WEYERS & ANOR v FC of T
Judges:Dowsett J
Court:
Federal Court
MEDIA NEUTRAL CITATION:
[2006] FCA 818
Dowsett J
The appeals
1. These are appeals by three taxpayers against appealable objection decisions made by the respondent (the "Commissioner") in connection with their taxation returns for the years ended 30 June 1995, 30 June 1996, 30 June 1997, 30 June 1998, 30 June 1999, 30 June 2000 and 30 June 2002. Mr and Mrs Weyers are husband and wife. Nommack Nominees Pty Ltd ("Nommack Nominees") was originally known as Robert Weyers Constructions Pty Ltd and later, as Zapped Pty Ltd. Since December 1994 it has been the trustee of the Elizabeth Street Sydney trust (the "Sydney trust"), or at least that is the case advanced by all three applicants. Mr and Mrs Weyers are directors and shareholders of Nommack Nominees.
Mr Weyers' trading history
2. Mr Weyers has, for a long time, worked in the construction and property development industries. At one stage he was a tradesman, conducting his business through Nommack Nominees, then known as Robert Weyers Constructions Pty Ltd. He and his family moved to Queensland in 1983 when he took up a position with Richard Crookes & Associates Pty Ltd ("the Crookes company"). In or about 1991 the Crookes company went into liquidation. Mr Weyers was a director and had given personal guarantees of its debts. Trade creditors sought to enforce the guarantees. At that time Robert Weyers Constructions changed its name to Zapped. Mr Weyers survived financially. Since that time, he and Mrs Weyers have been concerned to avoid personal liability for trade debts. Until late 1994 Mr Weyers traded through a company called Cherrybrook Pty Ltd ("Cherrybrook") as trustee of the Weyers Family Trust (the "family trust"). Initially, Cherrybrook contracted for the supply of Mr Weyers' services to Forrester Parker Developments Pty Ltd ("Forrester") which company was completing projects previously undertaken by the Crookes company. The arrangement between Cherrybrook and Forrester continued until late 1994. By that time Cherrybrook was also engaging in other projects not involving Forrester. Mr Weyers expected that Cherrybrook would derive substantially increased income in the future and so consulted his accountants about tax minimization. He initially spoke to a Mr Don Steele, but Mr Steele's son, Mr Ross Steele, was primarily involved in the events which followed.
Tax minimization advice, Mr Steele, Mr Priddle and Mr Collie
3. Mr Ross Steele or Mr Don Steele consulted two persons who were experienced in tax minimization, Mr Priddle and Mr Collie, both solicitors. Mr Priddle was practising on his own account. Mr Collie practised with a firm, Cleary Hoare. I infer that thereafter, Mr and Mrs Weyers acted upon advice given by either Mr Ross Steele, Mr Priddle or Mr Collie. After Nommack Nominees became involved in relevant transactions, it also acted on such advice.
4. Mr Priddle recommended that Mr and Mrs Weyers "acquire" a trust which had accumulated losses against which income could be "set off" for tax purposes. At that time, Mr Priddle expected that the efficacy of such a device might be adversely affected by anticipated amendments to the Income Tax Assessment Act (1936) (Cth) (the "ITA Act"). It was therefore necessary to move quickly. He approached Mr Collie. Mr Collie knew of the Sydney trust and, in late 1994, it was decided
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that Mr and Mrs Weyers should acquire control of it. Mr Priddle had previously known nothing about the Sydney trust. Mr Collie attended to the necessary documentation. At some stage Mr Priddle advised the Weyers that the proposal was lawful and effective. In a letter to Mr Weyers, dated 21 December 1994 he said:"I refer to our recent discussions in relation to the affairs of the Elizabeth Street Sydney Trust and confirm that I have researched the records and affairs of the Trust thoroughly. The transaction reflected in the Facilitation Agreement and the Deed of the Removal of Appointment of Trustee makes it clear at law that the new Trustee (and therefore the Trust) cannot in any way be liable for any debts of the Trust incurred before today."
5. In evidence he said that in advising Mr Weyers to acquire the Sydney trust he had not considered whether there was any continuity as between the trust's previous business and that to be conducted through it by Mr Weyers.
6. It is convenient at this stage to say a little about Mr Collie's evidence. In 1992 he acquired a company called ComLaw Pty Ltd which was appointed to be trustee of the ComLaw trust and undertook all future activities in that capacity. Mr Collie originally intended that it would perform syndication work in relation to property developments but in the early 1990s, he identified opportunities arising out of the collapsed property market, particularly in Sydney and Adelaide. In order to take advantage of these opportunities ComLaw acquired two other companies, Annesley Investments Pty Ltd ("Annesley") and Haven Sea Pty Ltd ("Haven Sea"). At all material times Mr Collie was a director of both companies. Annesley became trustee of the Annesley Trust which was established on 1 May 1994. These entities played minor roles in the transactions subsequently entered into by the Weyers.
7. During 1994 and 1995 ComLaw was approached by accountants, some seeking to find a market for clients who "owned" trusts which had accumulated losses and others seeking entities with deductible tax losses for acquisition by clients. Mr Collie decided that Annesley and Haven Sea should enter that market. The general basis upon which they operated in acquiring and selling "entities" was as follows:
- "10.1 Only trusts with assets (whether realised or unrealised deductible losses) would be considered. It was recognised that whilst a trust would not fail for want of a trustee, it would do so for want of any assets.
- 10.2 Accordingly, care was taken as far as possible to ensure that any prospective trust had always retained some assets.
- 10.3 Annesley would assume the role of a facilitator and acquire control of relevant trusts when there appeared to be a prospect of marrying a vendor and a purchaser with a significant price difference between the parties.
- 10.4 Haven Sea would assume the role of trustee at the time the acquisition was made.
- 10.5 In order to limit any financial exposure to Annesley, the acquisitions were only to be made on the purchaser committing to proceed."
8. The documents used to give effect to such transactions included:-
- "10.6.1 A Facilitation Agreement pursuant to which Annesley acquired effective control of the loss trust from the relevant interests of the vendor described as the 'Facilitators' …
- 10.6.2 A Deed of Removal and Appointment of Trustee pursuant to which Haven Sea was appointed the new trustee in lieu of vendor interests. The Deed also provided for the acquisition by Annesley for a nominal sum of the previous trustee's right of indemnity against trust assets.
- 10.6.3 Financial Statements relating to the period up to the acquisition by Annesley being provided and confirmed by the vendor or parties associated with it.
- 10.6.4 A Facilitation Agreement pursuant to which Annesley (as Facilitator) agreed to transfer control of the trust with the difference between the consideration payable under this agreement and that payable under the agreement referred to in sub-paragraph 1 above representing the profit to be derived by Annesley on the transaction.
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- 10.6.5 A Deed of Removal and Appointment of Trustee which, in essence, provided for the appointment of the purchaser's nominee as the new trustee of the trust and also saw the transfer of the right of indemnity to interests associated with the purchaser. In most cases, the consideration payable was equivalent to the consideration payable under the Deed relating to the change of trustee in favour of Haven Sea.
- 10.6.6 Financial statements and business records being provided to the purchaser's interests and, if possible and relevant, statutory declarations from those aware of the previous business dealings of the trust being acquired."
9. Mr Collie said that this approach was used in about eight transactions in the period from 30 June 1994 to 30 April 1995.
10. In late 1994 Mr Collie was contacted by Mr Gary Urwin of the Sydney accounting firm, Hall Chadwick. He indicated that clients of that firm had incurred significant trading losses. He inquired whether there was a market in Brisbane for such "entities". The word "entities" seems to have referred to, or included, the Sydney trust. At about that time Mr Collie was also contacted by Mr Priddle on behalf of the Weyers. Mr Collie said that "At some point soon thereafter, it became apparent that (the Sydney trust) could be suitable given the quantum of losses and the likely purchase/sale costs." Mr Collie "acquired" the trust and "assigned" it to the Weyers. This occurred in or about December 1994, prior to the date on which sch 2F (ss 265-5 - 272-140) of the ITA Act took effect.
The Sydney trust
11. The history of the Sydney trust appears from the affidavit of Richard Thomas de Lauret Arnold, a chartered accountant, and those of two solicitors, Mr Robinson and Mr Creais. Mr Arnold was, from its incorporation in 1984 until 1989, a director of Nommack (No 75) Pty Ltd ("Nommack (No 75)"), the trustee. No explanation has been given for choice of the name Nommack Nominees as the new name for Zapped Pty Ltd. It was unrelated to Nommack (No 75). The Sydney trust was established on 11 October 1985. Nommack (No 75) was its trustee from that date, probably until June, 1994. Mr Arnold prepared its tax returns until 1989 and, after the Weyers obtained control of it, for the years 1990 to 1994.
12. The Sydney trust was set up by Frank William Theeman and George Adler, both of whom were Mr Arnold's clients. They intended to use it as a vehicle for the purchase and sale of property in the Sydney central business district. They acquired Nommack (No 75) for use as its trustee. The trust deed is dated 11 October 1985 and records that the settlor, Vernette Elizabeth McLean, transferred to Nommack (No 75) the sum of one dollar upon the terms and conditions of the trust. There is confusion in the trust accounts as to whether the original settled amount was one dollar or ten dollars. The beneficiaries identified are:
- "(a) National Heart Foundation of Australia Queensland Division.
- (b) The Australian Red Cross Society Queensland Division.
- (c) The Royal Guide Dogs for the Blind Association of Queensland.
- (d) Any person or corporation (not being the Settlor) who or which at the time hereof or at any time prior to the vesting day has made or makes a donation to any one or more of the above named beneficiaries in the sum of $2 or upwards and who or which (with the consent of the Guardian should there be a person or company holding such office) the Trustee may at any time and from time to time after June 30, 1985 and before the vesting day nominate to be a general beneficiary.
- (e) Any person, corporation, trustee of any trust or charity as the Appointor shall by notice in writing to the Trustee after June 30 1985 and before the vesting day appoint to be a beneficiary for the purpose of this Deed PROVIDED THAT the following shall not be appointed beneficiaries for the purpose of this subclause;
- (i) the Settlor;
- (ii) any trust which would if appointed result in the infringement of the law against perpetuities.
- (f) Any assignee of rights of a beneficiary including any assignee of a part of those rights or of the right to receive income in whole or in part indefinitely for a fixed or limited period."
13.
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The trust deed contemplated the appointment of both an appointor and a guardian. Pursuant to sch 3 the first guardian was F.W.T. Investments Pty Ltd. The first appointor was Commercial Administrations (Kogarah) Pty Ltd. The guardian could, in effect, control aspects of the trustee's exercise of powers under the trust deed. The taxpayers accept that at all times relevant to these proceedings, there was no guardian. The appointor was empowered to appoint new trustees and a new appointor.Theeman and Adler - property transactions
14. Mr Arnold said that Messrs Theeman and Adler conducted their business in a particular way. Having identified a property for development, they would then acquire a new trustee company and establish a separate trust for the venture. The trustee would enter into an agreement to purchase the chosen property, borrowing the amount of the deposit pursuant to a limited recourse loan agreement with Rothwells, a merchant bank, or one of its associated companies. The terms of the loan provided for the equal division of nett profits between the lender and the trustee, after repayment of loan moneys and interest. Theeman and Adler were not, themselves, developers. They acquired property only for resale to developers.
15. According to Mr Arnold, the Sydney trust was established by Theeman and Adler as a vehicle for the purchase and sale of property at 261 and 263 Elizabeth Street, Sydney. That property was acquired and re-sold prior to 30 June 1987 for a nett profit of about $500,000. Notwithstanding the previously stated policy of using a new company and a new trust for each project, Messrs Theeman and Adler decided to use the Sydney trust in the acquisition and sale (the "Elizabeth Street project") of another property at 142-148 Elizabeth Street, Sydney (the "Elizabeth Street property"). In August 1987 Nommack (No 75), as trustee of the Sydney trust, entered into a contract to buy that property for $16.5 million. A deposit of $1.65 million was paid, having been advanced to Nommack (No 75) by Media Portfolio Ltd. Mr Arnold understood that company to be a member of the Rothwells Group, based in Western Australia. However other evidence suggests that it was associated with a Mr Peter Lucas and was based in Melbourne. Mr Arnold's evidence invites the inference that the loan was on terms similar to those set out above. I am not sure that I should draw it.
16. The funds were advanced by way of a commercial bill facility for a fixed period, but in the expectation that it would be renegotiated at maturity and "rolled over" for up to two years. Mr Arnold said in par 19 of his affidavit:
"In terms of the loan arrangements, the trustee Nommack No 75 remained liable for repayment of the deposit monies and accrued interest to Media Portfolio (even in the event of the Contract of Sale not proceeding). I recall that Frank Theeman was a man of substantial wealth whilst Mr Adler had very few assets. Mr Theeman was concerned in relation to his liability on borrowed funds and insisted that any borrowings that they undertook were to be limited only to the project. That is, there were to be no personal guarantees or other recourse beyond the special project vehicle and its assets."
17. Mr Arnold did not identify the source of his knowledge as set out in the first sentence of the paragraph. One might reasonably expect a director of Nommack (No 75) to have had such knowledge, but other parts of the evidence suggest that he had no direct knowledge of the matter. The project failed, and the vendor forfeited the deposit. It is not entirely clear whether this was because Nommack Nominees could not find a buyer or because it could not find funds to complete. Perhaps it was a combination of both. Such difficulties were said to have resulted from the collapse of the property market and the 1987 stock market "crash".
