ZBVK and Commissioner of Taxation

[2014] AATA 576

[2014] AATA  576

Division	TAXATION APPEALS DIVISION
File Number(s)	2013/2163-2165
Re	ZBVK
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Deputy President S E Frost
Date	19 August 2014
Place	Sydney

The parties have liberty to apply, within seven days of the date of publication of these reasons, for the Tribunal to make a decision in specified terms, consistent with the reasons that follow.

If no such application is made, the Tribunal will be taken, immediately upon the expiry of that period, to have set aside the objection decisions and substituted the following decisions:

(a)    In respect of the objections for the 2006 and 2007 years – objections disallowed;

(b)   In respect of the objection for the 2008 year – objection allowed in part, to the extent of the acceptance of the interest deduction referred to in [6] of the reasons that follow, but not otherwise.

.....................[SGD]...................................................

Deputy President S E Frost

CATCHWORDS

TAXATION – income tax – taxpayer lodges returns without deduction claims – claims later that significant deductions should be allowed – uncertainty around arrangements – objection decisions largely upheld

LEGISLATION

Income Tax Assessment Act 1997; ss 8-1, 35-10(1), 40-880(5), 104-20

REASONS FOR DECISION

Deputy President S E Frost

1. The taxpayer has practised as a barrister in various jurisdictions for very many years.

2. For at least the last 30 years, while maintaining his practice at the bar, he has also been involved in a number of business ventures of various kinds.  Many of those ventures have been spectacularly unsuccessful, and have caused the taxpayer to lose significant amounts of money.

3. In July 2012 the taxpayer objected against tax assessments made by the Commissioner in respect of the 2006, 2007 and 2008 income years, despite the fact that the Commissioner’s assessments were consistent with the tax returns as lodged by the taxpayer for those years.  In his notices of objection, the taxpayer sought to claim deductions for certain business expenses which had not been claimed when he lodged his returns.  In effect, he was claiming that the returns he lodged had mistakenly omitted the various expenses that he was now seeking to deduct.  Those expenses related to some of the failed business ventures referred to earlier.

4. The objections also appeared to disclose to the Commissioner that the taxpayer had received interest income in each of the relevant years, that income not having previously been declared.  In fact, that was not the case.  A spreadsheet that was included with the notice of objection incorrectly gave the impression that amounts that the taxpayer had lent to his sister and brother-in-law had been received from them as loan repayments.

5. The objections for 2006 and 2007 were out of time but the Commissioner granted the taxpayer an extension of time to object, effectively accepting the objections as if they had been lodged within time.

6. Each objection was allowed in part.  The partial allowance of the objection for each of 2006 and 2007 was detrimental to the taxpayer since in each case it resulted in an increase in his taxable income equal to the amount that appeared to have been disclosed as income.  For 2008, and for the same reason, the taxpayer’s assessable income was also increased, but some of the deductions claimed – $266,679, in respect of interest payments – were allowed.  All remaining deductions claimed for each of the relevant years were disallowed. 

7. The taxpayer has applied to the Tribunal for review of those objection decisions.

   THE COMMISSIONER ACKNOWLEDGES ERROR

8. The Commissioner acknowledges that the increase in taxable income, resulting from the incorrect spreadsheet entries provided by the accountant, should not have been made.  The amended assessments that resulted from that error will need to be adjusted.

   THE TAXPAYER

9. The taxpayer is 79 years old.  He turned 71 in the 2006 income year, the first of the income years in dispute in these proceedings.

10. He explained to the Tribunal that he had reached a stage in his life where he wanted to wind down his practice as a barrister.  He recognised that to do so whilst maintaining the standard of living that he and his now estranged wife had become accustomed to, he needed to replace his practice income with income from other sources.  He looked for investments that would return income.  He said that he “wasn’t interested in capital”.  The matrimonial home was owned outright.  He had a holiday home.  He had no need to add to his capital assets; he wanted to generate income.

