Fletcher & Ors v. Federal Commissioner of Taxation
88 ATC 4834
Full Federal Court
Judgment date: Judgment handed down 14 October 1988.
Lockhart, Wilcox and Burchett JJ.
This application comes to the Court by way of an appeal against a decision of the Administrative Appeals Tribunal [reported as Case V3,
88 ATC 113] affirming the disallowance by the Commissioner of Taxation of objections to 14 assessments of income tax. There are four applicants: Reginald Sidney Fletcher, his wife Coral Emily Fletcher, James Warren Dunlop and his wife Lilian Ann Dunlop. There are some differences regarding the relevant years of income, as between the various applicants, but all the relevant years are within the period 1982 to 1985 inclusive. As nothing turns upon the identity of any particular taxation year, it is not necessary to go into the further detail of that matter. All 14 appeals to the Administrative Appeals Tribunal were, by consent, heard together. They all raised the same points of principle in connection with transactions common to all four applicants.
The relevant facts commence in mid-1982. The four applicants were partners in the business of subdividing and selling land at Killarney Vale on the central coast of New South Wales. Mr Fletcher and Mr Dunlop were both builders and some lots were sold by the partnership with houses already constructed upon them. The four applicants shared the services of Mr B.F. McGrath, a public accountant then practising in The Entrance as B.F. McGrath & Co. Some time late in May or early in June 1982 Mr McGrath had a meeting with Mr Fletcher and Mr Dunlop at which he showed them a brochure put out by a company named Annuity Investments Pty. Limited. The brochure advertised the availability of what it called ``Future Cash Benefits''. Three different investment plans were offered, spanning terms of 15 years, 20 years and 25 years respectively. Features common to all three plans were that income tax deductions were said to be available in each of the first five years and that moneys were to be received by the investor only during the last five years of the plan. Mr McGrath explained the brochure, pointing out to the two men that tax benefits were available.
After discussion, the four applicants decided to make an investment in the annuity scheme. Each applicant borrowed some money from an independent financier. On 23 June 1982 each couple completed an application to invest $25,000 in the scheme. The total investment of the four taxpayers therefore amounted to $50,000. Each of the applications related to the 15 year plan. These applications were addressed to ``The Managing Partner, Annuity Investments'' at an address in Sydney. Apparently the applications, and bank cheques for the subscription moneys, were sent to that address by Mr McGrath. The address was the office of a firm called Crennan & Co., which carried on business as ``financial and taxation consultants''.
Evidence was given before the Tribunal by Mr Malcolm Tucker, an accountant carrying on practice in Wagga Wagga in the firm J.A. Crowl and Associates. He said that this firm, after taking actuarial and legal advice, had created a series of pro forma documents available to be used as needed in particular cases. Upon receipt of the loan applications signed by the applicants, Mr Robert Watson of Crennan & Co. contacted J.A. Crowl and Associates. That firm then prepared the documents for use in this case. The documents included a partnership agreement, two loan agreements and an annuity agreement. The partnership agreement was sent to the applicants, through Mr McGrath, for execution. The other documents were retained by J.A. Crowl and Associates.
The partnership agreement was in the form of a deed. It was dated 30 June 1982, although it was apparently signed by the applicants a few days before that date. The deed constituted a partnership known as ``Annuity Investments Partnership No. 18'', consisting of the four applicants and a company named Jimal Nominees Pty. Limited. The capital of the partnership was stated to be $50,001; $50,000 contributed by the applicants - and in return for which they were each allocated 5,000 ``ordinary units'' - and $1 subscribed by Jimal in return for which it took one ``special unit''. Subject to a preferential payment out of profits of $1 per annum to Jimal, the four applicants were to bear the profits and losses of the partnership. The deed made provision for the disposal of units and for the management of the partnership. It included a provision, cl. 21, appointing Jimal as the first managing partner of the partnership. Clause 23(1) provided that, subject to any direction of a general meeting of the partners or a regulation of the committee of management, the managing partner ``shall have
88 ATC 4837
control of the policy and management of the business of the partnership''. By cl. 23(3) the managing partner was ``empowered to enter into and sign contracts, arrangements and agreements of any nature whatsoever in connection with and incidental to the business of the partnership''. In particular, by cl. 23(4), the managing partner was empowered to borrow money for the purpose of carrying on the partnership business and to pledge the partnership assets by way of security.
The first of the loan agreements was made by Jimal, on behalf of the partnership and pursuant to the powers conferred upon it by the deed of partnership, with a company known as Doowarf Nominees Pty. Limited. By that deed Doowarf covenanted to lend to the partnership the sum of $2,000,000. Interest at the rate of 18% per annum was payable annually in advance. The capital was to be repaid, along with interest for each of the then current years, by three instalments due respectively on 30 June 1994, 30 June 1995 and 30 June 1996. The agreement was unusual in that it absolved the borrowers from any personal liability for payment of either the principal sum or interest thereon. Clause 5 relevantly provided:
``5(a) In order to secure to the Lender performance by the Borrower of his obligations under this Agreement, the Borrower hereby agrees to execute and enter into in favour of the Lender, upon the Lender's request and at the cost of the Lender, a charge and/or other security (as the Lender may require) over any property or interest in any property acquired by the Borrower with the principal sum or any part thereof, to secure repayment of the principal sum and interest provided for pursuant to this Agreement.
(d) The Lender hereby agrees that in the event of default by the Borrower any claim under this Agreement for either principal or interest repayments shall be limited to the value of the security taken under this Clause and the Lender shall have no further recourse against the Borrower in the event of any deficiency in the security.''
The effect of this agreement was to create an obligation to pay to Doowarf interest, in each of the first 12 years, of $360,000. The interest liability was to reduce in subsequent years as repayments of principal were made. But it was not intended that the partners should themselves find the money required for payments of interest. That was to come from two other sources: the second loan agreement and an annuity agreement.
The second loan agreement was also made by Jimal on behalf of the partnership. In this case the lender was a company called Eromdim Nominees Pty. Limited. The Eromdim loan agreement provided for that company to advance to the partnership at 30 June in each of the years 1982 to 1986 inclusive the sum of $190,000 together with the amount of the interest payable to Eromdim under this agreement; that interest being calculated at the rate of 18% per annum and payable in advance. The whole of the principal, together with interest for the then current years, was repayable by instalments due on 30 June in each of the years 1992, 1993 and 1994. Once again, there was a clause - in the same terms as that in the Doowarf agreement - confining the rights of the lender to the security.
The annuity agreement was made between Jimal, on behalf of the partnership, and Annuity Investments Pty. Limited. It was a simple document whereby, in consideration of the payment to it of $2,020,000, Annuity Investments agreed to pay to the partnership the sum of $170,000 in each of the first five years following the agreement, the sum of $600,000 in each of years six to 10 and the sum of $1,119,000 in years 11 to 15; all inclusive. The agreement contained an undertaking by Annuity Investments to redeem the annuity in whole or in part at any time after the expiration of 23 months from the date of the agreement; such redemption to be made within 21 days from the receipt of a notice of redemption given by the partnership. The redemption price was set out in an appendix to the agreement, being $24,000 at the end of year 2 and rising by specified steps to $80,000 at the end of year 10.
