Decision Impact Statement
Commissioner of Taxation v Starr and Hopkins
 FCAFC 204
2007 ATC 5447
(2007) 164 FCR 436
67 ATR 923
Venue: Full Federal Court
Venue Reference No: WAD 28 of 2007
Judge Name: Spender, Siopis and Gilmour JJ.
Judgment date: 21 December 2007
Appeals on foot:
Administrative Treatment (Implication on current Public Rulings and Determinations)
Tax avoidance scheme
This document is not a public ruling, but provides a statement of the Commissioner's position in relation to the decision and how the law will be administered as a consequence of the decision. Any proposals for changes in the law are matters for government and it is not appropriate for the Commissioner to comment.
Outlines the Tax Office's response to this case which concerned the meaning of the phrease 'tax avoidance scheme' in the former subsection 224(2) of the Income Tax Assessment Act 1936 (ITAA 36).
Brief Summary of Facts
The taxpayers claimed deductions in relation to investments in the Active Cattle Management (ACM) scheme. In an earlier decision of the Court, in Vincent v. FC of T  FCA 656, French J found that part of the deductions claimed by the taxpayer in relation to her investment in the ACM scheme were not incurred for the purposes of subsection 51(1) of the ITAA 36. However, his Honour found that the cash outlaid by the taxpayer was deductible under subsection 51(1), but was disallowable under Part IVA. On appeal, the Full Court (2002) 124 FCR 350 found that the cash outlaid was an outgoing of capital and that, therefore, as the cash was not deductible under subsection 51(1), there was no tax benefit for the purposes of Part IVA. The Full Court also found that no penalty was payable under section 226 because Part IVA did not apply. Neither French J, nor the Full Court, considered the application of section 226L.
These cases involved the possible application of section 226L in circumstances where the taxpayers had accepted, after the decisions in Vincent , that the expenses claimed in relation to the scheme were not allowable under subsection 51(1).
The only issue in dispute before the AAT was whether, for the purposes of paragraph 226L(c), the ACM scheme was a 'tax avoidance scheme' within the meaning of section 224. The taxpayers did not dispute that the ACM scheme was 'a scheme within the meaning of Part IVA', but contended that they did not enter into or carry out the scheme 'for the sole or dominant purpose of enabling a person to pay no tax or less tax'. The taxpayers contended that the reference to 'sole or dominant purpose' was a reference to the actual purpose of a person in entering into or carrying out a scheme, and that their actual purpose in entering into the ACM scheme was to make a commercial return and not 'to pay no tax or less tax'. The Commissioner argued that the requisite purpose was to be determined objectively by reference only to the observable facts and circumstances of the operation of the scheme. The Commissioner did not cross examine the taxpayers about their actual purpose in entering into the ACM scheme or lead any evidence to the contrary, on the basis that it was irrelevant, but merely relied on the finding of French J in Vincent that the taxpayer entered into the ACM scheme for the objective purpose of obtaining tax benefits.
The AAT decision of 19 August 2005 agreed with the Commissioner's approach to the interpretation of 'tax avoidance scheme' and found that, apart from their irrelevant evidence about their actual purpose in entering into the ACM scheme, the taxpayers had not adduced any evidence to show that their position was any different to the findings about objective purpose made by French J in Vincent .
French J allowed the taxpayers' appeals to the Federal Court against the AAT decision  FCA 23. His Honour agreed with the taxpayers that the 'purpose' referred to in the definition of 'tax avoidance scheme' in subsection 224(2) was their actual purpose in entering into the ACM scheme. He found that the AAT erred in excluding consideration of the stated purposes of the taxpayers, and that there was no point in remitting the matters to the AAT for reconsideration because the taxpayers' evidence about their actual purpose was not contested by the Commissioner.
Importantly, at paragraph 52 of his decision, French J noted 'Of course, purpose could be assessed even under s224(2) by reference to objective factors. It may also be that the statements of individual taxpayers about their purposes relevant to the imposition of penalty would be given little weight. But the relative weight and extent of subjective and objective evidence relevant to that determination will be an accident of the particular proceedings in which the question arises. In this case the evidence of the taxpayers and the advisors was unchallenged.'
The Commissioner appealed to the Full Federal Court
Issues decided by the Court or Tribunal
The Full Court was unanimous in dismissing the Commissioner's appeals and in agreeing with French J that the 'purpose' referred to in the definition of 'tax avoidance scheme' in subsection 224(2) was the actual purpose of the taxpayers in entering into the ACM scheme.