11. I accept, in a broad sense, what he says about his motivation.  However, at the same time I am mindful of the fact that the taxpayer is one of the beneficiaries of a family trust whose trustee is R Pty Ltd.  The taxpayer is a shareholder and director of R Pty Ltd, which is also the trustee of the taxpayer’s self-managed superannuation fund.  His statement that he wanted to generate income must be seen in light of the reality that he was very likely indifferent to the identity of the recipient of that income; the income may come to him personally, or it may come to the family trust or to the superannuation fund.  In that sense, I find that the taxpayer’s desire was not so much that he, personally, should generate income, so long as the entities of which he had effective control did so.  I also find that he gave little thought to the precise mechanism by which income would accrue to him or his associated entities.  He would have been equally content, for example, if he or his entities had derived interest income on amounts he lent to third parties, or received distributions from profits of third parties to which he contributed funds, or received a percentage of income derived by the participant in a given arrangement.

    GENERAL OBSERVATIONS ABOUT THIS CASE

12. The taxpayer seems to have had a view that he himself was carrying on many of the activities for which he provided funds, despite the appearance that the activities were actually being conducted by entities to which he had advanced or contributed funds and/or in which he had an interest.  He identified his involvement in many of the arrangements as that of a venturer in a joint venture, even though few documents, and in some cases no documents at all, were provided to the Tribunal to support that claim.

13. Indeed, striking features of this case are the vague nature of the evidence and the shortage of primary documentation and contemporaneous records.  The failure to produce documentation and records that might have been expected to exist has made it difficult to establish the precise nature of the arrangements that were entered into either by the taxpayer or by entities associated with him.  In addition to that, the evidence of the taxpayer’s current accountant, Mr Kelly, has been of little assistance; it consisted mostly of opinions as to how he would have characterised and accounted for the arrangements, based on the information provided to him by the taxpayer.  To that extent I consider him to have been no better placed than the Tribunal to come to conclusions on the matters in dispute.

    THE CATEGORIES OF EXPENDITURE

14. The taxpayer identified several different arrangements that gave rise to his claims.  I will deal with each of them in turn.

    The Queensland residential development (PH Pty Ltd)

15. This was a project involving the development of 27 housing lots in Queensland.  The lots were close to the coast.  The expectation was that they could be sold for a handsome profit.

16. The taxpayer described this as an arrangement “initially structured as a joint venture”[1] between himself and three others through PH Pty Ltd, which acquired the lots with bank finance.  He explained[2]:

    Each venturer used a trust entity to acquire a shareholding in [PH].  [PH] was initially funded by loans from the venturers.

    [1] Exhibit A1 [66]

    [2] Ibid

17. In cross-examination, the taxpayer characterised the “initial payments” not as “loans” but as “contributions”.  He expressed the view that what he had said in his written statement (Exhibit A1) was not accurate[3]:

    I think what happened was that we made contributions and then as the project went on and money was needed for development and so on, that then we made loans to the company.  But I think the first payments made were contributions. …

    [3] Transcript, 20.33-36

18. The lots sold slowly.  Refinancing became necessary, and the taxpayer and the other “venturers” provided personal guarantees to the lender. 

19. The taxpayer claims to be entitled to deductions in the amounts of $156,473.58 for the 2006 year, $19,500 for the 2007 year and $28,000 for the 2008 year.  The claims are based on the general deductions provision contained within s 8-1 of the Income Tax Assessment Act 1997 (the 1997 Act).  Section 8-1 is in the following terms (notes omitted):

    8‑1  General deductions

    (1)You can deduct from your assessable income any loss or outgoing to the extent that:

    (a)it is incurred in gaining or producing your assessable income; or

    (b)it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

    (2)However, you cannot deduct a loss or outgoing under this section to the extent that:

    (a)it is a loss or outgoing of capital, or of a capital nature; or

    (b)it is a loss or outgoing of a private or domestic nature; or

    (c)it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

    (d)a provision of this Act prevents you from deducting it.

    (3)A loss or outgoing that you can deduct under this section is called a general deduction.

20. All the amounts were recorded in the “Annual General Ledger” of PH Pty Ltd[4] as “loans”, advanced not by the taxpayer personally but by R Pty Ltd.  Those records were evidently created by Mr P[5], who had been the taxpayer’s “long-term accountant and business associate”, who “knew [the taxpayer’s] financial affairs intimately”[6], who was the taxpayer’s tax agent for the 2006 and 2007 income years and whom the taxpayer described as “punctilious”[7].  Mr P was also one of the other participants, in that his trust entity, just like R Pty Ltd, had become a shareholder in PH Pty Ltd.  I infer that Mr P was very well placed to make the judgment call as to what the amounts in question were, and how they should be recorded.

