3-D SCAFFOLDING PTY LTD & ANOR v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2008] AATA 1884

Decision date: 19 October 2007

J Block (Deputy President)

Part A - preliminary and introduction

1. There are two Applicants in this matter:

(a) Applications NT2004/287-289 relate to Mr James Docherty, who is referred to in these reasons as "Docherty". Docherty raised objections in respect of amended assessments referable to the tax years ending 30 June 1998, 30 June 1999 and 30 June 2000; those objections were disallowed and Docherty sought review by the Tribunal of that decision. The objection decision, which is under review in respect of Docherty, is thus the disallowance of his objection in respect of those tax years.
(b) Applications NT2004/290-293 relate to 3-D Scaffolding Pty Ltd, which is referred to in these reasons as "3-D". 3-D raised objections in respect of amended assessments referable to the tax years ending 30 June 1998, 30 June 1999, 30 June 2000 and 30 June 2001; those objections were disallowed and 3-D sought review of that decision. The objection decision which is under review in respect of 3-D is the disallowance of its objection in respect of those tax years.
(c) The tax years referred to in subparagraphs (a) and (b) above are collectively referred to as the "relevant years".
(d) The applications were heard together, and are connected. 3-D in the relevant years referable to it, claimed deductions for the hire of scaffolding equipment leased to it by a Mr Tony Borg (referred to in these reasons as "Borg" or as "Mr Borg"). The Respondent contends that 3-D was not entitled to the deductions claimed and raises in issue the question of whether or not Borg existed at all and received the payments alleged to have been made to him. The amended assessments in respect of Docherty were raised in accordance with Division 7A of the Income Tax Assessment Act 1936 ("the Act"), on the basis that if the deductions claimed by 3-D are disallowed, those payments would have been received in circumstances which permit assessments against Docherty in terms of Division 7A of the Act. The case in respect of Docherty is linked with that in respect of 3-D on the basis that if 3-D succeeds, then Division 7A assessments against Docherty cannot stand.

2. The Applicants were represented by Mr D. B. McGovern SC and Mr A. O'Brien of counsel instructed by Swaab Attorneys, while the Respondent was represented by Mr D. Fagan SC and Mr R. Quinn of counsel (and by Mr Quinn alone after the hearings in April 2007) instructed by the Australian Government Solicitor.

3. This case was originally listed for five hearing days commencing on 16 April 2007. Those hearing days proved to be insufficient, and it was re-listed for hearing on 30 May 2007, 31 May 2007 and 1 June 2007. In fact, and by consent, the case was, at the end of the hearing day on 30 May 2007, adjourned until 1 June 2007, and so that there was, in fact, no hearing on 31 May 2007.

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The transcript for the five hearing days in April 2007 is sequentially numbered from page 1 to page 437. The transcript for 30 May 2007 commences at page one as indeed does the transcript for 1 June 2007. References to the transcript or "TS" refer, unless indicated otherwise, to the transcript for the hearing days in April 2007. (In Annexure A, references to the Transcript are designated simply by "T".)

5. After the hearing had ended, a timetable for further written submissions was arranged. The Tribunal received written submissions as follows:

(a) In respect of the Applicants, dated 1 June 2007 ("AS1");
(b) In respect of Docherty, submissions entitled "Additional Submissions of James Docherty as to Division 7A" dated 1 June 2007 ("DS1");
(c) In respect of the Respondent, dated 1 June 2007 ("RS1");
(d) In respect of the Applicants, submissions in reply dated 3 August 2007 ("AS2");
(e) In respect of the Respondent, submissions in reply dated 6 September 2007 ("RS2"); and
(f) In respect of the Applicants, submissions in reply dated 14 September 2007 ("AS3").

As to whether leave was granted for AS3 is debateable, but nothing turns on the question of whether or not it can be considered for the purpose of these reasons; put in other words, consideration by the Tribunal of AS3 would not affect its decision in these matters.

6. The documentation before the Tribunal is quite astonishingly large.

(a) In the first instance, the Tribunal accepted, in respect of each of 3-D and Docherty the tender of the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. The T documents in respect of 3-D are much larger than those referable to Docherty. It is relevant to note that, in fact, the hearing related almost entirely to 3-D and that there was little mention, in relation to Docherty, of Division 7A of the Act.

(b) The Tribunal accepted the tender of a number of Exhibits, one of which, in particular, is of itself very large. The Exhibits are as follows:

Exhibit A1:	A large volume of documents entitled simply "Exhibit". It is divided into 16 tabbed sections and so that a reference to Exhibit A1 together with a reference to a tab number relates to that tabbed part of Exhibit A1;
Exhibit A2:	A witness statement by Docherty dated 2 December 2005;
Exhibit A3:	A witness statement by Docherty dated 17 March 2006, which includes its own exhibit marked "Exhibit 2"; Exhibit 2 in turn consists of a large folder of documents divided into tabs numbered 1 to 9;
Exhibit A4:	A further witness statement by Docherty dated 27 March 2007;
Exhibit A5:	A spreadsheet prepared by Docherty during the hearing;
Exhibit A6:	A witness statement by Lynette Susan Montgomery (who is referred to in these reasons as "Montgomery") dated 1 December 2005;
Exhibit A7:	A witness statement by Betty Orel (who is referred to in these reasons as "Orel") dated 30 November 2005;
Exhibit A8:	A statement of account issued by "Ricky Richards (Sales) Pty. Limited";
Exhibit A9:	A report by Paul Carter of PriceWaterhouseCoopers dated 2 December 2005;
Exhibit A10:	A witness statement by Peter Docherty dated 1 December 2005;
Exhibit A11:	A summons to produce addressed to the Office of State Revenue dated 4 November 2005;
Exhibit A12:	An historical company extract in respect of 3-D;
Exhibit A13:	Vodafone records;
Exhibit R1:	A summons to produce addressed to the NSW Police, together with the documents furnished by NSW Police in response to that summons;
Exhibit R2:	A diagram and picture of scaffolding equipment;
Exhibit R3:	Mastercard statements for Docherty showing transactions during the period 11 May 1999 to 1 June 1999; 23 November 1999 to 8 December 1999 and 9 December 1999 and 20 December 1999;
Exhibit R4:	An affidavit and report by Claude Arthur Jugmans dated 8 February 2007;
Exhibit R5:	A witness statement by David Morse dated 9 November 2006;
ATC 2057 Exhibit R6:	A witness statement by Sue Hird dated 23 October 2006;
Exhibit R7:	A search on "004576589";
Exhibit R8:	Working papers of interview on 21 February 2003;
Exhibit R9:	File note of conversation between Vodafone and Sue Hird dated 14 April 2003;
Exhibit R10:	A witness statement by Vladimir Proksch dated 15 November 2006.

Part B - summary and the nature of the proceedings

7. RS1 commences with a section which is entitled "Nature of Proceedings". That section describes, as the name suggests, the nature of the proceedings. It is followed by a summary of the issues, some of the law involved and the manner in which the relevant amended assessments came to be issued. Clauses 1 to 20 of RS1 serve as a useful background, and are included in these reasons as follows:

" Nature of Proceedings

1. These proceedings concern two applications under section 14ZZ of the Taxation Administration Act 1953 ("the TAA") for review of the decisions of the Respondent to disallow the Applicants' objections to amended assessments.

2. The application for review by 3D Scaffolding Pty Ltd ("3D") concerns the years of income ended 30 June 1998, 1999, 2000, and 2001, while the application brought by Mr James Docherty ("Docherty") concerns the years of income ended 30 June 1998, 1999 and 2000.

3. The Commissioner conducted an audit in relation to 3D and issued amended assessments in respect of the years of income ended 30 June 1998 to 2000 on 9 October 2003 disallowing certain deductions claimed by the Company of which the major part consisted of payments to a fictitious entity Modular Scaffold Hire Pty Ltd ("MSH"). In the 2001 year 3D was non taxable. In relation to the 1998 year the original assessment for that year had issued on 9 March 1999. In order to amend the 1998 assessment the Commissioner formed the opinion that the avoidance of tax was due to fraud or evasion.

4. The Commissioner also concluded that the alleged payments to MSH were in reality payments to Docherty and accordingly assessed him in respect of the years ended 30 June 1998, 1999 and 2000 under Division 7A of the Income Tax Assessment Act 1936 ("ITAA36") by the issue of amended assessments on 9 March 2004.

The Issues

5. While 3D has objected to the amended assessments and sought review of the objection decisions in respect of a number of matters concerning deductions claimed in the relevant years, it is only in relation to the following matters where evidence has been filed:

a) The deductibility of payments purportedly made to a bogus company MSH; (paragraph 4 of the Respondent's Statement of Facts Issues and Contentions);

b) the land clearing expense; (paragraph 7-8 of the Respondent's Statement of Facts Issues and Contentions);

c) the loan repayment to the director for scaffolding he had allegedly supplied to 3D from time to time; (paragraph 9-10 of the Respondent's Statement of Facts Issues and Contentions)

d) Penalty.

6. The application brought by Docherty concerns amounts which were purportedly paid by 3D to MSH which the Respondent has concluded were properly assessable to Docherty as deemed dividends under Division 7A. Docherty has also challenged the penalty imposed.

The Facts

7. The material facts are as set out in the Respondent's Amended Statement of Facts Issues and Contentions dated 17 October 2005 and as adduced at the hearing of this matter.

Legislation

Assessments issued to 3D

8. Section 8-1(1) of the Income Tax Assessment Act 1997 ("the ITAA97") is in the following terms:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

a. it is incurred in gaining or producing your assessable income ; or

b. it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (Emphasis added)

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9. The test of deductibility requires that the expenditure be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income (first limb) or the carrying on of a business for the purpose of producing assessable income (second limb). Expenditure will be deductible if there is a connection between the loss or outgoing on the one hand and the assessable income or business operations on the other, if it is "incidental and relevant" (
Ronpibon Tin N.L. v FC of T (1949) 78 CLR 47 at 56) to that end. It is necessary to identify by this approach the essential character of the expenditure.

10. It has long been established that "incurred in gaining or producing" is to be understood as meaning incurred "in the course of" gaining or producing the assessable income:
FCT v Payne 46 ATR 228 at 232. To come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income:
FCT v Payne 46 ATR 228 at 231-232;
Ronpibon Tin N.L. v FC of T (1949) 78 CLR 47.

11. Conversely the principle underlying section 8-1 is also one which will exclude outgoings which although incurred for the purpose of deriving assessable income or in the carrying on of a business, are not incurred "in the course of" doing so:
FC of T v Payne 46 ATR 228 at 230. It is not sufficient that the purpose of the expenditure is incidental or relevant to the derivation of assessable income but it must be of a character incidental or relevant to such derivation:
Lunney & Anor v FC of T 11 ATD 404.

12. The task of characterisation will involve enquiring what the loss or outgoing was for:
Colonial Mutual Life Assurance Society v FC of T (1953) 89 CLR 428 at 454;
Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634. The relevant question to be asked is: "is the occasion of the outgoing found in whatever is productive of actual or expected income":
FCT v Payne: 46 ATR 228 at 232.

13. It is clear from the words of sec 8-1 that a taxpayer will only be entitled to deduct a loss or outgoing incurred in gaining or producing assessable income, or incurred in carrying on a business for that purpose, from the assessable income of that taxpayer - i.e. sec 8-1 refers to "your assessable income".

14. On the present facts it is not possible to conclude that the amounts said to be paid to MSH were deductible expenses incurred in gaining or producing assessable income, or incurred in carrying on a business for that purpose. The testimony of the witnesses called by the Applicants was so improbable and unreliable that the Tribunal has no alternative but to reject the story about the payments to Mr Borg/MSH. A rejection of that testimony inevitably leaves the Applicants in a position where they have failed to discharge the onus of proof and the Tribunal should affirm the objection decisions.

15. Even if the Tribunal were to accept the evidence of the Applicants witnesses in total the Applicants must still fail. It was the unequivocal evidence of Mr Docherty that it was the Docherty Family Trust of which the trustee was 3D which had purchased scaffolding. In those circumstances a deduction would not be available as the expenditure has not been incurred in gaining or producing the assessable income of 3D. It has merely been voluntarily incurred on behalf of another entity. This is discussed further below.
Assessments issued to Docherty

16. Division 7A of Pt III of the ITAA36 deems certain payments, loans and other credits from private companies to shareholders and associated persons to be assessable dividends to the extent that there are realized or unrealized profits in the company.

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17. In the years of income ended 30 June 1998, 1999 and 2000 3D had claimed as a deduction a number of payments to a fictitious company MSH which were said to be incurred in gaining or producing assessable income, or necessarily incurred by it in carrying on a business under sec 8-1 of the Income Tax Assessment Act 1997 ("the ITAA97"):

Year Amount

1998 $111,500

1999 $609,508

2000 $781,731

18. The Commissioner did not accept that the payments were deductible outgoings to the Company and disallowed the claim for the deduction. The Commissioner also took the view that in the absence of a satisfactory explanation from the director, that the payments were in reality payments made to the director and applied Division 7A. Pursuant to sec 109C(2) the amounts in the table above were deemed as dividends under sec 109C(2). However sec 109Y restricts the amount of all deemed dividends under Division 7A to the company's "distributable surplus" for that year.

19. The amount of a Division 7A deemed dividend is proportionately reduced if the total of all Division 7A dividends taken to be paid by the private company at the end of the income year exceeds the distributable surplus of the company for that year. In these circumstances, the assessable proportion is the distributable surplus divided by the total of all Division 7A dividends paid: sec 109Y. Section 109Y(3) requires that the distributable surplus of a private company is to be calculated under sec 109Y(2) using the following formula:

Distributable surplus = Net assets − Non-commercial loans − Paid-up share value − Repayments of non-commercial loans

20. Subsection 109C(1) of Division 7A is in the following terms:
Payments treated as dividends

When private company is taken to pay a dividend

(1) A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

a. the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder; or

b. a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time.

Note 1: Some payments do not give rise to dividends. See Subdivision D.

Note 2: A private company is treated as making a payment to a shareholder or shareholder's associate if an interposed entity makes a payment to the shareholder or associate. See Subdivision E.

Amount of dividend

(2) The dividend is taken to equal the amount paid, subject to section 109Y.
Note: Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.

8. It will be noted that RS1 refers in clause 3 to a fictitious entity called Modular Scaffold Hire Pty Ltd, and which is referred to in these reasons as "MSH". MSH (purportedly) issued documentation in which it described itself as Modular Scaffold Hire Pty Ltd, and in which it reflected an ACN. MSH did not exist, and the ACN reflected was false. According to Docherty, MSH was a company controlled by Borg. Prior to the relevant years, 3-D engaged primarily, but not exclusively, in the supply of labour in the building industry, although it did also supply on hire some scaffolding equipment owned by it. From and after the relevant years, it supplied in addition and on hire scaffolding equipment, and which, so the Applicants contend, was hired by 3-D from Borg, and to

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whom payments were made on a regular basis and always in cash. As to how precisely, and by whom (and when), the relevant cash was procured for this purpose was the subject of evidence which was in important respects contradictory.

9. Oral evidence on behalf of the Applicants was given by Docherty, his brother Mr Peter Docherty (referred to as "Peter"), his sister Orel, and Montgomery, who during the relevant years, lived (together with her daughter) in Docherty's home, although there was not, according to their evidence, a de facto relationship between Docherty and Montgomery. Oral evidence was not given by another brother, Charlie Docherty, who during the relevant years was a co-shareholder with Docherty in 3-D, but not a director. Exhibit A2 states that Docherty was the sole director of 3-D. Oral evidence was also given on behalf of the Applicants by David Morse, an employee of the Office of State Revenue ("OSR") and by Paul Carter, an accountant. Oral evidence was given on behalf of the Respondent by Sue Hird and Vladimir Proksch (both employees of the ATO) and by Claude Jugmans, an accountant.

10. Oral evidence was not given by Borg, who during the course of the proceedings took on an almost mythical significance. Docherty's evidence was that he does not know where Borg is, but at the same time he made almost no attempt to find him. Such attempts as he did make were, according to his own evidence, perfunctory. The position as regards Borg is complicated further by the contradictory evidence as to the legal relationship between MSH or Borg, on the one hand, and (possibly) 3-D or (equally possibly) a trust referable to Docherty or Docherty's family (the "Trust"), on the other. That legal relationship, while not reduced to writing, was usually described as one of lease and in terms of which MSH or Borg leased scaffolding equipment to 3-D (or perhaps the Trust), and in respect of which the arrangements as to consideration were decidedly unusual. Although the contract, when it was originally entered into, was allegedly one between MSH as lessor and 3-D as lessee, MSH proved (as I have indicated) never to have existed, and I refer in these reasons to Borg as the alleged lessor simply because the evidence for the Applicants was that "rental" was paid to him. To refer on a continuous basis to MSH and Borg in the alternative would be unnecessarily repetitive. (This is so also in relation to 3-D and the Trust). The Applicants did not seek to allege that MSH did in fact exist, or had ever existed. The word "rental" appears in inverted commas because the evidence strongly suggests that the payments in question were not in respect of rental.

