HUA WANG BANK BERHAD & ORS v FC of T; DFC of T v HUA WANG BANK BERHAD & ORSJudges:
Federal Court, Sydney
MEDIA NEUTRAL CITATION:
 FCA 1392
|2.||Central Provisions and the Facts about the Location of the Taxpayers' Businesses|||
|(a)||The relevant provisions|||
|(b)||Basic facts about each taxpayer|||
|Chemical Trustee Limited|||
|Derrin Brothers Properties Limited|||
|Bywater Investments Limited|||
|Southgate Investment Funds Limited|||
|Hua Wang Bank Berhad|||
|3.||The Boundaries of the Location Debate|||
|(a)||Chemical Trustee, Derrin and Bywater - common issues|||
|The corroborative witnesses|||
|Global effect of the corroborative evidence|||
|(b)||Chemical Trustee Limited|||
|The Commissioner's 18 matters|||
|(i)||Mr Gould's beneficial ownership of Chemical Trustee|||
|(ii)||The loans were all to entities associated with Mr Gould|||
|(iii)||Loans to Gould/Leaver related entities via Normandy UK|||
|(iv)||Loans via Indo-Suez/JA Investments|||
|(v)||Outright Transfers to Indo-Suez|||
|(vi)||Transfers from Chemical Trustee to City and Westminster|||
|(vii)||Chemical Trustee's investments in Vita Life Sciences Ltd via Lloyds & Casanove|||
|(viii)||Chemical Trustee's investment in Mitre Focus through Lloyds & Casanove|||
|(ix)||Transfers from Mr Gould to his charitable interests|||
|(x)||Chemical Trustee's share investments for the benefit of Mr Gould|||
|(xi)||Explicit investment instructions from Mr Gould about Chemical Trustee|||
|(xii)||Mr Gould micromanaged Chemical Trustee's reporting and banking|||
|(xiii)||Anglore's invoicing of Chemical Trustee|||
|(xiv)||Mr Gould's involvement in ASX compliance by Chemical Trustee|||
|(xv)||Chemical Trustee's investments through Perkasa Normandy Malaysia|||
|(xvi)||Chemical Trustee's borrowings from the Bank of Commerce (Micronesia)|||
|(xvii)||Funds transfers between Chemical Trustee and the Hua Wang Bank|||
|(xviii)||Meetings of directors and shareholders of Chemical Trustee|||
|Conclusions on Chemical Trustee|||
|(c)||The position of Derrin Brothers Properties Ltd|||
|(i)||Mr Gould's beneficial ownership of Derrin Brothers|||
|(ii)||Loans made by Derrin were for the benefit of entities associated with Mr Gould|||
|(iii)||Other transactions associated with Mr Gould|||
|Hua Wang Bank|||
|Tifu Pty Ltd|||
|(iv)||The Dubai Property|||
|(v)||Mr Gould's checking of financial statements and involvement in the banking of Derrin Brothers|||
|(vi)||Directors' and shareholders' meetings|||
|(d)||Bywater Investments Limited|||
|(e)||Hua Wang Bank Berhad|||
|(f)||Southgate Investment Funds Limited|||
|4.||Central Management and Control|||
|5.||Double Taxation Issues|||
|(a)||United Kingdom after 2004|||
|(b)||United Kingdom prior to and including the 2004 year|||
|6.||The Capital/Revenue Distinction|||
|7.||Capital or Revenue Account?|||
|8.||Trading Stock Issue|||
|(a)||Hua Wang Bank - Sunland shares|||
|(b)||Hua Wang Bank - Cyclopharm shares|||
|(c)||Bywater - Russell Associates|||
|10.||Chemical Trustee - Penalties|||
|11.||The Charging Orders|||
1. This case concerns taxation appeals from decisions of the Commissioner of Taxation disallowing five taxpayers' objections to a number of assessments issued by him. The taxpayers, the relevant income years in dispute and the combined amount of tax in dispute in this Court are as follows:
|Chemical Trustee Ltd||2001, 2003-2004, 2006-2007||$1,750,439.82|
|Derrin Brothers Properties Ltd||2003-2005||$3,500,294.10|
|Bywater Investments Ltd||2002-2007||$5,239,294.00|
|Hua Wang Bank Berhad||2004, 2006-2007||$2,629,907.92|
|Southgate Investment Funds Ltd||2000-2002, 2006-2007||$1,144,982.69|
2. In addition to these primary tax liabilities each of the taxpayers has been levied a substantial amount in penalties and the general interest charge. Part of the case in this Court concerns a penalty of $21,794.30 imposed on Chemical Trustee. All of the penalties imposed on the other taxpayers are not in dispute in this Court although appeals from them are pending in the Administrative Appeals Tribunal ('the Tribunal').
3. Each of the taxpayers made profits on the acquisition and sale of securities in entities listed on the Australian Stock Exchange ('the ASX') which the Commissioner has treated as income and exigible to income tax. There are eight sets of issues between the parties:
- (a) The central management and control issue. The Commissioner contends that each of the taxpayers had its place of central management and control in Australia from where he alleges that they were completely controlled by Mr Vanda Gould, an accountant. If this contention be made good, the Commissioner submits that this will entail that each of the taxpayers was an Australian resident: Income Tax Assessment Act 1936 (Cth) ('ITAA 1936'), s 6(1). In turn, this will render each of the taxpayers liable to income tax on all sources of income whether inside Australia or outside it: Income Tax Assessment Act 1997 (Cth) ('ITAA 1997'), ss 6-5(2), 995-1(1). Each of the taxpayers says that its place of central management and control was in various overseas locations (Apia in Samoa, London or Neuchâtel in Switzerland) because, summarising it somewhat loosely, this is where their directors met or where the actual decisions about the share transactions in question were made. The Commissioner, by contrast, submits these structures are entirely formal and that, in truth, it was Mr Gould who was pulling all of the strings from Sydney. The taxpayers deny this but say, in any event, that it does not matter because the issue is to be decided by reference to where the decisions of the taxpayers, as a matter of formality, were made. They deny nevertheless Mr Gould's role as a decision-maker, instead characterising him as an advisor to the taxpayers.
- (b) The double taxation issue. In the event that the taxpayers were found to be Australian residents for the purposes of Australian law then each taxpayer, apart from Hua Wang Bank, submitted that they were also resident in the United Kingdom or Switzerland. If this were accepted this then raised an issue as to whether they were entitled to invoke any of three double taxation treaties between Australia and those nations. Under the terms of those treaties they will be entitled to relief from Australian taxation if, in the case of two of the treaties, they had their 'place of effective management' in either jurisdiction. In the case of the third, the test is where they are 'managed and controlled'. In effect, a similar, although not identical, debate would then ensue as had occurred under the rubric of the central management and control issue.
- (c) The capital/revenue issue. The Commissioner submitted that the share trading which had taken place was on the taxpayers' revenue accounts. The taxpayers submitted that the shares in question were purchased as 'growth' stocks, that is to say, with the view to making profits from growth in the value of the underlying company rather than through gains from cyclical fluctuations in the price of the shares. This then formed the foundation for an argument that the profits had been made on capital account. Ordinarily, this issue might have been academic given the existence of a capital gains tax. The taxpayers involved, however, claimed that they were foreign residents and entitled to an exemption unless the shares in question had a connexion with Australia. The Commissioner denied the former and asserted the latter.
- (d) The trading stock issue. If the previous issue were decided against them and it was held that the gains made on the sale of the shares were on revenue account, the taxpayers then submitted that the shares should be treated as trading stock, being assets held for purposes of 'manufacture, sale or exchange in the ordinary course of a business': ITAA 1997, s 70-10(a). If so they were entitled to make trading stock elections.
- (e) The penalties issue. The Commissioner imposed a 75% penalty on Chemical Trustee on the basis that it had failed to lodge a return by the due date and that the return had been necessary for the accurate determination of its tax position: Taxation Administration Act 1953 (Cth) ('TAA 1953') Sch 1 s 284-75(3). Chemical Trustee denied that this provision applied where it had taken the position of not filing its return on the basis of a reasonable belief that it was not an Australian resident for tax purposes. It also submitted that the Commissioner could have assessed its income from other sources apart from its returns and that this also made the provision inapplicable. Although the Commissioner applied other penalties to each of the taxpayers these penalties are not the subject of the current proceedings (although, as already noted, appeals are pending in relation to them before the Tribunal).
- (f) The nominee issues. Hua Wang Bank and Bywater denied that they were beneficially entitled to the shares the subject of the trading activity in question and submitted that any profits which had been made were not theirs and hence not exigible to income tax in their hands.
- (g) The charging orders. Early in the proceedings, the Deputy Commissioner obtained summary judgment against the taxpayers on the basis of the uncontestable nature of the notices of assessment he had issued. He then sought to enforce these judgments against Hua Wang Bank and Bywater, and, in particular, certain of their shareholdings. These two taxpayers then contended that they did not beneficially own these shares and that the Court should not make charging orders against the shares. This raised essentially the same as question (f).
- (h) Miscellaneous issues . There were a number of miscellaneous matters about which the parties made no submissions but which seem to be open on the parties' statements of issues.
4. I deal with these issues in turn.
2. Central Provisions and the Facts about the Location of the Taxpayers' Businesses
(a) The relevant provisions
5. The basic statutory issues are generated by ITAA 1997, s 6-5(2) which provides:
'6-5 Income according to ordinary concepts (ordinary income)
(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
6. An 'Australian resident' is defined in ITAA 1997 s 995-1(1) to have the same meaning it bears in the ITAA 1936. Section 6(1) of the ITAA 1936 provides relevantly:
(1) In this Act, unless the contrary intention appears:
resident or resident of Australia means:
- (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.'
7. Before turning to what this requires it is necessary to find some facts. The facts in this case are, unfortunately, quite complex. In a global sense there are two levels. The first consists of the facts which the taxpayers allege represent the true position. The second consists of additional matters which the Commissioner submits justify the conclusion that the structures are an elaborate façade to conceal the nature of Mr Gould's dominion over them. Largely, it is easier to approach the second level only once the first has been mastered. I therefore propose to examine, in the first instance, the taxpayers' version of events. In doing so, I will leave out of account - in the main - the Commissioner's criticisms of this material. In short, I give first an account of the outer surface of what the Commissioner alleges is a façade, postponing for now an assessment of whether that is its true nature.
8. The positions of the taxpayers are not identical and they each require separate treatment.
(b) Basic facts about each taxpayer
Chemical Trustee Limited
9. Chemical Trustee was incorporated in the United Kingdom originally under the name Raybell Properties Limited. It was renamed Susally Properties Limited in 1962. It acquired its present name in 1996. As at 28 March 1996, Chemical Trustee had on issue 4,152 shares which were held in the name of Guardheath Securities Ltd ('Guardheath'). Guardheath is a company owned by the partners of a London firm of accountants, Lubbock Fine. There is no evidence of any subsequent change in this capital structure and I find that in the relevant income years (being 2001-2007) Guardheath was the owner of the whole of the share capital of Chemical Trustee.
10. Guardheath holds the shares in Chemical Trustee as nominee for JA Investments Ltd ('JA Investments'). JA Investments is incorporated in the Cayman Islands. Chemical Trustee's abbreviated accounts for the income years 1999 to 2005 record that its ultimate parent is JA Investments. I return to the topic of JA Investments in more detail below. It will suffice for present purposes to say that the records for JA Investments show that it has only one shareholder, Mr Peter Martin Borgas.
11. Consistently with Mr Borgas' shareholding, the directors of Chemical Trustee have at all times relevant to this litigation been Mr Borgas, his wife Mrs Winny Borgas and their son, Mr Timothy Borgas. The minutes of the meetings of the board of Chemical Trustee record that all of its meetings during the relevant years were held in Neuchâtel, a town in Switzerland in the French speaking canton of the same name, and were attended by Mr Borgas and his wife.
12. In the income years 2001-2007 Chemical Trustee bought and sold a large number of shares on the ASX. In all but the 2005 year it made substantial profits by doing so. The details of the share transactions involved appear at Appendix A to the Commissioner's appeal statement. The detail of the particular transactions is of little moment for present purposes. All that matters is that substantial profits were made. At issue is the tax treatment of those profits.
13. Mr Borgas gave evidence before me. He testified that he made all the commercial judgments on behalf of Chemical Trustee and that he exercised his powers as an appointed director to decide upon all of its transactions and that he did this in Neuchâtel. This evidence forms the mainspring for Chemical Trustee's primary argument that its place of central management and control was Neuchâtel.
14. The Commissioner's submission is that this evidence was false and that Mr Borgas did nothing but act as Mr Gould's cipher making no decisions about any of the taxpayer's affairs and taking his instructions entirely from Mr Gould. Chemical Trustee's somewhat convoluted ownership structure (involving as it did apparently unnecessary layers of complexity in London and the Cayman Islands) was, on this view, to be seen as material designed to obscure Mr Gould's role.
15. The assessment of that submission requires the traversing of a large amount of material mostly of a documentary nature but also involving corroborative testimony called by the taxpayers from a number of witnesses.
16. Chemical Trustee's position has always been that it was not an Australian resident for tax purposes and on that basis it did not file any income tax returns for the financial years 2001-2007. On 12 August 2010, the Commissioner issued assessments (and in one case, subsequently, an amended assessment) in which he assessed Chemical Trustee as having taxable income over those years of $6,186,526 on which was due $1,859,376.52 in income tax. On top of this he levied in each year a 75% administrative penalty pursuant to s 284-75(3) of Schedule 1 to the TAA 1953 for failing to lodge a return and thus requiring the Commissioner to assess its income himself. In every year except the first, i.e., 2001, he levied a further administrative penalty of 20% on the basis that it had been liable to pay a penalty in the preceding year.
17. The assessments were as follows:
|Year ended 30 June||Taxable income||Tax Payable||Penalty|
18. Chemical Trustee has paid all of these assessments. It objected to them on 13 September 2010 and the Commissioner disallowed those objections on 30 March 2011. It is from those objection decisions that Chemical Trustee now appeals to this Court, apart from the decisions relating to the primary tax liability for the year ended 2002, and the penalties for all years apart from 2001, which are all subject to review in the Tribunal.
Derrin Brothers Properties Limited
19. I turn then to the position of Derrin Brothers. It was incorporated in the United Kingdom on 19 May 1959 under the name Garrett Properties Limited. It changed its name to Derrin Brothers Properties Limited on 27 October 1992.
20. The shareholders of Derrin are two United Kingdom companies Guardheath (mentioned above as the shareholder in Chemical Trustee) and another Lubbock Fine entity, Lordhall Securities Limited ('Lordhall'). At all times, Guardheath has held its shares as nominee for JA Investments, the same Cayman Islands company which holds all of the shares in Chemical Trustee and which, according to the taxpayers, is controlled by Mr Borgas.
21. Lordhall holds 50 of its 1,050 shares in Derrin as nominee for JA Investments. It holds the remaining 1,000 for another Cayman Islands entity, MH Investments Limited ('MH Investments'). MH Investments was incorporated in the Cayman Islands on 5 January 1994. The sole shareholder in MH Investments was previously Offshore Nominees Limited, another company incorporated in the Cayman Islands. Since 2012 the sole shareholder of MH Investments has also been Mr Borgas. The present structure of Derrin Brothers is, therefore, as follows:
22. This is an example of what will be many exotic shareholding arrangements in this litigation.
23. The directors of Derrin were, once again, Mr Borgas and his wife although, on this occasion, not their son. The secretary was a company called M & N Secretaries Limited. United Kingdom law permitted, until 2008, a company to have directors who were other companies. From 1 October 2008, that law was changed to require there to be at least one natural person as a director. The minutes of the meetings of directors for Derrin show that, as with Chemical Trustee, all of its meetings took place in Neuchâtel, Switzerland and were attended by Mr and Mrs Borgas.
24. As in the case of Chemical Trustee, Derrin made profits on the purchase and sale of shares listed on the ASX in the 2003, 2004 and 2005 years. The share trades relied upon by the Commissioner appear in Appendix A to his appeal statement. It was not substantially in dispute that the trades had occurred.
25. Derrin, like Chemical Trustee, took the view that it was not an Australian resident for tax purposes and did not, in consequence, file any returns for the years 2003-2005. On the same day that he issued notices of assessment to Chemical Trustee, 12 August 2010, the Commissioner also served notices of assessment on Derrin.
26. These Derrin objected to on 13 September 2010. The Commissioner disallowed these objections on 30 March 2011. Subsequently, he issued amended notices of assessment on 15 June 2011. It is these amended assessments which are in issue in the appeal. They are as follows:
|Year ended 30 June||Taxable income||Tax Payable|
Bywater Investments Limited
27. Bywater was incorporated in the Bahamas on 20 June 1994. It has two shares on issue both of which are held by a company called Anglore S.A.R.L. ('Anglore') ('société à responsibilité limitée'). It is not clear to me where Anglore was incorporated, however, this does not matter. Anglore is an important actor in this case and more will need to be said of it in due course. For present purposes the following will suffice: Anglore is said to be a 'corporate services business' based in Neuchâtel. It is the principal vehicle through which Mr Borgas provides, so the parties agree, 'corporate services'. What are these corporate services? It markets itself as a 'discrete, low profile fiduciary and administration company'. It offers to provide the service of 'the incorporation of companies located in many jurisdictions throughout the western world' and, additionally, the service of 'the provision of directors and other corporate officers for such companies'. The office holders of Anglore are Mr and Mrs Borgas and a Mr Lonsdale.
28. For reasons which will be presently unclear, but will begin to make sense later in these reasons, Anglore does not hold its shares in Bywater for itself but instead for MH Investments (the same Cayman Islands company referred to above).
29. Returning then to Bywater, it appears to have had three directors, Mr Borgas and his wife and a company known as NTW Directors Inc which has an address in Nassau in the Bahamas. The corporate records for Bywater appear to include only a cashbook which records payments from and receipts into its bank account. Under the law of the Bahamas it was not required to have directors' meetings or annual general meetings and it has not done so. The cashbook is maintained at the offices of Lubbock Fine in London.
30. In the years 2002-2007, Bywater made profits on the acquisition and sale of shares listed on the ASX. The details of the trading activity alleged by the Commissioner appear at Appendix A to his appeal statement in Bywater's appeal. As a result of that trading activity the Commissioner came to the view that Bywater had made assessable income in the years 2002-2007. On 12 August 2010 (as in the case of the other taxpayers) the Commissioner issued assessments to Bywater to which it objected on 13 September 2010. The Commissioner upheld Bywater's objection in part in relation to the 2005 year but otherwise dismissed the objection. As a result Bywater has been assessed to income tax as follows:
|Year ended 30 June||Taxable income||Tax Payable|
31. It is from the objection decisions resulting in these determinations that Bywater now appeals.
32. For completeness, it should be noted that Bywater has also had imposed upon it administrative penalties. It has sought a separate review of those before the Tribunal. They are not relevant to the present case.
33. For the three taxpayers considered above it is clear that the taxpayers' case is that they were located for tax purposes (to use a neutral expression intended to encompass all of the relevant tests) either where Mr Borgas and his wife conducted board meetings or Mr Borgas otherwise made decisions or at the offices of Lubbock Fine in London where employees of that firm gave effect to instructions apparently given by Mr Borgas. In all events, it is relatively easy to follow that the basic debate between the parties is as to the respective roles of Mr Borgas and Mr Gould with some additional consideration of the role of Lubbock Fine.
34. In the case of the remaining two taxpayers - Hua Wang Bank Berhad and Southgate Investment Funds Limited - the facts are more complex. Both taxpayers had identifiable directors who were situated outside Australia but their ultimate ownership was not something the taxpayers sought very much to explore. The Commissioner contended in the case of these two taxpayers that the ultimate control was vested in Mr Gould. Another difference between these two taxpayers and the initial three is that these seem to have had a connexion with the South Pacific lacking in the case of Mr Borgas' companies which, in general, have a Euro-Caribbean flavour. Yet, as events will show, Mr Borgas is not without involvement either. With those introductory words I move then to the position of Southgate Investment Funds Ltd ('Southgate').
Southgate Investment Funds Limited
35. Southgate was incorporated under the law of the United Kingdom on 4 August 1998. In the period 2000-2007 it filed tax returns in the United Kingdom reflecting income of a modest nature (i.e. £396.00 in 2007) earned as a nominee company.
36. The shareholders in Southgate are Guardheath and Lordhall which are United Kingdom entities through which the London accountants Lubbock Fine control companies on behalf of their clients and in respect of which mention has already been made. The directors and shareholders of these two entities have at all times been either partners or staff of Lubbock Fine.
37. For whom did the Lubbock Fine entities hold their shares in Southgate? The immediate answer is that they were held on trust for IRSS Nominees (4) Limited. IRSS Nominees (4) Ltd was a Samoan company incorporated as an 'international company' under the provisions of the International Companies Act 1987 (Samoa) on 7 April 1994. IRSS Nominees (4) Ltd appears, in turn, to have held its beneficial interest in the shares in Southgate as the trustee of the LJK Nominees Superannuation Fund (Samoa). This fund is an 'international trust' registered under the provisions of the International Trusts Act 1987 (Samoa). The members of this fund are the Sydney anaesthetist and investor, Dr Joseph David Ross, and his wife Lucille June Ross.
38. There is no doubt that Southgate's directors (who were Lubbock Fine entities or personnel) had a written instruction from IRSS Nominees (4) Limited to do as Mr Gould told them. It also instructed them to open an account in Southgate's name upon which Mr Gould was to be an authorized signatory.