    [4] Exhibit A1, Tab 22

    [5] Transcript, 19.7

    [6] Exhibit A1 [23]

    [7] Transcript, 20.4

21. It was R Pty Ltd, not the taxpayer, who paid the amounts to PH Pty Ltd[8]. 

    [8] Exhibit A1 [69], [76] and bank statements of R Pty Ltd at T11-187 to T11-190

22. The taxpayer now says that the amounts, paid by R Pty Ltd, are properly characterised as loans to him from R Pty Ltd, and then payments by him (seemingly as joint venture contributions) to PH Pty Ltd.  The problem with that contention is that (a) they were not recorded that way by the “punctilious” record-keeper and tax agent with intimate knowledge of the taxpayer’s financial affairs, and (b) no records have been produced, either by way of loan agreements, loan accounts or trustee resolutions, to support the contention that the money was lent to the taxpayer by R Pty Ltd and then provided by the taxpayer personally, no matter how characterised, to PH Pty Ltd. 

23. Mr Kelly said that, before lodging the taxpayer’s 2009 tax return[9], he “talked with [the taxpayer] and reviewed his documentation” and on the basis of that discussion and review, he formed the conclusion that:

    … [the taxpayer] was a joint venturer with others, [PH Pty Ltd] being the manager in that joint venture and having no financial interest in it.  I concluded that the interest [the taxpayer] paid in the 2009 tax year towards this joint venture was an allowable business deduction[10].

    [9] The 2009 year is not under review here

    [10] Exhibit A4 [15]

24. He also concluded that:

    … $156,474 in expenditure [the taxpayer] incurred in the 2006 year was for development costs towards the [PH Pty Ltd] joint venture and therefore an allowable business deduction[11].

    [11] Exhibit A4 [39]

25. His oral evidence produced the following[12]:

    [12] Transcript, 90.43-91.36

    MS GLEESON:  Do you recall that [the taxpayer] was asked some questions about his affidavit and references to loans that he made to [PH Pty Ltd]?

    MR KELLY:  Yes.  Yes.

    MS GLEESON:  And do you recall that there was some cross-examination on a ledger extract?

    MR KELLY:  Yes.

    MS GLEESON:  And the ledger appeared to show that loans were made by [R Pty Ltd]?

    MR KELLY:  Yes.

    MS GLEESON:  Is that ledger consistent with your understanding of what happened?

    MR KELLY:  No.

    MS GLEESON:  And why not?

    MR KELLY:  Well, because the loans were being made to or by [the taxpayer].  And in fact in 2007/2008, he was owed $4 million by the family trust.  So why would he be lending the family trust money, or why would the family trust be lending it to somebody on his behalf.

    MS GLEESON:  So how do you account for the fact that there is an inconsistency between your understanding of what happens and the [PH Pty Ltd] annual ledger?

    MR KELLY:  Well, I saw single pages that didn’t have a complete ledger, so I – and all of the accounts on the ledgers I saw were accounts that would have been in the joint venture.  And, I mean, I can expect that the page should have been headed, “[PH Pty Ltd] Joint Venture” but quite often it will be just left off: [PH].  Everybody knows that [PH] is the manager, just like everybody knows that it might be the trustee, if that’s what it is.

    MS GLEESON:  Now, could you go to paragraph 57 of your statement.  What was it that you were told that led you to the conclusion that [PH Pty Ltd] was the manager of a joint venture that held no financial interest?

    MR KELLY:  I had discussions with [the taxpayer] and he told me who the parties were who were involved, and their interests, and how one of the parties had dropped out, and it was certainly uncertain about whether the party had paid anything or been paid anything for dropping out, and it just seemed to me that it was – and then I asked him more questions about, “What did [PH Pty Ltd] actually do?”  And he said, “Well, you know, it incurred the debts and it sort of managed things.”  And I said, “And who were the shareholders of [PH Pty Ltd]?”   And he said that, “The various family trusts were the shareholders of [PH Pty Ltd].”  I said, “But you say that individuals were participants in the venture?”  And he said, “That’s right.”  So, I mean, I certainly had to sort of ask some questions and make some suggestions, I suppose, but it seemed to me pretty clear that it was just a lack of understanding about what – how a joint venture operates.

