PRICE STREET PROFESSIONAL CENTRE PTY LTD v FC of TJudges:
MEDIA NEUTRAL CITATION:
 FCA 345
1. The matter before me is an appeal from the decision of Senior Member McCabe in the Administrative Appeals Tribunal ("the Tribunal") delivered on 22 November 2005. In that decision, the Tribunal affirmed the decision of the respondent of 27 September 2002 which, in disallowing the applicant's objections to the amended assessments issued by the Australian Taxation Office ("ATO"):
- • disallowed the loss of $755,680 incurred upon the sale of real property in the year ended 30 June 1993;
- • disallowed the claims for deduction of unrecouped losses carried forward in the years ended 30 June 1995 through 2000; and
- • imposed a penalty under s 226J Income Tax Assessment Act 1936 (Cth) ("ITAA 1936") at the rate of 75%.
2. The applicant has sought orders that:
- • the decision of the Tribunal be set aside; and
- • the applicant's objections be allowed, or in the alternative, that the matter be remitted to the Tribunal with a direction that the applicant's objections be allowed or to a differently-constituted Tribunal for rehearing.
3. Appeals from the Tribunal are not appeals in the strict sense as they lie within the original jurisdiction of the court:
Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 at 581,
Birdseye v Australian Securities and Investments Commission  FCAFC 232 at , (2003) 76 ALD 321. A party to a proceeding before the Tribunal may appeal to the Court from any decision of the Tribunal in that proceeding, but only on questions of law: s 44(1) Administrative Appeals Tribunal Act 1975 ("AAT Act").
4. The facts forming the background to this appeal were described in detail by the Tribunal. So far as relevant those facts are as follows:
- 1. The applicant was incorporated on 15 March 1982 as a shelf company. Two shares in this company were issued on incorporation, one of which was to Mr Paul Doumany who was a principal of Paul Doumany & Co, solicitors.
- 2. On 13 December 1989 Mr Toshiaki Iwasaki, a non-resident businessman, purchased a 10.32 hectare parcel of vacant land in Rockhampton, Queensland, described as lot 172 on RP612341, for $940,000 ("the land").
- 3. Because Mr Iwasaki was a non-resident, he was required to obtain the approval of the Foreign Investment Review Board ("FIRB") to the purchase.
- 4. Mr Iwasaki's solicitors informed FIRB that the land was adjacent to a tertiary educational institution and that Mr Iwanaki wished to develop the land to provide accommodation for overseas students. On 30 May 1990 FIRB approved the purchase of the land subject to the condition that development of the land commence within 12 months of the approval.
- 5. In 1991 Paul Doumany & Co, commenced acting on behalf of Mr Iwasaki.
- 6. On 28 November 1991 the following events occurred:
- a. Mr Iwasaki paid Mr Doumany $1,449,998
- b. a meeting of the directors of the applicant was held and the directors resolved to allot Mr Doumany 1,449,998 ordinary shares fully paid to $1.00 each. Mr Doumany paid the applicant $1,449,998 for the shares, using the money he had received from Mr Iwasaki
- c. Mr Iwasaki transferred the land to the applicant for the sum of $1,450,000. To pay for the land the applicant used the money it had received from Mr Doumany (which had originally come from Mr Iwasaki)
- d. Mr Doumany signed an acknowledgment of his indebtedness to Mr Iwasaki in the sum of $1,450,000, upon the conditions that the debt was not repayable in cash but by the transfer by Mr Doumany to either Mr Iwasaki or his nominee of 1,450,000 ordinary shares fully paid to one dollar in the applicant, and that while Mr Doumany held the shares in the applicant he would not permit the company to declare any dividend or make any distribution without the written consent of either Mr Iwasaki or his nominee
- e. Mr Doumany executed a codicil to his will devising and bequeathing all shares in the applicant to Ms Yuriko Iwasaki. I understand that Ms Iwasaki is Mr Iwasaki's daughter
- f. Mr Iwasaki signed a Deed of Conditional Forgiveness of the debt of $1,450,000 owed by Mr Doumany to him, the principal term of which was that Mr Iwasaki forgave and released Mr Doumany from any further obligation in respect of the debt subject to and conditional upon Mr Doumany transferring to him or his nominee the 1,450,000 shares in the applicant allotted to Mr Doumany.
- 7. Shortly afterwards the applicant entered into a lease of dormitory accommodation on the land with a third party for the period 15 December 1991 to 14 December 1994.
- 8. In an unsigned letter dated 20 December 1991 from Paul Doumany & Co to Piper & Holmes (Gold Coast North) Pty Ltd ("Piper & Holmes"), Mr Iwasaki's accountants, the letter noted that the paid-up capital of the applicant was:
$1,450,000 made up of 1,449,999 ordinary shares held by PC Doumany in trust for Mr T Iwasaki and 1 ordinary share held by Mr GD Hyland in trust for Mr T Iwasaki. Please note that this trust is a blind trust and therefore undisclosed in any of the records or accounts of the company.
- 9. During early 1992 the further development of the land was discussed, including in correspondence from Paul Doumany & Co. However by 30 September 1992, the applicant had decided to sell the land rather than develop it, and in a letter of that date communicated this decision to the lessee.
- 10. By contract of sale dated 14 October 1992 the applicant sold the land, now described as Student Accommodation and Associated Buildings, lot 172 RP620056, to an unrelated third party for $1,105,000. This amount represented a significant loss for the applicant.
- 11. After payment of several amounts by the applicant, including in respect of an unregistered mortgage, the applicant was left with $720,794 in total. A cheque in this amount was drawn in favour of Mr Iwasaki by the applicant.
- 12. As at 1 May 1993 Mr Doumany and Mr Geoffrey Hyland were directors of the applicant. Mr Hyland resigned as a director on this date, and transferred his share in the applicant to Ms Joanne Doumany, Mr Doumany's wife. Ms Doumany was subsequently appointed a director of the applicant.
- 13. On 1 July 1993 the applicant changed its name to Price Street Professional Centre Pty Ltd.
- 14. On 27 August 1993 Piper & Holmes lodged a tax return on behalf of the applicant, in which there was an accumulated trading loss as well as a capital gains loss for the company, with the result that no tax liability existed for the financial year ending 30 June 1993.
- 15. On 17 September 1993 Mr Iwasaki authorised Paul Doumany & Co to wind up the applicant and for this purpose relinquished and renounced any claim he may have had as to the beneficial ownership of 1,450,000 ordinary shares in the applicant held by Mr Doumany.
- 16. Some time before 14 July 1994, the applicant appointed as its accountants Lee, Garvey Hunt & Fearnsley, Certified Practising Accountants and Business Advisers ("LGHH"). By letter of that date from LGHH to the ATO, LGHH advised that, in reviewing the financial statements for the year ended 30 June 1993, it noted that an error had been made in relation to the sale of trading stock, namely the land sold by the applicant. This error was that the loss of $755,377 from the sale of land, being the cost of sale minus the income the applicant received on the sale should have been treated as a revenue, not a capital loss. LGHH on behalf of the applicant requested that the tax return for that year be amended accordingly.
- 17. The loss of $755,377 was carried forward in the accounts of the applicant into the financial years ended 30 June 1995, 1996, 1997 and 1998.
- 18. In July 1999 the applicant was selected for audit by the ATO. Following the audit, the ATO issued notices of amended assessment for the years ended 30 June 1995, 1996, 1997 and 1998 which excluded claims for the loss carried forward from the 1993 financial year. A similar approach was taken by the ATO in respect of assessments for the 1999 and 2000 financial years.
- 19. Further, a 75% penalty was imposed on the assessment for the years ended 30 June 1995, 1996, 1997 and 1998.
- 20. The applicant lodged notices of objection against the ATO assessments and the penalty imposed. As indicated earlier in this judgment, on 27 September 2002 the respondent disallowed the applicant's objections.
5. In the Tribunal, the submissions of the applicant and the subsequent findings were as follows:
- 1. The applicant contended that the activities of the applicant in relation to the land were in the nature of a profit-making venture. However the learned Senior Member was not persuaded by that characterisation of the applicant's business activity (Reasons for Decision para 34), and was of the view that the land was a capital asset, with the result that the loss on its sale was a capital loss (para 35).