11. As to whether the relationship was in fact aptly described as a lease is open to considerable doubt. The evidence by Docherty was that the contract in question was entered into on the basis that after "rental" had been paid for a specified period (and the evidence as to the precise period was unclear), the equipment in question would belong to 3-D. If this is so, the contract in question would have been more aptly described as a hire purchase contract and so that deductions, if allowable, would have been restricted to the interest component and thus excluding (in relation to each payment) the capital component. Docherty's evidence was also that as the date for the commencement of the Goods and Services Tax ("GST") drew nearer, Borg was anxious to avoid any involvement with GST, and was thus prepared to enter into an arrangement whereby certain capital payments amounting in aggregate to $75,000 were made by way of "commutation" of any further "rental" obligations. It was never explained why GST was a cause for concern, so far as Borg was concerned, more particularly because the lease or hire purchase agreement was entered into some years before the GST legislation was introduced, and there was no evidence as to any variation or other term embodied in it which would have brought it, notwithstanding that it was entered into previously, within the GST legislation.

12. As if this were not sufficiently complex, Docherty also gave evidence that the acquirer of the equipment was his family trust and which (as set out previously) is referred to in these reasons as the "Trust". The Applicants did not ever produce evidence as to what precise equipment was supplied, or when it was supplied, or the terms on which it was supplied. Nor for that matter was there any evidence of any kind as to the nature of the Trust, except

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that it is a Trust referable to Docherty or his family.

13. The evidence before the Tribunal as regards Borg was so contradictory that a finding that Borg did not exist is, on the balance of probabilities, mandatory. This being so, much of the evidence before the Tribunal was irrelevant, and it is not necessary for the Tribunal to deal with it. This is so, by way of one important example, in particular (for the most part) as regards Messrs Carter and Jugmans. Both of these accounting experts gave evidence which, while on its face was unexceptionable, cannot be accepted simply because each of them assumed the existence of Borg, and the payment to him of rental for the hire of scaffolding equipment.

14. The evidence of Mr Morse can, in this context, conveniently be mentioned at this early stage. His evidence was that on behalf of the Office of State Revenue ("OSR"), he conducted an investigation into the question of whether hiring arrangement duty was being paid in accordance with stamp duty law in New South Wales. After he made contact with Docherty, duty was paid and moreover both on the hire of the scaffolding equipment to 3-D, and its subsequent on hire to customers of 3-D. Significantly, that duty was paid by 3-D. Mr Morse was given Borg's name and a telephone number in Queensland by Docherty. He telephoned that number and spoke to a male person who said that his name was Borg. Morse did not make any further enquiries, more particular as duty was paid. Duty in these circumstances would, in the normal course, although not invariably, be paid by the lessor and by return, although the lessor would usually, in such circumstances, seek to recoup the duty from the lessee. That payment of the duty was made by 3-D is explicable on the basis that it lent support to the existence of a hiring arrangement with Borg. The evidence of Morse, in this context, as to his conversation with a man who said that he was Borg, does not, in all the circumstances, convince the Tribunal that he was in fact who he said he was.

15. It is in these circumstances that considerable quantities of accounting evidence as to the scaffolding equipment being leased out to, and returned by, customers of 3-D can be dealt with (comparatively) briefly. The evidence was that a computer program designed to cater for this aspect proved to be faulty. Spreadsheets were originally prepared, but were unhelpful in that they were prepared on the basis that information was entered without saving the information previously prepared. Spreadsheets of a sort were in time reconstructed, and "reconstructed" is the appropriate term; they cannot be accepted as a correct record of equipment coming in and going out. In the same light, the manner in which payments to Borg were calculated and recorded proved to be open to considerable doubt, and cannot be accepted at face value.

16. At a very early stage of the proceedings, Mr McGovern, in a brief opening statement, noted that Docherty is a man who engages in a robust trade, and moreover that his health is not good. Mr Fagan noted at a later time that while this may be so, the witness statements prepared for the Applicants' witnesses are cast in a form which can aptly be described as polished.

17. Of the various submissions furnished on behalf of the parties, the format of RS1 appeared to me to be best organised; I have therefore, to some extent, in these reasons followed its general framework, and indeed have to some (at times considerable) extent, drawn on its content. In general terms, these submissions furnished by the Respondent dealt in detail with the evidence in a manner which the Tribunal found particularly helpful. (The Tribunal does not intend any criticism of the Applicants' legal advisers in this context; the manner in which the evidence for the Applicants was given made their task difficult.)

Part C - the evidence on behalf of the Applicants in general terms

18. The Applicants seek to contend that a person, subsequently identified as Borg (although Docherty did not, when first questioned by Sue Hird on behalf of the ATO, remember his full name), who attended at 3-D's premises on about 125 occasions, handed over equipment worth more than $1,000,000 under a contract which was not recorded in writing. There was, in other words, no written agreement, and there was no agreed purchase consideration. As a minimum, it could be expected that there would be a schedule of the

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equipment, and it is also reasonable to expect some form of documentation specifying the relevant period and the terms and conditions as to payments; it would be reasonable, furthermore, to expect provisions as to security, and generally provisions (such as, for example, as to insurance) inserted for the protection of the lessor. Docherty said that Borg was given a guarantee that he would receive a minimum of $12,000 per week.

19. Exhibit A2, clause 20 sets out that in this industry the absence of written agreements is not at all unusual. But at the same time, other 3-D transactions were fully and properly documented. One example, in particular, is the agreement described as Subcontract Agreement in tab 6 of Exhibit A1.

20. Borg did not apparently take any steps to protect the (valuable) property he was making available to 3-D. This is so, notwithstanding evidence before the Tribunal as to the fact that theft in the industry is rife. See in particular appendix C to Jugmans' report, which is at annexure A to Exhibit R4; see also paragraph 21 of Exhibit R6.

21. That Borg should act in this unbusinesslike fashion is all the more surprising in light of the fact that he refused to take cheques in respect of rental, and insisted on cash. His attitude was, according to Docherty, that there were "a few unscrupulous people in the industry" (TS 52). However, Borg did not seek any form of security in respect of these valuable assets.

22. According to Exhibit A2 (paragraphs 15 to 16), 3-D was not able to buy its own scaffolding; (see also TS 85-86). The duration of this arrangement was apparently only two and a half years, since in December 2000 (and as to whether this meant the beginning or the end of December 2000 was never clarified) 3-D (or alternatively the Trust) would own the equipment outright. Assuming payments of $12,000 per week, the aggregate amount paid would have been somewhat less than $1,500,000. Payments in some weeks might be, and in fact were, in excess of $12,000. But a transaction of this nature with a total stranger (for so Borg was), on so indeterminate a basis, is inconceivable.

23. According to Docherty, the transaction was terminated early because GST was introduced. Leaving aside the fact that GST was irrelevant because this lease or hire purchase agreement predated GST, GST would, if it had been relevant (and this is very unlikely), have been passed on to the lessee, if lease it was. It is unnecessary for me to deal with the law as to when a pre-GST lease would come within the GST regime since the lease (if it was a lease at all, which is very doubtful) did not include provisions, which could or might have this effect. Docherty, in his evidence, could not say whether the time ran to the beginning or the end of December 2000 (TS 84). If the latter, the additional cost would have been about $48,000 and at 30 June 2000, there were still 22 weekly payments to be made, even if the term was to expire at the beginning of December 2000. At $12,000 per week, this would have yielded $264,000 in aggregate, but Borg was prepared to accept $75,000 in settlement. As to why this was so was, and remains, a mystery.

24. According to the Applicants' evidence, the payments for equipment to Borg were no different from those 3-D had previously been making when it hired scaffolding equipment, by way of example, from Hillsley Hire. Yet in relation to Hillsley Hire, 3-D would not own the scaffolding equipment, in contrast to the alleged arrangement with Borg where 3-D (or alternatively the Trust) would acquire the equipment at the end of the term, and without being obliged to make any further payment. The Respondent in RS1 described the transaction as lacking commerciality; this is, in the Tribunal's view, an understatement. On a commercial basis, Borg could have derived rent for the equipment, and then at the end of the term he could have continued to lease it for rent or, in the alternative, sold it. The year 2000 was the year of the Olympics in Sydney and where there was, at that time, considerable building activity.

25. Not only was there no written agreement or schedule of equipment, but in addition, there was also no evidence of inspection prior to purchase, or of warranties as to quality, especially given that the equipment was second-hand. None of 3-D's staff inspected the equipment before delivery. Docherty said that Borg delivered one or two truck-loads for "testing" purposes. But why did Docherty not

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inspect all of the equipment? Peter, in Exhibit A10, said that there was always concern as to quality, because a failure of quality could result in accidents and substantial liabilities in consequence. Docherty said, at paragraph 16 of Exhibit A2, that he formed the view, based on a discussion with Borg, that the scaffolding equipment was worth more than $1,000,000. But that he formed this view without any inspection of the equipment is itself inconceivable. It must be remembered that Borg and Docherty were not, prior to this transaction, acquainted with each other; the transaction arose from a casual meeting of Borg by Peter (not Docherty) in a pub.

26. The evidence as to quantity is even more (if this is possible) unlikely. Not even Borg was aware of the precise quantities; the only record was made by Peter, who claimed to have made approximations as to quantities only after the equipment had been delivered. Peter, in Exhibit A10, said that there was no signage on the trucks making the deliveries. Nor was there any evidence as to who was to bear the cost of delivery. Of particular note is the total absence of consignment notes, or other documents, as to quantities or other information in this context.

27. The spreadsheets which were reconstructed or prepared by Montgomery were apparently accepted by Borg as to movements of the equipment in and out, although Borg had no records which would have enabled him to check them. Docherty claimed that Borg had only to look around the yard to know whether he was being "dudded". See TS 133, lines 5 to 41 as follows:

"But on occasions you did see him and he was checking the quantity of the scaffolding in the yard was he?---That's not what I say in paragraph 22.

Is that the case though?---Mr Borg came to the yard to collect his payments. Whether he collected it in cash or cheque he still the scaffold in the yard to see what was going on.

Well, what did he do by way of checking the scaffolding in the yard, was he checking the quantity of it?---I imagine he was.

That's what you have said in paragraph 22, that he came to check on the scaffolding, isn't it?---Yes.

And in paragraph 41, that he came almost on a weekly basis to collect payment and on each visit he received payment and the corresponding price sheet. He was regularly seen checking the equipment in the yard?---Not by me.

I see, that's something that you're writing as hearsay from somebody else, is it? Is that right?---No, Peter is - if you want to call it hearsay - Peter told me he came, collected a sheet and he collected and he looked at the scaffold and made sure that, you know, a rough idea of what was there and what was on the sheet. He'd know if he was been dudded or not.

Well, wasn't he given a price schedule, a price sheet?---Yes but what's wrong with me putting a small amount on - - -

Please don't ask me another question?---Okay.

He was given a price sheet and that purported to show him how much scaffolding had been out in the past week, didn't it?---Yes.

What would he be told by looking at what was in the yard?---If I had a small amount on the spreadsheet, saying it was out and the yard was empty, he'd know it wasn't true and accurate.

But you also had your own scaffolding in there, didn't you?---Not substantial amounts like his."

28. This assertion was made despite the fact that the delivery of the equipment had required 10 semi-trailer loads, and despite the fact that the Borg equipment was not kept separate from other (and indistinguishable) equipment already owned by 3-D itself. It was acknowledged that the task was difficult, more particularly because there was no record of other similar equipment owned by 3-D itself, and moreover equipment which was not in fact distinguishable from the equipment alleged to have been supplied by Borg.

29. The time at which Price Spreadsheets were prepared compounds the problems. The

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Price Spreadsheet at tab 2 of Exhibit A1 was dated 1 November 1999, but was prepared for the week ending 19 October 1999. Put in other words, the Price Spreadsheet produced to Borg was, by that time, out of date.

30. The evidence given for the Applicants was that Borg visited 3-D's yard on a weekly basis. But Exhibit A10, as one example, notes that he (Borg) just turned up, and there was no evidence as to regularity. How could Borg realistically know that he was being paid what was due to him, if he simply turned up without prior warning, to ensure that everything was in order? For that matter, how could 3-D know what cash amounts it had to have ready for Borg and when?

31. The only witnesses to ever lay eyes on Borg were Docherty, Peter and Orel (who are siblings) and Montgomery, with whom there was a relationship going beyond that of a purely employer/employee relationship. Montgomery was never required to clarify or justify or explain any amount so paid.

32. Orel referred in Exhibit A7 to the person "who I understood to be Mr Tony Borg". Why was she so uncertain given the number of occasions on which he attended 3-D's premises?

33. By the time of the hearing, Orel was able to be more precise. She said that she did not ever see Borg receive any payments, but did see him with Peter in the factory. This was so despite the number of occasions on which he attended at 3-D's premises, and despite the fact that he was 3-D's largest payee. And her description of Borg differed from that given by Montgomery. Montgomery described Borg as being "about 5'7" … average build, dark curly hair … [aged] 55/60" while Orel said "medium build. A bit heavy - not too heavy. Darkish hair, about my age".

34. Orel was asked why she did not disclose Borg's name when ATO officers first attended at 3-D's premises in October 2002 and February 2003. Orel said that she knew him only as Tony. Orel was in fact 3-D's bookkeeper or accounts clerk, and Borg was 3-D's largest payee. Moreover, that evidence conflicted with evidence by Montgomery as to the envelopes containing cash which she provided to Orel. Montgomery said "in the very beginning I probably wrote Tony Borg and later on it was just Tony and the figure". Orel must have known the name of the person for whom the envelopes were being provided. Nor was there any explanation as to why Orel did not simply ask Peter. And as to the need for receipts for cash, she said that the statements were themselves receipts; this astonishing statement was made by the person who was, in effect, 3-D's accounts clerk.

35. Montgomery said that Borg never came to the office to collect his money. He never asked what equipment was out on hire and he never queried her calculations, and as set out previously, the Borg scaffolding equipment was indistinguishable from 3-D's own scaffolding. Even though she lived in the same house with Docherty, she did not ever take up with him the possibility that Borg was being paid, in part, in relation to 3-D's own scaffolding; that is, scaffolding which had not been supplied by Borg.

36. The frequency with which Borg visited the premises, and the importance of establishing his existence, did not result in evidence other than that of the three siblings and Montgomery, even though if he existed he would have been seen by many other employees of 3-D. The Tribunal was informed that he visited 3-D's premises once or twice a week, and for four hours each time. This was after all Borg's business, but Docherty had "no idea" as to how Borg ran his business.

37. It was always clear that the existence of Borg was challenged by the Respondent. In these circumstances it might have been expected that there would be evidence by others in the employ of 3-D. The only evidence as to Borg was, as I have said, by the three siblings and Montgomery; it was sparse in the extreme, and it was moreover contradictory. That this is so reinforces the view that Borg was invented.

38. Borg was described as a person who, in late 1997 or early 1998, was "in his 60s and … looking to retire". Peter met him at a pub in Parramatta near a cinema. Peter had seen him about five times thereafter and believed that he was in the scaffolding business. Borg did not trust cheques because "there's a few unscrupulous people in the industry" (TS 52). Borg then asked Peter if he was interested in

ATC 2065

buying scaffolding. Peter told him to go and see the "fat man" (a reference to Docherty). Peter had been urging Docherty to go into the business of hiring scaffolding (Exhibit A10, paragraphs 18-19). No contact details appeared to have been obtained. Moreover, 3-D was already in the business of hiring scaffolding; I refer in this context to the reference to Hillsley Hire set out previously in these reasons.

39. The MSH statements (Exhibit A1 at tab 9) do not contain either a phone number or a street address; that MSH turned out not to have existed at all is, in the circumstances, hardly surprising.

