30 June 1998 for Aloe Vera Project;
Exhibit A13: ‘A' class share Register for the Australian Aloe project of 30 June 1999 for Sheldon W. Young (AAL985) with annexures;
Exhibit A14: ‘A' class share Register for the Australian Aloe project of 30 June 1998 for PPM (AAL255) with annexures;
Exhibit A15: Letter to shareholders from WR Young dated 18 March 1999 with annexures (no header); and
Exhibit A16: Notice of Special Meeting of Australian Aloe Project for 10/04/02 with annexures;
Exhibit R1:Further Amended Statement of Facts and Contentions for Warwick Young dated 3 August 2006;
Exhibit R2:Further Amended Statement of Facts and Contentions for Sheldon Young dated 3 August 2006;
Exhibit R3:Further Amended Statement of Facts and Contentions for Bernadette Young dated 3 August 2006; and
Exhibit R4:Respondent’s Written Submissions for all Applicant parties.
5. It will be noted then that in respect of the Applicants, the documentation before the Tribunal is quite astonishingly large and in respect of much of it unnecessarily so. This is also an aspect that will be dealt with in more detail later in these reasons.
6. As I have said, all three Applicants were represented by Mr Young who is himself one of the Applicants. Because Mr Young gave evidence first, it was necessary for the other two Applicants to absent themselves from the hearing room. But from and after the time at which Sheldon gave evidence, he took on the role of an additional advocate and on many occasions indeed tended to supplant his father in this role. In this context:
(a)The matter in which this case was conducted on behalf of the Applicants, (and this is putting it kindly) can best be described as idiosyncratic. Mr Young said that the Applicants would have preferred to have been legally represented but that the amount quoted to them as the cost of representation was too high. Mr Young described himself (TS 11) as a director of a company which wrote prospectuses. He said that he obtained a diploma of law when he was 22 or 23.
(b)From the very beginning and continuing through to the end of a three-day hearing, Mr Young repeatedly demonstrated that he had no proper understanding of how the proceedings were to be conducted. In particular, he demonstrated that he did not comprehend the difference between evidence and submissions. He repeatedly sought to tender as evidence material, which amounted (again putting it kindly) to material of a submission nature. Although Mr Young and his son are both educated and articulate men, they entirely failed to understand the basis on which the Respondent has disallowed the deductions claimed and contended (unfairly and without foundation) moreover that the Respondent has at times deliberately misunderstood or misconstrued the facts and that on a proper understanding of the facts the Respondent would not have disallowed the deductions. Sheldon indeed was particularly adamant in this regard. When Mr Young appreciated that the Respondent would be filing written closing submissions, he said that he too would want to file written closing submissions and would need time within which to do so. He asked for a period of three weeks within which to file such written submissions; the Tribunal however, appreciating that it might take a while for the transcript to be produced, allowed a (longer) period of six weeks; that is until the end of November 2007. At the same time the Respondent was granted a right of reply in respect of any submissions by the Applicants, and to be served and filed by Christmas 2007.
(c)Many of the Exhibits which were tendered (and this applies in particular to Exhibits A8 to A16 inclusive) were tendered on the third hearing day and notwithstanding the fact that the Applicants had been directed some considerable time before the hearing to produce and file all of the evidence on which they intended to rely.
(d)The Tribunal allowed the Applicants to tender as evidence documents which were in fact submissions, but subject to relevance and to objections by the Respondent, purely because it proved to be the only realistic manner in which this case could be run at all. As to whether the Applicants ever fully appreciated that they bore the onus of proof is open to very considerable doubt, bearing in mind that there were complaints as to the fact that documents could not be found or had only just been found. There were also contentions that there was no need to adduce evidence as to facts of which the Respondent was, so it was contended on behalf of the Applicants, fully aware.
(e)The Tribunal did not in fact need written submissions from either party although it cannot be denied that a practice has arisen whereby the Respondent does generally file written closing submissions and which often prove to be useful. The Tribunal determined to allow the Applicants time within which to file written closing submissions purely so as to obviate any possible suggestion that there has been a breach of natural justice. As a consideration of the transcript will demonstrate, the Applicants were allowed to conduct their case with a very considerable degree of latitude.
(f)It is convenient at this point to note that although the hearing lasted for three days, the transcript is numbered consecutively so that it is not necessary in relation to the transcript to distinguish the transcript for any particular day from that in respect of any other day.
7. It is also relevant to note that it was agreed that the evidence of each of the Applicants would be evidence in all of the applications. It is in this context that it is particularly noteworthy that it is clear from Mrs Young’s evidence that she did not ever see herself as engaged in a business. She said that she did purchase aloe vera products and when she did so, she paid for them in the ordinary way. There was no suggestion that she did so in order to resell them or that she did so in the course of a business referable to the distribution of aloe vera products. Sheldon in his evidence contended most vociferously that he was indeed involved in just such a business.
8. At the end of the first hearing day, the attention of the Tribunal was drawn to the fact that the same Project (and I refer to precisely the Project under review in these proceedings) was considered by this Tribunal (Senior Member Sweidan) in Re Barham and Commissioner of Taxation [2007] AATA 1824 handed down on 28 September 2007. As will be seen from that decision in Barham, Senior Member Sweidan found:
(a)That Mr Barham was not entitled to a deduction on the basis that he was engaged in a business;
(b)Mr Barham was entitled to a deduction under the other limb of s 8-1 of the Income Tax Assessment Act 1997 in that the deductions were incurred in the production of income;
(c)The Respondent had correctly applied Part IVA of the Income Tax Assessment Act 1936 and so as to disallow the deductions but provided that Senior Member Sweidan determined for the reasons set out in his decision, to allow a deduction in respect of the actual amounts of cash contributed; and
(d)The penalties imposed were appropriate.
9. There is only one significant difference between the position of Mr Barham and that of Mr Young and his son (but not that of Mrs Young). Mr Young was a director of Prospectus and Project Management Services (“PPM”), Australian Aloe Limited (“AAL”), Aloe Management & Marketing Limited (later Australian Aloe Marketing Limited) (“AMML”), and Export Growth Finance Pty Ltd (“the Lender”), and he was also a shareholder in all of these companies. Sheldon was also a director of and shareholder in some but not all of such companies. Put succinctly, Mr Young and Sheldon were much more actively involved in the Project than was the case in respect of Mr Barham. This factor was perhaps the major factor in respect of one relevant aspect. Each of the Mr Young and Sheldon contended that he personally was engaged in an aloe vera distribution business. Such a business was conducted, on the evidence before the Tribunal, by AAL or AMML but not by either Sheldon or Mr Young. I refer to this aspect later in respect of Sheldon and having regard to Exhibit A9 later in these reasons.
PART B - the facts as set out in the respondent’s submissions
10. At the conclusion of the third hearing day, the Respondent produced his written submissions dated 17 October 2007, which are referred to in these reasons as “RS”.
11. In clause 4 of RS, the Respondent noted that Mr Young claimed deductions of $167,500 and $201,000 in respect of the 1998 and 1999 years respectively, that Sheldon claimed deductions of $16,750 and $33,500 in respect of the 1998 and 1999 years respectively, and Mrs Young claimed a deduction of $16,750 in respect of the 1998 year. RS contains a lengthy section under the head of “Facts” and which describes in some detail (and in all respects correctly) the nature of the project and in particular the documentation referable to the project and importantly includes relevant extracts from those documents. The Tribunal emphasises that it has checked the content of RS under the head of “Facts” and is satisfied that it is correct. That content contained in clauses 9 to 60 inclusive can conveniently and for these reasons be included in these reasons as follows:
…
Facts
(a)The applicants
Warwick Young
9.Warwick Young was a director of Prospectus and Project Management Services Pty Ltd (PPM). He drafted the prospectus for the project.