- 2. The applicant contended that company losses could be carried forward, on the basis that the "continuity of ownership" test in s 80A ITAA 1936 had been satisfied, and during the relevant period the beneficial ownership of shares in the applicant remained with Mr Paul Doumany; or that the "same business" test in s 80E ITAA 1936 had been satisfied. The Senior Member observed that, given his findings concerning the characterisation of the applicant's business activity and the resultant loss, it was strictly unnecessary for him to reach a decision on either of these issues. In any event however, the Senior Member was satisfied that:
- • while the legal ownership of the shares in the applicant may have remained with Mr Doumany, at the time the loss on the sale of the land was incurred the beneficial ownership of shares in the applicant rested in Mr Iwasaki, having been transferred to Mr Iwasaki on or before 20 December 1991. Accordingly the applicant failed on the "continuity of ownership" test in s 80A (para 40); and
- • there had been a significant break in the business activities of the applicant between November 1992 and 1996, and the applicant therefore failed on the "same business" test in s 80E (para 45).
- 3. The Tribunal noted that the applicant bore the onus of proving the objection decisions should have been made differently: s 14ZZK(b) Taxation Administration Act 1953 (Cth) ("TA Act") (para 27). Although the Senior Member was not prepared to draw an adverse inference from the failure of Mr Doumany to give evidence in accordance with the rule in
Jones v Dunkel (1959) 101 CLR 298 (para 28), he noted that the failure of Mr Doumany to give evidence meant that it was more difficult for the applicant to show that the Commissioner's decision was wrong (para 29).
- 4. The applicant contended that a penalty of 75% was inappropriate because it acted with the advice of senior counsel. However the Senior Member was satisfied that the penalty of 75% under s 226J ITAA 1936 was appropriate (para 50).
Questions of law raised on appeal
6. The questions of law raised on appeal in this case were as follows:
- a. are the losses incurred by the applicant allowable as deductions under s 51(1) ITAA 1936?
- b. if yes to a., in the relevant years of income:
- i. did s 80A ITAA 1936 apply to deny the applicant deductions?; or
- ii. did s 80E ITAA 1936 apply to allow the applicant deductions?
- c. if the applicant was wrong in claiming deductions, were penalties correctly imposed under s 226J ITAA 1936?
- d. did the Tribunal err in instructing itself as to the applicant's onus of proof and as to its role in reviewing the objection decision?
- e. did the Tribunal err in not providing reasons for its rejection of the preponderance of the evidence as to the beneficial ownership of the shares?
- f. did the Tribunal err in finding that the applicant was not carrying on the same business in the relevant years within s 80E?
- g. could a reasonable tribunal have made, on the material before it, the findings made?
- h. does the Tribunal's apparent error of fact - namely that Mr Doumany was prosecuted in the criminal courts for causing the applicant to claim the deductions - show that the Tribunal failed to give due consideration to the material before it, or give rise to a reasonable apprehension of wrongful bias against the applicant?
7. I shall address each of these questions in turn.
a. Are the losses incurred by the applicant allowable as deductions under section 51(1) ITAA 1936?
8. As the relevant loss occurred in the 1993 year of income both applicant and respondent accepted that the relevant statutory provision was s 51(1) ITAA 1936.
9. The applicant submitted that:
- • the Tribunal applied the wrong test of deductibility to the facts as found
- • the Tribunal did not refer to the relevant test of when a profit from sale of a capital asset - as opposed to the proceeds of sale of a revenue asset - was on revenue account, which it submitted was whether the asset was acquired with a purpose or intention of profit-making by sale . This, the applicant submitted, was the relevant inquiry, not whether the land was trading stock or whether the gross proceeds were on revenue account
- • the Tribunal failed to direct itself as to the proper test of whether land is acquired as part of a profit-making undertaking, being whether one of the purposes of its acquisition, rather than the purpose, was profit-making by sale.
- • the test was not whether the applicant was in the business of property development, with the land being trading stock:
Moana Sand Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4897. In particular, the applicant submitted that in Moana Sand
88 ATC 4897, the profit made by the taxpayer was held to be income because one of the taypayer's purposes was profit-making by subdivision and sale, even though the subdivision was not in fact carried out and the taxpayer had to sell the land en globo due to a compulsory acquisition. The applicant also cited in support of its case
Federal Commissioner of Taxation v Cooling 90 ATC 4472; (1990) 22 FCR 42 and
Westfield Ltd v Federal Commissioner of Taxation 91 ATC 4234; (1991) 28 FCR 333.
10. In response, the Commissioner submitted that:
- • the necessary requirement of deductibility under s 51(1) is that the loss is "incidental and relevant" to the income-earning operations of the taxpayer
- • the ultimate question must remain whether the loss incurred had the necessary connection with the applicant's gaining or producing assessable income, or the carrying on of its business
- • the question of whether the taxpayer carries on a business is a question of fact
- • citing Gibbs J in
Commissioner of Taxation v Williams 72 ATC 4188; (1972) 127 CLR 226 at 249, proceeds resulting from the mere realisation of a capital asset are not income, even though the realisation is carried out in an enterprising way so as to secure the best price. However, a distinction needs to be drawn between mere realisation of an asset, and development and improvement of land to such a marked degree that it is impossible to say that it is mere realisation of an asset, as was the case in
Federal Commissioner of Taxation v Whitford's Beach Pty Ltd 82 ATC 4031; (1982) 150 CLR 355
- • the test propounded by the applicant was referable to the former s 26(a) ITAA 1936 and was of no application in this case. The land in question was purchased subsequent to the introduction of the capital gains tax provisions in September 1985 and s 26(a), the more recent s 25A and s 52 have no application to the transaction
- • profits brought to tax under statutory income provisions are not to be equated with net gains which may well fall within the ordinary concept of income
- • in this case the Tribunal found that the applicant did not acquire the land for the purpose of subdivision, development and sale, and the steps taken towards further development of the property were so limited that the whole undertaking could not be said to be comparable to the situation in Whitford's Beach
82 ATC 4031; 150 CLR 355 (Reasons for Decision para 32).
Section 51(1) ITAA 1936
11. This section has been interpreted many times, and at the highest judicial level in Australia. At the relevant time it read as follows:
ATC 4326"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."
12. In the context of the section it is clear that:
- • the expression "incurred in gaining or producing the assessable income" requires that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income:
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57
- • the reference to losses and outgoings "necessarily incurred in carrying on a business for the purpose of gaining or producing such income" adds little to the operation of the leading words "losses or outgoings to the extent to which they are incurred in gaining or producing assessable income": Ronpibon Tin 78 CLR at 56
- • losses and outgoings of capital are clearly excluded from the operation of the section even if they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income.
13. In the case before the Senior Member, a key issue in dispute was whether the loss in this case should be characterised as capital or income. If the loss was a capital loss, it would not be an allowable deduction within the meaning of s 51(1).
Capital vs income
14. In a regulatory environment where taxation legislation is as extensive as it is complex, the issue in question before the Senior Member was one of deceptive simplicity. Were the losses claimed by the applicant to be characterised as capital or revenue/income? Despite the plethora of cases over the years considering the distinction between income and capital (to paraphrase Wilson J in Whitford's Beach
82 ATC 4031; 150 CLR at 393 - the battle lines drawn by the parties in this case have a familiar ring) the outcome of each case will invariably depend on the facts of that case. Before turning to the decision of Senior Member McCabe, it is useful to summarise general legal principles relevant to this question.
15. Despite extensive legislative intervention over the years to identify forms of "income" and "capital" for the purposes of Commonwealth taxation legislation, neither term is legislatively defined. It is clear that, because of the traditional characterisation of receipts and expenditure as either income or capital, the term "income" has not extended to all forms of gain; nor has loss in revenue terms included all forms of loss (for an interesting discussion of this issue see the article by Professor Jeff Waincymer "If at first you don't succeed... reconceptualising the income concept in the tax arena" (1994) 19 MULR 977). However as observed by Jordan CJ in
Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 in relation to "income":
"The word 'income' is not a term of art, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts..."