Mr Tucker was, at the relevant time, a director of each of Jimal, Doowarf and Eromdim. Following its incorporation in April 1982 he had, for a short time, been also a director of Annuity Investments. The person acting as secretary of each of these companies, Mr Trevor Hattersley, was an employee of J.A. Crowl and Associates. The annuity agreement and the two loan agreements were each partially executed in Wagga Wagga before 30
88 ATC 4838
June 1982. On that day Mr Tucker drove to Canberra with Mr James Crowl, of his firm. He there completed the execution of the documents mentioned above. He also signed three bills of exchange which are relevant to this case.
The first bill was drawn on Doowarf by the partnership in the sum of $2,000,000. This was intended to be a payment in satisfaction of the loan agreement between those parties. Doowarf accepted this bill. On behalf of the partnership, Mr Tucker then endorsed the bill to Annuity Investments; thus paying the bulk of the annuity purchase price. Annuity Investments then endorsed the bill back to Doowarf, in satisfaction of an arrangement between those two companies whereby Annuity Investments had agreed to lend Doowarf $2,000,000 for 15 years at 18% interest.
The second bill was for $190,000. It was drawn by the partnership on Eromdim, being for the first payment of loan moneys under the agreement between those parties. Eromdim accepted the bill and Mr Tucker, on behalf of the partnership, then endorsed the bill to Doowarf, by way of payment of the first year's interest due to that company. Doowarf endorsed the bill to Eromdim.
The third bill had a value of $170,000. It was drawn by the partnership on Annuity Investments, being the first year's annuity payment. This bill was accepted by Mr Tucker on behalf of that company and endorsed to Doowarf. In turn Doowarf endorsed the bill back to Annuity Investments.
The net result of all this activity was, therefore, that all three bills ended up in the hands of the original drawee, so that no payment actually passed under the bills.
The only money which did pass at the end of June 1982 was the $50,000 paid by the applicants. Their cheques were paid into the bank account of Jimal. Almost immediately thereafter that company paid out the same sum to a company called TransCity Holdings Limited, a ``money market manager'', where it was held to the account of Annuity Investments. The Tribunal found that $30,000 was retained by Annuity Investments as an ``Establishment Cost''; leaving a balance of $20,000 available for actual investment. This $20,000 constituted the balance of the sum of $2,020,000 payable by the partnership to Annuity Investments as consideration for the grant of the annuity.
Mr Tucker gave evidence that, on 30 June in each of the years 1983, 1984 and 1985, he carried out similar ``round robins'' with bills of exchange, in order to effect the payments required by the two loan agreements and the annuity agreement. The evidence includes a document summarising the effect, in cash terms, of these transactions. That document is attached to these reasons as Annexure A. It will be seen that, apart from the $1 contributed by Jimal in 1982, the scheme provided for inwards and outward funds to tally precisely in each year until 1992. During each of the final five years funds of about $34,000 would accrue to the partners.
The taxation ramifications of the arrangements are set out in a further document tendered to the Tribunal, Annexure B to these reasons. [Annexures A and B reproduced on pp. 4840-4841.] The abbreviation ``UPP'' in the second line is ``undeducted purchase price''; the draftsman having in mind, we are told, sec. 26AAA of the Income Tax Assessment Act 1936. The interest deduction is claimed at 78.61% of the actual interest charges. It will be seen that the document envisages substantial taxation deductions for each of the four applicants during the first five years, small deductions during the following five years and very large taxable receipts over the last five years. The taxable receipts range from approximately four to seven times the amount of the available cash income. From a practical point of view, having regard to the incidence of taxation, it will clearly be advantageous to the applicants to terminate the arrangement prior to 1992.
Evidence was given by Mr C.J.R. Latham, the consulting actuary who advised in connection with the scheme, that a sum of $20,000 invested free of tax at the rate of 14% per annum for a period of 15 years would provide sufficient income to permit a payment out of the fund of $18,945 in each of the final five years. An investment of $50,000, upon the same assumptions, would therefore yield payments of $47,362.50 in each of those years.
Annuity Investments Partnership No. 18 submitted an income tax return for the year ended 30 June 1982. That return showed income of $170,000, being the annuity received, and expenditure of $494,667, being
88 ATC 4839
interest paid of $360,000 and undeducted purchase price of $134,667. The result was a net loss of $324,667. In their personal returns each of the applicants claimed, as a deduction, one quarter of this amount. In each case these claims were rejected. In each case, objections were lodged, but disallowed. Although the relevant monetary sums differed a little, the same course of events occurred in the subsequent relevant years; thus giving rise to the 14 appeals to the Tribunal.
The Tribunal's reasons
The principal reasons for decision in the Tribunal were those given by the Deputy President, Mr C.J. Bannon Q.C. Mr B.J. McMahon, Senior Member, expressed agreement ``with the conclusions he'' (Mr Bannon) ``has reached and with the decision he proposes''. However, Mr McMahon did not state that he agreed with the reasons of Mr Bannon, and he added additional reasons of his own. It is not clear whether or not Mr McMahon intended that his concurrence in Mr Bannon's conclusions should be understood as also constituting a concurrence in his findings of fact. As we will elaborate, this circumstance causes some difficulties.
Section 42 of the Administrative Appeals Tribunal Act 1975 provides that a question of law arising in a proceeding before the Tribunal at which a presidential member is presiding shall be decided in accordance with the opinion of the presiding member. But a presiding member enjoys no pre-eminence in relation to the facts. In a case where a board of the Tribunal is constituted by two members, the concurrence of both members is necessary for an effective finding of fact.
After dealing in some detail with the documentary evidence and with part of the oral evidence, the learned Deputy President referred to the actuary's evidence as to the benefits of a straight out investment of $20,000 and went on (at p. 118):
``The question then remains, what was the elaborate round robin scheme of bills of exchange and associated annuity, partnership and loan agreements, intended to achieve which an ordinary investment with a bank would not achieve, apart from some far off possibilities in capital accumulation which were not fully revealed to the taxpayers. The obvious answer is tax deductions for the first five years.
While the round robin mechanism was not revealed to the taxpayers, the brochure... made it plain that by entering into the scheme, large deductions from taxable income were obtainable...
While it is clear that the country accountant's highly artificial scheme was expressly designed to achieve large tax deductions in the first five years, it does not necessarily follow that this was also the purpose of the taxpayers.''
After referring to other submissions, Mr Bannon dealt with a submission put to the Tribunal on behalf of the Commissioner (at p. 120):
``Further it was said that on any view of the evidence the taxpayers never contemplated having to repay such debts, or having to include in their assessable income such large amounts as the scheme projected for its later years.
