Eleven investment scheme cases have been considered by the Federal Court.
Nine of these cases concerned mass marketed investment schemes which were part of the Commissioner’s 14 February 2002 settlement offer. In all nine cases the Courts have now confirmed the Commissioner’s view that the deductions are not allowable.
One of the remaining cases Cooke and Jamieson concerned an investment scheme which was not part of the Commissioner’s settlement offer. In this case the Court upheld the original decision that the deductions were allowable.
In the case of Star and Hopkins the only issue before the Full Federal Courts was the application of administrative penalty under section 226L of the Income Tax Assessment Act 1936.
Princi & others
On the 4 April 2008, the Federal Court dismissed the taxpayer’s appeal from the decision of AAT in the cases involving the Northern Rivers Tea Tree Oil Projects where the taxpayers sought to distinguish the decisions of the Federal Court in Sleight. The court again found that the dominant purpose for entering into the scheme was to obtain a tax benefit and therefore Part IVA of the income tax law operated to deny the deduction claimed.
Lenzo
On the 3 April 2008, the Full Federal Court held that the taxpayer was not entitled to deductions for his investments involved in the East Kimberley Sandalwood 1998 Project. Allowing the appeal the Full Federal Court held that the way the actual project was structured clearly points to the taxpayer’s dominant purpose as being the obtaining of a tax benefit.
Starr & Hopkins
On 21 December 2007, the Full Federal Court considered the application of section 226L of the Income Tax Assessment Act 1936. In this case the client invested in a cattle breeding project and expenditure incurred in connection with the project was disallowed. The Court found that, for purpose of section 226L, determining whether or not a participating taxpayer’s sole or dominant purpose for entering into an arrangement required consideration of the taxpayer’s actual purpose. This is to be determined by consideration of both objective and subjective matters.
Tolich & others
On the 10 August 2007, the Federal Court handed down its judgment in which it considered that the loss or outgoings claimed by the taxpayer in relation to the Travel Vision Project which concerned the promotion and sale of the Travel Vision System – the electronic storage on CD-ROMs of travel information.
The Court held that the deductions were rightly disallowed, as the taxpayer entered into an arrangement with the dominant purpose of obtaining a tax benefit, save and except to the extent they were reflected by actual cash outlays.
The taxpayer has lodged an appeal to the Full Federal Court.
Calder
On 1 July 2005, the Federal court held that a taxpayer who invested in Main Camp Tea Tree Oil Project No 3 was not entitled to a deduction for his investment as the dominant purpose for entering into the scheme was to obtain a tax benefit. The Court reached this decision after considering the objective rather than subjective purpose of the taxpayer.
On the 7 December 2005 this decision was upheld by the Full Federal Court on appeal.
Sleight
On 4 May 2004, the Full Federal Court held that the taxpayer was not entitled to a deduction for his half share of the deductions claimed by a partnership of himself and his wife investing in the Northern Rivers Tea Tree Oil project in the 1995 income year.
The Court found that although the taxpayer was carrying on a business the dominant purpose for entering into the scheme was to obtain a tax benefit and therefore Part IVA of the income tax law operated to deny the deduction claimed. In overturning the original finding that the overall commercial objective of the scheme saved it from the application of Part IVA, the Court considered the objective rather than the subjective purpose of the taxpayer in entering into the scheme.
On 4 February 2005 special leave to appeal to the High Court was not granted.
Puzey
On 26 August 2003, the Full Federal Court upheld an earlier decision of 19 September 2002. The court maintained that expenses claimed for the purchase of seedlings relating to the taxpayer’s investment in the Kununurra Tropical Forestry project were not allowable in the first year of the project. This was because the sole or dominant purpose of entering into the scheme was to obtain a tax benefit and therefore Part IVA of the income tax law operated to deny the deduction claimed.
The court found that the seedling purchase costs in the second year of the project were not allowable as expenses of a capital nature because the pooling arrangement that happened under the trust structure provided that the taxpayer became a passive investor in someone else's business.
The seedling purchase agreement was a scheme entered into by the taxpayer for the dominant purpose of obtaining the deduction of $40,000 in each year. The scheme was promoted with the tax consequences to the fore and with the taxpayer signing pre-prepared documents, while the success of the project was highly speculative. However, the tax consequences were certain. The amount paid for the seedlings was grossly excessive ($80,000 compared to a likely market price of $3,000), such that the tax refund from the deduction claimed was sufficient in each year to fund the cash outlays (repayments of the $80,000 borrowed) in each year of $14,000.
On 13 February 2004, the Full Federal Court handed down a supplementary decision that the $800 plantation management fees were deductible and that the $2,000 plantation establishment fees were of a capital nature and not deductible.
On 28 October 2004 special leave to appeal to the High Court was not granted.
Krampel Newman Partners Pty Ltd (known as Mephisto’s Web)
On 28 February 2003, the Federal Court handed down its judgment in which it considered the deductibility of amounts purportedly paid for the copyright and other costs associated with the production of an animated feature film.
The Court held that these amounts were not allowable under the general income tax deduction provisions nor under the specific regime in Division 10B for capital expenditure on Australian films. The Court also found that the specific anti-avoidance provisions in section 82KL of the income tax law and the general anti-avoidance provisions in Part IVA operated to disallow the deductions. The Court concluded that penalty tax of 50% was payable as the investor’s position on the deductions they claimed in connection with the scheme was not ‘reasonably arguable’.
Vincent
On 16 September 2002, the Full Federal Court decided that the expenses claimed by the taxpayer were not deductible under the general deduction provisions because the expenses were of a capital nature. Despite this finding, the court allowed the appeal in the 1995 year as the amendment, relying only on Part IVA, was outside the four-year period allowed under the general amendment provisions. In the 1996 year the deduction was not allowed by the court.
No application for special leave to appeal was filed by the Commissioner or the taxpayer.
Howland Rose and Ors (known as Budplan)
On 18 March 2002, the Federal Court held that amounts paid to participate in the Budplan Personal Syndicate were not deductible under the general deduction provisions of the income tax law. The court also held that the general anti-avoidance provisions in Part IVA of the income tax law operated to deny deductions for the amounts subscribed because the investment made no commercial sense without the tax benefits.
No appeal was filed by the taxpayers.
Cooke and Jamieson
On 26 March 2004, the Full Federal Court upheld the original decision that expenses claimed by the taxpayers in relation to their investment in the Australian Horticultural Project (No 1) were deductible under the general deduction provisions of the income tax law. Further the court held that the anti-avoidance provisions did not apply to disallow the deductions.
No application for special leave to appeal was filed by the Commissioner.
7 February 2005
Last Modified: Thursday, 19 June 2008
Subscribe