39. Some confusion arose about who the ultimate owners were. For reasons I later give, the situation was this: Mr Gould was providing to some of his clients an arrangement designed to minimise tax using international superannuation funds. Dr Ross was one of the clients who took part. The day-to-day administration of these structures was under the control of Mr Gould.
40. The debate between the parties was not really concerned with the issues of ownership but rather with where Southgate had its place of central management and control. Its directors' meetings appear to have been held in London at the office of Lubbock Fine. It was not suggested that Mr Borgas had a role in that process. The Commissioner's contention is that the share trading decisions were made by Mr Gould in Sydney and that Lubbock Fine's role was ornamental.
41. Under the terms of the trust deed for the LJK Nominees Superannuation Fund, the 'principal employer' was said to be LJK Nominees Pty Ltd. The shareholders in LJK Nominees Pty Ltd are Dr Ross and his wife Lucille. The company is also the trustee of the JD Ross Family Trust.
42. During the period 2000-2007 Southgate derived substantial gains and losses by the purchase and sale of shares listed on the ASX. The details of those transactions are set out in Appendix A to the Commissioner's appeal statement. There is presently no debate about the fact of these trades.
43. On 12 August 2010 the Commissioner issued assessments to Southgate for the years 2000-2002 and 2006-2007 on the basis that the gains made on the share transactions were assessable income. Southgate objected to these on 13 September 2010. The Commissioner disallowed the objections on 30 March 2011 and made adjustments to a number of the assessments by issuing amended assessments on 15 and 16 June 2011. The tax now in dispute is as follows.
|Year ended 30 June||Taxable income||Tax Payable|
44. Penalties were also imposed and an appeal in respect of them is pending in the Tribunal.
Hua Wang Bank Berhad
45. I turn then to the Hua Wang Bank Berhad.
46. In the interests of brevity I will call this taxpayer 'the Bank'. However, as will appear in due course, it is neither a bank in any ordinary sense of the word nor, despite the name 'Hua Wang' does it have the slightest connexion to China or Hong Kong. In fact, it is Samoan. It was incorporated on 17 January 1994 in that nation under the terms of its International Companies Act 1987.
47. Since 20 June 1994 there have been 250,000 shares in the Bank on issue. These have been held by Pacific Securities Inc, another international company incorporated in Samoa under the provisions of the International Companies Act 1987. Prior to Pacific Securities becoming the shareholder in the Bank it issued a bearer debenture. The terms of this debenture provided that whilst it was unredeemed the rights of the members of the company to vote or demand a poll were suspended. The ability of the debenture so to provide was sustained by the terms of its articles and by ss 15 and 57 of the International Companies Act 1987. The effect of those rules and such a debenture structure is to place control of a company in the hands of persons other than its members.
48. On 4 March 1998 Pacific Securities resolved to convert the original secured debenture to a registered secured debenture in the following name:
'J.A. Investments Ltd
c/- Moore Stephens'
Shedden Road, George Town
PO box 1782, GT
GRAND CAYMAN, CAYMAN ISLANDS'
49. This, of course, was one of Mr Borgas' companies in the Cayman Islands.
50. Although no direct issue about this arises, it appears that at an earlier time the debenture holder had been a Malaysian company, Perkasa Normandy Holdings which was based in Kuala Lumpur. It was the holding company for the Normandy Malaysia Group whose managing director was Mr Daud Bin Yunus. Mr Yunus testified before me.
51. The register of directors and secretaries for the Bank reveals several individuals over the period 2000 to 2007 and two companies, Westco Directors Ltd and Westco Secretaries Ltd. All the individuals, save one, were persons employed by another entity, Asiaciti Trust Samoa Ltd in Samoa. Asiaciti Trust Samoa Ltd in turn is based in Apia and one of its beneficial owners is Mr Graeme Briggs. Mr Briggs is the group managing director of Asiaciti and, apparently its 'founder' as well. Asiaciti is an international trustee and service provider and its services apparently include the provision of international companies, trusts, trustee services and international tax planning. Mr Briggs was the other person named as a director of the Bank. Westco Directors Ltd was a member of the Asiaciti Group. All of the persons authorized to act on its behalf were or had been employees of Asiaciti Trust's Samoan office.
52. By and large the directors of the Bank met in Apia in Samoa. As I have said, the Bank was not a bank in usual parlance. Instead it was an 'offshore bank' under the terms of the Off-Shore Banking Act 1987 (Samoa). It was granted a 'B' class licence as such on 20 June 1994 by the then Finance Minister of Western Samoa. At all relevant times it has maintained that licence. Although I will return to this in more detail later, the basic feature of an offshore bank under Samoan law is that none of its customers may be resident in Samoa. As will appear, in due course, the 'customers' of the Bank were all clients of Mr Gould.
53. During the income years 2004 and 2006-2007 the Bank made profits on the purchase and sale of shares listed on the ASX. The fact of these transactions is not in dispute. What is in dispute is the issue of whose transactions they actually were and the issue of where the Bank had its place of central management and control. The Bank contends that some of the profits on which the Commissioner sought to impose tax were generated on the sale of shares which it was holding on trust for others. Consequently, those profits were not liable to income tax in its hand. For his part the Commissioner submitted that the Bank had failed to prove this. On the question of central management and control a number of the Bank's directors were called. I will not attempt to summarise their evidence at this stage other than to observe, neutrally, that none purported to suggest that it was they who were the original authors of the Bank's management decisions, which it was accepted came from Mr Gould. The Bank submitted that they nevertheless each discharged the office of director in Apia. The Commissioner submitted that they were window dressing.
54. On 12 August 2010 the Commissioner issued assessments to the Bank. Following objections these assessments were varied as follows:
|Year ended 30 June||Taxable income||Tax Payable|
55. It is from these determinations that the Bank now appeals. The Commissioner has also imposed administrative penalties and an appeal from those is pending before the Tribunal.
3. The Boundaries of the Location Debate
56. It was the Commissioner's contention that all five taxpayers were conducted by Mr Gould. Whilst considerable effort had been expended in trying to make Chemical Trustee, Derrin and Bywater look as if they were conducted from Neuchâtel or London this was a deception serving only to mask the true role of Mr Gould as the owner and controller of these entities. Evidence given by Mr Borgas and members or employees of Lubbock Fine that it was Mr Borgas who was the owner and who made the relevant decisions was to be rejected.
57. A similar situation obtained in relation to the affairs of the Bank and Southgate. The Commissioner contended that regardless of who owned Southgate, it was Mr Gould who was running it. The interposition of the Lubbock Fine entities was, once again, window dressing to conceal the control of Mr Gould. Insofar as the Bank was concerned the same result applied. The directors provided by Asiaciti in Asia were puppets who did as Mr Gould told them.
58. The Commissioner submitted that the question of central management and control was a factual one and the facts would show overwhelmingly that it was Mr Gould who was running these taxpayers and doing so from Sydney.
59. The taxpayers, for their part, whilst not admitting Mr Gould was the ultimate owner and in control of the taxpayers, did not address any submissions as to why the Commissioner's submissions on this issue ought not to be accepted. Their principal focus was instead on the idea that the directors of all of the taxpayers, whilst perhaps heavily influenced by Mr Gould, nevertheless still applied their minds to the discharge of their respective offices. This fact, together with a number of other factors such as the place of each taxpayers' incorporation, meant that the Court should not conclude that they had their place of central management and control in Australia. Support for this view was said to be discernible in, inter alia, the reasons of Gibbs J in
Esquire Nominees Limited v Commissioner of Taxation (1973) 129 CLR 177.
60. The question of central management and control is a factual one. For the reasons which follow I am satisfied that the directors of the taxpayers exercised no independent judgment in the discharge of their offices but instead merely carried into effect Mr Gould's wishes in a mechanical fashion. The taxpayers' places of central management and control were in Sydney. I turn first to the common issues arising with Chemical Trustee, Bywater and Derrin.
(a) Chemical Trustee, Derrin and Bywater - common issues
61. These taxpayers submitted that no disposition of money or other assets of theirs ever took place without the express authorization of Mr Borgas or some act by him that purported to be on their behalf. They gestured, by way of example, to three sets of activities to make good this general point. These were:
- (a) the placing of orders with the stockbroker Bell Potter;
- (b) the transmission of signed letters on their letterheads; and
- (c) oral instructions given to staff at Lubbock Fine.
62. The testimony of Mr Borgas given in chief provided support for this view. At T1009 he gave this evidence about his role:
'MS SEIDEN: And where did the idea come for the beneficiary? The idea came from discussions that I have had with - or that I had with Mr Vanda Gould.
Now, you've mentioned that Chemical also has some stock market activities? Yes.
All right. Could you explain to the court what your investment criteria is? Yes. Very simply, it is capital growth through long-term investment in the stock in a particular company.
And who makes the decisions for Chemical Trustee about buying and selling shares? I do.
How do you go about making the decision? The - the decision is based on advice that I receive from people such as Mr John Leaver, Mr Vanda Gould, stockbrokers, for example, the late - one - one person in particular who was always very helpful is the late Jamie Saba of Wilson HTM, Ted Cod [sic] of Bell Potter. So I have a - and - and even sometimes suggestions are passed to me by Hasmukh Vara of Lubbock Fine in London, I mean, because they are quite close to the goings on in the stock market, and - but, having - having assembled the basic information - all right, so John Leaver has made a suggestion to Vanda - a recommendation to Vanda which is passed on to me, then I might - I might go back and check, for example, with Jamie Saba, "Have you got any input on this possible investment?" So it's - the - all right. The recommendations come from those people - people such as those, but the final decision about making the investment is mine.
All right. Once you've made a decision about a particular stock, what are the mechanics for executing the transaction? I send a - just imagine - all right. We're talking about a buy order. I send a fax or email to the broker confirming that we wish to purchase x number of stocks in that company, and - or at your discretion, or - anyway, if prices are mentioned, that will be mentioned. So I send a complete set of instructions to the broker. The broker - and I also send a copy of those instructions to Hasmukh Vara at Lubbock Fine in London. Once the order is completed, and it may not necessarily be completed in one fell swoop, it may be done in different stages, because the price that we've indicated may be fluctuating a little bit. Anyway. Once the order has been completed, the broker then sends a contract note to both Hasmukh Vara in London and to me in Neuchâtel. Hasmukh Vara is then responsible for ensuring that the funds that are due for settlement on that particular contract note are paid within the time stipulated on the contract note.
And how does he effect the payment? What's the mechanics for that? Well, let's take a company like Chemical Trustee as an example. All right. Chemical Trustee has his bank account, and the authorised signatories on the bank account are myself, plus any two of the equity partners in Lubbock Fine in London. That's just a purely practical measure. So when the time comes for him to settle, or to - to pay for the shares that have been purchased, he will then prepare the bank account - the bank pages, and, in normal circumstances, will have those signed by two of the equity partners within Lubbock Fine, rather than the papers being transmitted to me in Neuchâtel.
All right? But I - I do stress that I - I do have the power to sign on the account.'
63. Further, the taxpayers submitted that Mr Borgas' testimony was corroborated by the testimony of the following individuals:
- (a) Mr Codd, a stockbroker with Bell Potter;
- (b) Mr Yunus, an investment portfolio advisor, who also had dealings with Mr Borgas;
- (c) Mr Vara, an accountant at Lubbock Fine;
- (d) Mr Gibbs, a client advisor at Bell Potter;
- (e) Mr Paul Watson, the regional director of a Christian group called Ellel Ministries; and
- (f) Mr Lee Facey, the auditor of Chemical Trustee.
64. They also submitted that Mr Borgas' testimony was corroborated by statements which were made by a deceased man, Mr Jamie Saba, who had been a stockbroker at Wilson HTM. I assess this evidence below at  and following. As will be seen, I either do not accept the evidence given by these witnesses or I find that they were deceived by Mr Borgas.
65. The taxpayers also submitted that Mr Borgas' version was corroborated by a large volume of documentation. There are literally hundreds of these documents but a letter of 23 July 2003 from Chemical Trustee to Lubbock Fine will serve well enough as a general example:
'Mr. Hasmukh Vara
Messrs. Lubbock Fine
Russel Bedford House
250 City Road
London EC1V 2QQ
(original by post)
23rd July 2003
Re: Chemical Trustee Limited
[instruction already given from fax [initialled] 28/7/03]
Please accept this letter as your authority to advance AUD 1,000,000. - to Lloyds & Casanove Investment Partners Limited for the purposes of acquiring a further AUD 1,000,000. - worth of convertible notes in Vita Life Sciences Limited.
I look forward to hearing from you in the usual way.
Peter Borgas, Director
Lubbock doc.5 Word'
66. In general, almost every transaction in which these three taxpayers appear to have engaged is supported by a letter signed by Mr Borgas. Viewed in isolation this material certainly makes it appear that Mr Borgas was making the decisions for them.
67. I am satisfied that Mr Borgas' evidence about this was false and that the document trail generated by Mr Borgas is false too. All of these taxpayers' decisions were made by Mr Gould and Mr Borgas' role was to make it appear that he had transacted the business on their behalf. The documents which have been generated to corroborate Mr Borgas' evidence are designed to give the impression that Mr Borgas was the decision-maker and that impression is false.
68. But if that be so, why it might be asked would Mr Borgas obey Mr Gould's instructions when it was Mr Borgas who owned these taxpayers through JA Investments and MH Investments in the Cayman Islands? The answer to this question came early in the trial when documents were tendered which showed that it was Mr Gould who owned JA Investments and MH Investments and that Mr Borgas' ownership of them was a front.
69. This point, therefore, provides a convenient juncture at which to consider the role of JA Investments more closely. It was incorporated on 28 January 1994 in the Cayman Islands. Initially, it had two members, a Mr Douglas and a Mr Bowring. In May 1997 they ceased to be members and were replaced by Mr Parker. On 11 April 2003 Mr Parker, as the sole member, resolved to replace the existing memorandum and articles of association with a new set.
70. Article 3 then provided:
'3. The subscribers to the Memorandum of Association and such other persons as are admitted to membership in accordance with these Regulations shall be the members of the Company. No person shall be admitted as a member of the Company unless he is nominated in writing by the Appointor or after the death of the Appointor, his legal personal representatives (and the survivors and survivor of them) at the date of his death but the Appointor shall not be entitled to nominate himself. Every person who wishes to become a member of the company shall deliver to the Company an application for membership in such form as the Directors may require signed by the applicant and accompanied by the requisite nomination, and on receipt of same by the Company the applicant shall be admitted to membership.'
71. And Article 1(b) defined 'the Appointor' to be:
'the person or persons nominated as such by instrument in writing signed by the members and deposited at the Registered Office of the Company'
72. There is no evidence that such a document was ever lodged and there is some evidence that it was not. I will return to this topic below. Three days later on 14 April 2003 Offshore Nominees applied to become a member of JA Investments. Article 3, of course, required a written nomination by 'the Appointor'. On 14 April 2003, Mr Gould executed a nomination document in these terms:
'J.A. INVESTMENTS LTD.
NOMINATION OF MEMBER
I, MR, VANDA RUSSELL GOULD OF 2 DARLING STREET, CHATSWOOD, NSW, AUSTRALIA being the Appointor under the amended and restated Articles of Association of J.A. INVESTMENTS LTD., HEREBY NOMINATE the undermentioned as a Member of J.A. Investments Ltd. pursuant to Article 3 of the amended and restated Articles of Association of J.A. Investments Ltd.:
Offshore Nominees Ltd.
P.O. Box 1982GT
Dated this 14th day of April, 2003
Vanda Russell Gould'
73. This suggested that Mr Gould regarded himself as the appointor. Mr Borgas appears to have had the same view. On 21 April 2003 he executed the following document:
'J. A. INVESTMENTS LTD.
Written Resolutions of the Sole Director of the Company adopted
in accordance with the Articles of Association of the Company
APPOINTMENT OF NEW MEMBER
IT WAS RESOLVED that the application for membership duly signed by the authorised signatory of Offshore Nominees Ltd. accompanied by the requisite nomination by the Appointor, pursuant to Article 3 of the Company's Articles of Association, be accepted and that Offshore Nominees Ltd. be and is hereby appointed as a Member of the Company with immediate effect until such time as he may resign or be removed or otherwise disqualified in accordance with the Articles of Association.
RESIGNATION OF MEMBER
IT WAS RESOLVED that a Letter of Resignation from Jeffrey M. Parker as a Member of the Company dated 14 April 2003 be accepted, such resignation to take immediate effect.
Peter Martin Borgas
Dated: 21st April 2003'
74. Mr Borgas signed this as 'director'. It appears he became the sole director of JA Investments in May 1997. Mr Borgas gave evidence that Mr Gould had been the appointor since 1997. This exchange occurred during his cross-examination by Mr Fagan SC for the Commissioner:
'MR FAGAN: Well, now going back to article 3 then, which was page 118. Certainly from when you became a director on 22 May 1997, Mr Gould was the appointer for the company, wasn't he? Yes.
And as long as you have known anything about the company, which is up until to date from whenever you started to have any connection with it, he has always been the appointer, you've never known of any other? No.'
75. The Commissioner submitted that I should conclude that Mr Gould had been the appointor since 1997 and that it should be inferred that the articles had earlier contained some provision similar to the version which was put in place in April 2003. The taxpayers submission about this so far as it concerned JA Investments was in these terms:
'50. It is a matter for this court how many discrete factual findings the court proposes to make about the numerous collateral matters that the Respondent has raised, such as: the ownership of JA Investments and MH Investments, the significance (if any) that Peter Borgas was in the habit of describing inter-company payments as 'management fees', and Peter Borgas's level of knowledge of the internal operations of the Hua Wang Bank. The court may wish to refrain from making findings on these collateral points given that:
- (a) Many of the matters canvassed by the Respondent in cross-examination were not particularized by the Respondent prior to the hearing and related to other entities that were connected to the Applicants only tangentially;
- (b) Many of these matters have only scant relevance to Central Management and Control, which has always been assessed on an entity-by-entity basis rather than globally; and
- (c) Each of Vanda Gould, John Leaver and Peter Borgas are facing criminal charges.'
76. I regret that I must reject the proposition that the question of Mr Borgas' ownership of JA Investments is a collateral matter. It is central. Turning to the points raised by paragraph 50(a)-(c) as to why the Court ought not to consider these issues, I confess some confusion. I can well understand that a want of particularization, for example, could provide a basis for submitting that a case was not open to be pursued but I did not apprehend that this was what was contemplated in (a). If it was, however, it was clear from the moment the Commissioner sought to tender this material where the case was going. The most extensive objections were advanced as to why the material should not be received. Thereafter, the taxpayer did not contend - nor could they have contended - that it was not open to the Commissioner to seek to prove that Mr Borgas was a puppet. Accordingly, if (a) is an argument that the case is not open, I reject it.
77. As to (b), I do not accept that Mr Borgas' ownership of JA Investments is of 'scant' relevance to the question of central management and control. If Mr Borgas was lying about his ownership of JA Investments this must cast doubt upon the veracity of his evidence that he was making the decisions for Chemical Trustee. Why would he be making decisions in respect of a company which was not his? And why, if he was making these decisions, did he lie about the ownership structure? Observations of that kind well-show that the proposition that this material was of 'scant relevance' is, with respect, misconceived and symptomatic of a total divorce from reality which suffused much of the taxpayers' case.
78. As to (c), the charges have since been dropped. No application was made to me to stay these proceedings whilst the criminal proceedings were on foot. I am not prepared to read (c) as a subtle suggestion that I should do so now. Even if that were wrong, the dropping of the charges would mean that there remained no reason not to proceed.
79. In those circumstances, I conclude that there was a position of Appointor under the articles of JA Investments from 1997 onwards and that person was Mr Gould. Further, I conclude that there was a provision in the form of Article 3 before the new articles were adopted since the existence of the position would make no sense without such an article.
80. The effect of Article 3 was that it was Mr Gould who could control the affairs of JA Investments by appointing additional members. Further, Article 43 provided that the members could remove any director and Article 24 made clear that the members could appoint directors. This structure delivered complete control of JA Investments to Mr Gould, at least as a matter of legal theory.
81. That theoretical capacity was reflected in indisputable reality in the terms of a deed executed by Mr Gould dated 31 August 2005 with Offshore Nominees. Recital A provided that:
'The Appointer [Mr Gould] has a Company with the name of J.A. Investments Ltd. (hereinafter called "the Company") to be registered in the name of one or more of the Nominees [Offshore Nominees].'
82. And Recital B provided:
'[Offshore Nominees] are acting solely as Nominee for [Mr Gould] with respect to the said shares.'
83. These recitals suggested a complete subordination of Offshore Nominees to the will of Mr Gould. Clause 2 conveyed the situation with respect to ownership:
'[Offshore Nominees] hereby declare[s] that [it] hold[s] the said shares in the Company together with all dividends, bonuses and interests therein of behalf of [Mr Gould] and will deal with the said shares as [Mr Gould] may from time to time direct.'
84. It could not be plainer what the effect of these clauses was. In truth, they merely reflected the inevitable working through of what the powers of Mr Gould were, and always had been since 1997, under the articles.
85. Mr Borgas gave evidence that he was the beneficial owner of JA Investments at T1013:
'Q: ... Just taking JA Investments Ltd for the moment, who is the beneficial owner of JA Investments?
A: I am.'
86. This testimony left Mr Borgas with the challenge of explaining the role of Mr Gould as 'appointor' under the articles and, of course, the terms of the deed, which appeared to recognize Mr Gould's beneficial ownership. His first attempt to do so involved an assertion that it was all to be explained as a question of estate planning. At T1013-1014 he gave this evidence in chief when questioned by Ms Seiden SC, appearing for the taxpayers:
'Could you explain to the court why there is an appointer? Yes. Because there are companies within - I - I will continue to call them the group companies unless you - you consider that inappropriate - but there are group companies such as Chemical Trustee which hold money for third parties. Now, the appointer: his role is to step in in the event of my death so as to ensure that the parties who are owed money, or have other assets that are held on a nominee basis, receive those assets back in the administration of my estate, and the appointer is responsible for ensuring that nominee assets don't go with my estate but go back to the party for whom they're held on a nominee basis.