Company search
Warwick Young statement, par 9
10.Warwick Young was also a director of:
-Australian Aloe Limited (AAL);
-Aloe Management & Marketing Limited (later Australian Aloe Marketing Limited) (AMML);
-Export Growth Finance Pty Ltd (Lender).
Company searches
Warwick Young statement, par 5
11.Warwick Young was a shareholder in PPM, AAL, AMML and the Lender. His family company, Bernawarra Pty Ltd, was also a shareholder in the Lender.
Company searches
Warwick Young statement, pars 5, 14
Warwick Young, XXN
12.Warwick Young claims that “In all I purchased 44000 ‘A’ Class shares [in AAL] which entitled me to 22 licensed interests”.
Warwick Young statement, par 3
Bernadette Young
13.Bernadette Young was married to Warwick Young. She was the manager of an aged care facility.
Bernadette Young statement, pars 5, 20
14.Bernadette Young claims that “In all I purchased 2000 ‘A’ Class shares [in AAL] which entitled me to 1 licensed interest”.
Bernadette Young statement, par 3
Sheldon Young
15.Sheldon Young was a director of PPM. He contributed to the preparation of the prospectus.
Company search
Sheldon Young statement, par 9
16.Sheldon Young was also a director of:
-AMML;
-the Lender.
Company searches
Sheldon Young statement, par 5
17.Sheldon Young was a shareholder in AMML. His family company, Rainy Bay Pty Ltd, was a shareholder in the Lender.
Company searches
Sheldon Young statement, pars 5, 14
18.Sheldon Young claims that “In all I purchased 6000 ‘A’ Class shares [in AAL] which entitled me to 3 licensed interests”.
Sheldon Young statement, par 3
(b)The project
19.The prospectus for the project was issued by AAL and AMML. It was dated 28 May 1998 and amended by a supplementary prospectus dated 19 May 1999.
Prospectus, S1-1, 7
First supplementary prospectus, S2-82, 84
20.The prospectus opened with a warning to participants that the investments being offered were speculative and recommended that independent financial advice be obtained.
Prospectus, S1-1, 3
21.A section headed “Summary of Investment” provided an “Introduction”:
“Australian Aloe Limited (AAL) makes the offer contained in this Prospectus for the purpose of raising funds to purchase the whole of the undertakings including the business, land, plant and equipment of Hi Tech Aloe Vera (Australia) Pty Ltd (Hi Tech). It will add to expand and improve the existing facilities and business with the intention of generating profits for its shareholders.
Hi Tech established in 1988 conducts a vertically integrated operation whereby high quality aloe vera leaf is grown and harvested, processed into gel at its own premises and in turn sold to value adding manufacturers or used as the raw material in its own range of 36 value added products which are sold to both domestic and international markets.
Having purchased all of Hi Tech’s undertakings it will expand the existing growing and production facilities to meet the current growth in demand for Hi Tech’s products and more particularly the dramatic growth anticipated as a result of a professional and aggressive marketing strategy to be adopted with funds raised specifically for this purpose.”
Prospectus, S1-6
22.“The Offer” was described as:
“The offer in this prospectus is three fold, namely redeemable preference shares, ‘A’ Class shares and Interests arising out of the ownership of ‘A’ Class shares.”
Prospectus, S1-6
23.As to redeemable preference shares:
“1. Redeemable Preference $1 Shares
AAL intends to issue 2 million $1 redeemable preference shares on which a dividend at the rate of 8% per annum or such higher rate as the directors recommend will be paid commencing July 1999 and which will be redeemable at the option of the company after 1 July 2003 for $1.08 being a premium of 8%. The payment of a dividend is preferential in that this dividend ranks above dividends payable to ‘A’ class and ordinary shareholders. The payment of dividends is dependent on there being sufficient distributable profits available.
...”
Prospectus, S1-6
24.As to A class shares:
“2. ‘A’ Class $1 Shares
AAL intends to issue 3 million ‘A’ Class shares each fully paid to persons who subscribe under this prospectus. ‘A’ Class shares carry all of the rights to vote (that is one (1) vote for every ‘A’ Class share) and receive dividends of ordinary shares but in addition thereto each parcel of 2,000 shares entitles the holder to a Licensed Interest under which he is entitled to market and sell the whole range of AAL’s products.
3. Interests Attaching to ‘A’ Class $1 Shares
‘A’ Class shareholders who exercise the right to a Licensed Interest will engage in their own business as a licensed marketer and seller of the full range of AAL’s products. For each parcel of 2,000 ‘A’ Class shares a Licensed Interest governed by the terms and conditions of a License Agreement … can be applied for and the holder can (although there is no obligation to do so) appoint Aloe Management & Marketing Limited to manage that business under a management agreement. …
In the event that Aloe Management & Marketing Limited is appointed as Manager the interests of each Licensee under the Management Agreement are governed by an Investment Deed entered into by Aloe Management & Marketing Ltd (as Manager) Australian Aloe Limited (as Owner) and Inteq Custodians (as Trustee). By entering into the Management Agreement each Licensee agrees to be bound by the terms of the Investment Deed …”
Prospectus, S1-6
25.There was no requirement for a participant to acquire redeemable preference shares and A class shares.
Prospectus, S1-9, Note
26.“The Purpose of the Offer” was described as:
“1. By Australian Aloe Limited
a)To fund the acquisition of all of the assets and undertakings (the business) of Hi Tech including all production equipment and facilities, intellectual property consisting of formulates and technical production and marketing know how, all trademarks and brands, client lists and supply agreements.
b)To purchase land at 98 Scotland Street, Bundaberg.
c)To erect a purpose built factory on the land capable initially, of trebling the existing aloe vera processing capacity with provision to increase to seven times the existing capacity.
d)To purchase land at Bullyard and Quanaba near Bundaberg together with standing crops of aloe vera and to increase its current growing capacity.
e)To purchase standing crops of aloe vera on land currently leased or owned by interests associated with Hi Tech’s directors and to ensure they are efficiently grown and harvested for use in production.
f)To acquire further land by lease or purchase on which to grow crops of aloe vera in sufficient quantities to meet anticipated increase in demand for product.
2.By Aloe Management & Marketing Limited
a)To offer marketing and management services to ‘A’ Class shareholders of AAL who exercise their rights to be licensed as marketers and sellers of AAL’s range of products.
b)To secure and service existing markets established by Hi Tech and to embark on an aggressive marketing campaign with a view to significantly increasing its share of both the domestic and world markets for aloe vera products.
c)To thoroughly research existing world market trends thereby identifying consumer needs and preferences for new and modified products and packaging.”
Prospectus, S1-8
27.A section headed “Three possible Income Streams” stated:
“a)It is intended that a fully franked dividend will be paid to holders of redeemable preference shares. In addition subject to the option of the company to do so after 1 July 2003, the shares will be redeemed for $1.08 representing a premium of 8% unless the holder exercises the option to convert 50% them to ordinary shares ...
b)Income Projections for AAL indicate that it should achieve profits from 1999 onwards from which dividends on ‘A’ Class shares can be declared. …
c)Individual’s Licensees’ businesses. Licensees who engage in the business of marketing and selling AAL’s products will do so under the terms of a License Agreement which expires on 30 June 2017. ...”
Prospectus, S1-9
28.A “Finance Package” was available through the Lender:
“A finance package is offered to fund 100% of Year 1 Management and Marketing Fees and 25% of Year 1 License Fees. Subject to prepaying Year 1 interest and making one principal repayment the licensee can insure against the failure by his business to generate sufficient income and profits to meet subsequent interest and principal payments. He will do so by entering into an Indemnity Agreement ….”