18. On 11 August 1988 Nommack (No 75) lodged a caveat over the property. I infer that, by that date, it was in default, and that the vendor had rescinded, or threatened to rescind, the contract, forfeiting the deposit. Mr Theeman died on 24 January 1989. On 10 September 1990 the vendor applied, pursuant to the Real Property Act 1900 (NSW), for an "application for preparation of lapsing notice". That is apparently the process used by registered proprietors in New South Wales to remove caveats. Evidence from the solicitors who were then acting for Nommack (No 75), Messrs
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Robinson and Creais, suggests that in all probability, the caveat was subsequently removed. Mr Arnold cannot remember the outcome. I infer that the caveat has been removed. It is inconceivable that it could still be current in light of the subsequent history of Nommack (No 75). Mr Arnold understood that the debt owed to Media Portfolio was never forgiven or repaid. It continued to accumulate interest which Mr Arnold showed as a debt in the accounts of Nommack (No 75) for the years 1990 - 1994. According to Mr Arnold, an additional debt of $133,971 was incurred for consultancy fees. As far as the evidence goes, neither Nommack (No 75) nor the Sydney trust entered into any further transactions until late 1994 or early 1995."Transfer" of the Sydney trust to Mr Collie
19. On 20 June 1994, the appointor, Commercial Administrations (Kogarah) Pty Ltd, now known as Hall Chadwick NSW Management Consulting Pty Ltd ("Hall Chadwick NSW"), appointed V.A. Clothing Pty Ltd ("VA Clothing") to be trustee of the Sydney trust. VA Clothing was controlled by Mr Arnold. I infer that this step was taken in preparation for the transfer of the trust to some other person, perhaps Mr Collie. Until 29 February 1996 Mr Arnold's wife was also a director. They both attended a meeting of the board held on 20 June 1994 at which the company's appointment as trustee was noted. Under the heading "Indemnity", the minutes recorded that:
"The Chairman referred to the Elizabeth Street Sydney Trust and reported that he had negotiated acquisition of the right of indemnity from the former Trustee. In view of the trust's liabilities, the acquisition price was agreed to be $1,000 to be satisfied by payment of the amount in part settlement of professional accountancy fees due by the former trustee.
RESOLVED to execute any necessary documents to complete the transaction."
20. This suggests that Mr Arnold had negotiated the assignment of the right of indemnity by Nommack (No 75) in payment of his outstanding fees. One might have inferred that Mr Arnold was the assignee, but that would not explain why the matter was raised at the board meeting. In subsequent transactions it seems to have been assumed that VA Clothing was the assignee. There is no other evidence as to the terms of the assignment, nor as to the mechanism by which Nommack (No 75) made the assignment. It also seems to have subsequently been assumed that Nommack (No 75) had, by such assignment, released its claim to indemnity from the trust assets for any debt properly incurred by it as trustee of the Sydney trust. I would not infer such release from the content of the minutes of the meeting of 20 June 1994. I would rather have inferred that the assignment was of the future benefit of the right to indemnity, although such an assignment would be unnecessary. The trust deed and equitable principles would have conferred such right on any new trustee.
21. As at 20 June 1994, according to Mr Arnold, the trust assets included:
- • the settlement sum of $10;
- • an unsecured loan to Nommack (No 41) Pty Ltd in the amount of $1,700;
- • an entitlement to the refund of stamp duty paid on the contract to purchase the Elizabeth Street property; and
- • the books and records of the company.
22. The settlement sum was, in fact, one dollar. In cross-examination, Mr Arnold agreed that he had not physically received that sum. He also accepted that Mr Theeman had, prior to his death in 1989, recovered the stamp duty. Mr Robinson's evidence demonstrates as much. As there is no evidence of the receipt of that refund by Nommack (No 75), one might infer either that it did not pay the stamp duty in the first place, or that Mr Theeman's estate owes the relevant amount to Nommack (No 75) or to the present trustee, Nommack Nominees. There is no evidence as to the source of funds used to pay the stamp duty. There is some evidence that the liquidator of Media Portfolio enquired about it. This might suggest that its records show that it paid the stamp duty.
23. Exhibit RTLA9 to Mr Arnold's affidavit is a "facilitation agreement", apparently dated 23 December 1994. This was evidenced by the "transfer" of the Sydney trust to Mr Collie. The typed date is "22", but this has been crossed out and the date "23" inserted. The parties are VA Clothing, Hall Chadwick NSW and Annesley.
24.
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Mr Arnold asserted that on 23 December 1994 VA Clothing became appointor of the Sydney trust pursuant to cl 10 of the facilitation agreement. Pursuant to a deed of removal and appointment of trustee, which is schedule 2 to the facilitation agreement, VA Clothing was to become trustee prior to settlement, but then to be replaced by Haven Sea. On my reading of cl 10 of the facilitation agreement, Annesley became appointor. The facilitation agreement recorded Annesley's wish to obtain control of the trust, "including all assets and liabilities" and provided that at completion, Annesley was to be put in control of various records, choses in action and a "Duly executed deed in the form of the Deed referred to in Part Six of the Schedule", apparently the deed of removal and appointment of trustee. Consideration for the "acquisition" was the sum of $35,000.25. On or about 24 December 1994 Mr Arnold signed and lodged tax returns for the years 1989-90 to 1993-94. The return for 1994 showed accumulated losses of $2,655,292. Mr Arnold said that the debt of $1,700, shown in the accounts as owing by Nommack (No 41) to the trustee, was the balance of funds previously held by Nommack (No 75) as trustee, which funds were not needed and so were lent to Nommack (No 41). Mr Arnold was a director of that company. It has been wound up and/or de-registered.
26. The accumulated losses were apparently reflective of debts owed to Media Portfolio, Ratic Investments Pty Ltd and Nommack (No 100) Pty Ltd (the "trust debtors"). It seems that all of these debts arose out of the Elizabeth Street project. The vast bulk of the indebtedness was allegedly owed to Media Portfolio. I understand the parties to have conducted the case upon the basis that all three debts should be treated in the same way for present purposes. The dispute is as to how all three should be treated.
27. It seems that in addition to the consideration identified in the facilitation agreement, the sum of $10,000 was paid to persons entitled to share in Mr Theeman's estate.
"Transfer" of the Sydney trust to the Weyers
28. The documentation evidencing the transfer of control of the Sydney trust to the Weyers was in much the same form as that adopted in transferring control to Mr Collie. The facilitation agreement dated 21 December 1994 recited the fact that Mr Weyers wished to obtain "control of the trust including all assets and liabilities" and that Annesley and Haven Sea (the appointor and trustee) were willing to facilitate delivery of such control. At completion Mr Weyers was to receive:
- "3.1.1 All financial and accounting books and receipts, copies of all returns and assessments lodged by the Trust or in respect of the Trust under the Income Tax Assessment Act or other legislation, State and Federal, and all other financial and business records and documents of the Trustee relating to the Trust.
- 3.1.2 All bank accounts and other accounts, investments, facilities or other choses in action operated, maintained or held by the Trust with any bank or financial institution or person.
- 3.1.3 Duly executed deed in the form of the Deed referred to in Part Six of the Schedule."
29. That deed was a deed of removal and appointment of trustee similar in form to that used in the earlier transaction. Mr Weyers was to pay to Haven Sea the sum of $155,000, $85,000 on completion and the balance on or before 31 March 1995. At the completion date the Sydney trust was to have no liabilities other than those disclosed in financial statements and final accounts "… within a reasonable time after the completion date". There were to be no outstanding contracts, engagements or agreements binding the trust, and the trust and trustee were to have complied with "all material requirements and obligations statutory and lawful in respect of their accounts and records and the lodgment of all statutory returns of both the Trust and the Trustee …".
30. The deed of removal and appointment of trustee is dated 24 December 1994, the "4" having been handwritten over a pre-existing printed figure. The settlement date was also 24 December 1994, that date having been similarly inserted by hand-written amendment. The deed recites that Haven Sea was:
- • "to be appointed the trustee of the Trust with effect from the date set out in Part 7 of the Schedule (24 December 1994) on terms
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including the acquisition of the right of indemnity against trust assets to which (Nommack (No 75) was entitled …" and - • to be entitled to indemnity out of the assets of the trust to the extent that it incurred debts or liabilities on behalf of the trust "and/or as a consequence of the Trustees acquisition of the original right of indemnity …."
31. The deed also provided that the appointor (Annesley) would appoint Nommack Nominees as trustee in lieu of Haven Sea. Haven Sea would, at the option of Mr Weyers:
- "2.1 Assign and transfer all its right, title and interest in the right of indemnity to (Mr Weyers) or (his) nominee in which event (Haven Sea) shall forever discharge and release the assets of the Trust and (Nommack Nominees) and any liability for stamp duty in respect of such assignment and transfer shall be borne by (Mr Weyers).
- 2.2 Irrevocably renounce, relinquish and release all its right and interest in the right of indemnity and forever discharge and release the assets of the Trust and (Nommack Nominees) and any subsequent trustee from all claims arising in relation to the right of indemnity …".
32. The deed also provided that "… provision by (Mr Weyers) at settlement of a notice in writing exercising his option shall be sufficient to give full effect to (subclause 2.2) without further documentation." At some stage, probably on or about 22 or 23 December 1994, Mr Weyers nominated Cherrybrook for this purpose. See exhibit RW15 to his affidavit.
The Sydney trust and the Weyers - trading history
33. It seems that Mr Weyers was employed by Cherrybrook until 20 December 1994. On 30 March 1995, Nommack Nominees entered into an agreement with Forrester for the supply of consultancy services, but with effect from 20 December 1994. As it is common ground that Mr Weyers was to provide such services to Forrester as an employee of Nommack Nominees, I infer that he ceased working for Cherrybrook on that date and immediately commenced employment with Nommack Nominees. Mrs Weyers became secretary of Nommack Nominees and provided bookkeeping services. Nommack Nominees paid salaries to both Mr and Mrs Weyers, but they concede that the amounts were not sufficient to meet their living expenses. They regularly paid for personal and household outgoings from Sydney trust funds. To the extent that such payments were not treated in the trust accounts as salaries, they were treated as loans.
Trust income and outgoings
34. Relevant aspects of the trust financial records for the tax years from 1994-1995 to 2001-2002 are set out below. These figures are subject to two qualifications. Firstly, in each year, I have identified nett business income and other items of income, most of which are quite small. The total of such items was probably not the taxable income for the year in question because there were some minor deductions or adjustments which I have not included. However I have treated it as being the taxable income. In each year, I have then identified the purported set off of that taxable income against accumulated trust losses. Because I may have overlooked some minor deductions, the statement that in each year a particular amount was set off against accumulated losses may not be precisely correct, but it is close enough to give a fair impression of the way in which the Weyers' affairs and those of the trust were conducted. Secondly, the evidence suggests that there were some amended returns. I may have overlooked one or more of them but again, the overall impression is fair. However these figures should not be used as a basis for any further calculations.
| 1995 | |
| Nett business income | $184,383 (from Forrester) |
| Distribution from non-primary production income | $156,887 (from Cherrybrook) |
| Interest | $ 207 |
| $341,477 |
This sum was allegedly set off against prior year losses, leading to an assessable income of nil.
The balance sheet shows the following outstanding loans owing to Nommack
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Nominees as at 30 June 1995 and as at 30 June 1994:| 1995 | 1994 | |
| Nommack (No 41) Pty Ltd | Nil | $1,700 |
| Finmack Pty Ltd | $30,000 | Nil |
| Loan - R & BK Weyers | $314 | Nil |
| Loan - R Weyers | $110,315 | Nil |
| Loan - K Weyers | $73,135 | Nil |
| Loan - The Weyers Family Trust (Cherrybrook Pty Ltd as trustee) | $100,364 | Nil |
I understand "K Weyers" to be Mrs Weyers. Thus loans to Mr and Mrs Weyers in this tax year exceeded $180,000. As I understand the evidence, the debt previously owed by Nommack (No 41) was written off rather than paid.
The 1995 balance sheet shows non-current liabilities at 30 June 1995 as totalling $2,656,991, including:
| $2,514,506 | owing pursuant to commercial bills; |
| $1,960 | owed to Ratic Investments Pty Ltd; and |
| $140,523 | owed to Nommack (No 100) Pty Ltd |
These figures reflect the position as shown in the 1994 accounts.
The profit and loss account shows a reduction in accumulated losses from $2,655,292 to $2,317,134.
| 1996 | |
| Nett business income | $553,161 |
| Distribution from non-primary production income | $ 61,063 |
| Interest | $ 4,153 |
| $618,377 |
This amount was purportedly set off against prior year losses. The item of $61,063 may be the nett proceeds from a joint venture with a company called Finmack.
The balance sheet shows the following loans as outstanding:
| 1996 | 1995 | |
| Finmack Pty Ltd | Nil | $30,000 |
| Loan - R & BK Weyers | $144,424 | $314 |
| Loan - R Weyers | $208,939 | $110,315 |
| Loan - K Weyers | $76,618 | $73,135 |
| Loan - The Weyers Family Trust (Cherrybrook Pty Ltd as trustee) | $32,487 | $100,364 |
During this tax year loans to Mr and Mrs Weyers increased by more than $240,000.
Non-current liabilities are shown as $2,656,991. The profit and loss account shows a reduction in accumulated losses to $1,695,951.
| 1997 | |
| Nett income from business | $111,972 |
| Gross Interest | $ 7,909 |
| $119,881 |
There is a declared capital gain of $89,496. Prior year losses totaling $209,377 were set off against these sums.
The balance sheet shows loans as follows:
| 1997 | 1996 | |
| Loan - R & BK Weyers | $180,129 | $144,424 |
| Loan - R Weyers | $273,183 | $208,939 |
| Loan - K Weyers | $110,846 | $76,618 |
| Loan - The Weyers Family Trust (Cherrybrook Pty Ltd as trustee) | $32,487 | $32,487 |
In this tax year loans to Mr and Mrs Weyers increased by more than $130,000.
Non-current liabilities are again shown as totaling $2,656,991. The profit and loss account shows a reduction in accumulated losses to $1,484,054.
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| 1998 | |
| Nett income from business | $161,134 |
| Gross Interest | $ 7,339 |
| Unfranked dividends | $ 125 |
| $168,598 |
This amount was set off against prior year losses.
The balance sheet shows the following loans:
| 1998 | 1997 | |
| Loan - R & BK Weyers | $164,509 | $180,129 |
| Loan - R Weyers | $328,980 | $273,183 |
| Loan - K Weyers | $121,101 | $110,846 |
| Loan - The Weyers Family Trust (Cherrybrook Pty Ltd as trustee) | $32,487 | $32,487 |
In this tax year loans to Mr and Mrs Weyers increased by about $50,000.
The balance sheet shows non-current liabilities as $2,656,991. The profit and loss account shows a reduction in accumulated losses to $1,326,012.
| 1999 | |
| Nett income from business | $166,323 |
| Gross Interest | $ 3 |
| Franked dividends | $ 2,430 |
| Imputation credit | $ 1,367 |
| $170,123 |
This amount was set off against accumulated losses.