All right. And who is the appointer? Mr Gould. Vanda Gould.'
87. As the Commissioner pointed out in his written submissions there are at least four reasons why this cannot be correct.
88. First, Article 3 cannot operate this way. It does not deal with the situation of Mr Borgas' death. If Mr Borgas were to die nothing in the articles of JA Investments imposes any obligation on Mr Gould to ensure that assets held by Mr Borgas on a nominee basis do not pass to his estate.
89. Secondly, Article 3 achieves a dominion over Mr Borgas' position during his life which is unnecessary for the suggested purpose.
90. Thirdly, if the stated purpose were to be achieved by Mr Borgas under the articles it would make more sense for him to have been the appointor himself under Article 3.
91. Fourthly, Mr Borgas' version of events is inconsistent with the terms of the deed of 31 August 2005. That deed makes Mr Gould the beneficial owner which is inconsistent with Mr Borgas' contention that he was the owner.
92. After Mr Borgas gave his evidence on 10 October 2013 he returned the following day to continue his cross-examination. At that time he gave an entirely different account of why he was the beneficial owner. This time he contended that Article 1(b) required the appointor to be appointed in writing and that there was no written instrument appointing Mr Gould as such. Consequently, so Mr Borgas testified, Mr Gould was not the appointor. The cross-examination proceeded this way:
'MR FAGAN: Well, what is it that you want to say, Sir, about 1[b]? I want to say that I - I know that you have received a whole series of documents from the Cayman Islands. In those documents, was there a document nominating an appointor pursuant to 1[b] for both JA Investments and MH Investments?
Well, I'm not going to answer your question, Sir. I'm just asking you questions and getting answers from you. Now, if all you have to say with respect to 1[b] is to ask me a question, well, that's the end of it. But you have - you agree that you told us yesterday that from - throughout your involvement with JA and MH, Mr Gould has been the appointor, didn't you? No. No.
Well, you did tell us that yesterday, didn't you? In the sense - in one sense that we were talking about within a certain interpretation. There - to the best of my knowledge, recollection, there is no document in existence that complies with the provision of 1[b].
Well, whether there's a document or not, you did tell the court yesterday on your oath that Mr Gould had been the appointor in respect of both companies throughout the period of your involvement with the knowledge of them, didn't you? For the purpose of dealing with the reimbursement of people to whom group companies owed moneys in the event of my death. But I did not - and if I did imply - say I withdraw what I said about Mr Gould being the appointor having read clause 1[b].
You would like to escape from those answers that you gave yesterday now, would you, on the basis that you would resort to the requirement in the articles that there would be an instrument of appointment and that you think the Commissioner doesn't have one? Yes.
Is that what you would like to do? Well, that's - that's right.
Yes. And the problem with that, Sir, is that what you said yesterday was that Mr Gould was chosen as the appointor because of years and years of trust that you had with him? In relation, Sir, to acting as a form of protector, if I can use that expression, in relation to the repayment of parties to whom assets or moneys were owed from the group companies.
Well, you introduced there the word "protector" but the questions you-? Yes, because I think - I think to describe the role that I was trying to get - the role of Mr Gould that I was trying to get across to you yesterday is better described as a protector than as an appointor having regard to the very specific provision of clause 1[b] of the articles of association.'
93. This evidence followed from an invitation of the cross-examiner, Mr Fagan SC, at the end of the previous day to Mr Borgas to have a look overnight at the articles of, inter alia, JA Investments.
94. This explanation required Mr Borgas to say that his evidence that Mr Gould was the appointor given the previous day was wrong. His evidence then became that Mr Gould was a 'protector'; a position having no existence under the articles and to which I can ascribe no rational content.
95. This new evidence was again directly contradicted by the terms of the deed of 31 August 2005 which was signed by Mr Gould and which recited in terms permitting of no uncertainty that Mr Gould was the appointor. It was also contradicted by Offshore Nominees' application for membership of JA Investments which attached a form signed by Mr Gould 'as Appointor' consenting to Offshore Nominees becoming a member and which application said 'Attachment to this application is the requisite nomination form signed by the Appointor'. Mr Borgas signed the resolution approving Offshore Nominees'application, as extracted above at .
96. Mr Borgas was taxed by the cross-examiner about three of these four documents. All that Mr Borgas could say was that Mr Gould had not been appointed in writing.
97. I am unable to accept Mr Borgas' evidence about his beneficial ownership of JA Investments. It was directly contradicted by the documents and was incoherent. Mr Borgas was not the beneficial owner of JA Investments and did not control it.
98. Mr Borgas' evidence about this persuaded me that he was a witness who was willing to lie on oath in a most discreditable way.
99. The dishonesty of Mr Borgas is borne out by another matter. On 29 January 2009 and 3 February 2009 the ATO began the process of information gathering in relation to entities connected to Mr Gould and Mr Borgas. On 6 February 2009 Mr Gould executed an extraordinary document in these terms:
'WRITTEN RESOLUTION of the sole Member/Appointer/Beneficiary of the Company passed as at the 6th day of February 2009 and made pursuant to the Articles of Association of the Company, which resolution shall be as valid and effective as if the same had been passed at a meeting of the sole Director of the Company duly convened and held at Neuchatel, Switzerland on the 6th February 2009 THAT, I, Mr Vanda Russell Gould hereby acknowledge being the sole appointer of the Nominee Agreement held between the Company and Offshore Nominees Ltd, sole Member of the Company dated the 31st August 2005 THAT it is hereby authorized to cancel such Nominee Agreement with immediate effect, AND THAT Mr Peter Borgas be accepted and appointed as the Sole Member of the Company with immediate effect as in the herein attached Director resolution, hereby being made part of the corporate minutes of the Company.'
100. On the same day Mr Borgas resolved on behalf of JA Investments to transfer Offshore Nominee's share to himself. Before doing so he wrote to the firm who handled the paperwork for JA Investments in these terms:
'I have your fax of yesterday about outstanding fees for JA. I shall deal with this in the very near future.
In the meantime, I need your urgent assistance in relation to the transfer of the issued share in JA. I attach a copy of the share register and would be grateful if you would arrange for the share now held by Offshore Nominees Ltd. to be transferred to me. Mr. Gould knows about this and has agreed to the transfer.
As I say, the share should be transferred to me i.e. Peter Martin Borgas, Port Roulant 30, 2000 Neuchatel, Switzerland.
The matter is important and I hope that you will be able to deal with this before the end of the week. Once the transfer has taken place, please let me have (by fax or email) a certified copy of the share certificate in my name together with a certified copy of the up-dated share register.
(emphasis in original)
101. The broker who conducted trading on behalf of the taxpayers was Bell Potter and it received one of the notices sent on 29 January 2009. I infer that this was reported by Bell Potter to Mr Borgas. This flurry of activity by Mr Borgas and Mr Gould was an attempt to hide the truth.
102. My rejection of Mr Borgas' evidence that he was the beneficial owner of JA Investments is supported by some matters showing its use by Mr Gould as his own vehicle. These related to donations made to religious organizations apparently organized by Mr Gould. On 19 January 2007 Austrac records show that JA Investments transferred $150,000 to the 'Church Army in Australia'. On 24 January 2007 the Church Army issued a receipt to Mr Gould and his wife for that amount. The receipt formed part of a letter from the Church Army's national director. It read:
'Dear Vanda & Debbie,
Thank you for your gift to Church Army Australia. Your ongoing support is vital to ensure we can continue and grow our ministries in 2007, reaching the least, the last and the lost.
We truly appreciate your support of our mission to reach the darkest places in Australia for Christ - a dream we cannot even begin to realise without the generosity of donors such as you.
I hope you feel part of this mission, as you certainly are, and will continue to pray with us on this journey.
Gods richest blessings.'
103. Mr Borgas gave some evidence trying to explain other donations apparently made by companies alleged to be controlled by Mr Borgas to religious bodies associated with Mr Gould. This he did on the basis of what he said was their shared common faith and as a token of appreciation for all of the 'help and assistance' he had received from Mr Gould. I have no doubt Mr Borgas was making this up.
104. Nor was this the first time that Mr Gould had made such a donation. A receipt was in evidence issued by the Church Army for $106,000 on 1 January 2006 to Mr and Mrs Gould. In May 2006 Mr Gould subsequently corresponded with the Church Army in these terms:
I confirm that the substantial donation arranged by me in December 2005 of $106,000 was for the purpose of funding projects in 2006 as set out in your funding request letter. You will no doubt recall the concerns I expressed about some of the proposed applications of those funds in 2006.
May God bless you in all you are seeking to do.'
105. This shows that Mr Gould was certainly expressing sentiments consistent with control in respect of the donation of $106,000. There is no evidence that that donation came from JA Investments so this letter does not show, directly in any event, that the donation of $150,000 which was made by JA Investments was as a result of Mr Gould's control. But it does show that Mr Gould was a donor to the Church Army. The receipt for the $150,000 donated on 19 January 2007 is evidence of a fairly direct kind that Mr Gould caused that donation. His history of donating to the Church Army, the receipt, the fact that Mr Gould was the true owner of JA Investments and my conclusion that Mr Borgas was lying about his role in relation to it lead me to conclude that it was Mr Gould who arranged that the donation of $150,000. This merely reflected the fact that JA Investments and its assets belonged to him.
106. There is further evidence of Mr Gould's use of JA Investments as his own. On 22 January 2007 JA Investments transferred to the Mary Andrews College $100,000. It issued a receipt dated 22 January 2007 to 'Vanda & Debbie Gould'.
107. On the 16th day of the trial the Commissioner read the affidavit of Archdeacon Arline Jarrett. Between 1985 and 2008 Archdeacon Jarrett was the principal of Mary Andrews College which is an evangelical training college for women. She gave evidence that Mrs Debbie Gould had been a student at the college and had become a member of the college's committee. She said that whilst a student of the college she had discussed with Mrs Gould the college's financial needs. Mrs Gould had offered to ask her husband, Mr Gould, to assist the college with funding. Following these discussions, Mr Gould started to donate money to the College and the amounts involved were significantly higher than those to which the College was accustomed. In Archdeacon Jarrett's view, Mr Gould was the College's most significant financial supporter and his efforts made a substantial difference to it. She was able to recall that the largest donation he made was $100,000 which I infer was the payment made on 22 January 2007 by JA Investments.
108. No objection was taken to the affidavit of Ms Jarrett being read and she was not cross-examined. I emphasise that this occurred on the 16th day of the trial (11 October 2013). Although Mr Gould was subsequently arrested during the course of the trial this had not occurred by this stage.
109. What can one make of this evidence? Only this: it shows on the balance of probabilities that Mr Gould used JA Investments to donate $100,000 to the College as his own money. In turn, this provides powerful corroboration that what the corporate records of JA Investment show - viz Mr Gould's actual total control - accords with the reality.
110. The finding I make is that the true owner of JA Investments and the person in actual control of it was Mr Gould. I further find that Mr Borgas did nothing in relation to the affairs of JA Investments other than give effect to Mr Gould's will.
111. So much for JA Investments. As already noted, JA Investments owned Chemical Trustee through the nominee structure involving Guardheath. One puzzling aspect of the case is why this double layered, multinational structure existed at all. At T1035-1036 Mr Borgas was asked this precise question. He gave the following evidence:
'Why did you want the shares in Chemical Trustee to be held beneficially for, or in [sic] trust for, JA, rather than just on trust for you or for Anglore, or for some other entity in Switzerland that you could control? Why did you want them held for a company in the Cayman Islands? Because that company in the Cayman Islands is a company which I owned beneficially.
Yes. Well, you own other companies beneficially? Indeed.
So why did you want it - why did you want that one? Why? Without wanting to be facetious, it sounded - it seemed like a good idea at the time, and a sensible way of putting the position, or dealing with the position, as it should - it should have been dealt with.
A good idea for what purpose, to have - ? Well -
shares, ultimately, held by a company in the Cayman Islands, administered by FCM? For what purpose? I really, really don't recall. We're going back to '98. And I cannot give you any explanation of the thinking that occurred at the time that this '98 nominee deed was put into place.
And the answer would be the same in relation to Bywater, would it, in relation to which we're going back to 1994, that you just can't recall why it was a good idea? No.
Well, although it does go back to those dates, it's not as if nothing has happened in the meantime, Mr Borgas. These entities have been there ever since. And you say that ever since, over a period of about 15 years, you've owned them and controlled them, and they've been yours. Now, having regard to that 15 year history, can't you tell me why you ever set it up in the first place? No, I cannot recall.'
112. If Mr Borgas truly beneficially owned JA Investments he would have the answer to this. In my opinion, the reason he could not remember is because he never knew the purpose of the structure since it was Mr Gould's.
113. Mr Borgas' evidence about his control of JA Investments is also quite inconsistent with the manner in which the trial before me was conducted. At stake in the case of these three taxpayers was around $14 million in tax and the general interest charge. Mr Borgas did not arrive from Switzerland until the end of the applicants' cases. Three hearing days had to be vacated whilst the Court anxiously awaited his arrival from Switzerland. Up until his arrival, he was not present to give instructions during the applicants' case. Of course, there is the telephone. But if Mr Borgas had been giving instructions for the running of these appeals by such or other equivalent means, he displayed a remarkable ignorance of what had been going on in the case prior to his arrival. I return below to deal with the position of the Bank. As something of a prelude it may be noted that whilst Mr Borgas claimed to own that bank through JA Investments' ownership of the bearer debenture he was completely unaware of who its directors were. The director of the Bank was Westco Directors Ltd and its directors were Mr Carran, Ms Nicolson and Mr Hanning. Each was called by the applicants in the case. This remarkable exchange occurred at T1057.1 - 1057.17:
'MR FAGAN: Those individuals whose names I mentioned earlier, who I said had been resident directors of Hua Wang Bank, Mr Carran, Ms Nicholson and Mr Hanning, they were, I correct myself, in fact directors of a company called Westco Directors, and it in turn was a director of Hua Wang Bank. Did you know of that arrangement? Look, I - I can't remember, but may I ask you a question? Where they were resident, where they were located, in Samoa?
That's what I'm putting to you? Well, I don't know.
Okay. Did you know that those people, Bede Carran, Ms Nicholson and Mr Ross Hanning, were called as witnesses in this case? No.
You weren't told by your legal representatives? No.
- that they would be called in support - ? No.
- of the case for your entity, Hua Wang Bank? No, I was not told that.'
114. I do not think it is plausible that if Mr Borgas were truly in control of JA Investments he would not have had some idea of who the witnesses in his own case were.
115. In truth, Mr Borgas did not know what was happening in the case because it was not his case but Mr Gould's. So much became apparent towards the end of his cross-examination. At the close of the second last day of that cross-examination this exchange occurred:
'MS SEIDEN: Your Honour, I understand there were some travel plans. So I'm not sure how long my learned friend intends to be, and I know it's obviously the convenience of the court, but -
HIS HONOUR: Yes. Were you off somewhere tomorrow, Mr Borgas?
THE WITNESS: Well, I was hoping to catch a plane out back to Europe tonight.
HIS HONOUR: Tonight?
THE WITNESS: But - I mean, looking at the time, I think I have probably missed that, anyway.
HIS HONOUR: All right. Well, in that case, will you be inconvenienced if we regroup here in the morning for a brief period?
THE WITNESS: I'm sorry, your Honour, I
HIS HONOUR: In that case, will you be inconvenienced if we regroup here in the morning for a brief period?
THE WITNESS: Well, yes. I would be inconvenienced, but I don't have much of a choice, I think, your Honour.
HIS HONOUR: Is Mr Herman taking care of your travel arrangements?
THE WITNESS: No, that is being dealt with through the office of Mr Gould.
HIS HONOUR: I see. All right. Well, we will adjourn here until 10 tomorrow.'
116. It is more than passing strange that Mr Gould should be looking after Mr Borgas' travel arrangements. The inference I draw is that the litigation was being conducted by Mr Gould for Mr Gould and Mr Borgas' role was to turn up when requested. Although Mr Borgas claimed that he was the ultimate source of instructions for the taxpayer there is no prospect that this could be true. An attempt by me to elicit from the taxpayers' representatives during closing submissions where their instructions were coming from was politely declined. I infer that evidence from the taxpayers' solicitors about the source of their instructions would not have assisted their case on the role of Mr Borgas.
117. Essentially the same conclusion follows in the case of MH Investments. Under its articles from 2002 Mr Gould was the appointer and I find that he had been the appointor before that time too. There is the additional problem of an agreement dated 31 August 2005 entitled 'MH Nominee Agreement' in which Offshore Nominees agreed that it held its shares in MH Investments for Mr Gould. Mr Borgas was forced to describe the document as 'wrong' and that it should not have been produced. This evidence was unpersuasive.
The corroborative witnesses
118. As noted above at , the taxpayers submitted that Mr Borgas' account that he was the decision-maker for the taxpayers was corroborated by the evidence given by the Bell Potter brokers Messrs Codd and Gibbs; the evidence of the late Mr Saba; the evidence of the investment portfolio advisor Mr Yunus; the evidence of a missionary, Mr Watson; the evidence of the accountant Mr Vara; and that of Mr Facey, the auditor of Chemical Trustee. I deal with these in turn and then cumulatively.
119. Mr Codd performed stockmarket transactions for Chemical Trustee, Derrin and Bywater throughout the period 2001-2005. He said that he would speak on the phone with Mr Borgas 3-4 times per week and that Mr Borgas would give oral instructions to him over the phone often in response to advice which Mr Codd had proffered. Mr Codd thought that Mr Borgas was an astute investor and that he was the person making decisions on behalf of Chemical Trustee, Derrin and Bywater.
120. The Commissioner submitted, and I accept, that this evidence is not inconsistent with the Commissioner's case that Mr Borgas was a frontman. He posits that if Mr Borgas had spoken with Mr Gould on each occasion before speaking to Mr Codd then he would appear to be the person giving instructions; equally, Mr Gould could have provided him with the information that made him appear astute to Mr Codd. Then there is the fact that Mr Borgas' instructions were always confirmed in writing by fax usually the next day, sometimes by email. Again this is a matter which is consistent with Mr Borgas dealing with Mr Gould after the event. In the same vein, Mr Codd thought that Mr Borgas was dealing with other brokers because he was dealing in stocks that Mr Codd had not sold to him. This is consistent, however, with that person being not a broker but being Mr Gould.
121. Mr Codd also gave evidence that sometimes Mr Borgas would give him instructions on the spot (although sometime it would take a week or so). To determine whether this was an example of genuine spontaneous decision-making one would need to know whether Mr Borgas mentioned a stock for advice (which would be consistent with Mr Gould having prompted Mr Borgas to inquire about the matter) or whether the idea for the stock advice originated with Mr Codd and was then accepted by Mr Borgas. This is a critical matter and without it one cannot know the significance of Mr Borgas' instructions. The taxpayers did not seek to prove this. Mr Borgas was called as a witness and his evidence simply did not go into this kind of detail. It was evidence he could have been expected to give, however, if it had actually occurred.
122. The taxpayers criticised the Commissioner for not suggesting to Mr Codd that his evidence was incorrect. However, the nature of the above submissions proceeded on the assumption, upon which I also proceed, that Mr Codd's evidence was correct and that he was the victim of Mr Borgas' deceit. That being so, there is nothing which could have been asked of Mr Codd by Mr Fagan which would have been useful.
123. My impression to this point has been that Mr Borgas' evidence was almost entirely untrue. Mr Codd's evidence does not persuade me to the contrary.
124. It was Mr Yunus' evidence that he managed a portfolio of investments for Derrin and Chemical Trustee and had done so since 2003. He said in his affidavit that he had spoken with Mr Borgas who had sought advice and then given instructions or orders to him in the course of the same discussion. He gave particular evidence about a transaction in 2006 involving an investment in an entity called Silverbird. Mr Yunus had recommended an investment in Silverbird and this had been supported by Mr Gould. But Mr Borgas had called Mr Yunus himself to discuss the investment. Under cross-examination he said that he had spoken with Mr Borgas less than 10 times on the phone but was in regular email contact. The thrust of his affidavit evidence was as follows:
- (a) Mr Yunus' company Normandy Malaysia provides investment management and corporate advisory services;
- (b) the parent company is Perkasa Normandy Holding Sdn Bhd;
- (c) his relationship with Mr Borgas commenced in 2003 when Chemical Trustee retained one of the group members to manage Chemical Trustee's assets in the Asia Pacific region;
- (d) he has never met Mr Borgas in person but has spoken to him a number of times on the phone and has exchanged faxes and emails;
- (e) in the course of their relationship he has given advice and also received requests for advice from Mr Borgas in conversations which have culminated in Mr Borgas giving an immediate instruction or order;
- (f) he does not recall Mr Borgas needing to get the permission of any other person;
- (g) Mr Borgas is provided with regular written reports;
- (h) he has known Mr Gould for a long time and speaks with him on a semi-frequent basis;
- (i) he and Mr Gould have business dealings in common;
- (j) Mr Gould sometimes contacts Mr Yunus on behalf of other people who are clients of Normandy Malaysia and when he does so it is Mr Yunus' usual practice to require confirmation of Mr Gould's authority to speak on their behalf; and
- (k) Mr Borgas has made clear to Mr Yunus that Mr Gould 'has particular responsibility for Chemical Trustee and Derrin Brothers' investment in the Asia-Pacific'. For this reason, Normandy Managers has no hesitation about providing Mr Gould with any information he requests about Derrin Brothers and Chemical Trustee, and Mr Gould is frequently copied in on communications with Mr Borgas that relate to these two companies.