Prospectus, S1-9, 12
29.A participant who took the finance package was to pay cash of:
On application: ‘A’ Class share purchase 2,000
75% of Year 1 License Fee 1,500
Year 1 interest 1,350
Stock purchase 100
Indemnity Fee 400
90 days after or
on 30 September 1998: Principal repayment 2,500
7,850
Prospectus, S1-19
30.Nothing further was required:
“All future costs are funded by the Licensee’s business. If the business does not meet its projected income and there is a shortfall in funds available to make interest and principal repayments under the loan the Indemnifier must pay them.”
Prospectus, S1-19
31.The tax deductible expenditure was said to be:
Tax Deductible Expenditure
Year 1 Management and Marketing Fee 13,000
Year 1 License Fee 1,500
Year 1 Interest 1,350
Indemnity fee 400
Total 16,750
Prospectus, S1-20
32.The cash position where a participant was on a tax rate of 48.5% was said to be:
Cash Position
Tax Saving refund ($16,750 at 48.5%) 8,124
Less Licensee Cash 7,850
Net Position + 274
Prospectus, S1-20
33.The prospectus included two project agreements - a Management Agreement and a License Agreement. There was a separate Loan Indemnity Agreement and Loan Agreement.
Prospectus, S1-71
Prospectus, S1-63
Loan Indemnity Agreement & Loan Agreement, T117-274
34.An Investment Deed was said to relate to:
“only to those Licensees who have exercised their right to have AM&M manage their farms. ...”;
Prospectus, S1-60
Investment Deed, T105-101
35.As to A class shares, a participant could apply to:
(a)purchase A class shares by completing Application Form 2 and, inter alia, indicating how many shares the participant wished to purchase;
(b)become a Licensee by completing the Option Form and, inter alia, indicating the number of Licensed Interests being applied for;
(c)take the finance package by completing the Loan Details (Option 1),
and providing cheques for the required cash payments.
Prospectus, S1-79
36.A supplementary prospectus amended the prospectus by, inter alia, extending the period of the prospectus and increasing the number of A class shares and Licensed Interests.
First supplementary prospectus, S2-84
(c)The applicants’ material
37.The applicants have not produced any application or option forms relating to them. Nor have they produced any record of any shares acquired by them. The applicants have produced incomplete copies of project agreements said to relate to them. They have also produced some cheques for some payments, some of which were from a different entity, PPM, with no explanation offered as to why.
38.Warwick Young has produced, for the 98 year:
(a)an incomplete Loan Indemnity Agreement & Loan Agreement dated 28 June 1998;
Tab 1, pages 1-2
(b)an incomplete Management Agreement dated 30 June 1998;
Tab 1, pages 3-4
(c)an incomplete License Agreement dated 30 June 1998. It refers to Warwick Young as number AAL258 with one Licensed Interest;
Tab 1, pages 5-7
and, for the 99 year:
(a)an incomplete Loan Indemnity Agreement & Loan Agreement dated 30 June 1999. It refers to Warwick Young with a principal sum of $162,000 and indemnity fee of $4,800;
Tab 1, pages 8-11
(b)an incomplete Management Agreement dated 30 June 1999. It refers to Warwick Young as number AAL984 with 12 Licensed Interests;
Tab 1, pages 12-17
(c)an incomplete License Agreement dated 30 June 1999;
Tab 1, pages 18-21
(d)three cheques dated 30 June 1999 - $24,000 from W Young to AAL Holding A/C, $24,000 from PPM to AAL and $16,200 from W Young to EG Finance.
Tab 1, page 26
39.Bernadette Young has produced, for the 98 year:
(a)an incomplete Loan Indemnity Agreement & Loan Agreement dated 30 June 1998. It refers to Bernadette Young with a principal sum of $13,500 and indemnity fee of $400;
Tab 2, pages 27-30
(b)an incomplete Management Agreement dated 30 June 1998;
Tab 2, pages 31-34
(c)an incomplete License Agreement dated 30 June 1998. It refers to Bernadette Young as number AAL257 with 1 Licensed Interest;
Tab 2, pages 35-39
(d)three cheques dated 28 June 1998 - $2,000 from PPM to AAL Capital Account, $2,000 from PPM to AAL Holding A/C and $1,350 from PPM to Export Growth Finance.
Tab 2, page 40
40.Sheldon Young has produced, for the 98 year:
(a)an incomplete Loan Indemnity Agreement & Loan Agreement dated 30 June 1998. It refers to Sheldon Young with a principal sum of $13,500 and indemnity fee of $400;
Tab 3, pages 56-59
(b)an incomplete Management Agreement dated 30 June 1998;
Tab 3, pages 60-63
(c)an incomplete License Agreement dated 30 June 1998. It refers to Sheldon Young as number AAL261 with 1 Licensed Interest;
Tab 3, pages 64-68
(d)three cheques dated 30 June 1998 - $1,350 from S Young to Export Growth Finance, $2,000 from S Young to AAL Holdings A/C and $2,000 from S Young to AAL Capital A/C;
Tab 3, page 69
and, for the 99 year
(a)an incomplete Loan Indemnity Agreement & Loan Agreement dated 30 June 1999;
Tab 3, pages 70-71
(b)an incomplete Management Agreement dated 30 June 1999;
Tab 3, pages 72-74
(c)an incomplete License Agreement dated 30 June 1999;
Tab 3, pages 75-76
(d)three cheques dated 30 June 1999 - $4,000 from S Young to AAL Capital A/C, $4,000 from S Young to AAL Holding A/C and $2,700 from S Young to EGF.
Tab 3, page 77
Project agreements
41.The following summary of the project agreements is based on the forms contained in the generic s 37 documents, being the Management Agreement and License Agreement in the prospectus and the separate Loan Indemnity Agreement and Loan Agreement.
Management Agreement, S1-63
License Agreement, S1-71
Loan Indemnity Agreement & Loan Agreement, T117-274
42.The form of the Management Agreement and amended License Agreement in the supplementary prospectus and the form of the Loan Indemnity Agreement and Loan Agreement for the 99 year were relevantly similar.
Management Agreement, S2-105
Amendments, License Agreement, S2-88
Loan Indemnity Agreement & Loan Agreement, T119-304
Management Agreement S1-63
43.The Management Agreement was to be made between AMML as the Manager and a participant as the Licensee by AAL (referred to as the Company) as its agent.
44.Clause 3.1 stated that the Licensee had acquired by acquisition of shares in AAL rights to Licensed Interests.[1]
[1] “Licensed Interest” was defined in clause 1.1(8) and recital B as “the right to market and sell the Company’s products under license … on the terms set out in the license agreement annexed to the Articles of Association of the Company”.
45.The terms of the Management Agreement further included:
(a)by clause 3.2, the Licensee engaged the Manager to manage the Licensee’s Business;[2]
[2] “Licensee’s Business” was defined in clause 1.1(10) and recital A as “the business of marketing and selling the Company’s products”.
(b)by clause 4.1, the Manager was to manage the Licensee’s Interests, market the Products as it considers appropriate and perform all management matters, including record keeping and reporting to the Licensees;[3]
[3] By clause 1.1(20), “Product” was defined by reference to the License Agreement.
(c)by clause 4.8, the Manager was to pay the Net Proceeds of the Project to the Trustee under the Investment Deed to be divided and credited among the Licensee and Other Licensees with the intent that the Licensee shall be entitled to receive the Licensee’s Distribution (if any);[4]
[4] By clause 1.1(18), “Net Proceeds of the Project” was defined as “Gross Proceeds of the Project less the Management Costs and other expenses of the Project”. By clause 1.1(15) “Management Costs” was defined as “all costs of sale of the Products and all other costs properly incurred by the Manager in the operation of the Licensee’s Business”. By clause 1.1(21), “Project” was defined as “the venture to be established by the Manager being the scheme or undertaking to which the Investment Deed relates, to be known as “Australian Aloe Vera Project””.
