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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

Malcolm CJ

On 1 July 2004, the appellants Pearce, Tieleman and Wharton were each convicted in the Supreme Court at Perth of conspiring with each other and two others named Aistrope and Wahby to defraud the Commonwealth contrary to s 29D and s 86(1) of the Crimes Act 1914 (Cth). They were each subsequently sentenced to imprisonment for 5 years with a conditional release order after 18 months.

2. In the meantime, Aistrope and Wahby had pleaded guilty to the charge of conspiring to defraud the Commonwealth.

3. The original appeals against conviction and applications for leave to appeal against sentence were each dated 15 or 16 July 2004. By notices of motion dated 25 October 2004, each of the appellants sought leave to amend the grounds of their appeals against conviction and applications for leave to appeal against sentence. In each case there were originally 15 identical grounds of appeal against conviction and one identical ground of appeal against sentence. At the commencement of the hearing of the appeals and applications on 1 December 2004, leave was granted to each of the appellants to amend the grounds of appeal against conviction and the grounds of the applications for leave to appeal against sentence.

Particulars of the conspiracy to defraud

4. The offence of conspiracy to defraud typically involves the making of an agreement between two or more persons to inflict economic loss on a third party by dishonest means:
Peters v The Queen (1998) 192 CLR 493 at [ 73] per McHugh J. It needs to be borne in mind, however, that actually causing economic loss is not an element of the offence. It is sufficient to constitute the offence if those involved in the conspiracy intended to obtain an advantage for themselves by putting the property of another party at risk or by depriving another party of a lawful opportunity to acquire or protect property: see Peters v The Queen ( supra ) and
Wills v Petroulias (2003) 58 NSWLR 598 at [ 54] per Spigelman CJ. The offence will be committed if the conspirators were aware that there was a risk of economic loss as a result of their agreement to act in the way in which they did: Peters at [ 25] per Toohey and Gaudron JJ; and see
Welham v Director of Public Prosecutions [ 1961] AC 103 at 131 .

5. In Peters at [ 84] McHugh J made it clear that proof of a conspiracy to defraud ordinarily requires the Crown to prove that:

``The defendants intended to prejudice another person's right or interest or perform a 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.''

6. See also
Spies v The Queen (2000) 201 CLR 603 at [ 77]- [ 81] .

7. The particulars of the conspiracy to defraud ultimately alleged against the appellants were as follows:

``The Conspiracy was to defraud the Commonwealth by prejudicing the rights of the Commonwealth to tax payable by participants in the Servcom franchise scheme and/or by depriving the Commonwealth of monies paid as tax refunds to participants in the said scheme or by putting the rights of the Commonwealth to the said monies at risk.

ATC 4322

The parties agreed that the defrauding would be achieved by procuring tax-payers to make such false representations (by positive assertion and/or by concealment of material facts) as were deemed by the conspirators to be necessary to deceive the ATO [ Australian Taxation Office] into accepting that deductions from the tax-payers' [ sic ] assessable income, totalling (as it transpired) about $38,343, were properly claimed as expenses actually incurred by the tax-payer in the acquisition of a genuine business franchise (that was intended to produce and was capable of producing assessable income) and incurred by the tax-payer for the purpose of earning substantial assessable income.''

8. It was also stated in the particulars that:

``Particulars of the said false representations are provided in the accompanying Particulars of Overt Acts.''

9. The alleged conspiracy involved a tax evasion scheme. The scheme was alleged to have been developed following an approach made to an accounting firm McKessar Tieleman (``MKT'') by Messrs Aistrope and Wahby in February 1998. The business idea or proposal was one involving Internet service provider facilities. Aistrope and Wahby met with a partner in a firm of accountants, the appellant Tieleman, and a senior manager of the firm, the appellant Pearce. From about this time, it was apparent to the four that the initial plans to raise capital for the business were not likely to produce the funding required. Consequently, it would be necessary to devise and market a scheme that would, in effect, generate the funding from tax refunds for those to whom the scheme would be marketed. The scheme to produce these results was a complex one, requiring the expertise of the two accounting professionals, and the involvement of a third party ``lender at arm's length'' from whom the bulk of the investment of those to whom the scheme was marketed would be borrowed. The ``lender'' that was procured was a company associated with the appellant Wharton, the fifth person charged in connection with the scheme.

10. The scheme in its final form involved the sale of franchises to investors for a total of $39,500 of which $29,500 was lent to investors by the company associated with Wharton. In the marketing of the scheme, it was represented as one which would result in a tax rebate to investors of up to $18,810 in the year of investment, of which the franchisee would pay $10,000 to the franchisor which, added to the proceeds of the loan, would pay for the franchise.

11. A part of the scheme as marketed was an arrangement for an investor on payment of an initial amount of $675 by way of an indemnity fee and an annual payment of $150 to limit his or her liability to repay the $29,500 loan. Further, the investor was to provide authorisation to the company associated with Wharton to pay the loan moneys to the franchisor. The intended effect of the first set of arrangements was to make the loan a non- recourse arrangement, which would appear to the taxation authorities to be a recourse arrangement, an appearance which was crucial to the tax rebate sought; while the effect of the payment authorisations was intended to create an appearance of payments where none were to be made.

12. In the event, a total of 1160 franchises were sold. Had the scheme worked as the five participants had intended, taxation rebates totalling approximately $20 million would have become available, which would have produced a total benefit to those promoting the scheme about $14 million and a net benefit to Aistrope and Wahby of approximately $6 million. In the event, the franchisor was selected for a taxation audit, and after refunds in an initial amount of $1,589,540 had been paid, further refunds were stopped. There was an investigation into the activities of Aistrope, Wahby and the three appellants by the National Crime Authority. Before any criminal proceedings had been instituted, Aistrope left Australia for Turkey, apparently in search of business, and Wahby left Australia for Egypt, apparently to be with his ailing parents.

13. Subsequently, Wahby, Aistrope and the appellants were each charged on one count of conspiring to defraud the Commonwealth, contrary to s 29D and s 86 of the Crimes Act 1914 (Cth). Aistrope was arrested in Turkey in July 2003 and, after spending some time in custody there, he was extradited to Australia, arriving in Perth on 9 December 2003 to stand trial with his co-accused, other than Wahby. The trial was listed for 12 weeks, commencing in April 2004. On 27 February 2004, Aistrope pleaded guilty and on the same day was sentenced to imprisonment for 4 years which

ATC 4323

was reduced by 1 year on account of his co- operation with the authorities. McKechnie J sent a minimum term of 18 months with a recognisance release order subject to security in the sum of $10,000 without surety and with the offender to be of good behaviour for a period of 3 years. Credits of 8 months for Aistrope and 4 months for Wahby went against their minimum terms.

14. Upon learning of Aistrope's arrest in Turkey, Wahby contacted Aistrope's lawyer in Perth. After Aistrope had been sentenced, Wahby contacted the Commonwealth Director of Public Prosecutions and voluntarily returned to Perth from Egypt. On 6 May 2004, Wahby pleaded guilty and was sentenced by McKechnie J on that day on the same basis as in the case of Aistrope, except for a different credit against the minimum term.

15. The three appellants were convicted on 1 July 2004, following a trial lasting some eight weeks before McKechnie J and a jury. After their trial, each of the appellants was sentenced by McKechnie J to imprisonment for 5 years, with a minimum term of 18 months and with a recognisance release order on the same terms as for Aistrope and Wahby, except that no period for good behaviour was stipulated. On 5 November 2004, the Court made orders granting Aistrope and Wahby leave to appeal and ordered that the minimum terms of their imprisonment be varied by reducing them by 4 months in each case, so that Aistrope's minimum term was reduced to 6 months and Wahby's minimum term reduced to 10 months.

Overt acts

16. The overt acts relied upon by the prosecution were as follows: on 20 January 1998, Servcom Pty Ltd (``Servcom'') was registered as a company. Aistrope was appointed as a director of Servcom. On 4 February 1998, Aistrope and Wahby met with an accountant named Baker who referred them to specialist tax accountants. The topic of limited recourse loans was discussed. On 9 February 1998, there was a meeting between Aistrope, Wahby, Pearce and Tieleman. Agreement was reached at that meeting to use a round-robin of cheques, to set up a 4:1 (at that time) ratio between sums borrowed and sums provided by investors themselves, a possible third party lender at arm's length and to check out the tax loss situation. At a meeting on 16 February 1998 between Aistrope, Wahby, Pearce and Tieleman, Tieleman and Pearce recommended the engagement of Wharton. There was then a discussion about non-recourse loans.

17. On 17 February 1998, Percom Pty Ltd (``Percom''), a company controlled by Wharton, changed its name to Mortgage and General Indemnity Co Australia Pty Ltd (``Magica''). This became what was described as the ``indemnity company''. Tieleman talked to Wharton. They discussed tax losses and the need to make the loans full recourse, but with an indemnity effectively limiting liability. Tieleman noted that Wharton proposed full recourse loans, due to the level of Australian Tax Office (``ATO'') inquiry into schemes which adopted a limited recourse debt.

18. On 18 February Tieleman and Pearce proposed that they be paid a percentage on a sliding scale of capital raised and said they were contemplating liaising with a group providing tax loss protection. On 23 February Pearce asked Wharton if he would be interested in providing the tax protection. On the following day, 24 February, Aistrope accepted a proposal regarding the payment of Tieleman and Pearce.

19. On 6 March Wharton provided Aistrope with a disingenuous corporate profile of the entity supposedly providing the finance. On 10 March there was a conversation between Wharton and Aistrope in which there was a discussion of a limited recourse loan and the trust structure regarding the sale of tax losses. On the same date, Wahby was appointed a director of Servcom. On 19 March 1998, Wharton unilaterally altered the supposed franchise cost from $35,000 to $39,500. This cost was an artificially contrived figure, which bore no resemblance to the actual costs incurred in setting up the enterprise. Wharton informed Wahby by fax that ``moneys (ie investors' money due to Servcom) would be loaned to various entities and the loans repaid when franchisee loans were repaid (to Allied Securities) and flowed back to relevant parties ``as per our agreement in relation to loan back''. In this respect, Wharton was said to be foreshadowing a round-robin arrangement. Allied Securities Pty Ltd (``Allied Securities'') was a company controlled by Wharton.

20. On 20 March, Wharton and Wahby agreed that the finance company controlled by Allied Securities would retain 62.5 per cent of repayment of the long-term loan. On 23 March,

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Wharton discussed with Tieleman, the promoters' accountant, the level of the indemnity fee being provided by the supposedly independent indemnifier. Tieleman suggested the level of an indemnity fee and noted that Servcom retain 62.5 per cent of capital repayments. Tieleman noted that ``... we couldn't have a position where the buyers' assets are exposed because the indemnity does not stand up'' and ``Wharton confirmed in effect limited recourse if you had full recourse loan agreement and indemnity agreement together''. Tieleman also observed ``Isn't the full recourse indemnity arrangement simply a limited recourse with an additional element of limited recourse being the indemnity rights''.

21. On 1 April, Roseranch Holdings Pty Ltd (``Roseranch'') was registered. On 2 April, Tieleman observed to Pearce that the scheme could not work if the lender had recourse against the personal assets of the borrower. On the same day, Aistrope was appointed as a director of Roseranch. On 6 April, Pearce wrote to Servcom regarding the information memorandum and advised Aistrope that it would be undesirable to openly state tax benefits in the information memorandum, but, instead, MKT would be available to discuss tax benefits with a franchisee or financial adviser individually. He further advised Aistrope to remove any reference to the loan being limited recourse in the information memorandum.

22. On 6 April, Pearce also queried whether the fact that if 500 franchises were sold, that would only lead to $5 million in cash being received and whether that would be enough to perform the level of services. Wharton suggested to Wahby the appropriate indemnity fee. On 6 April, there was a meeting between Aistrope, Wahby, Pearce and Tieleman as to how to make the ratio between money loaned and money provided by the investor acceptable. Tieleman recorded the need to raise arguments in support of how a ratio of 4:1 would be acceptable.

23. On 8 April, the trust deed in respect of tax losses was accepted by Wahby and Aistrope on behalf of Servcom Australia Pty Ltd (``Servcom Australia''). Having been introduced by Tieleman and Pearce, Aistrope and Wharton participated in a tax loss protection strategy. They did so as a result of their knowledge that the purported movement of funds was a sham. The cost of arranging the tax loss structure to Servcom was an obligation to pay Wharton, if there were 1100 franchises sold, the sum of $2,803,500.

24. On 15 April, Roseranch changed its name to Servcom Pty Ltd. Servcom was set up to allow the commencement of an Internet service provider business. It owned the intellectual property. It granted the franchiser, Servcom Australia, an exclusive licence to market Servcom services in Australia. In turn, Servcom Australia issued licences to investors to acquire one or more of 1430 exclusive Servcom franchises. The franchises were for the marketing and promotion of Internet services provided by Servcom and described as the Servcom Business System. The cost of obtaining a franchise was $39,500.

25. The franchises each entitled the franchisee to a block of at least 5000 telephone listings which comprised the franchisee's ``exclusive territory'' and which were randomly spread through each State of Australia. The term of the franchise was 20 years on the basis that each franchisee would be provided with the operating system and training required in order to develop the business and use the Servcom name and logo.