16. A consequence of taxation reform has been that the traditional distinction between gains characterised as either income or capital has blurred over time, with obvious examples being the introduction of concepts of "statutory income" in the ITAA 1936 and Income Tax Assessment Act 1997 (Cth), and the treatment of profits made in respect of disposal of assets acquired after 19 September 1985 following the introduction of the capital gains tax regime in Australia. However, notwithstanding what has been termed the almost arbitrary nature of the distinction (note for example comments of
ATC 4327Greene MR in
Inland Revenue Commissioners v British Salmson Aero Engines Ltd  2 KB 482 at 498) the continued existence of that distinction means that the task of identifying transactions as related to either income or capital becomes a live issue in many cases.
17. This matter is one such case. As I have already noted, the applicant originally characterised the loss from the sale of the relevant land as capital, but subsequently, and now before the Court, claims that the loss was revenue according to ordinary principles. There was no issue in contention that the loss was deductible according to statutory concepts of revenue.
18. The traditional delineation between income and capital, so far as referable to outgoings, was described by Dixon J in
Sun Newspapers Ltd v Federal Commissioner of Taxation (1939) 61 CLR 337 at 359, 363 as follows:
"The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure or organization set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss...There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."
(These principles have been considered and applied many times by Australian courts: see for example
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 645-646; Williams
72 ATC 4188; 127 CLR 226, Whitford's Beach
82 ATC 4031; 150 CLR 355,
United Energy Ltd v Commissioner of Taxation 97 ATC 4796; (1997) 78 FCR 169 per Sundberg and Merkel JJ at 191-192;
Lamont v Commissioner of Taxation 2005 ATC 4411;  FCA 513;
Macquarie Finance Limited v Commissioner of Taxation 2005 ATC 4829;  FCAFC 205 at [105-106], and
Commissioner of Taxation v Citylink Melbourne Ltd 2006 ATC 4404;  HCA 35 per Crennan J (Gleeson CJ and Gummow, Callinan and Heydon JJ agreeing) at [147-154] and per Kirby J at [20-25].)
19. I shall return to this principle later in this judgment.
Capital or revenue and real property
20. Real property is commonly regarded as a capital asset. Generally speaking, unless a sale of real property is made in the operation of a business the resulting profit will not be income according to the ordinary concepts and usages of mankind. The courts have historically addressed the issue of whether a gain made by a taxpayer, in relation to the sale of what would otherwise be a capital asset, was capital or income, in terms of whether the taxpayer was merely realising the asset (in which case the gain is characterised as a capital gain), or whether the gain was made in the operation of business in carrying out a scheme of profit-making (in which case the gain is characterised as income or revenue): see for example
California Copper Syndicate v Harris (1904) 5 TC 159 at 165-166,
Commissioner of Taxes v Melbourne Trust Limited  AC 1001 at 1009,
Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148 at 151, and Whitford's Beach
82 ATC 4031; 150 CLR per Gibbs CJ at 367-368, Mason J at 372, Wilson J at 400.
21. Although s 26(a) ITAA 1936 specifically deemed, as income, profit arising from the sale by the taxpayer of any property acquired for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme, it is clear that the acquisition of a property for profit-making by sale of that property can, of itself, give rise to assessable income within the ordinary usage of the word (
Commissioner of Taxation v The Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199; and note the useful discussion of the history of this principle by Davies J in
McCurry v Commissioner of Taxation, 98 ATC 4487; unreported Federal Court of Australia, 15 May 1998).
ATC 4328However, the fact that in realising the asset the taxpayer has engaged in activities which were planned, organised and coherent, and which produced profits considerably more than could otherwise have been obtained, does not mean that an advantageous realisation converts into a profit-making scheme:
Scottish Australian Mining Co v Federal Commissioner of Taxation (1950) 81 CLR 188, Gibbs CJ in Whitford's Beach
82 ATC 4031; 150 CLR at 369. Examples of the application of this principle can be seen in Williams
72 ATC 4188; 127 CLR per Barwick CJ at 240-241, Menzies J at 245, Gibbs J at 249-251,
Gutwenger v Commissioner of Taxation (1995) 55 FCR 95 and
Casimaty v Commissioner of Taxation 97 ATC 5135; 1388 FCA (10 December 1997).
Relevance of purpose
23. The characterisation of activity as either capital or income was subject to some review by the High Court in Myer Emporium
87 ATC 4363; 163 CLR 199, where the Court in a unanimous judgment held that it was perfectly possible for an isolated business operation or commercial transaction, entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, to nonetheless constitute income in accordance with the ordinary meaning of the word, provided that the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction (at 209-210, 211, 220).
24. Although the Court considered the well-known proposition that mere realisation of a capital asset does not produce a gain which is assessable income, as the Court said at 213:
"The proposition ... requires some elaboration. First, the emphasis is on the adjective 'mere'... Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value... It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction."
25. Their Honours said later in the judgment:
"The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind... For present purposes it is sufficient for us to say...that, valuable though these considerations may be in categorizing receipts as income or capital in conventional situations, their significance is diminished when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit-making scheme. (at 215)"
26. Although the High Court in Myer Emporium
87 ATC 4363; 163 CLR 199 found that receipts from sale of capital assets generated as profit components of profit-making schemes were capable of constituting income, equally clearly the decision is not authority for the proposition that all gains made by business entities are assessable income. As pointed out by the Full Court of the Federal Court in
Commissioner of Taxation (Cth) v Spedley Securities Ltd 88 ATC 4126; (1988) 19 ATR 938 at 942, such a proposition would be contrary to authority, to the Act itself, and to basic concepts concerning the distinction between capital and income (note similar comments by the Hill J in Cooling
90 ATC 4472; 22 FCR at 55 and again by Hill J (with whom the other members of the Court concurred) in Westfield
91 ATC 4234; 28 FCR at 342).
Nature of purpose
27. In determining whether a sale receipt is generated as a profit component of a profit-making scheme, and therefore income in accordance with ordinary usages, it is only necessary that the intention or purpose of profit-making by sale was one aspect of a
ATC 4329profit-making scheme in existence at the time of the acquisition of the asset (or, as was the case in Whitford's Beach
82 ATC 4031; 150 CLR 355, coming into existence during the course of the taxpayer's ownership of the asset and remaining in existence at the time of the sale): Westfield
91 ATC 4234; 28 FCR at 343-344. It is not necessary that the intention or purpose of profit-making by sale be the sole or dominant purpose of the taxpayer entering into the profit-making scheme: Cooling
90 ATC 4472; 22 FCR at 56-57 (cf Myer Emporium
87 ATC 4363; 163 CLR 199 where the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify; and Moana Sand
88 ATC 4897 where the dominant purpose of the taxpayer in acquiring the land was not resale of the land at a profit). However the Full Court of the Federal Court in a number of cases has indicated that the purpose of profit-making must be a "not insignificant" aspect of the taxpayer's activities: Cooling
90 ATC 4472; 22 FCR at 57,
Selleck v Commissioner of Taxation 97 ATC 4856;  799 FCA (20 August 1997).
28. The meaning of "profit-making scheme" is well-known. It is useful to note in the present context that:
- • it is not necessary that the profit-making scheme was specific in detail, or that every step which culminated in the profit was planned or foreseen (Westfield
91 ATC 4234; 28 FCR at 344); and
- • the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised (Westfield
91 ATC 4234; 28 FCR at 344).
29. As Hill J further noted in Westfield
91 ATC 4234; 28 FCR at 333-345:
"(I)t is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of the scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s 25(1) of the Act is involved. As the court observed in Myer...the property which generates the gain must be acquired in an operation of business or commercial transaction 'for the purposes of profit-making by the means giving rise to the profit."
30. In identifying the purpose of a corporate taxpayer, it is important - indeed decisive - to consider the purpose of those who control the taxpayer: Ruhamah 41 CLR at 160, 162, 166; Whitford's Beach
82 ATC 4031; 150 CLR per Gibbs CJ at 370. So, for example, in Whitford's Beach
82 ATC 4031; 150 CLR 355 where ownership and control of the taxpayer company changed from that of individuals whose purpose in forming the taxpayer was for the taxpayer to hold land for the domestic purposes of those shareholders, to that of three companies which acquired the taxpayer for the purpose of carrying out a business operation of land development, a key issue in the decision was the fact of that change of control and the intentions of the new shareholders of the taxpayer.