Loans as per balance sheet:
| 1999 | 1998 | |
| Loan - R & BK Weyers | $244,306 | $164,509 |
| Loan - R Weyers | $356,210 | $328,980 |
| Loan - K Weyers | $124,968 | $121,101 |
| Loan - The Weyers Family Trust (Cherrybrook Pty Ltd as trustee) | $32,487 | $32,487 |
During this tax year loans to Mr and Mrs Weyers increased by about $110,000.
The balance sheet shows non-current liabilities as $3,103,097. The profit and loss account shows accumulated losses as $1,145,402.
| 2000 | |
| Nett income from business | $418,720 |
| Nett rent | $ 14,428 |
| Interest | $ 1,955 |
| Franked dividends | $ 2,726 |
| Imputation credits | $ 1,532 |
| $439,361 |
This amount was set off against accumulated losses.
Loans as per balance sheet:
| 2000 | 1999 | |
| Loan unsecured - R & BK Weyers | $974,243 | $244,306 |
| Loan unsecured - Robert Weyers | Nil | $356,210 |
| Loan unsecured - BK Weyers | Nil | $124,968 |
| Loan unsecured - The Weyers Family Trust (Cherrybrook Pty Ltd as trustee) | $32,487 | $32,487 |
In this tax year loans to Mr and Mrs Weyers increased by about $250,000.
The balance sheet shows non-current liabilities as $2,656,992. The balance of accumulated losses is shown in the tax return as $726,555 and in the balance sheet as $697,849.
| 2001 | |
| Nett income from business | ($191,054) |
| Nett rent | ($ 5) |
| Gross Interest | $ 77 |
| Franked Dividends | $ 1,635 |
| Imputation Credit | $ 842 |
| ($188,505) |
The loss was carried forward.
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Loans as per balance sheet:| 2001 | 2000 | |
| Loan unsecured - R & BK Weyers | $1,205,532 | $974,243 |
| Loan unsecured - The Weyers Family Trust (Cherrybrook Pty Ltd as trustee) | Nil | $32,487 |
During this tax year loans to Mr and Mrs Weyers increased by about $230,000.
The balance sheet shows non-current liabilities as $2,656,992. Accumulated losses are shown as $914,767 in the tax return and in the balance sheet as $889,267.
| 2002 | |
| Nett income from business | $938,179 |
| Interest | $ 8,867 |
| Franked Dividends | $ 1,350 |
| Imputation Credits | $ 578 |
| $984,983 |
This amount was set off against accumulated losses.
Loans as per balance sheet:
| 2002 | 2001 | |
| Loan unsecured - R & BK Weyers | $1,828,085 | $1,205,532 |
During this tax year loans to Mr and Mrs Weyers increased by over $620,000.
The balance sheet shows non-current liabilities as $2,656,992. Accumulated losses are shown as nil.
35. Of the above figures Mr Weyers gave some explanation. The amount of $156,887 identified in the 1995 return as a distribution from partnerships and trusts was a distribution from Cherrybrook as trustee of the family trust. Exhibit RW5 to Mr Weyers' affidavit contains minutes of a meeting of the directors of Cherrybrook as trustee, held on 3 March 1995. Mr and Mrs Weyers attended. The minutes noted a profit to 28 February 1995 of $207,413 and a decision to make an interim distribution of $160,00 to be "paid set aside and applied for the benefit of Nommack Nominees Pty Ltd … (as trustee for the Elizabeth Street Sydney Trust)". However it seems that Cherrybrook was to retain possession of that amount and "reinvest the same by way of loan or loans on behalf of each beneficiary to The Weyers Family Trust such loan or loans being interest-free and repayable on demand." Although the wording is a little obscure, this seems to mean that the money was to be lent by the Sydney trust to the family trust. At a subsequent meeting held on 28 June 1995, an appropriation of a capital gain of $4,014 was made in favour of Karen Weyers, presumably Mrs Weyers. This led to a trust loss for the year ended 30 June 1995. That loss was "applied in reducing the amount of the interim distribution to Nommack Nominees Pty Ltd", reducing the amount of the original distribution of $160,000 to $155,268. The figures do not quite add up.
36. In the 1995 year, according to Mr Steele, "A PPS credit was incorrectly included in the personal returns of Robert Weyers and Barbara Karen Weyers of $28,000 each and incorrectly excluded from the ESST taxation return." This seems to be a distribution of the PPS credit of $56,000 which appears in the Sydney trust's return for the year 1995. Such a credit may only be passed on to a beneficiary in this way if he or she receives a share of the nett income of the trust. In their 1995 returns, Mr and Mrs Weyers each declared receipt of $28,000 from this source. Both deny that they are, or have ever been, beneficiaries of the Sydney trust. They claim to have received loans from it during the year in question, but not to have shared in any income. The Commissioner relies on the distribution of PPS benefits as demonstrating that they are, or were, beneficiaries.
37. In August 2004, Mr and Mrs Weyers made statutory declarations asserting that they were not, and had never been beneficiaries of the Sydney trust. They also executed releases in respect of any benefits derived in that capacity. Whilst Mr and Mrs Weyers may give evidence as to whether they were beneficiaries at any particular time, they cannot change the position retrospectively in so far as concerns accrued tax liability.
38. As to the 1996 return, Mr Weyers said that the profit derived from a joint venture with Finmack concerned development of a block of units at Wynnum. Sale of the units progressed
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slowly, and so Nommack Nominees purchased two of the units for rental and sale at a later date.39. In 1997 Nommack Nominees sold two units in the Royal Albert apartment complex in the Brisbane central business district, deriving a profit from such sales.
40. In 1999 an amended return was lodged, but nothing relevant arises from that fact.
41. In 2000 Nommack Nominees entered into a joint venture with a company called Forrester Kurts which was the successor to Forrester.
42. In 2001 the Sydney trust made a loss, largely as the result of income from sales being received in the 2002 year rather than in the 2001 year. The market was a little depressed. Mr Weyers may have chosen to retain stock rather than to sell.
Tax returns, Part IVA determinations and re-assessments
Mr Weyers
43. Below, I set out relevant detail from Mr Weyers' tax returns for 1994 and 1995.
Year ended 30 June 1994
44. Mr Weyers returned the following income:
| from Cherrybrook (presumably salary) | $ 36,000 |
| partnerships and trusts | $ 67,044 |
| nett capital gain | $ 26,100 |
| Total taxable income | $129,144 |
Year ended 30 June 1995
45. Mr Weyers returned the following income:
| from Cherrybrook (presumably salary) | $54,000 |
| partnerships and trusts | Nil |
| Total taxable income | $54,000 |
46. The sum of $28,000 was claimed by way of "PPS credit" against tax payable, apparently as a distribution from the Sydney trust. At a later stage it was decided that such claim had been incorrectly made. I have previously discussed this matter.
47. In each of the years 1996, 1997, 1998, 1999, 2000 and 2002, Mr Weyers returned gross income of $60,000, derived from Nommack Nominees, presumably as salary.
48. At some time prior to 11 December 2003, the Commissioner concluded that the accumulated losses in the Sydney trust were not available for application in reduction of trust income in the years 1995 to 2000 and 2002, and that there had been an avoidance of tax payable by Mr Weyers due to fraud or evasion. On 11 December 2003, the Commissioner made determinations pursuant to Part IVA of the ITA Act with respect to Mr Weyers' assessable income for each of those years.
49. In each case the Determination under Part IVA was in the following form, with the appropriate additional information inserted:
"I, ……, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation, determine under paragraph 177F(1)(b) of the Income Tax Assessment Act 1936 (the Act) that:
The amount of $… being referable to a tax benefit obtained by Nommack Nominees Pty Limited as trustee of Elizabeth Street Sydney Trust (the Trust) in connection with a scheme to which the provisions of Part IVA of the Act applies, namely a deduction or part of a deduction being allowable to the Trust in relation to the year of income, be not allowable to the Trust in calculating the nett income (as defined in s 95 of the Act) of the Trust for the year of income ended 30 June ….
I further determine under paragraph 177F(1)(a) of the Act that:
The whole of the amount of $… being referable to a tax benefit obtained by Robert Weyers in connection with a scheme and being the net income of the Trust for the year ended 30 June …, be included in the assessable income of Robert Weyers, TFN 135 610 687, for the year of income ended 30 June ….
I further determine under subsection 177F(2) of the Act that an amount of $… being the whole of the net income of the trust for the year ended 30 June … be included in the assessable income of Robert
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Weyers for the year ended 30 June … under subsection 97(1) of the Act."
50. On 23 December 2003, the Commissioner issued the following amended assessments of taxable income:
| Amended Taxable Income | |
| 1995 | $395,477 |
| 1996 | $678,357 |
| 1997 | $269,057 |
| 1998 | $208,397 |
| 1999 | $192,517 |
| 2000 | $491,961 |
| 2002 | $782,336 |
51. On 20 February 2004, Mr Weyers lodged objections to those amended assessments. On 7 June 2004, the Commissioner disallowed the objections. Mr Weyers now appeals from those decisions.
Mrs Weyers
52. The Commissioner subsequently treated Mrs Weyers in the same way as he had treated Mr Weyers. Her returned income for each year and the amended assessments of taxable income appear below.
| Year | Taxable Income as Returned | Amended Taxable Income |
| 1995 | $16,213 | $357,690 |
| 1996 | $15,926 | $634,303 |
| 1997 | $15,494 | $224,871 |
| 1998 | $15,066 | $183,664 |
| 1999 | $14,858 | $154,981 |
| 2000 | $14,882 | $459,119 |
| 2002 | $14,767 | $741,352 |
53. Mrs Weyers objected, but her objections were dismissed. Mrs Weyers appeals.
Nommack Nominees on its own account and as trustee of the Sydney trust
54. As I understand the position, Nommack Nominees, in its own right and as trustee, returned no income for each relevant year. On or about 10 November 2004, the Commissioner issued notices of assessment against Nommack Nominees in its own right, fixing its taxable income for relevant years as follows:
| 1995 | $341,477 |
| 1996 | $597,908 |
| 1997 | $209,377 |
| 1998 | $168,598 |
| 1999 | $140,123 |
| 2000 | $444,237 |
| 2002 | $759,335 |
55. Nommack Nominees objected to these assessments, but the objections were overruled. It appeals. The Commissioner also issued amended assessments for Nommack Nominees as trustee of the Sydney trust. Those matters are the subject of proceedings in the Administrative Appeals Tribunal.
Factual disputes
56. The Commissioner claims to know nothing about the prior trading history of the Sydney trust or Nommack (No 75), nor of the circumstances in which Mr Collie, and then the Weyers, obtained control of that trust, nor of its dealings thereafter. He submits that it is for each taxpayer to prove that the amended assessments are excessive.
57. I am, on balance, inclined to accept Mr Arnold's evidence and that of Mr Robinson and Mr Creais as to the circumstances surrounding the establishment of the Sydney trust and as to the loss of the deposit paid pursuant to the contract to purchase the Elizabeth Street, property. Mr Robinson was not cross-examined. Mr Creais was generally a more impressive witness than was Mr Arnold. He seemed to have no particular interest in the matter. Mr Arnold, on the other hand, had some interest in the transfer of the Sydney trust to Mr Collie, although the exact nature of that interest was unclear. Where the evidence of Mr Arnold conflicts with that of either of the solicitors, I prefer the latter evidence.
58. I see no reason to doubt that in June 1999, Hall Chadwick NSW exercised its power as appointor to appoint VA Clothing to be trustee of the Sydney trust or that Nommack (No 75) was struck off in July 1994. I accept that Hall Chadwick NSW subsequently appointed Haven Sea to be trustee and
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Annesley to be appointor. Annesley, in turn, appointed Nommack Nominees to be trustee.59. In the course of the trial counsel for the Commissioner demonstrated concern at the changed dates on some of the documentation transferring control of the trust to Mr Collie and then to the Weyers. In the end I am unable to see that anything turns upon that matter. Mr and Mrs Weyers, Mr Steele, Mr Priddle and Mr Collie all agreed that there was a meeting at the Weyers' home in late December 1994 at which documents incidental to the "transfer" of the Sydney trust to the Weyers were executed. I find that the meeting occurred prior to Christmas Eve. Although there may be some doubt about the order in which documents effecting the two "transfers" were executed, the parties' intentions are clear. All have conducted themselves upon the basis that those transactions were effective. I see no reason to doubt that they were effective, assuming that the Sydney trust remained in existence at all material times.
60. My general acceptance of the factual matrix outlined above should not be taken as indicating my acceptance of any evidence as to the existence in the Sydney trust of accumulated losses, the intentions with which transactions were entered into or the characterization of particular transactions, either in the evidence of the witnesses or in the documents. To the extent necessary, I will deal with other aspects of the evidence in my subsequent reasons.
The loss
61. Whilst I accept that Nommack (No 75) as trustee of the Sydney trust contracted to purchase the Elizabeth Street property and lost its deposit, the question is whether or not those circumstances led to its incurring a loss for the purposes of the ITA Act. As I understand it that depends upon its being a loss or outgoing of the kind previously contemplated by s 51 of the ITA Act and now by s 8-1. As Dixon J observed in
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 at 207:
"To come within that provision there must be a loss or outgoing actually incurred. "Incurred" does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a concept intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected."
62. See also
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 506-507.
63. If the creditors were entitled to call for repayment by Nommack (No 75) of their advances, it was entitled to indemnity out of the trust assets in the same amounts. The first question, then, is whether the creditors were so entitled. It is convenient to focus on the position of Media Portfolio. According to Mr Arnold, the arrangement between Nommack (No 75) and Media Portfolio was that on resale, the borrowed funds would be repaid with interest and any profit divided equally between two companies. However Mr Arnold did not see any relevant documentation. Indeed, it seems that there was no documentation until after it became apparent that the project would fail. See par 8 of Mr Robinson's affidavit. Mr Arnold seems to have understood that the loan was from a company in the Rothwells group, from which group Messrs Theeman and Adler had previously borrowed. Mr Creais understood that Media Portfolio was not part of the Rothwells group.
64. Mr Arnold's knowledge of the transactions seemed, at some points, to be based on the assumption that it was funded in the same way as had been previous transactions. Clearly, however, it differed from earlier transactions in that it was a second transaction using Nommack (No 75) and the Sydney trust. According to Mr Arnold, Messrs Theeman and Adler had previously used each trustee company and trust for only one transaction. If Media Portfolio was not part of the Rothwells group, that was also a departure from the previous practice. At other points, Mr Arnold's knowledge seemed to be derived primarily from statements made to him by Mr Theeman. The evidence was received under s 63 of the Evidence Act 1995 (Cth). I am unpersuaded as to its reliability or that Mr Arnold had any specific knowledge of the terms upon which Media Portfolio advanced the relevant funds.