26. The cost of the ``total package'' for the franchise of $39,500 was made up of a ``franchise grant and establishment fee'' of $1500 payable by the franchisee for the grant of the franchise; an amount of $34,700 in respect of initial franchise fees; a ``training fee'' of $2625; and an ``indemnity fee'' of $675. The franchise fees of $34,700 were said to be paid in respect of licensing, administration and advertising services.

27. Servcom arranged finance for the franchisee through Allied Securities. Allied Securities agreed to loan the investor $29,500 per franchise toward the total cost of $39,500. Aistrope claimed that an investor was entitled to a tax deduction of $38,000 per franchise for the initial year of the scheme's operation. Such a deduction would result in a tax refund to the franchisee of up to $18,810. Out of that sum, the franchisee could then pay the balance of $10,000 that was owed.

28. Additionally, Aistrope offered to a potential investor the facility of a short-term loan agreement. This agreement in conjunction with an ``accountant's irrevocable authority to pay'' permitted the franchisee's tax agent or accountant to deduct $10,193 (inclusive of $193

ATC 4325

in stamp duty) from the tax refund received and to pay the balance of $10,000 required to obtain the franchise. The lender was Servcom Australia as trustee for the Servcom Australia Trust.

29. Included in the franchise cost of $39,500 was an indemnity fee of $675. This arose out of a further agreement the investor would be invited, by Aistrope, to enter into. The agreement was an indemnity agreement with Magica. In return for the initial payment of $675 and an annual payment of $150, the investor limited his or her liability to repay the loan of $29,500. In the franchise application form, it was stated:

``... if applicable, the Franchisee directs Allied Securities Pty Ltd to pay the money under the Loan agreement to Servcom Australia Pty Ltd.''

30. Aistrope knew that an arrangement would be set up whereby it would be claimed that the moneys would be paid into a clearing account. He knew this would be a round-robin transaction and, hence, a facade. In total, 1160 franchises were sold. In no case was the $29,5000, or any part of it, actually paid into the clearing account.

The O'Connor opinion

31. In the meantime, on 24 April 1998, Tieleman instructed solicitors to obtain a tax opinion from Mr R O'Connor QC. Tieleman knowingly provided information for the purposes of the opinion which was inaccurate to his knowledge and upon which the opinion was ultimately based. Tieleman stated in his instructions that:

``... the franchise proposal outlined in the information memorandum stands on its own as a commercial investment and the projections of the franchiser makes [ sic ] no mention of the taxation benefits so that the potential franchisee can judge the commerciality of the arrangement solely from the projected performance of the franchise business.''

32. Wharton provided further false information to the solicitors briefing Mr O'Connor in that he said ``... the indemnifier is not the same company as the lender''. He also claimed in the letter of instructions that Tye Nominees Pty Ltd was a company not associated with the Servcom group of companies. Again, that was false. Wharton also claimed that, on demand, the indemnifier would physically pay to the lender the amount of the debt. It was not in a financial position to do that and that was wholly within Wharton's knowledge.

33. Potential investors were referred, among other things, to Mr O'Connor's opinion. The opinion assumed that the situation was as outlined in Tieleman's letter dated 24 April, namely, that:

``... the loan funds (the $29,500) will be utilised by the Franchisee solely to meet their obligations under the franchise agreement and are specifically directed to the Franchiser for this purpose.''

34. Mr O'Connor stated that, on the basis of his instructions, real funds and real transactions were involved and there was no sham. The false information supplied by Wharton and Tieleman led Mr O'Connor to erroneously conclude, in his widely circulated opinion, ``... the indemnifier is a company unrelated to the franchiser and lender... the indemnity fees are calculated by the indemnifier on commercial considerations... the loans are not non- recourse''.

The marketing of the franchises and interpretation of the scheme

35. Aistrope continued to use what he knew to be an inaccurate document to persuade taxpayers to buy franchises. It was made clear by Aistrope to the sales force that only people earning above $40,000 per annum should be targeted so that they would be attracted by the tax advantage.

36. In late April or May, Wahby instructed the person in charge of marketing, Mr Rick Shenton to tell his sales staff to inform all potential franchisees that, should their claim be rejected by the Tax Department, their involvement in the scheme would be revoked. In his letter to the ATO dated 2 September 1998, Pearce stated that:

``... the promoters had not expressly or impliedly led franchisees to believe that they could exit the franchise where tax deductions were not allowable and that marketing agents were never advised or instructed to undertake to franchisees that the arrangement could be reversed.''

37. Shenton also recollected Wahby stating that:

ATC 4326

(1) he had used money from his ex-wife's family to establish the scheme;
(2) the scheme involved the sale of franchises in a telemarketing operation for the Internet provider, Servcom;
(3) franchisees would be allocated 5000 randomly selected telephone numbers;
(4) Servcom would then contact the subscribers of the selected telephone numbers with a view to selling the subscribers Internet access through Servcom;
(5) a percentage of earnings of the Internet access or Internet advertising would then be paid to the franchisee by Servcom after deduction of costs;
(6) while the franchisee owned the franchise, the business would be managed by Servcom for a fee;
(7) the cost of each franchise would be $38,000 which provided the investor with a 20-year operating licence;
(8) the $38,000 purchase price is a cost incurred in establishing the business, comprising management fees and other fees which would be fully tax deductible;
(9) the deduction would result in a considerable tax refund to a person on the top tax rate;
(10) franchise sales were to be targeted at people earning in excess of $50,000 per annum who would gain a maximum tax benefit from the scheme;
(11) each investor would be required to pay Servcom $10,000 from the proceeds of their tax refund, with the investor retaining any refund balance; and
(12) Wahby told Shenton that it was possible, but highly improbable that a franchisee would actually market and promote the product and confirmed that if there was no tax refund, no involvement would be expected of the franchisee.

38. The first round-robin was said to have taken place on 12 May 1998. On 11 May 1998, Allied Securities opened a bank account entitled ``Allied Securities Pty Ltd Servcom Australia Clearing Account'' (``the clearing account'') with the National Australia Bank in Melbourne. The signatories were Wharton, John Gillies and Sharon Smith. No Servcom office holder had access to the account. Cheques of $187,650 were issued on 12 May 1998 to Magica in respect of 278 indemnity premiums and $10.79 million to Tye Nominees. Wharton was a signatory to the Tye Nominees account.

39. On the same date, Tye Nominees issued a cheque for $14.32 million to Allied. Wharton never relinquished control of the purported ``loan funds'' of $10,891,000 and Servcom never received them.

40. On or about 15 May, Wahby told Shenton that he was going to run the business for a few years before ``gutting it''. He also said that 37.5 per cent of the business was owned by a person supplying tax losses to the business and that this person was to receive what was effectively a commission of 7.5 per cent for the tax losses. He further said that a Melbourne company would be legitimising the loan by a system of round-robin cheques, that no money would ever change hands and that the loan would be a paper transaction at arm's length to satisfy the ATO.

41. In a letter dated 20 May 1998 to Aistrope and Wahby, Tieleman distinguished between ``actual cash funds'' and the ``financed portion'' in respect of the funds received by Servcom, of which a percentage would be payable to MKT. In a letter dated 3 June 1998 to Servcom, Pearce stated that cl 3 of the franchise agreement made it clear that the services provided were ongoing business expenditure. Pearce was concerned that the information provided by Servcom to an unnamed accountant represented that the total expenditure per franchise was $17,500, although the price (if paid in advance) was shown as $34,700. Pearce queried whether Servcom needed to show him their costs, as opposed to just what services they were providing.

42. On 15 June 1998, Wharton faxed to Tieleman and Pearce a copy of a recent speech by the Commissioner of Taxation and suggested a subcontracting structure. The Commissioner noted that, in such arrangements, there was an underlying activity with the potential for profit, but the actual amount going to that activity was a small fraction of the claimed investment. Wharton's suggested solution was to consider adding a step with Servcom paying a subcontractor the majority of the costs, but retaining a profit margin on managing that activity, and that intending investors be advised

ATC 4327

that the majority of funds will be spent ``into [ sic ] the project''.

43. On 19 June, Pearce instructed his clients about what steps to take to ensure that the ATO did not regard the Servcom scheme as suspicious, in the sense that only a small fraction of the total investment would be available to be used to perform the services to the franchisee. Pearce also advised that Servcom take the franchise ``cost'' and work out what funds were required for what services as opposed to ascertaining the cost of services and deriving the cost of the franchise from that analysis. He posed the following question to Aistrope:

`` [ H]ow will you be able to show (to the ATO) that you have commenced providing any of the franchise services prior to 30 June 1998?''

44. Pearce also noted that:

`` [ T]he ATO was concerned with schemes whereby only a small fraction of the total investment was available to be used to perform the services to the franchisee. In Servcom's case, of the $38,000 in fees paid, $28,000 is financed leaving $10,000 in cash.''

45. Pearce also suggested a ``cosmetic'' subcontracting arrangement to Aistrope and Wahby in that he advised them to set up, through Wharton, subcontractors to provide services to franchisees. He indicated that this would demonstrate to investors that Servcom Australia was expending a major portion of the fees it received in providing services to franchisees.

46. On 23 June 1998, Wharton wrote to Aistrope regarding the financing arrangements and made a number of false observations. Wharton claimed that guarantees from ABC supported Allies Securities' finance facility provided by its bankers, which allowed it to initiate loans. There were no guarantees. There was no finance facility. Wharton also stated that:

``... upon completion of the Franchise Licensing arrangement under this project and draw down of facility to Franchisees, Allied Securities Pty Ltd will enhance this parcel of loans.''

47. On 24 June, the name of an account with the National Australia Bank was changed from Servcom Pty Ltd to Magica. On 26 June, John Gillies, the director of Allied Securities, a company controlled by Wharton, wrote to Servcom and indicated that loans of $29,500 each had been approved in relation to named borrowers. On the same day, Pearce repeated the advice given on 19 June and said that the cosmetic arrangement would strengthen Servcom's position against the Commissioner arguing that only a small fraction of the investment was used to perform the services.

48. On 30 June, there was a second ``round- robin''. Pursuant to the franchisees' direction to pay, Allied issued a cheque (following a reversing entry on 1 July to rectify a transposition error) of $34,839,000 payable to the clearing account. This represented 882 additional franchisees, all of who were each being lent $39,500. The balance in the Allied account on this occasion was $719,374. Two cheques were then issued from the clearing account on the same day. The first was for $595,350 which was made payable to Magica (again with 882 indemnity premium payments) and $34,238,650 to a company called National Investment and Loans Australia Pty Ltd (``NILA''). NILA had been incorporated four days earlier. One of the signatories of the cheques was Wharton. NILA then issued cheques for $54,331,573 and $1,585,200 on 30 June 1998. Once again, the loan agreement was reneged upon in that, of the ``loan funds'' of $34,839,000, Wharton had never relinquished control of them and Servcom never in fact received them. Magica then changed its registered offices. Banking records show that Magica paid back its indemnity premiums to the lender immediately they were received. In the week prior to 30 June, Wahby told Parham, one of the sales persons, that a limited number of Servcom franchises could be sold even after 30 June. On that day, Servcom sent agents' packs to franchisees' accountants.

49. On 10 July 1998, Pearce wrote to Aistrope and explained a proposal to purchase an Internet service provider through Servcom. He noted that Servcom Australia required all of the funds it had to provide the balance of the services and that funding from another party would be required. In the first two weeks of July, a number of franchise agreements were completed and backdated to 30 June. Aistrope signed them on behalf of Servcom. On 16 July, Tieleman wrote to Wahby suggesting a letter be sent to the franchisees reassuring them of the

ATC 4328

absence of round-robin financing arrangements and stating that the debt was full recourse with the indemnity option. On 19 August, Aistrope was prompted by Pearce to issue loan repayment invoices when they fell due under the short-term loan agreement.

50. On 2 September, Pearce sent a copy of a fax he intended to send to the ATO to Wharton for his approval. It contained, to the knowledge of both Pearce and Wharton, a number of inaccurate and false statements. In particular, the assertion that ``the lender has advised us that actual funds were physically passed to the Franchiser by virtue of the direction to pay and that the loan funds remain under the control of the franchiser''. It was further asserted that no round-robin of cheques occurred and that the lender and indemnifier were non-associated third parties. On 3 September, Wharton approved the letter to the ATO with some minor modifications. Pearce sent the letter dated 3 September 1998 to the ATO.

51. On 16 November, Gillies, acting on behalf of Wharton, confirmed to a number of franchisees that their request for finance has been approved and the principal sum was advanced to the Servcom Australia Clearing Account and disbursed pursuant to their authority and direction.

Further particulars of the conspiracy and the prosecution case

52. Further particulars of the overt acts were provided in a document dated 24 February 2004 which substantially repeated the earlier document and, by way of introduction, alleged that:

``Between 9 February 1998 and about 30 October 1998 there were numerous communications amongst the accused Pearce, Tieleman, Wharton and Aistrope and between each of the accused and the alleged co-conspirator Wahby. It is the Crown case that each such communication may properly be described as an overt act of the conspiracy charge. The Crown relies, by way of particulars, on the content of the statement of the accused Aistrope as providing an almost continuous catalogue of overt acts and does not attempt to repeat them all herein.''

53. The Crown also provided particulars of the indictment dated 3 March 2004 which made it clear that the offence charged was conspiracy contrary to s 86(1) of the Crimes Act 1914 (Cth) to commit an offence of defrauding the Commonwealth, contrary to s 29D of the Act. The conspiracy alleged was to defraud the Commonwealth by depriving the Commonwealth of moneys to be paid by the ATO as tax refunds to franchisee participants in what became the ``Servcom scheme'' (``the scheme'') and/or by putting such moneys at risk and/or by prejudicially affecting the Commonwealth in relation to its lawful rights concerning the said moneys.

