PEARCE & ORS v R

Judges: Malcolm CJ

Murray J
Steytler J

Court:
Supreme Court (WA) - Court of Criminal Appeal

MEDIA NEUTRAL CITATION: [2005] WASCA 74

Judgment date: 15 April 2005

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Murray J

203. In these matters I have been assisted greatly by being able to read in draft the judgment of Steytler J, with which judgment I respectfully agree. His Honour has carefully set out the grounds of appeal and canvassed the arguments of counsel both in support of those grounds and in response to them. His Honour has canvassed the facts in considerable detail and he has discussed the cases made by the respective parties at the trial. In these reasons, therefore, I need only explain why I consider that the appeals against conviction should all be dismissed and the applications for leave to appeal against sentence refused. Since writing these reasons, I have also read in draft the reasons of Malcolm CJ, with which I am also in general agreement.

204. I commence by noting that the appellants were charged with conspiring together and with the men Aistrope and Wahby to defraud the Commonwealth, contrary to s 29D and s 86(1) of the Crimes Act 1914 (Cth), as the relevant sections then were. To make it clear, s 86(1) at the relevant time made it an offence to conspire with another person to commit an offence against a law of the Commonwealth punishable by imprisonment for more than 12 months. Section 29D provided the offence of defrauding the Commonwealth. Under s 86(2), a conspiracy to commit an offence against s 29D was punishable by a fine of 2000 penalty units, or imprisonment for 20 years, or both. Each of the appellants was sentenced to 5 years imprisonment. A pre- release period of 18 months was fixed in

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relation to each offender, before, in accordance with a recognisance release order, each could be released on the giving of security.

205. As to the nature of the offence of conspiracy defined by s 86, it is sufficient for present purposes to note that the section effectively codifies the common law offence of conspiracy. Section 86(3) provides that the offender must have entered into an agreement with one or more other persons, which agreement the offender and at least one other party to the agreement must have intended to implement so as to commit an offence. The offender, or at least one other party to the agreement, must have committed an overt act towards the implementation of the agreement.

206. In this case, shorn of factual complexity, it seems to me that it was clear that the conspiracy charged was to defraud the Commonwealth by depriving it of moneys to be paid by way of tax refunds, or at least by putting at risk or prejudicially affecting the capacity of the Commonwealth to ensure that the Australian Taxation Office, the ATO, only made refunds of tax which it was lawfully obliged to make and to protect the public moneys involved by ensuring that it was in a position to make a proper judgment about such a liability in the case of any given taxpayer.

207. Detailed particulars of the charge were provided to the accused persons, as were particulars of the overt acts relied upon by the prosecution. The overt acts were numerous communications between the alleged co- conspirators. They seem to me to have been substantially proved, but in any event the appeals are not concerned with their sufficiency, or whether there was evidence capable of supporting any of the particulars Of course, the particulars of the indictment in their final form did not go before the jury. They were supplanted by the prosecutor's opening address and by the evidence led at trial, including that of Aistrope and Wahby, who had earlier pleaded guilty and been convicted.

208. At the conclusion of the opening address of senior counsel prosecuting, senior counsel representing Tieleman, taking up the invitation of the trial Judge to make an opening statement, reminded the jury that the Crown had charged a criminal agreement to defraud the Commonwealth, ``an agreement to cause somebody else to make a statement that the parties to the agreement knew to be false... if made by a taxpayer.'' That, counsel said, was the dishonesty upon which the prosecution relied. On the other hand, counsel said, everyone knew that a tax audit of the scheme in question, by the ATO, would probably occur and, in that context, counsel suggested that the prosecution could not prove beyond reasonable doubt, a dishonest agreement to defraud the Commonwealth of tax revenues. To the extent that there was an agreement involving Tieleman there could not be excluded, beyond reasonable doubt, an agreement simply to minimise tax by legitimate means.

209. Senior counsel appearing for Pearce spoke in similar terms. He conceded Pearce's involvement in various steps directed towards the implementation of the scheme, but he said that Pearce, like Tieleman, was involved in no dishonesty. Pearce ``went to great lengths to ensure that the Servcom arrangements were entirely legitimate.'' Like Tieleman, Pearce anticipated as inevitable, an audit by the ATO. Pearce, counsel said, was concerned, not to defraud the Commonwealth, but to provide for those who invested, an effective and profitable business, ``a legitimate tax-effective investment for the people involved.'' Counsel for Mr Wharton adopted those remarks.

210. Tieleman and Pearce gave evidence and called other evidence in their defence. Wharton did not do so. Before going to the evidence and what, in my opinion, it was capable of establishing as to the nature of the scheme, I should mention those matters of law to which I have had regard in respect of the issues of fact which arose at the trial.