This appears to be correct. Although partners are liable for the debts incurred by each other in the partnership business, the members of (the partnership) had been assured in the brochure... that `as the annuity value will always exceed any loan value for the entire term, there cannot be any further recourse on an investor for further payments'. The round robin nature of the scheme with its creation of periods of partnership loss and partnership profits through paper transactions appears to indicate that the profits at the end of the rainbow are a mirage, together with the paper debts. There is no indication on the evidence of any fund provided by (Annuity Investments) to meet the projected profits.''
At a later stage of his reasons, dealing with the question whether the case fell within Pt IVA of the Income Tax Assessment Act, the Deputy President set out some further findings of fact regarding purpose (at pp. 120-121):
``Turning now to the provisions of Pt IVA of the Act, this appears to be a case in which the taxpayers entered into the annuity schemes with the dominant purpose within the meaning of sec. 177A(5) of the Act, for the purpose of obtaining a tax benefit in
88 ATC 4840
Annuity Investments Partnership No. 18 - Cash Surplus
1982 1983 1984 1985 1986 1987 1988
Inflow of funds $ $ $ $ $ $ $
Annuity 170,000 170,000 170,000 170,000 170,000 600,000 600,000
Loan Doowarf 2,000,000
Loan Eromdim 190,000 190,000 190,000 190,000 190,000
Partners capital 50,001
2,410,001 360,000 360,000 360,000 360,000 600,000 600,000
Outflow of funds
Management fees 30,000
principal and int.
- Doowarf 360,000 360,000 360,000 360,000 360,000 360,000 360,000
- Eromdim 240,000 240,000
2,410,000 360,000 360,000 360,000 360,000 600,000 600,000
Cash surplus $ 1 - - - - - -
Annuity Investments Partnership No. 18 - Statement of Net Income and Partnership (Losses) for Income Tax
1982 1983 1984 1985 1986 1987 1988
Assessable income $ $ $ $ $ $ $
Annuity 170,000 170,000 170,000 170,000 170,000 600,000 600,000
Less UPP 134,667 134,667 134,667 134,667 134,667 134,667 134,667
35,333 35,333 35,333 35,333 35,333 465,333 465,333
Interest (Note (a)283,007 309,892 341,618 379,053 423,227 475,352 476,014
Income/(Loss) (247,674)(274,559)(306,285)(343,720)(387,894) (10,019)(10,681)
R.S. Fletcher (61,919) (68,640) (76,571) (85,818) (96,974) (2,505) (2,670)
C.E. Fletcher (61,919) (68,640) (76,571) (85,818) (96,974) (2,505) (2,670)
J.W. Dunlop (61,918) (68,640) (76,571) (85,817) (96,973) (2,505) (2,670)
L.A. Dunlop (61,918) (68,639) (76,572) (85,817) (96,973) (2,504) (2,671)
Note (a) Interest has been apportioned at the rate of total assessable income
of $7,425,000 to total income of $9,445,000 being 78.613%
Doowarf nominees 360,000 360,000 360,000 360,000 360,000 360,000 360,000
Eromdim nominees - 34,200 74,556 122,176 178,368 244,674 245,515
360,000 394,200 434,556 482,176 538,368 604,674 605,515
Interest/claimed 283,007 309,892 341,618 379,053 423,227 475,352 476,014
88 ATC 4841
ANNEXURE `A' (cont'd.)
1989 1990 1991 1992 1993 1994 1995 1996 TOTAL
$ $ $ $ $ $ $ $ $
600,000 600,0 0 600,000 119,000 119,000 1,119,000 1,119,000 1,119,000 9,445,000
600,000 600,000 600,000 119,000 119,000 1,119,000 1,119,000 1,119,00 12,445,001
360,000 360,000 360,000 360,000 360,000 661,400 1,084,920 1,084,920 7,151,240
240,000 240,000 240,000 724,920 724,920 423,529 3,073,369
600,000 600,000 600,000 184,920 184,920 1,084,929 1,084,920 1,084,92012,274,609
- - - 34,080 34,080 34,071 34,080 34,080 170,392
ANNEXURE `B' (cont'd.)
1989 1990 1991 1992 1993 1994 1995 1996 TOTAL
$ $ $ $ $ $ $ $ $
600,000 600,000 600,000 1,119,000 1,119,000 119,000 119,000 1,119,000 9,445,000
134,667 134,667 134,667 134,666 134,666 134,666 134,666 134,666 2,020,000
465,333 465,333 465,333 984,334 984,334 984,334 984,334 984,334 7,425,000
476,794 477,715 478,802 480,084 412,979 333,796 240,358 130,098 5,718,789
(11,461)(12,382)(13,469) 504,250 571,355 650,538 743,976 854,236
(2,865) (3,096) (3,367) 126,063 142,834 162,590 185,994 213,559
(2,865) (3,096) (3,367) 126,063 142,834 162,590 185,994 213,559
(2,865) (3,095) (3,367) 126,062 142,834 162,589 185,994 213,559
(2,866) (3,095) (3,368) 126,062 142,833 162,589 185,994 213,559
(11,461)(12,382)(13,469) 504,250 571,355 650,358 743,976 854,236
360,000 360,000 360,000 360,000 360,000 360,000 305,748 165,492 5,151,240
246,508 247,679 249,062 250,693 165,332 64,606 - - 2,123,369
606,508 607,679 609,062 610,693 525,332 424,606 305,748 165,492 7,274,609
476,794 477,715 478,802 480,084 412,979 333,796 240,358 130,098 5,718,789
88 ATC 4842
connection with the scheme and that the scheme falls within sec. 177D of the Act.
The taxpayers' accountant (Mr McGrath at transcript p. 47) said of the taxpayers:
- `From memory they were not particularly wrapped in insurance company schemes.'
He said he knew nothing about capital of (Annuity Investments) except what was in the brochure,... (and it said nothing). (Mr Dunlop's) account... that the (Dunlops) were only interested in the superannuation cannot be accepted in the light of his knowledge of the tax benefits... and his failure to inquire about (Annuity Investments) and his claimed dislike of insurance-type superannuation... does not bear examination. He had been subdividing and selling land and it seems hard to accept that he was unaware of a possible tax liability. A similar position obtains with (Mr Fletcher).... The speed with which the agreements were negotiated to fall within the financial year ended 30 June 1982... and the coincidence of land sales having occurred, suggest the real reason was a tax reason.
It is not acceptable that two builders who have moved into land development, and their accountant, would not concern themselves with the financial viability of an unknown company, as against the safety of investing with a large life assurance company, if superannuation was the real motivation.
Not only does it seem that the dominant purpose of the taxpayers was to obtain the deductions for interest payments, but it seems perfectly clear that this was the principal purpose involved in (Annuity Investments) propounding the scheme. This is apparent from the way the annuity scheme is structured and from the instructions given by the accountant to (Mr Latham). Section 177D takes into account not only the purposes of the taxpayers, but also the purpose of a person referred to in sec. 177D(b)(vi), or of persons who enter into or carry out the scheme. The accountant's intentions can be predicated to (Annuity Investments) of which he was a director taking an active role in management. Having regard to each of the matters set out in sec. 177D(b), the conclusion should be drawn that the annuity scheme falls within the section. There appears to be no reason why the whole of the tax benefit obtained should not be treated as cancelled pursuant to sec. 177F(1) of the Act.