54. The prosecution case was that the parties to the conspiracy agreed that the defrauding would be achieved by procuring taxpayers to enter into franchise agreements and, pursuant to the scheme (innocently), to file income tax returns containing false claims for deductible expenditure, totalling (as it transpired) $38,000 per franchise, purportedly incurred in the 1998 financial year in the discharge of genuine obligations under a business franchise agreement and by those means to trigger the ATO self-assessment system to issue tax refunds of up to $18,810 per franchise, $10,193 of which the taxpayer recipients were then to remit to the franchisor under the scheme. The parties further agreed that the taxpayers were to be given only such false or misleading information about the scheme (by positive assertion and/or by concealment of material facts) as would cause the taxpayers to deceive the ATO into accepting the false claims as properly founded and allowable claims for expenditure actually incurred by the taxpayer in the 1998 financial year, in the discharge of genuine obligations under a business franchise agreement and thereby incurred by the taxpayer in gaining assessable income, or necessarily incurred in carrying on the franchise business for the purpose of gaining or producing such income.

55. It was alleged that to that end, the conspirators agreed to provide the taxpayer franchisees so procured with false or misleading information designed at once:

`` • to sell the scheme (by convincing them and their advisers that the scheme was lawful and effective), and

• to equip and induce the said franchisees to maintain the said deception in the face of scrutiny from the ATO.''

ATC 4329

56. Further, the conspirators were alleged to have agreed to structure the scheme so that PAYE taxpayers who had earned sufficient taxed income during the 1998 financial year (about $40,000 or more) to generate a refund from the ATO of more than $10,193 by participating in the Servcom scheme as franchisees, were to be procured to make the following false representations:

`` • That claims in their income-tax returns for deductible expenditure in relation to the Servcom scheme totalling $38,000 per franchise were well-founded in fact and law and should properly cause the ATO to allow (and not to disallow) them in full and to refund tax accordingly.

• That the deductions claimed were in respect of funds that flowed in their entirety to the franchisor to be used by the franchisor solely to perform its obligations under the franchise agreement during the 1998 and 1999 financial years.

• That information contained in documents supplied or to be made available to each such taxpayer, including but not limited to:

(a) an Information Memorandum;

(b) an opinion from Robert O'Connor QC; and

(c) an opinion letter from McKessar Tieleman, Chartered Accountants;

was accurate and provided a reliable and proper basis for the ATO to determine whether or not the claim should be disallowed.''

57. In essence, the prosecution case was that the said representations to be made by the franchisee to the Commissioner under the scheme were, to the knowledge of the appellants, false or misleading in that:

`` [ 1] $29,500 of the $38,000 to be so claimed (per franchise) was based on ostensible obligations of the franchisee taxpayers under an agreement for a loan of $29,000 that was fictitious and none of the said $29,500 was to be available to the franchisor in the 1998 or 1999 financial years, or at all, to enable the franchisor to discharge its purported obligations under the franchise agreement.

[ 2] None of the balance of the $38,000 (per franchise) to be claimed was genuinely to be incurred in the 1998 financial year (or at all) in that the purported obligations of the taxpayer franchisees were not ones to which they were to be definitively committed in the 1998 financial year but were to be conditional upon their receipt (necessarily after 30 June 1998) of a tax refund of at least $10,193 (being the amount they were required to pass on to the franchisor in full discharge of their ostensible financial obligations and risks under the scheme).

[ 3] The capacity of the franchisor to honour its purported obligations under the franchise agreement and thereby to generate assessable income as represented in the Information Memorandum was non-existent, speculative and unfunded as at 30 June 1998 and was reliant upon such funding as could be extracted from the ATO after 30 June 1998 through the operation of the scheme pursuant to the conspiracy charge. There was no 'business' in existence as at 30 June 1998.

[ 4] The $10,193 component of the tax refunds to be generated under the scheme was to be applied by the franchisor to meet expenses inherent in or incidental to the scheme other than and in priority to those arising from its obligations under or disclosed in the franchise agreement (and other than those disclosed, adverted to or implied in the Information Memorandum or otherwise revealed to the franchisees), including substantial commissions to agents for selling the scheme to franchisees (about $2.5 million), fees to the accused Wharton for providing the franchisor with protection from liability to income-tax (depending on projected sales of between 1000 and 1430 franchises) of between $15 million and $20.55 million on paper income generated notionally by the scheme of between $38 million and $54.14 million (at the rate of 7 per cent of the income protected but apparently capped by later agreement at $2.5 million) and fees and performance related commissions to the accused Pearce and Tieleman (up to about $599,000).

[ 5] Thus, on a projected sales range of between 1000 and 1430 franchises, instead of the deductions to be claimed under the scheme as represented in the Information Memorandum producing a cash-flow to the franchisor of between $38 million and

ATC 4330
$54.14 million, whether or not the said claims for deductions were allowed , as the accused were aware, the franchisor could expect to have available to discharge its obligations under the franchise agreement for the 1998 and 1999 financial years a net cash-flow (sourced from the ATO) of between $5.59 million and $8.96 million, but only if the tax refunds were successfully obtained from the ATO in each case.''

58. The Crown contended that, to the knowledge of each accused, the information in the documents supplied to each franchisee did not provide a true and proper basis for the ATO to determine whether or not the claimed deductions should be disallowed. Rather, they were designed by the accused to conceal the true nature of the scheme beneath a gloss of propriety in order prejudicially to affect the rights of the Commonwealth in relation to tax refund moneys paid by or claimed from the ATO under the scheme.

59. The Crown case was that each of accused intended that funds belonging to the Commonwealth represented by the refunds claimed under the scheme were to be (and were) put at risk and the rights of the Commonwealth concerning those refunds that would automatically be triggered under the self- assessment system by the lodgement of tax returns containing claims for deductible expenditure, were to be (and were) prejudiced at two levels:

`` [ 1] By causing refunds to be made in response to the claims and thereby placing Commonwealth funds outside the control of the ATO.

[ 2] By ensuring that, in the event of scrutiny by the ATO, the franchisee taxpayers revealed in response only the false or misleading facts with which they had been fed under the scheme.''

60. It was also stated that the Crown could not provide full particulars of what false representations may have been made by individual taxpayers as a result of the agreement beyond saying that all of those taxpayers who were induced to lodge tax returns containing claims for deductions in relation to the scheme falsely claimed, by implication, that there was a proper basis, in fact and law, for such claims to be allowed by the ATO and not to be disallowed.

61. The Crown also alleged that the conspirators agreed to procure any taxpayer with a taxable income of about $40,000 or more in the 1998 financial year who could be induced to purchase a Servcom franchise, and participate in the scheme up to a maximum of 1430. The taxpayers so procured were all those that purchased Servcom franchises and submitted claims for deductions in their 1998 income tax returns. The above particulars were dated 3 March 2004 and duly served. They essentially maintained the allegation of a conspiracy to defraud by agreeing to cause taxpayers to make false representations to the ATO. The particulars also incorporated a reference to a report by one Eric Barr, but, after objection by the appellants, Mr Barr was not called at the trial and his report was not tendered in evidence.

62. It may be accepted that the Crown was constrained by the particulars provided. As White AUJ said in
Henry Walker Contracting Pty Ltd v Farnworth [ 2002] WASCA 167 at [ 15] a person:

``... cannot be convicted on the basis of evidence outside the defined particulars...''

See also
Johnson v Miller (1937) 59 CLR 467 at 497 per Dixon J; and
Interstruct Pty Ltd v Wakelam (1990) 3 WAR 100 at 118 where Pidgeon J said, in the context of a prosecution under s 19 of the Occupational Safety and Health Act 1984 (WA) that:

``There is only the one offence of failing to provide the defined environment. However, one would expect an offence of this nature to be particularised and if particularised that is the offence the defendant is required to answer, and it would not be open to introduce evidence beyond particulars without amendment or to convict the defendant of an offence where the omissions to establish the offence are clearly outside the defined particulars.''

His Honour enlarged on this point at 120, as follows:

``In prosecutions of this nature the complainant is bound by its pleadings...''

63. In Interstruct Pty Ltd v Wakelam ( supra ) it was held that the particulars failed to identify the essential factual ingredients of the actual offence charged.

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The case for Pearce and Tieleman

64. Senior Counsel for the appellants Pearce and Tieleman described the Servcom scheme as an invitation to members of the public to invest in the purchase of a franchise of the nature described in the Information Memorandum. The franchise enabled an applicant to acquire one or more Servcom franchises under a franchise agreement. The Servcom franchise comprised a block of 5000 telephone listings in an exclusive territory, randomly spread in each State of Australia. Servcom was the owner of the intellectual property and granted Servcom Australia as trustee for the Servcom Australia Trust (the franchisor) an exclusive licence to market the Servcom services in Australia. Servcom Australia as franchisor granted a licence to each investor as the franchisee to acquire an exclusive Servcom franchise. The franchisee operated the business of selling and marketing Internet and advertising services within the exclusive territory. The question whether this would constitute a relevant business for the purpose of the Corporations Regulations , reg 1.02 and reg 7.102 was considered in
Madison Pacific Property Management Pty Ltd & Ors v ASIC (1999) 17 ACLC 550 ; (1999) 89 FCR 263 . As previously described, the cost of a franchise, if the total package was taken, was $39,500, but structured in such a way that with a loan of $29,500 the net cash outlay was $10,000. The application procedure required the investor to pay a full franchise cost of $38,825, but if the fully indemnified loan option was preferred, a payment of $10,000 or a payment of $2,000 together with a short-term monthly loan agreement for the balance of $8,000 was available. So far as the tax consequences were concerned, the initial grant and establishment fee of $1500 was said to be not deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (``the ITAA '') which came into force on 1 July 1997. The amount was not deductible because it was of a capital nature.

65. The initial franchise fee of $34,700 was said to be deductible under s 8-1 of the ITAA for the franchisee, being incurred to obtain the franchisor's services as long as none of the services were of a capital nature. The amount was said to be deductible under both limbs of s 8-1. As the fees were paid for services to be provided within 13 months following payment, s 82KZM of the ITAA 1997 did not limit or deny deductibility. The training fee of $625 was said to be deductible under s 8-1 of the ITAA for the franchisee, as was the annual approved sales agent's fee of 15 per cent of gross annual revenue. The indemnity fee of $625 in the first year and $150 each subsequent year was a capital outlay and not deductible. Interest payable on the fee, however, was said to be deductible under s 8-1 of the ITAA . The proceeds receivable under the indemnity agreement were of a capital nature.

66. As the loan was for more than five years, however, and the indemnity fee was expenditure incurred for borrowing money, the indemnity fee was said to be deductible under s 25-25 of the ITAA . In answer to the question whether the fact that the franchisee obtained loan finance to fund the payment of the expenses altered the deductibility of the expenses, it was said that the question was whether the taxpayer incurred the outgoing rather than how he financed it:
FC of T v Lau 84 ATC 4929 ; (1984) 6 FCR 202 .

67. In answer to the question whether Pt IVA or any other anti-avoidance provision would operate to deny deductibility of any or all of the expenses, the answer provided was that a Department ruling TR 97-217 described the circumstances in which Pt IVA may apply to afforestation schemes. It was contended that the franchise fees were not excessive within the meaning of par 115, par 116 or par 150 of Taxation Ruling TR 97/D17 because, so it was said, the fees were commercially reasonable and paid solely for the purpose of obtaining the franchisor's services.

The controversy about the basis of the Crown opening of the case

68. Counsel for the Crown took more than two days to open the case. There was controversy later in the trial regarding the precise basis upon which the case had been opened. Counsel for Pearce and Tieleman submitted that the case was opened consistently with the particulars, namely, that the appellants were parties to a conspiracy to defraud the Commonwealth by causing taxpayers to make false representations to the ATO.

69. As outlined by Senior Counsel for the prosecution at the trial, the essence of the Crown case was that the three appellants, Pearce, Tieleman and Wharton, assisted by Wahby and Aistrope:

ATC 4332

``... agreed dishonestly to exploit the self- assessment taxation system of this country on a massive scale to obtain millions of dollars of public funds to which they were not entitled.

The plan was simple in concept. It was designed by the three accused in the early part of 1998 to persuade large numbers of ordinary members of the public who happen to be relatively higher pay as you earn taxpayers during the 1998 financial year to make claims on the Australian Taxation Office for tax refunds, the greater part of which were to be immediately channelled back to the promoters of the scheme and ultimately to be distributed between the promoters and the three accused.

The scheme had the capacity in the space of a few months after 30 June 1998 to net the conspirators more than 14 and a half million dollars in benefits to themselves and it had the capacity to cause losses to the Commonwealth of more than $26,800,000. Each of the three accused is a qualified and apparently experienced practising accountant. Each of them specialises in taxation matters. The accused Pearce and Tieleman practised within the Perth firm of chartered accountants called McKesser Tieleman. The accused Wharton practised under the title of Wharton Partners... accountants and advisers from offices in the inner Melbourne suburb of Toorak.''

70. It was contended by the Crown that each of the three appellants had Aistrope and Wahby as their co-conspirators. Neither Aistrope nor Wahby were taxation experts. They came from a business background and they enlisted the expertise of the three appellants effectively to create a means of extracting money from the ATO.