40. It is also surprising that it was never necessary to contact Borg. The first occasion Docherty met Borg was when Borg eventually came to 3-D's yard unannounced (see Exhibit A2, paragraph 15). He was often seen "wandering around the yard without anyone at 3-D Scaffolding knowing that he was there". The evidence was that Borg made unscheduled visits to collect his money. The Applicants apparently accepted an arrangement whereby large amounts of cash had to be maintained, and held in the safe, until Borg chose to come to collect it (see Exhibit A10, paragraph 28). It must be remembered that there was evidence that 3-D's premises had previously been robbed on at least two occasions.

41. As to how Borg was paid was the subject of evidence that was remarkably contradictory. Peter said in Exhibit A10 at paragraph 28 that payment was made once a week. Also in paragraph 28 of Exhibit A10, Peter said that he sometimes gave Borg an envelope containing a Price Spreadsheet and the cash. Docherty said that Peter generally paid Borg (see Exhibit A2, paragraph 39). There was other evidence by Docherty that it was he who received the cash so that no-one else would know. That indeed was what he told the ATO auditors, Ms Hird and Mr Proksch, according to their evidence. Whenever Borg came he would be paid either out of cash, if somebody had already been to the bank, or if not, Peter or someone else went to the bank to cash a cheque (see Exhibit A2, paragraph 41). On odd occasions, Peter went to the bank with Borg to collect the cash. On each visit Borg would collect a Price Spreadsheet from Montgomery that may have related to a period which was two or perhaps three weeks earlier. Orel signed the cheques drawn as cash cheques. No receipts were ever required.

42. The evidence in the witness statement did not agree with Docherty's evidence in chief. He said that Orel would phone the bank to tell the bank how much cash would be needed. Peter and Borg then went to the bank to collect the cash; this occurred for a while, but thereafter "Tony went on his own".

43. The fact that Docherty had not known Borg previously is strange given the length of time that Docherty had been involved in the scaffolding industry. It was put to Docherty that over 20 years since 1987 he had not been able to find anyone who knew Borg. Docherty answered "that he was lucky to know 10 percent of the people in the scaffolding industry". All of this must be seen against the background of a verbal contract between two strangers as to the supply, on unspecified terms, without security, of scaffolding equipment (not detailed) worth in excess of $1,000,000.

44. The Respondent contends that Docherty's efforts to locate Borg bordered on the ridiculous. That description was altogether apt. He did not hire a private inquiry agent because he had those skills himself. See TS 219, lines 11 to 47 as follows:

"Well, yes, you went to Stockport in Queensland?---Southport.

Southport?---Yes.

In Queensland?---Yes. I went to Southport in Queensland but, I mean, as I said, I went round to - just because you retire doesn't mean that you don't still go and associate with friends from previously, you know - - -

But I want to put this to you, there are only two possible explanations for your inability to find him. Either you didn't look hard enough or you didn't look in the right places. There's a third, and that's that he died?---That's a possibility too but no, I believe I looked hard enough.

On the other hand, his age is not such that death is likely. But if he was in his early '60s when you first dealt with him in 1998, he's not 70 yet. So - - -?---But Sir, he no longer lives in Sydney and he doesn't live in Southport or Surfers Paradise or anywhere

ATC 2066
there. I can't look all over the rest of the State and I can't go to Melbourne or Perth or - - -

But, Mr Docherty the amount involved in this case is considerable, is it not?---I agree but - - -

The very fact that you've got solicitors plus well known Silk and Junior means that you are taking this case very seriously?---I am taking it seriously.

Why, if necessary, didn't you get an inquiry agent to find Mr Borg for you? It wouldn't have been all that difficult?---Well, I thought I could find him myself. I mean, I used to be a part inquiry agent and so did my brother.

When?---A long, long time ago in the '80s. We had a private - - -

You seem to have undertaken a multiplicity of functions not excluding expert in that jacket?---I wouldn't say expert.

Well, it sounds like an expert to me. In fact, you were never more fluent during the whole of your evidence than in your description of how to count the numbers in a casino?---It's fairly simple - plus one zero, or minus one."

45. Previously and at TS 156 and on the same subject, Docherty had given evidence in lines 21 to 46 as follows:

"MR FAGAN: Mr Docherty, you say in paragraph 45 of your statement of December 2005 that in order to locate Mr Borg you have visited certain hotels in Parramatta and Bondi?---Yes.

Which ones?---You go to the - I think it's the Bourke in Parramatta. I can't tell you exactly their names but Bondi Junction there's a hotel on the corner there that's a well-known scaffold haunt. There's several places are all well-known haunts. I've gone to Queensland looking for him as well but I haven't been able to locate him.

It's a bit of an outside chance to be going around hotels in Parramatta and Bondi looking for a man whose only known address was a post office box in Southport, Queensland, isn't it?---What choice do I have? I am asked to try and locate him. I go to a hotel where scaffolders congregate or are. I have stopped in, I have checked. Who knows? Maybe I'll be lucky and find him.

You've asked other people in the industry, have you?---I have asked other people that know him.

Where's Tony Borg? Is that what you asked?---No, no. I've asked them if they know him. I haven't asked them, Where's Tony Borg? Because I don't know if any - if they know him.

You haven't found anybody who knows him?---No.

No one in the scaffolding business?---No."

46. Docherty said that he asked people in the industry if they knew Tony Borg, and did so in the usual haunts of scaffolding people, and notwithstanding the fact that according to his own evidence, Borg had long since retired. His efforts appear to have been confined to Bondi and Parramatta in New South Wales, and Southport in Queensland. In Southport, he looked for him at the post office. The following exchange given in cross-examination is relevant; and see clause 54 of RS1 as follows:

"54. Docherty's description of the efforts which had been undertaken to locate Mr Borg bordered on the ridiculous. He had not hired a private inquiry agent to locate him and inferred that the reason for this was that he was possessed of those skills himself. He said that he had looked for him in various hotels around Parramatta and Bondi, and said that he had gone to Queensland looking for him. He said that he had asked other people in the scaffolding industry if they knew Tony Borg. He claimed to have looked amongst the regular haunts of people in the trade notwithstanding the fact that Borg had retired long ago. He claimed to have gone to Southport and started looking for Mr Borg at the post office:

A 'I have gone to Southport. I have looked in the post office. I have looked around through the shops. I have been around Surfers Paradise, been around different places hoping that I may run into him.'

ATC 2067
Q Hoping to bump into Mr Tony Borg at random on the streets of a fairly large urban area of the Gold Coast

A Yes

Q This is just make-believe, isn't it Mr Docherty?"

47. The Respondent contends that Borg is in fact Docherty. In my view, the contentions of the Respondent in this context are well-founded. It is likely, on the balance of probabilities, that if Borg never existed, Borg is Docherty. Put at its best for 3-D, it has not discharged the onus upon it under section 14ZZK of the Taxation Administration Act 1953 ("the TAA").

48. Having come to the conclusion that Borg did not exist, the elaborate arrangements alleged as to how he, Borg, was paid, may be of limited relevance. Put in very broad terms (and as noted previously), the computing system was faulty and did not achieve its desired purpose. Spreadsheets were prepared, but new information was inserted in place of the prior information, without saving the old. Price Spreadsheets were reconstructed comparatively late in the chain of events.

49. I do not think it necessary to go into great detail as to the accounting and related problems which arose in this context. At the same time, and in the interests of completeness, it is necessary to deal with those aspects, at least to some extent.

50. RS1 contains in clauses 56 to 101 an admirable (and correct) summary of the evidence given in this connection. Those clauses are set out separately (due to their length and because they are of peripheral relevance) in Annexure A to these reasons, although Annexure A should be treated as incorporated in these reasons. Before leaving this aspect of the matter, it is relevant to note that the manner in which 3-D maintained its accounts tended, at times, to be chaotic. Reference was made to the fact that when Docherty's parents sold their home, the purchase consideration was paid into 3-D's account; when it was paid out, that amount was claimed by 3-D as a deduction (TS 29).

51. Put in general terms, the witnesses called by the Applicants (and I refer in this context to the three siblings and Montgomery) invariably sought to give their evidence in accordance with their prepared witness statements. The witness statements were polished to an extent, which could not have been achieved by either Docherty or Peter, although Orel demonstrated a somewhat greater degree of sophistication. Orel's evidence was given in a fashion that is best described as guarded in the extreme. Peter, by contrast, started by confirming the content of his witness statement, but then required an adjournment in order to consider it, and then sought changes (and changes which were material) to it.

52. Docherty, at the relevant time, owned half the shares in 3-D while another brother, Charlie, owned the other half. Charlie did not figure in the hearing in any manner whatever. Peter's position in 3-D appears to have been menial and, given the manner in which he gave evidence, this is not surprising. Montgomery can be described, at least to an extent, as being in the family; she worked for 3-D and lived in Docherty's home. Each of them was reluctant to answer questions about the business in which they worked, unless it fell within their own restricted area. Docherty, for example, denied any knowledge of the Price Spreadsheets; see TS 136, lines 10 to 34 as follows:

"And that indicates, does it, that the payment for the weekend of 19 October '99 was made on 1 November, is that right?---Yes.

And the date on the spreadsheet is 1 November?---Yes.

The payment couldn't have been made any earlier than 1 November on what you're telling us because it was only on 1 November that the spreadsheet is dated and brings up to date the amount payable?---I've no idea.

They all follow that pattern, don't they, that the - - - ?---I have no idea. I didn't do - - -

You haven't heard my question?---Okay.

They all follow a pattern, don't they, that the spreadsheets, such as they've been able to produce from the relevant time, dated some little time, perhaps two weeks later than the week ending to which they relate?---I have no idea.

ATC 2068
And the payments likewise?---I have no idea.

And consequently when Mr Borg, as you say, came into your yard to get his money, looking around at what was in there that week wouldn't be the slightest use to him to confirm the voracity or otherwise of a payment that he was getting that related to two weeks before, would it?---I have no idea, I didn't do the spreadsheets, I didn't pay him."

53. Docherty also sought to distance himself from what went on in the yard saying that he would only get "into the yard once, maybe twice a week and in total I wouldn't spend more than four hours in the day that I was in there": see TS 111. Docherty said also that he did not "know anything about the banking whatsoever" and deferred to Orel in this regard: TS 176.

54. Montgomery knew only about the preparation of the Price Spreadsheets; she knew nothing about the drawing of cheques. Orel knew nothing about scaffolding, but did know about the drawing of the cheques. Only Peter dealt with Borg when he came into the yard. Any questions falling outside the compass of their witness statements were usually met with replies to the effect that the witness did not remember.

55. In respect of Docherty, appearances were, at times, deceptive. He sought to present himself as an uneducated and unsophisticated tradesman. In his evidence as to his gambling activities, he demonstrated that he can be more articulate (but not more truthful). He spoke of numerous visits to casinos in various parts of Australia, and at which he won money largely due to his skill at counting the cards in games of blackjack (the Tribunal notes in this context that casinos generally are on the watch for professionals of this kind and seek to ban them from their premises).

Part d - the evidence Docherty in particular

56. I have dealt with a part of Docherty's evidence in the preceding Part C, and this Part D relates to his evidence to a limited extent only.

57. I do not consider it necessary to include any extracts of Exhibits A2, A3 or A4 since Docherty's oral evidence departed to so considerable extent from his witness statements.

58. In essence, Docherty said that he entered into the arrangement, previously referred to, with Borg (who was not known to him), which was not reduced to writing, and whereby after payments of $12,000 per week (as a minimum) over a period (not precisely specified) the equipment would be owned by 3-D or, alternatively, the Trust. As to payments to Borg, he had nothing to do with the presentation of cash cheques. Peter and Borg went to the bank at first, and then Borg went alone. This does not accord with the evidence of other witnesses in the same context.

59. When Docherty met Ms Hird on 19 June 2003, he told her (according to her evidence) that he received the cash and made the payments and that "no one else would know" (paragraph 28 of Exhibit R6). He denied in cross-examination that he made this statement to Ms Hird: see TS 131. Mr Proksch confirmed that a statement of this kind was made in his presence.

60. But later in his cross-examination, Docherty said that he did not know about the payment arrangement; put in other words, he did not know whether Peter went to the bank with Borg or went to the bank before Borg arrived. He did not know about cash being kept in the safe (see TS 132).

61. Prior to the arrangement with Borg, 3-D had hired equipment from other companies, but after the arrangement with Borg, MSH equipment was used. The first payment to Borg was $11,500 on 4 May 1998 and this payment was made by cheque, notwithstanding Borg's refusal to accept payments otherwise than in cash. That payment suggests that the equipment was then out on hire, but Docherty said that it did not all go out immediately (TS 65). One might imagine that the MSH equipment went out progressively in substitution as the other equipment came back. Docherty elaborated at TS 76 and following as follows:

"11,500?---Well, we had a grace period. You can't just get it all and get it out to that in the first week, so we had to have a grace period, and then when we got scaffold from Mr Borg we would then take scaffold from

ATC 2069
there and send it back to our other suppliers to get it off hire there and put it out there.

What do you mean a grace period?---Well, a period where we weren't paying hire, you know.

To whom?---To Mr Borg. He's got to get the material down and he's got to get it there and we've got to have a chance to get it out and the hire starts.

He's got to get it down to where?---To our yard. He's got to get it from wherever he's bringing it from to our yard.

Yes, and then?---And then we've got to hire it out.

Yes?---So we've come to an arrangement - and okay, he's delivering it, but I can't just go, I've got jobs for this tomorrow, let's do that. I've given him a guarantee that I would pay him a certain amount of money and that I would guarantee that money on a weekly basis for the length of the entire transaction. Now, I need some sort of grace - I need a couple of weeks to be able to keep going, find some jobs to get it on, and send material back to our other suppliers so that it comes off hire there and goes on hire here.

Well, why - if he brought you in a front load of scaffold and you started to put it out on sites, why wouldn't you be paying him hire on what you got from the sites that it went to from when you got it and when you put it out?---Because we asked for a grace period.

Have you referred to that anywhere in your statement?---Did I need to?

Please answer me. Have you referred to that anywhere in your statement?---I don't think so, no. I don't know, but I don't think so, no.

Did you refer to that anywhere in your discussions with the ATO auditors when they came to your premises and saw the explanation of all this?---I don't remember.

You didn't. You know you didn't?---I just said to you, I don't remember.

You've just produced the proposition of a grace period to explain a difficulty that you have with having charged him in your first amount, according to your evidence of what this document, this invoice or statement from Modular Hire represents?---I've just told you, we used his scaffold to send back to our other suppliers.

…"

62. As the Respondent contends, this appears to have been an invention. There were many other instances; the Respondent drew attention to only a few in RS1, clause 109 as follows:

"109. This has all the hallmarks of a fumbling recent invention - the witness endeavouring to invent to cover a deficiency in the story which the cross examiner has exposed. There were many instances of this in Docherty's evidence:

a. The suggestion that there could have been a written contract - Docherty in cross examination could not remember whether this was the case or not. Docherty had stated unequivocally at paragraph 20 of Exhibit A2 that there had not been a written contract. This suggestion was further embellished when he suggested that he could not find a copy because the premises had been robbed, as if to infer that that the thieves had found his contract of interest. This was an absurd proposition and brought into focus the ridiculousness of the whole story.

b. Docherty was asked whether he had inquired of Mr Borg where the scaffolding was kept once he had ascertained that the scaffolding was worth a million dollars. The first answer he gave was "No why do I need to? He answered, I didn't need to ask him where.." Within one question he had changed this answer to "I don't think so, I don't know. Again, you are asking me to remember back 10 years. I don't remember everything in a conversation 10 years ago."

c. The suggestion that he may have forgotten that he had visited Mr Borg's yard to inspect the scaffolding before it was delivered.

d. The suggestion that the payment arrangement was to conclude at the beginning of December rather than the end of December, when he did not really know one way or the other.

e. The suggestion that the MSH statements had been handed over on the day that they were requested. It is clear from the evidence of Sue Hird that she had requested that the certain invoices be provided by a fax which was sent on 12 September 2002. At the interview on 9 October 2002 she was supplied with some of the MSH statements."

ATC 2070

63. Docherty was referred to a letter dated 12 September 2002 from the ATO seeking an explanation as to a number of MSH cheques (exhibit SH4 to Exhibit R6). Ms Hird had attended at the offices of 3-D on 9 October 2002 and 21 February 2003. On both occasions, Docherty told Ms Hird that he did not remember who he had dealt with at MSH (see TS 80). When it was put to him that it might have been Frank or Tony, he said that what he told Ms Hird was:

"…

No, I told her it was possibly Frank and Tony. I think that's their names. I don't remember their second name and I don't remember their phone number. But, once again, David Morse has their names and their phone numbers and he spoke to them.