26. I am not persuaded that the conclusions that Mr Kelly reached are justified on the strength of the material before me.  I am not swayed by his statement that “[e]veryone knows that [PH] is the manager”, and although “it just seemed to [him] that it was”, and “it seemed to [him] pretty clear”, the evidence does not strike me the same way.

27. I am not persuaded that these amounts are properly characterised as anything other than what they were recorded as – loans by R Pty Ltd to PH Pty Ltd.  The taxpayer is not entitled to deductions in respect of these amounts.

    The Queensland industrial development (W Pty Ltd)

28. This arrangement is somewhat similar to the previous one.  The proposed development concerned two blocks of land.  On borrowed funds, one block was to be purchased and sold; the proceeds were to be used to seek rezoning of the second block for residential development.

29. W Pty Ltd purchased the land as the trustee of the W Unit Trust.  One of the other participants, Mr F, had a 50% interest in the shares in W Pty Ltd and the units in the W Unit Trust.  The remaining 50% was held by a company known as NNEW Pty Ltd.  Ownership of the shares in NNEW Pty Ltd was shared equally by interests associated with the three remaining participants – the taxpayer, his accountant and business associate Mr P, and a Mr L.  It was R Pty Ltd as the trustee of the taxpayer’s self-managed superannuation fund that acquired one-sixth of the shareholding in NNEW Pty Ltd.

30. On 30 November 2007 NNEW Pty Ltd agreed to lend $500,000 to W Pty Ltd “to assist in the completion of [the purchase of] the Property”[13].  On the same day, R Pty Ltd as trustee of the taxpayer’s self-managed superannuation fund paid $250,000 to W Pty Ltd[14].

    [13] Exhibit A1, Tab 27, Recital G

    [14] Exhibit A1, Tab 26

31. The taxpayer claims deductions totalling $274,500, under s 8-1 of the 1997 Act, for the 2008 income year.  The total is made up of the $250,000 amount just referred to, plus a further payment of $24,500, described as having been made “[i]n the 2008 year” but no more specifically than that.  The only record of the payment of the $24,500 amount is a hand-written spreadsheet[15] which records payments of $20,000 on 17 December 2007 and $4,500 on 4 June 2008, evidently to the entity that was the major lender to W Pty Ltd.

    [15] T11-178

32. The taxpayer described the $250,000 payment in the following way[16]:

    ... I paid $250,000 by way of loan to [W Pty Ltd] repayable to [NNEW Pty Ltd].  Those funds came from my self-managed superannuation fund, which was managed by [R Pty Ltd].  I used my power to control [R Pty Ltd] to direct it to pay the funds to [W Pty Ltd] as a pension payment to me from that fund. 

    [16] Exhibit A1 [96]

33. No documents have been produced to show that the trustee of the superannuation fund had resolved to make a pension payment to the taxpayer.  In any event, and no matter whether the payment to W Pty Ltd was made (as it appears) by R Pty Ltd or (as the taxpayer claims) by the taxpayer himself, the advancing of money by way of loan does not give rise to a s 8-1 deduction. 

34. The taxpayer was not able to explain whether the $24,500 payment came from R Pty Ltd or from his personal funds[17].

    [17] Transcript, 28.7-8

35. Mr Kelly said, in respect of this arrangement:

    … [the taxpayer] was a joint venturer with others, [W Pty Ltd] being the manager in that joint venture and having no financial interest in it.  Each of the joint venture participants, including [the taxpayer], guaranteed the performance of the obligations [of W Pty Ltd] in relation to the finance obtained by the venture and incurred the interest thereon.  Often parties of a joint venture provide guarantees to third parties that provide financing to the joint arrangement.  I concluded that the interest [the taxpayer] paid in the 2009 tax year towards this joint venture was an allowable business deduction[18].

    [18] Exhibit A4 [15]. Again, the 2009 year is not under review here, but Mr Kelly reached a corresponding conclusion at [45] in respect of the 2008 year.

36. I am unable to come to the same conclusion as Mr Kelly.  That joint venture parties often provide guarantees to third parties is not to say that parties providing guarantees are always involved in joint ventures.  I do not share Mr Kelly’s view that W Pty Ltd had “no financial interest” in the venture.  I do not understand on what basis he could come to that view.  I have seen no financial records of W Pty Ltd or NNEW Pty Ltd.  No evidence has been provided by any of the other participants to explain their understanding of the arrangements.