It appears the proper answer to the taxpayers' objections is that the agreements with (Annuity Investments) and the other agreements to implement the scheme, and the annuity scheme itself, were carried out with the dominant purpose of enabling the taxpayers to obtain tax benefits within the meaning of sec. 177D of the Act. In any event, the taxpayers have failed to overcome the onus of showing the assessments are incorrect.''
The case for the applicants, before the Tribunal, was a simple one. The applicants said that the disputed amounts were deductible by them pursuant to sec. 51 of the Income Tax Assessment Act as being outgoings incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. The Commissioner contested this claim. He also raised other arguments: that the transactions were shams, fiscal nullity, and that the interest payments were outgoings incurred under a ``tax avoidance scheme'', within the meaning of sec. 82KH(1) of the Act, and were therefore made non-deductible by sec. 82KL. No submission was put to the Tribunal on behalf of the Commissioner to the effect that Pt IVA of the Act applied to the transactions.
As appears from the passage from his reasons set out above, the Deputy President disposed of the appeals, in the Commissioner's favour, by resort to Pt IVA. He rejected the argument that the transactions were shams. Having regard to the decision of this Court in
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718, Mr Bannon merely noted the submission regarding fiscal nullity. Although the Deputy President referred to the argument relating to sec. 51 of the Act, he linked that matter to sec. 82KH and 82KL. Taking the view that the interest payments were not ``eligible relevant expenditure'' within the meaning of sec. 82KH(1F), the Deputy President rejected the submission under sec. 82KL. Although he did not expressly say so, the Deputy President seems to have regarded that rejection as dealing also with the Commissioner's argument that
88 ATC 4843
sec. 51 did not apply. Mr Bannon did not otherwise deal with sec. 51.
As we have said, Mr McMahon agreed with the conclusions of the Deputy President. But, in his separate observations, he indicated a view that, in any event, the interest payments were not deductible under sec. 51.
The power of the Tribunal to exercise discretion under sec. 177F(1)
Part IVA was inserted into the Income Tax Assessment Act in 1981, applying - in place of sec. 260 of the Act - to transactions entered into on or after 27 May 1981. So it had potential application to the subject transactions. In the words of its title, Pt IVA deals with ``schemes to reduce income tax''. The term ``scheme'' is defined by sec. 177A(1) as meaning:
``(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b) any scheme, plan, proposal, action, course of action or course of conduct.''
Section 177C explains what is meant in Pt IV by the term ``obtaining a tax benefit''. It is enough to say that the term includes a deduction being allowable which would not have been allowable in the absence of the scheme. Section 177D sets out criteria for determining whether a particular scheme is one to which Pt IVA applies. Section 177F gives to the Commissioner a discretion to cancel a tax benefit obtained by a taxpayer in connection with a scheme to which the Part applies. That section relevantly reads:
``177F(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may -
- (b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income,
and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.
(3) Where the Commissioner has made a determination under sub-section (1) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this sub-section referred to as the `relevant taxpayer') -
- (a) if, in the opinion of the Commissioner -
- (i) there has been included, or would but for this sub-section be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and
- (ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income,
determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or
- (b) if, in the opinion of the Commissioner -
- (i) an amount would have been allowed or would be allowable to the relevant taxpayer as a deduction in relation to a year of income if the scheme had not been entered into or carried out, being an amount that was not allowed or would not, but for this sub-section, be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income; and
88 ATC 4844
- (ii) it is fair and reasonable that that amount or a part of that amount should be allowable as a deduction to the relevant taxpayer in relation to that year of income,
determine that that amount or that part, as the case may be, should have been allowed or shall be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income,
and the Commissioner shall take such action as he considers necessary to give effect to any such determination.
(4) Where the Commissioner makes a determination under sub-section (3) by virtue of which an amount is allowed as a deduction to a taxpayer in relation to a year of income, that amount shall be deemed to be so allowed as a deduction by virtue of such provision of this Act as the Commissioner determines.
(5) Where, at any time, a taxpayer considers that the Commissioner ought to make a determination under sub-section (3) in relation to the taxpayer in relation to a year of income, the taxpayer may post to or lodge with the Commissioner a request in writing for the making by the Commissioner of a determination under that sub-section.
(6) The Commissioner shall consider the request and serve on the taxpayer, by post or otherwise, a written notice of his decision on the request.
(7) If the taxpayer is dissatisfied with the Commissioner's decision on the request, the taxpayer may, within 60 days after service on the taxpayer of notice of the decision of the Commissioner, post to or lodge with the Commissioner an objection in writing against the decision stating fully and in detail the grounds on which the taxpayer relies.
(8) The provisions of Division 2 of Part V (other than section 185) apply in relation to an objection made under sub-section (7) in like manner as those provisions apply in relation to an objection against an assessment.''
(There was a minor amendment to sec. 177F(7) - dealing with the manner of lodgment of objections - in 1986. Apart from that change, the current provisions are those in force at all relevant times.)
We have already set out the passage in the reasons of the Deputy President dealing with the application to the appeals of sec. 177D. It will be recalled that the Deputy President made a finding ``that the annuity scheme falls within the section'', that is sec. 177D. The Deputy President then went on to say that there ``appears to be no reason why the whole of the tax benefit obtained should not be treated as cancelled pursuant to sec. 177F(1) of the Act''. In other words, the Deputy President purported to exercise the discretion which is conferred upon the Commissioner under sec. 177F(1) and to disallow the claim made by each of the applicants to deduct from his or her taxable income one quarter of the partnership loss. By reason of Mr McMahon's concurrence, this became the decision of the Tribunal; so that each of the appeals to the Tribunal was dismissed.
Counsel for the applicants contend that the Tribunal was not entitled to take that course. They cite two reasons. Firstly, they say that the task of the Tribunal was to review the decisions of the Commissioner disallowing the applicants' objections to his various assessments. They point out that sec. 25(4) of the Administrative Appeals Tribunal Act 1975 gives to the Tribunal the ``power to review any decision in respect of which application is made to it under any enactment''. Counsel recognise that sec. 43(1) of that Act provides that ``for the purpose of reviewing a decision, the Tribunal may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision''. But they submit that this provision is limited in its application to powers relevant to the making of the decision under review. Although counsel concede that, in reviewing the decision to disallow an objection, the Tribunal is empowered to exercise any discretion available to the Commissioner in relation to his decision upon the objection, they contend that sec. 43(1) does not empower the Tribunal to exercise a discretion conferred upon the Commissioner for a different purpose or at an earlier point of time; namely, at the time of assessment.
Secondly, counsel for the applicants point out that the Commissioner himself did not purport to exercise a discretion under sec.