31. Having set out the relevant legal principles in some detail, I now turn to consider whether, in reaching its decision, the Tribunal erred in law as submitted by the applicant in relation to question a.
32. The Tribunal commenced its discussion of whether the loss in question was income or capital in para 26 of the Reasons for Decision where it says:
"Was the loss which the applicant seeks to carry forward more appropriately characterised as a capital loss, or should the sale of the land in 1991 be treated as a disposal of trading stock or part of a profit-making scheme that gives rise to a loss which can be offset against future income? That question requires me to consider the law in relation to the distinction between income and capital."
33. After making observations concerning the evidence, the key reasons for decision are found in paras 30-35. In summary the Tribunal:
- • stated as a principle of law that the applicant bore the burden of proving the objection decisions should have been made
ATC 4330differently under s 14ZZK(b) TA Act (paras 27 and 35)
- • stated that "the starting point of the analysis was the well-established rule that the proceeds from the mere realisation of a capital asset will not give rise to income according to ordinary concepts" (para 30)
- • noted that if the asset was more like trading stock that was bought and sold as part of a business of developing and dealing in land, the law might treat the proceeds of the sale as income (para 30)
- • noted that the applicant had submitted that it had been engaged in a profit-making venture (para 31)
- • considered the submissions of the applicant concerning the characterisation of the company's business activity (para 31)
- • found that the characterisation of the company's activity as submitted by the applicant was not persuasive (para 32)
- • found as a fact that the correspondence between Mr Iwasaki's solicitors and FIRB indicated that the land was acquired by Mr Iwasaki to construct student accommodation, and that this was the only use to which the property was ever put (para 32)
- • found as a fact that the transfer of ownership of the land to the company was completed as part of a re-ordering of Mr Iwasaki's affairs because of taxation concerns (para 32)
- • found as a fact that the applicant continued to derive rental income from the accommodation developed on the property, and although Mr Iwasaki foreshadowed the possibility that the land might be sub-divided as a development project, it was only one option under consideration (para 32)
- • found as a fact that Mr Iwasaki played a central role in the decision-making process of the applicant (para 32)
- • found as a fact that, although the applicant investigated whether the property could be sub-divided or on-sold for the purposes of development, the evidence did not establish that that was the purpose for which the land was acquired (para 32)
- • found as a fact that no particular significance attached to the payment of a share of the sale proceeds to Mr Iwasaki after the sale was completed (para 33)
- • found as a fact that the applicant's accountants regarded the sale as the realisation of a capital asset when they prepared the applicant's accounts in 1993 (para 34)
- • found as a fact that the amendment to the accounts in July 1994 was the product of a decision of Mr Doumany to explore the possibility of deriving some value from the applicant once Mr Iwasaki's involvement in the applicant has ceased (para 34)
- • found that the applicant had not discharged the burden of proof imposed on it by s 14ZZK(b) TA Act, and that the Tribunal was not persuaded that the land was anything other than a capital asset (para 35).
34. In my view the submissions of the applicant that the Tribunal erred in law in its findings respect of this issue cannot be supported. I form this view for the following reasons:
- 1. Senior Member McCabe stated the law correctly when he referred to "the well-established rule that the proceeds from the 'mere realisation' of a capital asset will not give rise to income according to ordinary concepts - and any loss incurred on the disposal of the asset will not lead to a loss that can be offset against other income of the taxpayer". This is clearly supported by the body of case law to which I referred earlier in this judgment, beginning with California Copper (1904) 5 TC 159.
- 2. The applicant in its submissions contended that the Senior Member erred in making the inquiry as to whether the land was trading stock or whether the gross proceeds were on revenue account. However:
- • I note from the Statement of Facts, Issues and Contentions filed by the applicant in the Tribunal that the applicant had
that the loss incurred by the applicant on the sale of the land in the year ended 30 June 1993 was a revenue loss by reason
ATC 4331the trading stock provisions or as a loss on a profit-making undertaking or scheme. Further, the evidence showed that LGHH, in its letter of 14 July 1994 to the ATO on behalf of the applicant, described the land as "trading stock". In light of this it is to be expected that the Senior Member would address the issue whether the land was trading stock or the gross proceeds were on revenue account (paras 30-31).
- • In any event, in my view it is clear from reading para 30 of the Reasons for Decision that the Senior Member, in referring to the situation "if the asset was more like trading stock", was giving an example of a scenario where the proceeds of sale of capital assets such as real property can properly be characterised as income rather than capital. The Senior Member did not base his decision that the loss in this case was not in the nature of revenue, solely on this principle.
- • I note from the Statement of Facts, Issues and Contentions filed by the applicant in the Tribunal that the applicant had contended that the loss incurred by the applicant on the sale of the land in the year ended 30 June 1993 was a revenue loss by reason either of
- 3. The applicant submitted that the Tribunal erred in that it did not refer to what the applicant defined as the relevant inquiry in the circumstances, namely whether the asset was acquired with
purpose or intention of profit-making by sale. The applicant submitted further that, in failing to direct itself as to the proper test of whether land was acquired as part of a profit-making undertaking, the Tribunal also failed to direct itself as to whether
of the purposes of its acquisition, rather than
purpose, was profit-making by sale. However, in my view the Senior Member made it clear that he had applied the test of whether the applicant had acquired the land with a profit-making purpose, but that in doing so as a finding of fact he was not satisfied that the applicant had had that purpose
, ie as either "the" purpose or one of a number of purposes be they significant or otherwise. Rather, the Tribunal considered the range of purposes of acquisition of the land and the characterisation of the applicant's business activity as submitted by the applicant, and on the facts found against the applicant. This is apparent from the Reasons for Decision, including:
- • At para 31, where the Senior Member specifically acknowledged: "The applicant says this was a profit-making venture... The company acquired the land with a view to developing it or on-selling the property to another entity. The company investigated various development options before completing a sale and then distributed a portion of the proceeds to the foreign businessman".
- • At para 32, where the Senior Member specifically stated: "I am not persuaded by that characterisation of the company's business activity. The taxpayer was a shelf company until it contracted to purchase a parcel of land from a foreign businessman who was a client of one of the company's directors. The correspondence between the businessman's solicitors and the FIRB make it clear the property was acquired by the businessman to construct accommodation. As it happened, that was the only use to which the property was ever put... The taxpayer did investigate whether the property could be sub-divided or on-sold for the purposes of development, but I do not think the evidence establishes that was the purpose for which the land was acquired."
- 4. Although the applicant submitted that the findings of the Tribunal in para 32 of its Reasons for Decisions - namely that the applicant had considered sub-division or on-sale for the purposes of development as one option and that steps were taken to achieve that purpose - required the Tribunal to conclude that the loss on sale of the applicant's land was deductible under s 51(1), I do not so find. Rather, in my view:
- • The finding of the Tribunal in the circumstances of this case that the proceeds from the sale of the land were on capital account rather than income is consistent with the legal principles as articulated by Dixon J in Sun Newspapers 61 CLR 337. The land was purchased by Mr Iwasaki, transferred to the applicant, and used for the purposes of constructing student accommodation
ATC 4332which in turn generated income. It bore all the hallmarks of a capital asset. The fact that the applicant was a corporate entity does not mean that any disposal of asset is on revenue account (Myer Emporium