37. In these circumstances I am not satisfied that the taxpayer is entitled to deductions in respect of either of these amounts.

    The bar/nightclub arrangement

38. The taxpayer’s son and one of the son’s friends wanted to set up a bar/nightclub.  The son had knowledge of the club music scene, while the friend “had run dance parties and knew a lot about running bars and night clubs”[19].

    [19] Exhibit A1, Tab 11 [1]

39. The son and his friend proposed to the taxpayer that the two of them (that is, the son and his friend), and two others (an accountant and a musician) would:

    … form a partnership to run the bar.  I would be the financier.  We would share the profits.  It would not be necessary for me to take part in the administration of the business[20].

    [20] Exhibit A1, Tab 11 [2]

1. Some months after that approach to the taxpayer, and following some unsuccessful attempts to agree on the terms of a lease with a proposed landlord, the taxpayer himself met with the landlord and struck a “handshake agreement” with him.  Formal documents were signed shortly thereafter.  The lessee was MB Pty Ltd[21], of which the taxpayer was the only shareholder[22].

   [21] Exhibit A1, Tab 43

   [22] Transcript, 60.34

2. Extensive renovations and fit-out of the premises were required.  A liquor licence had to be obtained and then, over time, the liquor trading hours were extended from a midnight close to 3:00 a.m. and eventually to 5:00 a.m.  The money for renovations, fit-out, the liquor licence, advertising, legal fees and, in due course, if takings were insufficient, the rent of the premises all came from the taxpayer, either from his own personal bank accounts or from accounts in the name of R Pty Ltd as trustee of the family trust.

3. The taxpayer’s son provided a written statement[23] which noted that, in the very early days, he and his friend presented the taxpayer with a business plan prepared by the friend.  The business plan has not been produced to the Tribunal.

   [23] Exhibit A5

4. The son said that at one stage, during a meeting in his father’s chambers, someone indicated that the five participants – the son, his friend, the two others and the taxpayer – were partners[24].  He said they discussed the fact that “the business would be owned” as to 40% by the taxpayer, as to 17.5% each by the son and the friend, and as to 12.5% each by the other two participants[25].  In time, the two others withdrew.  The son said that the three remaining participants met and decided that the business “would now be owned” as to 40% by the taxpayer and as to 30% each by the son and his friend[26] (although the taxpayer himself said the agreement was a 50/25/25 split[27]).

   [24] Exhibit A5 [7]

   [25] Exhibit A5 [8]

   [26] Exhibit A5 [24]

   [27] Exhibit A1, Tab 11 [24]

5. The venture was unsuccessful and was eventually sold for very much less than had been spent on it.

6. Mr Kelly formed the view that the taxpayer was a joint venturer with others, MB Pty Ltd being the manager in that joint venture and having no financial interest in it.  I am unable to share that view on the material before me.  In circumstances where MB Pty Ltd leased the premises, held the liquor licence, paid the wages to employees and accounted for GST, I am not satisfied that the business was conducted by any entity other than MB Pty Ltd.

7. I note that there was extensive involvement by lawyers in respect of the application for a liquor licence, and entering into the lease of the premises where the bar operated.  Surprisingly, however, there was no involvement by lawyers in respect of the structuring of the arrangements between the participants.  There was not even any recording, by the participants, of the terms of the agreements they made.  That would have been understandable, and not at all unusual, if the only participants had been the taxpayer and his son.  But these arrangements involved three persons who had no familial relationship with the taxpayer.  The taxpayer is himself an experienced lawyer, and yet did not record the arrangements by which, on his own version, he contributed around $1.5 million.

8. No financial records of MB Pty Ltd have been produced.  There is no evidence of the way MB Pty Ltd recorded the amounts of money the taxpayer provided.  It is not implausible that the amounts the taxpayer provided were loans, to be repaid when the money became available through profitable trading.

9. Given this level of uncertainty, I am not satisfied that the claimed deductions based on s 8-1 are available to the taxpayer.

10. There are also claims based on s 25-20 in relation to lease preparation costs, and s 43-10 in relation to capital works, but since I conclude that it was MB Pty Ltd, and not the taxpayer, who used the property for the purpose of producing assessable income, those claims must fail.

11. Claims based on s 40-880, relating to legal fees for setting up the business, must also fail on the basis that they relate to obtaining the liquor licence which is, in the context of the disqualifying provision in s 40-880(5),  a “legal … right”.