88 ATC 4845
177F(1) in relation to these assessments. In no case did the reasons for disallowing the objection, as set out in the Commissioner's statement under sec. 37 of the Administrative Appeals Tribunal Act, contain any reference to sec. 177F; or to any other provision in Pt IVA. No reference was made to this Part during the oral hearing before the Tribunal or in the written submissions supplied to the Tribunal on behalf of the Commissioner. Under these circumstances, say counsel, their clients were accorded no opportunity to be heard upon the question whether Pt IV applied to the transactions; the finding of the Tribunal against their clients upon that ground therefore constitutes a contravention of the requirements of natural justice and an error of law.
Counsel for the Commissioner concede that at no time did their client make a determination against any of the applicants under sec. 177F(1). They further concede that no submission was made to the Tribunal in connection with Pt IVA. Notwithstanding those concessions, counsel dispute that it was erroneous in point of law for the Tribunal to decide the appeals by reference to that Part.
In relation to power, counsel for the Commissioner refer to
Re Grolier Enterprises and Australian Postal Commission (1977) 1 ALD 10;
Drake v. Minister for Immigration and Ethnic Affairs (1979) 46 F.L.R. 409 and
Re Control Investments Pty. Ltd. and ors and Australian Broadcasting Tribunal (No. 2) (1981) 3 ALD 88. However, those cases contain no discussion as to whether the powers given by sec. 43(1) enable the exercise of a discretion vested in the decision maker at a time earlier than the time of exercise of the decision under review; although it is relevant to note that, in Control Investments at p. 92, Davies J. referred to sec. 43 as being a provision which ``extends the authority of the Tribunal so that it may more adequately exercise its function of reviewing on the merits the subject decision''.
As a matter of principle, it must be correct, as submitted on behalf of applicants, that the powers and discretions referred to by sec. 43(1) are the powers and discretions vested in the original decision maker for the purposes of making the decision under review. They do not include any powers and discretions which may be vested in the decision maker for some other purpose. If authority be needed for this conclusion it is to be found in
Repatriation Commission v. O'Brien (1984-1985) 155 C.L.R. 422 at p. 429. See also
Secretary, Department of Social Security v. Riley (1987) 13 ALD 608.
However, we do not think that it follows that, in the present case, the Tribunal lacked jurisdiction to exercise the discretion conferred upon the Commissioner by sec. 177F(1). It is necessary to examine closely the relevant statutory provisions. Section 166 of the Income Tax Assessment Act empowers the Commissioner, from the taxpayer's return and from any other information in his possession, to ``make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon''. There is no doubt that, in taking that step, the Commissioner is entitled, in a proper case, to exercise the discretion conferred upon him by sec. 177F(1). That latter subsection specifically provides for including particular sums ``in the assessable income of the taxpayer'' and that a ``deduction... shall not be allowable to the taxpayer''. Section 185 provides for the making of an objection by a ``taxpayer dissatisfied with any assessment''. Thereafter, by virtue of sec. 186, the Commissioner incurs a duty to consider the objection, to disallow it or to allow it either wholly or in part, and to notify the taxpayer of his decision. In considering the objection, the question for the Commissioner is the correctness of the original decision, that question being considered in the light of the terms of the objection but taking account of all the information then available to the Commissioner regarding the amount of the taxable income of the taxpayer and the amount of the tax payable thereon. It may well happen, for example, that, between the date of the original assessment and the date of determination of an objection, new information comes to the Commissioner or that there is some change in the relevant law. Subject to the limitations imposed by sec. 170 of the Act, these are matters properly to be taken into consideration by the Commissioner, in any case, in determining whether to issue an amended assessment. As the issue of an amended assessment is a possible result of the consideration by the Commissioner of an objection to an assessment, it must be appropriate for the Commissioner to take
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account of such matters in determining an objection to an assessment.
It follows that, in determining an objection to an assessment, the Commissioner is entitled to make a determination under sec. 177F of the Act; and thereafter to give effect to that determination by an appropriate decision under sec. 186.
By force of sec. 43 of the Administrative Appeals Tribunal Act, the Tribunal has all the powers and discretions that are conferred by sec. 186 of the Income Tax Assessment Act upon the Commissioner. In exercising those powers and discretions the Tribunal was bound to consider the facts as they were proved in evidence before the Tribunal, making the decision which, upon that evidence and at that time, was the correct or preferable decision to be made in considering the objection. The Tribunal was not confined either to the material which was before the Commissioner, as primary decision maker, or the events which had occurred up to that time: see Drake at p. 419,
Nevistic v. Minister for Immigration and Ethnic Affairs (1981) 34 A.L.R. 639;
Commonwealth v. Ford (1986) 65 A.L.R. 323 at p. 328;
Freeman v. Secretary, Department of Social Security (Davies J., 18 August 1988, not reported).
Once it is understood that, in exercising his powers under sec. 186, the Commissioner would have been free to exercise a discretion under sec. 177F of the Income Tax Assessment Act, it follows that, in reviewing the Commissioner's decision under sec. 186, the Tribunal is free to exercise that same discretion if, upon the material then before it, it seems proper to take that course.
In coming to that conclusion, we appreciate that sec. 177F(3)-(8) provides a regime whereunder the Commissioner may make compensating adjustments in respect to any taxpayer. That taxpayer may be a person different from the taxpayer in connection with whose affairs a determination has been made under sec. 177F(1). In a case where the requisite adjustment is to an assessment which is before the Tribunal at the time of the exercise by it of its discretion under sec. 177F(1), we see no difficulty about the Tribunal making the adjustment. The Tribunal would only be doing what the Commissioner could himself do in connection with that assessment at the time of considering the objection. In a case where the requisite adjustment needs to be made to an assessment not before the Tribunal - either because it relates to some other taxpayer or to some other year of income - the Tribunal could not itself make an adjustment under sec. 177F(3). But we see no difficulty about the Commissioner following up the decision of the Tribunal by making the appropriate adjustment, in the same way as he would do if he himself had made the original sec. 177F(1) determination.
Upon the view just expressed, the current position is similar to that which applied during the period in which the jurisdiction to review taxation determinations was vested in Boards of Review constituted under the provisions of Div. 1 of Pt V of the Income Tax Assessment Act. Those provisions were repealed in 1986, at the time when jurisdiction in taxation matters was conferred upon the Administrative Appeals Tribunal. Section 193(1), which was also repealed at that time, formerly provided that, for the purposes of reviewing decisions of the Commissioner under the Act ``the Board shall... have all the powers and functions of the Commissioner in making assessments, determinations and decisions under this Act, and such assessments, determinations and decisions of the Board, and its decision upon review, shall for all purposes (except for the purpose of objections thereto and review thereof and appeals therefrom) be deemed to be assessments, determinations or decisions of the Commissioner''.
In our opinion the Tribunal did not err in law in holding, in the present case, that it had jurisdiction to determine under sec. 177F that the deductions claimed by the applicants should not be allowable in the relevant year of income.