71. Aistrope and Wahby were dependent on the three appellants for that task. The Crown case was that the three appellants each willingly obliged them to create a scheme that had the outward appearance of legality, but was designed to conceal the core of dishonesty and deceit. The three appellants were motivated by the promise of substantial reward. The Crown alleged that Pearce and Tieleman stood potentially to gain more than $500,000 if the scheme had run its course. Mr Wharton stood to gain well in excess of $2.5 million.

72. The Crown opened the case on the basis that the evidence would show that, between February 1998 and about October 1998, when Pearce and Tieleman terminated their part in the conspiracy, all three of the appellants played their part in putting the agreement into effect. It was alleged that each played vital roles in both constructing the scheme and promoting the successful sale and implementation of the scheme. In particular, the Crown alleged that each of the appellants contributed to crafting and making positive false or misleading assertions of facts. They each contributed to the careful concealment of material facts and to the resultant deceit practised, first, on the taxpayers who were targeted by the scheme and, secondly, on the ATO, as the scheme was designed to achieve the object of defrauding the Commonwealth on a massive scale.

73. The case was opened on the basis that, in the period between 15 April 1998 and about 30 June 1998, out of a possible maximum of 1430 sales, 1160 sales were made at a ``purported cost'' of $39,500 per unit sold so that the process was successful.

74. The jury was told that if the ATO had not got wind of the scheme in early July 1998, the sales were likely to have resulted in claims for taxation deductions being made during July and August of 1998 at the rate of $38,000 per sale. If those claims had been made, the result would likely have been that the ATO would have been induced to pay tax refunds of up to $18,430 per sale. That calculation was made on the basis that the scheme was targeted on taxpayers in the highest tax bracket which would entitle them to a deduction of 48.15 cents in the dollar claimed, which would result in a refund of approximately $18,430 to each taxpayer participating in the scheme. The potential loss of revenue to the Commonwealth was calculated in the sum of $21,378,800.

75. The scheme required each taxpayer to channel back to the promoters of the scheme a sum of $10,193. The $193 was a payment in respect of stamp duty, so that the net amount channelled back to the promoters of the scheme was $10,000. The individual taxpayers were only required to contribute $150 from their own pockets, which was called an ``administration fee''. The total amount invested by the taxpayers was $174,000 which was to be compared with the sum of approximately $11.8 million that would be obtained from the ATO.

ATC 4333

The grand total potential return from the conspiracy on the basis of the sales actually made was $11,997,880. The Crown case was also that, as between Aistrope and Wahby, the promoters of the scheme and the three appellants, the agreement was that the appellants would be paid success fees or commissions in respect of the operation of the scheme. Based on the agreed formula, Pearce and Tieleman would have been entitled to a success fee on top of their ordinary time-based fees for the services provided to Aistrope and Wahby. The amount of the success fee was $371,250.

76. Under the originally agreed formula, Aistrope and Wahby would have been entitled to approximately $2.8 million or $3 million, but, as a result of negotiations with the promoters, Aistrope and Wahby agreed to reduce their fee to $2.5 million.

77. In addition to the fees that Aistrope and Wahby would have had to pay out of the $11.8 million that they obtained from the ATO, Aistrope and Wahby would also have been liable for the commissions payable to the team of sales agents who had been engaged to sell the scheme.

78. In fact, a team of sales agents was engaged to sell the scheme, not only in Perth, but also in Kalgoorlie and other mining towns where large numbers of relatively high income PAYE wage-earners were employed who, during the course of the financial year, would have had significant amounts deducted on account of tax and would be potential participants in the scheme. In the result, Aistrope and Wahby were liable to pay sales commissions of a total of $2,182,000, which would have been funded by the ATO.

79. Aistrope and Wahby would also have been liable for the costs of setting up a business, but the fact was they did not have the capital to do that. In this context, the Crown case was that the scheme was designed to enable them to obtain the capital to go into the Internet business with a view to the cost of setting up that business being met by the funds derived substantially from the ATO. Such costs had been estimated by the promoters at between $1.5 million and $2 million.

80. The Crown also contended that none of those costs or expenses had anything to do directly with the actual provision of services to the taxpayers. While the setting-up of the business establishment, buying equipment, etcetera, provided the means or the structure from which those services could emanate, none of those items of expenditure had anything to do with the actual operation of the business and the provision of the services that the taxpayers had effectively purchased with the $38,000 component in the amount which they had been charged for the franchise. The Crown estimated on the basis of ``rough calculations'' that, had the ATO not intervened, Aistrope and Wahby would have been left with about $5 million from which they were obliged to provide services for which the 1160 taxpayers had produced claims for deductible expenditure totalling $44.08 million.

81. Counsel for the Crown invited the jury to compare the figures of $5 million as against approximately $44 million on a per unit sale basis that the taxpayer had made a claim for allegedly deductible expenditure, in respect of services to be provided to them under the scheme and each deduction claimed for those services was $38,000 per unit. On the other hand, dividing $5 million by 1160, the promoters were left with no more than about $4300 to provide for the services for which the taxpayers were claiming to have incurred tax- deductible expenditure in obligations to pay for such services. In other words, the role of the taxpayers was to claim deductions for expenditure incurred in the sum of $38,000 to purchase services that were to be provided during the year ended 30 June 1998, but the promoters only had some $4300 per unit to provide those services.

82. It was calculated that the potential payout by the ATO triggered by the claims totalling $44 million was approximately $21,378 for each taxpayer. Each of the taxpayers stood to receive a refund of $18,430 from which they were required to pay the promoters $10,193. Consequently, the taxpayers stood to make a windfall gain of about $8,000 each. All they had to do to obtain that sum was to sign a few documents, put up the initial $150 as an administration fee and later put in a tax return in which they marked the appropriate box, ``$38,000 deduction''. They would receive the deduction whether or not the business that was supposed to be built with the funds ever got off the ground.

83. As it transpired, the ATO was alerted to the scheme in early July 1998 and was able to

ATC 4334

put a stop to the issue of most of the tax refund cheques that would otherwise have been sent out as a result of the operation of the scheme. At the time of the stoppage, deduction cheques totalling some $1,599,540 had been paid to taxpayers.

84. In the course of the opening, the Crown case was that the three appellants joined in a criminal conspiratorial agreement to defraud the Commonwealth. In other words, the Crown case was that the appellants joined in an agreement with an intent to prejudice the interests of the Commonwealth by dishonest means. The interests of the Commonwealth that were to be prejudiced were those involved in the protection of the national revenue. In particular, it was put to the jury:

``The dishonest means to be employed with intent to cause that prejudice was the use of statements that the Crown says were known to be untrue. Those knowingly untrue statements, the Crown says, were directed in the first instance to the taxpayers targeted under the scheme and then through those taxpayers to the [ ATO].''

85. As the ATO was an office of the Commonwealth, the charge involved defrauding the Commonwealth of taxation revenue to which it was otherwise entitled.

86. Significantly, it was specifically put to the jury in opening that, in the event that the ATO sought to investigate the basis for the claimed deductions, the untrue facts were designed to induce the taxpayers to rely on those untrue facts to deceive the ATO regarding the true factual basis for the deductions claimed. Further, the prejudice that was intended by such dishonest means involved prejudicially affecting the ability of the ATO to protect the property of the Commonwealth and was designed to prejudicially affect that ability by causing claims to be made by taxpayers for deductions based on false or untrue facts. As it was also put by counsel for the Crown in opening:

``They were designed to prejudicially affect the [ ATO's] ability to protect the Commonwealth by putting at risk the ability of the [ ATO] properly to determine whether or not the claimed deductions should be disallowed, that is that the untrue facts were designed to deprive the [ ATO] of a true factual basis for making that determination.''

87. In short, the Crown case was that by their conduct the appellants caused the relevant taxpayers to provide, albeit innocently, false representations to the ATO in support of their claims for tax deductions in respect of the relevant expenditure. Further, the prejudice that was intended was the putting at risk of the ability of the ATO properly to take action to recover refunds that were paid out again to be achieved by those standing to benefit by depriving the ATO of a true factual basis for taking effective action. In concluding that part of the opening, counsel for the Crown said to the jury:

``Let me make the Crown position absolutely clear. The prosecution is not about proving that the accused have misunderstood or misapplied taxation law. It is about proving that each of the accused knowingly and quite deliberately joined in an agreement to defraud the Commonwealth in the ways that I have outlined.''

88. I have endeavoured to summarise the key points of the Crown opening in the context of the appeal.

Opening remarks by counsel for the appellants at the trial

89. At the conclusion of the Crown opening, counsel for each of the appellants was given leave to make some opening remarks. It is apparent from those remarks that counsel for the accused apprehended that the Crown case alleged a conspiracy to use dishonest means by causing third parties, namely, the participating taxpayers to make statements to the ATO that the parties to the conspiracy knew to be false. Counsel for the appellants Pearce and Tieleman said in response to the opening that:

``What is illegal and what the Crown says happened in this case is the entering into an agreement to cause somebody else to make a statement that the parties to the agreement knew to be false. That's the dishonesty. What you must focus upon, I would suggest and hope you will, is the dishonest aspect of the case. Look for an agreement to cause people to say things that the parties to the agreement knew to false.

Because that's the focus it gets me back to my first general point. You have to look carefully at what the state of knowledge of each of the accused was because you will have to [ make a] decision whether they

ATC 4335
knew, each of them knew, a particular statement would be false if made by a taxpayer.''

90. It was maintained on behalf of Mr Tieleman that he was focused upon what ought to be done to make the structure effective so that the tax deduction was allowable, which was inconsistent with an agreement to deceive the Commissioner. It was also put on behalf of Mr Tieleman that he was endeavouring to make sure that the factual basis was correct so that the tax investigation, when it came, would lead to the conclusion that the claims were deductible. Counsel for Mr Tieleman submitted at the trial that this stance was wholly inconsistent with him having agreed with others to cause false statements to be made to the ATO by the taxpayers involved. The context was one in which an investigation by the ATO was inevitable.

91. It was stressed that the case depended very much on the drawing of inferences from the evidence. Counsel submitted that the fact that a big deduction was claimed by a taxpayer did not mean that lies were told, any more than that the services of Servcom, as franchisor, were sold a lot above cost was relevant to the question whether lies were told. The jury were invited to look carefully at when the business in which the taxpayers were involved started, as well as the evidence about the loans.

92. Mr Percy QC told the jury that Mr Pearce accepted that he was an accountant in the firm of McKessar Tieleman as an employee until 30 June 1998. Mr Percy was at pains to point out that in relation to MKT Consulting Pty Ltd (``MKT Consulting'') the shareholders were Pearce and Tieleman which might give the mistaken impression that Pearce was always one of the beneficiaries of that company. His case was that he only became a shareholder of that company in 1999 after the events the subject of the conspiracy charge had occurred.

93. The case for Pearce was that he was not at the meeting on 9 February 1998. He subsequently became aware that Tieleman had been approached by Aistrope and Wahby to discuss their proposals for a tax-effective capital-raising using a licence or franchise, in the same way as had been used by a firm called Satcom previously in the previous year. He worked on the new scheme under the supervision of Tieleman. His case was that he and Tieleman had very little original input. His case was that from the time the firm was approached, Wahby and Aistrope had a structure that they wanted followed. This was the one which was ultimately adopted, subject to some ``fine-tuning'' on advice from Aistrope and Wahby's legal firm, Garton Smith Owen. Aistrope and Wahby also had input from a firm of legal taxation specialists, namely Wilson and Atkinson and from Wharton himself. Pearce did not prepare any of the legal documents. That was done by Garton Smith Owen on instruction from Wahby and Aistrope.

94. Pearce's position was that Tieleman referred Aistrope and Wahby to Wharton, who was known as a finance provider for tax- effective arrangements. As the preparation of the scheme progressed, Pearce understood that Wharton, as set out in his brochure, had the capacity through the ABC Group and Allied Finance to make more than $250 million available. Pearce's position was that he always understood that the proceeds of the long-term loans referred to in the arrangement were to be held to the credit of Servcom in what was called a ``securitised deposit''.

95. Pearce prepared the brief to Mr O'Connor QC, a tax specialist. In doing so he acted on information provided by Aistrope, Wahby and Wharton. His case was that neither he nor Tieleman had any reason to investigate the accuracy of any of the information supplied to them, and they acted in good faith.

96. Pearce denied that any of his actions or his intention in relation to Servcom were dishonest. His case was that he and Tieleman went to great lengths to ensure that the Servcom arrangements were entirely legitimate. The context was that it was inevitable that the arrangements would be investigated by the ATO and Pearce's position was that he structured them so that they would stand that test.

97. In particular, he denied that he deliberately misled Mr O'Connor or was part of any criminal agreement to defraud the Commonwealth or to prejudice the ATO. He said he had every expectation that Wharton, who was in charge of the project, was in a position to effect the necessary loans and indemnities at the appropriate time and would do so. Pearce's case was that his actions throughout were beyond reproach, that the Servcom project complied with the requirements of the law and would be effective

ATC 4336

in providing for them the possibility of sharing in an Internet business which could produce results for many years to come, as well as producing a legitimate tax-effective investment for those involved.

98. Counsel for Mr Wharton appeared to adopt the submissions of Mr Martin QC and Mr Percy QC. His position was that, while the scheme was complicated, it was lawful.