125. The Commissioner collected 17 communications between Mr Gould and Mr Yunus involving instructions from Chemical Trustee and Mr Borgas was party to these only three times. Although there are some letters in which Mr Borgas seems to have had his hand on the tiller (such as his letter to Mr Yunus of 5 December 2007) most of the correspondence consists of a dialogue between Mr Yunus and Mr Gould. Typical of that kind of correspondence is their exchange of 24 and 25 September 2007. On 24 September 2007 Mr Yunus sent Mr Gould a fax about the affairs of AsiaTrust Development Bank in these terms:
As at today, Chemical Trustee Ltd holds 653,900 shares in AsiaTrust Development Bank and registered under the following custodian/trustee:-
- 1. 553,900 Amanah Raya (Labuan) Ltd
- 2. 100,000 Universal Trustee (Malaysia) Bhd
Chemical Trustee Limited may arrange to remit the additional funds by telegraphic transfer to the following account:-'
126. On 25 September 2007 Mr Gould replied in these terms:
Thank you for your fax of 24 September 2007.
Unless there is a good reason for keeping the two holdings, would it not be better to consolidated [sic] the 100,000 shares in the name of Universal Trustee (Malaysia) Bhd into the holding in the name of Amanah Raya (Labuan) Ltd?
We have arranged for the additional A$50,000 to be remitted to the account set out in your fax and confirm our mutual client's instructions for you to purchase further shares in AsiaTrust Development Bank at a limit of PHP9.00.
Your assistance is appreciated.'
127. These exchanges naturally tend to suggest that it was Mr Gould who was in charge of Chemical Trustee notwithstanding the disingenuous reference to the 'mutual client'. The 'mutual client' is a theme in much of the correspondence and not just with Mr Yunus. As will be later seen Mr Borgas struggled to explain who he was and the taxpayers themselves did not really seek to identify this man of mystery at the trial. It was, of course, Mr Gould.
128. There are therefore a number of apparently contradictory aspects to Mr Yunus' evidence. There is the fact that the companies in question are truly Mr Gould's and the money at stake economically his and not Mr Borgas'. There is the fact that Mr Gould appears to be the substantive decision-maker in his dealings with Mr Yunus. It is difficult to accommodate into this view any actual role for Mr Borgas as a decision-maker. Yet, on the other hand, there is Mr Yunus' evidence that he spoke with Mr Borgas who gave him instructions and appeared to take advice. If that evidence is accepted at face value, I would need to conclude that Mr Borgas was the decision-maker. But to do that I would need to have a rational explanation for why Mr Gould was permitting his money to be invested on Mr Borgas' instructions and a further explanation as to why he was then acting as Mr Borgas' advisor in respect of investments which were, in reality, his. On any view, that would be a bizarre situation.
129. There is no tidy way to fit this together. The Commissioner submitted that it could be the case that whilst Mr Yunus understood that the shots were being called by Mr Gould, Mr Borgas was the director of the relevant taxpayers and he needed to make the actual decisions as a matter of formality. Thus Mr Yunus needed to get his approval. On this view, Mr Borgas' role is entirely formal and he is reduced essentially to a vice-regal position. But I have difficulty squaring this theory with Mr Yunus' evidence that he did in fact proffer advice and receive instructions from Mr Borgas.
130. On balance, I have come to the view that the situation with Mr Yunus is likely to have been similar to that which obtained with respect to Mr Codd. That is to say, Mr Gould was orchestrating with Mr Borgas the appearance of the latter giving instructions to Mr Yunus. The fit, I admit, is not perfect; especially, as Mr Gould appeared to have a much more direct role with Mr Yunus than he did with Mr Codd. However, this is in my opinion the most likely reconciliation of the evidence. No doubt, it is not perfect. The reason I embrace it however is that the alternate view gives rise to impossible inconsistencies about the role of Mr Borgas. In particular, it simply cannot cohere with the fact that he had no economic interest in these companies. It would also require me to accept much of his evidence about ownership and control when that testimony is overwhelmingly contradicted by contemporaneous documentary evidence.
131. It was Mr Vara who attended to the paperwork side of transactions from the offices of Lubbock Fine. He gave this evidence at T386.30-387.4:
'MS SEIDEN: I see. And what is your impression of the level of knowledge that Mr Borgas had of the assets and the transactions of Chemical Trustee?---Over the - over the years that I've known Mr Borgas, I think he's a well-versed and knowledgeable businessman as well and demonstrated by the growth in the value of those companies.
I see. And I asked you that question specifically in relation to Chemical but I think you've answered that it's the same, if I'm correct, in relation to Derrin and Bywater? ---I would say so.
Yes and what gives you the impression that he's - how did you describe him? I don't want to - - -?---Knowledgeable businessman.
What gives you that impression?---Well, when we speak, we often - he often discusses that he's making investments, generally talk about the general markets in UK and elsewhere, and we generally have a chitchat, then, regarding the companies, he would inquire about the bank balances, banking transactions and what deposits are ..... if there were large balances available so that he can authorise if he had to put funds on deposit.'
132. In addition to this answer Mr Vara also denied that he knew that Mr Gould was in charge of Chemical Trustee and stated that he was fully confident that Bywater (and I infer the other taxpayers) were controlled by Mr Borgas: T419.29-T425.45.
133. I regret I must conclude that Mr Vara's evidence was not reliable. The Commissioner did not directly submit that I should reject his evidence although at T1447 Mr Fagan rhetorically asked whether his evidence could be correct. I reject his evidence as unreliable because in respect of two matters I can only conclude he was lying. These were:
- • at T447 he was cross-examined on a fax from Mr Borgas dated 19 October 2004 to Mr Gould which contained this statement:
'The attached letter of 24th August is clear but my letter to Wilson HTM of the same date (copy attached) is, unfortunately, incorrect in that it was sent on Derrin Bros. note paper. A copy of the contract note is attached.
My error, for which I sincerely apologise, was pointed out to me by Hasmukh.
Kindly let me have your comments as how you feel we should best deal with this matter given the circumstances set out above.'
134. 'Hasmukh' is Mr Vara's first name. It is obvious that this is not the kind of letter a client writes to an advisor. The cross-examination then proceeded as follows:
'MR FAGAN: Without drawing too heavily on your recollection, it's apparent from the documents, particularly from the one at page 251, that the intention had been Chemical Trustee and that it had miscarried by them going to the name of Derrin Brothers and that that was being reversed?---Well, if that's the case, yes.
And can you tell me why was Mr Borgas apologising to Vanda Gould for this?---I don't know. Mr Borgas' nature. But you would have to ask him.
I would have to ask him?---Yes.
But you're saying that, to you [sic] understanding, these - the determination to purchase these shares was in Mr Borgas' hands?---That's right.
And the entity that they went into was Mr Borgas' choice?---That's right.
And both of the entities which constituted the choice, Derrin and Chemical Trustee, were ultimately his?---That's right.
So, to your understanding of relationships, you would find his apology to Mr Gould and his request for comments as to how Mr Gould felt this matter should best be dealt with quite inexplicable, wouldn't you?---No. I can't comment on somebody else's comments.
That means it's inexplicable, doesn't it - - -?---Sorry?
- - - to you?---No, I can't - I honestly cannot comment why - you would have to ask Mr Borgas.
You can't comment upon why there would be an apology in these circumstances?---I don't even recall fully reading the letter, so it's very difficult for me to say anything.
All right. Well, certainly in due course Mr Borgas and Mr Gould will be asked, but I just - - -?---Sure.
Since you're here giving evidence first, Mr Vara, I just want to be clear. You can't offer any explanation?---I cannot.'
135. This is simply not plausible. Mr Vara could not offer any explanation because to do so he would have had to have admitted that the letter showed that Mr Gould was in charge.
136. He was also asked about the references to 'our mutual client' in much of the documentation at T477.5-477.26:
'MR FAGAN: When Mr Borgas speaks of a transaction which Chemical Trustee is entering into, when he speaks of "our mutual client", the only way that would make any sense would be on the basis that Mr Gould is the client, wouldn't it?---I don't know.
It's just a code, isn't it, the expression "our mutual client" - - -?---No, it's not.
- - - that was used between Mr Gould, Mr Borgas and your firm? Isn't it just a code? ---No, it's not.
Isn't it just an expression that was used as a way of avoiding stating the true relationships?---No, it's not.
And in the next paragraph [of the letter from Mr Borgas to Mr Vara dated 6 March 2001], Mr Borgas said:
I have to admit that I have rather lost the plot in relation to this matter, and at the moment I'm following instructions received from our mutual client.
That makes it clear that the mutual client was Mr Gould, doesn't it?---Not to me, no.
The other correspondence I've showed you clarifies that the person to whom he was referring for an understanding of what was going on in this transaction was Vanda Gould?---You would need to ask Mr Borgas.'
137. Again I cannot accept this. It was quite clear who the mutual client was. Mr Vara's evidence is simply implausible
138. I conclude therefore that in critical aspects Mr Vara's evidence was false. Not all of his evidence was false. When it was not inconsistent with the taxpayers' case Mr Vara did give true evidence but only because it was not inconvenient to him. In those circumstances, however, I do not feel I can give any weight to it in areas which are controversial. It follows that I do not accept Mr Vara's evidence insofar as it corroborates Mr Borgas' evidence. Neither was reliable.
139. Mr Gibbs was employed by Bell Potter. His evidence at paragraph 15 of his affidavit was that he would receive faxes from Mr Borgas making orders and sometimes Mr Gibbs would send return faxes giving investment advice. Mr Borgas would then sometimes revise his order by way of a further fax after he had received the advice. This is not inconsistent with the Commissioner's case.
140. Mr Watson was part of a Christian organisation called Ellel Ministries. He needed $500,000 to complete the purchase of a property known as Gilbulla. He knew Mr Gould and Mr Gould told him that he might be able to secure the funds for him. Mr Gould arranged the loan through Chemical Trustee. Subsequently, Mr Watson decided that Ellel Ministries needed to raise further funds. Although in his affidavit evidence he said that he contacted Mr Borgas who refused him and, in fact, asked for the earlier loan to be repaid, his cross-examination revealed that he had spoken with Mr Gould first who had told him it was unlikely that Chemical Trustee would further assist. In light of that there is really no inconsistency between the Commissioner's case and the evidence of Mr Watson. In effect, he was another person deceived by Mr Gould and Mr Borgas.
141. Mr Facey is a partner at Lubbock Fine and was the auditor of Chemical Trustee. His evidence was that he had a lot of dealings with Mr Borgas in the course of his audit duties. However, his evidence also showed that these enquiries were in writing. This is consistent with the Commissioner's case.
142. The late Mr Saba, a stockbroker, did not give evidence in the proceedings. There is documentary evidence of his having dealt with Mr Borgas. However, apart from Mr Borgas' evidence (which I do not accept) there is no evidence of Mr Saba's oral dealings with Mr Borgas. The position of Mr Saba as explicated in the evidence is therefore consistent with the Commissioner's case.
Global effect of the corroborative evidence
143. I have rejected each part of the taxpayers' case on corroboration either because I do not accept the evidence (in the case of Mr Vara) or because it is consistent with the Commissioner's case. It is useful to pause and to consider whether this material viewed globally is more than the sum of its parts. I do not think it is.
(b) Chemical Trustee Limited
144. Having dealt globally with the common features of Chemical Trustee, Bywater and Derrin I turn then to the individual circumstances of Chemical Trustee. Again the taxpayers did not really seek to cavil with the Commissioner's contention that Chemical Trustee was operated for the benefit of Mr Gould although neither did they entirely concede it. In the interests of completeness, I will deal with the Commissioner's contentions. He made 18 points. They were all directed to the same end, namely, that Chemical Trustee was owned and operated by Mr Gould for his own benefit.
The Commissioner's 18 matters
(i) Mr Gould's beneficial ownership of Chemical Trustee
145. Because Mr Gould owned and controlled JA Investments it is an inevitable consequence that he owned and controlled Chemical Trustee through the Lubbock Fine entity Guardheath.
146. The Commissioner submitted that the transactions which Chemical Trustee engaged in were very substantial and that it was unlikely that Mr Borgas who had no such economic interest, would have been making the decisions about those matters rather than Mr Gould, who did. Mr Borgas described four activities in which Chemical Trustee engaged. These were:
- (a) acting as a nominee;
- (b) acting as a lender;
- (c) acting as a charitable donor to religious organisations; and
- (d) investing in shares.
147. Mr Borgas explained his role in relation to each of these in his evidence in chief as follows:
As to (a) (nominee activities):
'MS SEIDEN: Well, could you describe the nature of the transactions that Chemical undertake as nominee? Yes. One example is when - where third parties will place their funds in the account of Chemical Trustee so that money - a larger amount of money is built up. And the reason for building up a larger amount of money is so that when that money is deposited, a better rate of interest can be obtained.
And who makes the decisions about investing for the entities? For the entities that Chemical is acting as a nominee for? I do. We - I'm sorry.
Where do the commercial ideas come from in relation to investing for entities that Chemical is acting as a nominee for? They can - they can come from a number of different sources. For example, when it's a question of the investment of money that Chemical Trustee is holding as nominee, my main point of consultation is Mr Hasmukh Vara who - for - I - he and I will talk. I say, "All right, Hasmukh. We need to put this money on deposit. Please, will you do the necessary, phone around the banks, just see what is the best rate of interest that you can obtain on a three month deposit or a four month deposit, six month deposit," whichever is appropriate in the circumstances. And he will come back with three or four options. And then I decide, having regard to the bank and the rate and so on and so forth just which of the options that he has given me I will - I will exercise.
All right. And what way does acting as a nominee - in what way is that beneficial to Chemical Trustee? Well, in the case, for example, of the deposit of funds, Chemical will take a margin on the interest that is earned on such deposits.'
As to (b) (acting as a lender):
'MS SEIDEN: All right. You mentioned that Chemical also lends money. Can you describe to the court an example of a transaction where Chemical has lent money? Yes. Chemical has lent money to, for example, a company called Normandy Finance and Investment Limited, and that company is - is managed by - it is part of a - it is a group company, but it is managed from Monaco. And it is then lent, for example, for - to mortgage borrowers and so on and so forth.'
As to (c) (acting as a charitable donor):
'MS SEIDEN: Have you, in relation to Chemical Trustee, have you heard of Moore College? Yes, I have.
Would you explain to the court the connection? Yes. I should perhaps have said earlier that one of the activities of Chemical Trustee is - or one of the activities in which it has become involved is charitable giving. Moore College is a - the largest seminary bible college in this part of the world, and yes, I have heard of Moore College.
And has Chemical Trustee entered into some form of transaction with that? It has made a charitable donation to - of A$1 million to Moore College.
And who made the decision to make the donation? I did.
And where did the idea come for the beneficiary? The idea came from discussions that I have had with - or that I had with Mr Vanda Gould.'
As to (d) (acting as a share investor):
'MS SEIDEN: Now, you've mentioned that Chemical also has some stock market activities? Yes.
All right. Could you explain to the court what your investment criteria is? Yes. Very simply, it is capital growth through long-term investment in the stock in a particular company.
And who makes the decisions for Chemical Trustee about buying and selling shares? I do.
How do you go about making the decision? The - the decision is based on advice that I receive from people such as Mr John Leaver, Mr Vanda Gould, stockbrokers, for example, the late - one - one person in particular who was always very helpful is the late Jamie Saba of Wilson HTM, Ted Cod [sic] of Bell Potter. So I have a - and - and even sometimes suggestions are passed to me by Hasmukh Vara of Lubbock Fine in London, I mean, because they are quite close to the goings on in the stock market, and - but, having - having assembled the basic information - all right, so John Leaver has made a suggestion to Vanda - a recommendation to Vanda which is passed on to me, then I might - I might go back and check, for example, with Jamie Saba, "Have you got any input on this possible investment?" So it's - the - all right. The recommendations come from those people - people such as those, but the final decision about making the investment is mine.'
148. The Commissioner submitted that this evidence was contradicted by 18 matters. I have already concluded that Mr Borgas was quite willing to lie to the Court about his ownership of JA Investments. My view is that in areas of any controversy his testimony is unreliable. On that basis I would not be inclined to accept Mr Borgas' evidence of the manner in which he controlled Chemical Trustee. The Commissioner's 18 matters provide additional reasons for concluding that Mr Borgas was lying about the affairs of Chemical Trustee.
149. The first point was the disparity between the idea that Mr Borgas was making decisions about Chemical Trustee's activities when regard was had to the size of the transactions and the fact that the actual owner of it was Mr Gould. I accept this submission. I have already accepted Mr Gould's ownership of Chemical Trustee.
150. As to the transactions, the evidence before me showed that Chemical Trustee had extended loans to entities associated with Mr Gould in the sums of $750,000, $500,000, $2,075,000, $2,540,000, $1,000,000 and $15,000,000. These totalled $21,865,000. Further, it had transferred sums of $30,000,000, $250,000, $4,202,000, $900,000, $3,000,000, $2,002,000 and $150,000. These totalled $40,504,000. These sums were advanced to an entity called Normandy UK. The shares in Normandy UK were held by Guardheath and Lordhall, pursuant to nominee agreements in favour of JA Investments and MH Investments.
151. I return to its role below. For present purposes, it will suffice to observe that it was ultimately owned by JA Investments and MH Investments and hence by Mr Gould. Chemical Trustee also extended to another entity, Lloyds & Casanove, sums totalling $6,065,000 which were used to purchase shares in an entity called Vita Life Sciences Ltd. I am satisfied that Lloyds & Casanove was at all times controlled by Mr Gould. Vita Life Sciences was, between 2003-2007, a delisted company of which Mr Gould was the Chairman from 2004. Mr Gould's role in the actual transactions is of no immediate concern for the purposes of the Commissioner's first argument. His point is that the transactions were in excess of $60 million and that it was implausible that Mr Borgas, who had no stake in Chemical Trustee, would be making decisions for it when it was Mr Gould's money. I accept that submission.
152. This is another reason to reject Mr Borgas' evidence about the affairs of Chemical Trustee.
(ii) The loans were all to entities associated with Mr Gould
153. The Commissioner's second contention was that the lending transactions just referred to were all to entities associated with Mr Gould. I accept this submission.
154. There were six loans. The first of $750,000 was made on 20 March 1988 and was extended to Mr Gould's wife, Mrs Debbie Gould. Security was provided over two lots in a deposited plan in Chatswood.
155. The second loan was for $500,000 and was made on 13 August 1999 to Regatta Point Developments Pty Ltd. That company had ten shares on issue. Three of these were held by Chemical Trustee and three by Normandy UK which were both ultimately owned by Mr Gould. One share was held by Formrace Pty Ltd about which I know little. Three were held by a company called 14 Portland St Pty Ltd which was owned by Dr Ross. I am satisfied that Regatta Point was controlled by Mr Gould.
156. The third loan of $2,075,000 was made on 30 June 2000 to Fennelltown Pty Ltd which was the trustee of the VR Gould Family Settlement.
157. The fourth loan of $2,540,000 was made on 30 June 2000 to Malackey Holdings Pty Ltd. It was the trustee of the Malackey Trust the beneficiaries which were Mr Gould (and his family) and another family called the Nichols family.
158. The fifth loan was of $1,000,000 and was to the Education Gold Trust. It was extended on 15 May 2002. The eligible beneficiaries of that trust are Mr Gould and his family and the Raptis family. The trustee of the trust is, however, Education Corporation of Australia Pty Ltd. Its directors were Mr Gould and his secretary, Ms Shean. The ultimate holding company for it was Morning Star Fiduciaries Pty Ltd. It has one share on issue which is held by Mr Gould.
159. The sixth loan for $15,000,000 was to Education Corporation of Australia Pty Ltd. For the reasons just given it was controlled by Mr Gould. The money was advanced to purchase property at Surfers Paradise, although that purchase did not proceed and the money was returned.
160. These matters permit of no conclusion other than Chemical Trustee lent very substantial funds to persons or entities close to, owned by, or under the control of Mr Gould. There is no reason for Mr Borgas to have engaged in these transactions. There is every reason for Mr Gould to have done so.
161. These six loans, therefore, present, a second reason for concluding that Mr Borgas was lying about his involvement in Chemical Trustee.
(iii) Loans to Gould/Leaver related entities via Normandy UK
162. The Commissioner's third reason for why Mr Borgas' account was false was related to transfers of money by Chemical Trustee to Normandy UK which were then on-lent to entities controlled or owned by Mr Gould and/or Mr Leaver, his business associate. I return in more detail to the role of Mr Leaver below.
163. As outlined above, Normandy Finance and Investments Ltd was a company incorporated in the UK. Its two issued shares were held by Guardheath and Lordhall. They held them pursuant to nominee agreements in favour of JA Investments and/or MH Investments. This was the testimony of Mr Vara, of Lubbock Fine. Consequently, it was ultimately owned by Mr Gould. Normandy UK owned 499 of the 1000 shares on issue in Normandy Finance and Investments Asia Ltd ('Normandy Asia'). The other 501 shares were held by another nominee company Glen Nominees Ltd. On 30 October 2009 Glen Nominees transferred that parcel of 501 shares to Normandy UK. It is likely, I think, that those shares were always held for Normandy UK. However, I do not need to make a finding about this. It is sufficient to observe that Mr Gould had a 49.9% interest in it through Normandy UK.