We turn to the second question arising in connection with Pt IVA: whether, in making a determination under sec. 177F(1), the Tribunal denied the applicants natural justice; or, to use the modern terminology, procedural fairness.
Mobil Oil Australia Pty. Ltd. v. F.C. of T. (1962-1963) 113 C.L.R. 475 at p. 502 Kitto J. discussed whether the Boards of Review were legally bound to conform to the principles of natural justice in making a determination of taxable income under sec. 136 of the Income
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Tax Assessment Act. In so doing his Honour said:
``It is beyond question that in the ordinary kind of case a Board of Review is not under such an obligation, for its function is merely to do over again (within the limits of the taxpayer's objection) what the Commissioner did in making the assessment - not to give a decision affecting the taxpayer's legal situation, but to work out, as a step in administration, what it considers that situation to be. The Board is `in the same position as the Commissioner himself', as the Privy Council said in
Shell Co. of Australia Ltd. v. Federal Commissioner of Taxation  A.C. 275, at p. 298; (1930) 44 C.L.R. 530; at p. 545. It is `only another executive body in an administrative hierarchy':
Jolly v. Federal Commissioner of Taxation (1935) 53 C.L.R. 206, per Rich and Dixon JJ.''
However, the law relating to procedural fairness has evolved considerably since 1963, to the point where Mason J. was able to say, in
Kioa v. West (1985) 159 C.L.R. 550 at p. 584:
``The law has now developed to a point where it may be accepted that there is a common law duty to act fairly, in the sense of according procedural fairness, in the making of administrative decisions which affect rights, interests and legitimate expectations, subject only to the clear manifestation of a contrary statutory intention.''
Mason J. went on, at p. 585, to speak of the expression ``procedural fairness'' as conveying ``the notion of a flexible obligation to adopt fair procedures which are appropriate and adapted to the circumstances of the particular case''.
We see no reason to doubt that the obligation of procedural fairness, understood in the sense explained by Mason J., applies to the proceedings of the Administrative Appeals Tribunal, in a taxation case as much as in any other case. The duty of the Tribunal can be likened to that of a court. In Drake, Bowen C.J. and Deane J., at p. 419, commented that, in its proceedings, the Tribunal ``is obliged to act judicially, that is to say, with judicial fairness and detachment''. The duty of a court has been discussed in two recent decisions of the High Court. The first case,
Stead v. State Government Insurance Commission (1986) 161 C.L.R. 141, was one in which the trial Judge had stopped counsel addressing upon a particular issue only, eventually, to find against his submission upon that issue. At p. 145 the Court said:
``The general principle applicable in the present circumstances was well expressed by the English Court of Appeal (Denning, Romer and Parker L.JJ.) in
Jones v. National Coal Board  2 QB 55, at p. 67, in these terms:
- `There is one thing to which everyone in this country is entitled, and that is a fair trial at which he can put his case properly before the judge... No cause is lost until the judge has found it so; and he cannot find it without a fair trial, nor can we affirm it.'
That general principle is, however, subject to an important qualification which Bollen J. plainly had in mind in identifying the practical question as being: Would further information possibly have made any difference? That qualification is that an appellate court will not order a new trial if it would inevitably result in the making of the same order as that made by the primary judge at the first trial. An order for a new trial in such a case would be a futility.
For this reason not every departure from the rules of natural justice at a trial will entitle the aggrieved party to a new trial. By way of illustration, if all that happened at a trial was that a party was denied the opportunity of making submissions on a question of law, when, in the opinion of the appellate court, the question of law must clearly be answered unfavourably to the aggrieved party, it would be futile to order a new trial.''
The Queen v. Lewis (1988) 62 A.L.J.R. 340 a complaint was made by the Crown that it had been denied natural justice by the Northern Territory Court of Criminal Appeal. One of the grounds of the complaint was that the Court had decided the respondent's appeal upon a ground which was not agitated before it and in relation to which the Crown had been given no opportunity to be heard. The High Court upheld this ground, holding that the Court of Criminal Appeal had allowed the respondent's appeal upon a substituted ground of appeal upon which the Crown had no opportunity to present submissions. At p. 342 the Court said:
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``It is no answer to say that the Crown had had an opportunity to address submissions with respect to the `totality' of the evidence because that word was used in the respondent's grounds of appeal in relation to the conduct of the trial and was to be seen as having particular reference to the manner in which his defence had been conducted. Once it be conceded, as in our view it must be, that the Crown counsel was denied an opportunity to make a general summation of the evidence with a view to demonstrating that notwithstanding the submissions advanced for the respondent the verdict was neither unsafe nor unsatisfactory, then it must follow that the proceedings were marked by a serious irregularity in procedure whereby the Crown was denied natural justice.''
As we have already mentioned, in the present case it is conceded that at no time prior to, or during, the hearing before the Tribunal was any reference made to Pt IVA of the Act. Although the objections to the various assessments submitted by Mr McGrath on behalf of the applicants had included, as one of 18 grounds of objection, an assertion that Pt IVA of the Act did not apply to the transaction, the Commissioner at no time indicated any intention to rely upon this Part. Nor did the members of the Tribunal give any indication to the applicants that the Tribunal might determine the appeals by reference to that Part; as they were entitled to do notwithstanding that the Commissioner himself had not raised Pt IVA.
It is not clear to us that the applicants would have adduced additional evidence in order to resist a case made under Pt IVA. Indeed it is not easy to see what additional evidence could usefully have been led. But, because the matter was not raised, the applicants and their advisers had no opportunity to consider this question. We are not in a position to conclude that there was no possibility that material evidence could have been led. Moreover, as both Stead and Lewis demonstrate, the question whether procedural fairness has been denied does not depend upon the question whether material evidence has been lost. The opportunity of making relevant submissions is an important ingredient of a fair trial. This statement is true in all cases; notwithstanding that there may be cases in which the grant of a new trial is unnecessary or futile.
The discretion committed to the Commissioner, and on appeal to the Tribunal, under sec. 177F(1) arises only after facts are found which correspond with the conclusions set out in sec. 177D. By reason of the course which was taken, the applicants had no opportunity to put submissions to the Tribunal as to whether such findings should be made. Moreover, even when appropriate factual findings are made, liability under Pt IVA does not automatically arise. It is incumbent upon the Commissioner or, on review, the Tribunal to consider whether, as a matter of discretion, a determination under sec. 177F(1) ought to be made. Unless the exercise of discretion is affected by demonstrable error of law, a person against whom the Tribunal exercises the discretion granted by sec. 177F(1) has no redress. It is, therefore, of fundamental importance that such a person have a fair opportunity of putting to the Tribunal any available arguments against that exercise. Necessarily, this involves notice to the person of the possibility of the Tribunal applying Pt IVA.
In our opinion the course taken in the present case involved a denial to the applicants of procedural fairness. Prima facie the matter ought to be remitted to the Tribunal for further consideration at a hearing at which all parties will have a proper opportunity to address the possible application to the case of the provisions of Pt IVA of the Act.