Grounds of appeal

99. As amended on 18 October 2004, ground 1 in Pearce's appeal was that:

``1. The trial judge erred in directing the jury that it was open to find, beyond a reasonable doubt, that the Appellant was guilty having regard to the whole of the evidence, when he should have directed the jury that the evidence of the Crown taken at its highest, was incapable of establishing the guilt of the Appellant beyond a reasonable doubt.''

100. The particulars of that ground were that there was no evidence capable of establishing beyond a reasonable doubt:

``(a) An agreement between Pearce and any other alleged conspirator to cause any taxpayer to make any false statement to the Australian Taxation Office (`ATO');

(b) That claims by taxpayers for a deduction in respect of franchise service fees were not allowable deductions under the provisions of the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (Cth) (the ITAA);

(c) That the appellant and another alleged conspirator with whom he had agreed each knew that claims by taxpayers for the deduction of franchise service fees were not allowable deductions pursuant to the provisions of the ITAA;

(d) That the appellant and another alleged conspirator each knew and intended and agreed that taxpayers would make any particular representational statement to the ATO other than the claim for the deduction of franchise service fees;

(e) That the appellant and another alleged conspirator each knew and intended and agreed that any particular statement or representation to be made by taxpayers to the ATO would be false when made;

(f) That any particular false statement or representation to be made by taxpayers to the ATO pursuant to an agreement between the appellant and another alleged conspirator would cause the ATO to take some action which it would not otherwise have taken, or to fail to take some action which it would otherwise have taken, which act or omission would imperil the legal rights and financial interests of the Commonwealth of Australia;

(g) That the appellant and another alleged conspirator with whom he had agreed each knew and intended that any particular false statement or representation to be made by taxpayers to the ATO pursuant to their agreement would cause the ATO to take some action which it would not otherwise have taken, or fail to take some action which it would otherwise have taken, which act or omission would imperil the financial interests of the Commonwealth.

B. The Crown case, at its highest, was only capable of establishing beyond a reasonable doubt a failure to disclose to taxpayers and to the ATO the full terms of the arrangement between the lender and the franchisor for the disbursement of funds to be loaned to franchisees to enable them to discharge their obligations to the franchisor, which failure was incapable, at law, of establishing the offence charged, having regard to, inter alia ,

(a) The fact that the Crown case was particularised and opened on the basis of an agreement to cause false statements or representations to be made by taxpayers, not of an agreement to cause taxpayers to make disclosures;

(b) The fact that a charge brought on the basis of an agreement to cause taxpayers to fail to make disclosure would not, even if it had been brought, disclose an offence known to the law, given the lack of any obligation to make disclosure (other than disclosure of assessable income) under the ITAA;

(c) The fact that the terms of the arrangement between the lender and the franchisor for the disbursement of the funds to be loaned to franchisees to enable them to discharge their obligations to the franchisor were irrelevant to the deductibility of the franchise service fees under the ITAA; and

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(d) The failure of the Crown to adduce any evidence capable of establishing beyond a reasonable doubt that the appellant and another alleged conspirator with whom he agreed knew that terms of the arrangement between the lender and the franchisor for the disbursement of the funds to be loaned to franchisees to enable them to discharge their obligations to the franchisor were relevant to the deductibility of the franchise service fees under the ITAA.''

101. Tieleman's and Wharton's grounds 1-3 and 7-12 were originally the same, as in the case of Pearce. Pearce and Tieleman subsequently amended their grounds of appeal on 25 November 2004 with the result that the grounds of all three appellants 1-15 were identical. The only remaining differences in the grounds were that Wharton did not adopt Pearce and Wharton's ground 16 which contended that his sentence was excessive. Grounds 17 and 18 correspond with Wharton's grounds 16 and 17.

102. Ground 12 was that:

``The verdict of the jury should be quashed on the ground that it is unsafe and unsatisfactory, because of the lack of evidence capable of establishing beyond a reasonable doubt each or any of the issues referred to in grounds 2, 3, 7-11 above, each of which had to be established before the jury could properly convict the appellant.''

103. Ground 2 contended, in essence, that the learned Judge failed to direct the jury adequately or at all that they could not convict the appellant unless satisfied beyond reasonable doubt that there was an agreement between the relevant appellant and another alleged conspirator to cause a false statement or representation to the ATO, and failed to direct them that they must be satisfied what the statement or representation was and that it was in fact made.

104. Ground 3 contended that the trial Judge erred in failing to direct the jury that in order to convict the appellants they had to be satisfied beyond reasonable doubt that the claimed deductions were not allowable, but erroneously directed the jury that it was sufficient if they were satisfied that there was a risk that the financial interests of the Commonwealth were imperilled pursuant to the alleged agreement, when, if the deductions were allowable, there could have been no such risk and no unlawful conspiracy to defraud the Commonwealth.

105. Ground 3 contended that:

``The trial judge erred in failing to direct the jury that in order to convict the Appellant they must be satisfied beyond a reasonable doubt that claims by taxpayers for the deduction of franchise service fees were not allowable deductions under the provisions of the ITAA, but instead erroneously directed the jury that it was not necessary that they make such a finding but rather that it was sufficient if they were satisfied that there was a risk that the financial interests of the Commonwealth were imperilled pursuant to the alleged agreement, when if the deductions were in fact and law allowable under the ITAA (and they either were or they weren't), there could not have been any such risk, and therefore no unlawful conspiracy to defraud the Commonwealth.''

106. Ground 4 was that:

``The trial judge erred in failing to direct the jury that on the evidence adduced they should conclude that the claims for the deduction of franchise service fees were allowable deductions pursuant to s 8-1 of the ITAA (1997).''

107. Ground 5 was that:

``The trial judge erred in failing to direct the jury that in assessing the dominant purpose to be ascribed to a particular participant in a scheme coming within s 177D of the ITAA having regard to the matters specified therein, they should have regard to and evaluate the other possible purposes of any such participant in order to objectively assess which was the dominant purpose.''

108. Ground 6 was that:

``The trial judge erred in failing to direct the jury as to the proper meaning and application of s 177D of the ITAA to the facts they might find established by the evidence, and in particular failed to direct the jury adequately or at all as to the meaning and application of the provisions of that section concerning the difference between the form and substance of the scheme, and in that context failed to direct them that there was no evidence from which they could be satisfied that any of the agreements in evidence before them were a sham (in the legal sense of not having been

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intended by the parties to create the rights and obligations specified therein) and in so doing failed to correct the Crown opening in which it was asserted that the loan agreement between lender and franchisee was a sham, and that it was unenforceable at law, when there was no evidence capable of sustaining either conclusion.''

109. Ground 7 contended that:

``The Trial Judge erred in failing to direct to the jury that in order to convict the jury would have to be satisfied beyond reasonable doubt that the Federal Commissioner of Taxation would have exercised the powers conferred on him by s 177F of the ITAA 1936, and failed to direct the jury as to the evidence, or more particularly the complete lack of evidence relating to that issue.''

110. Ground 8 was that:

``The trial judge erred in failing to direct the jury that in order to convict they must be satisfied beyond a reasonable doubt that the Appellant and another alleged conspirator with whom he had agreed each knew that claims by taxpayers for the deduction of franchise fees were not allowable deductions pursuant to the provisions of the ITAA, and failed to provide any or any adequate direction as to the evidence relating to that issue (or more particularly the lack of any evidence capable of supporting such a finding and the overwhelming evidence to the contrary).''

111. Ground 9 was that:

``The trial judge erred in failing to direct the jury that in order to convict they must be satisfied beyond a reasonable doubt that the Appellant and another alleged conspirator with whom he had agreed, each knew and intended and agreed that the statement or representation which they had found were to be made by taxpayers to the ATO would be false when made, and failed to give any or any adequate direction as to the evidence (or more particularly the complete lack of any evidence) on that issue.''

112. Ground 10 was that:

``The trial judge erred in failing to direct the jury that in order to convict they must be satisfied beyond a reasonable doubt that the false statement or representation that they were satisfied was to be made by taxpayers to the ATO pursuant to an agreement between the Appellant and another alleged conspirator would cause the ATO to take some action which it would not otherwise have taken, or fail to take some action which it would otherwise have taken, and that such act or omission would imperil the financial interests of the Commonwealth of Australia, and failed to give any direction as to the evidence (or more particularly the complete lack of any evidence) on that Issue.''

113. Ground 11 was that:

``The trial judge erred in failing to direct the jury that in order to convict they must be satisfied beyond a reasonable doubt that the Appellant and another alleged conspirator with whom he had agreed each knew and intended that that false statement or representation which the jury had found was to be made by taxpayers to the ATO pursuant to their agreement would cause the ATO to take some action which it would not otherwise have taken, or to fail to take some action it would otherwise have taken, which act or omission would imperil the financial interests of the Commonwealth of Australia, and failed to give any direction as to the evidence on that issue (or more particularly the complete lack of any evidence capable of sustaining such a finding, and the overwhelming evidence to the contrary).''

114. The appellants contend that the Crown case was limited to that which was opened, namely, that the dishonest means relied upon by the Crown were causing the investors to make false statements to the ATO. Further, it was also contended that no false statements of the kind stated in the opening were proved to have been made. The basis for this contention was that, under the current system of self-assessment by taxpayers a claim for a deduction was made and is either accepted or disallowed by the Commissioner. There was no false representation made. Consequently, if a deduction was allowed as claimed, there was no consequence. The mere making of the claim had no consequence. If the claim was disallowed, the onus was on the taxpayer to establish that the deduction should have been allowed.

115. In my opinion, the Crown was not constrained by the particulars in the way the appellants contend, whether in the context of the indictment or the particulars provided at the

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opening of the Crown case at the trial. On the basis of the particulars provided and the Crown opening, it was clear that the dishonest means relied upon by the Crown was the making by or on behalf of the appellants of untrue and misleading statements to taxpayers with the intention of causing or persuading them to purchase a franchise in the belief that the payment of $38,000 for the franchise would enable the franchisor to provide the contracted services to the franchisee taxpayer to carry on the franchise business and so entitle the franchisee to claim the relevant tax deduction.

116. It was clearly represented, at least by implication from the literature provided to those who became franchisees, that the $39,500 which they paid would be received by the franchisor and expended within the ensuing period of 13 months so as to enable them to claim the nominated tax deduction of $38,000 in respect of the tax year ended 30 June 1998.

117. At the same time, the appellants were clearly aware that only some $10,393 or thereabouts would be available to Servcom as franchisor in the first 13 months of the operation of the scheme. The context compelled the conclusion that the loan agreements would not result in any genuine transfer of funds, but only to enable the taxpayer participants to claim tax deductions. If the claims were challenged by the ATO, it was clearly intended by the appellants that the participants would rely on the false information provided to them by the appellants to justify the claimed deductions. It was in this way that the evidence made out the Crown case that the appellants had agreed that the taxpayers were to be misled by them by providing the taxpayers with false or misleading information about the scheme which would cause them to:

``... deceive the ATO into accepting the false claims as properly founded and allowable claims for expenditure actually incurred by the taxpayer in the 1998 financial year in the discharge of obligations under a business franchise agreement.''

118. In other words, the Crown alleged that the appellants agreed to provide the relevant taxpayers with false or misleading information that was designed to convince them both to participate in the scheme by saying that the scheme was lawful and effective and to ``procure'' them to make false representations to the ATO. That this was the way the case was put was made clear by the opening address by Mr Maidment SC. The conduct of the prosecution case by counsel for the Crown, in my opinion, was not on the basis that the appellants agreed to procure the taxpayers to make false representations to the ATO as was contended on behalf of the appellants.

119. In this context it is of great significance that ground 1 particular B of the grounds of appeal accepts that the Crown case was capable of establishing beyond reasonable doubt a failure to disclose to taxpayers and the ATO the full terms of the arrangement between the lender and the franchisor for the disbursement of funds loaned to the franchisees to enable them to discharge their obligations to the franchisor.

Grounds 1 and 12

120. Counsel for the appellants Pearce and Tieleman, Mr Martin QC, submitted that grounds 1 and 12 raised the issue considered in
M v The Queen (1994) 181 CLR 487 , namely, whether having regard to the charge, the particulars of the charge, the way the case was presented to the jury, and on the whole of the evidence, the verdicts should be regarded as unsafe and unsatisfactory.

121. It appears that during the period preceding the trial, different versions of particulars relied upon by the Crown were provided in response to requests from the solicitors for the accused. The first particulars were those served on 29 August 2003, the essence of which was that the appellants agreed that the defrauding of the Commonwealth:

``... would be achieved by procuring taxpayers to make such false representations (by positive assertion and/or by concealment of material facts) as were deemed by the conspirators to be necessary to deceive the ATO into assessing that deductions from the taxpayers' assessable income... were properly claimed...''

122. These particulars were overtaken by a document described as ``Draft Further Particulars'' to which I have already referred, provided during December 2003 which allege that:

``The conspirators agreed that taxpayers... were to be procured to make the following false representations...''

123. That document was in turn overtaken by particulars dated 3 March 2004 being the

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substantial and detailed particulars to which I have already referred. The thrust of them was an allegation of a conspiracy to defraud by agreeing to cause taxpayers to make false representations to the ATO.

124. Those particulars incorporated a reference to the report of Eric Barr, but as previously stated, after objection by counsel for the appellants, Mr Barr was not called at the trial and his report was not tendered in evidence.