(d)by clauses 6.1, 6.2(2) and 6.3, in consideration for the Manager agreeing to carry out the services, the Licensee was to pay to the Manager by way of management fees:
(i) for the first 13 months (referred to as the First Period), $13,000 per Licensed Interest payable on full on the date of the Agreement;
(ii) for the next period to 30 June 2000 (referred to as the Second Period), the Licensee’s Proportion (a term which was not defined) of Net Proceeds of the Project in respect of the First Period, from which the Manager was to pay:
-any License Fees, any interest on borrowings in respect of the Licensee’s Interest and any principal repayment on such borrowings;
-and if the Net Proceeds of the Project exceeded $1,500 per Licensed Interest in the First Period, the excess amount over $1,500 as to one third to the Manager by way of Management Fees and two thirds to be retained by the Trustee for distribution to the Licensee;
(e)by clause 6.4, for each subsequent year of the Term, the Manager was to be entitled to be paid a sum equal to 5% of the Licensee’s Net Proceeds of each previous period by way of Management Fees;[5]
[5] By clause 2, the term of the Agreement was from the date of execution until the earlier of, amongst others, 30 June 2017 or the Licensee ceasing to market and sell Products.
(f)by clause 6.5, other than in respect of the First Period, the Manager was to have no recourse to the Licensee personally for payment of any Management Fees;
(g)by clause 7.1 to 7.3:
(i) the Manager was to pay all Management Costs:
-incurred during the First Period and the Second Period from the Management Fees;
-incurred during each Further Period from the Gross Proceeds of the Project for each previous period;
(ii) other than in respect of the First Period, the Manager was to have no recourse to the Licensee personally for payment of any Management Costs or any other expenses associated with the provision of Management Services.
License Agreement S1-71
46.The License Agreement was to be made between AAL as the Licensor and a participant as the Licensee by AMML as agent.
47.By clause 2.1, in consideration of the performance and observation of the covenants contained in the Agreement by the Licensee the Licensor granted the Licensee the right to market, distribute and sell the Products and to use the Marks for the purpose of the Business in conjunction with similar rights granted to other Licensees.[6]
[6] By clause 1.1, “Products” was defined as “Aloe Vera products manufactured or processed by the Licensor”, “Marks” was defined as “all names logos trademarks and service marks relating to the Products” and “Business” was defined as “the Licensee’s business of marketing and sale for profit of the Products and associated activities”.
48.By clause 2.2, in consideration of the continuing right obtained under the Agreement during the Term, the Licensee was to pay the Licensor a License fee of $2,000 for each Licensed Interest for the first year commencing the date of the Agreement until 30 June 1999 and for each subsequent year a sum equivalent to 5% of the Sale Proceeds.[7]
[7] By clause 1.1, “Licensed Interest” was defined as “each separate right to market and distribute Products on the terms contained in this Agreement, such right deriving from the acquisition of a specified number of shares in the Licensor as set out in the Articles of Association of the Licensor” and “Sale Proceeds” was defined as “the Licensee’s proportion of the Net Proceeds of the project”. “Net Proceeds” was not defined. “Project” was defined as “the venture to be established by the Manager being the scheme or undertaking to which the Investment Deed relates, to be known as the “Australian Aloe Vera Project”.
49.By clause 4.1, the Licensee covenanted and agreed with the Licensor with respect to certain duties, including to commence Business as soon as practical after execution of the Agreement and to actively and diligently promote the Business and to exercise best endeavours in the conduct of the Business.
50.By clause 5.1, the Licensee agreed to each month order Products from the Licensor by issuing a written purchase order stating the particular Product and amount requested.
51.By clause 8(a), the Licensee had the option of appointing the Manager (by clause 1.1, AMML or such other company approved by the Licensor) to manage the Licensee’s Interest with regard to the marketing and distribution of the Product, the performance of the Licensee’s duties under the Agreement and generally to manage the Business on the Licensee’s behalf. On execution of a Management Agreement, the Licensor was to enforce the Licensee’s obligations under the License Agreement only against the Manager and not personally against the Licensee. The Licensee assigned such of its rights under the Management Agreement so as to enable the Licensor to enforce the Licensee’s obligations against the Manager.
Loan Indemnity Agreement T117-275
52.The Loan Indemnity Agreement was to be made between AMML as the Indemnifier, the Lender and a participant as the Borrower.
53.By clause 1 and Schedule A of the Loan Agreement (which was a Schedule to the Loan Indemnity Agreement - see below), the Borrower agreed to pay to the Indemnifier a fee of $400 at the time of execution.
54.By clauses 1 and 2, provided that the Borrower prepaid the first year’s interest and the principal repayment of $2,500 in accordance with the Loan Agreement, the Indemnifier agreed to meet interest payments from year two onwards.
55.By clause 4, the Indemnifier warranted to the Lender that at the end of the term of the Loan Agreement the Indemnifier would make repayment of any principal then outstanding and save harmless the Borrower from any remaining obligations under the Loan Agreement and the Lender accepted that warranty and would not seek any further payment from the Borrower.
Loan Agreement T117-278
56.The Loan Agreement was to be made between the Lender and a participant as the Borrower.
57.By clause 2.1 and Schedule A, the Lender agreed to lend to the Borrower the Principal Sum of $13,500.
58.By clauses 2.2 and 4, the Borrower agreed to pay to the Lender interest during the first year, at the discounted rate of 10% per annum, provided the Borrower prepaid the first year’s interest and paid a principal repayment of $2,500 on or before 30 September 1998.
59.By clauses 2.3, 2.4 and 5 and Schedule A and provided the Borrower entered into the Loan Indemnity Agreement, prepaid the first year’s interest and paid the principal repayment:
(a)the Borrower was to pay to the Lender interest from year two onwards at the discounted rate of 4% per annum by 30 June in each year;
(b)the interest was payable only from the net income of the business or by the Indemnifier under the terms of the Indemnity Agreement and not look to the Borrower;
(c)the Borrower was to pay instalments of principal repayments but the Lender was to accept as repayments an amount equal to 50% of the net profit of the Business in lieu of payment;[8]
[8] By clause 1, “Business” was defined as “the marketing and selling of Aloe Vera Product by [AAL]”.
(d)the term of the loan was to be extended from 8 years to no longer than 20 years if the net profit of the Business was insufficient to pay the Principal Sum by the expiration of 8 years.
60.Evidently, the Australian Securities and Investments Commission was concerned that demands were made upon participants for further payment, notwithstanding the terms of the prospectus and the Loan Indemnity Agreement and Loan Agreement, and undertakings were sought from the Lender to refund any further payments and to not demand further payment.
Enforceable Undertaking, Tab 19
61..
…
12. It will be noted (and as previously defined in these reasons at paragraph 9), the term “AAL” refers to Australian Aloe Limited, the term “AMML” refers to Aloe Management & Marketing Limited which later changed its name to Australian Aloe Marketing Limited, and the term “the Lender” relates to Export Growth Finance Pty Ltd; “PPM” refers to Prospectus and Project Management Services Pty Limited. All of these companies were associated with each other.
PART C - the evidence of mr young
13. This is not a case in which it is necessary for the Tribunal to deal with the evidence presented on behalf of the Applicants in detail. Nor for that matter is it necessary for the Tribunal to include the witness statements or extracts from them (in some cases containing a wealth of irrelevant material) which were tendered at the hearing.