…"

64. That Docherty could not remember the names of the people with whom he dealt at MSH is extraordinary.

65. The evidence demonstrated that the family (and this includes Montgomery) was sometimes less than careful when reconstructing accounting information. See in particular clauses 112 to 115 inclusive of RS1 as follows:

"112. Docherty was questioned about the termination of the arrangement which he said was because Mr Borg could not be bothered with GST. As at the 30 June 2000 Mr Borg still had 22 weeks of the arrangement still to run assuming that the agreement was to come to an end at the beginning of December which represented payments of $264,000. Docherty endeavoured to justify this anomaly by suggesting that 3-D had by that stage already purchased around $60-70,000 of the scaffolding. In particular Docherty referred to page 215 of Exhibit A1 and said that the details there were for the purchase of timber boards. This simply could not have been the case as original Price Spreadsheets at Tab 8 of Exhibit A1 which are all dated prior to the alleged sale do not record 'timber boards' as a hire in the inventory. Docherty also pointed to the references to 'scaffold parts' at pages 212 and 214, and the reference to 'scaffold sale' on pages 201 and 207 as other examples. He claimed that:

'we purchased pieces that were in the actual amount anyway, because they either had been damaged or done or whatever. So they were taken off the list and we weren't hiring them out on a weekly basis any more because we had purchased them.'

113. The particular item Docherty referred to at page 207 of Exhibit A1 was on the MSH statement of account for December 1999 and was in the following terms:

Date Item Total Notation made by Mrs Montgomery

15-12-99 Scaffold Sale $16,550 'purchased'

114. If this was true then the evidence which Mrs Montgomery gave about this payment was patently false. This was the very payment for which Mrs Montgomery had oddly managed to prepare a re-constructed Price Spreadsheet (at page 427 of Exhibit A1) with calculations of hire charges. It was clear that the reconstructed Price Spreadsheet appearing at page 427 could not have come into existence without manipulation of the figures if the payment shown on the MSH statements was in fact a scaffold sale. Clearly in creating the Price Spreadsheets, Docherty and Mrs Montgomery had forgotten that this particular payment had been designated a scaffold sale on the MSH statement. What this showed was a deliberate attempt to mislead the Tribunal by fabricating evidence. The re-constructed Price Spreadsheets had been prepared in support of the central plank in the Applicants' case that it was possible to demonstrate by so called contemporaneous documents that the payments made to MSH were for hire charges. The fact that the Applicants were

ATC 2071
caught out on this point was a serious matter and brought into question other testimony which they had given.

115. According to Docherty the differential between the amounts which were paid to Mr Borg and the amounts received from builders for the hire of the scaffolding resulted in a small profit, but then said that he did not really know. Such answers were typical of Docherty. If he was to be believed, then such answers showed that he had a complete lack of appreciation of how his business operated. A more probable explanation was that he did not wish to stray too far from the script as laid out in his statements in Exhibits A2, A3 and A4."

66. To say that Docherty was vague as to how the arrangement with Borg came into being is to understate the case: see clause 116 of RS1 as follows:

"116. Further examples of this are shown by the answers he gave in relation to Mr Borg. Docherty was able to give quite a detailed recollection of a number of conversations with Mr Borg but in relation to other details (from the same period) he professed to have no recollection. For example he was asked in cross examination how long after he had been told by his brother Peter, 'about someone who wanted to sell scaffolding', that he had spoken to Mr Borg. Docherty was not able to say. This of itself would have been a significant event given the fact that at the time he was on the lookout to acquire his own scaffolding. In the usual course it would be expected that he would have got on the phone and chased Mr Borg up. This he could not remember doing. If the events had occurred as described it would be expected that he would remember a first conversation with Mr Borg on the telephone. To cover this anomaly Docherty said: 'I may not have had his contact or phone or anything. I don't know. I'm not going to speculate.' He also was unable to remember whether his brother Peter had given him the name of the person who wanted to sell the scaffolding when he had first spoken to him. He did however remember that when Mr Borg had first visited 3-D's yard he had introduced himself as 'Tony'. Docherty maintained that in that first meeting he had not asked for a second name because 'that's not my nature.' He also had not obtained Mr Borg's business name or his phone number. Docherty had simply let 'Tony' disappear down the street."

67. Docherty's evidence was that at the first meeting with Borg he told Borg that he could not buy the scaffolding outright (TS 94). He estimated that there was "a million bucks worth" of equipment (TS 95). He made no record of the actual equipment involved (TS 95). He then entered into the arrangement pursuant to which a minimum $12,000 per week would be paid, but that at the end of the day 3-D or the Trust would own the equipment. Docherty referred in this context to the payment of what he described as a "sweetener" (TS 96). The "sweetener" was that payments were at times more than $12,000. Exhibit A2, and for that matter Exhibits A3 and A4, say nothing whatever about a "sweetener".

68. The "hiring" commenced at the end of April 1998 (TS 101). Between that date and the beginning of December 2000, there is a period of 137 weeks. The arrangement only continued in fact until 30 June 2000 and, in other words, 112 weeks. At $12,000 per week, the aggregate figures are markedly different and being either $1,644,000 and $1,344,000 depending on whether or not the arrangement continued for its full term.

69. Docherty was asked how he could be sure that 3-D was complying with its obligations as to payments to Borg. He answered as follows (TS 101-102):

"To have that belief over the period from the end of April 1998 through to June 2000 you must have been looking at what he was getting and comparing it to what you knew was the average that you promised him and satisfying yourself that you were pretty well on target or that he was doing a little bit better; is that right?---No, there was no need.

No need to what?---Look at anything. If we're hiring out a certain amount of gear or doing a certain amount of work and we're consistently doing that certain amount of

work you don't have to go back and check it. You know how you're travelling whether

ATC 2072
you're travelling all right or you're travelling bad."

70. He said also that he did not need to be concerned about the extent to which rental was being received and the extent to which payments were being made to Borg (TS 102). The Respondent categorised this statement as "nonsense", and that description is not at all inaccurate. Unless he had recourse to records, Docherty could not establish the quantity or make of scaffolding which was out on hire. He said that the rentals derived would be less than $12,000 in some weeks but that they would be made up in other weeks. It is relevant in particular that Docherty denied that he had ever seen the MSH statements. See TS 105, lines 22 to 26 and TS 106, lines 7 to 9 as follows:

"…

MR FAGAN: Mr Docherty, are you saying you didn't see these modular scaffold hire statements as they were issued?---No.

You're saying you did see them?---No, I didn't see them, no. I would have no need to see them, I don't see - - -

…

Are you saying that you didn't see these as they were issued?---No, Mr Borg made these up. Mr Borg handed them to Peter or someone else and they went into the office. I don't need to see them."

Yet it was these statements that would inform him as to payments to Borg and, moreover, were provided at his request; see Exhibit A2, paragraph 38. When examined further as to this aspect, Docherty said (extract from RS1, as quoted in clause 121):

"It is a significant difference, isn't it?---Those two figures, yes, there is a significant difference.

And you needed to know at the time you made this arrangement with Mr Borg, what exactly was the weekly amount which would multiply by the number of weeks to work out how much you were really letting yourself in for, guaranteed return to him?---No idea."

71. Docherty claims that it was necessary only for him to look in the yard to establish the quantity of scaffolding in it (TS 109). Leaving aside the fact that there was no attempt to separate Borg equipment from 3-D equipment, the average payment would have differed depending on whether the contract ran for 112 or 137 weeks; see TS 109, lines 29 to 35 as follows

"Q It is a significant difference, isn't it?

A Those two figures, yes, there is a significant difference.

Q And you needed to know at the time you made this arrangement with Mr Borg, what exactly was the weekly amount which would multiply by the number of weeks to work out how much you were really letting yourself in for, guaranteed return to him?

A No idea."

72. That this cannot be true is readily apparent. There was no provision as to when shortfalls would be made good, nor was there any accounting as to this aspect when the arrangement was terminated.

73. Docherty was asked whether, in his first discussions with Borg, he ascertained where the scaffolding was. He said at first that he did not need to know and then said that he did not remember. He said at TS 110 lines 10 to 12:

"You don't recall. Didn't you say to him, Tony, where is your yard, I will come around and have a look at your stock and see the condition of it, did you say anything like that to him?---No, he delivered some to us and we tested it."

74. The evidence as to a truckload being delivered for testing purposes demonstrates how absurd the evidence was. The equipment was worth more than $1,000,000. It is highly unlikely that anyone acquires scaffolding of this value without inspecting it, especially given that the industry has "unscrupulous" participants. See TS 112 lines 6 to 11:

"Why didn't you say to him, Tony, don't waste your time bringing a whole truckload of pallets of gear around here, I will simply hop in the car and come over to your yard and inspect some, why not say that?---I don't go anywhere and inspect it, not as a general rule. I don't know, maybe I did, I don't know. I am telling you I don't remember. You are asking me to remember

ATC 2073
something that is 10 years old and I do not remember."

75. Docherty in this context said (contrary to Peter's evidence) that he was not concerned about quality; as he put it, "scaffold is scaffold". See TS 112, lines 13 to 20 as follows:

"You would also want to know where he had his gear which wasn't in his yard on site, wouldn't you?---No. Scaffold is scaffold.

Did he tell you that he had some on site?---I don't even know that I asked him.

Did he tell you that it was all in a yard?---I don't know that I even asked him.

Did he tell you who his customers had been?---I wouldn't have asked that."

He made no enquiries of any kind as to the nature and condition of the equipment or the work on which it had been engaged.

76. Nor, according to Docherty, did Borg attempt to sell the business in which the scaffolding was used (see TS 114). Docherty knew in respect of Borg only that his name was Tony and he had scaffolding to sell.

77. One of the most remarkable aspects of this alleged transaction is the fact that Borg was prepared to enter into this extremely uncommercial transaction (not reduced to writing), but that he would not take cheques (see TS 115).

78. Although Docherty consistently maintained that he could not remember matters where it could be expected that he would be able to recollect them, he was able to assert the ATO auditors knew, prior to his meetings with them, that MSH did not exist (TS 116). At the interview at 9 October 2002, he had told the ATO auditors that he did not know the name of the person at MSH with whom he dealt. He maintained (TS 117 lines 9 to 12):

"… we had already been down that road with OSR, and I told her who to speak to there because she would have asked me then who their names were. If she didn't, she asked at the next one. But I had already told her I had been down the road with OSR and they had information."

79. Docherty accepted in cross-examination that he had told Ms Hird that the person with whom he dealt at MSH might have been Frank or Tony (TS 117). In cross-examination, he said that Frank "was with Tony every time I ever saw him" (TS 117 line 30). He said Frank was with Tony at the first meetings. This suggested Frank and Tony were separate people. There is no mention of Frank in Exhibit A2.

80. But Docherty persisted with assertions that there was another person besides Tony called Frank. See in this context TS 117, 118 and 119 (inclusive) as follows:

p117. You said, in relation to that, that you could not remember the name of the person you dealt with - - - ?---I told her that in the previous interview as well.

- - - it might have been Frank or Tony?---I had already told her that in the previous interview.

You had told her on 9 October 2002 that you couldn't remember the name of the person you dealt with at MSH?---From the very beginning, when MSH came up, I told her we had already been down that road with OSR, and I told her who to speak to there because she would have asked me then who their names were. If she didn't, she asked at the next one. But I had already told her I had been down the road with OSR and they had information.

I suggest you didn't tell her about the OSR investigation until this meeting of February 2003?---I told her.

But in any event, you agree - you are asserting, are you, that in the meeting of 9 October 2002 you said to the ATO officers who were present then, I can't recall the name of the person I dealt with at MSH?---I do remember I told them I didn't recall, I didn't fully recall who I was dealing with, but OSR would know because they had it on record and they had a telephone number.

You told her again on 21 February 2003 that you could not remember the name of the person you'd dealt with?---That is quite possible.

And you told her that it might have been Frank and Tony?---That's possible.

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Who was Frank?---He was with Tony. I don't know whether he was - - -

When was he with Tony?---He was with Tony every time I ever saw him.

Every time you saw Tony you saw Frank; is that the case?---Maybe not. But, you know, he was always with Tony. He was always around. I don't whether he was his partner or what he was.

At the first meetings when you discussed the sale Frank was there, was he?---Yes.

And you have said in your affidavit that there were a series of discussions - - - ?---Yes.

- - - which led to the agreement that you have asserted?---Yes.

Frank was present on each occasion?---I think so, I can't say 100 per cent.

What was Frank's second name?---I have no idea.

What was his involvement with the scaffold which you say was for sale?---I have no idea. He was with Tony.

p118. Didn't you need to ascertain whether he was a part owner who needed to give his agreement, whether he was another person who you were contracting with?---No.

You have never before suggested that Frank was present at the meeting when this arrangement was discussed, have you?---No one asked. They simply asked when did I first meet Mr Borg and how did I first meet him, and I have told you.

When in your affidavit, for example, your first one in December 2005 when you describe the meeting and the arrangements you have said in paragraph 15 that you first met Mr Borg at 3D Scaffolding yard in late 97 or early 98 and that Peter had spoken to you about someone who wanted to sell scaffolding and that you eventually met Mr Borg, who attended unannounced?---Yes.

And there is not a mention of Frank in that paragraph, is there?---Does there need to be.

Just agree with me, there is not a reference to him?---No, there is no mention of him in the paragraph.

And in paragraph 16 when the conversation is recorded there is not the slightest reference there to Frank either, is there?---I am not dealing with Frank, I am dealing with Tony.

Just agree with me - is that the case or am I wrong? Am I missing something? In the affidavit there is not a mention of him?---No, no.

Nor anywhere else in the following paragraphs which record the supposed agreement?---No, there is no mention of him.

Well when you were laying out this statement to explain that there really were people who you dealt with, or a person or a company who you dealt with to acquire scaffolding, and that payments really were made, didn't you think that if you had Mr Frank whoever he was present that you would need to refer to him, to identify another party to this agreement?---No, I was dealing with Tony. People often come with someone else from their company to see you. Not everybody comes alone.

So are you now saying that you thought that you were dealing with Tony and he was the only person whose agreement was required, and you had no reason to think that Frank had anything to do with it.

…

p.119 MR FAGAN: I thought you said, a little earlier, that you thought Frank may have been Tony's partner?---No, I said I don't know what association he had with him.

And you say that you didn't know at the time?---No, I didn't know at the time and I still don't know how he was connected to Tony; he was just with Tony.

But really when you are attempting to give an account of a purely oral dealing, never reduced to writing, not recorded anywhere?---I don't know that it wasn't reduced to writing. I just can't find a copy of it. Our premises were robbed in 98.

Can't find a copy of what?---If we ever reduced it to writing I can't find a copy. Our

ATC 2075
premises were robbed in 98. We had filing cabinets, safes, everything stolen.

Do you think it is possible somebody came and stole your agreement with Tony, do you?---No. We were robbed twice in a period of a fortnight.

Well, just tell me, do you or do you not recall having reduced to writing - - - ?---I don't recall.

- - - your agreement with Tony?---I don't recall.

In any event, the position at 21 February 2003 was that you told the ATO auditors present then, Ms Heard and Mr Croce, that you could not remember the name of the person you dealt with beyond Frank and Tony?---I don't know if I said that then; it is possible.

Why on earth wouldn't you be able to recall the name Tony Borg whom you had done this deal with and whom you had caused payments to be made to over a course of at least 112 weeks from 26 April through until June 2000? Why wouldn't you be able to recall the second name, which you now give in your affidavit?---The second name I got from David Morse, because David Morse had it. The first name I probably got back off David Morse as well because I had to ring David Morse because Sue Heard wouldn't.

But didn't you give David Morse, at the Office of State Revenue, the name of Tony Borg in the first place?---That was in 2000.

Yes?---Yes.

81. Docherty maintained that he had not been able to recall the first or the second name of Borg; he said at TS 119 lines 40 to 43:

"The second name I got from David Morse, because David Morse had it. The first name I probably got back off David Morse as well because I had to ring David Morse because Sue Heard wouldn't."

82. An OSR investigation was conducted in respect of large payments out of 3-D's account. This occurred in, or about, August 2000, shortly after the arrangement whereby Borg received the commutation payment of $75,000. See TS 120 as follows:

"… In 2000 you had known that this man's name was Tony Borg; is that right?---I don't know for sure, but I believe so, yes.