The notice of contention
However, counsel for the respondent contend that, in the special circumstances of this case, that course ought not to be taken. They argue that, upon the findings made by the Tribunal, the respondent was, in any event, entitled to succeed; so that a remission to the Tribunal would be futile. By a notice of contention they raise again the four grounds argued before the Tribunal.
In relation to the first two grounds, that the transactions were shams and fiscal nullity, it is sufficient for us to say that we see no legal error in what was said by the Deputy President, and adopted by Mr McMahon.
As we have already said, the Deputy President held that the interest payments were not ``eligible relevant expenditure'' within the meaning of sec. 82KH(1F), so that sec. 82L had no application. It will assist the
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understanding of Mr Bannon's reasoning if we refer to the relevant statutory provisions.
Division 3 of the Income Tax Assessment Act deals with deductions from taxable income. Subdivision D (sec. 82KH-82KL) is headed ``Losses and Outgoings Incurred under Certain Tax Avoidance Schemes''. The Subdivision appears to be intended to create an exception to the entitlement of taxpayers to deduct from their taxable income expenditure which, in the absence of the Subdivision, would be deductible from that income. Regrettably, in pursuit of that objective, the Parliament has found it necessary to enact provisions of a length and obscurity which are noteworthy even by the Byzantine standards of this Act.
Section 82KH is a lengthy interpretation section. In subsec. (1) the term ``relevant expenditure'' is defined as meaning, in relation to a taxpayer, expenditure, or a loss or outgoing, falling within one or more of the 20 paragraphs in the definition. These paragraphs include (d) and (w), as follows:
``(d) a loss or outgoing incurred by the taxpayer in respect of interest to the extent to which a deduction would, apart from section 82KL, be allowable to the taxpayer under section 51 in respect of the loss or outgoing;
(w) a loss or outgoing (other than a loss or outgoing referred to in sub-section 52A(1) or to which a preceding paragraph of this definition applies) incurred by the taxpayer to the extent to which a deduction would, apart from section 82KL, be allowable to the taxpayer under section 51 in respect of the loss or outgoing;.''
The term ``tax avoidance agreement'' is also defined, as follows:
```tax avoidance agreement' means an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into or carried out, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into or carried out;''
Subsection (IF) of sec. 82KH defines the term ``eligible relevant expenditure'':
``(IF) For the purposes of this Subdivision, an amount of relevant expenditure incurred by a taxpayer shall be taken to be an amount of eligible relevant expenditure if -
- (a) that amount of relevant expenditure was incurred after 24 September 1978 by reason of, as a result of or as part of a tax avoidance agreement entered into after that date;
- (b) by reason of, as a result of or as part of the tax avoidance agreement the taxpayer has obtained, in relation to that relevant expenditure being incurred, a benefit or benefits in addition to -
- (i) in a case to which sub-paragraph
- (ii) does not apply -
- (A) the benefit in respect of which the relevant expenditure was incurred; and
- (B) any benefit that resulted directly or indirectly from the benefit in respect of which the relevant expenditure was incurred and is a benefit that, in the opinion of the Commissioner, might reasonably be expected to have resulted if the benefit in respect of which the relevant expenditure was incurred had been obtained otherwise than by reason of, as a result of or as part of a tax avoidance agreement; or
- (ii) in a case where the relevant expenditure is relevant expenditure to which paragraph (w) of the definition of `relevant expenditure' in subsection (1) applies - any benefit that resulted directly or indirectly from the incurring of the relevant expenditure and is a benefit that, in the opinion of the Commissioner, might reasonably be expected to have resulted if the relevant expenditure had been incurred otherwise than by reason of, as a result of or as part of a tax avoidance agreement; and
- (c) in a case where the relevant expenditure is relevant expenditure to
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which paragraph (s), (v) or (w) of the definition of `relevant expenditure' in sub-section (1) applies - that amount of relevant expenditure was incurred by reason of, as a result of or as part of a tax avoidance agreement entered into before 28 May 1981.''
Subsection (1G) provides that the reference, in subsec. (1F), to the benefit in respect of which relevant expenditure was incurred by a taxpayer shall be read, in the case of relevant expenditure incurred by the taxpayer in respect of interest, as ``the availability to the taxpayer of the money borrowed by the taxpayer''. It appears, therefore, that particular expenditure, incurred in respect of interest, is ``eligible relevant expenditure'' if:
- (a) it was incurred after 24 September 1978 by reason of, or as a result of or as part of, a tax avoidance agreement entered into after that date; and
- (b) it provided a benefit to the taxpayer travelling beyond the availability of the money borrowed by the taxpayer and any concomitant benefit that might be expected to occur, in the absence of a tax avoidance agreement.
Section 82KL is the critical provision in Subdiv. D. Subsection (1) provides:
``(1) Where the sum of the amount or value of the additional benefit in relation to an amount of eligible relevant expenditure incurred by a taxpayer and the expected tax saving in relation to that amount of eligible relevant expenditure is equal to or greater than the amount of the eligible relevant expenditure, notwithstanding any other provisions of this Act but subject to this section, a tax benefit is not and shall be deemed never to have been, allowable in respect of any part of that amount of eligible relevant expenditure.''
It is not necessary to refer to the remainder of the section, which deals with specific cases and procedural matters. It is enough to note the principle enshrined in subsec. (1), which has the effect of requiring the sum of the amount or value of the additional benefit and the expected tax saving in relation to the eligible relevant expenditure to be measured against the amount of eligible relevant expenditure. If those benefits exceed the eligible relevant expenditure, that expenditure ceases to be an allowable deduction.
Mr Bannon dealt with the issue arising under Subdiv. D in the following manner (pp. 118-120):
``It was submitted that the taxpayers were not entitled to deductions pursuant to sec. 51 of the Income Tax Assessment Act 1936 (Cth) (`the Act') because of the provisions of Subdiv. D of Div. 3 of the Act. The definition of `relevant expenditure' in sec. 82KH(1) includes expenditures coming within sec. 51 and it would seem sec. 82KH(1)(d) would specifically apply, and in any event, sec. 82KH(1)(w) would bring the deductions claimed within the definition. Again the scheme for the annuities agreement clearly falls within the definition of `tax avoidance agreement' in sec. 82KH(1). Learned counsel then argued that an additional benefit pursuant to sec. 82KH(1F)(b) of the Act arose by reason of sec. 82KH(1J) in that interest was payable under a tax avoidance agreement satisfying para. (a) thereof, a debt became owing by the taxpayers within the terms of para. (b)(i) thereof and that para. (c) was satisfied because it may reasonably be expected that either by reason of or as part of the tax avoidance agreement `D' and/or `E' would release the partnership from the debt and/or debts. Further it was said that on any view of the evidence the taxpayers never contemplated having to repay such debts, or having to include in their assessable income such large amounts as the scheme projected for its later years.