65.
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Although I accept that Media Portfolio advanced the deposit, I find it more difficult to conclude that the advance was to be repayable by Nommack (No 75) in the event that the project failed. If Media Portfolio was to recover the loan, interest and half of any profits on resale, it is quite possible that it was to bear some or all of the risk of the project. Prior to the circumstances which caused the project to fail, the risk may have seemed quite small. Given that Nommack (No 75) had virtually no assets and there were no guarantees, Media Portfolio can hardly have expected such repayment.66. Mr Robinson said that after the advance was made, and after the stock market crash which was responsible for the project's failure, Mr Theeman agreed to execute loan documents evidencing the transaction. Mr Robinson also said that shortly after the documents were signed, the debt was assigned by Media Portfolio. Perhaps there was some potential tax advantage to Media Portfolio or any assignee in appearing to be entitled to repayment. It seems that at a later stage, the liquidator of Media Portfolio enquired after the stamp duty. As I have said, this might suggest that Media Portfolio paid the stamp duty. Nobody seems ever to have sought to recover the debt or interest on it.
67. In all of the circumstances, I am inclined to the view that at the time of the transaction, nobody expected that Nommack (No 75) would repay the amount of the advance or interest in the event that the project failed. That no attempt has ever been made to secure repayment confirms this view. Of course, absence of a reasonable expectation of payment does not mean that there was no legal liability to pay. The fact that Media Portfolio advanced funds to meet amounts payable by Nommack (No 75) pursuant to the contract would normally be sufficient to justify an implied undertaking to repay, but the circumstances of this case are more complex, particularly as Nommack (No 75) and Media Portfolio were joint venturers.
Treatment of the "debt" in the accounts of Nommack (No 75)
68. There is considerable confusion in Mr Arnold's evidence concerning the preparation of accounts and tax returns for Nommack (No 75) for the years 1988 to 1994. In his first affidavit he said at par 15:
"Hereto annexed and marked "RTLA-4" are true copies of a bundle of documents comprising financial statements and tax returns for the financial years 1985/1986 to 1990 (inclusive) which were prepared by me and which were part of the documents which were retained by me as part of the business records of the trust."
69. Exhibit RTLA4 appears to contain tax returns for 1986, 1987, 1988, 1989 and 1990. The contract for the Elizabeth Street property was entered into in August 1997. The 1988 return discloses a nett loss of $6,518, showing the Elizabeth Street property as an asset valued at $1,835,139.47 (presumably representing the amount of the deposit and some outgoings) and liabilities, including commercial bills, totalling somewhat more than that. At a later stage the Commissioner adjusted that return to include profit on sale of the property at 261 and 263 Elizabeth Street in the amount of $554,226 which profits had been distributed to Ratic Investments Pty Ltd as trustee of the Theeman Family Trust and Stavex Pty Ltd. The 1989 return shows a nett loss of $277 and carried forward losses of $6,795. No other information for that year is provided in exhibit RTLA4. The 1990 return, which is also included in exhibit RTLA4, shows total assets of $1,710 represented by the $1,700 advance to Nommack (No 41) previously mentioned and the erroneous settlement amount of $10. Liabilities are shown to be $2,656,991.56, apparently the amount of the trust debts, plus interest.
70. In par 35 of his affidavit Mr Arnold said that "On or about 24 December 1994 I signed and caused to be lodged with the Commissioner of Taxation income tax returns for Nommack No.75 as trustee of the (Sydney trust) for the years ended 30 June 1990 to 30 June 1994 (inclusive) …". This suggests that such documents were prepared later than those contained in ex RTLA4, probably at the time of the transfer of the Sydney trust to the Weyers. The difficulty with that scenario is that the (perhaps critical) 1990 return is in both categories.
71. In par 24 of Mr Arnold's first affidavit he said, concerning the claimed "loss" and interest thereon:
"The loss sustained by the Trust on forfeiture of the deposit under its contractual
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arrangements with Tipora Pty Ltd ("Tipora") was a substantial loss and included interest which was also payable on that loan which Nommack No.75 received from Media Portfolios. I calculated the interest expense due to Media Portfolio prior to submitting the 1990 income tax return of Nommack No.75 at $864,513.70."
72. In view of the express statement in par 35 that the 1990 return was lodged on 24 December 1994, it seems probable that the 1990 return was prepared shortly before its submission in December 1994, and that its inclusion in exhibit RTLA4 was incorrect. The matter is further complicated by Mr Arnold's second affidavit in which he said at par 1.7:
"I have been shown a copy of documents 100, 116 and 122 within the Agreed Bundle. All of these documents were prepared by me; subsequently presented to Mr Theeman for his approval and were subsequently approved by him. In the course of the preparation of the financial documents for each entity, I would be provided with source documents. The source documents would come to me and after looking through them I would delegate tasks regarding those documents to various staff members of mine. I have not retained any of those documents myself however some of the documents were kept within the files which were provided to the new trustee."
73. I do not understand this statement to detract from Mr Arnold's other evidence to the effect that he had not seen documents evidencing the Elizabeth Street transactions. The documents in the agreed bundle to which Mr Arnold referred were a report for the Sydney trust for the year ended 30 June 1987 (document 100), the trial balance for the period 1 July 1988 to 30 June 1989 (document 116), and a transfer of shares in Nommack (No 75) by Commercial Administrations (Kogarah) Pty Ltd (now Hall Chadwick NSW) to Nommack (No 41) Pty Ltd (document 122). The trial balance to 30 June 1989 showed a credit item of $1,783,971.46, representing the Elizabeth Street property, and a debit item of $1,650,000 said to represent "commercial bills". It shows inventories as $1,783,971.46 and liabilities as $1,792,483, yielding a nett excess of liabilities over assets of $6,784.88. In the agreed bundle of documents the trial balance follows a copy of the tax return for the year 1989. This appears to be a copy of the same document as is found in exhibit RTLA4. The trial balance precedes documents which appear to be accounts for 1988-1989. The trial balance bears figures in the top left-hand corner which suggest that it was prepared in November 1991. In any event it is unlikely that the trial balance for 1988-1989 was shown to Mr Theeman and approved by him. He died in January 1989. I reject Mr Arnold's evidence concerning the date of preparation of the trial balance and his claim that he showed it to Mr Theeman.
Was a relevant loss or outgoing incurred in connection with the Elizabeth Street property?
74. I accept that when Media Portfolio advanced the amount of the deposit, it expected to recoup it from the proceeds of sale of the property. This is demonstrated by the inclusion in the 1987-1988 accounts of the Elizabeth Street property as an asset and the amount of the bills as a liability. The question is whether Nommack (No 75) was liable to repay the advance (with interest) if the project failed. The absence of any assets suggests that there was no expectation that it would be able to discharge such liability. Media Portfolio apparently made no demand for repayment before it went into liquidation. There was a suggestion that the debt had been assigned by Media Portfolio, but no assignee has ever made demand for repayment. The liquidator of Media Portfolio enquired about the stamp duty, but not about the debt or interest thereon. The only reasonable inference is that it was never contemplated that, in the events which occurred, the advance would be repaid. I infer from the fact that the liquidator demonstrated no interest in the debt that it did not appear in the books of Media Portfolio. This conclusion is re-inforced by the fact that tax returns for the years 1990 to 1994 were not prepared until Mr Collie showed interest in the Sydney trust. If there were real losses of this magnitude, one would expect that steps would have been taken to maintain records of them. As these proceedings demonstrate, there was at least the possibility that they were of value to some people. Of course Mr Theeman died in January 1989 but nonetheless, he seems to have been a person of
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substance. One might have expected that his personal representative would have been anxious to maximize such benefits as were available from those losses.75. I do not say that I am persuaded on the balance of probabilities that Nommack (No 75) was not liable to repay the Media Portfolio debt. However I am not persuaded that it was so liable. As to the other debts, my understanding is that they were allegedly incurred by the creditors on behalf of Nommack (No 75) for the purposes of the Elizabeth Street project. In the absence of any suggestion by the parties that they should be treated differently, they should be treated in the same way as the Media Portfolio debt. I am not satisfied that they were to be repaid by Nommack (No 75) in the event that the Elizabeth Street project failed.
76. It seems that in the accounts of Nommack (No 75) the contract for purchase of the Elizabeth Street property was treated as being on foot as at 30 June 1989. There seems to have been little justification for so treating it. The caveat was lodged, in August 1988. It is likely that the contract had been determined by that time.
77. There is one other aspect of Mr Arnold's evidence to which I should refer. He said at par 26 that he was aware of outgoings totalling $133,971, "related to project costs including consultants such as engineers, architects and town planners." He claimed to have seen journal entries, bank statements and/or primary documents such as cheques, requisitions and invoices justifying that amount. It may be that these items were included in the smaller debts to which I have previously referred. If so, then my treatment of those debts as outlined above is appropriate. If not, I am unwilling to accept this evidence in the absence of more detailed explanation of the amounts in question.
Assuming that the trust debts were incurred
78. Despite my findings concerning the non-incurrence of the trust debts, it is appropriate that I consider the outcome in the event that such finding is incorrect. The Commissioner asserts that if there was a loss, then at some time prior to December 1994, it ceased to be available because it became apparent that the loans would never be called in. It is now more than eight years since the advances and more than seven years since the Elizabeth Street project failed. Nommack (No 75) and Ratic Investments have been de-registered, and Media Portfolio has been wound up. There would be serious procedural difficulties in seeking to recover such debts. Mr Weyers was assured by Mr Priddle that the trust assets were not liable for any debts incurred prior to December 1994. I find it difficult to believe that he would have acquired the trust on any other basis. On balance it is safe to infer that by the time Mr Weyers acquired the trust in December 1994, there was no reasonable possibility that Media Portfolio or anybody else would seek to enforce any debt owed by Nommack (No 75). There was also no reasonable likelihood that Nommack (No 75) would seek indemnity out of the assets of the Sydney trust. It is also probable that the situation in June 1994, when VA Clothing became trustee, was the same.
Treatment of forgiven or abandoned debts
79. Assuming, contrary to my finding, that there was a loss in the 1988 or 1989 tax years, and accepting that by some time prior to December 1994, it was improbable that the trust debts, upon which the loss was based, would ever be called up, it is necessary to determine the tax consequences. The Commissioner submits that I should apply by analogy the decision of Hill J in
Warner Music Australia Pty Ltd v Commissioner of Taxation (1996) 70 FCR 197. In that case the taxpayer was, in November 1985, served with two sales tax assessments for the periods from 1 January 1982 to 31 May 1985 and from 1 February 1982 until 31 May 1982. The assessments were in the amounts of $599,087.72 and $564,544.69, together with additional tax in each case. The taxpayer objected to the assessments and sought an extension of time in which to pay. The extension was disallowed, and the decision to disallow challenged pursuant to the Administrative Decisions (Judicial Review) Act 1977 (Cth) (the "ADJR Act"). The Commissioner sought to recover the debt in the Supreme Court of New South Wales. The proceedings under the ADJR Act were resolved by consent orders in 1987. The dispute between the parties was ultimately settled in 1991. The Commissioner agreed to accept $650,000 in full satisfaction of the taxpayer's liability under the two assessments, waiving all rights to recover the amounts
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initially assessed, without admitting the correctness of the taxpayer's arguments. The taxpayer then claimed the total amounts assessed, excluding the additional tax, as income tax deductions for the year ended 30 November 1985. The Commissioner allowed the claim. The unpaid liability for sales tax had not previously appeared in the taxpayer's accounts, but it had been noted in the directors' report, with an indication that there had been an objection, and that in the opinion of the directors no amount was payable. In subsequent years similar notes appeared. The Commissioner sought to include that part of each assessment which he had foregone as income received by the taxpayer in the 1991 tax year.80. In June 1987 two further sales tax assessments were issued for the periods 1 June 1984 to 30 June 1985. One was for $4,197,209.20 with additional tax. The other was for the amount of $87,210 with additional tax. The amounts assessed were not paid. An extension of time was sought. The Commissioner refused the application, and an application was made pursuant to the ADJR Act. The taxpayer lodged objections against both assessments. The objections were overruled. The taxpayer appealed, in respect of the larger assessment to this Court, and in respect of the smaller, to the Administrative Appeals Tribunal. The proceedings concerning the refusal of the extension of time were settled upon the taxpayer agreeing to pay $1 million to the Commissioner who agreed not to commence recovery proceedings with respect to the balance until the proceedings had been determined. The proceedings in this Court were determined in favour of the taxpayer, as were the proceedings in the Administrative Appeals Tribunal. The Commissioner refunded the amount of $1 million to the taxpayer. The taxpayer claimed income tax deductions for the 1987 year in the amounts of the two assessments. The claims were allowed. The taxpayer returned the amount of the refund as assessable income. The Commissioner assessed that amount to income tax.
81. Expert accounting evidence was led concerning the proper accounting treatment of the disputed sales tax assessments. In order to understand the reasons given by Hill J, it is necessary to know something about that evidence.
82. One accounting witness said that once a sales tax assessment had been issued and become payable, liability should be recognized in the balance sheet of the taxpayer, whether or not the assessment is challenged. The witness then considered whether the assessment should be an "expense" item in the profit and loss account, and whether there should be a corresponding "receivable" item in the balance sheet, representing the contingent right to have the assessment expunged in the event of a successful objection and appeal. Hill J said at 202:
"It is, no doubt, obvious that the question whether a receivable should have been recognised in the balance sheet involved a question of judgment, depending upon factors such as the likelihood of success in contesting the assessment. Also relevant, no doubt, would be matters such as materiality and prudence in the preparation of the accounts. If (the taxpayer) had had a high expectation of success for its objection, in (the accountant's) view this would have justified recognition of a receivable in an amount equal to the liability. In such a case it would, no doubt, be wrong to recognize the liability as an expense in the profit and loss account."
83. The same accountant said that in the event of forgiveness or waiver of the liability, the initial entry recording the liability should be reversed and any corresponding asset written back.