    Activities in Fiji and Dubai

12. In early 2006 the taxpayer placed a newspaper advertisement indicating that he was prepared to invest up to $3 million in suitable projects.

13. After rejecting a few responses, he was contacted by a businessman, BG.  They met in the taxpayer’s chambers.  BG had plans to buy some land in Fiji and develop a resort.  The taxpayer did some background checks on BG and satisfied himself as to BG’s knowledge and experience.

14. The taxpayer and BG entered into what the taxpayer described as a “joint venture” in which the taxpayer provided all the funding and BG put in all the effort “on the ground”[28].  The taxpayer agreed to pay BG’s living expenses in Fiji.

    [28] Exhibit A1, Tab 10 [8]

15. On 21 April 2006, “to start the joint venture”, the taxpayer paid $300,000 into a bank account in the name of LM Pty Ltd, an entity associated with BG[29].

    [29] Exhibit A1, Tab 10 [9]

16. BG located a block of land that he thought was suitable for the project.  It was owned by a Fijian company called WD Limited.  The sole shareholder of WD was a Vanuatu company, PI Limited.  The sole shareholder of PI was a lawyer from the USA, named DL.

17. The selling price of the land was $US4 million.  On 25 May 2006 PI granted to BG a two month option to buy its shares.  BG’s company, LM Pty Ltd, paid about $A200,000 to DL for that option.  The option could be exercised by 25 July 2006 or, on payment of $US250,000, extended to 25 May 2007.  LM Pty Ltd paid that fee and the option was extended to 25 May 2007.  On 5 December 2006 BG assigned the option to the taxpayer by deed.

18. In December 2006, as a result of political unrest in Fiji, all interest in the fledgling proposed resort development evaporated[30]. 

    [30] Exhibit A1, Tab 10 [24]

19. On 25 May 2007 DL agreed to extend the option exercise date by three years.  Amounts totalling $A1.045 million were paid to DL for the extension.  Those payments came from the account of R Pty Ltd as trustee of the taxpayer’s family trust[31].  In addition, the taxpayer agreed to pay monthly interest on the outstanding purchase price of the land[32].  The Commissioner (whether correctly or not) allowed deductions for the consequent interest payments.

    [31] Exhibit A2

    [32] Exhibit A1, Tab 34, pp. 445-446

20. The taxpayer seeks to characterise the payment of $A1.045 million as a payment in the nature of interest.  The Commissioner, on the other hand, submits that the payments are on capital account – payments for an extension of an option to buy shares in a company that owns the land.  Each argument has some merit but a particular difficulty for the taxpayer is that the claim under s 8-1 is for only 75% of the total, the remaining 25% to be treated as a capital loss to offset capital gains in the 2007 year[33].  That apportionment is based, apparently, on an email sent by the taxpayer to BG in July 2006 which suggests that the intention was to develop and sell most of the land for a profit, and to retain part of the land to operate resort facilities for a profit[34].  Significantly, the email itself does not suggest a specific apportionment between the two proposed categories of use, which leaves the 75/25 split as nothing more than speculation. 

    [33] Applicant’s Statement of Facts, Issues and Contentions at [58]

    [34] Exhibit A1, Tab 32

21. At the end of the day the taxpayer’s submission seems to be that to treat the amounts (or a proportion of them) as payments in the nature of interest is consistent with the practical commercial reality of the arrangement, that the taxpayer needed to pay DL to buy time to purchase the property.  But the fact is that on its face, the option agreement is simply that – an option to buy shares in a company.  On that basis, the payments seem to me to be undoubtedly outgoings of a capital nature and not deductible under s 8-1. 

22. I do accept, though, that the amounts were incurred by the taxpayer personally.  It was he who made the agreement with DL to extend the option exercise date.  He claims that he sourced the money by way of loan from R Pty Ltd as the trustee of his family trust.  He has not provided any financial records of the trustee to support the claim, but his inability to verify the source of the funds is not to the point – if anyone was liable to DL for the $1.045 million, it was the taxpayer personally, not R Pty Ltd. 