Well, how else could you tell Mr Morse unless you had known?---Maybe Mr Morse got his name out of him when he phoned him, but I believe so, yes."

83. When it was put to Docherty that he could have asked Peter for Borg's name, he said (TS 129):

"… In August 2000 when the Office of State Revenue came Peter still worked for us and Peter dealt with him. Not me. Peter dealt with him on a weekly basis and I asked him who he was and he told me and I told them.

…

And you are saying that at that time you had to ask Peter because you yourself couldn't remember Tony Borg's name?---Correct."

84. It is to be noted that there is no reason whatever why he could not have asked Peter when Ms Hird questioned him about the person with whom he had dealt at MSH. He said that he had not done so because Ms Hird could get this information from the OSR (see TS 129). He made the statement at the meeting on 21 February 2003, even though he had been informed by Ms Hird of the need for substantiation.

85. At an interview on 19 June 2003, Docherty persisted in his assertion that he could not remember any further detail of the names other than Tony or Frank. Mr Morse said that he had been told that Frank came to collect the cash payments, but Docherty denied this when it was put to him; (see TS 130).

86. TS 119 also indicates that Docherty then suggested that there had been a written contract but that the premises had been robbed in 1998 and he could not find a copy. He then retracted this suggestion and said that he could not remember if there was a contract (TS 119 line 30). Paragraph 20 of Exhibit A2 sets out specifically that the arrangement was not reduced to writing. It is in the highest degree unlikely that such a written contract, if it existed, would have been forgotten. It is not as if Docherty did not consult advisers (see TS 127). This is so having regard to his evidence that a family trust had been set up in order to

ATC 2076

buy the factory. Moreover, it was that trust that acquired the scaffolding equipment from Borg. Such an adviser (a solicitor perhaps) would be able to produce such a contract if there was one.

87. In paragraph 22 of Exhibit A2, Docherty said "Mr Borg came to 3-D Scaffolding's yard on a regular basis to check on the scaffolding and collect payment for the hire".

88. But in cross-examination, Docherty could not remember seeing Borg check on the equipment (T 132 line 33). He did not know whether he had seen him two, five or 50 times (TS 132 line 43). When pressed, he said that he had seen him "irregularly. I wouldn't have seen him very often at all"; (see in this context paragraphs 22 and 41 of Exhibit A2).

89. Docherty was asked about a number of large deposits, which appeared in the bank statements at tab 10 of Exhibit A1, but he could not explain the source of those funds (TS 172 lines 7-8). In some cases the transfers were very large indeed. That Docherty could not recall transactions of this magnitude is extraordinary. He said that he would leave the explanation to be given by Orel: TS 174.

90. The bank statements indicate that on each day on which a payment was to be made (generally Tuesdays), a cheque was cashed. This evidence must be considered in the light of the fact that Docherty and other witnesses' evidence was that Borg could come in on any day and also that he, Borg, would sometimes cash cheques.

91. Record-keeping at 3-D was plainly, at times, haphazard. An amount of $133,534 was paid by 3-D for a property at Kingswood. This was claimed as a deduction. Docherty said that this was a mistake on the basis that it might have referred to scaffolding purchased for 3-D: see clause 9 of Exhibit A3. See also TS 178 and TS 180.

92. Evidence as to a claim for monies from St Mary's Earthworks was, if anything, more bizarre. Docherty met a person (name unknown), at a pub (also unknown), whose signature on receipts furnished to the ATO could not be identified. Docherty made no enquiries as to the St Mary's Earthworks amounts. It was suggested that he could have gone to St Mary's Leagues Club where he had heard that St Mary's Earthworks had been doing work, in order to ascertain the identity of the person to whom he spoke. Docherty said that he went to the doorman at St Mary's Leagues Club but, getting no response, he made no further enquiries: see TS 185, lines 33 to 39 as follows:

"Yes?---I asked at the front door if they knew who they were and I didn't get any response.

Who was it you asked?---One of the doorman at the door if he knew who the - how to get in contact with the people who did the outside and he said no.

You stopped with the doorman, did you?---Yes."

93. Docherty was cross-examined as to amounts that he said were casino winnings: see paragraph 15 of Exhibit A3 and also TS 194 and following. He was referred, in particular, to deposits to a cash management trust account between November 1999 and December 1999 (at tab 4 to exhibit 2 of Exhibit A3). He said that he had visited casinos at that time but could not say with certainty that the deposits represented winnings (TS 196). The cash management trust account is the account from which large amounts were transferred to 3-D's cheque account and to which Docherty referred, at TS 174, line 2. The cash management trust accounts are in any event incomplete.

94. In paragraph 15 of Exhibit A3, Docherty stated that he was proficient at counting cards. Docherty went into some detail (articulate by comparison with his other evidence) as to his winnings at blackjack and arising from his ability to count the cards. Docherty then said at TS 198 that counting the cards did not involve counting and remembering the actual cards which had been dealt. This demonstrably ridiculous answer must be considered in the light of the fact that to count the cards by number only serves no purpose at all; at blackjack, it is relevant, in particular, to be able to keep a count of the high cards and including court cards as they are dealt. In any event, and as I have noted, casinos generally tend to refuse entry to professionals of this sort.

95. Further cross-examination as to his gambling activities and deposits to his cash management trust account elicited a similar

ATC 2077

degree of confusion. See in this context clause 150 of RS1 as follows:

"150. The statement for the cash management account showed a further deposit of $9,400 on 30 November 1999, and two deposits on 1 December 1999 of $8,600 and $8,000 respectively which in total (including the deposit of $8,000 on 29 November 1999) amounted to $34,000 within 3 days. He was cross examined about his trip to Melbourne and Tasmania and shown a copy of his Mastercard statement which showed a first transaction in Port Melbourne at a 7 Eleven store on 2 December 1999. There was a transaction on the same day at Penrith Sydney so the inference to be made is that he had travelled to Melbourne on 2 December 1999. If that was the case the amounts deposited would not have been the winnings from gambling during his trip to Melbourne and Tasmania. It was suggested to him that the amounts could have been deposited by other persons while he was away. He rejected this proposition - he said that and said that neither Mrs Montgomery or Betty Orel would know the cash management account."

Part E - the evidence of Montgomery

96. In his first written statement (Exhibit A2), Docherty referred to Montgomery simply as an employee of 3-D. It was in his second witness statement (Exhibit A3) that Docherty referred to the fact that Montgomery (and her daughter) lived in his home; both of Docherty and Montgomery denied that there was a de facto relationship. One thing is clear, however, and that is that Montgomery was involved with the three siblings (and by which I refer to Docherty, Peter and Orel) in respect of the Borg/MSH arrangement. She was indeed closely involved, in that it was she who prepared the Price Spreadsheets, and the maintenance of records of movements in and out of the scaffolding equipment (TS 263).

97. Montgomery endeavoured to confine her evidence to the content of her witness statement. When asked questions that were not so confined, she answered to the effect that either she did not know, or that she could not remember. Many of the aspects as to which she denied recollection would have been within her knowledge, given that she started work in the offices of 3-D with Orel in May 1998, and worked for 3-D for a number of years thereafter.

98. Asked whether she had any understanding of what Orel did in relation to the payments, she said "none at all" (TS 264). She claimed that she knew nothing about the drawing of cheques (TS 265). She said that she worked four hours per week, and came in on Mondays or Tuesdays. When asked whether this was the day on which Borg usually called, she said that she had no idea (TS 268). She was prepared only to admit that she prepared the Price Spreadsheets for Orel, and that they were prepared up to the preceding Friday (TS 270). This was, she said, what she did throughout her period of employment.

99. It is hard to believe that Montgomery knew as little as she said. The accounting analysis set out previously in these reasons (and see Annexure A) indicates clearly that, putting it kindly, they were unreliable and were, moreover, manipulated. As regards the MSH statement, the Respondent has drawn attention to the following specific aspects at clause 155 of RS1:

"i) The name of the company and the ACN is fictional;

ii) The statements are unsigned;

iii) They purport to state terms of net payment as 7 days but payment had already been made, a detail which was not shown on the statement.

iv) They do not have an issue date (but purport to be for a monthly period (eg April 99)

v) They contain rounded amounts which is unlikely having regard to the hire-out charges detailed on the Price Spreadsheet.

vi) The statement of account for Aug 2000 refers to "Timber Boards re: 31. 7. 00". This was not an item which appears on the Price Spreadsheets;

vii) If the arrangement was a hire purchase arrangement the explanation given for the (further) purchase of items of scaffolding that appears on the MSH statements meant that Docherty was paying twice for the scaffolding.

ATC 2078
viii) There were a number of handwritten notations on the statements "purchased" and "parts" which Mrs Montgomery acknowledged was her handwriting, but said it was after Sue Hird, the ATO auditor had raised a number of queries and that the annotations were wrong. The amounts next to those annotations corresponded with a number of cheques which did not fall into the weekly pattern of the cheques which were cashed each Tuesday.

ix) Mrs Montgomery suggested that Mr Borg had made a mistake (footnote: T 291, line 41-45) as to the description as scaffold sales but was unable to explain why Mr Borg was entitled to extra payments (footnote: there were more receipts than weeks) for hire if those particular payments were not for scaffold sale.

x) The Applicants treated the statements as receipts even though they were nothing of the sort.

xi) The statements were given to Mrs Orel"

100. Docherty had given evidence that the statements served as receipts. This being so, it is relevant to note that they were not saved, and that hard copies were not retained, and so that there would not have been the necessary evidence of receipt if there had been a dispute with Borg.

101. The statements were designed, so the evidence went, to provide details in respect of scaffold hire; nevertheless, they also included amounts in respect of sales or purchases of equipment. Montgomery's evidence was that hire payment cheques were cashed regularly on a weekly basis (TS 269 and 272), but that cheques referable to sales were cashed on different days. As to why this should be so was not explained.

102. The Respondent has referred critically to aspects of the evidence referable to the payments in clauses 159 to 163 of RS1, which are included in these reasons as follows:

159. The dates in the left hand column of each statement do not pertain to the dates of hire but correspond invariably to the dates the cheques were drawn. According to one version of the Applicants' evidence Mr Borg generally did not see the cheques so it is suspicious that he would be in a position to know the dates on which the cheques were drawn to be able to create the MSH statements. One possible explanation is that he took the dates in the left hand column from the dates the Price Spread Sheets were created but it is clear that those statements could have been created on any day between the date the relevant week ended and the Tuesday when the Price Spreadsheets had to be ready for Mrs Orel to draw the cheques. There is the further problem that there would be no need to prepare a Price Spreadsheet for a scaffold sale, so that in each of those cases Mr Borg would have had no way of knowing what date the cheque was drawn. Nevertheless it would appear that he has still managed to divine the date on which the cheque was drawn.

160. In relation to the hire of scaffolding, if it were assumed that Mr Borg used the date the Spreadsheet was created, this would mean that the Spreadsheets were invariably prepared on the same day as the cheques were drawn. The likelihood of this occurring 100% of the time is doubtful. The ability of Mrs Montgomery to prepare the Price Spreadsheet was dependent upon whether she had been supplied with the Pre-printed Delivery and Return forms by the yard manager who presumably was Mr Peter Docherty. It would also mean that Mrs Montgomery and Betty Orel were both in attendance on each of the days when the Price Spreadsheet was prepared by Mrs Montgomery and the cheque was drawn by Mrs Orel.

161. According to Mrs Montgomery, Mrs Orel was a permanent employee who worked at least four days per week. For example Mrs Orel drew a cheque according to the MSH statements on Sunday 6/12/98 - this would also have meant Mrs Montgomery was in that day and had prepared a Price Spreadsheet on the same day. The likelihood of this occurring is lessened by the fact that Mrs Orel was inconsistent as to the day she drew the cheque. On some occasions Mrs Orel drew a

ATC 2079
cheque on Thursday or Friday of the previous week or on other days:

Date cheque was drawn Day of Week Amount

9.07.98 Thursday $18,500

7.09.98 Friday $11,600

21.08.98 Friday $3,100

27.08.98 Thursday $14,800

23.10.98 Friday $12,300

13.11.98 Friday $17,000

06.12.98 Sunday $11,500

14.01.99 Thursday $10,500

29.04.99 Thursday $2,047

14.05.99 Friday $32,584

21.05.99 Friday $13,200

11.06.99 Friday $11,900

30.07.99 Friday $8,900

24.09.99 Friday $9,900

15.12.99 Wednesday $16,550

162. The fact that the cheques were drawn prior to the period even ending is suspicious. It will be recalled that Mrs Montgomery gave evidence that the period ended on the previous Friday. Mrs Orel says in her statement that about once a week Mrs Montgomery at the offices of 3D would either show her a Price Spreadsheet which had been placed in an envelope, or orally advise her of the amount owing to MSH. Mrs Orel who was entrusted with considerable authority to write cheques apparently accepted instructions as to the amount for which the cash cheque should be drawn from a fellow employee rather than from Mr Docherty. This is clear from the evidence. Mrs Montgomery says at para 40 that she generally put the Price Spreadsheet in an envelope and gave it to Mrs Orel. Mrs Montgomery says in her statement that she would let Mrs Orel know the amount owing either by telling her the amount or otherwise writing it on the front of the envelope. Mrs Orel says that she would give the cheque to Mrs Montgomery or Peter Docherty. Mr Peter Doherty says that he "normally took the cheque to the Commonwealth Bank at St Marys, at the request of James or Betty Orel to cash it".

163. According to the statements of the Applicants' witnesses it is not clear as to who gave Peter Docherty the Price Spreadsheet but presumably it is said that it was either Mrs Orel or Mrs Montgomery. There appears to have been no other way that Mr Borg on the Applicant's account could have received the Price Spreadsheet. If that is the case there is an inconsistency in what Mr Peter Doherty (who was the yard manager) says at para 28 of his statement, that he sometimes gave Mr Borg an envelope containing a Price Spreadsheet and the cash payment. The effect of this evidence is that it would mean that there were occasions when other employees gave the envelope to Mr Borg, but both Mrs Montgomery and Mrs Orel did not speak with Mr Borg, an oddity given the number of occasions he had attended the premises of 3D.

Part F - the evidence of Orel

103. Orel is a sister of Docherty and Peter. As set out previously, she was the bookkeeper and accounts clerk of 3-D and, as such, was trusted. She kept the books and records of 3-D. In that capacity, she was the person who had the most intimate knowledge of 3-D's financial records, both in respect of taxation and otherwise (TS 332). It was part of her function to verify claims for payment by creditors, and to assemble records for the tax agent to prepare the necessary return (TS 330).

104. As was the case with Montgomery, Orel purported to remember very little. She was unable to remember whether she was working full-time in 1998 to 2000 (TS 295), although Montgomery had said that she had worked full-time. Nor could she remember the hours that she worked during this period but thought that she might have worked between 10 am and 5 or 6 pm (TS 296). In cross-examination, it was put to Orel that she had returned salary wages income from 3-D of $8,146 in 1998, $9,988 in 1999 and $9,548 in 2000 (TS 332), which she did not dispute. Those figures do not suggest that she was in full-time employment with 3-D during those years. There was no evidence as to what other means of support were available to her during those relevant years.

105.

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Up until around June 1998, Orel had done all the banking. 3-D operated two accounts; a cash management account and a cheque account. When cheques to cash had to be drawn, Orel would ring the bank and ask for money to be transferred from the cash management account to the cheque account (TS 297).

106. In relation to the MSH payments, Orel gave evidence that once per week Montgomery would give her the figure for the amount to be paid to Borg, and that she would then withdraw that amount from the bank and give it to Peter, or alternatively put it in the safe (TS 300 - 301). She would do this on the same day that she drew the wages. She said that Montgomery would either write the amount due to MSH on an envelope containing a Price Spreadsheet, or simply tell her the amount (TS 301). She would then write the "cheque then and there, or the day after, or whatever", and contact the bank in advance to ensure that the cash would be available when she went to collect it (TS 301). At some stage between June and November 1998, she said that she had been mugged, and that after this, she did not go to the bank. Instead she gave the cash cheque to Peter and he would then collect it (TS 302).

107. Orel said that it was her invariable practice to place the cash in the safe after the cheque had been cashed, and leave it there until Borg would arrive (TS 350). When asked in cross-examination whether Borg attended on the same day every week, Orel could not remember (TS 350). She said this, notwithstanding the fact that in her own witness statement (Exhibit A7) she had given evidence that after she had put the cash in the safe, "a day or two later Mr Peter Docherty would ask me to open the safe and give him the cash". When her attention was drawn to this statement, she said that sometimes Borg attended on the same day, but agreed that it was within a day or two. This evidence is inconsistent with the statement of Peter who said, at paragraph 28 of Exhibit A10, that "sometimes the money was held in the safe for days until Borg next came to the yard to collect it".