84. Another accounting witness said that in a relevant United States standard, the definition of liability had, as the key issue, "whether management believed that payment of the amount of the liability was probable, either at the time of the original assessment or subsequent thereto." Of this proposition, Hill J said at 203:
"It is clear from his evidence that there could, at least, be occasions, in his view, where there could be an offsetting asset which, if the view was taken that the whole of the assessment was capable of being overturned on appeal, could be equal in amount to the amount of the liability. … In other words, if a taxpayer owed the
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Commissioner a sum of money and the taxpayer believed that it would be wholly successful on appeal so that there was a receivable in an amount equal to the amount of the assessment, the two amounts could be netted off. …"
85. The Commissioner advanced the proposition that:
"… the Court should recognise a general principle of taxation law that the assessable income of any taxpayer should include the gain or benefit derived by that taxpayer by the reduction or extinction of a liability in respect of which a deduction had been allowed under the Income Tax Assessment Act 1936 (Cth) … in a previous year."
86. Hill J considered that such a proposition was inconsistent with the earlier decision of the Full Court in
Commissioner of Taxation v Rowe (1995) 60 FCR 99, a decision which was subsequently upheld on appeal by the High Court in
Commissioner of Taxation v Rowe (1996-1997) 187 CLR 266. In those circumstances Hill J said (at 205):
"The real issue between the parties is whether the release of (the taxpayer) from its liability to pay sales tax constituted income in ordinary concepts by virtue of that release constituting a gain or profit forming part of its business income. There are two steps in the resolution of this issue. The first involves the question whether the amount released involved a gain to (the taxpayer) so as to constitute a profit. The second is whether this profit or gain was on revenue account."
87. At 210, his Honour observed:
"The cumulative effect of these provisions is that service of a notice of assessment of sales tax gives rise to a statutory liability which may be recovered by the Commissioner. … That liability operated to reduce the actual assets of (the taxpayer) from the moment of time that the notice of assessment issued. While there may be difficulty in a lawyer comprehending the concept of a notice of appeal against an income tax assessment as being property … no doubt it is possible to talk, in commercial terms, of a company having an offsetting right through the objection and appeal procedure whereby a company might hope to bring about a situation that the liability to pay sales tax is extinguished. But whether that is correct or not, (the taxpayer) had a continuing liability to the Commissioner of Taxation until the 1991 income tax year when, as a result of compromise or court decision as the case may be, it was freed from that liability. In a legal sense, at that point of time (the taxpayer) made a gain. The fact of that gain is not in any way to be diminished by reference to possible accounting treatment. It cannot be the law that the fact that one taxpayer forms a view that its chances of success on an objection are high and another taxpayer forms the view that its chances of success on a sales tax objection are low, that the consequences of being released from the sales tax liability would differ. In my view, it is unarguable that (the taxpayer) made a gain when the sales tax liabilities to which it remained subject until the 1991 income tax year, were released.
Once it is accepted that there was a gain, then the question is whether that gain should be characterised as income in ordinary concepts in the year in which the gain was made."
88. Although there was no substantial body of expert accounting evidence in this case, both Mr Steele and Mr Arnold gave some evidence. Mr Steele's evidence is of principal significance. Of his methods in preparing financial statements for Nommack Nominees, he said at par 25:
"Financial Statements were prepared … as specific purpose compilation reports for the sole use of the trustees and to satisfy the requirements of the trust deed. No audit was conducted and there was no requirement to prepare more complex and onerous general purpose financial statements. Financial statements were prepared on an accruals basis. Trading income was brought to account when earned and expenses brought to account and matched against that income irrespective of the period incurred. Expenses of developments were generally capitalised as either work in progress or stocks of completed units. Expenses related directly to rental income were isolated to rental
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property accounts. Net rental income is rental income less rental property expenses. Entity maintenance expenses such as accountancy and administration (unless of course the expenses related directly to a construction project or rental) were not otherwise specifically allocated."
89. In pars 37-38 concerning the debt of $1,700 owed by Nommack (No 41) he said:
- "37. … In presenting the accounts for the year ended 30 June 1995 a decision was made that this debt might not be collectible and it was therefore written off. It was determined that the collection of the debt was most likely uncommercial and even though I believe it was never formally released, it was at the time prudent accounting practice for the debt to be written off to show a true and fair view of the financial asset position of the trust.
- 38. It is usual accounting practice to apply the 'doctrine of conservatism' in the preparation of financial accounts. That is, I will generally take a less than optimistic view of the value of assets, particularly if estimated realisation amounts will be less than cost."
90. Of the treatment of the loss associated with the Elizabeth Street project, he said at pars 95-97:
- "95. In my opinion the accounting methodology which has been adopted is correct. Based on my understanding of the facts that Messrs Theeman and Adler (as Nommack No 75) were acquiring sites with a view to obtaining the development approvals (and no more) - it would have been appropriate and indeed correct for the land to be treated as trading stock as opposed to investments and any profit or loss to be ordinary trading income as opposed to a capital gain.
- 96. In my opinion if a taxpayer is buying with the intention of making profit by reselling rather than intending to hold the asset, the former mentioned is trading and ought properly to be brought to account as ordinary trading income.
- 97. Due to the nature of the losses as well as the change in legislation under the Income Tax Assessment Act, and out of an abundance of caution, I sought advice each year concerning the deductibility of the income against the losses which were accumulated within (the Sydney trust). I initially received verbal advices in this regard from Mr Les Priddle and thereafter I received written advice from Cleary Hoare."
91. A number of letters of advice are attached. They canvassed aspects of taxation law as it applies to trusts but offered little practical advice specific to the Sydney trust. At par 98 Mr Steele said:
"The seeking of these advices was viewed by myself as prudent, especially after the implementation of the trust loss provisions (by way of amendment to the ITAA) in 1995. Based on the advices which I received from Cleary Hoare, I advised Mr and Mrs Weyers that in each year in question they were entitled to the deduction of any income in the (Sydney trust) from prior years and from the net amount of prior year losses. I also recall that I sought specific reassurance from Cleary Hoare in relation to the transitional provisions in regard to the controller of the trust. I was therefore of the view that the legislation applied as at the date on which it was implemented and had no retrospective operation.
92. In par 99 he referred to other advice but its content is unclear.
93. In cross-examination Mr Steele said that he would not apply the doctrine of conservatism so as to write off debts owed by a company. He said that "Assets tend to be written down, liabilities tend to be written up." Mr Steele also said that if a debt was forgiven, the forgiveness might be treated as the debtor's income. Such treatment was not dependent upon the borrowing having been shown as "current". He said that if a creditor ceased to exist, he would nonetheless leave the debt in the debtor's books if it remained legally payable. He also said that he would take legal advice as to the appropriate treatment. He also would apply the doctrine of conservatism.
94. Mr Steele was asked about steps taken to identify the circumstances in which the trust debts arose. He said that his role was not to audit the books, implying that he had more or less accepted the records provided to him. He
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had been advised that if he wrote off the liabilities in this case, "there will be consequences". He understood that to be a reference to tax consequences. In effect he considered that if there was any chance that the liabilities could be called in, prudence dictated that they be kept on the books. This seems to suggest that if there is no chance of their being collected, they may be written off. At a meeting held on 26 April 1996 the matter was specifically discussed with Mr Priddle and Mr Collie. It was decided that the trust debts should stay in the accounts. He would not write off a debt owed to a company which had been deregistered.95. Mr Steele said, concerning his understanding of the Weyers' position in connection with the trust losses and liabilities:
"Well, my understanding of it was that the client effectively - this is going to sound a little bit unusual but sort of owned the - he effectively had both sides of the equation here. He had a right of indemnity anyway, in respect of these liabilities, so he had acquired that, I think from the previous trustee, and in a sense you might say that - you might say in a sense that he had both sides of the ledger."
96. Mr Steele was asked if some provision ought to have been made for paying the trust debts and replied:
"Well, I think - my understanding is if the liabilities were in fact called and Mr Weyers had a right of indemnity against the trust assets which would have been his loan accounts."
97. Mr Steele may have been referring to the continued presence in the trust accounts of the trust debts and the certainty that they would not be called up because of the fact that Cherrybrook had purportedly received an assignment of the right to indemnity previously held by Nommack (No 75), the actual debtor.
98. Mr Steele did not consider the operation of any limitation statute.
99. He was asked questions about advice which he had received in preparing tax returns for the Sydney trust. He may have consulted another accountant about some aspects, but his advice came primarily from Mr Priddle and Cleary Hoare, of which firm Mr Collie was a member. I will consider that advice in more detail in a moment. It was, perhaps, unfortunate that Mr Steele should have continued to seek advice from Cleary Hoare in view of Mr Collie's involvement in the acquisition of the Sydney trust by the Weyers.
100. Mr Steele and the Weyers did not discuss the way in which the trust debts might have been paid if called up. Mr Steele said that "generally you don't have to ring creditors and ask them if they want payment. They normally demand it." He said that had the debts been demanded he thought that the Weyers would have paid them because "The Weyers had always paid their debts, to my knowledge." This seems to be inconsistent with his earlier evidence concerning the indemnity. He was asked about assets from which Nommack Nominees might have paid the debts. His answer was:
"What assets might - I don't think Nommack had any right to any assets because it hadn't incurred the liabilities, had it?"
101. He was then asked, and answered:
"What trust property of which you were aware might Nommack have looked to, as trustee in the first instance, to meet any call if one were ever made by a liquidator of Rothwells or Media Portfolio? --- Well, my understanding would be that it hadn't incurred the liabilities, why would it have any access to the assets?
How can you say it hadn't incurred the liabilities when you had been putting them in the accounts for years? --- Yes, because those liabilities belong to a prior trustee, didn't they? They were incurred by prior trustees, isn't that exactly what the advice says?
How can you say, having told us solemnly for the last hour and a half or two hours that you recorded this debt because you were told that it was still owed, how can you say they hadn't incurred liability for it? --- Well, Nommack had. The previous trustee had incurred the - it was still a debt of the trust, but it had been incurred by the prior trustee."
102. He agreed that Mr and Mrs Weyers had, after the meeting in December 1994,
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advanced moneys to themselves from the Sydney trust. He thought that somebody must have advised them in connection with that matter.103. Concerning the origins of the trust debts, he said:
"I knew very little about these, you know, these particular, the depth of the transactions behind the scenes because they were in prior records prepared by previous accountants. But my understanding of it is that these liabilities, in effect that Mr Weyers had acquired the right of indemnity and therefore if these liabilities - in effect he owed these liabilities. Its a terrible - it's not necessarily maybe a legal method of looking at it. It's the way I looked at it."
104. Further cross-examination indicated that Mr Steele had no knowledge of the source of any indemnity to the Weyers. He later suggested that Nommack (No 75) had given the indemnity.
105. It is appropriate to say something about the various legal advices received by Mr Steele in connection with this matter. I have previously referred to exhibits 3 and 8 which are copies of a letter dated 21 December 1994 from Mr Priddle to Mr Weyers in which he advised that "The transaction reflected in the Facilitation Agreement and the Deed of the Removal of Appointment of Trustee makes it clear at law that the new Trustee (and therefore the Trust) cannot in any way be liable for any debts of the Trust incurred before today." At a meeting on 26 April 1996 Mr Steele raised with Mr Priddle and Mr Collie the proper accounting treatment of the trust liabilities. He received some information concerning those liabilities and was told that they should be kept on the books. He said that he enquired as to whether the liabilities were "to be continued from here" and was advised that they should be, and that they were existing liabilities. He was told that they were still legally payable and that:
"(A)ny merging or write-off, or whatever, of these loans could give rise to adverse tax consequences, and that whilst they also remained on the books, there would be essentially no adverse tax consequences, and there was a technical argument, obviously between Mr Collie and Mr Priddle about a number of these things, which is beyond my understanding as a simple accountant. However it was quite clear, as a result of that meeting, that these were in fact liabilities of the trust, as perceived by my client, and they were to be in fact - were to remain on the books, and I took that advice, and it's as simple as that."
106. He did not enquire as to whether the creditors still existed.
107. On 20 June 2001 Cleary Hoare advised in relation to liabilities to Ratic Investments Pty Ltd, Nommack (No 100) Pty Ltd and arising out of "Commercial Bills" as follows:
"We advise that under the documentation in which the above Trust was acquired, the rights of creditors under the liabilities were not acquired by Robert Weyers. What was acquired was the right to be indemnified out of the assets of the Trust in respect of those liabilities, which was acquired by Robert Weyers from the former Trustee.
The rights of creditors is a right to payment of the liability by the entity which incurred the liabilities, namely the former Trustee. Since the former Trustee has no assets to meet those liabilities and is not entitled to be indemnified out of the assets of the Trust, the assets of the Trust are not available for meeting the claims in respect of those liabilities.
However, the amounts owing in respect of those liabilities remain owing to the original creditors (they have not been assigned to Robert Weyers) and so the disclosure of those liabilities would remain as stated in the balance sheet."
108. Both Mr Priddle and Cleary Hoare accepted that the debts remained owing by Nommack (No 75). Both, however, considered that Nommack (No 75) no longer had a right of indemnity as against trust assets. This appears to have been as a result of the purported successive transfers of the right of indemnity. The object of the exercise seems to have been to permit retention of the trust debts as liabilities in the accounts whilst protecting the trust assets from any call for indemnity in respect of such debts. I need hardly say that it is unlikely that Nommack Nominees could properly claim to be liable for the trust debts if there were no possible way in which they could
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be enforced against it. Accepting at face value the view that Nommack (No 75) released any claim to indemnity from the trust assets, it follows that Nommack Nominees and the trust itself (if one may use that term loosely) had no loss to apply against income. In that case there could be no question of the Sydney trust being liable for the debts. They clearly could not be called up as against any entity other than Nommack (No 75), and that company would have no recourse to trust assets.109. Mr Steele's approach to accounting methods was, in my view, influenced by his desire to ensure that the Weyers derived the benefit for which they had bargained. He was content to rely upon advice given by Mr Collie and Mr Priddle, notwithstanding their involvement in the Weyers' acquisition of the Sydney trust and their interest in ensuring that the Weyers obtained such benefit. Mr Steele conceded that there were accounting aspects which concerned him, and he claimed to have consulted another accountant. Yet there is no evidence of any request for detailed and independent legal or accounting advice or of the receipt of such advice. Mr Steele was unable to give any rational explanation as to how the Sydney trust, through Nommack Nominees, could have been liable, for accounting purposes, for debts incurred by the Nommack (No 75) whilst, at the same time, not liable to indemnify that company for such debts.