14. Mr Young said that he had intended to call accounting evidence and in particular Mr Colin Thomas who furnished tax advice in connection with the Project and also his own accountant who had presented his and his son’s tax returns, but not his wife’s tax returns, which were apparently prepared and presented by another accountant, but had not been able to find them. He did not at any time specify what efforts had been made to find them or any of them. It is doubtful whether Mr Thomas can be hard to find, more particularly having regard to the fact that he has played a prominent role in various mass-marketed projects. His name arose in respect of the projects which were referred to in Re Woodand Commissioner of Taxation [2007] AATA 1802. (It may be noted that the documentation in respect of the Project is cast in terms similar to the documentation which figured in Wood’s case and other mass-marketed scheme cases; all of them feature a prospectus in which the tax advantages are strongly featured; all of them involve a high degree of leverage and all of them require a very small cash outlay and so that taking into account the limited recourse nature of the borrowings the investor is not in reality at risk.) In the Budplan projects dealt with Re Brody and Commissioner of Taxation [2007] AATA 1764 the borrowings were best categorised as ephemeral in that they were organised through a round-robin arrangement and no moneys actually changed hands. Mr. Young acknowledged (and so did his son) that this Project too was financed through a round-robin arrangement.
15. Mr Young’s evidence in chief was in the main confined to his tender of his witness statement.
16. The remainder of this Part C relates for the most part to the cross-examination of Mr Young.
17. Mr Young is referred in particular to the supplementary T documents and which contain the prospectus and the supplementary prospectus. (It may be noted that the prospectus was issued in May 1998 and that it expired in May 1999; the supplementary prospectus extended the period involved for a further year.)
18. Mr Young agreed that he drafted the prospectus and also certain agreements included in the prospectus and including the management agreement, the license agreement and a loan agreement and loan indemnity agreement. He said that his son did the computer work involved. He said also that the supplementary prospectus was drafted by a Mr Hehir, who is a solicitor.
19. Mr Young agreed that the prospectus provided that the acquisition of a parcel of 2,000 A Class shares entitled the acquirer to enter into a management agreement with AMML.
20. Mr Young agreed that the prospectus contained two specific warnings that the investment was speculative. He insisted that this was inserted because it was a requirement of ASIC that it be inserted. When asked whether he personally thought that the investment was speculative, he asked Ms Harding to define “speculative”. Eventually Mr Young agreed, albeit reluctantly, that the investment would not be one which would be classed within the type of investment which would be readily undertaken by a trustee.
21. It is unnecessary (and it would also be tedious) to set out in detail the cross-examination which followed. It established, to my mind, in clear terms that:
(a)The arrangements as regards licence fees and the manner in which proceeds were to be divided between the manager and the licensee were artificial.
(b)Mr Young’s claim in clause 6 of his witness statement that he received income virtually from the outset in respect of sales concluded by AAM or AMML could not be correct. See in this context transcript (TS) 43, line 15 to TS 44, line 21 as follows:
…
Could it have been less?‑‑‑It could have been more, it could have been less. I don’t know
If I draw your attention to sub (2) of clause 6.3, you’ll see there a reference to:
In the event that the net proceeds of the project exceed 1500 per licensed interest in the first period, then the excess amount over 1500 shall be divided into thirds and distributed as follows; one-third shall be payable to the manager by way of management fees, and two-thirds shall be retained by the trustee to be deposited into the licensee’s account for distribution to the licensee.
?‑‑‑Having read that, it is my recollection that the condition, “Subsequent to net proceeds of the project exceeding 1500 per licensed interest in the first period,” didn’t take place, so that one would assume that the net proceeds were less than 15.
THE D.PRESIDENT: Sorry, forgive me, I’m a little lost. Could you repeat that, Mr Young?‑‑‑If you look at 6.3(2), “In the event that the net proceeds exceed 1500 per licensed interest in the first period, then the excess of over 1500 shall be divided in a particular way,” and it says (a) and (b), “One-third to the manager and two-thirds by the trustee to be put to the licensee’s account,” from my recollection, those two matters, which were conditions subsequent to earning 1500 per licensed – having net proceeds of in excess of $1500 did not take place, and therefore my assumption is that the net proceeds of the project were less than $1500 per licensed interest. Does that answer the question?
MS HARDING: It does. What then was the amount of 1720 which you say a licensee received?‑‑‑That was a sum distributed. I can’t remember the dates of it particularly, but I do know that it must have been in the ’98/99 year, because it was included – I included it in my ’99 tax return.
But it wasn’t a portion of the net proceeds, was it, because there was no entitlement under clause 6.3 to receive any amount as licensee because any income from that first period was to be paid to the manager. An amount would only then pass through to the licensee if that income exceeded 1500?‑‑‑Yes.
Your evidence is that your best recollection is that it didn’t exceed 1500?‑‑‑It didn’t exceed 1500, because those two conditions didn’t take place. I can – bear in mind that the manager was – it would seem was entitled to retain all of those proceedings, but I seem to recall that the manager – the directors took the view that as their year 2 fees had been prepaid, they were entitled to – or the manager was going to give them a distribution to their business. I can’t recall why we would be so – the company would be so vanilla, but that appears to have been the case, unless they paid it in that year when they could have paid it in the subsequent year.
Mr Young, are you guessing what might have occurred here as opposed to speaking of your own knowledge as to what actually occurred?‑‑‑I don’t know what actually occurred. Given the opportunity to do so, I would be able to clarify that matter, I would hope.
In your witness statement, you refer in paragraph 6 to having received income virtually from day one as a result of sales concluded by AAM or AMML from 30 June 1998?‑‑‑Can you refer me to that?
In paragraph 6 of your witness statement?‑‑‑Yes.
I put it to you, Mr Young, that that statement is not correct?‑‑‑Insofar as ‑ ‑ ‑
…
(c)the borrowing arrangement into which virtually all participants entered was so arranged that having regard to the indemnity arrangement included in it, the loan was effectively and to a large extent non-recourse.
(d)In fact, the loan agreement and the moneys ostensibly to be provided thereunder, constituted a round robin arrangement. Cheques were drawn and the relevant moneys did pass round in a circle but by arrangement with the banks involved through, (as I have said), a round robin arrangement.
(e)Contentions by Mr Young that he personally was engaged in a business albeit managed for him by the manager, could not be justified; in particular Mr Young could not produce accounts dealing with trading stock in the usual and conventional manner and in particular containing opening and closing stock entries. (A trading business of this nature would of necessity deal with trading stock in this manner.)
(f)Many of the documents produced by Mr Young as agreements entered into by him were incomplete.
(g)The entire transaction was so organised that participants could not lose; see in particular TS 57, line 29 to TS 58, line 16 as follows:
…
MS HARDING: Indemnity fee of 400, 2000 share purchase, 100 stock purchase. That was ‑ ‑ ‑
THE D.PRESIDENT: A stock purchase of, sorry?
MS HARDING: Stock purchase.
THE D.PRESIDENT: I beg your pardon, yes. Stock purchase ‑ ‑ ‑
MS HARDING: Is all it says, sir, unfortunately.
THE D.PRESIDENT: One hundred, yes.
MS HARDING: One hundred, yes.
THE D.PRESIDENT: Indemnity – right, stock purchase and that leaves out the principal repayment.
MS HARDING: Yes.
THE D.PRESIDENT: You say that adds up to?
MS HARDING: Well, when one adds the rest, if I might shortcut, sir, perhaps. There was to be a total of 7850 from the participant. A total of 13,500 from borrowed funds and giving a tax deduction of 16,750.
THE D.PRESIDENT: Tax deduction of?
MS HARDING: 16,750.
THE D.PRESIDENT: Sixteen?
MS HARDING: 16,750. Indeed, that’s set out on page 20 of the prospectus.
THE D.PRESIDENT: Sorry, okay, I’ll get there in a moment, but how do we get a tax deduction of 16,750?
MS HARDING: Well, if I could ‑ ‑ ‑
…
(h)The prospectus emphasised the tax advantages and the fact that the Project, whether or not successful, could not result in a loss. (Mr Young’s evidence indicated that after a time, and for reasons which were not explained, the Project did in fact fail.)