87 ATC 4363; 163 CLR 199).
- • In any event, as found by the Tribunal, Mr Iwasaki was the directing mind and will of the applicant between 1991 when the land was transferred to the applicant, and 1993 when Mr Iwasaki relinquished any claim he may have had as to the beneficial ownership of shares in the applicant following the sale of the land. Accordingly, during that period, the purpose of Mr Iwasaki with respect to the land was the relevant purpose (cf Whitfords Beach
82 ATC 4031; 105 CLR 355; Austin RP and Ramsay IM, Ford's Principles of Corporations Law (13th ed, Butterworths, 2007) Ch 16; Lipton P and Herzberg A, Understanding Company Law (13th ed, Law Book Co, 2006) at pp 103-108). That purpose as found by the Tribunal was bi-fold, namely that the land was a capital asset to be used for constructing student accommodation, and the applicant was to hold the land on Mr Iwasaki's behalf as part of the re-ordering of Mr Iwasaki's affairs. As found by the Tribunal, other than consideration of the option of development of the land, neither Mr Iwasaki nor the applicant at the relevant time held the land for the purpose of resale consistent with a profit-making scheme (cf Hill J in Westfield
91 ATC 4234; 28 FCR at 344-345). Further, as found by the Tribunal at para 32, there was no change of purpose of the applicant with respect to the land, as evinced, for example, by steps towards further development of the property, so as to result in the applicant acquiring a profit-making purpose akin to the situation in Whitford's Beach
82 ATC 4031; 150 CLR 355.
- • Notwithstanding the submissions of the applicant, in my view the law is
that, in the absence of a clear intention of a taxpayer in acquiring the property that it be used for a profit-making purpose,
subsequent consideration by the taxpayer of exploitation of a capital asset (for example by the possible options of either subdivision or on-selling) results in the immediate creation of a profit-making scheme and the resultant characterisation of profits or losses made in respect of subsequent dealings with that asset as revenue. A bare claim that this was the intention of the taxpayer is insufficient to manifest that intention in the absence of evidence of that intention, for example, by steps to progress those options. The surrounding circumstances must be taken into account in ascertaining the true intention of the taxpayer, and also characterising the receipts in the hands of the taxpayer. To find otherwise would potentially sanction
manifestation of intention of the taxpayer to convert a capital asset to the revenue account (or vice versa), however meagre or fleeting such manifestation of intention. By analogy I note comments of the High Court in
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation 90 ATC 4413; (1990) 170 CLR 124 at 142 where their Honours said:
"... it cannot be accepted that an intention on the part of a payer and a payee or either of them that a receipt be applied to recoup capital expenditure by the payee determines the character of a receipt when the circumstances show that the payment is received in consideration of the performance of a contract, the performance of which is the business of the recipient or which is performed in the ordinary course of the business of the recipient."
- • The finding of the Tribunal in the circumstances of this case that the proceeds from the sale of the land were on capital account rather than income is consistent with the legal principles as articulated by Dixon J in Sun Newspapers 61 CLR 337. The land was purchased by Mr Iwasaki, transferred to the applicant, and used for the purposes of constructing student accommodation
35. I also note comments of the Full Court in Cooling
90 ATC 4472; 22 FCR 42 and Selleck
97 ATC 4856;  799 FCA, referred to earlier in this judgment, that the purpose of profit-making must be a "not insignificant" aspect of the taxpayer's activities.
36. In my view, no error appears from the Reasons for Decision of the Tribunal in relation to this question of law. Accordingly the answer to question a raised on appeal is "No".
b. If yes to a., in the relevant years of income:
- i. Did section 80A ITAA 1936 apply to deny the applicant deductions?, or
- ii. Did section 80E ITAA 1936 apply to allow the applicant deductions?
37. In view of my negative answer to question a. raised on appeal, it is unnecessary to answer these questions.
c. If the applicant was wrong in claiming deductions, were penalties correctly imposed under section 226J ITAA 1936?
38. Section 226J ITAA 1936 provided as follows:
"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 75% of the amount of the shortfall or part."
39. In this case the respondent imposed a penalty of 75% additional tax for the reason that Mr Paul Doumany, who:
- • was the legal adviser to Mr Iwasaki;
- • held the majority of the shares in the taxpayer;
- • had been fully aware of the circumstances which led to the sale of the property to the taxpayer; and
- • was the sole beneficial owner and one of the directors of the taxpayer during the years that the company sought a tax offset for the loss,
had acted to obtain a tax benefit for the taxpayer in disregard of taxation laws.
40. In considering the issue of penalties, the Tribunal said as follows:
- "48. The applicant says a penalty of that magnitude is inappropriate because it acted with the advice of senior counsel. It seems that advice was given orally. It is unclear on the evidence before me what that advice would have been, or to what aspect of the applicant's affairs it related. What evidence there is certainly does not suggest careful thought and evaluation of the decision to carry forward and claim the losses made by the company against its future income. To the contrary: the evidence suggests to me that Mr D (the directing mind and will of the company after the foreign businessman ceased to be involved) recognised what he took to be an opportunity to obtain a tax advantage by exploiting a corporate shell that had been abandoned by one of his clients. To do so, the company had to ignore the plain effect of many of the documents in relation to the sale of the land and the relationship between the foreign businessman, the company and Mr D. The taxpayer could not have believed it was entitled to seek the deductions, yet it persisted in its attempts to do so.
- 49. Mr D was prosecuted in the criminal courts in connection with his part in this transaction. I do not see how that casts the taxpayer's activities in a different light.
- 50. I am satisfied the penalty of 75% under s 226J is appropriate."
41. Before me, the applicant submitted that:
- • the Tribunal erred in law in finding that Mr Doumany could not have believed the applicant's losses were available
- • the question of intentional disregard of the law is necessarily one concerning subjective intention to engage in conduct that defies the tax law, however defying the Commissioner is not to defy the law
- • no reasonable tribunal could find it "plain" that the documents gave rise to a trust relationship or that, where there was evidence of a purpose of profit-making and activity directed thereto, that it was "plain" that any profit would be capital in nature
- • not accepting a witness' evidence does not equate to a finding that the witness is dishonest; in this case however the Tribunal made an effective finding of dishonesty against Mr Doumany although the Tribunal also said that it drew no adverse inferences against the applicant from the failure of Mr Doumany to give evidence
- • the question of penalties should in all events be remitted to the Tribunal to be decided according to law.
42. The burden of proof is on the applicant to show that there was no intentional disregard
ATC 4334of the ITAA 1936 or the regulations and that the penalty under s 226J should not have been imposed (cf Nozzi Pty Ltd Commissioner of Taxation  FCA 356 at ).
43. As made clear by the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 which introduced s 226J, s 226J requires knowledge by the taxpayer that, for example, it has claimed a deduction knowing that it is not allowable. Accordingly, "intentional disregard" of the ITAA 1936 or regulations requires, inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the ITAA 1936 or regulations. The legislation treats "intentional disregard" differently from, and more seriously than, negligence to comply with the Act (cf s 226G) or recklessness with regard to the correct operation of the Act (cf s 226H).
44. Whether the conduct of the applicant has satisfied s 226J requires findings of fact by the Tribunal.
45. I am not persuaded that the Tribunal acted unreasonably in finding that the taxpayer had ignored the plain effect of many of the documents in relation to the sale of the land and the relationship between Mr Iwasaki, the taxpayer and Mr Doumany, or that it acted unreasonably when it was satisfied on the facts that the conduct of the taxpayer was in "intentional disregard" of the legislation for the purposes of s 226J. The Tribunal carefully reviewed:
- • the history of the transaction;
- • the relationship between the key parties;
- • the previous advice given by Piper & Holmes that the loss was a capital loss compared with subsequent conduct of the taxpayer in light of later advice, including the revision of the taxpayer's characterisation of the transaction;
- • the fact that Mr Doumany himself was a solicitor and had had a relationship with the taxpayer from its incorporation including what appeared to be a close professional relationship with Mr Iwasaki;
- • the fact that it appears the taxpayer acted on oral, rather than written, advice that the loss was in the nature of revenue rather than capital; and
- • the dearth of evidence as to the nature of that advice or to what aspect of the applicant's affairs it related.
46. In my view the adverse inferences drawn by the Tribunal in para 48 as to the conduct of Mr Doumany and through him, the applicant are open on the evidence. No error of law has been demonstrated on the part of the Tribunal.
47. Accordingly the answer to question c raised on appeal is "Yes".
d. Did the Tribunal err in instructing itself as to the applicant's onus of proof and as to its role in reviewing the objection decision?