110. Mr Arnold said that in terms of accounting practice, a debt owed by a company which had been deregistered, might be removed from the creditor's accounts. As to the treatment of moneys owed to a company which was in liquidation, he said that he would check the question of liability and make inquiries as to what the liquidator intended to do. If the company to which money was owed had been deregistered, and if there was no notice of assignment of the debt or that the company had been acting as trustee, an accountant would be inclined to delete the liability from the accounts of the debtor. Mr Arnold agreed that at the time at which he made his statutory declaration (exhibit 9 - 16 December 1994), he did not expect that the debts owed to Media Portfolio, Ratic Investments and Nommack (No 100) would ever be paid. He said that notwithstanding this, he retained them in the accounts because "… there was no formal release. They were just carried forward as historical balances. There was no formal release of those debts." If, as Mr Arnold conceded, it may be appropriate to write off an unclaimed debt in the books of a debtor, then this was a clear case for doing so.
111. The question is whether or not Nommack Nominees was entitled to set off income derived between December 1994 and 30 June 2002 against the accumulated losses incurred as a result of the trust debts. The question is not as to the proper treatment of the debts for accounting purposes, although that may give some insight into the problem. It is rather as to the continued existence of the debts in December 1994. The problem may be unusual, but that is because of the curiosity of the taxpayers' conduct. There is no suggestion that Nommack (No 75) lost anything, save that it incurred the trust debts which have not been paid. It is not remotely likely that they will ever be paid by that company, or that it will be indemnified for any such payment from trust assets. The taxpayers' case seems to be that even if Nommack (No 75) were to pay them, the trust assets would remain unaffected by such payment. The taxpayers argue that nonetheless, trust income may be set off against the losses. Such an unlikely situation invites close examination.
112. Whatever the position in 1988, by December 1994 the trust debts had ceased to exist as liabilities of the trust. That may have been because Nommack (No 75) had released its right to claim indemnity. Alternatively the passage of time, winding up or de-registration of relevant companies and possibly, the assignment of the debt by Media Portfolio, together with the absence of any demand, made it highly unlikely that such debts would ever be called in. That was almost certainly the situation as at the time of acquisition of the Sydney trust by the Weyers and as at June 1994. In those circumstances, to value them in the trust accounts at face value was to misrepresent the true position. The circumstances to which I have referred, and the Weyers' willingness to acquire the trust and inject money into it, suggest that from a commercial point of view, there was no
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possibility of the debts ever being called in. The accounts should have reflected that position.113. Either of two approaches might be appropriate for present purposes. The first is that adopted by Hill J in Warner Music. His Honour there treated forgiveness of a debt as a gain which, if of a revenue nature, should be treated as income. If that approach were adopted in the present case, it would presumably be necessary for the Commissioner, if he still may, to re-assess the taxable income of the trust in one or more of the years prior to 1995 to reflect such gain. That gain would then go in reduction of the accumulated losses. The result would be that by December 1994, and probably by 30 June 1994, the accumulated losses would have ceased to exist.
114. The second approach, which I favour, would be to recognize that the trust debts and accumulated losses were over-valued in the accounts of the trust as at December 1994, and as at 30 June 1994 (after the right of indemnity had allegedly been released by Nommack (No 75). By that time, at the latest, they were worth nothing and should have been taken out of the accounts. That was so whether one treated the release by Nommack (No 75) as being effective or relied upon the history of the matter. It was factually incorrect to assert that the trust had suffered any loss as a result of the Elizabeth Street project, notwithstanding the position as it may have appeared in 1988 or as Mr Arnold saw it in 1994. To adopt the language of the accountants in Warner Music, management's belief as to the probability of the company having to pay the relevant debts proved to be unduly pessimistic. Such an approach is, in my view, more attractive than is any attempt to apply the Warner Music approach to the present case.
Limitation statutes
115. The Commissioner submitted that the trust debts may, in any event, have been, at relevant times, statute-barred. The submission was not developed in detail. The debts may have been incurred in New South Wales where, as I understand it, there are both procedural and substantive bars after expiry of the limitation period. It was suggested that the creditor was in Western Australia or Victoria. For procedural purposes, it may be that Queensland law should be applied. This "choice of law" question was not addressed. In any event, since 1990, the debts have been consistently acknowledged in the books of the trust.
Continued existence of the Sydney trust
116. The Commissioner also submitted that the Sydney trust had ceased to exist at some time prior to 1994, by virtue of there being no property subject to its terms. It is not sufficient for the Commissioner to assert this fact and leave it to the taxpayers to disprove the assertion. Given the virtually indisputable facts which demonstrate that the trust was established and had property, one would readily infer that it continued to exist in the absence of evidence to the contrary. It is likely that the settled fund of one dollar was lost, however a debt of $1,700 remained due by Nommack (No 41). Whilst it may have been written off at some time since 1994, I cannot infer that it had been extinguished prior to that date. It may not have been worth much, but it may have had some value. Secondly, the trust's books of account are still in existence. They are trust property. Thirdly, any beneficiaries may have some right of recourse against Nommack (No 75) as trustee, arising out of the Elizabeth Street project. It is not every day that a trustee, acting properly, loses such a substantial amount so quickly and with such apparent ease. I am not persuaded that the trust has ever been without assets. I am also not persuaded that any changes of trustee or of beneficiaries terminated the trust or effected a resettlement. Such changes were contemplated by the trust deed.
Payments to nommack nominees and to the Weyers
117. It is necessary to consider the amounts received by Nommack Nominees and Mr and Mrs Weyers, other than those payments made by way of salary, in order to determine whether they should be included in the assessable income of each. I should first refer to the evidence of Mr and Mrs Weyers concerning those amounts. At TS 92 Mr Weyers said "I think we lived off that loan account …". The following questions and answers ensued:
"Now, did that strike you as in any way something of a dilemma at all for you, as a director of the trustee lending that money to you and your wife? --- Initially, yes. I again went back to my accountant and asked him
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if this was all right. He said, 'Yes, that is correct, because its your money.'And that's really how you treated it, as if it was your money? --- Yes.
In that context then, did you strike any term for the loan, anything about when it might be repaid by you or by you and your wife? --- Yes. I asked that question at that same time, and it was a loan. It was my money, payable back on demand.
So more or less as far as you were concerned, just like looking in mirror? --- Yes.
Really? Well, on demand? --- Yes.
And no interest? --- No, to my knowledge, no.
No. Not a subject that ever entered your mind, that there might be interest at all? --- No.
Did you look at all of the trust deed in deciding to make any of those lines? --- No. Again, its advice from my advisers.
Did you ever form a view at all, in your capacity as a director of the trustee company, Nommack Nominees, to this effect, 'Gee, that loan account balance is getting a bit high. I better get Robert Weyers to pay it back?' --- No.
Never turned your mind to that at all? --- Not at all.
Just let it run on? --- Correct.
Year after year? --- Yes.
You personally do some packaging work and project management of the kind you described yesterday, and Forrester Parker pay money across to Nommack Nominees? --- That's correct.
Effectively for the work that you described in terms of your expertise? --- Yes.
And then it goes into a bank account of Nommack Nominees? --- Yes.
And then either you or your wife - or you and your wife jointly just draw the money down and treat it as if it is your own personally? --- Effectively, yes.
And do that on the basis that you will call it a loan? --- Correct."
118. Mr Weyers said that when the tax losses were absorbed they stopped drawing on Nommack Nominees. He was then asked and answered:
"Is there any time window at all within which you anticipate any of the loans being paid back? --- No.
You could well die with them being unpaid, as it were? --- Correct.
…
They are really on the never-never as it were? --- Yes.
So that after the losses were used up, you effectively were finished with Elizabeth Street Sydney Trust' --- Correct.
And moved on to something else I suppose? --- Correct."
119. Mrs Weyers was questioned about various payments of family and household expenses. She agreed that there had been payments in connection with interior decorating at the Weyers' home. She was then asked and answered as follows:
"… Now, did you have a look at the trust deed, or form a view at all, even if you didn't look at the trust deed, as to whether or not that was something that really the trustee should advance money for? --- Well, I think there's several references in the trust deed that enables the trustees to makes loans under whatever terms that they see fit.
Alright. Now, in terms of whatever terms, what were the terms, say, of a loan for the funding of interior decorating at the house that you owned at Hawthorne? … --- It was to be repaid on call, on demand.
On demand. And these interior decorating works were done in 1988, weren't they? Agreed? --- I don't know the exact date, but if that's the date you're quoting me.
Any demand at all been made? --- Not as yet.
Not as yet. Got it in mind that there'll ever be a demand made? --- We haven't discussed it.
Never discussed between you and your husband about, 'Gee, it must be time to call up at least that loan we used for the interior decorating.'? --- No.
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You could each, in the fullness of time, pass to your graves without ever such a demand being made, couldn't you? --- Yes.Indeed, that's the intention, isn't it? --- I don't know what the intention is, but it's never been discussed.
Any interest at all to be paid on the loan which was used to fund those interior decorating works? --- No.
Did it occur to you at all as a trustee that perhaps one ought to get some interest in for the benefit of that trust on the loan used for the interior decorating? --- No.
Was it really the case that you were just treating the Elizabeth Street Sydney trust bank account more or less as your own money? --- We were using it for personal expenses.
So that if one goes through account records, one looks and sees - one would see, for example, school fees at Moreton Bay College? --- Yes.
For a daughter? --- Yes.
School fees at Churchie for a son? --- Yes.
Body corporate expenses for a unit in a complex called Biarritz on the Gold Coast? --- Yes.
…
Was it a matter of concern to you at all, as a director of Nommack Nominees, that money was being advanced to Robert to pay for the body corporate expenses for a unit? --- No.
And that's because you were really just treating the money as if it was a joint cheque account? --- We were using it for personal expenses.
For personal expenses? --- Mm.
…
So these loans just went on year after year. Are they still going on now? --- No.
Is there something that brought them to a halt, some particular decision that you made as a director of Nommack Nominees, no more loans? --- We are not trading in Nommack Nominees at the moment …
Any particular reason why that is occurring? --- Because of these actions.
…
Did the cessation of loans have anything to do with the using up of the losses that you understood were there? --- No, I don't think so because we continued to trade for a short time afterwards.
…
But new arrangements are in place now, anyway? --- Yes.
Did it ever become a subject of concern to you, as a director of Nommack Nominees, that the amount of the loan to - say, to you personally, or to you and your husband jointly, was getting to a level where you just could never repay it from income that you were able to earn, or any assets that you had if they were sold? --- We have assets that are worth more than the loan.
Was it ever a matter which came to you as far as thinking that it must be time to get some sort of security for the loan, it's getting so high? --- No."
120. It seems probable that the purpose of distributing funds to Nommack Nominees as trustee was to utilize the benefit perceived to flow from the Sydney trust's accumulated losses. Such benefit could only be derived if the funds were received by Nommack Nominees as trustee. However the funds were not thereafter treated as trust assets. Funds were "lent", interest-free, to Mr and Mrs Weyers, with no expectation that they would ever be repaid. It is said that although Mr and Mrs Weyers were qualified to be beneficiaries of the Sydney trust (having made the appropriate donations on 23 June 1995, they were not beneficiaries. In those circumstances, it is difficult to see how the making of interest-free, non-repayable loans was a proper exercise of the trustee's powers.
121. Clearly, all parties (Cherrybrook, Nommack Nominees in its own capacity and as trustee, and the Weyers) had two objectives:
- • to utilize the perceived accumulated losses in the trust; and
- • to make funds available to the Weyers for their exclusive use.
122. Both aspects were critical. It would be impossible, even in the short term, to derive funds from Forrester and not disclose such receipt to the Commissioner. The Sydney trust accounts for the years 1990 to 1994 were prepared so as to evidence a loss to the trust
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which had not previously been identified as such. The obvious purpose was to achieve a tax advantage. In the face of such substantial losses, and having regard to the returns for the years prior to 1990, it would have been difficult to explain how there could have been any distribution of income or capital to beneficiaries in the years after 1994. It was also obviously advantageous to characterize payments to the Weyers as loans rather than distributions.123. The parties did not, in their submissions, distinguish between the various sources of funds received by Nommack Nominees in relevant years. Primarily these funds came from Forrester or Forrester Kurts, its successor, or otherwise from the trust's business activities. I should say that the contract between Nommack Nominees and Forrester Kurts does not indicate that Nommack Nominees was contracting as trustee. However I infer that it was doing so. In the 1995 year, one other substantial amount was received from Cherrybrook as trustee of the family trust. The family trust deed provided for three classes of beneficiary. Primary beneficiaries were identified in the first schedule as Robert Weyers, Barbara Karen Weyers and each of their children. Secondary beneficiaries were "The next of kin of the primary beneficiaries". Tertiary beneficiaries were the Australian Red Cross Society (Qld Division), the National Heart Foundation of Australia (Qld Division) and "any company or corporation (not being the settlor or the Trustee or an excluded person as hereinbefore defined) of which any one or more of the primary beneficiaries or any one or more of the secondary beneficiaries is a member or over which any one or more of the primary beneficiaries or any or one or more of the secondary beneficiaries have control."
124. Mr and Mrs Weyers are members of Nommack Nominees. I infer that it is a tertiary beneficiary of the family trust. At the time of the distribution Mr and Mrs Weyers were directors of both Cherrybook and Nommack Nominees. Both were employed by Nommack Nominees for salaries which were inadequate to meet their needs. It seems likely that the distribution from Cherrybrook was derived from the supply of Mr Weyers' consultancy services by Cherrybrook to Forrester. It is probable that the distribution to Nommack Nominees was designed to serve both of the above objectives - to gain a tax advantage and to facilitate payment to the Weyers. It cannot seriously be suggested that it was contemplated that Nommack Nominees might pay it to anybody else. It certainly did not do so. I infer that both trustees acted at all times in accordance with Mr and Mrs Weyers intentions, perhaps guided by Mr Steele's advice.
125. The methods used to achieve the two objectives produced inconsistency in the treatment of the funds. The tax advantage could only be obtained by paying the money to Nommack Nominees as trustee. If the money was received in that capacity, any disposition of it to the Weyers by way of loan was likely to be inconsistent with the trust, particularly if the Weyers were not beneficiaries. This difficulty probably led the Weyers to make the donations to relevant charities, thus qualifying them as potential beneficiaries. Such inconsistency also led to the distribution of the PPS credits and the subsequent attempts to reverse that distribution, and the attempts to establish that they were not beneficiaries. In the end the question is whether the Weyers, Cherrybrook and Nommack Nominees intended that the distribution from the family trust be available to the Weyers or that it be property of the Sydney trust.