(i)A consideration of the transcript in this context indicates that Mr Young was frequently evasive. His evidence at times bordered on the ridiculous; see TS 70, line 39 to TS 72, line 11 as follows:
…
As a hypothetical purchaser of 2000 A-class shares and exercising the license interest, where would I find a document, or a term that gives me $100 of stock?‑‑‑Say that again, please?
What gives me my $100 for stock? Who sells it to me? Which stock is it? Where will I find a term in an agreement relating to it?‑‑‑I don’t know that you find a term in any agreement relating to it, but as an expenditure it would be paid to Australian Aloe Ltd.
Who purchased the stock? Who made the expenditure?‑‑‑The – well, the manager on behalf of the individual, I would imagine.
Then where is that provided for in the management agreement?‑‑‑I don’t believe it is and I don’t – I wouldn’t understand why it would be.
If you would turn, please, to page 71 of the supplementary prospectus?‑‑‑The prospectus.
Of the prospectus, thank you. This here is the license agreement?‑‑‑Yes.
Was there a license agreement for you?‑‑‑Yes.
Did you keep a copy?‑‑‑I believe so.
Have you produced a copy?‑‑‑I thought – I was under the impression I had. Yes, I can’t see a signature page on it, but I see a reference to me in there.
Would you please identify for the tribunal what pages you’re referring to?‑‑‑Just a moment. Twenty-one.
Is that the only page you’re referring to?‑‑‑That’s 99, I’m trying to find 98. Five to seven and there should be an eight – eight should be the ‑ ‑ ‑
Pages 5 through to seven?‑‑‑Yes.
That document is incomplete. Is it not?‑‑‑It is.
On page 7, it shows you as having one licensed interest. Does it not?‑‑‑Yes, yes.
THE D.PRESIDENT: Where are we, page 7 of the?
MS HARDING: Page 7, it refers to Mr Young as having – these are his documents, sir, that he’s referring to.
THE D.PRESIDENT: So you’re referring to page 7 ‑ ‑ ‑
MS HARDING: Pages 5 through to seven is what Mr Young has identified as the license agreement, and he’s agreed that the reference on page 7 shows him as having acquired one licensed interest?‑‑‑Then I’d refer you to page 25.
Page 25?‑‑‑Yes.
Is that a license agreement?‑‑‑I believe so. It’s a sublicense agreement.
Of what relevance is that document, Mr Young?‑‑‑Well, it’s because I – the owner on the shares was PPM Crayfish Management and it gave the rights to me under a sublicense.
I’m talking about your acquisition of A-class shares?‑‑‑Yes.
Does this sublicense relate to your acquisition of A‑class shares?‑‑‑No.
I’ve asked you whether or not you’ve produced a license agreement relating to your acquisition of A-class shares, and you’ve referred the tribunal to pages 5 through to 7, which is an incomplete copy of a license agreement which shows you as having one licensed interest?‑‑‑Yes.
Is there any other document that shows a license agreement for you?‑‑‑No, it shows a sublicense agreement.
I’m talking about a license agreement, Mr Young?‑‑‑No.
…
22. The provisions of the preceding clause represent just one example of the nature of Mr Young’s evidence under cross-examination. There are other such examples; see TS 79, line 15 to TS 80, line 49 as follows:
…
Then you talk about production assumptions, license fees, sales revenue and cost of production?‑‑‑Yes.
In your assumptions there, you do not refer to the mark-up in price that would be charged to AMML of 15 per cent and then 25 per cent. You do not refer to that in those assumptions there, do you, Mr Young?‑‑‑No.
Turning to the ‑ ‑ ‑
THE D.PRESIDENT: So he’s restricting within 25.
MS HARDING: Yes.
In those assumptions, Mr Young, you also assume the license fees will be paid and the management fees will be paid?‑‑‑In the assumptions I assume?
It’s a foundation, is it not, in these assumptions that the license fees would, in fact, be paid and that the management fees would, in fact, be paid?‑‑‑Well, not in this page. As far as these assumptions for AAL, there’s an assumption that the license fees would be paid.
And as far as AMML is concerned there’s an assumption that the ‑ ‑ ‑?‑‑‑Well, they’re different assumptions and different forecasts.
Well, according to this, it says that the assumptions for AAL and AMML relate to projections for AAL and licensees who appoint AMML to manage their businesses?‑‑‑I see, yes. So can you say – what was the question again?
So you’ve assumed, have you not, that the license fees would be paid?‑‑‑Yes.
And that the management fees would be paid?‑‑‑Yes.
Now, if I take you to page 34, these are the figures for a minimum subscription of 850 licensees?‑‑‑Yes.
You show there towards the bottom of the page an internal rate of return of 19.5 per cent?‑‑‑Yes.
You show there a loan account at year 2017 of zero?‑‑‑Yes.
When would the loan be repaid on these projections?‑‑‑The projections don’t show that, the date of payment.
When would the investors’ investment be recouped on these projections?‑‑‑I can’t analyse these projections just sitting here right at this moment answering your questions. I don’t – my answer is I don’t know. I would like to look closer at not only the actual projections but the independent accountant’s report on them and his assessment of the validity of those, which – clearly he comments further in the document.
Why do the projections show expenses of selling and marketing, administration and management fees as coming out of sales, when under the management agreement all management costs incurred during the first period and the second period were to be paid by the manager from the management fees?‑‑‑The manager doesn’t pay for product. How could ‑ ‑ ‑
I’m talking about the selling and marketing, administration and management fees, Mr Young. You’ll see that they’re shown there on page 34 as expenses for the first period and the second period, which you’ll recall is the period up until 30 June 2000?‑‑‑I don’t know how they are calculated. I relied on the chartered accountant and the independent accountant as to their veracity. I don’t – again ‑ ‑ ‑
So you did not for yourself check whether or not these projections were accurate when compared against the terms of the management agreement and the license agreement?‑‑‑I relied on the advice of the investigating – not the investigating accountant, the independent accountant who was required to and put in a report which assured me and referred to the fact that – if I may just refer to that:
We have reviewed the financial forecasts of AAL and the licensees’ projected income for the period to 30 June 2001. The forecasts are set out in section 6 of the prospectus in accordance with Australian Auditing Standards AUS 902 review of financial reports. Our review consisted of. These procedures have been undertaken to form an opinion whether all material aspects of the forecasts are properly prepared on the basis of the assumptions adopted and are fairly in accordance with accounting policies prescribed in the Australian Accounting Standards and on a basis consistent with the accounting policies disclosed in note 1 of notes to and forming the financial statements.
That extract that you read out, Mr Young, makes no reference to the management agreement or the license agreement, does it?‑‑‑No, it refers to the projections generally – the financial forecasts of ALL and the licensees’ projected income.
…
23. Put in general terms, Mr Young’s assertion that he incurred the amounts claimed as deductions because he was in business through the license arrangement referred to in the prospectus cannot be accepted.
24. It may be noted that Mr Young conducted his case and that of his fellow Applicants on the basis that each of them was entitled to a deduction under the business limb of s 8-1 of Income Tax Assessment Act 1997 (“the 1997 Act”). He did not at any time seek to contend that any of them was entitled to a deduction under the other limb of s 8-1. As to whether I might (had there been evidence to this effect) have made the same finding as Senior Member Sweidan made in this context in Barham supra, is not to the point. It is possible that Senior Member Sweidan had the benefit of evidence which was not available to me.
PART D - the evidence of sheldon
25. Sheldon confirmed the content of his witness statement, which is Exhibit A4 and the remainder of this Part D relates in the main to the cross-examination of Sheldon.
26. It may be noted that in general terms Sheldon tended to speak very fast, often including considerable quantities of extraneous and irrelevant matter and sometimes verging on the incoherent. Sheldon agreed that the loan arrangement was in fact a “round robin”.