164. There were seven indirect loans of this kind relied upon by the Commissioner.
165. The first was for $30 million and was advanced on 17 December 1998 to Normandy UK. This was then advanced by Normandy UK to CVC Investment Nominees Pty Ltd. Its shareholders were Southsea Nominees Pty Ltd and Wenola Services Pty Ltd. Southsea Nominees has one share on issue, held by Morning Star, which has been owned by Mr Gould since 2003. Between 1997-2003 Morning Star was owned by Phillips River Pty Ltd, which was in turn owned by Mr Gould and his family during the relevant period. Wenola Services Pty Ltd has always been owned by interests associated with Mr Gould and/or Mr Leaver. Consequently, this elaborate structure reveals the ownership of CVC Investment Nominees by Mr Gould and Mr Leaver at the time of the transaction.
166. I therefore conclude that Chemical Trustee transferred $30 million effectively to Mr Gould and Mr Leaver through Normandy UK.
167. The second indirect loan was for $250,000 and was made on 2 April 2004. It was advanced by Chemical Trustee to Normandy Asia which was almost half owned by Normandy UK and hence by Mr Gould.
168. The third indirect loan was for $4,202,000 and was made on 3 November 2004 to CVC Investment Nominees which was controlled by Mr Gould and Mr Leaver. Twenty-one days later a sum slightly less than this amount was returned to Chemical Trustee. The taxpayers made no effort to explain this curious transaction.
169. The fourth indirect loan was for $900,000 and was made on 8 December 2004. It was extended to Melbourne Insurance Co Ltd. Melbourne Insurance has, at relevant times, had 2 shares on issue which were held by Southsea Nominees (which for reasons I have already given was controlled by Mr Gould through Morning Star). Elsewhere in the records of Chemical Trustee a loan of $2.5 million to Melbourne Insurance was treated as a loan to JA Investments, i.e. Mr Gould. For reasons that neither Chemical Trustee nor Mr Borgas sought to explain, this $900,000 was returned to Chemical Trustee 22 days later on 30 December 2004 by the circuitous route of Hua Wang Finance Ltd, a subsidiary of the Hua Wang Bank.
170. The fifth indirect loan was of $3 million to Melbourne Insurance Company Pty Ltd (controlled by Mr Gould). Of this $1.225 million was advanced to CVC Investment Nominees (controlled by Mr Gould and Mr Leaver) and the balance returned to Chemical Trustee via, once again, Hua Wang Finance. Again, neither Mr Borgas nor Chemical Trustees proffered any explanation for this circular transaction.
171. The sixth loan was of $2,002,000 and was made on 31 May 2006. It passed through Melbourne Insurance Co apparently to another entity, Sunleisure Group Ltd. I know nothing of this entity but it suffices for present purposes that Melbourne Insurance was controlled by Mr Gould.
172. The seventh indirect loan was of $150,000 and through Normandy UK to Normandy Asia. The first of these was controlled by Mr Gould; the second as to 49% Mr Gould (and possibly as to 100%).
173. These seven uses of Normandy UK as a funnel for loans made by Chemical Trustee to Gould-related entities (with the exception possibly of Sunleisure) are not, however, isolated examples of these kinds of intercompany transactions. Because some of these touch upon the credit of Mr Leaver I will deal with them in detail.
174. There are three aspects to this. The first concerns 11 transfers totalling $3,966,900 which were described in Mr Borgas' written instructions as 'management fees'. These were paid to Normandy UK. Mr Borgas testified that these were inter-company transfers in this way:
'MS SEIDEN: And you see that - the reference there to the expression "management fee"? Yes.
What does this mean? When - well, I have explained that Chemical Trustee lent funds, or would - would move funds down to its sister company, Normandy Finance and Investments Limited, and that when funds were moved, for example, from Chemical Trustee to a company within the same group, it was described as a - a "management fee" because there was never any obligation, really, to - for - in this particular case, Normandy Finance to repay the money to Chemical Trustee, nor to pay interest on the loan. Chemical Trustee was a company that needed to be audited and file audited accounts, and this was a way that the auditors of Chemical Trustee would know - and you will see that this was addressed to Mr Vara at Lubbock Fine - this was a way of them being able to determine exactly the nature of the movement of those funds and for them to know that when they came to the - organising the audit of Chemical Trustee Limited they did not need to take it into account as an asset of - a loan - a repayable loan of Chemical Trustee.'
175. It is hard to understand what Mr Borgas meant by this. I conclude that the obvious is the case and that what was going on was the channelling of money from one Gould related entity to another.
176. The second aspect is this. There were two transfers of, respectively $2,002,000 (on 22 May 2001) and $1,251,000 (on 28 May 2002) from Chemical Trustee to Normandy UK where the purpose of the transfer was not recorded with any specificity. Again, the appropriate conclusion is that this was the funnelling of money from one Gould-controlled entity to another.
177. The third aspect is, perhaps, a little more involved. There were seven transfers from Normandy UK to Gainsborough Stud Ltd which were then on-lent to Planette Thoroughbred Trading Pty Ltd as follows:
|7 February 2005||$3,415,513|
|28 February 2005||$2,474,989|
|1 March 2005||$35,739|
|21 April 2005||$839,989|
|5 August 2005||$181,490|
|2 September 2005||$627,990|
|18 July 2007||$298,000|
178. Gainsborough Stud Ltd is an Irish company with a registered office in Dublin. About its ultimate ownership the evidence is not clear. With Planette things are more straightforward: it has two shares one of which is owned by Mr Leaver and the other by Phillips River Pty Ltd which, as I have explained, was controlled by Mr Gould. The complexity about this third aspect of the transfers through Normandy UK concerns three further transfers all of which went to relatives of Mr Leaver.
179. The first of these was to Mr Leaver's daughter, Ms Kate Leaver, and was in the amount of $1,250,000. It occurred on 4 December 2009. The funds passed first to Normandy UK and thence to Curwoods Lawyers. That firm then used the money to settle the purchase of a property by Ms Leaver of a residential dwelling in a fashionable street in Paddington, Sydney. The 'loan' from Normandy UK was documented by a letter from it to those solicitors dated 16 November 2009 inexplicably sent from Monaco. It was on the letterhead of Normandy UK and was in these terms:
'Dear M. Manookian,
We have agreed to lend Ms. Kate Leaver the sum of A$1,250,000 to purchase a property at [address supplied] Paddington NSW 2021 ([Folio Identifier supplied]). The security which we require you to prepare as part of advancing the funds, which we will transfer to your trust account, is a registered first mortgage over the above mentioned property, together with the unlimited guarantee of Mr. John Scott Leaver (Kate's father) of [address supplied] Point Piper NSW 2027.
The loan will bear interest at the rate of 6% p.a. for a period of five years at which time the interest rate will be reviewed and adjusted to market. Interest is payable in annual instalments on 30 June each year. However, by agreement between the parties, interest may be capitalised. Interest may be paid by Australian dollar cheque to our registered office (46 Bedford Square, London WC 1B 3DP, United Kingdom) or by telegraphic transfer to our Australian dollar bank account in London, which details will be provided on our annual debit notes.
We understand from Mr. Leaver that he is anxious for this purchase to settle as soon as possible and we will aim to place you in funds by the end of November. Please provide us with your trust account details. Mr. Leaver will pay your costs in relation to this matter and will provide the additional funds that are needed to complete the purchase.
Please do not hesitate to contact us if you have any queries.
Egmont International Associates Inc.
Represented by: J. Walfenzao/ S.E. Beach'
180. I have no idea what Egmont was or who Messrs Walfenzao or Beach were. However, since Normandy UK was Mr Gould's company I am not in the slightest persuaded that this transaction was at arm's length.
181. My sense that there was nothing arm's length about this loan is heightened by a consideration of the terms of the loan. The terms of the offer letter made this appear to be a generous loan. The formal terms were, however, even more generous. They gave a further option of five years and forbade the payment of interest without the lender's consent.
182. Mr Leaver is a close business associate of Mr Gould's. Between them they run a venture capital company in Sydney known as CVC Limited. They work from the same office and, as will already have been seen, have many common shareholdings. Mr Leaver gave evidence before me about this loan. It was as follows:
'MS SEIDEN: All right. And could you tell the court about the circumstances of this transaction? That is a loan for the payment of a house in my daughter's name.
And Normandy Finance & Investments Limited; how did -? It's a financier.
Yes. And how did you come to find them? Mr Gould - well, I came to find them because I asked the bank for a loan and they refused me, and they said the only situation they would give me a loan for my daughter was if I actually put half the money up in cash as guarantor and put the house in her - in my name. The reasons that I had bought the house were firstly medical and personal. The personal element being I was just about to turn 70 and I decided that my daughter - or daughters and my stepson should begin to have their inheritance.
And what role did Mr Gould play in this transaction? He organised - well, he was the one that spoke to the bank for me and I spoke to the bank also, Westpac, and when they knocked me back, he said "I will try and get the money from Peter Borgas".
And did you speak to Peter Borgas about the loan? No, I did not.
And do you know anything else about the company, Normandy Finance & Investments Limited? I've seen the name but I know nothing else about it. As far as I'm concerned, they're a financier.'
183. I reject this evidence. The idea that an arm's length loan to his daughter to buy a house would assist in her inheritance makes no sense. If it were arm's length it would remain owing even if Mr Leaver died. Providing for her inheritance, on the other hand, makes sense if the money was in truth his.
184. Nor do I accept that Mr Gould asked Mr Borgas for the money. This is impossible since the money was Mr Gould's and not Mr Borgas'. Mr Leaver also lied about his intention to make repayments of $100,000 manually under this loan. Its terms expressly forbade that. My conclusion: Mr Leaver's evidence was false. He knew this was not a financing transaction. I am unable to determine whether Mr Gould was transferring his own money to Mr Leaver or whether this money was Mr Leaver's arising from some antecedent and concealed transaction requiring the use of offshore vehicles to conceal the identity of the true actors. The result is the same: the money flowed to persons closely associated with Mr Gould.
185. The second 'loan' was to another of Mr Leaver's daughters, Ms Sophie Leaver. It was for $1.9 million. This does not appear to have come from Chemical Trustee but rather from Russell Associates Limited a company incorporated in the British Virgin Islands and having one bearer share issued to MH Investments. It was, therefore, controlled by Mr Gould.
186. It is an example, therefore, of Mr Gould providing a large amount of his, perhaps Mr Leaver's, money to one of Mr Leaver's daughters. Contrary to Mr Leaver's evidence it is not an example of an arm's length loan transaction. In this again, I regret, Mr Leaver was lying to me.
187. However, I do not think this transaction assists the Commissioner in his immediate forensic aim of showing that Mr Borgas was lying when he claimed to control Chemical Trustee. So far as I can see this loan did not pass through Normandy UK. On this occasion at least, Mr Borgas is left unscathed.
188. Not so, I fear, in the case of Mr Leaver's step-son, Mr Alexander Nickolls. In this transaction, $1.6 million passed from Normandy UK this time to buy premises in Woollahra. Only half the pages of the loan agreement were available to be placed in evidence but it is apparent that the terms of this loan were largely the same as those which existed in the case of Mr Leaver's daughter. I draw the same conclusion: money was being funnelled from Chemical Trustee through Normandy UK. Mr Leaver's evidence that this was an arm's length transaction was false.
189. It follows from these observations that all of the money which came out of Normandy UK went to Mr Gould or to people close to him. The only evidence of any money going into Normandy UK was from Chemical Trustee. I infer that Normandy UK was a device to disguise further the flow of funds from Mr Gould's offshore interests to himself or persons or entities close to him.
190. The immediate question is whether this long digression assists the Commissioner in his contention that Mr Borgas' evidence that it was he who was making the decisions for Chemical Trustee was false. The answer is that it does. It is another reason, sufficient in itself, to conclude that Mr Borgas was lying.
(iv) Loans via Indo-Suez/JA Investments
191. I turn then to the Commissioner's fourth reason that Mr Borgas' evidence about controlling Chemical Trustee was false. He submitted that Chemical Trustee engaged in lending via an entity known as Indo-Suez but that analysis would show that all of these funds ended up with Mr Gould or his associates.
192. He also contended that a similar process took place through JA Investments.
193. Dealing first then with Indo-Suez Investments Ltd, Mr Vara from Lubbock Fine gave evidence at T420 that this company was ultimately owned by JA Investments or MH Investments. I accept this evidence and it follows that Indo-Suez was owned and controlled by Mr Gould.
194. The first transaction is a transfer of A$1.96 million from Chemical Trustee to Indo-Suez. This was caused by a letter sent by Mr Shah of Lubbock Fine to the HSBC Bank on 5 July 2000. No reason was advanced in the letter for it. Since Indo-Suez was controlled by Mr Gould I infer that the transfer was for his benefit.
195. The second transaction was a transfer of A$2.5 million from Chemical Trustee to Indo-Suez. This resulted from a direction given by Mr Borgas on Chemical Trustee letterhead to Lubbock Fine on 2 March 2001. The letter said that the transfer was for the purpose of enabling 'a loan to be made by Indo-Suez Investments Limited to Continental Venture Capital Limited'. This is the former name of CVC Limited, the Australian listed company introduced above at . Its founding Chair was Mr Gould and the other major participant in its founding was Mr Leaver. Both are presently directors. It is a venture capital firm which invests in the private equity market in Australia.
196. I conclude that this transfer of $2.5 million was from entities controlled by Mr Gould to an entity very closely associated with him.
197. The third transaction concerned a transfer of $362,500 to Indo-Suez on or around 25 June 2001. Mr Borgas signed a letter on Chemical Trustee's letterhead that day addressed to Mr Vara at Lubbock Fine instructing him to make this transfer. The letter recorded the purpose of the transfer as being 'to enable Indo-Suez Investments Limited to acquire a 25% interest in the syndicate which has been put together by Rosecorp Management Services Limited'. Mr Robert Rose AM is a director of that company along with other members of his family. The taxpayers read an affidavit of Mr Rose who explained having known Mr Leaver for 25 years and having done business with him 'on a number of occasions, almost invariably on the basis of oral agreement'. He described one such venture in the late 1990s to which this transfer by reason of timing cannot refer. He does, however, refer to another development he engaged in with Mr Leaver for some apartments in Cabarita which may be the project to which this refers. The resolution of this piece of ancient history is, however, unnecessary. What is clear is that Rosecorp's intrusion into the affairs of Indo-Suez (and Chemical Trustee) is explicable on the basis of Mr Leaver. I therefore conclude that this advance by Chemical Trustee through Indo-Suez was most likely for Mr Leaver's benefit to assist his venture with Mr Rose AM.
198. JA Investments was used for the same purpose as Indo-Suez, that is to say, as a funnel to pass money from Mr Gould's offshore interest in Chemical Trustee to his onshore interests in Australia. There were two transactions. The first was 25 June 2007 and involved a transfer of $1.4 million from Chemical Trustee via JA Investments to Morning Star Fiduciaries which then passed it on to Melbourne Insurance Company Pty Ltd. As I have already noted above, both of these companies were under the control of Mr Gould. A later transfer of $1 million on 28 July 2000 to JA Investments was then passed on to Melbourne Insurance and the same conclusion applies.
199. What does this show? The use of Indo-Suez and JA Investments as conduits shows that these transfers were from an entity controlled by Mr Gould to entities or persons associated with Mr Gould and/or Mr Leaver. Why does this matter? It demonstrates, for present purposes, that Mr Borgas' contention that he was the owner and controller of Chemical Trustee cannot be correct. It is another reason to reject his evidence.
(v) Outright Transfers to Indo-Suez
200. In fact, Mr Gould's use of Indo-Suez was more extensive than first appears. In truth, Indo-Suez was a vehicle by which Mr Gould and his wife operated offshore debit cards. Mr Vara gave evidence that Lubbock Fine maintained an account with Lloyds TSB Bank PLC in the name of Indo-Suez on which were maintained debit cards for Mr and Mrs Gould. A letter from Mr Vara to a branch of that bank in London put this issue beyond any doubt.
201. Nor is there any doubt that the following sums were transferred by Chemical Trustee into that Indo-Suez account to fund the debit transactions which Mr and Mrs Gould were performing using their debit cards:
|8 July 1999||$30,000|
|8 November 1999||$20,000|
|18 January 2000||$20,000|
|9 March 2000||$20,000|
|11 July 2000||$50,000|
|13 September 2000||$20,000|
|6 November 2000||$30,000|
|9 February 2001||$40,000|
|6 March 2001||$30,000|
202. It is not open to doubt this because Mr Vara admitted it under cross-examination. In each case the transfer was accompanied by a letter from Mr Borgas to Mr Vara instructing him to make the transfer 'to pay a management fee'. I have already referred to Mr Borgas' evidence that by management fee he simply meant an inter-company transfer: T1067.
203. This shows that Mr Gould was using Indo-Suez to transfer money back into Australia using debit cards from money he controlled in Chemical Trustee via Indo-Suez. The idea that Mr Borgas was taking these steps using his own money is unrealistic. He gave the following evidence about this:
'MR FAGAN: Now, you knew throughout 1999 and through to August 2004 at least, didn't you, that Lubbock Fine operated a debit card on an account of Indosuez at Lloyds TSB Bank PLC? I was not - I was aware that there was a - there were no debit cards, as far as I was aware. There were credit cards, but no debit cards.'
204. It was apparent from the cross-examination of Mr Borgas that he was unaware of the existence of the drawings by Mr and Mrs Gould using debit cards on the Indo-Suez account (in turn funded by Chemical Trustee).
205. On its face it is very difficult to explain why Mr Borgas might be arranging for such surreptitious payments to Mr and Mrs Gould using his own money. Indeed, Mr Borgas thought so too since his initial positon on this issue was that he would need to speak to Mr Vara. When confronted with the fact that Mr Vara had testified that the debit cards were used by Mr Gould, Mr Borgas testified that he had nothing to say in disagreement with Mr Vara.
206. It is implausible that Mr Borgas was permitting Mr Gould to take Mr Borgas' money in this fashion. The much more obvious explanation is that the money was Mr Gould's.
(vi) Transfers from Chemical Trustee to City and Westminster
207. Between 15 July 1999 and 21 November 2006 there were 22 transfers of funds from Chemical Trustee to City and Westminster. These totalled $4.45 million. City and Westminster was ultimately beneficially owned by Mr Gould through JA Investments and MH Investments. It had two shares on issue, both of which were held by companies the owners and directors of which were partners or staff of Lubbock Fine. The testimony of one of the Lubbock Fine partners was that the ultimate ownership of City and Westminster was ultimately beneficially owned by MH Investments, JA Investments, or both. There is no reason for Mr Borgas to have caused these transactions if he were the beneficial owner of Chemical Trustee.
208. Further, after the money arrived at City and Westminster some of it was spent on activities closely associated with Mr Gould. For example, the Reverend Michael Jensen, the Rector of St Marks, Darling Point, gave evidence that Mr Gould had supported him in his studies at Oxford University to the extent of £36,000 in fees and approximately $90,000 in living expenses. An example of one of these transfers was provided by a letter dated 26 October 2005 signed by Mr Borgas on Chemical Trustee letterhead to Mr Vara at Lubbock Fine instructing him to transfer $20,000 to City and Westminster and telling him that the purpose of the transfer was a 'to facilitate payment' of Oxford University Fees for Michael Jensen for 2005/2006'.
209. No evidence was led by the taxpayers about this. I find that Mr Gould was paying the Reverend Jensen's fees and expenses using funds owned by him through Chemical Trustee.
210. The Commission also relied upon a transfer of $1,935,596 from City and Westminster to Ms Vicki McGrouther. The evidence did not satisfy me that this was a disposition to a person close to Mr Gould. Ms McGrouther was the wife of Mr Tod McGrouther who has some involvement with Mr Gould but not in a way which permits me to conclude that, in this instance, the Commissioner is correct. However, this hardly matters where City and Westminster was owned and controlled by Mr Gould.
211. I am satisfied, therefore, that these transactions are inconsistent with Mr Borgas' evidence that it was he who owned and controlled Chemical Trustee. It is another reason to reject his testimony to that effect.
(vii) Chemical Trustee's investments in Vita Life Sciences Ltd via Lloyds & Casanove
212. Vita Life Sciences Ltd was listed on the ASX until 30 June 2003. Leading up to that date it had run into financial troubles as a result of the collapse of Pan Pharmaceuticals. It had traded below $1 leading up to its delisting.
213. Mr Borgas and Mr Gould have very different views about the prospects of Vita Life Sciences. On the one hand, Mr Gould was a strong supporter and urged the board of CVC Ltd to maintain an investment it had made in the company. In 2004, consistent with his expressed enthusiasm for investment in Vita Life Sciences, Mr Gould became its chairman. Some years later, in 2007 the company relisted.
214. On the other hand, Mr Borgas testified that he did not regard Vita Life Sciences as worthy of investment.
215. Assuming Mr Borgas was telling the truth about this (a not insignificant assumption, but one about which the taxpayers can hardly complain) it would be difficult to conceive of reasons why he would wish to use Chemical Trustee to invest in Vita Life Sciences. Yet that is what the evidence shows. Between May 2003 and February 2007 Chemical Trustee transferred funds on 16 occasions to Vita Life Sciences which totalled $6,065,000. On each occasion Mr Borgas signed a letter authorizing the transfers via an intermediary company - Lloyds & Casanove - before being passed to Vita Life Sciences. On one occasion the intermediaries appear to have been both Lloyds & Casanove and another company called Barleigh Wells Ltd. At all times Mr Gould controlled both companies; Lloyds & Casanove through JA Investments, at one time, or at another, through IRSS Nominees (4) Ltd as trustee of the Phillips River Superannuation Fund. The shareholders in Barleigh Wells were Lubbock Fine staff. With Mr Gould associated with every other element of these transactions I think it most unlikely that Barleigh Wells was not being operated for Mr Gould's benefit.