108. Orel said that she did not keep a copy of the Price Spreadsheet given to her by Montgomery. Her reason for not doing so was because "Ms Montgomery had the record" (TS 334). She claimed that she did not know anything about the Price Spreadsheets and did not concern herself with their contents (TS 351). According to her evidence, this was Montgomery's task. She said that Montgomery performed only one function and that was to come in on a Monday, or a Tuesday, or some day early in the week in order to prepare the Price Spreadsheet (TS 352). When asked why she would not have performed this function given that it was within the role of an accounts clerk, Orel claimed that she did not know anything about scaffolding and had nothing to do with it (TS 352). This was astonishing given that she had worked for almost 20 years in 3-D's business. She claimed that all she did was "pay the bills", and that she did not need to concern herself with the amounts of hire that were being charged, or the manner of calculation (TS 352). She said that she knew nothing at all about the arrangement between Docherty and Borg, and had not needed to speak to Borg (TS 352).

109. When asked about the amount of $32,843 (TS 353 and see also Tab 9 of Exhibit A1) (which was not one of the usual hire payments) and whether it had occurred to her as being out side the usual weekly pattern, she said "it wouldn't have occurred to me … I just wrote cheques, yes" (TS 353). When it was suggested by the Tribunal that there would be a difference in the way a hire payment was posted, as opposed to a purchase payment, Orel said that she could not assist and said, "As far as I remember, all of this was hire". TS 354, between lines 20 to 31, reads as follows:

"THE D.PRESIDENT: Can I just interrupt for a second?

Just focusing on that statement that Mr Fagan is referring to, there would be a difference, would there not, in the way you posted a rent payment and a purchase payment? In one case, you would be charging profit and loss account; in the other case, you would be charging a fixed assets account?---As far as I know - - -

Where would you post it to?---As far as I remember, all of this was hire. I don't remember anything else.

ATC 2081
MR FAGAN: You had - - -?---And I probably would have posted it all as hire, I think. I really don't remember."

110. Orel said that she was given the MSH statements by Peter once a month (TS 303). She kept these in a file as part of the business records of 3-D. When asked if she looked at the statements before filing them, Orel said "Not really" (TS 347). One would have thought that as the accounts clerk and book-keeper, she would have checked the details on the "receipt", as she called it, so to ensure that it correlated and corresponded with the amount of the cheque payments. Nor was Orel anxious about the fact that she had never received any receipt from Borg, notwithstanding the fact that large amounts of cash were being handed over (TS 348). At first, it did not strike her as unusual that large amounts were being paid by cash (TS 353). No other creditors were paid in this way.

111. Orel acknowledged that she had worked as an accounts clerk and bookkeeper for 20 years, but had not obtained anything by way of a receipt. Incredibly enough, she maintained that the MSH statements were acknowledgments of payment. See TS 349 between lines 43-46 as follows:

"What I asked you about was are you seeking to have the Deputy President accept that you treated this as an acknowledgment that money had been paid?---Yes.

It wasn't anything of the kind, was it?---Well, it was."

112. Overall Orel was extremely reluctant in the manner in which she gave her evidence. As was the case with other witnesses, she was most reluctant to venture outside the confines of her statement. The fact that she was not able to assist the Tribunal, when questioned in relation to many of the financial matters, is surprising given that she was effectively the accountant, unless of course, as is extremely likely, she was a participant in the whole fabrication. As was the case with Montgomery, she tried to stick as closely to her script as she possibly could. The fact that she earned so little for full-time work may, perhaps, be significant in this particular context.

Part G - the evidence of Peter

113. If the evidence of the previous witnesses, being Docherty, Montgomery and Orel, was unsatisfactory (and it was), the evidence of Peter achieved a new low. When he first took the witness stand, and was shown his signed witness statement, it was necessary to adjourn the hearing for about half an hour to enable him to read it. His evidence thereafter was such that it was plain that he played little or no part in the preparation of his witness statement, and indeed his oral evidence departed from his witness statement to simply an amazing extent.

114. The evidence of each of Docherty, Montgomery and Orel as regards Borg and MSH was unsatisfactory; the evidence of Peter was so unsatisfactory that it bordered on the ludicrous, and so much so that it did not appear to the Tribunal that Peter was taking the proceedings seriously. From the outset, Peter claimed that he did not know that these proceedings concerned scaffolding (TS 363). He claimed that this was so, notwithstanding that his witness statement (Exhibit A10) indicated the contrary. He said that the evidence in his statement, at paragraph 17, that "10 large semi-trailer trucks of 8 to 12 tonne capacity" had delivered the scaffolding, meant the weight of the trucks (TS 362). He later sought to delete the word capacity from his statement. In re-examination, he sought to expand on the reference to "8 to 12 tonne" stating that this was the weight of the cab chassis (TS 403). In view of the fact that he had precisely stated in his original statement (before it was amended) that the trucks were of an "8 to 12 tonne capacity", and that the significance of paragraph 17 of Exhibit A10 had been to indicate the quantity of scaffolding (that is, that it took "a number of truck loads to deliver the scaffolding" and that the "amount of scaffolding was quite substantial"), Peter's suggestion that he had meant the weight of the cab chassis (that is, the part of the truck which supplied the motive power) was plainly a silly "spur-of-the-moment" invention.

115. The Respondent contends (and the Tribunal considers that this contention may be correct) that Peter varied his evidence in order to neutralise the evidence given by the

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Respondent's expert, Mr Jugmans. Mr Jugmans had based a number of calculations as to the amount and cost of the scaffolding on the evidence in paragraph 17 of Exhibit A10 as originally given by Peter.

116. Peter said that he could "remember everything except for the years, dates and phone numbers" (TS 366). He claimed not to remember the job that he was doing in 1998, or whether he was working for 3-D (TS 366). He said this, notwithstanding the fact that the statement he made (Exhibit A10) was all about events in 1998 (TS 367). Following the conversation with Borg that was detailed in paragraph 7 of Exhibit A10 Peter had again spoken to Borg a "short while later" (paragraph 9 of Exhibit A10). He was unable, however, to elucidate as to what period of time this referred to (TS 369). When pressed as to what "a short while later" might mean, he said that the two conversations with Borg (referred to in paragraphs 7 and 9 of Exhibit A10) were "years apart" (TS 370).

117. The evidence of Peter was so unsatisfactory that, as set out previously, it became necessary to adjourn so that Peter could review his statement and make any changes he thought were appropriate or necessary. One of those changes involved altering the words in his statement at paragraph 9 from "a short while later" to "sometime later". When asked about the time frame that this referred to, Peter thought that this would be something under a year, or could have been longer, or had "no idea" (TS 376).

118. Although the arrival of the MSH scaffolding would have resulted in a major change in the way 3-D conducted its business, Peter avoided being committed on dates, and was obtuse about any detail where there was the possibility of a challenge (TS 382). He was non-committal about whether he had entered into the computer the first two entries in the Job Balances (other witnesses had said that he had done this in order to get the program to work). He also needed to be reminded of evidence he had given during his examination in chief (TS 378). Peter later said that he had "put those estimates in" (TS 378 to 379). However, in response to questioning from the Tribunal, he said that the figures that had been entered were a "guess" (TS 380). When questioned about this further, he was unable to elucidate whether he had guessed the total stock available either out in the field or in the yard, or whether it was the total quantity of stock received from Borg (TS 381). Peter was unable to say over what period the MSH scaffolding was received, notwithstanding that it was his job to receive and send stock (TS 382 to 383). He claimed that Docherty did not tell him that the scaffolding was being paid for, or even the total sum being paid for the scaffolding (TS 384). He was unable to assist as to the total value of the goods, or whether the scaffolding included new as well as second-hand items (TS 385). He said that he did not know that Docherty was buying the scaffolding, only that "We were getting scaffolding" (TS387). He also did not enquire about the quantity of scaffolding being received when Docherty told him that scaffolding was coming (TS 400).

119. Peter claimed that Docherty informed him that "some trial stuff" was coming and then "we're going to get a heap of stuff" (TS 401). There was no reference to any trial period in his statement. At no stage had Peter gone to Borg's yard to inspect the scaffolding, and he had not asked Borg the whereabouts of his yard (TS 402). He thought that the scaffolding may have been delivered on a couple of different trucks, and was unable to recall whether he had received a delivery docket (TS 402).

120. When the MSH scaffolding was delivered, Peter claimed to have made a rough estimate of the numbers, but did not know where he had recorded these details (TS 388). He said that he had worked out, from what Borg had told him, that it was going to cost $1 million or over a million (TS 388). In response to a question about the price he had used, Peter said that he had used a new price because he "wasn't smart then" (TS 389). He did not ask Borg how much the scaffolding had been used, or how old it was, or how good it was, as "it didn't interest me" (TS 389). Although there was no reference to this fact in his witness statement, Peter suggested that he had given Docherty's phone number to Borg (TS 389).

121. Peter said that Borg came "regularly weekly" to collect his money (TS 391). He agreed that Borg had come on well over 100

ATC 2083

occasions. He said that he never counted the money when he had handed it over to Borg (TS 392) and that sometimes he had handed over money, and sometimes cheques, depending on whether or not he had gotten to the bank (TS 392). If Borg "popped in on a Tuesday morning before I had gone to the bank, and wanted his money … he would take the cheque around himself" (TS 392). He said that there had been occasions when Borg had accompanied him to the bank to cash the cheque (TS 400). Peter's answer was varied when asked what proportion of the time he had handed over cash cheques, stating that "At the start it was mostly cash. Actually, most of the time it was probably mostly cash" (TS 392).

122. Peter confirmed that there had been three ways that Borg was paid:

(a) Peter went to the bank, cashed the cheque and returned with the cash;
(b) Peter went with Borg to the bank while he cashed the cheque;
(c) Peter would give Borg a cheque and Borg would go to the bank on his own and cash the cheque (TS 400).

123. He said that he had never looked in the envelopes he gave to Borg, and had not checked the amount of cash he had handed over (TS 392). Even when going to the bank to cash the cheque, Peter said that he had never checked that he was getting the right amount (TS 393). When asked whether Borg checked his money he said that: "Sometimes he did" (TS 395). When asked about the occasions when Borg opened the envelope, he said "Not many … I actually think he counted it in his car before he left" (TS 399). He said that he did not take Borg into the office because the "office had been broken into too many times", and if Borg had counted his money that process would take 5-10 minutes; instead, the money was handed over in the yard, in full view of other workers (TS 395).

124. Given that he had apparently been very trusting of Borg in handing over large amounts of cash without counting it in front of him (TS 396), Peter's explanation as to why he had not taken Borg to the office did not make sense. When asked by the Tribunal why he had the role of handing over the money, Peter answered "I handed [him] the money probably because I have a black belt in martial arts" (TS 399). As the Tribunal noted, this was an odd situation as Peter's job was running the yard, and that making the payment was something that, in the usual course, would have been done by one of the administrative staff (TS 399).

125. Peter also claimed that he did not know that Borg was providing the statements of account appearing at Tab 9 of Exhibit A1 (TS 399). This was an odd situation, as the only person who dealt with Borg was Peter, and the statements must have been handed to him for Orel to come into possession of them.

126. I include, by way of illustration of the nature of Peter's evidence, a (quite lengthy) extract from TS 378 to TS 384 as follows:

"MR FAGAN: Didn't you give evidence in answer to my learned friend here earlier in the day, that you needed to come up with these numbers in order to get the program started?---If you are talking about the first entries ever put in, then yes, it was me.

You can see that I am talking about the first entries, can't you, by looking at this page?---No, I can't.

But didn't you tell your own counsel earlier in the day - earlier today that - - -

MR McGOVERN: I object to that, I am not his counsel.

MR FAGAN: Right. I have been trying to make that distinction. didn't you tell my learned friend here earlier today that you did come up with those numbers, because you had to to start the program, or did I misunderstand you?---No, you understood me.

Right. Do you want to change that?---No, I don't want to change that.

Okay. If those numbers were produced by you, were they the numbers that were chosen, selected, adopted by you at about that date, June '98, you must have been the yard manager at that time. Would that be right?---I was a yard hand before I was a yard manager.

I didn't ask you that, Mr Docherty. Wouldn't it be the case that you must have been the yard manager when that was done? Would you answer the question?---No.

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Would you have done that as a scaffold hand, working on building sites?---Depends on whether I was working in the yard as well.

Would you have done it as a yard hand working in the yard?---Could have done.

Was there a yard manager before you?---I am not sure about that.

Well, how did the yard run itself before you become its yard manager?---James and Charlie.

Right. Well, they fulfilled the function of managing the yard prior to you, is that the case?---I don't think there was actually a manager prior to me.

You see if it is the case that your brother, James, said that those numbers there are estimates that you came up with to go into the computer, is it the position you wouldn't be able to confirm whether that was true or not?---No, I put those estimates in.

You did. The ones we are talking about at tab 5, did you?---By this piece of paper here, I can't tell because of the dates on it, I don't know, but I can tell you that it was me that set up that program and it was me that estimated the amounts and made them work, because the amounts had to be put in.

Well, look at the first two numbers for the standards of three metres, 3500, 1500. Add them together and I think you get 5000, am I right?---Possibly.

Do you have a recollection of coming up with a number of 5000 for three metre standards as the opening number?---I thought it was either 5 or 10, but don't remember coming up with that exact number, but most of them were around the same number unless it was a smaller item, which I put in less amounts for.

Well, just for three metre standards, that is a pretty commonly used unit, isn't it?---Yes.

Every module of scaffold that is set up has to have standards?---No. Go ahead.

Each module needs four, one in each corner, doesn't it?---No.

The most commonly set up modules of scaffold need four, the most common configuration is one standard in each corner, isn't it?---Only if you are doing one single bay.

Yes. If you are doing one single bay, that is the most common configuration for a single module, isn't it?---Four is needed, yes, most times.

And if you are making two bays, you would only need another two standards, because two in the middle would be common to both modules, am I right?---Pretty much.

Consequently, the standards are commonly used units in erecting modular scaffold, aren't they?---Yes.

And in particular in erecting modular scaffold of the type that your company had?---Yes.

And the three metre length is a commonly used unit, isn't it?---Yes.

All right. Now, can you recall whether you came up with a figure of 5000 for these commonly used units at the time when scaffold was first provided to you by Tony Borg, or whether you came up with a figure of double that, namely 10,000?---I can't recall.

Sorry?---I can't recall.

Can't recall even the difference between those two?---No, it was just a figure that needed to be put in.

Yes, but - - -

THE D.PRESIDENT: Was this a guess on your part? Can you just analyse what happened, Mr Docherty? In order to make the computer program work, you have got to have an opening number, because I thought that was the number you started with?---Yes.

Now, that number can be one of only two things; the actual number or a guess?---Yes.

Now, which was it, the actual number or a guess?---A guess.

And it was a guess by whom?---Me.

Base on what?---Based on that I needed a number to start the thing running.

I see. Would any number have done? I mean, would 10,000 have served equally

ATC 2085
well?---10,000 would have served equally as well.

MR FAGAN: So when you put this number in there you weren't trying to record how many units of these things had come from Mr Borg at all?---No, the computer was going to do that.

Yes. But you know that the computer worked on a system of a starting point and then so many in, so many out week by week, didn't it?---That's how it was supposed to work.

Yes. So if the computer was going to keep track and give you accurately a number of units that were either in or out of the yard, the starting point would need to be accurate, wouldn't it?---No.

Why not?---Because you have add and subtract.

Yes, I know. But if you - it's garbage in, garbage out, isn't it? If you start off with 10,000 and there were really only two, and you take away two, then you have got 9998, whereas it really should be 1998, which is different; isn't that a problem?---Not for me.

No? So you thought that you could somehow take account of the scaffolding stock with the figure going in at the beginning to this computer system as being completely arbitrary?---We were supposed to eventually have a number of what we actually had, by what was going in and what was coming out, yes.

Okay. But you are saying that the starting point numbers weren't intended to be an estimate of what was actually in your yard, or on hand?---They may have been at the time. I don't know. They were guesses.

All right. But guesses are what though? Guesses of what total stock you had available, either out in the field or in your yard, or guesses of something you hoped to get next year, or guesses of what?---I have no idea at this time.