27. It was put to Sheldon that the investment was highly speculative. He refused to acknowledge that this was so, and notwithstanding clear statements to this effect in the prospectus. He said that the investment could be regarded as equivalent to a purchase of shares in BHP and that an investment in the Project was no more speculative than a BHP investment.
28. The examination-in-chief of Sheldon was generally leading and thus resulting in a considerable number of objections by Ms Harding, although not nearly as many as might have been made by her. This is so in particular because the Tribunal indicated that the matter would proceed rather more easily if the Applicants were permitted to conduct their case in such a manner as they desired.
29. Sheldon is firmly of the view that the Respondent has behaved badly and has misunderstood the facts. See by way of one example only, TS 109, lines 26 to 36 inclusive as follows:
…
I’m not going to interrupt you again, but it would be kinder if you could just shorten your answers. You have actually said this over and over and over again. What you are saying is, if I’ve understood you rightly – you do go at a terrific speed – is that the commissioner has got the facts wrong and if he had only got the facts right you would be here now. Would that be a fair way of assessing it?‑‑‑Correct, with the addition of one small part, that it knew the facts to be wrong at the time of making the decision.
…
30. Although Sheldon's evidence and cross-examination took some considerable time, it is not necessary to canvass it in any detail. One quite startling example of the nature of his evidence is as I have noted, his insistence that an investment in the Project was equivalent to an investment by way of purchase in shares in BHP.
31. At a very late stage of the hearing documents were tendered on behalf of the Applicants and as indicated previously subject to objections and reservations by Ms Harding. Exhibit A9 in particular deserves consideration and it is referred to in detail later in these reasons.
32. Although the exact dates on which Sheldon invested in the Project are not completely certain it is likely having regard to the Project documentation referable to him that he invested in each of the 1998 and 1999 years on the last day (30 June) of each such year.
PART E - the evidence of Mrs Young
33. It must be said the evidence of Mrs Young did not advance the matter in any material fashion. One aspect of her evidence however did make it entirely clear that whatever the prospectus said, she as a participant in the Project was not involved in business.
PART F - section 8-1 of the 1997 Act
34. Clauses 61 to 71 of RS with which the Tribunal agrees and which the Tribunal thus endorses, read as follows:
…
Section 8-1
61.The respondent submits that the applicants have not established that they incurred losses or outgoings in the amounts claimed in the 98 year and the 99 year (as the case requires).
62.Critically, the applicants have not established what amounts were paid or borrowed by them in any year:
(a)the applicants claim to have been entitled to certain numbers of Licensed Interests and to have borrowed from the Lender;
Warwick Young statement, pars 3, 4
Bernadette Young statement, pars 3, 4
Sheldon Young statement, pars 3, 4
(b)they have not produced any application or option forms, or any record of any shares acquired by them, to support their claims for any year;
Prospectus, S1-79
(c)as to the material which has been produced:
- the project agreements said to relate to them are not complete;
- at best, the cheques are for some, but not all, of the cash payments which would have been required if the applicants had participated to the extent claimed;
- some of the cheques, in the case of Warwick Young and Bernadette Young, are from a different entity, PPM, and no explanation has been provided as to why.
See the references at pars 38 to 40 above
63.The respondent also submits, for the reasons which follow, that the applicants have not established that they were carrying on a business for the purpose of gaining or producing assessable income. See also Barham v FCT at [47]-[52].
64.The determination of whether an outgoing is an allowable deduction for the purposes of s 8-1 is a matter of characterisation by reference to the advantage sought to be obtained. As was pointed out in Vincent v FCT (2002) 124 FCR 350 at [62]-[65], it is incumbent upon the Tribunal to analyse all the rights and obligations, particularly what the outgoings were for, rather than to rely on the way the outgoings were styled. See also FCT v Emmakell (1990) 22 FCR 157 at 162.8; FCT v Brand 1995 ATC 4633 at 4646 and FCT v Lau (1984) 6 FCR 202 at 207.9.
65.Characterisation is a matter of fact to be determined by the facts and circumstances of the case: Puzey v FCT (2003) 131 FCR 244 at [50]; FCT v Sleight (2004) 136 FCR 211 per Hill J (Hely J agreeing) at [51].
66.While Warwick Young and Sheldon Young were directors of the project entities, the facts and circumstances are those which relate to A class shareholders and what was being offered here.
67.The respondent submits that following facts are material to characterisation of the claimed deductions:
(a)AAL offered A class shares in itself for sale. Each parcel of shares entitled the holder to a Licensed Interest under which he or she was entitled to market and sell the whole range of AAL’s products;
Prospectus, S1-6
(b)this right to market and sell was said to arise upon the acquisition of a parcel of shares and be governed by the terms and conditions of a License Agreement;
Prospectus, S1-6
(c)by the form of the License Agreement, the holder of a parcel of shares was to pay a license fee for the right to market and sell.
License Agreement, S1-71, clause 2
68.If each parcel of shares entitled the holder to a Licensed Interest, the license fees did not secure for the holder any right which they did not already possess as the holders of A class shares.
69.Also:
(a)a participant signed up for the project by completing a standard “package” of documents offered to participants and paying the required cash payments on application;
Prospectus, S1-79
First supplementary prospectus, S2-82
(b)nothing further was required in order to participate, other than a once off principal repayment of $2,500 per Licensed Interest under the Loan Agreement;
Loan Agreement, T117-278, clauses 2.2, 4
(c)by the form of the Management Agreement, Licensees engaged AMML as manager of their “Licensed Business” of “the business of marketing and selling [AAL]’s products”;
Prospectus, S1-6
Management Agreement, S1-63, clause 3.2, definition of
“Licensee’s Business” clause 1.1(10) and recital A
License Agreement, S1-71, clause 2
(d)by the form of the License Agreement, Licensees assigned to AAL “such of [their] rights under the Management Agreement, so as to enable [AAL] to enforce the Licensee’s obligations” under the License Agreement against AMML;
License Agreement, S1-71, clause 8(a)
(e)no products were ordered by the applicants themselves in pursuance of any business being conducted by them. The products which were purchased by Bernadette Young were purchased for her on personal use or to give away to friends. No mention was made in the project agreements to any initial $100 stock purchase;
Bernadette Young, XXN
Prospectus, S1-19
(f)the applicants have not produced evidence of any products ordered by AMML, or steps taken by it, in pursuance of any Management Agreement entered into with them. Notwithstanding their assertions, the applicants have not produced any reports or other records to support their claims that all sales made were on behalf of Licensees or that all proceeds of sales were banked to the Licensees’ account;
Warwick Young statement, par 8
Bernadette Young statement, par 8
Sheldon Young statement, par 8
(g)what the amount of $1,720 per Licensed Interest said to have been received by the applicants in the 99 year was for, or how it arose under the project agreements, has not been explained beyond speculation;
(h)as the directors of AAL described it, AAL’s principal activity was “to grow aloe vera, manufacture and sell aloe vera products throughout Australia and in export markets through [AMML]”;
Financial report, half year ended 31 December 1998, T130-598
Financial report, year ended 30 June 1999, T131-639
(i)as the directors of AMML described it, AMML’s principal activity was “to act as the Manager for the Aloe Vera Project at Bundaberg”, while also acknowledging the appointment of the company as “the Manager for the Licensee’s business”;
Financial report, 12 May 1998 to 30 June 1998, T121-360
Financial report, half year ended 31 December 1998, T122-395
Financial report, year ended 30 June 1999, T123-418
(j)the project was an investment.
Prospectus, S1-1
Warwick Young statement, par 22
Bernadette Young statement, pars 19, 20
Sheldon Young statement, par 22
70.On the basis of the above facts, the respondent submits that it ought to be concluded that the applicants have not established that they were conducting a business. Although formally a manager was to be appointed, in effect the business was to be AMML’s, alternatively AAL’s, with investors to take no part in its operations.