216. In any event, where it is Mr Borgas' evidence that he would not invest in Vita Life Sciences the only plausible explanation is that these events reveal Mr Gould investing his own money in Vita Life Sciences. This is another reason to reject Mr Borgas' evidence that he owned Chemical Trustee.
(viii) Chemical Trustee's investment in Mitre Focus through Lloyds & Casanove
217. Mitre Focus Sdn Bhd is a company carrying on real estate investment in Malaysia. Mr Yunus testified that Mr Gould was introduced to Mitre Focus by a person who was recruited as the managing director of Vita Life Sciences. It was Mr Yunus, it seems, who arranged the investment in Mitre Focus for Mr Gould. And, so Mr Yunus testified, this was done through Mr Yunus' own entity, Perkasa Normandy Managers Sdn Bhd.
218. The evidence thus suggests an investment by Mr Gould, not Mr Borgas, in Mitre Focus. Consistently therewith it was Mr Borgas' evidence that he knew nothing about Mitre Focus.
219. How then should one understand the $1,570,000 transferred from Chemical Trustee to fund the acquisition of equity in Mitre Focus? In three separate instruction letters on Chemical Trustee letterhead Mr Borgas gives instructions for the transfer of Chemical Trustee's money for that purpose. I do not accept that anything other than the obvious is the case. This was Mr Gould's money and Mr Borgas' involvement was no more than window dressing.
(ix) Transfers from Mr Gould to his charitable interests
220. Involved here are two transactions: a donation by Chemical Trustee of $500,000 to Ellel Ministries Australia Ltd to allow it to complete the purchase of a property called Gilbulla (already discussed above) in the context of Mr Watson's evidence and a donation by Chemical Trustee of $1,000,000 to Moore Theological College.
221. I have no doubt that these were done at Mr Gould's behest with Chemical Trustee's funds which were Mr Gould's.
222. As to the first transaction, Mr Watson of Ellel swore that Mr Gould had arranged the $500,000 loan from Chemical Trustee to assist Ellel complete a purchase. The Commissioner submitted, and I accept, that there is no plausible reason why Mr Borgas would have directed Chemical Trustee's funds to an obscure charity in Australia. As to the second transaction there is the small difficulty of a letter from Mr and Mrs Gould to the principal of the College stating that they were:
'...arranging for a Trust to transfer $1,000,000 to Moore Theological College to enable a Trust to be established to support the Department of Missions.'
223. This leaves open the (slight) possibility that Mr and Mrs Gould may have been mere interlocutors for some other unidentified donor. However, a subpoena was issued to the College for any document identifying the donor of the $1,000,000 but no document was produced which did so.
224. Mr Borgas testified that he arranged this donation of his own choice and as a thank you to Mr Gould. With this, as with almost all of Mr Borgas' evidence, I am satisfied that he was lying. As the Commissioner pointed out, if Mr Borgas was the true donor, one might have expected this fact to appear in Mr and Mrs Gould's letter.
225. It follows that these transactions strongly show that it was Mr Gould's money which rested in Chemical Trustee. This is another reason to reject Mr Borgas' evidence as to his ownership of Chemical Trustee.
(x) Chemical Trustee's share investments for the benefit of Mr Gould
226. The Commissioner relies upon three sets of transactions:
- i. purchases of shares by Chemical Trustee which were for the apparent benefit of one of Mr Gould's clients, Mr Tod McGrouther;
- ii. the investment by Chemical Trustee in the Sunland Group Ltd which the Commissioner contends was for the benefit of Mr Gould; and
- iii. the investment by Chemical Trustee in Sunleisure Ltd and SMC Gold Ltd which the Commissioner contended was for the benefit of Mr Gould and Mr Leaver.
227. I accept that the Commissioner has established these examples.
228. As to (i), I accept that Mr McGrouther was a client of Mr Gould. Mr McGrouther is the sole shareholder in TM Consulting Pty Ltd. This company was associated with an international superannuation fund in Samoa called the Power Superannuation Fund. In effect that fund was Mr McGrouther's vehicle. The fund maintained an agency agreement with an Irish company called Apollo. Additionally, the shares in Apollo were ultimately beneficially held by the Power Superannuation Fund, that is, Mr McGrouther. It can be inferred, therefore, that despite the rather elaborate corporate camouflage put in place to obscure Mr McGrouther's identity, he and Apollo are essentially the same.
229. This matters because on 27 April 2001 Mr Gould wrote to Mr Vara at Lubbock Fine informing him that $1.25 million would be received from Apollo, that is to say, Mr McGrouther, for investment by Chemical Trustee 'as a nominee of Apollo Solutions Limited... in a new Australian listing called Globe International Limited'. Curiously, Mr McGrouther appears to have been one of the underwriters for that float through another of his vehicles, KTM Capital Pty Ltd. I do not hesitate to conclude that this was an example of Chemical Trustee being used by Mr Gould to assist one of his clients in an apparently concealed share acquisition. No role for Mr Borgas in this fandango was suggested and no evidence to that effect led. Of course, there was no role for Mr Borgas because Chemical Trustee was always Mr Gould's entity.
230. There are two other McGrouther related transactions which show much the same thing. On 14 May 2002 Chemical Trustee paid $15,000 to Apollo - I infer as a dividend on its investment in Globe International - and on 5 November 2002 it paid an amount of $26,000 as a dividend on shares in the Kaz Group Ltd. There is no direct evidence, but I infer, that Chemical Trustee also held shares in that entity for Mr McGrouther. In any event, the point is the same - the use by Mr Gould of Chemical Trustee to assist a client; the absence of any coherent role for Mr Borgas.
231. As to (ii) (an investment in Sunland Group Ltd) one begins by noting that what is involved here is an investment of $1.575 million by an entity called Global Holdings LLC. This entity is incorporated in Wyoming. Until October 2009 its shareholders were two companies owned by another corporate services company called Intrust Ltd. There, in the natural splendour of Wyoming, the trail nearly runs cold. But there were two events which suggest that this interest was just another front for Mr Gould. First, on 11 March 2010 Intrust sent Mr Gould a fax. This fax enclosed a standard transfer form for the transfer of 4 million shares in Sunland Group Ltd from Global Holdings LLC to Lloyds & Casanove, an entity which as I have already observed, was one of Mr Gould's vehicles. This does not prove that Mr Gould controlled Global Holdings LLC. The terms of the fax are consistent with it perhaps being an innocent provision by a transferor of an instrument of transfer to a transferee (or a transferee's ultimate controller).
232. Secondly, a subsequent communication from Intrust to Mr Gould of 21 December 2010 reveals that Intrust was taking instructions from Mr Gould on the operation of Global Holdings LLC; in particular, it was taking instructions from him on the dissolution of the entity. The fax read in part:
'As the cheque of A$3,750 has now been credited on the Company account, we will soon proceed with the issuing of our additional invoice for the carrying out of non-dissolution related work done so far, which we will forward to you for your records.
Once the invoice has been paid from the A$ bank account of the a.m. company at Barclays, we will proceed with the transfer of the remaining funds to Normandy I&F Ltd. Could you please clarify the relationship between the beneficiary of this final transfer out and Global Holding LLC.
Finally, please note that to date we have not received the Indemnity Letter which was sent to you on 15.10.10. Please note that until this letter is received signed, we cannot proceed with the dissolution.'
233. I infer from these two matters that Global Holdings LLC was an entity controlled by Mr Gould. It is possible that Mr Gould might have been arranging the dissolution of Global Holdings LLC on behalf of a client but this is unlikely given that the dissolution proceeds were to pass to Normandy UK, itself largely controlled by Mr Gould.
234. Why does it matter that Global Holdings LLC was an entity controlled by Mr Gould? Because it tells one something about Chemical Trustee and Mr Borgas. On 1 March 2004, Mr Borgas instructed Mr Vara of Lubbock Fine to transfer $1.575m from Chemical Trustee to Global Holdings LLC so that, as his letter put it, it might 'enable that company to take up its entitlement to 1,500,000 ordinary shares in Sunland Group Limited'.
235. There is no evidence to suggest any connection between Mr Borgas and Global Holdings LLC and more than enough to connect it to Mr Gould. The transfer apparently authorized by Mr Borgas from Chemical Trustee to Global Holdings LLC for the purchase of Sunland shares was, therefore, from one Gould entity to another. It is inconsistent with Mr Borgas' assertion that Chemical Trustee was owned beneficially by him.
236. As to (iii) (investments in Sunleisure Ltd and SMC Gold Ltd), it is true, as the Commissioner contended, that Mr Borgas purportedly instructed Mr Vara to transfer $2.5 million from Chemical Trustee's bank account in Jersey to its London account and thereafter to Sunleisure Ltd but it is not shown that Sunleisure was associated with Mr Gould. This is of little moment since I remain satisfied that it was Mr Gould who controlled Chemical Trustee. On the other hand, I do accept the utility of the Commissioner's submissions about the transfer of $352,000 from Chemical Trustee to Normandy UK and thence to Golden Investments Pty Ltd which was to be used for the purchase of shares in SMC Gold Ltd. Mr Borgas purported to give such an instruction to Mr Vara on 7 November 2005 on Chemical Trustee letterhead. In fact, Golden Investments Pty Ltd has at all times either been owned by Wenola Services or Southern Nominees. As previously noted the former is controlled by Mr Gould with Mr Leaver, whilst the latter is Mr Gould's through the artifice of Morning Star Fiduciaries.
237. Consequently, I accept that this transaction is another reason to reject Mr Borgas' evidence that it was he who beneficially owned Chemical Trustee. There is no reason why he would have been sending his own money to these entities. None was suggested. None exists.
(xi) Explicit investment instructions from Mr Gould about Chemical Trustee
238. Here the Commissioner relied upon the investments by Chemical Trustee in the following transactions:
- (a) Altec Irrigation Inc;
- (b) CVC Reef Ltd;
- (c) CVC Biz Vision Ltd;
- (d) Powerplan Ltd;
- (e) HHG Plc;
- (f) Ion Ltd; and
- (g) Capral Aluminium Ltd.
239. It is useful to deal with each of these separately.
(a) Altec Irrigation Inc
240. Up until this point I have referred from time to time to letters of instruction issued by Mr Borgas on the letterhead of Chemical Trustee. Viewed in isolation these letters, together with Mr Borgas' untested evidence in chief, are apt to create the impression that Mr Borgas was the directing mind of the company. As will already be apparent, however, there are a number of reasons to reject this characterization of the events in question. The first is that the letters falsely imply a role for Mr Borgas which he simply did not have.
241. In that regard, the transactions involving Altec Irrigation Inc are especially important because, by accident, they reveal in correspondence the true nature of the relationship between Mr Gould and Mr Borgas. Whilst on the vast majority of occasions Mr Borgas produced documents on Chemical Trustee letterhead which seemed to suggest that he was a decision-maker, just now and then the guard was momentarily dropped and the truth of the matter accidently revealed.
242. The Commissioner relied upon 11 of these matters but five will suffice to make the point. One begins by keeping firmly in the front of one's mind Mr Borgas' contention that Chemical Trustee was his business and Mr Gould's role was merely as friend and advisor. This contention cannot be reconciled with these five matters.
243. First, on 17 July 2000, Mr Vara at Lubbock Fine wrote to Mr Borgas at his own company Anglore SARL (not Chemical Trustee). He referred to the fact that Altec Irrigation had received a loan advance from Chemical Trustee and went on to inquire:
'...I should be grateful if you would confirm whether you have issued interest debit notes for the years to 30 June 1999 and 30 June 2000.'
244. Mr Borgas replied on Chemical Trustee letterhead:
'With regard to Altec Irrigation Inc, I cannot trace having sent Interest Debit Notes for either of the years in question. This is perhaps something you will have to raise with Vanda, unless you think it best that I raise it with him.'
245. I can conceive of no reason why Mr Borgas would think it necessary to inquire about this matter from Mr Gould unless it was Mr Gould who was truly in control. This is consistent with Mr Vara having written to Mr Borgas at Anglore SARL which is Mr Borgas' own corporate services company. This suggests that Mr Borgas' role in this imbroglio was through that entity and had nothing to do with his own personal affairs. I so conclude.
246. Secondly, on 10 November 2000 Mr Borgas wrote to Mr Vara in these terms:
Re: Chemical Trustee Limited ("CT")
I refer to your letter of 3rd November in relation to the above and attach a copy of the 5 page fax I sent to you on 17th July.
Whilst this gives you certain information regarding the Fennelltown and the Malackey situations, I have asked Vanda to let me know if there is any relevant information I can add to that contained in my said fax.
With reference to Alec, I have asked him to let me have any relevant information which I can pass to you since I have very little on my file.
As soon as I hear from Vanda, I shall be in touch with you again.'
247. This letter, once again, was sent on the letterhead of Anglore SARL not Chemical Trustee. If Mr Borgas were the true owner of Chemical Trustee then it makes no sense that:
- (a) he is writing letters about its affairs on the letterhead of an (apparently) unrelated business;
- (b) he indicates that he had requested information from Mr Gould which, if the business were truly Mr Borgas' might reasonably be suspected to be known by Mr Borgas; and
- (c) he suggests that information would flow from Mr Gould to Mr Borgas and then to Mr Vara when, on Mr Borgas' case it is Mr Borgas who should be the source of the information.
248. I conclude, again, that this shows that Chemical Trustee is owned and controlled by Mr Gould.
249. Thirdly, there is Mr Borgas' letter of 27 February 2001 to Mr Gould. Again it is on Anglore letterhead. It is in these terms:
RE: Chemical Trustee Limited
Altec Irrigation, Inc.
I have your 9 page fax of earlier today in relation to the above, the contents of which I note.
I confirm that the Agreement of Purchase and Sale of Stock to which you refer has been executed by me as a director of Chemical Trustee Limited and faxed to Mr. Kurt Penberg in California.
I have also advised Mr. Penberg that the UCC Financing Statement Amendment form will be completed upon receipt in full of the first instalment by Chemical Trustee Limited of USD 250,000.
I shall keep you informed of developments in relation to this matter.'
250. The language of this letter is only consistent with Mr Gould being the client and Mr Borgas the assistant. Clients do not 'confirm' matters to their advisors nor promise to keep them informed of developments. The true role of Mr Borgas as Mr Gould's hired help is underscored by the fact that the letter is on the letterhead of Mr Borgas' own advisory firm.
251. Fourthly, there is the letter of 6 March 2001. Written by Mr Borgas on the letterhead of Anglore to Mr Vara it is said to be 'RE: Chemical Trustee...' and, following an initial paragraph which can safely be disregarded went on to say with disarming frankness:
'I confirm that in accordance with our mutual client's instructions, I have signed this agreement as a director of Chemical Trustee and have faxed the same to Mr. Penberg (you will notice that this agreement has been signed by someone on behalf of Ambient Control Systems Inc.).
I have to admit that I have rather "lost the plot" in relation to this matter and, at the moment, I am following instructions received from our mutual client.
Should you become aware of further developments or should you receive funds in relation to this matter, please be kind enough to let me know. Thank you.'
252. I have no doubt that the 'mutual client' was Mr Gould. The reference to the 'lost plot' is devastating.
253. This letter shows the true nature of Mr Borgas' role as a person whose job was to carry out steps at Mr Gould's behest then to make it appear as if they were his own. It not only reveals that true nature but also, I regret to say, reflects the arrangement's abject dishonesty. What was involved was a charade.
254. I pause at this point to observe that this letter by itself would have led me to conclude: (a) that the web of companies put forward as Mr Borgas' was always Mr Gould's and (b) that the arrangement was fundamentally dishonest. And this is so quite apart from the revelation that it was Mr Gould who owned and controlled JA Investments and MH Investments.
255. The same point is made by another letter sent on 25 June 2001 by Mr Borgas on the letterhead of Chemical Trustee to Mr Vara. That letter is in the following terms:
'Please accept this letter as your authorisation and instructions to pay the sum of AUD 257,647.- to Normandy Finance & Investments Limited. This amount represents the commission payable by Chemical Trustee Limited on the monies received from the successful sale of Altec/Ambient shares in the USA (I believe you are aware of this).'
256. Why Mr Vara would be aware of this other than from Mr Borgas is perhaps a little mysterious but that can be put to one side. What is important is the handwritten annotation which appears on it in the following terms:
'OK. [illegible] confirmed by client'
257. I think it is likely that this was placed on the document by Mr Vara but it does not really matter. There is no reason for an instruction signed by the ostensible client to bear an annotation that it had been confirmed by the client. What this annotation shows is that Mr Borgas was not the client and that his instructions needed to be checked with the actual client. Whether it was Mr Vara who spoke to Mr Gould and annotated the letter accordingly or someone else inside Lubbock Fine does not matter.
258. Mr Borgas was confronted with these difficulties during his examination in chief. He was asked the identity of the 'mutual client' referred to in the letter of 6 March 2001. The exchange was this:
'MS SEIDEN: So who are the mutual clients in this letter? I'm sorry, yes, I'm sorry, my learned friends correct me. Quite right, mutual client. Who is the mutual client? I consider that the - that the reference is to Chemical Trustee in that - yes. Chemical Trustee.'
259. This cannot be correct. It makes no sense for Mr Borgas to be referring to Chemical Trustee when the very letter he is sending is an instruction from Chemical Trustee (albeit on Anglore letterhead). Mr Borgas was later taxed about this during his arduous cross-examination and gave the following evidence:
'MR FAGAN: You gave evidence, asked by your own counsel, that what was meant by "our mutual client" was a reference to Chemical Trustee? As between Mr Vara and myself, yes.
How was Chemical Trustee a mutual client of yours and Mr Vara's? Well, as Lubbock Fine were the auditors of Chemical Trustee.
But how was Chemical Trustee a client of yours? Well, Chemical Trustee in the sense that it was within the money laundering legislation that you have in operation in Switzerland -we've - I - we have touched on this before. It was a company that had to be within the Anglore system of companies that were covered by the money laundering legislation, and it was - it was a client of Anglore - I'm writing on Anglore notepaper - and to - to the extent that I've just explained, yes, it was a client of Anglore.
But you were just then taking instructions in relation to entering into this transaction involving the Altec shares and the Ambient shares, weren't you?
Taking instructions -
Yes? - from whom?
From Mr Gould? No.
Were you taking instructions from anybody? I was getting information, which was perhaps not - not necessarily as full as it should have been, but the decision -
But just answer my question, please? Yes.
Were you taking instructions? No.
Were you being directed by somebody -? No.
- with respect to this transaction? No, no. You're suggesting I'm a puppet, and I was not.
I am suggesting you were a puppet -? - Well, I'm not.
- of Mr Gould -? I am not.
- a cipher, if you like? I am not.
No? Well, in the third paragraph of this letter, you said:
I have to admit that I've rather lost the plot
...in relation to this matter.
What did you mean by that? That there were matters that in relation to the conclusion of the transaction that still had to be sorted out.
All right. And you went on to say:
And at the moment, I'm following instructions received from our mutual client.
That seems to contradict what you just told the court on your oath, that you weren't taking instructions? I was not taking instructions from Mr Gould.
Well, I asked you who you were taking instructions from. You said you weren't taking instructions? Well, there was - there was two parties, I suppose, when a reference -
Who were you taking instructions from? Well, it was - it was certainly not Mr Gould.
Who were you referring to? "Following instructions from our mutual client." Who were you referring to, Mr Borgas? I don't - I don't recall. I really don't recall.
HIS HONOUR: I think you will have to do a bit better than that, Mr Borgas? Excuse me?
I think you will have to do a little bit better than that? Well, the truth is, I do not recall, sir.
MR FAGAN: What clients did you have that were interested in a transaction with Altec Irrigation and Ambient Control -? Well -
- a Californian and Delaware company respectively? What clients did you have amongst whom we might choose to identify the one or ones from which you were taking instructions? Well, there would be - there would be Anglore, may I suggest?
Anglore isn't a client. Anglore is your entity through which you carry on business as a corporate -? Well, Chemical Trustee is a client of Anglore.
But we've agreed that you were taking instructions from somebody other than Chemical Trustee, haven't we? You know, I really - I really don't recall the circumstances going back to 2001.
Wasn't the client the person to whom you had written on 27 February 2001, as we saw at page 139, to inform him about the transaction? At which - at which page, sorry?
Wasn't that the client, the addressee of that letter, Mr Vanda Gould? No.
Wasn't that the reason you were writing to him that date informing him about this transaction, because he was the client -? No, no. The reason -
- and because he was mutually a client of yours and of Vara's at Lubbock Fine in relation to this? But that - that does not mean to say that the transaction involved me being Mr Gould's puppet, as we mentioned a moment ago.
Could you put aside puppet? You deny that he was the client, do you, in relation to this transaction to whom you referred at page 152? Yes. Recommendation, right.
All right? Directors of Chemical Trustee made the decisions, yes.
HIS HONOUR: Just so I can be clear, in relation to the -? I'm sorry, your Honour?
Just so I can be clear, in relation to the document at page 152, who do you currently say is the client, the client referred to in the second-last paragraph? Second-last paragraph. Well, you told me a moment ago, your Honour, I have to do better than that, but I do not recall who the mutual client might be, but I do stress that that is not intended to be a reference to Mr Gould.
All right. Is that a convenient time, Mr Fagan?'
260. The bottom line of this ridiculous evidence was that Mr Borgas could not remember who the 'client' was but was sure it was not Mr Gould. I reject this. The client was Mr Gould.