125. In my opinion, the Crown was constrained by the particulars it provided and none of the appellants could be convicted on the basis of evidence which went beyond the defined particulars:
Henry Walker Contracting Pty Ltd v Farnworth [ 2002] WASCA 167 at [ 15] per White AUJ, applying
Johnson v Miller (1937) 59 CLR 467 . In that case, Evatt J said at 497-498 that:

``It is of the very essence of the administration of criminal justice that a defendant should, at the very outset of the trial, know what is the specific offence which is being alleged against him. This fundamental principle has been deemed applicable to bodies which are not strictly judicial in character. But the rigorous application of the principle by courts of justice proper is to be regarded as deriving from the court's inherent power and jurisdiction.

... It is an essential part of the concept of justice in criminal cases that not a single piece of evidence should be admitted against a defendant unless he has a right to resist its reception on the ground of irrelevance, whereupon the court has both the right and the duty to rule upon such objection. These fundamental rights cannot be exercised if, through a failure or refusal to specify or particularise the offence charged, neither the court nor the defendant (nor perhaps the prosecutor) is as yet aware of the offence to be charged.''

126. See also
Interstruct Pty Ltd v Wakelam (1990) 3 WAR 100 at 118 per Pidgeon J and at 120 per Rowland J.

127. The essence of the scheme developed and promoted by the appellants was that the franchisees were required to pay an initial amount of $39,500 of which $1500 being an initial grant and establishment fee, was a payment of a capital nature and non-deductible. The expectation was that the balance of $38,000 would be deductible from the taxable income of franchisees, notwithstanding that the liability was to be discharged in part by borrowing $29,500. The arrangements relating to the provision of the loan funds became the focus of the Crown case.

128. Section 8-1 of the Income Tax Assessment Act 1997 (the current equivalent of s 51 of the Income Tax Assessment Act 1936) provides for the deduction from assessable income of losses and outgoings to the extent that:

(a) they are incurred in gaining or producing assessable income; or
(b) they are necessarily incurred in carrying on a business for the purpose of gaining or producing such income
except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature.

129. The availability of a deduction under the relevant provision depends upon the characterisation of the outgoing: FC of T v Lau (supra) at ATC 4940 and 4941-4943; 216 and 217-219 per Beaumont J. In
FC of T v Emmakell Pty Ltd 90 ATC 4319 at 4324; (1990) 22 FCR 157 at 162 Wilcox, Burchett and Ryan JJ held that an outgoing did not cease to be deductible if the lease in connection with which the payment was made was invalid. In the context of a claim for a deduction under s 51 of the 1936 Act, the economics or legal efficacy of the payment is irrelevant. In
Fletcher & Ors v FC of T 91 ATC 4950 at 4952; (1991) 173 CLR 1 at 7 , the question which the High Court was called upon to decide was whether, the whole or some part of outgoings of interest claimed should be treated as deductible under s 51(1) of the Act in calculating the net income or loss of a partnership in respect of the period 1982-1985 (``the tax years''). The sole question considered by the High Court was, as appears from the joint judgment of all seven Justices at ATC 4952; CLR 7-8:

``... whether, putting to one side the Commissioner's outstanding arguments based upon Pt IVA and s 82KL, the whole or some part of the alleged outgoings of interest should be treated as deductible under s 51(1) of the Act in calculating the

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net income or loss of the partnership for the tax years.''

130. Their Honours said, at ATC 4957; CLR 17-18:

``The question whether an outgoing was, for the purposes of s 51(1), wholly or partly `incurred in gaining or producing the assessable income' is a question of characterisation. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character of an outgoing of the relevant kind. It has been pointed out on many occasions in the cases that an outgoing will not properly be characterised as having been incurred in gaining or producing assessable income unless it was `incidental and relevant to that end' [ see eg Ronpibon Tin NL v FC of T (1949) 8 ATD at p 436; (1949) 78 CLR at p 56;
Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 95 CLR 344 at p 350 ;
Lunney v FC of T (1958) 11 ATD 404 at p 411; (1957-1958) 100 CLR 478 at p 497 ; John 89 ATC at p; 4105; (1989) 166 CLR at p 426;
Ure v FC of T 81 ATC 4100 at pp 4103-4109; (1981) 50 FLR 219 at 223-231; 34 ALR 237 at 241, 248 ; Riverside Road 90 ATC at p 4574; (1990) 23 FCR at 311-312]. It has also been said the test of deductibility under the first limb of s 51(1) is that:

`it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.'

[ See, eg, Ronpibon Tin NL v FC of T (1949) 8 ATD at p 436; (1949) 78 CLR at p 57; John 89 ATC at 4105; (1989) 166 CLR at 426].

So to say is not, however, to exclude the motive of the taxpayer in making the outgoing as a possibly relevant factor in characterisation for the purposes of the first limb of s 51(1). At least in a case where the outgoing has been voluntarily incurred, the end which the taxpayer subjectively had in view in incurring it may, depending upon the circumstances of the particular case, constitute an element, and possibly the decisive element, in characterisation of either the whole or part of the outgoing for the purposes of the sub-section [ see the authorities cited in FN 34]. In that regard and in the context of the sub-section's clear contemplation of apportionment, statements in the cases to the effect that it is sufficient for the purpose of s 51(1) that the production of assessable income is `the occasion' of the outgoing [ see John 89 ATC at 4105; (1989) 166 CLR at 427] or that the outgoing is a `cost of a step taken in the process of gaining or producing income' [ John 89 ATC at 4105; (1989) 166 CLR at 427] are to be understood as referring to a genuine and not colourable relationship between the whole of the expenditure and the production of such income.''

131. A deduction is available whether or not payment of the outgoing is made during the year under return, so long as the taxpayer is definitively committed to the outgoing during that year: FC of T v Lau ( supra ); and
FC of T v James Flood Pty Ltd (1953) 10 ATD 240 at 244; (1953) 88 CLR 492 at 506-507 , in which Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ said of s 51(1):

``... Under its provisions all losses and outgoings may be deducted to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, provided, of course, they are not of a capital nature or otherwise excluded. The word `outgoing' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word `incurred' the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement.

In Inland Revenue Commissioners v James Spencer & Co [ [ 1950] SLT 266 at p 268, (1950) SC 345 at 352], Lord Cooper says that from an examination of the numerous cases `the broad working rule which emerges as a guide to the crediting or debiting in a tax computation of subsequently maturing credits or debits is to inquire in which accounting period the right or liability was established, and to carry the item into the account in that year. I used the vague word ``established'' advisedly, for we

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are now in the region of proper commercial and accountancy practice rather than of systematic jurisprudence.' This passage must be qualified in its application under the Commonwealth Act. For under our law the facts must satisfy the expression `losses and outgoings incurred'. These words perhaps are but little more precise than the word `established' or the expression used above `definitively committed'. But they do not admit of the deduction of charges unless, in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them. It may be going too far to say that he must have come under an immediate obligation enforceable at law whether payable presently or at a future time. It is probably going too far to say that the obligation must be indefeasible. But it is certainly true that it is not a matter depending upon `proper commercial and accountancy practice rather than jurisprudence'. Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by s 51(1) but it cannot be substituted for the test.''

132. In such cases the subjective purpose of the taxpayer may be the subject of evidence. One of the investors, a Mr Talbot, gave evidence that a Mr Horsten emphasised to him the investment benefit that he would get from the franchise. This was the main reason why he bought into the franchise.

133. The question is whether in any particular case, as their Honours said in the joint judgment in Fletcher & Ors v FC of T ( supra ) at ATC 4958; CLR 19, upon consideration of all of the relevant factors:

``... it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterised as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s 51(1) unless it is either somehow excluded by the exception of `outgoings of capital, or of a capital, private or domestic nature' or `incurred in relation to the gaining or production of exempt income'. If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterised by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary.''

134. As Beaumont J put it in FC of T v Lau ( supra ) (at ATC 4941-4942; FCR 217-218), for the purposes of assessing deductibility, the manner in which the payment is financed is wholly irrelevant. The question is whether the taxpayer incurred the outgoing rather than how he financed it.

135. In such a case the deduction will be allowed unless circumstances relating to the outgoing resulted in a sham:
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at [ 8] ; see
Snook v London and West Riding Investments Ltd (1967) 2 QB 786 ; and
Mullins Investments Pty Ltd v FC of T 76 ATC 4288 ; (1976) 135 CLR 290 . In that case, Barwick CJ and Stephen J, in separate judgments, held that a taxpayer is entitled to cast a transaction into which he proposes to enter in a form which has taxation advantages without attracting the operation of s 260 of the Income Tax Assessment Act 1936. If, however, the actual transaction into which parties have entered involves a taxpayer in liability to tax or does not afford him some taxation advantage, and that transaction is cast into another form which, if effective, would relieve him of tax, the intention with which that form of transaction is chosen is an intention ``to alter the incidence of the income tax''. Section 260, however, does not apply if, being effective, a transaction does not alter the incidence of tax. In the result, Barwick CJ and Stephen J held that a taxpayer was entitled to cast a transaction into which he proposed to enter into in a form which has taxation advantages without attracting the operation of s 260. However, if the actual transaction into which parties entered involved a taxpayer in liability to tax, or did not afford him some taxation advantage, and that transaction is cast into another form which, if effective, would relieve him of tax, the intention with which that form of transaction was chosen is an intention ``to alter the

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incidence of the income tax''. It followed that s 260 did not apply if, being effective, a transaction did not ``alter the incidence of income tax''; cf Snook v London and West Riding Investments Ltd ( supra ).

136. In order for a transaction to constitute a ``sham'' all of the parties to it must have a common intention that their actions or documents executed by them were not to create the rights and obligations which they gave the appearance of creating. As Diplock LJ, said in Snook v London and West Riding Investments Ltd ( supra ) at 802, of a ``sham'':

``I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the `sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure [ (1882) 21 ChD 309]; and Stoneleigh Finance Ltd v Phillips [ [ 1965] 2 QB 537]), that for acts or documents to be a `sham' with whatever legal consequences flow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations they give the appearance of creating.''

137. In the present case, the prosecution expressly disavowed reliance upon the transaction being a sham or on notions of fiscal nullity.

138. A deduction is available whether the outgoing was productive of income in a subsequent tax year, or even if not at all, if the outgoing had the requisite character;
FC of T v Cooke 2004 ATC 4268 at 4280 [ 31]; [ 2004] FCAFC 75 at [ 31] per Lee, Sundberg and Conti JJ; and see Fletcher & Ors v FC of T ( supra ); and
Steele v DFC of T 99 ATC 4242 ; (1999) 197 CLR 459 , in which was held by Gleeson CJ, Gaudron, Gummow and Callinan JJ that where interest was a recurrent payment to secure the use of borrowed funds for a limited term, it was proper to regard it as a revenue item and its character was not altered by reason of the fact that the borrowed funds were used to purchase a capital asset.
Australian National Hotels Limited v FC of T 88 ATC 4627 at 4632-4634; (1988) 19 FCR 234 at 239-241 was approved. In that case it was noted by Gleeson CJ, Gaudron and Gummow JJ at ATC 4248 [ 26]; CLR [ 26] that in
Texas Co (Australasia) Ltd v FC of T (1940) 5 ATD 298 at 356; (1940) 63 CLR 382 at 468 Dixon J said:

``... Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible. Under the Australian system interest on money borrowed for the purpose forms a deduction. So does the rent of premises and the hire of plant.''

139. The Court approved of the decision in
FC of T v Ilbery 81 ATC 4661 ; (1981) 58 FLR 191 , in which Toohey J (with whom Northrop and Sheppard JJ agreed) noted at ATC 4664-4665; FLR 196-197 that the generalis- ation that interest on moneys which are borrowed for the purpose of acquiring an income producing asset was deductible under s 51(1) and also noted that in Ilbery at ATC 4668; FLR 201-202 a concession was made by the Commissioner that ``so long as the... property was held for an income-producing purpose, interest paid on a loan to acquire that property was deductible under sec 51''.

140. Their Honours commented on this statement in Steele at ATC 4248 [ 27]; CLR [ 27] that:

``... Such generalisations may require qualification in particular cases, but they fairly reflect the ordinary position referred to by Dixon J.''

141. In
GP International Pipecoaters Pty Ltd v FC of T 90 ATC 4413 ; (1990) 170 CLR 124 , Brennan, Dawson, Toohey, Gaudron and McHugh JJ said that [ ATC at 4419]:

``The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid.''

142. A number of authorities were cited for that proposition including
Cooper v FC of T (1957) 11 ATD 281 at 285; (1957) 97 CLR 397 at 404 ; and
Cliffs International Inc v FC of T 79 ATC 4059 ; (1979) 142 CLR 140 . In GP International Pipecoaters , their Honours said at ATC 4419-4420; CLR 137-138:

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``... It was accepted on both sides that the plant was a capital asset and that expenditure by the taxpayer in its construction was an outgoing of a capital nature, though the plant was a wasting asset: see Cliffs International , per Gibbs J at ATC pp 4066-4067; CLR p 153. But that circumstance does not necessarily answer the relevant question.

Although the amount received as establishment costs was expended by, and was intended by SECWA to be expended by, the taxpayer to meet the costs of constructing the plant so far as that amount would extend, and although the amount expended on the construction of the plant was a capital expenditure, it does not follow that the taxpayer's receipt of the establishment costs was a receipt of capital. To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. The factors relevant to the ascertainment of the character of a receipt of money are not necessarily the same as the factors relevant to the ascertainment of the character of its payment.''