71.Further, while the respondent accepts that the Tribunal in Barham v FCT found that management and license fees incurred by Mr Barham were incurred for the purpose of deriving assessable income (see at [52]), the issue remains as to whether it is properly to be concluded here that the gaining or production of assessable income was the occasion of any losses or outgoings incurred by the applicants: Ronpibon Tin NL v FCT (1949) 78 CLR 47 at 56-57.
…
35. Having due regard to Senior Member Sweidan’s conclusion in Barham supra that the applicant in that case was not carrying on a business, I find that the Applicants in this case were not carrying on a business.
36. Had this aspect been argued before me, I would not have found that the deductions were incurred in order to derive income and within the other limb of s 8-1. The evidence before me points in strong terms to the fact that the payments were made in order to procure tax deductions.
PART G - Part IVA of the Income Tax Assessment Act 1936
37. It is not strictly necessary for me to deal with this aspect because having regard to the decision in Vincent and Commissioner of Taxation of the Commonwealth of Australia [2002] FCAFC 291, Part IVA arises only where the deductions would otherwise have been allowed. I have held that deductions under s 8-1 of the 1997 Act were not available and so that Part IVA of the 1936 Act is irrelevant. However and in case it can be suggested that I have erred in this respect, I note that for the reasons set out in Barham supra, Part IVA operates to disallow the deductions sought. RS contains detailed reasons and contentions as to Part IVA of the 1936 Act and which are in some respects, more extensive than those contained in the Barham decision, but I do not think it necessary to repeat them. I note however that Senior Member Sweidan in Barham supra, decided to allow a deduction in respect of amounts actually expended. It must be remembered that Senior Member Sweidan in Barham supra had found that deductions were allowable under the non-business limb of s 8-1 of the 1997 Act. I have made no such finding and therefore a finding similar to that made by Senior Member Sweidan in Barham supra is not warranted.
PART H - penalties
38. There was little or no argument as to penalties. In my view and having regard to all of the circumstances, the penalties imposed were appropriate and I see no reason to disturb them.
PART I - conclusion
39. I would have preferred that the Applicants be represented; Mr Young said that solicitors in Western Australia quoted a very high figure indeed for the conduct of this case. The figure cited is so high that one must doubt whether there was such a quote. A much smaller amount should have been ample. As to why solicitors in Western Australia were consulted for this purpose remains a mystery.
40. The evidence before the Tribunal is so huge and the transcript alone so lengthy that this decision might have been much longer but I do not think that any useful purpose would have been served by further citations or extracts from it. At the end of the first day the decision in Barham was drawn to the attention of the Applicants, but it did not appear to have any effect. Allegations of mala fides against the Respondent by Mr Young and his son, both educated men, were in my view regrettable. Moreover there were aspects of the evidence given on behalf of the Applicants which were (and this too is putting it kindly) unfortunate.
41. As indicated previously the Applicants were allowed until 30 November 2007 within which to file written submissions. The period was exactly double the period sought. The Applicants did not file written submissions by 30 November 2007 or thereafter. It is in these circumstances that the Respondent was not obliged to file any further submissions; in the result and nevertheless, he did so on 17 December 2007; those submissions received in this context are short and are included for the sake of completeness as follows:
1.The applicants were to file with the Tribunal and serve on the respondent written submissions, if they wished to do so. No submissions have been served on the respondent.
2.The bundle of documents handed up by the applicants on the last day of the hearing includes as A9 Licensee Tax Statements for Sheldon Young for the years ended 30 June 1998, 30 June 1999 and 30 June 2000. These further submissions relate to those documents.
3.Under the project agreements, any income earned for the First Period was to have been applied to management and license fees and loan and principal for the First Period. No amount would have been distributed to Licensees unless the Licensee's Proportion of Net Proceeds of the Project exceeded $1,500, which it did not. For later periods, any income earned was to have been applied first to management and licensee fees and loan and principal,
Prospectus, SI-19
Management Agreement, SI-63, clause 6
License Agreement, SI-71, clause 2.2
Loan Agreement, T117-278
Loan Indemnity Agreement, T197-275
Warwick Young, )O(N
4.The statements show:
(a)in respect of AAL261 - "gross profit" of $0, $458 and $188.26 and an overall position of ($16,750), $0 and $24.79;
(b)in respect of AAL985 - "gross profit" of $0 and $376.52 and an overall position of ($33,500) and $0.
5.The only statement which suggests a return to Sheldon Young is that for AAL261 and the year ended 30 June 2000 which shows an overall position of $24.79 on a "gross profit" of $188.26.
6.If the statements relate to Sheldon Young's participation in the project, no amount has been applied to loan and principal as required under the loan. The expenses charged do not reconcile with the management and license fees which were to be charged under the management and license agreements.
7.It cannot be concluded on the basis of the statements that participation resulted in any change in Sheldon Young's financial position beyond the benefit created by the deductions claimed by him.
42. As set out previously in these reasons Mrs. Young made it clear that she was not involved in a business and it was accepted that the evidence of each Applicant would be evidence in respect of all of them; I have come to the conclusion (again as set out previously) that just as Senior Member Sweidan found in Barham the individual investors in the Project were not engaged in any business but that any relevant business was conducted by AAL or AMML. There are however aspects of Exhibit A9 in respect of which comment by the Tribunal even apart from those made by the Respondent in his submissions dated 17 December 2007 are appropriate. Trading account statements (described as “licensee tax statements” were tendered in respect of Sheldon, but not either of the other two Applicants, late in the hearing and after comment earlier in the hearing that if the Applicants were in business then trading accounts showing opening and closing stock figures might reasonably have been anticipated. Exhibit A9 includes licensee tax statements for Sheldon for each of the 1998 and 1999 years and also the 2000 year; in this regard:
(a)a licensee tax statement for the 1998 year shows opening stock of nil purchases of $100, and closing stock of $100. Business expenses of $16750 are reflected thus producing an overall loss of the same amount. (It will be remembered that Sheldon invested for the first time on 30 June 1998.) The statement relates to one license only.
(b)a licensee tax statement for the 1999 year (in respect of one license) shows opening stock of $100, and closing stock of nil. It also reflects purchases of $1169 and sales of $1727; the difference between sales and purchases is $458 which is reflected as assigned to the manager “to cover cost for the period 1 July 1999 to 30 June 2000”. The taxable income is thus nil.
(c)a licensee tax statement for the year ending June 2000 in respect of one license is included in the exhibit and in addition a licensee tax statement for the same year in respect of two licenses. As to why there would for the same year be two different licensee tax statements was not explained.
(d)the licensee tax statements in question do not indicate who prepared them and certainly bear no signatures.
(e)my comments as to the Exhibit A9 statements set out previously in this clause should not be construed so as to indicate that I do not accept the Respondent’s comments on them in his submissions dated 17 December 2007 and as set out above. The latter comments serve only to reinforce my doubts (if reinforcement were necessary) as to the Exhibit A9 statements and my view that they cannot not be accepted as correct. Put in other words, the provenance of the Exhibit A9 statements is in my view altogether dubious and they certainly do not cause me to believe that Sheldon was personally engaged in the relevant business.
43. In all the circumstances, all of the objection decisions under review must be affirmed.
I certify that the 43 preceding paragraphs are a true copy of the reasons for the decision herein of Mr Julian Block, Deputy President
Signed: .....................................................................................
AssociateDate/s of Hearing 15, 16 and 17 October 2007
Date of Decision 21 December 2007
Solicitor for the Applicant Self-represented
Counsel for the Respondent Ms D. Harding
Solicitor for the Respondent Mr D. Uglesic
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