(b) CVC Reef Limited
261. It appears that sometime prior to April 2001 Chemical Trustee entered into a subscription agreement with CVC Reef Ltd. It did so apparently as trustee of the British Firemans Pension Fund. Of this fund nothing is known. Based on the other evidence in this case, I should be very surprised, assuming the fund exists, that it has anything to do with firemen. But this does not matter. The key point is the instruction apparently given by CVC Reef to Chemical Trustee on or about 7 June 2001. This was sent from a fax machine previously used by Mr Gould. CVC Reef has, according to this instruction, the same address as Mr Gould's office. Amongst the various instructions contained in this document and given by CVC Reef to Chemical Trustee is one requiring it to subscribe $31,594 under the pre-existing subscription agreement. On the version which is in evidence it is marked for the attention of Mr Vara. There are handwritten annotations including a circling of the figure '$31,594' connected by a line to the words 'Approved by client' above what appears to be Mr Gould's signature. The inference I drew from this is that Mr Gould was the client behind Chemical Trustee and that Mr Vara needed to be satisfied in each instance that Mr Gould had given approval.
(c) CVC Biz Vision Ltd
262. On 12 June 2001 Mr Gould on his own letterhead sent this interesting fax to Mr Vara at Lubbock Fine:
Chemical Trustee Limited
Please find enclosed a letter from CVC Biz Vision Limited together with Final Call Notification and Dividend Election Forms.
We have discussed this matter with the directors who will confirm their approval separately for Chemical Trustee Limited to elect Option 2 which will require Chemical Trustee Limited telegraphically transferred a total of A$800,000 to CVC Biz Vision Limited, whose bank account details are as follows, prior to 5 July 2001:'
263. The formal directors of Chemical Trustee were Mr Borgas and his family. If Mr Borgas was, as the taxpayers suggest, the client there is no reason why Mr Gould would be communicating with Mr Vara first. It would be Mr Borgas who was contacting Mr Vara. Again, this shows not only that the true client was Mr Gould but that steps were being taken to conceal that fact.
264. Mr Borgas' role as a front for Mr Gould is further confirmed by a fax he sent to Mr Vara on 20 April 2004. On that day Mr Borgas received a fax from CVC Biz Vision in relation to a transaction. He responded on Chemical Trustee letterhead the same day before sending this fax to Mr Vara which, in part, said this:
Re: CHEMICAL TRUSTEE LIMITED («CT»)
CVC Biz Visions Limited
I attach for your information copies of:
a) A 4 page fax received this morning from Mr. Beard of CVC Biz Vision
b) The reply I sent to him today after I had spoken to the consultant.
In the light of the above exchange of correspondence, please accept this letter as your authorisation and instructions to transfer the sum of A$ 584,521.00 to Westpac Banking Corporation as referred to in Mr. Beard's said fax of today's date.'
265. One might reasonably suspect that 'the consultant' was Mr Gould. This suspicion is confirmed not only by the absence of any intelligible alternative conclusion but also by the presence on another copy of this letter of a handwritten annotation 'client approved' above Mr Gould's signature. The sequence of events is therefore that the CVC Biz Vision fax was sent to Mr Borgas; Mr Borgas called Mr Gould to see what to do; Mr Borgas carried out his instruction by replying to the CVC Biz Vision fax; Mr Borgas reported to Mr Vara and Mr Vara sent through Mr Borgas' report to Mr Gould for his approval.
(d) Sale of shares in Powerlan Limited
266. On 5 August 2002 Mr Borgas signed an instruction from Chemical Trustee to Austock Brokers to sell its entire holding in Powerlan 'at the best price available'. Mr Borgas has written on the bottom of the page 'CC: Mr Hasmukh Vara: By fax for information: The holding of Powerlan shares is 3 million although I have no idea of their current price. Best regards, Peter'.
267. I do not accept that if Mr Borgas were the true owner that he would dispose of a parcel of shares without knowing the value. The more likely inference, and the one I draw, is that he was giving effect to an instruction from Mr Gould.
(e) Accidental purchase by Derrin Properties Pty Ltd of shares in HHG Plc which should have been placed in the name of Chemical Trustee.
268. On 19 October 2004 Mr Borgas wrote to Mr Gould in these terms:
'The attached letter of 24th August is clear but my letter to Wilson HTM of the same date (copy attached) is unfortunately, incorrect in that it was sent on Derrin Bros. note paper. A copy of the contract note is attached.
My error, for which I sincerely apologise, was pointed out to me by Hasmukh.
Kindly let me have your comments as how you feel we should best deal with this matter given the circumstances set out above.
I look forward to hearing from you. Thank you.'
269. There is no reason for Mr Borgas to be apologizing to Mr Gould unless it is Mr Gould who is the client.
(f) Investment in Ion Ltd
270. The next transaction, although apparently minor, is significant in the context of the picture it paints of the relationship between Mr Borgas and the firm of Australian brokers, Bell Potter. I have dealt with the evidence of Mr Codd above which was to the effect that Mr Borgas appeared to be the client to him. I have concluded that Mr Codd was deceived.
271. The underlying proposal was for Chemical Trustee to buy 200,000 ordinary shares in Ion Ltd at $1.50 per share. Mr Borgas appears to have become confused about his instructions. He seems to have thought that the transaction was to follow from instructions from Bywater but that the shares were to be placed in the name of Chemical Trustee. On 28 May 2004 he sent a draft copy of the instruction to Mr Vara bearing this annotation:
'Not quite sure about this but am checking the position with the consultant. Shall keep you informed.'
272. A few days later on 31 May 2004 Mr Borgas wrote to Mr Vara on his own Anglore letterhead in these terms:
RE: Chemical Trustee Ltd. ("CT") - Purchase of 200,000 Ion Limited shares.
Reference the attached copy fax of 28th May, it has been confirmed that the purchase of the above shares should be made by CT.
I therefore attach a copy of a fax sent to the broker in Brisbane today. I have told him to ignore the fax sent to him on 28th May.
I trust all is clear but should any points arise, please let me know.'
273. Consistently, on the same day a fresh instruction was sent to Bell Potter this time on the correct letterhead of Chemical Trustee. There is no person who can be the 'consultant' apart from Mr Gould. This sequence of events shows that the instructions given by Mr Borgas to Bell Potter proceeded entirely from Gould and that a conscious decision was made both by Mr Borgas and inevitably by Mr Gould to make it appear otherwise.
(g) Investment in Capral Aluminium
274. On 23 April 2007 Mr Gould wrote to Mr Borgas at Anglore in these terms:
Chemical Trustee Limited
As you are aware, in February 2007 Chemical Trustee Limited changed its address to c/- our office to enable it to participate in a Convertible Note issue by Capral Aluminium Limited.
Now that the Convertible Notes have been issued (see attached holding statement) it is appropriate that the address be changed back to the London address. Accordingly, we enclose a Change of Address Notification and confirm our mutual client's instructions for you to fax the signed Notification to Computershare Investor Services Pty Limited on +61-3-9473-2500.'
275. Plainly enough this is not written as if Mr Borgas were the client. The very interesting aspect of the letter is Mr Gould's reference 'our mutual client's instructions'. The taxpayers' case is that Mr Borgas is the client but this letter makes a nonsense of that. Mr Borgas' attempts to explain who this might be were incoherent. I have no doubt that Mr Gould was referring to himself so that Mr Vara could be satisfied that he had so agreed. Consistent with that view is the fact that Mr Borgas then faxed Mr Gould's fax to Mr Vara.
(xii) Mr Gould micromanaged Chemical Trustee's reporting and banking
276. The taxpayers, to the extent that they sought to engage with the Commissioner's case were, of necessity, obliged to concede that Mr Gould had had some role in the affairs of Chemical Trustee. In the lead-up to the trial, and through its first few days, the taxpayers adopted the position that Mr Borgas was the real decision-maker and that Mr Gould was a trusted advisor of his. It was on that basis that Mr Gould's frequent interventions in the affairs of Chemical Trustee were to be explained. Mr Borgas pursued this line in his evidence telling counsel for the taxpayers in chief that the decisions were his and that Mr Gould was, in essence, an investment advisor.
277. It will be apparent by this stage in these reasons that I regard Mr Borgas' evidence as wholly unreliable. Of course, rejecting Mr Borgas' evidence that Mr Gould was an advisor does not logically entail that Mr Gould was the owner and operator of Chemical Trustee. It is, however, apparent from the way that Mr Gould conducted himself that this was so.
278. To make this proposition good the Commissioner relied upon three sets of activities. The first concerned the settlement of trades from maturing bank deposits. On 9 February 2001, Mr Vara instructed HSBC to pay $750,000 to CVC Bix Vision Ltd. At the same time he sent a note to Mr Borgas at the bottom of which there was a handwritten note saying:
'The deposit will mature on 14 February when the sum will be transferred. I hope this is ok with you and Mr Gould.'
279. There would be no reason for Mr Vara to be concerned about Mr Gould's views if Mr Gould were a mere advisor.
280. By itself, I would not regard that point as perhaps overwhelming. However, the theme it suggests is confirmed by the Commissioner's second matter which concerned Mr Gould's otherwise inexplicable habit of checking and approving the accounts of Chemical Trustee. On 25 July 2002, Mr Borgas wrote to Mr Vara enclosing signed copies of Chemical Trustee's accounts (and others) for the year ended 30 June 2001. Mr Borgas' letter included the statement:
'Please note that a copy of each set has been faxed to Vanda who will let you know very shortly whether he has any comments to make.'
281. There is no reason for an advisor to have such a role with respect to the accounts. It is indicative that Mr Gould was the ultimate beneficial owner and controller of Chemical Trustee.
282. The third matter concerned instances where Mr Gould directed Lubbock Fine what to do with Chemical Trustee's money. On around 26 April 2004 AMP declared a dividend of 9 cents which Chemical Trustee received as a cheque in sterling for £5843.79. The dividend notice bears a handwritten annotation:
'keep in sterling.'
And then on a separate part of the notice:
'Bank in £ please. T/Y Vanda'
283. I can think of no reason why Mr Gould rather than Mr Borgas would be giving this instruction unless it was Mr Gould who was the person behind Chemical Trustee.
284. These three matters show that Mr Gould conducted himself in a manner quite inconsistent with Mr Borgas' alleged control of Chemical Trustee.
(xiii) Anglore's invoicing of Chemical Trustee
285. There was no dispute that Mr Borgas did conduct a corporate services business through Anglore S.A.R.L and did so from Neuchâtel. One obvious inference could be that Anglore was providing Mr Gould with the service of ostensibly (but not actually) conducting Chemical Trustee's affairs from Switzerland. This was denied by the taxpayers and by Mr Borgas who claimed that Chemical Trustee was his own business.
286. This version of events is difficult to reconcile, however, with the fact that Anglore rendered invoices to Chemical Trustee and one of Mr Gould's other companies, Russell Associates. These were addressed to Mr Vara at Lubbock Fine. One such letter was as follows:
Re: Chemical Trustee Limited ("CT") - Bill No. 062-2004 Russell Associates Limited ("RA") - Bill No. 063-2004
I enclose the originals of each of the bill [sic] referred to above. You will see that details of the account to which payment should be made are shown on the bills.
The bills have been approved by the consultant and I would therefore be grateful if you would kindly make arrangements for each bill to be paid as soon as you can.
287. Mr Borgas gave evidence in chief that he referred to Mr Gould in correspondence when not using his name as 'the consultant'. I infer that in this letter Mr Borgas is telling Mr Vara that Mr Gould had approved the payments and they could therefore be made. This, of course, is quite inconsistent with Mr Borgas' asserted dominion over Chemical Trustee.
288. Naturally, the fact that Anglore was invoicing Chemical Trustee is an embarrassment for the taxpayers. Mr Borgas did not, however, see it this way. Under cross-examination he sought to contend that the invoices were simply to facilitate intercompany transfers between his businesses. So at T1209 this exchange took place:
'MR FAGAN: You did also render invoices to Chemical Trustee and Russell Associates, didn't you? For work of Anglore S-a-r-l? Yes. And, I don't find that there's anything unusual in that.
Right. Why would you do that? Because Anglore was a company that had to be kept in sound financial state, and if I - I mean, it's like - in the sense that it had its auditing obligations, money laundering compliance obligations and so on and so forth, and it needed to have a stream of income that was sufficient to enable it to meet all of its obligations, and if I decided that, for example, in order to boost the cash at bank for Anglore, I was going to invoice one of my companies, that was my decision and nobody else's.
Well, wouldn't you simply transfer funds from a company like Chemical Trustees or Russell Associates as an inter-company transfer? No. No, because we've got to - you've got to remember that those companies had to be audited in the UK by Lubbock Fine, and it had to be done properly.
At page 211, in volume C2, there's a letter to Mr Vara -? Yes.
- dated 22 July '04; you see the date? Yes.
And it refers to Chemical Trustee Limited, bill number 062-2004? Right.
You see that this is on the letterhead of Anglore S-a-r-l? Correct.
And then Russell Associates Limited, bill number 063 of 2004? Correct. Yes.
And you say:
I enclose the originals of each of the bill referred to above.
Those are examples of bills rendered Anglore S-a-r-l to those companies, are they? Correct.
Right. Well, what did you mean in the second paragraph by saying that the bills had been approved by the consultant? Was that, as usual, a reference to Mr Gould? As usual, I say the bills had been discussed with Mr Gould, I imagine, and that that was a - perhaps loose use of language, but at the end of the day, these were bills that I was perfectly entitled to submit to Mr Vara in the way that they were submitted.
I said, "as usual," because you would recall, you gave evidence-in-chief to your own counsel that you're accustomed to referring to Mr Gould as the consultant? Correct.
Yes. And what's loose about the language in this? Which part is loose? Well, that they have been approved by the consultant; that he is recommended, or that he is - these were discussed with him, but they did not, in fact - contrary to what the letter says, did not need his approval before they were sent to Mr Vara.
Why would you have said that they had been approved then? Well, sometimes you dictate a letter in a rapidly - you don't pay quite as much or as careful attention of the wording of the letter as you should, and it can catch up in a bit.
Yes. Why ever did you refer these bills to Mr Gould, even to look at? Wait, I'm not saying that I have - I'm not indicating that I have referred these bills to Mr Gould to look at; I might have mentioned to him over the phone -
I thought you said you had discussed them with him? Over the phone.
Could you discuss them without showing them to him? Yes.
Why ever would you discuss them with him? Just to keep him informed of things that were going on.
What, billing of your services to your own companies for the purposes of providing cash flow into Anglore S-a-r-l? I don't see anything particularly heinous in doing so.
I wouldn't suggest heinous, but I would suggest that's an indication that Mr Gould was really the person who was beneficially interested -? Yes. But we still come back to the very basics of this situation, so - these are group companies owned by JA, MH and -'
289. In my view, this evidence is difficult to accept. I reject it. I find that Mr Borgas caused Anglore to invoice Chemical Trustee and Russell Associates for the service which Mr Borgas provided, namely transacting the business of Chemical Trustee on behalf of Mr Gould so as to give the appearance that it was Mr Borgas who was conducting the business and not Mr Gould.
(xiv) Mr Gould's involvement in ASX compliance by Chemical Trustee
290. Mr Borgas gave evidence that it was Mr Gould who undertook responsibility for Chemical Trustee's compliance with ASX requirements 'respecting on-market investments'. It is not immediately clear to me what this means. Chemical Trustee was not itself listed so it did not have the (substantial) obligations which a listed entity has with respect to the notification to the ASX of significant developments. I am not precisely aware what obligations a shareholder (such as Chemical Trustee) has with respect to the ASX. The Commissioner's submissions included a reference to the need to disclose the shareholding of related corporate investors.
291. The Commissioner's point was that an investment advisor such as it was alleged Mr Gould was for Chemical Trustee would not have been able to acquire the detailed knowledge of its affairs needed to provide disclosures to the ASX. Further, so it was said, Mr Borgas gave no account of how Mr Gould might have obtained this information.
292. In the case of this particular allegation I am not persuaded that the fact, by itself, that Mr Gould took care of the ASX requirements for Chemical Trustee means that one can infer that Mr Gould was the true owner of Chemical Trustee. This is principally because I am unclear what the requirements in question are. It is also because it is not clear to me that this is not the kind of information which an advisor might well be responsible for.
293. This does not mean that I have changed my mind about the fact of Mr Gould's control and ultimate ownership of Chemical Trustee - only that this particular matter does not advance that case.
(xv) Chemical Trustee's investments through Perkasa Normandy Malaysia
294. This entity was apparently conducted by Mr Yunus. Mr Yunus was called as a witness by the taxpayers. I have dealt with his evidence above concluding that he was most likely deceived by Mr Borgas. It was Mr Gould who was in charge of these transactions.
(xvi) Chemical Trustee's borrowings from the Bank of Commerce (Micronesia)
295. The Commissioner next relied upon Chemical Trustee's dealings with the Bank of Commerce (Micronesia) and that bank's curious actions in lending money to Chemical Trustee which was used to purchase what purport to be life insurance policies on the life of Mr Gould. Aspects of these transactions make little sense but for reasons I will shortly explain they do provide strong support for the idea that Mr Gould was in control of Chemical Trustee and that Mr Borgas was his puppet.
296. One begins, I suppose, with the Fidelity Pacific Life Insurance Company Limited, a business which appears to have operated from Port Vila, Vanuatu. There is in evidence a table of life insurance policies apparently issued by this company. The table of life insureds includes Mr Gould, Mr Leaver, Dr Ross and Mr McGrouther. In respect of Mr Gould the policy is identified as 'F118'. The cover said to be provided by Policy F118 is 'US$25,000 (Total: US $125,000)' from which it appears to follow that the policy may have provided for five claims which is, even in the case of Mr Gould, a little surprising. The beneficiary of the policy was Mrs Gould. The policy also provided for $5,000 death cover which raises an issue about what the US$125,000 cover was for.
297. On 28 June 2000 Southern Nominees Pty Ltd paid a premium on this policy of $209,661. If matters rested there one would have the curiosity of a life insurance policy for which the annual premium substantially exceeded the cover provided. A number of other people associated with Mr Gould appear to have developed a desire to insure their lives under similar policies with Fidelity Pacific Life, that is, with policies where the premium exceeded the cover in each insurance year. For example, the following policies also existed in the 2000 insurance year:
|Life Insured||Policy No||Maximum Coverage||Premium||Date||Payer|
|John Leaver||F119||US$125,000||A$209,661||28/6/00||Planette Pty Ltd|
|Dr Ross||F122||US$125,000||A$208,333||28/6/00||LJK Nominees Pty Ltd|
|Mrs Ross||F123||US$125,000||A$208,333||28/6/00||LJK Nominees Pty Ltd|
298. Each of the paying entities was associated closely with the life insured. On its face these transactions appear irrational. It makes no sense to pay a premium of $209,661 for a year of cover with a maximum liability of US$125,000. No attempt was made by the taxpayers to show that the policies were thought to have a surrender value. The reason for that forensic oversight is, I think, to be found in Mr Gould's remarkable letter to the insurer of 11 August 2000. It was not the usual kind of letter written to an insurer. To begin with, it was addressed to:
'Ms Sue Phelps
Fidelity Pacific Life Insurance Company Limited
PO Box 301
PORT VILLA VANUATU'
299. The parties were agreed that this insurer, if that is what it was, had been incorporated in Vanuatu. However, for reasons which are not obvious its office holders were revealed by a search of corporate records maintained by the Office of the Attorney-General and Public Safety of Prince Edward Island in Canada. Prince Edward Island is Canada's smallest province and lies in the Gulf of St Lawrence. According to those records, Ms Sue Phelps is one of its directors and she resides at Bribie Island in Queensland. Bribie Island lies between Brisbane and the Sunshine Coast and is not in the Gulf of St Lawrence.
300. The topic of Mr Gould's fax was expressed to be 'Bank of Commerce (Micronesia) Limited'. The letter contained a series of instructions addressed, presumably to Fidelity Pacific, to transfer funds to a series of entities all associated with Mr Gould and including, inevitably I suppose, Chemical Trustee.
301. The letter then went on to say:
'We respectfully suggest that the Bank of Commerce (Micronesia) Limited send a letter along the following lines to the directors of each of the abovementioned companies:
Southgate Investment Funds Limited
Russell Bedford House
250 City Road
LONDON EC1V2QQ UK
Attention: Mr Hasmukh Vara
By facsimile & Post: +44-20-7490-5102
We advise that we have telegraphically transferred the sum of A$720,100 (in two amounts of A$360,050) into the account of Southgate Investment Funds Limited.
As arranged, these sums will bear interest at 10% per annum and represent a facility that is renewable annually at our discretion for a period of five years, subject to our satisfaction as to the security for the loans. We reserve the right to vary the interest rate and derive a profit share in future years.
We trust the above meets with your approval.'
302. In this letter, therefore, Mr Gould has suggested to an alleged life insurer to whom Mr Gould pays premiums which exceed the cover granted that the Bank of Commerce (Micronesia) should extend to Mr Gould's companies loans on terms dictated by Mr Gould.
303. Interesting questions which arise from this are:
- • Why is Mr Gould writing to Fidelity Insurance to suggest that the Bank of Commerce (Micronesia) should do something?
- • Why does Mr Gould appear to be able to dictate the terms of the loans by that bank to Mr Gould's entities?
- • What is the point of insurance policies whose required premiums exceed the cover provided?
- • Why does the money start and end with entities associated with Mr Gould passing through an insurance company apparently operating from Vanuatu that has an unexplained relationship with the Bank of Commerce (Micronesia)?
304. It was no part of the Commissioner's case to answer these questions. Consequently it is no part of my role to answer them either.