48. In its Notice of Appeal, the applicant linked this question of law with paras 27-30 and para 35 of the Reasons for Decision of the Tribunal. In these paragraphs, in the context of considering whether the loss the applicant sought to carry forward was more appropriately characterised as a capital or income loss, Senior Member McCabe said as follows:
- "27. Section 14ZZK(b) says the taxpayer has the burden of proving the objection decisions should have been made differently. The Commissioner's decision effectively creates a presumption the applicant must rebut if he or she is to succeed in an appeal: see, for example,
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 314-8315 per Jacobs J. That may be a difficult task where the taxpayer does not call any witnesses to explain a paper trail that does not speak for itself, or which is consistent with the Commissioner's view or even ambiguous.
- 28. The Commissioner has asked me to draw adverse inferences against the taxpayer in light of the fact the applicant has not called Mr D to give evidence. Mr D was in the best position to explain the transactions into which the applicant entered. His evidence would probably have been of assistance to the Tribunal. Mr Hack, for the Commissioner, says the rule in
Jones v Dunkel (1959) 101 CLR 298 should apply. That rule permits me to draw an adverse
ATC 4335inference from the failure to call the witness in appropriate circumstances. One of the circumstances in which I may not draw an adverse inference is where there is a reasonable excuse for the failure to call the witness. I think there is a reasonable excuse in this case. That excuse can be gleaned from the submissions made in relation to the application for a suppression order: see A Taxpayer and Commissioner of Taxation  AATA 398. Mr D has apparently declined to answer questions on the basis he might expose himself to a criminal prosecution. There is little point in calling a witness in those circumstances.
- 29. While I decline to draw an adverse inference from Mr D's failure to appear, that failure inevitably makes it harder for the applicant to show the Commissioner's decision was wrong.
- 30. The starting point of the analysis is the well-established rule that the proceeds from the 'mere realisation' of a capital asset will not give rise to income according to ordinary concepts - and any loss incurred on the disposal of the asset will not lead to a loss that can be offset against other income of the taxpayer: see
Federal Commissioner of Taxation v NF Williams (1972) 72 ATC 4188 per Gibb J at 4195. If the asset was more like trading stock that was bought and sold (or bought, developed, sub-divided and sold) as part of a business of developing and dealing in land, the law might treat the proceeds of the sale as income : see, for example,
Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1982) 82 ATC 4031.
- 35. I have already observed the applicant would have difficulty establishing the Commissioner's objection decisions were wrong - the task required of the applicant by s 14ZZK of the TAA - in circumstances where the taxpayer did not call any witnesses and relied instead on inferences drawn from the evidence. I do not think the applicant has discharged that burden. The applicant has not persuaded me the land was anything other than a capital asset. The proceeds of the sale of the land should therefore be regarded as the proceeds of a mere realisation of a capital asset. The loss on that sale was a capital loss. The objection decisions under review ought to be affirmed in that respect."
49. On consideration of the grounds of appeal, the applicant's submissions, and Reasons for Decision of the Tribunal highlighted by the applicant, two issues emerge, namely:
- a. whether the Tribunal incorrectly applied the onus of proof borne by the applicant; and
- b. whether the Tribunal improperly applied the rule in
Jones v Dunkel 101 CLR 298.
50. Unfortunately question d was not the subject of oral submissions by the applicant during the hearing before me. Ms Brennan for the respondent however referred me to the decision of the Full Court in
Repatriation Commission v Deledio (1998) 83 FCR 82. In that case however the Court noted that it was considering the principles of burden and onus of proof under s 120 (5) and (6) Veteran's Entitlements Act 1986 (Cth) ((1998) 83 FCR 82 at 95).
51. Like in the case before me, the applicable legislation in Deledio was not silent on issues of proof. In relation to the first issue in this case with respect to onus of proof, it is clear in light of s 14ZZK(b)(i) TA Act that the taxpayer in this case bore the onus of proof that the amended assessment was excessive. The nature of the onus of proof in the context of this legislation has been recognised in numerous decisions, including
McCormack v Commissioner of Taxation 79 ATC 4111; (1979) 143 CLR 284 (although McCormack was decided under predecessor legislation),
Federal Commissioner of Taxation v Munro (1997) 97 ATC 5041 and
Vu v Commissioner of Taxation 2006 ATC 4387;  FCA 889. Further, it is clear on the authorities that the taxpayer, in its application before the Tribunal, must prove its case affirmatively on the balance of probabilities: McCormack
79 ATC 4111; 143 CLR at 303 per Gibbs J, Munro
97 ATC 5041,
Vu v Commissioner of Taxation 2006 ATC 4387;  FCA 889 at .
52. The applicant claimed in its grounds of appeal, inter alia, that "the onus of proof provided for in s 14ZZK TA Act operated against the applicant only where the balance of probabilities was against a finding of fact
ATC 4336required by the applicant or was evenly balanced for and against such a finding of fact". In its submissions, the applicant contended:
"The Tribunal was wrong at para  to consider that the applicant's failure to call Mr D inevitably made it harder for it to show the Commissioner's decision was wrong and to set up two documents inferentially supporting the Commissioner's contentions as evidence to be rebutted. The role of the onus of proof arises only in the rare case where all the evidence is weighted equally for and against a conclusion of fact, and it never has relevance to questions of legal characterisation of the facts as found."
53. In my view, this misconceives the obligation of the taxpayer when challenging a determination of the Commissioner under the legislation, and the onus borne by the taxpayer as a result of s 14ZZK(b)(i) TA Act. As Jacobs J explained in McCormack
79 ATC 4111; 143 CLR at 314, there is, by virtue of the section, a rebuttable presumption of law that an assessment is not excessive, and the onus is on the taxpayer to rebut that presumption. This means, for example, that where the evidence is equivocal the applicant in an appeal before the Tribunal against an assessment fails to discharge its onus : Mason J in
Gauci v Federal Commissioner of Taxation 75 ATC 4257; (1975) 135 CLR 81 at 89-90, approved in McCormack
79 ATC 4111; 143 CLR by Gibbs J at 303-304, Stephen J at 306, Jacobs J at 314 and Murphy J at 323. Contending that the onus of proof under s 14ZZK(b) only arises in the limited circumstances submitted by the applicant misstates the effect of that provision. In my view no error of law appears in this respect from paras 27-30 and 35 of the Tribunal's Reasons for Decision.
54. Extensive submissions were made by the applicant with respect to the requisite onus and standard of proof concerning evidence as to continuity of ownership and the business of the applicant, including issues concerning the provenance of unsigned documentation to which the Tribunal referred in its decision. Issues concerning continuity of ownership and the nature of the applicant's business are the subject of questions e and f before me. To the extent that question d relates to these issues - and the relationship is not obvious from the applicant's reference to paras 27-30 and 35 of the Reasons for Decision of the Tribunal - in my opinion:
- • the applicable legal principles are those I have articulated above and no error of law appears from the decision of the Tribunal; and
- • for reasons I shall explain in relation to questions e and f, it is unnecessary to consider question d in relation to findings of the Tribunal with respect to continuity of ownership and the business of the applicant.
55. In relation to the second issue concerning the rule in
Jones v Dunkel 101 CLR 298, the applicant contends as a ground of appeal that the Tribunal erred in law by correctly ruling that the rule in
Jones v Dunkel 101 CLR 298 did not apply, but then in fact applying that rule. The key aspect of this well-known rule for present purposes is that the unexplained failure by a party to call evidence or witnesses may, not must, in appropriate circumstances lead to an inference that the uncalled evidence or missing material would not have assisted that party's case (see Heydon JD, Cross on Evidence (7th Australian ed, Butterworths, 2004) at p 39.
56. Although the applicant also referred to paras 35, 39, 40, 41 and 49 of the Tribunal's Reasons for Decision in connection with this question of law, this contention is particularly relevant to paras 28 and 35 where the Tribunal:
- • noted the rule, but observed that it should not apply it because the applicant had a reasonable excuse for the failure to call the witness (para 28); and
- • said that the applicant had not discharged its burden of proof (para 35).