143. Their Honours referred to
FC of T v The Myer Emporium Ltd 87 ATC 4363 at 4366-4367; (1987) 163 CLR 199 at 209 , where Mason ACJ, Wilson, Brennan, Deane and Dawson JJ, said:

``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit- making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterized as income: (
FC of T v Whitfords Beach Pty Ltd 82 ATC 4031 at pp 4036-4037, 4042; (1982) 150 CLR 355 at pp 366-367, 376 ).''

144. As their Honours said, in GP International Pipecoaters at ATC 4421; CLR 139-140:

``... The establishment costs were received by the taxpayer under the contract as part of the monetary consideration payable for the taxpayer's agreement to perform, or its performance of, the entire contract. It is impossible to treat the business of the taxpayer as limited to the coating of the pipe when the construction of the pipe-coating plant was an integral part of the work which the taxpayer was bound to perform. The establishment costs were not received under a severable part of the contract relating to the construction of the plant. By constructing the plant and coating the pipe the taxpayer performed the obligations in consideration for which it was entitled to be paid the establishment costs and other moneys payable under the contract. It earned the money by doing the work it had contracted to do. The establishment costs were not received in exchange for an item of capital or a right of a capital nature.''

145. In the result, it was held at ATC 4421-4422; CLR 141 that the establishment costs must be classified as a receipt of income, with the consequence that they were liable to income tax on it.

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146. It follows that a receipt may be income in the hands of a payee, notwithstanding that it is expenditure of a capital nature by the payer and that the payee has applied the income in the acquisition of a capital asset. It does not depend upon what the taxpayer actually receives, but upon what it was that the taxpayer paid for. Characterisation of the payment does not depend upon its effectiveness, either economically, in the sense that it earned or was likely to earn a profit, or legally: see
FC of T v Emmakell Pty Ltd 90 ATC 4319 at 4324; (1990) 22 FCR 157 at 162 per Wilcox, Burchett and Ryan JJ.

147. Further, deductibility is not conditional upon the economic viability or the economic desirability of the payment or its amount. As the High Court said in
Ronpibon Tin NL & Tongkan Compound NL v FC of T (1949) 8 ATD 431 at 437; (1949) 78 CLR 47 at 60 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ:

``... It is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent: see per Ferguson J in Tooheys Ltd v Commissioner of Taxation [ (1922) 22 SR (NSW) 432], at p 440; per Williams J in Tweddle v FC of T [ (1942) 7 ATD 186], at p 190.''

148. As Beaumont J said in FC of T v Lau ( supra ), at ATC 4911; FCR 218:

``... Once it is concluded that the moneys were outlaid by the taxpayer for a real or genuine commercial purpose, any inquiry as to the manner in which those funds were subsequently applied by their recipients is immaterial for the purposes of sec 51.''

149. The fact that there is a disproportion between the outgoing expenses and income does not affect the proper characterisation of the payment, unless the disproportion is to be explained by reference to an independent pursuit of an objective other than the gaining of assessable income: Fletcher & Ors v FC of T ( supra ). In that case, their Honours also said at ATC 4956; CLR 14 that:

``The fact that the relevant `payments' were purportedly made by `round robins' of bills of exchange which were not supported by equivalent amounts of cash and which all ended up in the hands of the original drawees does not, once arguments of sham and fiscal nullity are rejected, necessarily preclude those `payments' from being effective and legally binding. Depending upon the circumstances, they could constitute counterbalancing set-offs of credit and debit amounts. Prima facie, it would seem that they so operated in the circumstances of the present case. Whether they did is, however, a mixed question of law and fact. The Commissioner has, by his conduct of the case, allowed that question to be effectively resolved by default against him in both the Tribunal and the Federal Court. In the circumstances of these already over-protracted proceedings, it is now too late for him to raise the argument for the first time in this Court.''

150. See also
Mobil Oil Australia Ltd v FC of T (1965) 14 ATD 14 at 15-16; (1965) 112 CLR 407 at 410 , where their Lordships in the Privy Council accepted that the arrangements in that case were real transactions intended to be and in fact carried out according to the terms of the documents.

151. In relation to the second limb of s 8-1 or s 51 of the former Act, the relevant inquiry in the case of a claim for a deduction by a franchisee is into the business of that party rather than the business of the franchisor. In
FC of T v Sleight 2004 ATC 4477 at 4488 [ 50]- [ 51]; (2004) 136 FCR 211 at [ 50]- [ 51] Hill, Carr and Hely JJ said:

``50. In
Puzey v FC of T 2003 ATC 4782 at 4791-4792; (2003) 131 FCR 244 at 256-257 Hill & Carr JJ set out various propositions derived from the case law. Their Honours, after dealing with some of the matters set out above, said:

`... A person may carry on a business, notwithstanding that the person had some other activity, such as full time employment. It is not necessary, in concluding that a business is carried on, that the acts to be undertaken are acts of the person seeking to establish he or she is carrying on a business. So a person may appoint another to take the steps which constitute the business activity:
Ferguson v FC of T 79 ATC 4261 at 4270; (1979) 37 FLR 310 at 322-324 and, at least if the facts in
FC of T v Lau 84 ATC 4929 at 4942; (1984) 6 FCR 202 at 218 involved a business, that case is another example.

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...

In deciding whether or not a business is carried on courts have pointed to what have been called in the United Kingdom the ``badges of trade,'' indicia which, while no one of them will be determinative of whether a business is carried on, collectively will demonstrate a business. These include the profit motive (although a non profit company may still carry on a business), acting in a business like way, (although many businesses may be found which operate in a non-business like way), the keeping of books of account and records, (although the fact that there are none will not necessitate the conclusion that a business is not carried on) and repetition (although a fixed term project may still be a business).'

51. In Puzey it was also pointed out that reliance can seldom be placed on a particular decided case to conclude that a business is, or is not, carried on, unless there is a complete identity of fact between that case and the circumstances under consideration. However in this case, some guidance can nevertheless be obtained from the decisions to which counsel for both parties referred.''

152. Further, it may be accepted that the business can be carried on through an agent without affecting the deductibility of outgoings: FC of T v Cooke ( supra ) at ATC 4282 [ 36]; FCAFC [ 36] per Lee, Sundberg and Conti JJ.

153. In the present case, it was clear from the material provided to prospective franchisees that it was intended to represent to them that the $39,500 would be received by the franchisor and that of that amount, $38,000 would be expended in the provision of the services to be provided in the period of 13 months after the expenditure had been incurred. It was also clear that the representations made were both false and intended to cause the franchisees to claim the $38,000 as deductible expenditure against their income in the year ended 30 June 1998. As a matter of fact, to the knowledge of the appellants, while the loan agreements themselves were not shams, there was not to be any genuine transfer of funds, but only a ``round-robin'' calculated only to provide an artificial basis for the participants to claim a deduction in the amount of $38,000. This was intended by the appellants to enable each franchisee to fund the amount invested from the taxation refund which was obtained from the ATO.

154. It was the intention of the appellants that, if the claimed deductions were not allowed by the ATO, the franchisees would innocently use the false information provided to them by the appellants to contest the disallowance of the deductions claimed.

155. In this context, the element of dishonesty relied upon by the Crown was that the information provided to the prospective investors was calculated, not only to deceive them into making the investment, but also to cause them to mislead the ATO. In my opinion, this was entirely consistent with the particulars provided by the Crown to the effect that the conspirators, including each of the appellants, agreed that the prospective franchisees were to be given false or misleading information about the scheme. This false or misleading information was calculated to defraud the Commonwealth of taxation revenue to which it was otherwise entitled. The particulars also made it clear that the Crown also alleged that the conspirators agreed to provide the franchisees with false or misleading information both: to sell the scheme (by convincing them and their advisors that the scheme was lawful and effective); and to equip and induce the... franchisees to maintain the deception in the face of scrutiny from the ATO.

156. This is the basis for the allegation in the particulars that the taxpayers were ``procured to make... false representations'' to the ATO. In my opinion, both the opening of the Crown case and the manner in which it was conducted was consistent with the particulars provided, rather than as contended on behalf of the appellants. As I have stated above, it is also of considerable significance that ground 1 Particular B of the grounds of appeal accepted that the Crown case was:

`` [ C]apable of establishing beyond a reasonable doubt a failure to disclose to taxpayers and to the ATO the full terms of the arrangement between the lender and the franchisor for the disbursement of the funds to be loaned to franchisees to enable them to discharge their obligations to the franchisor...''

ATC 4347

157. It follows that ground 1 Particular A(a) to (e) and B(a) necessarily must fail.

158. So far as the particulars in ground 1A(f) and (g) and 1B(b) to (d) are concerned, the Crown case was that the conspiracy alleged involved an agreement by the conspirators, including the appellants, to deprive the Commonwealth of the opportunity to protect its interest by dishonest means.

159. In my opinion, the jury was entitled to conclude that each of the appellants knew what the true facts were, namely, that the participating taxpayers were not in fact or law truly entitled to the deduction they were being invited to claim in respect of the $38,000. The facts were that the amount of money actually to be made available to the franchisees was a fraction of that amount. This was clearly highly relevant to the question whether the relevant deduction would be allowed or, if allowed, subsequently cancelled under the relevant provisions of the Act.

160. There was a real question whether the franchisee investors would be in fact or law carrying on a business for the purpose of producing assessable income within the meaning of s 8-1 of the Act and whether the appellants and the other alleged conspirators who were involved in the scheme, and the franchisees who participated in it, did so for the dominant purpose of enabling them to obtain tax benefits from the implementation of the scheme. If this was the case, it was likely that the ATO would invoke 177D and E of the Act, particularly in the context in which deductions were also intended to be claimed in respect of agents' commissions and the fees and commissions payable to the appellants were also to be deducted from the limited funds in fact available. In this context, it was sufficient to make out the Crown case that the claims for the relevant deductions might have been allowed: see Wills v Petroulias ( supra ) per Spigelman CJ (with whom Handley and Santow JJA agreed). In my opinion, it would be enough to prove that the conspirators were aware that they were exposing the Commonwealth to a risk of economic loss: Peters v The Queen ( supra ) at [ 25]- [ 26] per Toohey and Gaudron JJ; and at [ 84] per McHugh J; and Spies v The Queen ( supra ) at [ 77]- [ 81] per Gaudron, McHugh, Gummow and Hayne JJ.

161. I have set out earlier in these reasons the various authorities relied upon by the appellants for their contentions regarding the deductibility of the relevant sums claimed by the taxpayers. The fact remains, however, that the claims made by the franchisees might have been disallowed, or if initially allowed, the deductions subsequently disallowed or cancelled by the ATO under the provisions of Pt IVA of the Act, given the reality that only very limited funds would be available to the franchisor for the purpose of meeting its contractual obligations to the franchisees pursuant to the various franchise agreements.

162. In my opinion, on the evidence before the Court at the trial, there were real and substantial questions whether the franchisor and the investors in the scheme were in fact engaged in carrying on a business for the purpose of gaining assessable income, or whether the reality was whether the conspirators, including the appellants, developed and implemented the scheme and/or the taxpayers who participated in it did so for the dominant purpose of enabling the taxpayer franchisees to alter the incidents of income tax or obtain tax benefits by the implementation of the scheme or participation in it.

163. Further, in my opinion, the Crown case and the evidence was such that the only inference which could properly be drawn in the light of all the evidence was that each of the elements of the charge of conspiracy had been proved beyond reasonable doubt. It follows from this conclusion that, had the true facts been known to the ATO or the Commissioner of Taxation, the deductibility of the claimed deductions would have been questioned or challenged by the Commissioner with the result that the deductibility of the relevant expenditure would also have been challenged.

164. For these reasons, I am of the opinion that the remaining particulars of ground 1, also fail. It follows that ground 12 also fails.

Grounds 2 and 9

165. Grounds 2 and 9, as they were argued were based upon an assumption that the jury could not convict the appellants unless they were satisfied beyond a reasonable doubt that there was an agreement between the appellant and at least one other of the conspirators to cause taxpayers to make a particular false statement or representation to the ATO. It was contended that the learned trial Judge should have given a direction to the jury that there was no evidence that any such statement or

ATC 4348

representation was in fact made or intended to be made. Given the reasons and conclusions which I have already expressed in respect of ground 1, it is apparent that grounds 2 and 9 were based upon a misconception of the Crown case. In my opinion, there was no misdirection with the consequence that grounds 2 and 9 fail.

Grounds 3, 4 and 8

166. These grounds can be conveniently dealt with together because they rest upon the assumption that in order to convict the appellants, the jury had to be satisfied beyond a reasonable doubt that the claims by franchisees for the deduction of the franchise service fees were not allowable under the provisions of the Act. This issue has already been considered in the context of my reasons for rejecting ground 1. As a consequence, grounds 3, 4 and 8 necessarily fail.

Ground 5

167. Ground 5 contended that the learned trial Judge erred in failing to direct the jury that in assessing the dominant purpose to be ascribed to a particular participant in a scheme within the meaning of s 177D of the Act, having regard to the matters specified therein, the jury should have regard to and evaluate the other possible purposes of any such participant in order to objectively assess which was the dominant purpose.

168. Section 177D relevantly provides that:

``This Part applies to any scheme... where:

(a) a taxpayer (in this section referred to as the `relevant taxpayer' ) has obtained, or would but for section 177F [ which makes provision for the disallowance or cancellation of benefits] obtain, a tax benefit in connection with the scheme; and

(b) having regard to:

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);''

169. In
FC of T v Spotless Services Ltd & Anor 96 ATC 5201 ; (1996) 186 CLR 404 , it was held that the application of s 177D of the Act provides that Pt IVA applies to a scheme where a taxpayer (the relevant taxpayer) has obtained, or would but for s 177F, a tax benefit in connection with a scheme and, having regard to certain matters set out in s 177D(b)(i)-(viii):

``it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme...''