126. I find it difficult to accept that any competent lawyer or accountant would seriously have entertained the idea that the Sydney trust came with legitimate accumulated losses, given that those losses represented debts which had never been paid and would never be paid. Any reasonably intelligent member of the community, let alone a person with legal or accounting training, would immediately have wondered why there should be such a substantial tax advantage in the detritus of a failed transaction which had occurred so long ago. I cannot avoid the conclusion that Cherrybrook distributed profits of the family trust to Nommack Nominees in order to facilitate their payment, tax free, to the Weyers. We know that they could not survive on their salaries. Although it was contemplated that Nommack Nominees would account for the money as trust funds in order to utilize the perceived benefit of accumulated losses, the real intention was that the funds become the property of the Weyers. The trust and its
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allegedly accumulated losses were used as window dressing in order to create the illusion that the money had been returned for tax purposes.127. With the exception of the claimed tax benefit, the only other function to be performed by Nommack Nominees was as banker for the Weyers. The money in its hands was treated as effectively theirs, to call on as they wished. Nobody seems to have treated Nommack Nominees as having any duties as a trustee. To my mind, the relationship was that of debtor and creditor or banker and customer. If there was any trust relationship, then Nommack Nominees held as bare trustee for the Weyers.
128. It is true that at the end of the 1995 year, about $100,000 remained on loan by Nommack Nominees as trustee to Cherrybrook as trustee. That may have been part of the distribution from the family trust. That does not detract from my view concerning the parties' intentions in making the distribution. In any event, if the Weyers drew more from the Sydney trust's business income and less from the family trust distribution, the result would be the same. That is because I am of the view that all other moneys paid by Nommack Nominees to the Weyers were paid as distributions from the Sydney trust. I will now give my reasons for that view.
129. Nommack Nominees must have incurred outgoings in connection with its business. Those outgoings had to be paid. Nommack Nominees as trustee entered into the contract with Forrester and, presumably, was entitled, in that capacity, to moneys payable pursuant thereto. I infer that the same arrangement existed in connection with the dealings with Forrester Kurts. In those circumstances, it is not easy to infer that such receipts were held solely for use by the Weyers. I am inclined to accept that such moneys and other moneys received in connection with Nommack Nominees' business activities were received in its capacity as trustee. However the profits were not treated as trust assets. Nommack Nominees seems to have treated itself as obliged only to account to the Weyers. No consideration was given to the nominated beneficiaries. The question is whether Mr and Mrs Weyers became beneficiaries of the Sydney trust pursuant to its terms or whether trust funds were misapplied in unauthorized payments to them.
130. I found Mr Steele's explanations for the distribution of the PPS credits to Mr and Mrs Weyers to be unsatisfactory. It is very easy to explain an inconvenient event by asserting that it was an error, particularly eight or nine years later. If that explanation stood by itself. I may have been inclined to accept it. However Mr Steele said that he understood that Mr and Mrs Weyers became beneficiaries of the Sydney trust. That was the purpose of the donation made by Mr Weyers to the Australian Red Cross (Qld Division) and that made by Mrs Weyers to National Heart Foundation of Australia (Qld Division), both of which were receipted on 23 June 1995. The coincidence of these donations, so close to the end of the 1995 tax year, and the inclusion of the PPS credits in their returns for that year, is hard to accept as accidental. As Mr and Mrs Weyers acted on Mr Steele's advice, I infer that it was intended that they be beneficiaries of the Sydney trust.
131. The position therefore was that Mr Steele understood that Mr and Mrs Weyers were beneficiaries, but prepared the trust accounts, year after year, on the basis that they had borrowed ever-increasing amounts from the trust. This ceased in 2002 when the perceived accumulated losses were exhausted. Thereafter a different structure was adopted. Although the trustee had power to lend under the trust deed, I doubt whether an interest-free loan, with no expectation of repayment, would be a proper exercise of that power. Such payments to a beneficiary would be more properly described as distributions than loans. This was not a case in which any legitimate purpose was served by retaining an ultimate right to call for repayment. There is no suggestion that there could have been any circumstances in which the loans would have been called in. Once the accumulated tax losses are set aside, it is clear that the Sydney trust was making substantial profits (save in 2001). There is no evidence that the funds were ever likely to be needed to pay creditors or for capital investment. The history of the trust to 2002 demonstrates this. Even now, there has been no suggestion that the "loans" will be called in. Subject only to the question of whether or not Mr and Mrs Weyers were, in fact, appointed beneficiaries under the
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trust deed, I consider that, whatever they were called, these payments were by way of distribution of income.132. As to the question of appointment, the relevant provision of the trust deed is cl 2(d) which authorizes the trustee, with the consent of the guardian, if there is such a person, to appoint as a general beneficiary, anybody who has donated $2 or upwards to one of the three identified charities. There is no requirement that the appointment be in writing. It is accepted by the tax payers that there was, at the relevant time, no guardian. The absence of any writing is to be considered in light of cl 10 which requires that certain determinations, not including those under cl 2, be recorded in writing. It is true that cl 10 requires that any disposition of income pursuant to cl 6 be evidenced in writing, but that is a different question. If the transaction was properly one of distribution, then the failure to comply with a formal requirement cannot change its nature. It is said by the taxpayers that there is no evidence of any determination by Nommack Nominees to make a distribution to either Mr or Mrs Weyers, and that appears to be so. However, as far as I am aware, there is also no particular evidence of any approval of loans, save in the annual accounts, presumably adopted by the board. In the circumstances I infer from the fact that Nommack Nominees has made payments, properly characterized as distributions, that it exercised the power pursuant to cl 2(c) to appoint Mr and Mrs Weyers as general beneficiaries. The affairs of the trust appear to have been conducted upon the basis that only their interests were relevant.
133. I infer that the moneys received by Mr and Mrs Weyers from Nommack Nominees (other than to the extent that Nommack Nominees derived such funds from Cherrybrook) were distributions to them as beneficiaries of the Sydney trust. The funds received from Cherrybrook were held on behalf of the Weyers and were taxable in their hands as distributions of profit from the family trust.
Section 99B
134. Alternatively, the Commissioner relies upon s 99B which provides:
- "(1) Where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount.
- (2) The amount that, but for this subsection, would be included in the assessable income of a beneficiary of a trust estate under subsection (1) by reason that an amount, being property of a trust estate, was paid to, or applied for the benefit of, the beneficiary shall be reduced by so much (if any) of the amount, as represents -
- (a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income);
- (b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of the year of income;
- (c) an amount-
- (i)that is or has been included in the assessable income of the beneficiary in pursuance of section 97; or
- (ii) in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of section 98, 99 and 99A;
- (d) an amount that is or has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD; or
- (e) if the beneficiary is a company - an amount that is or has been included in the assessable income of the beneficiary under section 102AAZD."
- (3) In pars 2(d) and (e):
'Company' means a company other than a company in the capacity of a trustee."
135. The taxpayers make three points concerning the operation of s 99B. Firstly, they submit that the section should be read down to recognize the difficulties identified by Hill J in his decision in
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Traknew Holdings Pty Ltd v
"The application of s 99B also presents difficulty. Literally, the section is capable of applying in the circumstances of the present case. However, the section was not enacted to render assessable payments or applications to the benefit of discretionary beneficiaries. Such payments or applications were already made assessable income by force of s 97 alone or in combination with s 101, leaving aside a case where s 98 applies but the presently entitled beneficiary is under a legal disability where the trustee is assessable."
136. His Honour then went on to consider the history of the enactment of the section, suggesting that it is concerned primarily with the derivation of accumulated income from a source outside of Australia. His Honour did not finally decide whether or not it was appropriate to adopt a narrow construction of s 99B in order to give effect to that perceived parliamentary intention. In view of my conclusions concerning other aspects of the matter, it is not necessary that I address this question.
Part IVA and Schedule 2F
137. The Commissioner also relies upon Pt IVA of the Act. However the identified schemes (identified in par 7.1 of the Commissioner's amended statement of facts issues and contentions) depend for their efficacy upon the carried-forward losses. I have found that there were no such losses. It may be possible to identify one other scheme, not involving such losses, to which Part IVA could apply. However no such case was advanced by the Commissioner. It would be unfair to the taxpayers were I to proceed in that way. In any event, I understand that the Commissioner relies on Part IVA in the alternative to the case which I have determined in his favour. It is therefore unnecessary for me to consider its operation. It is also unnecessary to consider the operation of Schedule 2F.
Are the amended assessments excessive?
138. Whether or not the amended assessments are excessive depends upon the way in which Nommack Nominees' income is distributed. There are four possibly relevant taxpayers: Mr and Mrs Weyers, Nommack Nominees in its own right and Nommack Nominees as trustee of the Sydney trust. The amended assessments affecting the last-mentioned taxpayer are not in issue before me, but my findings lead to certain inferences concerning those assessments.
139. I have concluded that the whole of the distribution by Cherrybrook, nominally to Nommack Nominees as trustee, in the 1995 year ($156,887) was actually to Mr and Mrs Weyers and should have been included in their assessable income. It is quite clear from their evidence that their drawings were used for joint, as well as individual expenses. It would be pointless to speculate about whether Mr or Mrs Weyers would have had greater personal expense. No doubt a large part went to maintaining their children and their household. That income should be treated as having been distributed equally.
140. As to income derived by Nommack Nominees as trustee, to the extent that it was purportedly lent to either Mr or Mrs Weyers, it was in fact distributed income and should have been included in their assessable incomes. The treatment of any undistributed amounts is not so easy. I have found that Nommack Nominees' business income was derived by it as trustee, although it seems that it was thereafter treated as effectively the property of Mr and Mrs Weyers. One might infer that all profits were effectively distributed to them but not drawn. Alternatively, one might infer that only those amounts actually paid were so distributed. I am inclined to the second view, only because prior to any drawing by the Weyers, there had been no positive action inconsistent with Nommack Nominees' duty as trustee. I am therefore reluctant to infer any such conduct. Undistributed trust income should be included in the assessable income of Nommack Nominees as trustee. As I understand it, that leads to the conclusion that Nommack Nominees had no assessable income in its own right in any relevant year. After publishing these reasons, I will entertain further submissions concerning these provisional views, should the parties wish to be heard.
Power to amend the Weyers' assessments for 1995, 1996, 1997 and 1998
141. Section 170(2) provides:
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"Subject to this section, where there has been an avoidance of tax, the Commissioner may:
- (a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; …
- (b) …
amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment."
142. In the case of Mr and Mrs Weyers, the Commissioner has purported to amend the assessments in the years 1995, 1996, 1997 and 1998, notwithstanding the fact that the four year period had expired. He could only do so if he held the opinion that there had been an avoidance of tax due to fraud or evasion. In a letter dated 11 December 2003, the Commissioner indicated that he had formed such an opinion "with emphasis on the word 'evasion' " and gave the following reasons:
"The Commissioner has formed this opinion because you paid $160,000 for a trust without any assets, save for (possibly) tax losses and with a Fund Deficiency of Capital of $2,655,292.
The only documentation received when the trust was acquired in December 1994 was the Trust Deed. The evidence available to the Commissioner indicates that you did not obtain any financial records from the former trustee to verify that the tax losses exceeding $2.6 million were actually available. The Facilitation Agreement expressly provided for the provision of these documents.
Moreover, the onus of proof that there had not been an avoidance of tax due to fraud or evasion rests with you. In this case, it has not been satisfied despite a specific request for a submission why the Commissioner should not, given the facts already available to him, be in a position to consider that tax has been avoided as a result of fraud or evasion."
143. The nature of the Commissioner's request for information appears elsewhere in the letter. By their notices of objection Mr and Mrs Weyers denied fraud or evasion and alleged that the amended assessments were not "genuine attempts to ascertain the taxpayer's taxable income and the tax payable on that taxable income". The objection was disallowed.
144. The power to reassess is enlivened by the Commissioner's formation of the relevant opinion. In
Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 at 360, Dixon CJ said, concerning the formation by the Commissioner of an opinion as to a different matter:
"But it is for the commissioner, not for me, to be satisfied of the state of the voting power at the end of the year of income. His decision, it is true is not unexaminable. If he does not address himself to the question which the subsection formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review. Moreover, the fact that he has not made known the reasons why he was not satisfied will not prevent the review of his decision. The conclusion he has reached may, on a full consideration of the material that was before him, be found to be capable of explanation only on the ground of some such misconception. If the result appears to be unreasonable on the supposition that he addressed himself to the right question, correctly applied the rules of law and took into account all the relevant considerations and no irrelevant considerations, then it may be a proper inference that it is a false supposition. It is not necessary that you should be sure of the precise particular in which he has gone wrong. It is enough that you can see that in some way he must have failed in the discharge of his exact function according to law."
Drummond J said in
Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455 at [107]:
The applicants have sought to show that the Commissioner erred in forming the opinion that there was an avoidance of tax due to fraud or evasion because the applicants, their advisers and other witnesses had given evidence in this court to the effect that there was no such fraud or evasion, evidence it is said which this Court should accept. In
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rejecting the applicant's attack on the amended assessments because they are excessive, I have explained why this part of the applicant's case is, on the evidence before me, unfounded. But, in any event, for the reasons given, the issue of fraud and evasion is not at large for this Court. In accordance with Avon Downs and Kolotex [(1975) 132 CLR 535] the Commissioner's opinion that there was fraud or evasion involved must stand unless the applicants can show that the Commissioner, in forming that opinion, fell into the kind of error therein referred to. Only if the applicants can establish, by reference only to the material that was before the Commissioner, that his opinion was vitiated by some such deficiency in the approach he took in reaching that opinion would it be open to this court to form its own view on the question of fraud or evasion. Consistently with their submissions that the appeal to this court is by way of hearing de novo, the applicants did not seek to mount the kind of attack on the Commissioner's determination that there was fraud or evasion involved that must be made before this court can consider that issue for itself. No challenge to the formation by the Commissioner of the opinion necessary to enliven his power under s 170(2) to issue the amended assessments here in question within the principle in Avon Downs was raised by the applicants, let alone made out at trial."
146. It is for the taxpayer to identify grounds upon which the formation of the Commissioner's opinion may be impugned. The Commissioner need not justify the decision, save in response to an appropriate attack upon it.