57. Paragraphs 39, 40, and 41 relate to carrying forward losses and continuity of beneficial ownership (and hence are relevant to question e), whereas para 49 refers to the penalty imposed on the applicant (which I have already considered) and the alleged prosecution of Mr Doumany which I will discuss later in this judgment.
58. In para 28, the Tribunal made it clear that the task of the applicant in discharging its burden of proof was made more difficult because it did not call Mr Doumany as a
ATC 4337witness. However the Senior Member also made it clear that he made his decision based upon the evidence that was before him, and provided reasons to this effect. I am not persuaded that that the Tribunal in fact applied the rule in
Jones v Dunkel 101 CLR 298, either unconsciously (as submitted by the applicant) or otherwise. Given the history of this matter, and Mr Doumany's involvement in the affairs of the applicant and all relevant transactions the subject of this application, it is obvious that his evidence would have been important in these proceedings. In light of this, contrary to the submissions of the applicant, there were very good reasons for the Tribunal to take the view that the failure of the applicant to call Mr Doumany as a witness made the applicant's task of discharging its burden of proof more difficult in these proceedings. However this does not mean that the Tribunal drew inferences adverse to the applicant from its failure to call Mr Doumany as a witness. Further, the examination by the Tribunal of whether the loss should be characterised as income or capital, including consideration of the facts as presented to the Tribunal, suggests that the Tribunal did in fact give careful consideration to such evidence as was before it.
59. Accordingly the answer to question d raised on appeal is "No".
e. Did the Tribunal err in not providing reasons for its rejection of the preponderance of the evidence as to the beneficial ownership of the shares
f. Did the Tribunal err in finding that the applicant was not carrying on the same business in the relevant years within section 80E
60. I have a number of observations concerning questions e and f.
Does question e raise a question of law?
61. Clearly, the Tribunal is obliged to provide reasons for its decisions: s 43(2) AAT Act. However, in the sense that question e is framed in terms of whether the Tribunal erred in "not providing reasons for the rejection of the preponderance of the evidence as to the beneficial ownership of the shares", in my view the question actually seeks a review of the Tribunal's decision on its facts. Question e is based upon the factual assumption that there was a preponderance of evidence showing there was a substantial continuity of beneficial ownership of the taxpayer's shares. It is not obvious to me how it is possible to answer question e without reviewing the facts as considered by the Tribunal to weigh the evidence as to the beneficial ownership of the shares in question.
62. The authorities are clear that:
- • On administrative review under the AAT Act the Tribunal is the arbiter of the facts:
Repatriation Commission v Thompson (1988) 82 ALR 352 at 357. Accordingly, in exercising its jurisdiction under s 44(1) AAT Act the task of the Court is to leave to the Tribunal decisions of fact, and to interfere only when the identified error is one of law (Thompson,
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 115 ALR 1,
Phillips v Commissioner for Superannuation  FCAFC 2,
Federal Commissioner of Taxation v Swift (1989) 89 ATC 5101). There is no error in law simply in making a wrong finding of fact (Brennan J in
Waterford v Commonwealth (1987) 163 CLR 54 at 77, Thompson at 357). This point has been reiterated many times (see for example Pozzolanic at 9 and Phillips at ).
- • Simply disputing factual findings of the Tribunal on the weight of evidence does not raise errors of law in the absence of other circumstances. As pointed out by the Full Court in
Collins v Minister for Immigration and Ethnic Affairs (1981) 36 ALR 598 at 601:
"A number of authorities were cited by counsel for the appellant in support of the propositions that the making of a decision against the evidence or the weight of the evidence and the making of an unreasonable decision are errors of law. We find it unnecessary to examine these authorities for the reason that, in our opinion, there is no factual basis to found these propositions. We would, however, comment that the concepts of a decision being against the evidence and of being against the weight of the evidence belong to appeals from courts of law and have particular application to jury verdicts. Even in that context, they do not involve questions of law. They
ATC 4338certainly have no place when the appeal, or review, is of proceedings of an administrative tribunal which is not bound by the rules of evidence and which, subject to the obligation to observe the requirements of natural justice, can inform itself as it chooses: see s 33(1)(c) of the Administrative Appeals Tribunal Act 1975. An appellant who attacks a conclusion of the Tribunal because of deficiency of proof said to amount to error of law must show, if he is to succeed, that there was no material before the Tribunal upon which the conclusion could properly be based."
Blackwood Hodge (Aust) Pty Ltd v Collector of Customs (NSW) (1980) 47 FLR 131 at 144-5,
Deniz v Minister for Immigration and Ethnic Affairs (1983) 51 ALR 645 at 650,
Repatriation Commission v Thompson 82 ALR at 358, Swift at 5,113,
McAuliffe v Comcare  FCA 769 at ,
Commissioner of Taxation v Word Investments Ltd 2006 ATC 4715;  FCA 1414 at )
63. In relation to question e, the applicant has not contended that there was no material upon which the decision of the Tribunal could properly be based - only that there was a preponderance of evidence against the Tribunal's findings. As the Court pointed out in Collins, a finding of fact against the weight of evidence does not give rise to a question of law.
64. Alternatively, as pointed out by the Full Court in
Repatriation Commission v Thompson 82 ALR at 358:
"When the challenged finding is one of fact, an error of law will only arise if it be found that the finding was unreasonable in the sense expounded in
Associated Provincial Picture Houses Ltd v Wednesbury Corporation  1 KB 223, or that the reasoning of the tribunal disclosed that it approached the issue on a wrong footing by posing the wrong question or otherwise made a legal error which vitiated the finding."
65. The question raised in question e relates almost exclusively to facts found by the Tribunal on the evidence. In itself, the question does not cavil with the legal approach of the Tribunal to the conceptualisation of continuity of beneficial ownership. In my view question e is not a question of law which attracts the jurisdiction of the Court under s 44(1) AAT Act.
Does question f raise a question of law?
66. Similarly, question f queries the finding of the Tribunal with respect to whether the applicant was carrying on the same business during the relevant period, without disputing the approach by the Tribunal to the issue. Question f seems to seek a review of the decision of the Tribunal purely on the facts. In my view, for the reasons I have just outlined, question f also does not raise a question of law.
Is it necessary to answer questions e and f anyway?
67. However further, and in my view fatally, questions e and f appear to be a rephrasing of question b. Question b is predicated on the basis that, if the answer to question a is "no", it is unnecessary to answer question b. The reason is clearly that, for the purposes of this case, allowable domestic losses could be carried forward and deducted in arriving at the taxable income in later income years of the applicant (s 79E ITAA 1936), but as the applicant was a corporation it was necessary in order to carry forward the losses that the applicant satisfy either the "continuity of beneficial ownership" test in s 80A or the "same business" test in s 80E. As noted by the Senior Member, in light of his finding that the loss in question was a capital loss as distinct from a revenue loss, and therefore the loss was not deductible under s 51(1) ITAA 1936, it was strictly unnecessary for him to deal with the aspect of the argument concerning carrying forward of losses (Reasons for Decision para 36). Similarly, it was unnecessary for me to consider question b as a result of my finding that the Tribunal made no error in characterising the loss of the applicant as a capital loss. In light of this point, and that questions e and f raise issues of the findings of the Tribunal in respect of the continuity of beneficial ownership test in s 80A and the same business test in s 80E, the necessity for me to answer questions e and f raised on appeal is not obvious. Even if I were to find that the Tribunal had erred in its consideration of either of these tests, it would not change my finding in relation to question a that the applicant's loss was a capital loss, not deductible as a revenue loss as claimed by the applicant, and not capable of
ATC 4339being carried forward as a revenue loss as claimed by the applicant.
New issue raised by applicant
68. The fact that I have found against the applicant in relation to question a, means that consideration of issues raised in questions e and f in respect of the findings of the Tribunal, even assuming that they give rise to questions of law which can be the subject of appropriate and meaningful consideration, appears to be a pointless exercise. I note however that before the Tribunal:
- • the applicant raised the possibility that the losses of the applicant could be available to the applicant to be carried forward as capital rather than revenue losses
- • the applicant submitted that the Tribunal should remit the matter to the respondent to recalculate the applicant's taxable income allowing the losses to offset any capital gains.