This appears to be correct. Although partners are liable for the debts incurred by each other in the partnership business, the members of (the partnership) had been assured in the brochure... that `as the annuity value will always exceed any loan value for the entire term, there cannot be any further recourse on an investor for further payments'. The round robin nature of the scheme with its creation of periods of partnership loss and partnership profits through paper transactions appears to indicate that the profits at the end of the rainbow are a mirage, together with the paper debts. There is no indication on the evidence of any fund provided by (Annuity Investments) to meet the projected profits.
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However, in order to come within sec. 82KH(1F) of the Act it is necessary for the taxpayer to obtain a benefit or benefits under sec. 82KH(1F)(b)(i) which is in addition to the benefit in respect of which the relevant expenditure was incurred. If counsel's argument is correct, neither the debt would be enforced, nor would the annuity be paid, therefore there would be no ostensible benefit, i.e. annuity payments, in respect of which the relevant expenditure was incurred to which the tax benefits would be additional. Under sec. 82KH(1F)(b)(ii) it does not seem possible to predicate that the first five years of interest deductions would have been available if the relevant expenditure had been incurred otherwise than by reason of, as a result of or as part of a tax avoidance agreement. The note at ¶23-010, p. 14,504 of the Vol. 3 Australian Federal Tax Reporter (CCH) appears to be correct where it says:
- `Subdivision D of Div. 3 (sec. 82KH to 82KL) also contains provisions which may operate to deny deductions otherwise allowable under sec. 51. That Subdivision applies to deny a deduction where the loss or outgoing in question has been incurred under tax avoidance schemes designed to gain the benefit of the deduction without actually incurring any real detriment in terms of expenditure incurred.'
In the present cases the taxpayers did incur real detriment in terms of expenditure incurred. They paid out $50,000. Therefore it appears that they do not come within Subdiv. D of Div. 3 of the Act.''
We prefer not to debate the correctness of the CCH note cited by the Deputy President, although we point out that the authors of this note refer to ``any real detriment in terms of expenditure incurred'', thus suggesting that they were (rightly) addressing the true, as distinct from apparent or theoretical, position of the taxpayer. The better course is to attempt to apply the legislation itself to the facts of the case. Once it be found, as the Deputy President did find, that each of the subject interest payments was ``relevant expenditure'' made under a ``tax avoidance agreement'' - and there being no doubt that all material events occurred after 24 September 1978 - the first question is whether para. (b) of sec. 82KH(1F) is satisfied. In so far as the expenditure falls within para. (d) of the definition of ``relevant expenditure'' this question is to be answered by reference to subpara. (i) of the paragraph. The taxpayers obtained the benefit referred to in sub-subpara. (A), that is the availability of the money borrowed. The question, then, is whether they also obtained an additional benefit other than one which, in the opinion of the Tribunal (standing in the shoes of the Commissioner), might reasonably be expected to have resulted if that availability had been obtained otherwise than by reason of, or as a result of, the tax avoidance agreement. In our opinion, it would have been open to the Tribunal to hold that there was such a benefit, namely the immunity from personal liability to repay the borrowed moneys and the capacity to bring all of the transactions to an end before any net taxable income was earned; the loan transaction therefore offering extraordinary taxation benefits.
In our respectful opinion the Deputy President misdirected himself in asking whether the applicants incurred any detriment in entering the transaction. This was not the relevant question. It is not inconsistent with the application of sec. 82KL to a particular transaction that such a transaction may have involved a payment of money or some other element which, considered alone, is detrimental to the taxpayer. The question which needed to be addressed was the application of para. (b)(i)(B), as outlined above. We add that, if the matter be considered under para. (w) of the definition of ``relevant expenditure'', the last question which we have mentioned still arises.
For the reasons outlined, it seems to us that it would have been open to the Tribunal to find that the interest payments fell within the definition of ``eligible relevant expenditure''. As Mr Bannon appreciated, the question would then arise as to the application of sec. 82KL. Nothing has been said by the Tribunal upon that matter.
It is not possible for us finally to dispose of the claim made by the Commissioner in reliance upon Subdiv. D. Having regard to such findings of fact as have been made it is not possible, as a matter of law, to exclude that claim. But neither is it possible to uphold that claim. The necessary findings of fact, both under sec. 82KH(1F) and 82KL, have yet to be made. If the case is remitted to the Tribunal,
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this is a matter which may be further addressed and the requisite findings made.
The remaining point taken by the Commissioner in his notice of contention relates to sec. 51. As we have said, the Commissioner disputes that, upon ordinary principles, the interest payments are deductible under sec. 51. Mr McMahon accepted the Commissioner's argument in relation to this aspect of the case. Mr Bannon did not, but this appears to be because he regarded it as intertwined with the question of the application of Subdiv. D. With respect, this approach was erroneous. If the payments are not deductible under sec. 51, that is the end of the matter. The taxpayers' appeals must fail. The possible application of Subdiv. D does not arise.
There are findings in Mr Bannon's decision which suggest that, if he had correctly addressed the question of the application of sec. 51, Mr Bannon may have shared the view expressed by Mr McMahon. We have in mind, in relation to the objective facts, the passage in Mr Bannon's reasons in which he asked himself the purpose of ``the elaborate round robin scheme of bills of exchange and associated annuity, partnership and loan agreements'' and his reply ``tax deductions for the first five years''. This, he thought, was the express purpose which the ``highly artificial scheme'' was designed to achieve. As to subjective purpose, the Deputy President accepted as a fact that ``the taxpayers never contemplated having to include in their assessable income such large amounts as the scheme projected for its later years''. He referred to the income to be derived under the scheme as as ``a mirage'', plainly accepting that the applicants contemplated taking steps - as they easily could - to terminate the annuity before any substantial income was earned; at which time, ironically, the annuity would become unprofitable to them.
However, the findings made by Mr Bannon were made in the context of a consideration of the question whether the transactions fell within Pt IVA. The Deputy President was not addressing the questions which arise under sec. 51. Those questions must also be remitted to the Tribunal.
In the result we propose to allow the appeal, to set aside the decision of the Tribunal and to remit the case to the Tribunal for further hearing. Section 44(5) of the Administrative Appeals Tribunal Act gives to the Court a discretion upon the question whether there shall be fresh evidence at that hearing. We prefer to leave this matter to the discretion of the Tribunal, to be exercised after hearing the submissions of the parties. It is not obvious to us that any useful further evidence would be available but this impression may be erroneous. Particularly if any additional evidence is relevant to Pt IVA, it would seem appropriate to permit it to be adduced.
As to costs, the applicants have been successful in persuading the Court to set aside the decision of the Tribunal dismissing their appeals to that body. Whatever may be the ultimate outcome of the case, they are prima facie entitled to recover their costs in this Court. However, the Commissioner has also been successful, in challenging the adverse decisions of the Tribunal in relation to Subdiv. D and sec. 51. These matters of contention occupied a significant proportion of the hearing time. Under the circumstances we think that justice would be done if we ordered the Commissioner to pay to the applicants one half of their costs of this appeal.