147. The taxpayers complain that the Commissioner has not, in these proceedings, identified the officer who formed the relevant opinions or the matters said to involve "dishonesty". However the Commissioner, at an early stage in the correspondence, explained his reasons for forming the view that there had been avoidance due to evasion. Those reasons either withstand scrutiny or they do not. The taxpayers also complain that in providing particulars, the Commissioner purported to rely upon all of the matters in his statement of facts, issues and contentions, other than the assessments and subsequent events. That may not have been a particularly helpful way of responding to a request for particulars with respect to a narrow issue such as this. However the Commissioner was an outsider to all relevant transactions. It is not surprising that he should cast his net widely. In those circumstances the complaint is a little precious.
148. The Commissioner appears to have formed the opinion that there had been evasion rather than fraud. The use of old tax losses of an apparently abandoned trust with which the taxpayers had no previous association is, by itself, a reasonable basis for suspecting avoidance through evasion It is suggested that the Commissioner applied the wrong test in that he did not consider whether any fraud or evasion occasioned avoidance of tax. However that is the precise opinion which he formed. See the letter of 11 December 2003 at p 5. The Commissioner's reasons demonstrate that he formed the view that the Weyers, or persons associated with them, had probably become beneficiaries of the Sydney trust. That is a not unduly cynical view, given that they paid $160,000 to acquire it. The Commissioner enquired as to any nomination of new beneficiaries and as to any resolutions concerning income. There was no response. The Commissioner was also aware, as appears from his reasons, of the distribution of the PPS credits, indicating that the Weyers were beneficiaries of the Sydney trust. In his reasons he placed emphasis upon the fact that the Weyers had acquired, for $160,000, a trust structure which had no assets and an apparent deficiency of liabilities over assets of $2,655,292. He understood that the only documentation received was the trust deed, and that no financial records verifying the loss had been sighted.
149. The Commissioner was entitled to place significant weight upon the failure by the taxpayers to respond to his request for further information. There may have been a valid reason for acquiring a trust with accumulated losses for a relatively substantial amount of money. If so, one would expect the taxpayer to respond to such an inquiry. In the absence of such response, it was reasonable to infer that the Weyers did not wish to explain to the
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Commissioner the purpose for which they had acquired the trust or their use of it. It would also be a reasonable inference that the trust was acquired for use in avoiding tax.150. I see no ground for interfering in the exercise of the Commissioner's discretion. These reasons apply to both Mr and Mrs Weyers and to the amended assessments for each of the years 1995 to 1998.
Additional tax
151. That leaves for consideration only the question of additional tax. As Nommack Nominees has no tax liability in its own right, the assessment of it to additional tax should be set aside. Additional tax assessed against that company as trustee of the Sydney trust will presumably be dealt with in the Administrative Appeals Tribunal. I need only consider the additional tax assessed as payable by Mr and Mrs Weyers. The relevant provisions are ss 226G, 226H and 226J. Section 226G provides:
"Subject to this Part, if:
- (a) a taxpayer has a tax shortfall for a year; and
- (b) the shortfall or part of it was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with this Act or the regulations;
the taxpayer is liable to pay by way of penalty, additional tax equal to 25% of the amount of the shortfall or part."
152. Section 226H provides:
"Subject to this Part, if:
- (a) a taxpayer has a tax shortfall for a year; and
- (b) the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part."
153. Section 226J provides:
"Subject to this Part, if:
- (a) a taxpayer has a tax shortfall for a year; and
- (b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;
the taxpayer is liable to pay, by way of penalty, additional tax equal to 70% of the amount of the shortfall or part."
154. The Commissioner has assessed Mr and Mrs Weyers to penalty tax pursuant to s 226J at the rate of 75 per cent. On my findings both Mr and Mrs Weyers had a tax shortfall for each of the relevant years. In each year the shortfall was caused primarily by two things, namely:
- • the purported utilization of accumulated tax losses in the Sydney trust; and
- • failure to return distributions from the Sydney trust and, in the 1995 year, from the family trust.
155. I accept that Mr and Mrs Weyers were advised by Mr Steele and/or Mr Priddle and/or Mr Collie that the various steps taken were both lawful and effective to reduce their income tax liability. It is in the nature of the relationship between a client and his or her solicitor or accountant that he or she can rely upon the advice given, save where the client would be expected to know that the advice was not worthy of such reliance. It may be, too, that Mrs Weyers put her affairs into the hands of her husband. She seemed to know significantly less about the transactions in question than did he. In assessing their conduct it must also be remembered that the Sydney trust was acquired in late 1994. Public awareness of the dangers of tax avoidance schemes may not have been as high as it now is. Nonetheless one wonders about the Weyers' acceptance that they were to obtain such a substantial advantage (in effect the amount of tax on $2.6 million, received over eight years) for an investment of $155,000, plus legal and accounting expenses and outgoings.
156. Mr Weyers was an experienced businessman. In 1991 he and his wife made a deliberate decision to trade through a corporation as trustee of a family trust, with the aim of avoiding personal liability. It is reasonable to infer that they also enquired as to other consequences and incidents of such a structure, including the distinction between personal assets, corporate assets and trust assets and the legal duties of company directors and
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trustees. They certainly should have done so. It would surely be reckless to enter into such arrangements without inquiring as to the relevant duties. In 1994 they cannot have been entirely unaware of the consequences of acquiring the Sydney trust and adopting it as the principal organ through which they conducted their business. By that time neither the notion of incorporation nor that of a trust can have been entirely alien to them. It is also of concern that no inquiry was made as to the mechanism by which the acquisition of the Sydney trust was said to lead to such a substantial tax benefit. A client is not obliged or entitled to accept bland assurances by his or her professional advisers. Bland assurance is not the same thing as professional advice. A taxpayer may simply accept advice that he or she will achieve a tax benefit if he or she acquires a particular entity, but such acceptance is at the taxpayer's own risk. If the advice is wrong, there will be consequences. If the advice is about taxation, one consequence may be exposure to the additional tax regime. Mr and Mrs Weyers must have been aware that if such advice was wrong, the result would be that their respective incomes would be understated, and that understatement may lead to penalties. Their conduct in connection with their tax affairs ought reasonably to have reflected the seriousness of the consequences, for them and for the revenue, of wrong advice.157. As a minimum requirement I would have expected the Weyers to have inquired as to the history of the Sydney trust and as to the mechanism by which the loss had been incurred. In the absence of such knowledge, they could not honestly claim the losses in reduction of their taxable incomes. Undoubtedly the taxation legislation of this country is arcane, if not incomprehensible, to most people. It is unfortunate that it should be so. Nonetheless the ideas which underlie it are fairly simply and known to most people, particularly those who are in business. The idea of carrying forward losses from earlier years is not difficult to understand. What is difficult to understand in this case is why a debt incurred in 1988 and never paid, nor ever likely to be paid, should lead to a substantial tax benefit in the years 1995 to 2002. Had the Weyers enquired as to the trust's trading history, they would have discovered the doubtful nature of the claimed loss. That knowledge would have prompted questions concerning the mechanics by which any tax advantage was to be obtained.
158. Mr Weyers was at least unsure as to the course of conduct which he and Mrs Weyers adopted. He claims to have been reassured by Mr Steele that it was all his money. That statement was substantially correct, but it was not the position which was presented to the Commissioner. The Commissioner was told that the money really belonged to the trust and was lent to Mr and Mrs Weyers. The reasonable lay person would not be satisfied by an explanation which depended upon the proposition that he was lending money to himself and thereby avoiding tax liability. Apart from questions concerning the accumulated losses, the fundamental question which they ought to have asked was why the transactions involving "his" or "their" money were being recorded as loans. A second question might have been why, if such payments were loans, they were not to be repaid.
159. It is tempting to seek to exonerate Mrs Weyers from these criticisms on the grounds of her assumed lack of business experience and reliance on her husband. However it would be anachronistic to assume that a female taxpayer's duty in connection with the revenue is somehow of a lower order than that of a male taxpayer. Indeed, if her experience is less, her duty to enquire may be greater.
160. Sections 226G, 226H and 226J provide a graduated scheme of penalties. Each section identifies a slightly different form of conduct and a slightly different level of culpability. Section 226G addresses a failure to take reasonable care to comply with the Act or regulations. Section 226H addresses recklessness with regard to the correct operation of the Act or regulations. Section 226J concerns intentional disregard of the Act or regulations. For the purposes of s 226G it is necessary to identify conduct falling short of that expected of a reasonable person in the circumstances. Section 226H requires the identification of conduct with disregard for the consequences. Section 226J requires intended disregard of the Act or regulations.
161. Mr and Mrs Weyers made no personal attempts, as far as I can see, to satisfy themselves as to the existence of the claimed
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losses in the Sydney trust or to acquire a broad understanding of the mechanism by which they claimed to be entitled to set off the income of the Sydney trust against such losses. They made no attempt to identify why money was treated as lent to them when it was said to be Mr Weyers' money and not repayable. Had the Weyers insisted that Mr Steele give rational explanations of these matters, he would have been unable to do so. Either he or the Weyers would then have been compelled to seek appropriate, hopefully independent, advice. Had competent advice been obtained, it would have addressed the issues which I have addressed in my reasons. Any competent advice would, in my view, have raised serious doubts about both the accumulated losses and the system of distributing income to the Weyers. Had such advice involved a reasonable explanation, in lay terms, of why the accumulated losses might be available and why it might be arguable that the payments to the Weyers were loans, then it would have been difficult to conclude that the Weyers had failed to take reasonable care to comply with the Act, notwithstanding my findings. However the Weyers' actual conduct fell well short of being reasonable. The case for the assessment to additional tax under s 226G is made out. I turn to s 226H.162. Section 226H addresses shortfalls caused by recklessness with regard to the correct operation of the ITA Act or the regulations. That Act is concerned with the assessment of taxable income and tax. Assessment depends upon the disclosure of income, including trust income. The Weyers must have known that the correct operation of the Act depended upon their accurately disclosing all relevant sources and amounts of income. They did not do so. They must have realized that the consequences of their use of the claimed losses and of the treatment of distributions as loans would reduce their taxable incomes and their tax liabilities. Indeed, that was the avowed purpose. A taxpayer must know that factual accuracy in relevant tax returns is essential to the correct operation of the Act. If a taxpayer elects to rely on the outcome of past transactions of which he or she has no direct knowledge, then he or she must take steps to ensure that all relevant factual assertions are true. If they are not, then the Act will not operate correctly. To fail to make such enquiries is to disregard that consequence and, in my view, is reckless.
163. As to the claimed loans, the idea of a loan is not difficult to understand. The legal concept does not differ from common understanding. To assert that one has lent oneself one's own money is absurd. It makes correct operation of the ITA Act impossible. It is at best reckless with regard to the correct operation of the Act. Assessment to additional tax pursuant to s 226H was justified.
164. I turn to s 226J. Mr and Mrs Weyers must have been aware of the obligation to return all income accurately. Had they investigated the claimed losses or considered whether the amounts which they received were really loans, they would have realized that by purporting to set off taxable income against such losses and returning those payments as loans, they were intentionally disregarding the Act. However I am inclined to the view that they chose not to consider the consequences of their actions, save to ensure that they acted on advice which appeared to facilitate a favourable result. Their conduct was reckless rather than deliberate.
165. To this point I have focussed solely upon the conduct of the Weyers. However a taxpayer may be assessed to additional tax if a tax shortfall is caused by relevant conduct of a tax agent. Mr Steele was a tax agent. A tax agent presumably comes to taxation matters with some understanding of the structure of the Act and experience of its operation. Mr Steele was aware of the need to ensure that the Weyers' tax returns accurately reflected their income. He knew of the circumstances in which the Sydney trust was acquired, and that the purpose was to enable the Weyers to minimize their tax liability. He knew that Mr Collie had an interest in the transaction by which Mr and Mr Weyers obtained control of the Sydney trust. He seems to have been content to act on the advice of Messrs Priddle and Collie and to allow Mr and Mrs Weyers to do so.
166. His knowledge of the prior history of the Sydney trust appears to have been based on the documents received from Mr Arnold. He apparently accepted them at face value. In some circumstances, it may be appropriate to take that course, but in these circumstances, it was inappropriate to do so. Inevitably, accounts
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reflect matters of opinion. Mr Steele should have realized that those who sold the trust to Mr Collie had an interest in presenting the accounts in a particular way. He ought to have taken steps to verify the contents as best he could, at least before effectively representing their truth to the Commissioner. If he could not verify their truth, he should not have relied on them in preparing the Weyers' tax returns. Had the Weyers instructed him to act on a particular basis, the position may have been otherwise, but it is clear that they acted on his advice. It may be that he simply trusted Mr Collie and Mr Arnold (or his accounts). For that reason I would be inclined to treat this aspect of his conduct as reckless rather than as intentional disregard of the ITA Act.167. However it is not so easy to take such a view of his conduct in connection with the payments to the Weyers. He knew that they were obliged accurately to return their income, including trust income from both the family trust and the Sydney trust. It is possible that Mr Steele thought that the money from the family trust had really gone to Nommack Nominees, although I have formed a different view. However I find it hard to believe that he understood the payments to, or for, the Weyers, either in 1995 or any other year, to have been by way of loan. He believed the Weyers to be beneficiaries. To describe such amounts as loans, when they were not to bear interest or to be repaid, is to misuse language. I accept Mr Weyers' account of his discussions with Mr Steele. In particular, I accept that Mr Steele told Mr Weyers that the money which he and his wife were drawing was his or their money. That was not merely a figure of speech or over-simplification for the benefit of a lay client. His meaning could only have been that the Weyers could use Nommack Nominees' money in their absolute discretion.
168. I return to the requirement of the ITA Act that a taxpayer disclose trust income. It does not really matter whether the moneys distributed by the family trust went to Nommack Nominees as banker, as bare trustee or as trustee of the Sydney trust. To the extent that such moneys and other income of the Sydney trust was distributed to the Weyers, it was income derived from one or other of the two trusts and should have been returned as such. I cannot avoid the conclusion that Mr Steele must have known that. He intentionally disregarded the requirement for disclosure of such income. That caused the Weyers' tax shortfalls. The assessment to additional tax pursuant to s 226J was correct.
169. After publication of these reasons I will adjourn the matter to enable the parties to prepare draft orders and to identify any further findings of fact which they might reasonably require. I will hear submissions as to costs.
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