211. I start with the decision of the High Court in
Peters v The Queen (1998) 192 CLR 493 , where the majority, Kirby J dissenting, held that dishonesty, to the knowledge of the accused, was not a separate element of the offence of conspiracy to defraud. So far as it was necessary to speak in terms of the nature of the conduct agreed upon and the mental element of individual accused persons, it was sufficient that an accused person had been a party to an agreement, intended to be put into effect and commenced to be put into effect, the purpose of which was to defraud, in the sense that, by dishonest means, another was to be deprived of money or property, or that person's proprietary rights were put at risk or prejudiced, or that person's lawful interests were prejudicially affected, without lawful

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justification. The means to be employed would be dishonest if, in the view of the jury, they might properly be so regarded according to the standards of ordinary, decent people. Kirby J would have held that dishonesty connoting conscious wrongdoing was an element of the crime of conspiracy to defraud to be separately explained to the jury.

212. As to the mental element involved in the crime by the need to prove that the nature of the agreement was consciously to use dishonest means to imperil the rights of the victim, McHugh J, with whom Gummow J agreed, said, at 529 [ 84]:

``In most cases of conspiracy to defraud, to prove dishonest means the Crown will have to establish that the defendants intended to prejudice another person's right or interest or performance of public duty by:

• • making or taking advantage of representations or promises which they knew were false or would not be carried out;
• • concealing facts which they had a duty to disclose; or
• • engaging in conduct which they had no right to engage in.''

213. Peters was followed, and the above passage from the judgment of McHugh J approved, in
Spies v The Queen (2000) 18 ACLC 727 [ extacts]; (2000) 201 CLR 603 at 630-631 [ 77-81] .

214. In this case, therefore, the prosecution had to prove that the appellants were parties to an agreement to use dishonest means to cause the Commonwealth to pay moneys by way of tax refunds, to the prejudice of the Commonwealth's rights to protect the revenue and to ensure that tax to which it was lawfully entitled was not foregone.

215. Steytler J has discussed at length the way in which the Crown case was put. It was asserted and, in my opinion it was properly open to assert, that the dishonest means to be employed pursuant to the agreement was to provide information to taxpayers who invested in the scheme which was calculated to support a certain level of deductibility of money which the investors were to pay, or assume a liability to pay, without revealing to taxpayer investors, and therefore to the ATO should it audit the scheme as anticipated, that there were other elements to the scheme which, if known, would be relevant considerations for the ATO in determining whether the deduction claimed was necessarily incurred in carrying on a business for the purpose of generating or producing assessable income. Alternatively, the ATO would be prevented from properly considering whether the scheme in question was one, the dominant purpose of which was to obtain a tax benefit by way of deduction of expenditure made or liability incurred in connection with the scheme, in which case the deduction might be disallowed and the amount claimed included in the taxpayer's assessable income.

216. The Crown case as it was opened, presented in evidence and, in my opinion, closed, was, and involved no shift from, the position that the conspiratorial agreement was to market to taxpayers and potential investors a scheme which, on its public face, would, on inquiry by the ATO, support full deductibility while concealing from taxpayer investors elements which, were they known to the ATO, would challenge the deductibility of the investment, for the purpose or with the intention to prejudicially affect the ATO in its capacity to properly evaluate the lawfulness of deductions to be claimed. Thus were described the dishonest means which it was alleged were to be consciously employed in the conspiracy to defraud the Commonwealth by depriving it of the opportunity to test whether deductions to be, or which might be, claimed were properly allowable under the law in light of all the factual elements of the scheme, whether or not, had that opportunity been available to the ATO, it was likely that deductibility would have been denied:
Wills v Petroulias (2003) 58 NSWLR 598 , per Spigelman CJ, at 614 [ 72]- [ 73], a judgment in which Handley and Santow JJA agreed; Income Tax Assessment Act 1997 (Cth), s 8-1 and Income Tax Assessment Act 1936 (Cth), Pt IVA.

217. Steytler J has discussed in some detail the evidence led, from which it was open to the jury to find established beyond reasonable doubt, a scheme to which all of the alleged conspirators were parties, knowing its essential elements. I need not repeat that discussion.

218. As I understand it, the essential matters in respect of the alleged conspiracy to defraud were as follows. In early 1998, Aistrope and Wahby approached and met with Tieleman and Pearce. They had a plan for a franchise scheme relating to the supply of internet and advertising

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services, to be marketed by a company called Servcom Pty Ltd, or its Australian subsidiary. Tieleman and Pearce were chartered accountants. Tieleman was a partner in a firm, and Pearce was a senior employee who became a partner during the period covered by the indictment. The scheme required a capital raising which, it was ultimately agreed, would be undertaken pursuant to a complex process by which, in effect, funds would be generated by the payment by investors in the scheme to the franchisor, of tax refunds obtained by franchisees as the result of deductions claimed for expenditure made and liabilities incurred by way of loans obtained from a third party lender, Allied Securities Pty Ltd, a company controlled by Wharton.

219. An information memorandum was devised, inviting taxpayer investors to purchase franchises which would entitle them to provide to the public the internet services provided by Servcom. The purchase price of a franchise was $39,500, comprised of an establishment fee, initial franchise fees, a training fee, and an indemnity fee. The indemnity fee, initially $675 and thereafter $150 per annum, would limit the investor's liability to repay a loan of $29,500 which could be obtained by the investor to meet the obligation for all but $10,000 required to make the investment. The information memorandum said that, upon the advice of Robert O'Connor QC, and the firm of accountants of which Tieleman and Pearce were members, effectively all the payment required, except the sum of $1,500 which was the initial establishment fee (a capital sum), would be tax deductible, ie, the sum of $38,000.