69. The Tribunal did not decide this issue. I note that, in his reasons for decision, the Senior Member considered issues relevant to continuity of ownership and "same business" but only because he considered those issues were potentially relevant to penalties.
70. The applicant acknowledged in its submissions that no question of law in relation to this issue is before me under s 44(1) AAT Act so as to attract the jurisdiction of the Court. However, the applicant contends that if I were to reach the conclusion that the losses were not deductible but there was a continuity of ownership or the same business, the appeal should be allowed and the matter remitted to the Tribunal to be decided in accordance with law. The applicant submits further that the Tribunal would then be in a position to decide whether to order the applicant's taxable income to be recalculated to take into account capital losses.
71. With respect, this contention by the applicant is simply not sustainable. As I have already stated, the law on this point is crystal clear. The Federal Court has jurisdiction to hear appeals on questions of law arising in the decision of the Tribunal and to determine such questions of law. If a question of law is not the subject of appeal, the Court has no jurisdiction to hear it. Further, it is not open to the Court to make orders which do not relate to the questions of law before it. Section 44(4) AAT Act provides
"The Federal Court of Australia shall hear and determine the appeal and may make such order as it thinks appropriate by reason of its decision."
72. I agree with comments of Sheppard J in
Minister for Immigration and Ethnic Affairs v Gungor (1982) 63 FLR 441 at 454-455 where his Honour said:
"It is in my opinion not correct to say that this Court is by provisions given wide powers to make such order as it thinks fit. Implicit in its powers are a number of restrictions. The appeal is expressly limited to error of law, which alleged error is the sole matter before this Court and is the only subject matter of any order made consequent on the appeal. The order which this Court can make after hearing the appeal is also similarly restricted to an order which is appropriate by reason of its decision. It follows that the only order which can be properly made is one the propriety of which is circumscribed by and necessary to reflect this Court's view on the alleged or found error of law. To go further I would see as amounting to exceeding the jurisdiction of this Court under this section. A power to make 'such order as it thinks appropriate by reason of its decision' is much more restrictive than a power 'to make such order as it sees fit' or a power 'to make a decision in substitution for the decision' the subject of the appeal.'...
The powers of this Court on appeal under s 44 of the AAT Act are limited to consideration of alleged errors of law by the Tribunal and go no further.
Morales v Minister for Immigration and Multicultural Affairs (1998) 82 FCR 374 at 386-387 and
Minister for Immigration and Multicultural Affairs v Thijagarajah (2000) 199 CLR 343 at 356-357)"
73. In this case, it is not possible for the Court to make orders concerning a hypothetical question which was not the subject of a claim by the applicant, nor decision by the first respondent, nor contention before the Tribunal, nor decision by the Tribunal - that is, whether
ATC 4340the losses of the applicant could in fact be carried forward on capital account. It is not the role of the Federal Court to answer hypothetical questions or give advisory opinions:
Bass v Permanent Trustee Co Ltd (1999) 161 CLR 399 at 413-415.
74. Accordingly, in view of my findings concerning question a, it is both unnecessary for me to make any findings with respect to questions e and f, and inappropriate to make the orders sought by the applicant which could follow from any consideration of those questions.
g. Could a reasonable Tribunal have made, on the material before it, the findings made?
75. In the grounds of appeal the applicant submits that no reasonable Tribunal, properly apprised of its role, could have made the findings that were made. It follows from my findings in this judgment that this claim cannot be substantiated.
76. Accordingly the answer to question g raised on appeal is "Yes".
h. Does the Tribunal's apparent error of fact - namely that Mr Doumany was prosecuted in the criminal courts for causing the applicant to claim the deductions - show that the Tribunal failed to give due consideration to the material before it, or give rise to a reasonable apprehension of wrongful bias against the applicant?
77. In the grounds of appeal the applicant submits that:
- • the Tribunal's apparent error of fact - that the controller of the applicant had been prosecuted for claiming the deductions - leads a reasonable observer to the conclusion that the Tribunal did not give due consideration to the material before it, and may have been biased against the applicant; and
- • a Tribunal acting under such a misapprehension could more readily make adverse findings of fact against the applicant.
78. In its submissions the applicant contended that:
- • the Tribunal made its findings about the evidence in circumstances where a fair-minded observer would consider it believed that Mr Doumany had been prosecuted in the criminal courts for his part in the transactions
- • the applicant had submitted that because the respondent had sought to pursue Mr Doumany for criminal offence, albeit unsuccessfully, penalties should be remitted because of Parliament's policy to allow either prosecution or penalties to occur, but not both
- • although it was possible that the Tribunal only meant by para 49 to reject the applicant's submission, it is also possible, given the seven month interval between the hearing and the decision, that the Tribunal mistakenly considered that Mr Doumany had been prosecuted. A fair-minded observer, reading the reasons for decision, would reach that conclusion and conclude further that it might unfairly affect the Tribunal's consideration of the conflicting evidence of Mr Doumany
- • accordingly, the existence of this possibility requires the decision to be set aside.
79. The relevant statements of the Tribunal are found in paras 49-50 of its decision, which read as follows:
- " Mr D was prosecuted in the criminal courts in connection with his part in this transaction. I do not see how that casts the taxpayer's activities in a different light.
-  I am satisfied the penalty of 75% under s 226J is appropriate."
80. First, contrary to the submission of the applicant, in my view the obvious inference to be drawn from the observations of the Tribunal is that the Tribunal was rejecting the applicant's submission. Before the Tribunal in its Statement of Facts, Issues and Contentions, the applicant submitted:
"Any remaining penalties should be remitted in full in the discretion of the Tribunal under subs 227(3). In this regard the policy of Parliament where there has been an alleged offence is either to proceed with pursuing the offence, or impose penalties, but not both. The Respondent, in conjunction with the Australian Federal Police, chose to pursue Mr Doumany for offences. Mr Doumany was charged with offences, but the respondent and the
ATC 4341Australian Federal Policy ultimately abandoned the charges but not before Mr Doumany was subjected to a time consuming, costly and stressful investigation (in which he cooperated fully)."
81. The brevity of para 49, and the fact that the Tribunal dismisses the relevance of what it described as a criminal prosecution, shows clearly in my view that the Tribunal did not consider the issue of prosecution - however mistaken the Tribunal was in identifying this as an issue - as relevant to its decision.
82. Secondly, the brief consideration by the Tribunal of the issue of criminal charges (or lack thereof) was only in the context of the application of penalties, in light of the submission made by the applicant. In so considering, the Tribunal was responding to submissions made by the applicant.
83. Thirdly, I note that a criminal prosecution is usually commenced by the laying or filing of an information, complaint or charge before or with a magistrate, justice or other authorised person, giving the court jurisdiction (Halsbury's Laws of Australia (as at 13 April 2004) vol 9, 130 "Criminal Procedure" paras 130-13235). In this case no criminal charges were laid against Mr Doumany, and no prosecution commenced. It was clear from the submission of the applicant, and exchanges between the Senior Member and Counsel during the Tribunal Hearing, that the Senior Member was aware that a police investigation had occurred, however from a perusal of the transcript of the Tribunal hearing it appears that the issue was not the subject of oral submissions, and in any event the fact that no charges had been laid was clearly on the record before the Tribunal. In my view the reference by the Senior Member in para  of his Reasons for Decision to Mr Doumany being "prosecuted" in the criminal courts appears to be, at most, an error of fact. Errors of fact are not reviewable by the Court.
84. The submission that the Tribunal's view concerning the prosecution had unfairly affected the Tribunal's consideration of the conflicting evidence of Mr Doumany cannot in my view be substantiated. I note again that the Tribunal considered the issue of criminal proceedings involving Mr Doumany to be irrelevant. It is clear that the Tribunal was concerned with the material before it, rather than possible external events concerning Mr Doumany. In my view a fair-minded observer would take the view that the issue of whether or not Mr Doumany had been the subject of criminal prosecution had not influenced the Tribunal in any way.
85. Accordingly the answer to question h raised on appeal is "No".
86. In view of my answers to the questions of law raised on appeal, it follows that the application is dismissed.