23. Counsel for the Respondent, Ms Gleeson SC (as her Honour then was), submitted that if the amounts should be regarded as outgoings of a capital nature then they could be claimed under s 40-880.  In principle I agree.  But a complicating factor is that paragraph (5)(f) denies a deduction for an amount of expenditure if it “could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event”.  With no reliable basis on which to determine whether the 75/25 split is appropriate, paragraph (5)(f) necessarily operates to deny the entire amount.

24. During the 2006, 2007 and 2008 income years, the taxpayer paid significant amounts of money to BG or to BG’s company LM Pty Ltd.  The payments came either from the taxpayer’s own bank accounts or from the bank accounts of R Pty Ltd.  The taxpayer claims that the payments were “towards development costs for the joint venture with [BG]”[35].  For the 2006 and 2007 years they totalled around $3.7 million.

    [35] Applicant’s Statement of Facts, Issues and Contentions at [49] and [55]

25. Notwithstanding the magnitude of the payments, there is not much detailed information about exactly what the money was used for.  There appears to have been some significant progress made towards the resort development to be known as PP – Exhibit A3 is a 50-page brochure showing the various facilities that were planned – but it did not come to fruition. 

26. With things in Fiji moving slowly, if at all, and with money running out, BG suggested that he move, with his family, to Dubai to see if he could get finance for the Fiji project.  The taxpayer was initially against the idea but eventually he agreed.  He agreed also to pay for BG to rent a house to live in, and to pay BG’s expenses including those of his family.

27. “For the first few months, if not more”[36], according to the taxpayer, BG focused on trying to get finance for the Fiji project.  However, financiers would not come to the party because the taxpayer and BG did not own the land in Fiji. 

    [36] Exhibit A1, Tab 10 [45]

28. BG thought he could take advantage of his location in “the trading capital of the world”[37] and turn his talents to trading gold.  That started to unravel when BG was arrested for writing a cheque which bounced for lack of funds.  The taxpayer borrowed money and paid $185,000 “to get [BG] out of gaol”[38].  His evidence provides no further detail on exactly how he achieved BG’s release.

    [37] Exhibit A1, Tab 10 [48]

    [38] Exhibit A1, Tab 10 [56]

29. Despite what may have been very extensive and persistent effort by BG and the taxpayer, no income from the Fiji venture was ever generated[39].

    [39] Applicant’s Statement of Facts, Issues and Contentions at [67]

30. The taxpayer claims deductions under s 40-880.  Because of the lack of specificity as to the purposes for which the amounts sent to BG in both Fiji and Dubai were used, it is difficult to reach a degree of satisfaction as to which, if any, of the provisions of s 40-880 may be available to support the deduction claims.

31. In any event, and even if s 40-880 applied to any of this expenditure, the taxpayer faces an insurmountable problem, in that Division 35 (non-commercial losses) would render the deductions not capable of being claimed in the year in which the expenditure was incurred.  This is because the taxpayer has not been able to establish, and in fact has not attempted to establish, that any of the four tests in s 35-10(1) were satisfied during the relevant years.

    The SSM arrangement

32. In early 2007 the taxpayer agreed to invest in the “SSM” business.  On 8 March 2007 an amount of $500,000 was transferred from the bank account of R Pty Ltd as trustee of the taxpayer’s family trust into the bank account of SSM in Fiji.

33. Mr B, the individual involved in the SSM business, improperly withdrew funds from the bank account.  When the taxpayer became aware of this, he commenced action, in his own name, against both SSM and Mr B in the High Court of Fiji[40].  According to the affidavit sworn by the taxpayer in the High Court proceedings, he became aware of the unauthorised withdrawals sometime in the period 25 to 28 April 2007[41].  I find that he became aware of the withdrawals no later than 28 April 2007.

    [40] Exhibit A1, Tab 38

    [41] Exhibit A1, Tab 38, p. 483 [11]

34. On 29 August 2007 the taxpayer obtained an order from the High Court for the recovery of the entire amount that he had contributed (approximately $649,000 in Fijian currency)[42].  On 31 August 2007 the taxpayer’s solicitors received Fijian $204,000 (approximately) from the SSM Westpac account pursuant to the High Court order[43].  That was the only amount recovered.  The taxpayer therefore lost about $445,000 Fijian.