220. It was represented to the proposed investors that for the 1998 financial year the deduction of $38,000 which might be claimed would generate a tax refund of up to $18,810, of which just over $10,000 was to be paid to the franchisor, the balance of $29,500 being provided by the loan ostensibly made to the franchisee under the scheme and payable to the franchisor under an authority provided to the lender by the investor. For a PAYE taxpayer who had, for the 1998 financial year, a taxable income of $40,000 or more, a refund would be generated which would fund the taxpayer investor's commitment to actually pay money into the scheme.

221. In fact, there was evidence from which it might be found to have been known by the alleged conspirators that in relation to each franchise sold, where the loan of $29,500 was taken out, the loan funds were not provided to the franchisor during the particular financial year for the purpose of meeting its obligations. In the end there was, by and large, no funding commitment incurred by the franchisees in the 1998 financial year. The loan funds did not go to the franchisor and the funds provided directly by the franchisees were generated by tax refunds necessarily received after the close of the 1998 financial year. At that time, the prosecution said there was no business capable of substantiating any claim for deductions.

222. There was evidence from which it might be inferred that the conspirators, knowing the true position, also understood that if that was known to the ATO the claimed deductions might not be allowed and the scheme would effectively collapse. The case was that the loan arrangements were artificial and to be entered into for the purpose of allowing the taxpayer investors to fund the entire commitment to pay the franchisor entirely from the proceeds of tax refunds generated by the claimed deductions, in circumstances where, if the ATO challenged the deduction, the information which the taxpayer would supply was calculated to allay any concern that the claimed deductions were not properly allowable. In those circumstances, in my opinion, the agreement and the relevant knowledge of the appellants having been established, it was open to the jury to characterise the means employed to the prejudice of the interests of the Commonwealth as dishonest.

223. As I have said, in my opinion, the case was opened by the prosecution in this way. It was closed by the prosecution in this way. There was evidence to support that case and, indeed, the defence evidence involved very little relevant dispute as to the primary facts constituting the scheme. The trial Judge summed up the case consistently with the above, in terms discussed by Steytler J.

224. Steytler J discusses the grounds of the appeals against conviction. They are unhelpfully drafted, in my opinion, and there is much overlap between the various grounds. There is nothing that I really wish to add to the discussion of the grounds by his Honour. As he notes, ground 1, the primary ground, really seeks to confine the prosecution case, and having done so, suggests there was no evidence

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to support a conviction on the basis of the case attributed to the prosecution, a case which was never so confined. Ground 2 proceeds on a similar basis and is equally without merit. In my opinion, grounds 3 and 4 seek directions in relation to the franchise service fees which, as I have indicated, would be wrong in law.

225. Grounds 5, 6 and 7 raise matters concerned with the directions of the trial Judge in respect of Pt IVA of the Income Tax Assessment Act 1936. They overlook the fact that the case was not about how the relevant sections would have been approached in assessing whether the deductions claimed were properly to be allowed. So far as these matters were relevant, the case was concerned with the fact that, on the public face of the scheme, no matter was raised which would have allowed the ATO to consider the potential application of Pt IVA in the light of the true facts. Ground 8 calls for a direction which was not required, having regard to the nature of the prosecution case, and ground 9 would fail also because, as Steytler J observes, it attributes to the prosecution a case which it was not seeking to make. Grounds 10 and 11 would fail for similar reasons.

226. Grounds 12 and 18 are, in truth, not grounds of appeal at all, but refer to the proper approach of an appellate court. The directions which appear to be the subject of ground 13 have been discussed by Steytler J. In my opinion, no error of law in respect of them has been established and the jury could not have been misled in any way by the directions on the issues canvassed by this ground which were given by the trial Judge. I have nothing to add to what Steytler J has said in relation to grounds 14 and 15, particularly in respect of the evidence of O'Connor QC. As to ground 17, the prosecution did not change its tack or split its case between its opening and closing. I therefore agree that the appeals against conviction should be dismissed.

227. Finally, as to the applications for leave to appeal against sentence, I have nothing to add to the reasons of Steytler J in respect of the applications of Pearce and Tieleman. As to the application by Wharton, I would only add, in respect of the amended ground, that concerned with Mrs Wharton's medical condition, that the material placed before us did not go beyond Dr Szer's report of 10 November 2004. That report, when read with that of 19 August 2004, clearly provided no basis upon which the Court might respond favourably, as an act of exceptional clemency, to the need to ameliorate the punishment which might otherwise be appropriately imposed, on the ground of the hardship encountered by Mrs Wharton. I agree that the appropriate course, if the facts of the case at any time warrant it, would be to seek an act of executive clemency, under the Crimes Act 1914 (Cth), s 19AP.