The Court noted that the construction adopted by French J was consistent with the approach taken by the High Court in FC of T v. Students World (Australia) Pty Ltd (1978) 138 CLR 251 to similar wording in the former subsection 80B(5) of the ITAA 36 (paragraphs 42, 55 and 56).
The Court also rejected the Commissioner's contention that the construction adopted by French J could not have been intended because it would lead to anomalies in relation to the imposition of penalty for participation in tax avoidance schemes depending on what provision applied. The Court considered that the differences in application of various penalty provisions related to schemes merely reflected the difference in language which was chosen between schemes to which Part IVA applied and other schemes (paragraphs 61 to 63).
Finally, the Court concluded that it was open for French J to have concluded, on the evidence before the AAT, that it was not the sole or dominant purpose of the taxpayers to pay no tax or less tax (paragraph 67).
Tax Office view of Decision
The Commissioner has not sought special leave to appeal from the decision of the Full Court to the High Court. The Tax Office accepts the decisions of French J and the Full Court that the 'purpose' referred to in the definition of 'tax avoidance scheme' in subsection 224(2) is the actual purpose of a taxpayer in entering into a scheme.
However, the Tax Office notes the comments of French J in paragraph 52 of his decision that the relative weight and extent of subjective and objective evidence relevant to the determination of a taxpayer's actual purpose will depend on the evidence given in the particular proceedings in which the question arises.
In that regard, the Tax Office notes the further decision of the AAT of 13 March 2008  AATA 199 that follows an earlier decision in Petersen & Anor v. FC of T  AATA1896. In Petersen , the AAT decided that the taxpayers were not entitled to deductions in relation to their investment in the Banalasta Joint Venture (BJV) project. In particular, the AAT found that the taxpayers were 'not genuinely concerned with making a return at all. Their assertions to the contrary are not accepted'. In the decision of 13 March 2008, the AAT further considered the application of section 226L to the taxpayers. The AAT concluded, after weighing up the subjective and objective evidence that occurred in the earlier decision, that the taxpayers' actual purpose in entering into the BJV project was to pay no or less tax.
Implications on current Public Rulings & Determinations
Implications on Law Administration Practice Statements
Implications for general administration
For other cases currently before the AAT dealing with taxpayers who have invested in the ACM scheme, the Tax Office accepts that section 226L does not apply to impose penalty in relation to any tax shortfalls in those cases. On a weighing up of the subjective evidence of the taxpayers and the objective findings made by French J and the Full Court in the Vincent case, the Tax Office accepts that it would probably be found that the taxpayers' actual purpose in entering into the ACM scheme was not to pay less tax or no tax. Of particular relevance is the fact that, although the Full Court in Vincent concluded that the cash outlaid by the taxpayer was an outgoing of capital, it did not disagree with the earlier finding of French J that the taxpayer had incurred the cash to gain or produce assessable income.
For cases currently before the AAT or the Federal Court dealing with the possible application of section 226L to taxpayers who have invested in other schemes, the Tax Office will apply the decisions in Starr according to the views set out in this statement. Submissions will be made in each case that the determination of the taxpayer's purpose in entering into the scheme be undertaken by weighing up the relevant subjective and objective evidence in the case. As occurred in the Petersen case, the Tax Office will invite the AAT or the Court to consider any findings of fact that may have been made in that case or other related cases about whether a deduction was allowable in relation to an investment in the scheme.
We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.
| Date Issued:
|| 21 April 2008
| Due Date:
|| 16 June 2008
| Contact officer:
| Email address:
||(03) 927 55124
||(03) 927 54801
||6 Gladstone St
Moonee Ponds Vic 3039
Income Tax Assessment Act 1936
Vincent v. Federal Commissioner of Taxation
 FCA 656
(2002) 2002 ATC 4490
(2002) 50 ATR 20
Vincent v. Commissioner of Taxation
(2002) 124 FCR 350
(2002) 2002 ATC 4742
(2002) 51 ATR 18
News Ltd v. South Sydney District Rugby League Football Club Ltd
(2003) 215 CLR 563
(2003) 200 ALR 157
 HCA 45
Federal Commissioner of Taxation v. Lutovi Investments Pty Ltd
(1978) 140 CLR 434
(1978) 78 ATC 4708
(1978) 9 ATR 351
Federal Commissioner of Taxation v. Students World (Australia) Pty Ltd
(1978) 138 CLR 251
(1978) 78 ATC 4040
(1978) 8 ATR 356
Petersen & Anor v. Federal Commissioner of Taxation
 AATA 1896
(2007) 2007 ATC 2700
70 ATR 644
Petersen & Anor v. Federal Commissioner of Taxation
 AATA 199
71 ATR 325