So if your brother James said that those numbers were your guesses as to the total quantity of stock received by Mr Borg, you wouldn't be able to support him and agree in that or not; is that the case?---The computer was started twice.

No, just answer my question, please?---I wouldn't know.

The answer is no, you wouldn't be able to agree with him about that at all?---Not 100 per cent, no.

Well, not at all, would you?---I have no idea.

Your mind is a blank?---My mind's not a blank. My mind's perfect. You're asking the wrong questions.

But with respect to this subject? Your mind is a blank as to whether the numbers that were put in were your attempt to estimate the total quantity of stock - - -?---I don't know.

- - - available to you in the yard?---I don't know whether it was an attempt to do a guess on the total stock or not.

All right. Well, having had - - -?---I know how the program runs.

Well, having had a look at the dates on that - I am sorry, I cut you off. What did you want to say?---I said, I know how the program runs. I know what I would have done.

Right. Having had a look at those documents and the dates at the beginning of them you are still not able to tell us whether you were or weren't the yard manager in about the middle of 1998?---No, I couldn't tell you definitely.

You see that the third one down is a return of 1675 on 14 July. A week later there is an advice of 1082 going in and so on. There are weekly changes thereafter. You don't think you even put in the numbers for those returns and advices?---I have no idea. I didn't do the computer system for long. I hated it.

Right. And you have no idea whether you came up with the numbers and gave them to somebody else to put in to the computer system at those dates, that is, July '98?---I cannot say on July '98.

Now, from this conversation in paragraph 9, when you had this conversation, you are not

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able recall how much longer it was before equipment started coming into the yard, as you have described at paragraphs 16 and 17?---I have no idea.

This was quite a big change for your business, wasn't it, that you were now holding in your yard a substantial quantity of stock that was sent out by you and returned to you, instead of dealing with scaffold that was supplied by Hillsley or Bell or WACO?---I was still dealing with them.

Yes. But it was a substantial change, in the sense that now a large part of your business was handling the stock which was under your own control, and didn't have to be returned to somebody else, like the Hillsley, Bell and WACO?---Most of it was.

Most of what was what?---Most of it was returned to Hillsley and Bells.

Yes. But this stuff that came in, when it came in, whenever that date was?---I started returning it to Hillsley and Bell.

I don't understand you. What do you mean by that? I will go back. Aren't you telling us in paragraphs 16 and 17 that a large quantity, 10 semi-trailer truck loads of scaffolding came into your yard?---Not all at once, but, yes.

Okay. Over what period?---I have no idea.

Well, approximately? You know, did you get it, what, a truck a week for 10 weeks, did you get - - -?---I would be guessing.

Did you get two a week for five?---I would be guessing.

Did you get a truck every day?---I have no idea.

Everything would be a guess?---Pretty much.

It is all baloney, isn't it? None of it actually happened, did it?---No, it's actually all true.

But you can't even remember down to that level?---I remember a lot. I just don't remember what you want me to remember, unfortunately.

Well, it seems to be the coincidence, Mr Docherty. You just don't seem to be able to recall anything that I want to know, is that - - -?---No. Well, you ask me about my job. Yes, I can tell you everything.

But wasn't this your job, handling this stuff in the yard?---Inputting into the computer was not my job.

I am not asking you about that at the moment. I am asking you about the stock physically coming into the yard. Forget the computer?---Right.

Forget it entirely?---Go ahead.

Now, wasn't this your job, to receive stock coming into the yard, put it away?---It's part of my job.

Right. Well, then I am asking you about your job, and can't you remember, with reference to your job, whether these truck loads came in over a period of six months, a year, three weeks, two days? Can't you help us at all?---It was a long time ago.

I know?---It was another lifetime for me.

Yes. Can you answer it?---No.

Can you help us at all to - - -?---I don't know.

Can you narrow it down even a little bit?---Sorry.

Not even to tell us that it was under six months?---Couldn't do it.

Could have been over the space of a year that these trucks came in a brought the scaffold, could it?---I don't know.

Notwithstanding that you can't recall that, you are able to say that it was about 10 trucks?---No. I actually said it was 10 or more. They put about 10.

Have a look in your statement, paragraph 17?---Yes, I know the statement says about 10. It's a true statement.

But four lines down, about 10?---It's still a true statement.

Right. Well, not 20?---Probably not.

Not about 30?---Probably not.

And not as few as five?---Probably not.

How is it you are able to be pinning down the number of trucks to the range of about 10, but you can't tell us whether this took place over the space of 365 days or 10 days?---Because it was - - -

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Can't make any discrimination between those two. Why is this?---Because it was a long time ago.

But not too long for you to be able to remember the number of trucks?---Remembering the number of trucks and remembering a date's a different thing.

Well, that's because it's in the script, which is what your statement is. It's in the script - - -?---No.

- - - and you want to stick to it - - -?---Script has nothing to do with it.

- - - and you don't want to tell me a thing that isn't already pre-composed in the script; isn't that the situation?---The script has nothing to do with it.

Well, let us try another topic then. What about the arrangements concerning the terms upon which you would have this equipment? Did your brother James ever tell you anything about that?---With Mr Borg, no.

He didn't tell you what he was paying for the stuff?---No.

Not even the total sum?---No.

Did he tell you if he was going to pay for it outright or only by the week?---I have no idea what you mean by that.

Is that so difficult?---Yes, it is, because you're crossing two lines there.

Right. Well the question is this, at the outset of the arrangement whereby the material came into your yard, and at about the time of it coming into the yard, did you brother James tell you that he would be paying the supplier outright for the goods, or over a period of time, or how much he would be paying, or anything about payment?---Told him what the hire charges would be.

Hire charges, what did he tell about that?---Just what we had to pay him, what rate.

And what was that?---I have no idea.

You can remember you were told but not how much?---It's rate per piece.

Yes?---I have no idea.

Well, did he tell you how much in total per week had to be paid to this person who was supplying it?---He was going to be paid for what we used.

Right. And that is all, just what we used?---Pretty much.

And how was that to be calculated?---I didn't do the calculations.

How was it to be calculated, whether by you or anyone else?---I could only give you a guess.

Go on, guess away?---I'm sorry.

Guess away?---It would have been what was out we paid for, what wasn't out we didn't pay for, and it would have been at a set rate."

127. In general, Peter's account was unreliable in the extreme. His selective memory, and the highly improbable evidence he gave about particular matters, showed no respect for the truth. The lengthy extract quoted above is just one illustration, but there are other passages which would have served the same purpose.

Part H - cash cheques

128. RS1, in clauses 187 to 197, deals with the question of cash cheques (in a manner which the Tribunal considers correct) in the following terms:

187 The description of the Borg arrangement by Mrs Orel and other of the Applicants' witnesses suggested it was rather casual - it was apparently open to Mr Borg to show up anytime. At the same time the cash cheques were consistently cashed on Tuesdays save for a few minor exceptions which were transactions of a different type described on the MSH invoices as a "purchase" 4/8/98; "scaffold parts" 21/8/98. Further analysis of the MSH invoices shows that generally the cash cheques were drawn on Monday or Tuesday. There are a number of exceptions where the cheque was drawn on the Thursday or Friday of the previous week (perhaps because Orel knew she would not be in on Monday/Tuesday), but again the cheque is cashed on Tuesdays.

188 One explanation offered by the Applicants was that the banking was done on Tuesdays. There appeared to be a

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standing arrangement that the 'MSH cheque' would be taken to the bank on the same day that other banking transactions occurred. On the same day other cheques appear to have also been presented, and also this was the day on which "Pays" (presumably to employees) were deducted from the account.

189 From the above it is clear that Mrs Orel would have needed to prepare the cash cheque which was said to have been paid to MSH so that it could be taken to the bank on Tuesday. This meant that the Price Spreadsheet for the relevant period also needed to be available to calculate the amount of the cheque.

190 It is to be inferred that the Commonwealth Bank did not have a problem with the cashing of cheques for large amounts of money. The cheques were made out to "Pay cash or bearer". According to the back of the cheques the funds handed over were generally in $100 notes for example the cheque for $32,843 was cashed on 29.6.99 for 328 notes of $100 denomination 2 × $20, 1 × $1. It is a reasonable inference that for the reason that the identity details of the person cashing the cheque have not been noted on the back of the cheque which is a common banking practice that the tellers knew the person who attended to cash the cheque.

191 It is useful on this point to consider the contemporaneous records of interview completed by the ATO auditors. The records of interview consisted of a list of prepared questions on which were completed the answers supplied by Docherty in the course of the interview. In respect of the record of interview for 19 June 2003 there are two records of Docherty's answers, one completed by Sue Hird and a second record completed by Vladimir Proksch Docherty was asked a number of pre-prepared questions and gave the answers set out in the following tables:

Q 7 Who usually paid the MSH representative?

Answers as recorded by the ATO auditors

Sue Hird Myself or Betty. Usually myself. No-one else would know

V Proksch Myself or Betty - no one else deals with company monies. It was probably me

Q. 11 Who usually cashed the cheques?:

Answers as recorded by the ATO auditors

Sue Hird In 1998 Betty would go to the bank. After she was held up she didn't usually go. Mainly I would go to the bank

V Proksch 1998 Betty was held up at Bank So cheque mostly cashed by myself or Betty. Sometimes by Frank or Tony. But Sue said Bank indicates only account holder cashed the cheque. Jim then agreed only he or Betty cashed chqus (sic)

Q 12 Who held/stored the cash before it was paid to MSH?

Answers as recorded by the ATO auditors

Sue Hird I usually didn't get cash out till he was coming and I paid it to him

V Proksch Went and cashed cheque and handed it over to Tony or Frank

192 While the auditors in their oral evidence did not suggest they had captured every word that Docherty had said they did confirm that they had recorded the essence of what Docherty was saying to them. The answers which they have recorded should be looked at in aggregate to obtain a full picture of Docherty's response. While there are minor differences between the answers as recorded by the auditors, what the recorded responses show is that Docherty was telling the auditors at the interview on 19 June 2003 a very different story to that which was advanced in his affidavit and oral evidence.

193 For the reason that the evidence of the auditors is likely to be more reliable than anything heard from the Applicants' witnesses on the point the Tribunal should accept that the auditors have faithfully

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recorded what was said to them on 19 June 2003. That evidence of course left Mr Docherty holding the cash and this conclusion is particularly apposite if the story about Mr Borg and MSH is treated as nothing more than a fabrication. This is particularly so given the evidence Docherty gave in the proceedings where he endeavoured to paint a picture to suggest that he was not involved in the obtaining of the cash from the bank and its delivery to Mr Borg.

194 The only explanation for the change in Docherty's story is that he was not telling the truth. The Tribunal is left in a position where his evidence must be rejected. The conclusion is also open to the Tribunal that one possible reason as to why Docherty was not telling the truth is that the cash was being extracted from the business by him personally. In any event the evidence called by the Applicants is so unreliable that it is incapable of discharging the onus of proof.

Part I - ownership of the scaffolding equipment

129. A further reason why 3-D has not discharged the onus of proof in respect of the deductions claimed relates to the question of ownership of the scaffolding. Docherty acknowledged that the scaffolding acquired by 3-D from MSH was never recorded in the accounts of 3-D. The reason for this, he said, was because the scaffolding was purchased by the Trust, of which 3-D was the trustee. 3-D had, so he said, a dual function and operated in two capacities; firstly, as the proprietor of a business it carried on and secondly, as the trustee of the Trust and its assets which it held for the beneficiaries. The Trust was formed in 1998 in order to buy some scaffold and the factory premises. Docherty said that it was the Trust that had bought the scaffolding, and suggested that 3-D paid a maintenance fee on the scaffolding to use it. In re-examination, he said that the Trust owned the scaffolding, but that 3-D was making the payments to Borg. Docherty was asked by the Tribunal whether this gave rise to a debt between the Trust and 3-D, and he said that he did not know. In response to a question from the Tribunal on this point, Mr Jugmans said that one would expect, in these circumstances, to find a loan account between the Trust and 3-D (leaving aside the fact that according to Docherty, 3-D was the trustee of the Trust). There was no evidence as to the Trust.

130. In view of this evidence, if any entity was entitled to a deduction (and if there was a purchase then no entity was so entitled), it was not 3-D but the Trust. This is because it was the Trust that bought the scaffolding, notwithstanding the fact that the funds may have been provided in some fashion by 3-D.

131. There was little or no evidence as to what arrangement 3-D had with the Trust as to the use of the equipment that 3-D had paid for as a voluntary incurrence on behalf of the Trust. The effect of section 8-1 of the Income Tax Assessment Act 1997 must be that a taxpayer is not entitled to deductions for losses and outgoings incurred in gaining another person's assessable income. The fact that outgoings were incurred by 3-D on behalf of the Trust does not supply the necessary nexus with the income producing activity. This paragraph is inserted more for the sake of completeness than anything else since if this was a transaction of purchase, then deductions would not have been available at all unless the scaffolding equipment could (somehow) come within the concept of trading stock. There was never any suggestion, however, that the concept of trading stock was relevant in any way.

Part J - other evidence

132. The evidence of the two accounting experts, Mr Carter and Mr Jugmans, need not be dealt with because their calculations were based on the proposition that scaffolding was hired by 3-D from MSH or Borg, and that rental was paid for the use of that equipment. I should say that the fact that this is so, does not in any way reflect to the discredit of either of these gentlemen.

133. The evidence of Mr Morse was of limited relevance. The OSR became involved in an enquiry relating to the stamp duty. Duty was eventually paid, but by 3-D. Mr Morse was, as I have noted, given a telephone number in Queensland and told that he could phone that number and speak to Borg. When he phoned the number, the call was taken by a man who said that he was Borg. Having regard to all of the

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other evidence before the Tribunal, that telephone call established nothing at all.

134. Ms Hird and Mr Proksch gave evidence as to their meetings with the Applicants, which gave rise to the amended assessments that are the subject of these applications for review. Although Ms Hird, in particular, was cross-examined extensively by Mr McGovern, there was nothing in her evidence which was not worthy of credit. Insofar as her evidence differed from that of Docherty, her evidence must be preferred. Mr Proksch's evidence related to file notes that he made at the relevant time when acting as junior to Ms Hird. His evidence, too, should be accepted.

135. I should, perhaps, if only for the sake of completeness, note that a witness statement presented by the Respondent was not admitted because the Respondent did not call him. That evidence, had it been given, would have related to the computer program referable to the scaffolding equipment. Mr McGovern suggested that the Respondent's failure to call that witness might give rise to an inference that the computer program was in order. Having regard to the evidence of the siblings and Montgomery I draw no such inference, and nothing whatever turns on the failure of the Respondent to call that evidence.

Part K - finding

136. In their submissions, the Applicants complained as to some of the language contained in RS1 on the basis that it was, put in short, too emotive. I do not agree. The descriptions, are in the circumstances, justified and, if anything, restrained.

137. The Applicants contend that I should not draw an inference under
Jones v Dunkel (1959) 101 CLR 298 as to the fact that Borg did not give evidence because he would not have done so for reasons of tax, and that he would thereby have exposed himself to a liability for tax. That statement can only be described as astonishing; how would the Applicants know of Borg's own tax situation? For all they knew, and if he existed at all, there is no reason to suppose that he did not pay tax properly, or as an alternative, that he had carry-forward losses available. It is also possible that he reflected the transaction as a sale and moreover, at values equivalent to depreciated book value. But of course, all of this is the merest conjecture. The whole transaction is so bizarre that there is only one possible conclusion and that is, as set out earlier in these reasons, that Borg did not ever exist, and that it was Docherty who received the money. The evidence of Ms Hird, in particular, was that Docherty told her that it was he who received the cash because he was concerned that the others should not know, and I accept Ms Hird's version in preference to that of Docherty. If Borg did not exist, then it is Docherty who received the cash. This being so, I draw no inference as to the fact that Borg did not give evidence, if only because it was not possible for a non-existent person to give evidence. I refer in this context to the bizarre and completely incredible evidence as to a transaction between 3-D and a total stranger on terms that were, putting it kindly, not in the faintest degree commercial. It is unnecessary for me to refer again to the alleged terms of this particular transaction. My finding is, quite simply, that there could not possibly have been any such transaction.

138. It was suggested that there was no evidence as to unexplained wealth in the hands of Docherty. This is so, but it establishes nothing at all. It is possible that Docherty was less successful in his gambling activities than he claimed. It is also possible that the money has been concealed or, is in some way or another, held in the Trust. The fact that there is no evidence of any kind in this context establishes nothing at all.