    [42] Exhibit A1, Tab 39

    [43] T13-818

35. The taxpayer claims a capital loss of A$370,000 made up of legal fees paid in Fiji plus the unrecovered investment.  He submits as follows:

    ·A “CGT asset” is any kind of property, or a legal or equitable right that is not property: s 108-5(1).  By s 108-5(2), a part of a CGT asset is also a CGT asset;

    ·Foreign currency is a “CGT asset”: note to s 108-5;

    ·CGT event C1 occurs if a CGT asset owned by a taxpayer is lost or destroyed: s 104-20(1);

    ·The time of CGT event C1 (s 104-20(2)) is:

    owhen you first receive compensation for the loss or destruction; or

    oif you receive no compensation – when the loss is discovered or the destruction occurred;

    ·A loss of money caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation is appropriately described as a loss: compare s 25-45;

    ·No compensation was received for that part of the CGT asset that was lost, namely $445,000 Fijian, and therefore, the time of the CGT event was no later than 28 April 2007 (the latest date on which the unauthorised withdrawals were discovered);

    ·The taxpayer made a capital loss of $445,000 Fijian in the 2007 year.

36. The Commissioner submits that the taxpayer has not identified any CGT asset that he owns that has been lost or destroyed.  The money transferred to SSM was not owned by the taxpayer, because:

    ·R Pty Ltd, not the taxpayer, supplied the funds; and/or

    ·SSM owned the money, since it was held in SSM’s bank account.

37. In my view, the order of the High Court of Fiji comfortably establishes that the taxpayer personally owned the money.  The time of the CGT event is, as submitted by the taxpayer, no later than 28 April 2007.  It is not the case that the taxpayer received “compensation” of Fijian $204,000 for his loss (since his loss was Fijian $445,000, not $649,000).  He received no compensation at all for his loss, and so the “time” of the CGT event is set by s 104-20(2)(b), not (a).

    The payments to the taxpayer’s daughter-in-law

38. The taxpayer’s daughter-in-law, Ms R, carried on a part-time business selling clothing and accessories.  In late 2006 the taxpayer agreed with Ms R to enter into a joint venture to expand the business into the US market.  He contributed amounts to the business in return for receiving 10% of any profits.  In the 2007 year he contributed $21,000 and in the 2008 year he contributed $29,000.  The entire amount contributed in 2007 came from the taxpayer’s own bank account.  Of the 2008 amount, $14,000 came from his bank account and $15,000 came from an account in the name of R Pty Ltd.

39. He claims the amounts contributed as deductions under s 8-1.  However, once again, his claim must be rejected because of the non-commercial loss provisions in Division 35.  There is no evidence to establish that any of the four tests in s 35-10(1) were satisfied during the relevant years.

    CONCLUSION

40. Virtually all of the taxpayer’s claims have been unsuccessful.

41. An exception is the capital loss in relation to the SSM arrangement.  But even that results in no immediate advantage for the taxpayer, since in the 2007 year he had no capital gains against which the loss could be claimed.  My finding in his favour in relation to that amount therefore has no impact on his taxable income for that year, or on the amount of tax payable.

42. The other area in which he stands to receive a benefit is as described in [8] of these reasons.  When the Commissioner incorrectly formed the view that interest income had been received, he made amended assessments to reflect that view.  As I have already indicated, the Commissioner acknowledges the error.

    DECISION

43. Each objection was allowed in part but because of the error just referred to, there were adjustments, adverse to the taxpayer, made in each year.

44. Having regard to my findings and conclusions, I consider that the appropriate decision for the Tribunal to make is to set aside each objection decision and substitute the following decisions:

    (a)In respect of the objections for the 2006 and 2007 years – objections disallowed;

    (b)In respect of the objection for the 2008 year – objection allowed in part, to the extent of the acceptance of the interest deduction referred to in [6] of these reasons, but not otherwise.

45. That seems to me to be the most convenient way of ensuring that my conclusions are put into effect and the errors inherent in the amended assessments are corrected.  However, I will delay making a formal decision for seven days to allow the parties, if they wish to do so, to apply to the Tribunal for the decision to be formulated differently.

I certify that the preceding 84 (eighty -four) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost.

..........................[SGD]..............................................

Associate

Dated   19 August 2014

Date(s) of hearing	17 – 19 March 2014
Counsel for the Applicant	Ms J Gleeson SC and Mr B Dean
Solicitors for the Applicant	A R Conolly and Company
Counsel for the Respondent	Mr A J O'Brien
Solicitors for the Respondent	ATO Review and Dispute Resolution