170. The matters to which s 177D(b) refers include:

``(i) the manner in which the scheme was entered into or carried out; and

(ii) the form and substance of the scheme;''

171. Section 177A defines ``scheme'' to mean, among other things:

``(b) any scheme, plan, proposal, action, course of action or course of conduct.''

172. Section 177A(5) provides that a reference to a scheme or part of a scheme being

ATC 4349

entered into or carried out by a person for a particular purpose shall be read as including:

``... a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.''

173. It was contended on behalf of the appellants that although the trial Judge gave directions to the jury in respect of Pt IVA, it was contended that there was no direction to the jury to evaluate the relative significance of the purposes, objectively assessed, of the participants in the scheme, other than the proscribed purpose, nor did the trial Judge give any adequate direction as to what ``dominant'' meant in the context of Pt IVA.

174. The trial Judge directed the jury by reference to the provisions of Pt IVA and s 177D in particular to the effect that:

``A taxpayer who would have obtained a deduction but, having regard to the eight factors specified, concluded that the taxpayer entered into the relevant transaction for a dominant purpose of obtaining a tax benefit for other persons... that one of the persons entered into it to enable a relevant taxpayer to obtain a benefit - then you go to section 177F which allows the Commissioner in an appropriate case to determine that the deduction shall not be allowable.''

175. It was contended on behalf of the appellants that in applying the provisions of Pt IVA, the Crown's case did not rely upon proof that franchisees were to be procured to make false representations to the ATO by both positive assertion and concealment of material facts. Nor was the Crown case closed on the narrow basis of ``a conspiracy to conceal material facts from the taxpayers'' as was contended on behalf of the appellants. Further, the Crown case was not confined to reliance upon any false representation, whether express or implied, in respect of the prospective or actual allowability of the deductions to be claimed pursuant to the alleged conspiracy, in the tax returns of franchisees.

176. The Crown also did not purport to rely upon, and did not in fact rely upon proof that the claimed deductions were not allowable under s 8-1 of the Act and did not purport to rely upon or in fact rely upon proof that the claims would necessarily be disallowed under Pt IVA of the Act.

177. As has been seen, the Crown case was that ``the public face of the scheme'' was designed to convince the franchisees and their taxation advisors that the franchisees would be entitled to claim deductions under the Act at the rate of $38,000 per franchise so as to entitle them to an allowable deduction by virtue of s 8-1 of the Act. On the Crown case, the conspirators agreed to, and did, devise and execute the scheme to ensure that facts they knew to be material to a proper consideration of both s 8-1 and Pt IVA were not to be revealed as part of the public face of the scheme, but were to be concealed from the franchisees and through them from the ATO. The latter was ``the private face of the scheme''.

178. It was not in issue that the prospective or actual claims for deductions would or may have been allowable by virtue of s 8-1 of the Act. In any event, such a determination could only have been made properly on the actual facts pertaining to each individual claimant.

179. In my opinion, the Crown case was not dependent upon proof that the ATO would necessarily have disallowed the claims by application of s 8-1 or Pt IVA or the Act. What was required was proof that the conspirators agreed to present the public face of the scheme while concealing the private face of the scheme so that neither the franchisees, nor the ATO, would have knowledge of the facts which the appellants knew would be relevant to a proper and fully informed consideration of s 8-1 and/or Pt IVA and that there was a real risk that the ATO, representing the Commonwealth, would have been deprived of a proper opportunity to protect the national revenue by acting promptly to stop payment of refunds, to disallow the claims and to take timely recovery action in respect of refunds previously paid.

180. The Crown case was not that the effect of ss 177D and 177F(1) had the effect that the claims which were made would be necessarily disallowed. It was that by implementing the scheme, the conspirators sought to obtain advantages for themselves by putting property of the Commonwealth, namely, its rightful claim to receive income tax properly levied, or by depriving it of the opportunity to protect revenue to which it would be otherwise entitled. In this context, it was sufficient for the learned trial Judge to direct the jury in general terms

ATC 4350

about the relevant provisions. The direction which was given was to the effect that:

``... a taxpayer who would have obtained a deduction but having regard to the eight factors is [ sic ] concluded that the person entered into it for a dominant purpose of obtaining a tax benefit for other persons, as you see in that section - that one of the persons entered into it to enable a relevant taxpayer to obtain a benefit - then you go to section 177F which allows the Commissioner in an appropriate case to determine that the deduction shall not be allowable.''

181. The contention on behalf of the appellants was that the trial Judge should have directed the jury that it was for them to evaluate the relative significance of the various purposes, objectively assessed, of each franchisee in order to identify the dominant purpose. The complaint was that the trial Judge failed to direct the jury to evaluate the relative significance of the competing purposes to determine what was the ``dominant'' purpose of each of the taxpayers.

182. In FC of T v Spotless Services Ltd & Anor ( supra ), Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ said at ATC 5206; CLR 416:

``Much turns upon the identification, among various purposes, of that which is `dominant'. In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose.''

183. In my view, no direction of the kind contended for on behalf of the appellants was necessary. The Crown did not have to contend, and did not contend, that s 177D, in combination with s 177F(1) would have had the result that the claimed deductions would be disallowed. The Crown case was that the conspirators intended to obtain an economic advantage for themselves by putting property in the sense of tax revenue to which it was otherwise entitled, or by depriving it of the opportunity to protect property in the form of revenue to which it was entitled. In this context, no more was required than to draw attention to the potential application of the relevant provisions of Pt IVA to the extent that his Honour did.

184. In my opinion, ground 5 was not made out.

Ground 6

185. As set out in the ground, it was contended on behalf of the appellants that the learned Judge failed to direct the jury regarding the interpretation and application of s 177D of the Act and, in particular, the alleged failure of the trial Judge to explain to or direct the jury about the difference between form and substance. In this context, it was also argued that his Honour should have made it clear that the Crown had incorrectly asserted that the loan agreement was ``bogus'' or a ``sham''.

186. The difficulty with this argument is that, as I have understood the Crown case, the expression ``bogus'' or ``sham'' were limited in their application to the circumstances that the franchisees did not receive and were never intended to receive the benefit of the loan funds. In my opinion, for this reason and for the reasons I have stated in reference to ground 5, no additional direction was required regarding the interpretation and application of s 177D.

Grounds 7, 10 and 11

187. Ground 7 contended that the trial Judge was in error in failing to direct the jury that to convict the appellants, the jury would need to be satisfied beyond reasonable doubt that the Commissioner of Taxation would have exercised the powers conferred on him by s 177F of the Act and failed to direct the jury in respect of the lack of evidence relating to that issue.

188. Grounds 10 and 11 contended that it was necessary for there to have been a false statement or representation by taxpayers to the ATO which would cause the ATO to take some action which it would not otherwise have taken, or to fail to take some action which it would otherwise have taken, and that the relevant act or omission would imperil the financial interests of the Commonwealth in circumstances in which the conspirators knew that this was so and failed to give any direction regarding the evidence on that issue, or, more particularly, the complete lack of any evidence capable of sustaining such a finding, and the overwhelming evidence to the contrary. Suffice it to say that these grounds necessarily fail by reason of the views I have already expressed in respect of ground 1.

ATC 4351

Grounds 12 and 13

189. Ground 12 contended that the jury's verdict was unsafe and unsatisfactory because of the lack of evidence capable of establishing beyond a reasonable doubt any of the circumstances or issues referred to in grounds 1, 2, 3 and 7 to 11. The reasons expressed in relation to those grounds are sufficient to justify the conclusion that ground 12 necessarily fails. It was contended on behalf of the appellants that, having summarised the evidence given by the taxpayer franchisees, the trial Judge directed the jury that such evidence could be used to establish a conspiracy to defraud ``by arming taxpayers with false information under the guise of a legal scheme''. It was submitted that this was another significant departure from the way in which the Crown had particularised and presented its case, which was to the effect that taxpayers were to be procured to make false representations to the ATO. I have already dealt with these contentions in relation to grounds 1, 2 and 9 and concluded that there was no significant or material change in the way in which the Crown put its case.

190. It was also contended in support of ground 13 that when the trial Judge directed the jury to use the same evidence when evaluating the anti-avoidance provisions and s 8-1, his Honour gave them no assistance about how they might conduct this evaluation and that his Honour should have directed that the evidence established that the deductions were allowable and should have directed them in relation to Pt IVA to evaluate the evidence in respect of their possible alternative purposes. It follows from what I have previously written in this context, that it was not necessary for his Honour to do so and there is no merit in ground 13.

Grounds 14 and 15

191. It was contended on behalf of the appellants, in support of grounds 14 and 15, that the Crown opened the case against them on the basis that an essential part of the alleged conspiracy was the misleading of Mr O'Connor QC to obtain a favourable tax opinion from him that would not otherwise have been available had he known the true facts and that each of Aistrope and Wahby were parties to the illegal conspiracy. Each of those persons was called to give evidence. It was not put to Mr O'Connor QC that he had in fact been misled, or that if he had been apprised of certain facts, his opinion would have been different. Further, the Crown did not put to either Aistrope or Wahby that they were parties to an agreement to use dishonest means to defraud the Commonwealth. It was contended that, in such circumstances, it was not open to the Crown to close its case on the basis either that Mr O'Connor QC had been misled or that Aistrope and Wahby were parties to the illegal conspiracy.

192. Prior to the closing addresses of counsel, it was submitted to the trial Judge on behalf of the appellants that the Crown should not be permitted to close its case on the basis that Mr O'Connor QC had been misled, or that Aistrope or Wahby were parties to the conspiracy. Further, it was contended the trial Judge should have prevented them from doing so in accordance with the authority of such cases as
R v MRW (1999) 113 A Crim R 308 at [ 46] per James J; and
R v Kennedy (2000) 118 A Crim R 34 .

193. The learned trial Judge rejected those submissions and permitted the Crown to close on the basis that Mr O'Connor QC had been misled and that Wahby and Aistrope were conspirators. The Crown proceeded to do that and the trial Judge charged the jury on the same basis. It was contended on behalf of the appellants that the authorities on which they relied, as well as in terms of basic fairness and maintaining the integrity of the trial process, required that the Crown be obliged to put to the witnesses whom it called, the propositions on which it relied in order that the jury could evaluate their response to those propositions. It was submitted, in effect, that in the present case, not only was the Crown expressly permitted to depart from that course, but the effect in terms of unfairness was compounded by the trial Judge directing the jury to the same effect.

194. In my opinion, it would not have been proper to ask Mr O'Connor QC whether or not he believed that he had been misled or what, if any, consequences flowed from him having been misled. In my view, such evidence would have been inadmissible as opinion evidence. It was a matter for the jury to determine whether on the basis of the evidence given by the witnesses in respect of the relevant facts, Mr O'Connor QC was or was not misled. If, as it appears they must have done, they concluded that he had been misled, it was then necessary for the jury to assess the significance of that in relation to the issue whether it had been

ATC 4352

established beyond reasonable doubt that there was an agreement between the conspirators to use dishonest means to imperil the economic interests of the Commonwealth.

195. In this context, it is of particular significance that there was no challenge to the evidence which established that Mr O'Connor QC was not told that the loan funds would not pass to the franchisors in the relevant period and that the documentation provided to him for the purposes of his opinion, plainly represented to him that such funds would be available. In this particular context, Mr O'Connor QC's evidence whether or not he was in fact misled was irrelevant and inadmissible. The issue was one for the jury to decide on all of the relevant evidence before them.

196. So far as Aistrope and Wahby were concerned, neither the Crown, nor counsel for any of the appellants, sought an admission from either of them that they had been parties to an unlawful agreement by way of a conspiracy to defraud the Commonwealth. There was, however, no significant challenge to the evidence which each of them gave in respect of their participation and knowledge of matters relevant to the alleged conspiracy, which clearly identified them as participants, notwithstanding their denials in cross- examination and in the face of their pleas of guilty.

197. In my opinion, the Crown was not prevented from suggesting that the jury should draw an inference that they were parties to the conspiracy, notwithstanding that they had not specifically put the matter to each of them in their evidence-in-chief. Had the Crown done so, this may well have had the result that informing the jury of their pleas of guilty could well have had the result of prejudicing the fair trial of the appellants. It was a matter for the jury to determine, in the light of the relevant evidence, what their respective roles were.

198. For these reasons, I consider that grounds 14 and 15 were not made out.

Ground 16 (Wharton) and ground 17 (Pearce and Tieleman)

199. Ground 16 related to the appellant Wharton and ground 17 related to the appellants Pearce and Tieleman. The contention was that the Crown closed its case on a basis different from which the case was opened. This point has already been dealt with and rejected. It follows that ground 17 necessarily fails.

Ground 17 (Wharton) and ground 18 (Pearce and Tieleman)

200. In each of these grounds it is contended that there was a substantial miscarriage of justice as a result of the totality of the errors raised by the earlier grounds. As none of those grounds have been made out, it necessarily follows that these grounds also fail.

201. For these reasons, I would dismiss each of the appeals against conviction.

Appeal against sentence

202. In my opinion, each of the applications for leave to appeal against sentence should be dismissed for the reasons to be published by Steytler J with which I am in entire agreement.

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