139. In AS2, the Applicants complained of a denial of procedural fairness in that questions that should have been put to Montgomery were not put to her. In respect of both sides, experienced senior counsel were engaged, and moreover senior counsel particularly expert in the art of cross-examination. Each of them cross-examined carefully and extensively. I do not accept that there is any substance in the Applicants' contentions under this head and, indeed, the fact that this contention was raised suggests desperation. See also clause 29 of RS2 as follows:

"29. Mrs Montgomery had also managed to create a Price Spreadsheet in respect of items which proved not to be for hire at all but for sale, demonstrating the fact of its

ATC 2091
fabrication. Mrs Montgomery was cross examined about this and it was squarely put to her in the following terms:

Really, Ms Montgomery, what this shows is that your documents at tab 14 are a fabrication, aren't they?---No, they're not. They came out of the computer program.

You have told us that the starting point of one of them, the first one behind tab 14 for the week ending 28 December, is a real document from the time, haven't you?---That's right.

It's nothing of the kind, is it?---Yes, it is.

It's something that you have put together to try to substantiate numbers?---No. I took it out of - off the job balance generals.

And then you have told us that you have extrapolated back, and, lo and behold, you have been able to extrapolate for the week ending 7 December by adding and subtracting advices and receipts to page 427, a number of 16,500, which you purport would explain another entry in the bank statements and on Mr Borg's statements of account?---These were all - these all came out of the computer program.

These, being tab 14?---These were all worked out of the computer program.

They have been massaged - the numbers have been massaged and fiddled with - - - ?---No.

- - - and put together by you - - -"

140. The Respondent has cited a host of cases on onus. It is unnecessary for me to refer to any of them. On my findings, 3-D did not hire equipment from Borg, and 3-D has failed to discharge the onus on it under section 14ZZK of the TAA to establish the contrary. The Applicants, in their submissions, pointed to the fact that the Tribunal itself noted that there was equipment, and that it must have come from somewhere. It was reasonable to assume that this is so because of the increase in revenue from the hiring of equipment, to which the accounting experts referred. It was not in any way demonstrated as to what equipment there was and where it came from. The probabilities are that the scaffolding equipment in question had been acquired somehow or another by Docherty, but this too is conjecture.

140. Once 3-D fails (and it has failed) in respect of its application, the Applicants raise issues under Division 7A of the Act which are dealt with in the following Part L.

Part L - Division 7A

142. Section 109C(1) relevantly provides that:

"…

A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either:

(a) the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder;

(b) a reasonable person would conclude (having regard to all of the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time..
…"

143. The expression "payment" to an entity is defined in section 109C(3) to mean:

"…

(a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and

(b) a credit of an amount to the extent that it is:

(i) to the entity; or

(ii) on behalf of the entity; or

(iii) or the benefit of the entity; and

(c) a transfer of property to the entity.
…"

144. The Applicants contend that there is no evidence that payments were made to Docherty. Leaving aside the admissions made by Docherty to Ms Hird, I do not consider that it is necessary for me to deal with this contention further, simply because my finding is that Docherty is Borg.

145. The Applicants relied on the English case of
Stephens v T Pittas Ltd (1983) 56 TC 722 ("Stephens") (see DS1, clauses 3 to 6 inclusive) in the following terms:

"3. Even if the cash was paid to James Docherty (which is denied) Division 7A does not apply to deem the payment to be a dividend where the amount was not paid by the company, in the sense of a consensual payment made by the company, but misappropriated by James Docherty. In this regard the applicant relies on the decision of
Stephens v Pittas Ltd 56 TC 722.

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4. Stephens case dealt with the company T. Pittas Ltd. The company acted at all times through a Mr P. who was described as having regarded the company as his "alter ego". Mr P was also the major shareholder in the company (his wife held the remaining one share) and a director. Mr P stole much of the company's money which was received from trading debtors and as a result the company's accounts were understated and tax underpaid. As a result the company was required to pay tax under section 75(1) of the Finance Act 1965 which provided:

'75(1) Where after the end of the year 1965-66 a close company, otherwise than in the ordinary course of a business carried on by it which includes the lending of money, makes any loan or advances any money to an individual who is a participator in the company or an associate of a participator, there shall be assessed on and recoverable from the company, as if it were an amount of income tax chargeable on the company, an amount equal to income tax on the grossed up equivalent of the loan or advance.'

5. The Special Commissioners' found against the Inspector of Taxes. At paragraph 12 (page 733) they stated:

'… Mr Pittas regarded the company as his alter ego. Legally, however, the two are distinct legal persons and must be treated as such. We find that in appropriating the moneys which he diverted to his own use, Mr Pittas acted for himself, and not as an agent of the company, which, although a separate legal entity, was not represented in the transaction by anyone. Had Mr Pittas kept a record of those sums, with a view to advising the company's accountants of them when the time came to prepare accounts, there was a possibility that initially they might have had some of the characteristics of a loan or advance. This Mr Pittas did not do, however, … We are satisfied, however, that that when Mr Pittas failed to record in the company's books sums which he received on the company's behalf from those with whom it did business, he did so … deliberately, and without intention to make those sums available to the company at the time or later. There can have been no consensus between the company and Mr Pittas in those circumstances, and in our view it is not possible to regard those sums as loans or as advances by the company to Mr Pittas . We do not accept the suggestion of the Revenue that a wide interpretation should be given to those words … But even were it correct to adopt that approach we find ourselves unable to bring what were clearly a misappropriations of the company's funds within the description of a loan or advance '. [Underlining added.]

6. The Inspector appealed the decision to the Chancery Division but the decision (and reasoning of the Special Commissioners) was upheld by Goulding J. At page 736-7 he states:

'The crucial question, as it seems to me, is this. Did the company pay the money in question to Mr Pittas? He undoubtedly took it from the company's till, or from the company's debtors, but did the company pay it to him? It is of course tempting to identify an individual with a company where you have a case that is so nearly a one-man company as this is, but one cannot answer questions under this legislation by an identification of this kind, for as I have said the very basis of the scheme of taxation is the distinction between the company and those interested in it. If Mr Pittas and the Respondent could be regarded as one person, the same sums could hardly be brought into account both for corporation tax or for income tax. Nor can the outstanding share, of which Mr Pittas was not shown to be beneficial owner, be ignored. There is no evidence that its beneficial owner (whether Mr Pittas's wife, in whose name the share was registered, or some third party) consented to the taking of the money .' [Emphasis added.]
And later at page 737

… In my view an outright misappropriation of the company's money cannot be treated as the act of the company except possibly if all the corporators of a solvent company consent to it.

ATC 2093

146. The Applicants referred also to the judgment of the Full Federal Court in
MacFarlane v Commissioner of Taxation 86 ATC 4477; (1986) 13 FCR 356 ("MacFarlane") that dealt with section 108 of the Act. They contend that there is an important factual distinction between MacFarlane and Stephens in that the taxpayer and his partner, in MacFarlane, held between them all of the shares in the company, were the directors of the company, and the trial judge found that both were parties to the particular fraud being committed. In relation to MacFarlane, see in particular the judgment of Beaumont J at page 373:

"…

The income in question was the property of the company. That income was applied for the benefit of one of the company's shareholders with the acquiescence of the controllers of the company . The application of funds in this way may well have constituted a breach of the directors' fiduciary duties at least so far as the company's creditors were concerned … But whether the conduct of the company's directors was liable to be challenged as a misfeasance is a different question [emphasis added].

…"

147. As I have said, the fact that there is no evidence as to an increase in Docherty's asset value is beside the point. It is possible, as I have said, that money was needed for gambling, but there is no firm evidence as to this aspect. But if the evidence as to Borg is rejected, and the Tribunal has indeed rejected it (and in no uncertain terms), there is evidence before the Tribunal that it was Docherty who was the last person holding the cash. Each of Ms Hird and Mr Proksch recorded that when Docherty was asked who actually paid MSH he said that it was himself or Orel; (see paragraph 28 of Exhibit R6, exhibit VP3 of Exhibit R10).

148. The Respondent points out (correctly) that Stephens was decided under UK legislation where the statutory language is different. See clause 19 of RS2 as follows:

"19. The first point to be made is that the language of the UK legislation that the High Court of Justice considered in Stephens is different in its terms, referring to a situation where a company "makes any loan or advances any money to an individual", whereas sec 109C uses the expression "pays" which will include within its spectrum of meaning a simple transfer of funds. Clearly the UK legislation requires that the payment which is made has the character of a "loan or advance". There is no basis for construing the expression "pays" as limited in the manner submitted by the Applicants. It will be an unusual circumstance where the unilateral transfer of funds from a company to a shareholder will be sanctioned by a meeting of a board of directors, and even if it were, such actions would be likely to constitute a breach of a director's duty. The very mischief to which Division 7A is directed is the simple extraction of funds from a company; to limit the section in the manner suggested by the Applicants would subvert its statutory purpose."

149. In
Di Lorenzo Ceramics Pty Ltd v Commissioner of Taxation 2007 ATC 4662; [2007] FCA 1006 (5 July 2007) his Honour Lindgren J discussed at 23 to 26 the policy underlying Division 7A as follows:

"23 Prior to the introduction of Div 7A, s 108 of the Act was an anti-avoidance provision intended to prevent private companies from distributing profits to shareholders and their associates tax free in the form of loans or other payments. Generally speaking, s 108 also operated to capture amounts paid or credited to a shareholder or a person associated with a shareholder, deeming such amounts to be dividends, which would therefore be included in assessable income of the recipient under s 44(1) of the Act. The deemed dividend was not, however, subject to dividend withholding tax and was unfrankable (that is, could not carry imputation credits to allow a rebate to the recipients for tax paid by the company).

ATC 2094
24 Importantly, however, s 108 operated only when the Commissioner formed the opinion that the amount lent or paid represented a distribution of profits. In order to be in a position to form that opinion, the Commissioner needed to consider many factors and to analyse much information, which usually would not be available unless the Commissioner conducted an audit. It was believed that many amounts paid or credited that should have been assessed as dividend income were escaping taxation.

25 Division 7A was introduced by the Taxation Laws Amendment Act (No 3) 1998 (Cth). In the Explanatory Memorandum for the Bill for the amending Act, it was explained that the new measures would operate automatically rather than depend on the formation of an opinion by the Commissioner.

26 On the Second Reading Speech for the Bill, the Assistant Treasurer, Senator the Hon Rod Kemp, stated:

'The Income Tax Assessment Act 1936 is being amended to ensure that payments and loans made by a private company to a shareholder or a shareholder's associate are treated as assessable dividends to the extent that there are realised or unrealised profits in the company.'

…

150. The evidence before the Tribunal in relation to 3-D (as I have noted) indicates that Docherty and another brother, Charlie, were the shareholders during the relevant years. Clearly 3-D was controlled by Docherty who was its only director. Equally clearly, Peter and Orel were only employees of 3-D.

151. With the consent of the Applicants, these applications were heard together. The hearings turned almost entirely on whether 3-D was entitled to the deductions claimed in respect of payments alleged to have been made to Borg. The Tribunal accepts that Docherty could not reasonably, in these circumstances, be expected to give evidence to the effect that the alleged Borg payments were in fact made to some other person or persons who are not caught under Division 7A, and in other words, a person or persons who were not Docherty or any associate of Docherty. The possibility of the Tribunal finding that Borg did not exist would certainly have been within the contemplation of the Applicants' counsel, both of whom are able and experienced. It might, perhaps, with the benefit of hindsight have been more prudent to hear the 3-D case first, and then if 3-D did not succeed, to hear the Division 7A issue thereafter. But that course of action was not selected, and as I have said, these applications were heard together by consent. The result is that there is no evidence of any kind before the Tribunal as to where the monies went if they did not go to Borg (and they could not and did not), and so the onus cannot be discharged; it must be said that there was little, or no attempt, to do so. Generally, as to the onus in respect of Division 7A matters, the Tribunal refers to the recent Full Court judgment in
Epov v Commissioner of Taxation 2007 ATC 5009. As I have indicated, I cannot draw a
Jones v Dunkel inference as to the failure by Borg to give evidence since as I have noted he did not exist. But the same cannot be said of Charlie Docherty. If he was a shareholder, and if he did play any part in the running of 3-D (although there was no evidence of any sort to suggest any involvement of any kind), why did he not give evidence as to this most important transaction? The failure to call Charlie must lead to an inference that his evidence would not have been of assistance to the Applicants. I should in fairness make it clear that the content of this clause should not be construed as critical of the Applicants' legal advisers. Their decision to have the two applications run together was no doubt made for a reason, even if that reason is not apparent to me.

152.

ATC 2095

On the evidence before me, and on the basis that there never was a transaction with Borg as alleged, it is clear that Docherty treated 3-D as his own entity. 3-D did exactly as he directed; as I have noted he was its only director. His own evidence as to the fact that it was his Trust which bought the equipment must mean that Docherty did not, in relation to 3-D, need or seek the consent of Charlie, given that it would appear that payments referable to the equipment were made by 3-D, even though it was the Trust which acquired the equipment. There was, as I have said, no evidence whatsoever as to the Trust, and in particular as to the identity of its beneficiaries. Even if some of the cash which figured in this case found its way, somehow or other (perhaps through Docherty), to Charlie or, for that matter, Orel or Peter, they were all associates within section 109C of the Act.

153. Put succinctly, the Tribunal finds, as a matter of fact, that Borg did not exist and that Docherty and Borg are one and the same person. Substantial payments were channelled from 3-D to Docherty (for reasons of which the Tribunal is not aware), and this whole elaborate Borg structure was devised so as to ensure that there was an additional benefit in the form of tax deductions to 3-D. 3-D was, as I have said, controlled by Docherty who was its sole director, although he only owned half of its shares. In effect, Docherty treated 3-D as his own and took its money for his own use. I do not accept that it can be suggested that Docherty stole the money from 3-D. He was its controlling mind as its only director, and he plainly considered that he could do what he pleased in relation to 3-D. I do not consider, in other words, and to the extent that this aspect may be relevant (which is doubtful), that there is a relevant misfeasance aspect.

154. It is clear that Division 7A of the Act must apply. The Respondent has prepared calculations which indicate that he has, on the figures before him, sought to ensure that the deemed dividends assessed do not exceed the amounts available, and there was no evidence of any kind before the Tribunal that would indicate that the Respondent's calculations were in any way incorrect.

155. Mr Quinn, on the last hearing day (1 June 2007), advised me that the penalty, notwithstanding indications as to a higher percentage in some of the documents before the Tribunal, was confined to 25 percent. The circumstances are such that a penalty of this size was, on the facts, entirely justified and I do not think it proper to disturb it.

156. The evidence before the Tribunal indicates that the entire Borg/MSH transaction was concocted, and that all of the siblings and Montgomery were involved in it. The evidence presented by the Applicants was, as I have demonstrated, unsatisfactory in the extreme, and in the case of the siblings and Montgomery not worthy of credit.

157. In all of the circumstances, the objection decisions under review must be affirmed.

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Date	Item	Total	Notation made by Mrs Montgomery
15-12-99	Scaffold Sale	$16,550	'purchased'

Date cheque was drawn	Day of Week	Amount
9.07.98	Thursday	$18,500
7.09.98	Friday	$11,600
21.08.98	Friday	$3,100
27.08.98	Thursday	$14,800
23.10.98	Friday	$12,300
13.11.98	Friday	$17,000
06.12.98	Sunday	$11,500
14.01.99	Thursday	$10,500
29.04.99	Thursday	$2,047
14.05.99	Friday	$32,584
21.05.99	Friday	$13,200
11.06.99	Friday	$11,900
30.07.99	Friday	$8,900
24.09.99	Friday	$9,900
15.12.99	Wednesday	$16,550

	Answers as recorded by the ATO auditors
Sue Hird	Myself or Betty. Usually myself. No-one else would know
V Proksch	Myself or Betty - no one else deals with company monies. It was probably me

	Answers as recorded by the ATO auditors
Sue Hird	In 1998 Betty would go to the bank. After she was held up she didn't usually go. Mainly I would go to the bank
V Proksch	1998 Betty was held up at Bank So cheque mostly cashed by myself or Betty. Sometimes by Frank or Tony. But Sue said Bank indicates only account holder cashed the cheque. Jim then agreed only he or Betty cashed chqus (sic)

	Answers as recorded by the ATO auditors
Sue Hird	I usually didn't get cash out till he was coming and I paid it to him
V Proksch	Went and cashed cheque and handed it over to Tony or Frank