305. The Commissioner's point was that the process of paying these premiums with on-lending to Gould-related entities continued over a number of years and was entirely inconsistent with Mr Borgas having any role. I accept both submissions. Mr Borgas was cross-examined about these curious transactions at T1169 as follows:
'MR FAGAN: Again, at this date, more than a year later, that sort of communication between Fidelity Pacific and Mr Gould was the sole communication of the relevant balances. Wasn't it? Well, given - given that - I mean, that doesn't surprise me, to be honest, given that the policies were between Fidelity - the policies that I am talking about were between Mr Gould and Fidelity Pacific, and Mr Leaver and Fidelity Pacific. That had nothing to do with me, it was not relevant to me.
And do you say you gave approval to Mr Gould for the borrowing to go ahead in the names of Chemical Trustee and Russell Associates? Yes.
Why? Why borrow from this source out in the Pacific? These small amounts? Yes. I don't recall the exact circumstances, but what I can say is that these were small - all right - you call them relatively small amounts. But in both sets of circumstances - in the Gould circumstances; in the Leaver circumstances - the moneys that Chemical Trustee was owed or Russell Associates was owed was significantly higher than the amount we are talking about in the reverse situation.
The amounts that it was owed by whom? The amounts - well, the amounts that you have been talking about.
You mean the amounts that Russell and Associates and Chemical Trustee had loaned out? Yes.'
306. It was obvious that Mr Borgas had no idea what he was speaking about. I conclude, again, that Mr Borgas was lying. These unusual transactions powerfully demonstrate that Chemical Trustee was Mr Gould's entity.
(xvii) Funds transfers between Chemical Trustee and the Hua Wang Bank
307. For reasons I have already given the Hua Wang Bank was controlled by JA Investments which also controlled Chemical Trustee. The Commissioner pointed to a number of transactions to show that Chemical Trustee and Hua Wang Bank must have a common controller. There is no need to examine these transactions because it is not in dispute that JA Investments owned both. The real debate in the case was about who owned JA Investments. On that issue, it does not advance matters to show that Chemical Trustee and Hua Wang Bank appeared to operate as if owned by the same person. I do not think, therefore, that this advances the Commissioner's case (nor, though, does it harm it either).
(xviii) Meetings of directors and shareholders of Chemical Trustee
308. The minutes of the meetings of directors and shareholders for Chemical Trustee were available for the years 2001-2005, 2008-2010 and 2012. These minutes do not reveal the disposition of a single item of substantive corporate business and are entirely formal.
309. The Commissioner submitted that these minutes were inconsistent with the management and control of the company actually being discharged from Neuchâtel. It seems to me that by itself this circumstantial matter is equivocal.
Conclusions on Chemical Trustee
310. There are four conclusions which may be drawn from the preceding 18 matters.
311. First, the Commissioner has established an overwhelming case that it was Mr Gould who controlled Chemical Trustee and not Mr Borgas. The documents obtained from the Cayman Islands put the matter beyond any doubt but I would have reached the same conclusion even without those documents. The Commissioner's case was, in my opinion unanswerable. Chemical Trustee was Mr Gould's entity and not Mr Borgas'.
312. Secondly, there can be no doubt that Mr Borgas deliberately attempted to conceal Mr Gould's true role. He did this in two ways: first, by generating a large amount of contemporaneous, but essentially deceitful, correspondence to make it appear that he had made decisions which I am abundantly satisfied he did not make; secondly, by giving deliberately false evidence to this Court.
313. Thirdly, I infer that Mr Borgas did not do this purely for recreational purposes. It is obvious that Mr Borgas provides the service of providing persons who desire it with the façade that their business is conducted by Mr Borgas from Neuchâtel. It is this service that Mr Borgas provided to Mr Gould via Anglore SARL and for which Mr Gould paid Anglore. I infer, without any hesitation, that Mr Gould acquired the dubious services of Anglore because Mr Gould wished to make it appear, for whatever reason, that certain money flows of his were not his.
314. Finally, consistent with the view that Chemical Trustee was a façade, I conclude that all of the decisions of Chemical Trustee were made by Mr Gould and that Mr Borgas was not involved in them in the slightest way. In short, the structure was fake. Nothing happened in Neuchâtel but the generation of pieces of paper. I take into account the seriousness of this conclusion in reaching it.
(c) The position of Derrin Brothers Properties Ltd
315. The position of Derrin Brothers is largely the same as that of Chemical Trustee and the issues are similar. Its ultimate beneficial owners were JA Investments and MH Investments which, for reasons I have already given, were a ruse to make it appear that Mr Borgas was in control when, in truth, it was Mr Gould who was. So too, as in the case of Chemical Trustee, Mr Borgas testified that it was he who made the decisions on its behalf and Mr Gould was to be seen as merely as an advisor.
316. It will be quite apparent from the foregoing that I regard Mr Borgas a thoroughly discreditable witness and I do not accept this evidence.
317. That leaves unresolved what the nature of Mr Borgas' decision-making process with respect to Derrin Brothers was. The Commissioner submitted that six matters pointed to Mr Borgas having no role. These were as follows:
(i) Mr Gould's beneficial ownership of Derrin Brothers
318. The Commissioner submitted that given that Mr Gould was the beneficial owner of Derrin Brothers through JA Investments and MH Investments and since it appeared that Derrin engaged in very substantial transactions it was highly improbable that Mr Gould would have left Mr Borgas to make decisions on its behalf.
319. Examples of the substantial transactions in question were:
- (i) a sale of 6 million shares in the Sunland Group for $6.6 million;
- (ii) four loans made by Derrin over nearly a ten year period totalling around $33 million.
320. I accept the submission.
(ii) Loans made by Derrin were for the benefit of entities associated with Mr Gould
321. The loans referred to in the previous paragraph were as follows:
|10 April 1994||$800,000||Malackey Holdings|
|24 Jan 1995||$600,000||Fennelltown Pty Ltd|
|3 Sept 1997||$1,600,000||Avidan Pty Ltd|
|5 Sept 2006||$30,000,000||CVC Fund Managers Pty Ltd|
322. Each of the businesses was associated with Mr Gould. I accept the Commissioner's submission.
(iii) Other transactions associated with Mr Gould
Hua Wang Bank
323. The Commissioner relied upon a transfer of $502,000 by Derrin to the Hua Wang Bank. Below I conclude that the Bank was under the control of Mr Gould and existed to assist Mr Gould and his clients in passing money out of Australia through Samoa and then back into Australia to a closely related associate. I do not need to decide whether - and the Commissioner had no need to submit that - this was money laundering. I accept the Commissioner's submission.
Tifu Pty Ltd
324. So too in the case of Tifu Pty Ltd. On its face this appeared to be an offer by Derrin (through Mr Borgas) to Dr Ross to grant Dr Ross' entity an option to purchase 5 million ordinary shares in CVC Ltd at $1.15 exercisable any time up to 30 June 2002.
325. In fact, CVC was trading at 62 cents and the price had been well under $1 for three years. The significance is that the option fee paid by Dr Ross' company of $1 million was paid to Derrin which immediately paid a 'management fee' of $900,000 to Southgate. As I have already explained, Southgate was conducted for the benefit of Dr Ross by Mr Gould. In effect it appears that Mr Gould has passed Dr Ross' $1 million through Derrin and back to Dr Ross for a fee of $100,000. Under cross-examination Dr Ross denied this ('absolutely not') but it is difficult to see that it can be anything else. Dr Ross sought to explain in his evidence why he thought the $1.15 strike price made sense but his explanation reduced to the proposition that he was a big punter and this was a big bet which went wrong. I accept the Commissioner's submission that this was an attempt by Dr Ross and Mr Gould to repatriate Dr Ross' money in a disguised form into Australia. What matters, however, is the central role of Mr Gould in this web of deceit and the corresponding absurdity of attributing to Mr Borgas any role.
326. It will be remembered that Indo-Suez was the company used by Mr Gould to pay himself and his wife using UK based debit cards. On 22 January 2002, Mr Borgas instructed Mr Vara to transfer $200,000 from Derrin to Indo-Suez. Accepting, as I do, that Indo-Suez existed for the purpose of allowing Mr Gould to access funds through the debit cards, the idea that Mr Borgas was in control of this process, rather than as I have no doubt he was, a name for hire, is correspondingly untenable.
(iv) The Dubai Property
327. In this section Mr Gould next became interested in buying property in Dubai, apparently in the name of Derrin. It was no part of the taxpayers' case that Mr Gould was an adviser to Mr Borgas in the property market in Dubai so the alignment of Mr Gould, the Dubai property market and Derrin makes no sense at all even on their case. Of course, if Mr Gould was the ultimate controller of Derrin through the Cayman Islands then this transaction is easy to understand.
328. On 19 June 2007 Mr Vara sent Mr Gould a letter whose subject line was 'Derrin Brothers Properties Ltd' and which enclosed a document containing some information about buying a property in Dubai. A week later on 25 June 2007 it was clear that events had moved on. A Ms Nancy Sanchez of the Emirates Sunland Group LLC sent an email to Mr Vara in relation to the purchase of 'PV Unit 3 Reservation Contract'. She sought details of the corporate purchaser. It appears from the email that the unit was to be one of the condominiums in the Palazzo Versace in Dubai.
329. On the next day, Mr Borgas was brought into the picture, I infer, so as to conceal the role of Mr Gould in the usual way. Mr Vara wrote to Mr Borgas at Anglore. The letter was in these terms:
Derrin Brothers Properties Limited
As you are aware the above company is purchasing an apartment in Dubai and I enclose a copy of the e-mail from Nancy Sanchez in respect of the information she requires.
Accordingly I enclose a copy of reservation contract which please sign and courier back to me together with a copy of your passport and board resolution to be notarised and legalised with UAE. If you are not able to legalise with UAE embassy there then please have these notarised and send to me so that I can try and get them legalised in London.'
330. The language of 'As you are aware...' is not the language one would use to a person who was, in fact, the client. It is instead the phraseology one would use when the writer knows that the recipient has been informed of a fact by a third party independently of the writer. Here, given Mr Gould's earlier correspondence about the Dubai property market and his ownership of Derrin through the façade of the Cayman Islands companies I conclude that the third party in question was Mr Gould. A few days later on 29 June 2007 Mr Borgas sent a fax to Mr Vara on the letterhead of Anglore whose terms are much more consistent with him being the recipient of instructions rather than their source:
'Re: Derrin Brothers - Dubai Property
In your superseded letter of 26th June, you mention an email from Nancy Sanchez which I presume sets out the procedure to be followed in dealing with the contract requirements for the above.
I received the attached but not Nancy's email. Please send me a copy of her email as soon as possible.'
331. Note especially '...which I presume sets out the procedure to be followed...'. Inevitably Mr Borgas was cross-examined about the Dubai apartment. His evidence was as follows:
'MR FAGAN: That's 2010, August. Well, with respect to the period - for safety sake, let's say prior to 2008 - up to that point, had Derrin Brothers Properties actually bought real property? Direct investment in real property? I have no recollection.
And I'm not limiting that question to Australia, but anywhere in the world? I have - I honestly have no recollection.
All right. Well, can I just try to test your memory with reference to centres in the world where property investment has taken place? What about - by any entity - what about Malaysia? Did you make any property investment in Malaysia? I have no recollection.
What about Dubai? Derrin Brothers has a joint venture with a - I believe his name is Mr Terry Jackman, in connection with one apartment in Dubai.
Right. And from what period does that interest date? I would have to look. I don't recall. But the - that joint venture arrangement is still in existence, I believe.
I see. And is it in respect of an apartment which has been constructed or in respect of the purchase of an apartment off-plan? I don't know, in the sense that I do not know whether the apartment is still under construction, whether it has been completed
All right. How much is the amount of Derrin Brothers Properties' financial commitment to this joint venture? I don't recall.
Approximately? I don't recall.
Well, just in the order, sir? Well -
I mean - you know, was it - for example, was it an apartment that was being purchased for a price which was of - in the order of A$1 million or £1 million, or double that or half that; the order of magnitude? Look, I really don't recall, and I'm not going to guess.
What's the building that the apartment is in? It has got the word Versace in it, and one apartment in, what I understand to be, a block of residential apartments.
And what's the nature of the joint venture? I don't recall the terms of the venture.
Does it involve Derrin Brothers and Mr Jackman contributing equalling to purchase price or in some different proportions? I don't recall.
Does it involve any terms as to when the apartment may be sold, requiring the agreement of both or on the initiative either? Possibly so, but I just do not recall.
Sir, if I may, this is a remarkable ignorance about an investment of your company. Can you explain why it is you're so detached from it? Yes, indeed. And just - it just underlines how I have, for the last - if you take - since 2007/2008; since the freezing order in 2010, I have really put these matters out of my mind to a large degree and dealt only with the absolute essential and have got on with my other work.
Have you taken the view that whatever interest Derrin Brothers has in this property in Dubai is frozen under the orders of this court? It's not a matter to which, honestly, I have addressed my attention, but without to trying to sound as if I'm smart, it is a matter to which I would have addressed my attention in the event that there was an attempt to transfer the apartment, for example.'
332. I do not accept that Mr Borgas would forget the details of his ownership of an unfinished apartment in the Palazzo Versace in Dubai if he truly had an interest in it. Mr Borgas was vague because he was not the true owner.
(v) Mr Gould's checking of financial statements and involvement in the banking of Derrin Brothers
333. As in the case of Chemical Trustee it appears that Mr Gould was provided with the accounts of Derrin Brothers for his approval. On 30 July 1999, for example, Mr Borgas wrote to Mr Vara enclosing signed financial statements for the year ended 30 June 1998. The letter includes this passage:
'The financial statements ... are returned to you, duly signed and dated, on the strict understanding that they have been seen and approved by the Accounting Consultant.'
334. I do not doubt that the 'Accounting Consultant' was Mr Gould. That Mr Gould's sign-off was necessary is just another element in the Commissioner's overwhelming contention that Mr Gould was the true operator of these companies.
335. The same conclusion flows from another letter sent by Mr Borgas to Mr Vara dated 25 July 2002 in which Mr Borgas says, inter alia, '[p]lease note that a copy of each set [of the accounts] has been faxed to Vanda who will let you know very shortly whether he has any comments to make'.
336. In two instances Mr Gould gave direct instructions to Mr Vara about what should happen with Derrin's money. These were on 24 January 2007 when he instructed Mr Vara to place certain monies on deposit and 16 April 2007 when Mr Gould told Mr Vara:
'...Upon receipt of this dividend we confirm our mutual client's instruction to transfer the sum of $140,000 to a Jersey account to obtain a better rate of interest.'
337. Mr Gould was, of course, the mutual client. In those circumstances, this is another example of Mr Gould dealing with Derrin in a way which is antithetical to the taxpayers' case.
(vi) Directors' and shareholders' meetings
338. As in the case of Chemical Trustee, the minutes of the meetings of the directors and shareholders of Derrin are devoid of anything but purely formal matters. This would not be expected if Mr Borgas were truly in charge. As before, however, I regard this matter as equivocal.
339. I reach the same conclusions about Derrin as I have reached about Chemical Trustee. Mr Gould was its owner. Mr Borgas' role was to transact Mr Gould's business as if it were his own to conceal Mr Gould's role. Mr Borgas was himself not in the slightest involved in the decision making process. The entire structure of Derrin was a façade to conceal Mr Gould's role.
(d) Bywater Investments Limited
340. I turn then to the position of Bywater Investments. Largely this is the same as that of Chemical Trustee and Derrin. It was owned by Mr Gould through the device of the Cayman Island's entity MH Investments. As the Commissioner submitted, Mr Gould's ownership makes it highly unlikely that Mr Borgas would have been making the decisions. This is particularly so given the magnitude of Bywater's share trading activities in Australia. For example, in 2002 it was involved in over $8 million worth of dealings in entities listed on the ASX and in 2003 in excess of $11 million. I simply do not accept that Mr Gould as the owner would have permitted Mr Borgas, who had no interest in the business, to be making these decisions.
341. Mr Borgas gave evidence that he made the decisions for Bywater. It will be apparent that I reject his evidence.
342. As with Chemical Trustee and Derrin there are several instances when Bywater was used as a vessel for Mr Gould's interests or as the recipient of his instructions. These were:
- • the repatriation of payments made by the Sunland Group to Bywater to Mr Gould through Chemical Trustee and Russell Associates. Mr Borgas reported to Mr Gould of these events (rather than the other way around);
- • the giving of instructions by Mr Gould on behalf of 'our mutual client' (i.e. Mr Gould) in respect of certain share trades;
- • the reporting by Mr Borgas to Mr Gould (rather than the converse) on the establishment of a discretionary trading account with Bell Potter; and
- • transfers of large sums from Russell Associates to Bywater.
343. I draw the same conclusions about the role and behaviour of Mr Borgas and Mr Gould in respect of the affairs of Bywater as I have in relation to Chemical Trustee and Derrin.
(e) Hua Wang Bank Berhad
344. As outlined above at -, the Bank was controlled by Mr Gould's company JA Investments. I am satisfied, therefore, that the Bank was yet another of Mr Gould's disguised entities. Although it is of no direct relevance to the Commissioner's case, it is to be observed that Ex 70 (to which I will return) showed that the Bank's curious debt-capital structure was put in place 'to avoid attribution of Hua Wang Bank's profits to the beneficial owner under Australian Controlled Foreign Corporations taxation laws'. Here with this document one has the measure of the man.
345. As with the others, JA Investments' register gave the impression that Mr Borgas was the owner but this was simply part of Mr Gould's elaborate deceit. Mr Borgas gave evidence to support the truth of this deceit but, as I have already explained, Mr Borgas' evidence is unreliable.
346. Just as Mr Gould used the services of Mr Borgas' company Anglore in Switzerland to assist him in creating the impression that decisions were being made in Switzerland, he had a similar need for someone to provide the illusion that he was not running the Bank. This someone was the Asiaciti group.
347. Asiaciti was controlled by a Mr Briggs who is based overseas and was unable to give evidence in person in these proceedings. However, a transcript of his examination by the Australian Crime Commission was available. This transcript revealed at a high level of generality what the fine detail of evidence confirmed.
348. To begin with, at the times relevant to these proceedings, Mr Briggs was himself a director of the Bank and had been so since its incorporation. It was his business, Asiaciti, which had set up the Bank in the first place and it had done so for Mr Gould who was the invariable source of its instructions. Mr Briggs did not think that Mr Gould would have permitted himself to be named as the Bank's beneficial owner but 'I would have to say I would think that Mr Gould would have been the real beneficial owner in that he gave us, he was the one that always gave us instructions'. This evidence, of course, is strongly supported by the evidence concerning JA Investments, the presence of Mr Borgas and Ex 70 to which I return below.
349. What was the business of Hua Wang Bank? One service it appears to have provided to Mr Gould's clients involved superannuation funds in Australia putting money on deposit with the Bank in Samoa which the Bank would then lend back to a person closely associated with that superannuation fund, often a beneficiary. The Bank's summary trial balances for the period 1 July 2004 to 30 June 2005 were placed in evidence together another document headed 'Analyze Balance Sheet' which was evidently generated from the trial balances. Under the assets entries was a section headed 'Customer Loans' and under the liabilities entry there was another section headed 'Deposits Payable'. This document also contained a comparison with the previous 2004 year. The Commissioner generated a version of this document which allowed for a convenient comparison to be made between the 'customer loans' and the deposits. It became Ex 19. The list contains some 58 entries. With very few exceptions every deposit matches up with a loan. For example, there is a loan to Anglo American in 2005 of $4,290,000.00 and a deposit of an identical amount by Chemical Trustee. Anglo-American is owned by Morning Star which is owned by Mr Gould. The transaction thus revealed, in substance, is one of Mr Gould's entities depositing $4.29 million with the Bank and then lending it back to another Gould entity.
350. I infer that all of the depositors with the Bank were either Mr Gould's clients or entities controlled by Mr Gould. The evidence to that effect (to which I will turn shortly) is overwhelming. Once that is appreciated, what Ex 19 shows is that the Bank's predominant business was receiving money from Mr Gould or his clients and then returning it to related entities in the form of what would have appeared to anyone examining the transaction on its face to be a loan from a bank.
351. It was not part of the Commissioner's case to give this practice a name such as, for example, money laundering and he did not do so. I am in a similar position. Although I find it almost impossible to imagine that these activities could be proper it is sufficient for the purposes of these reasons to observe only Mr Gould's control of what was occurring.
352. Quite apart from his ownership of it, I draw the conclusion that it was Mr Gould, and Mr Gould alone, who controlled the Bank's every move for three further reasons.
353. First, all of the depositors of the Bank had to be clients of Mr Gould. It was a term of the Bank's licence in Samoa that it would accept 'as depositors only those parties or entities owned or controlled by the owners or controllers of the Bank or other connected parties and entities'. The Bank provided a list of its depositors as at 30 June 2002 on 29 January 2003. The list included the trustee of Dr Ross' superannuation fund, LJK Nominees Pty Ltd, CVC Investment Nominees and the Phillips River Superannuation Fund (both Gould entities) and, of course, Chemical Trustee. The Bank's 2004 and 2005 annual returns suggest that it was Mr Borgas who owned the Bank which, of course, is not the case. By accident an unsigned copy of the Bank's annual return for 2001 suggests that the beneficial owner of the Bank was Mr Gould. One of the Asiaciti employees, Mr Lead, gave evidence that he was responsible for this mistake and had been castigated by the owner of Asiaciti, Mr Briggs, for doing so. Mr Briggs' testimony to the Crime Commission was placed in evidence and it confirmed, beyond any doubt, that the Bank was run by Mr Gould and dealt in 'matched loans'. I conclude, therefore, that all of the Bank's customers were clients of Mr Gould or entities associated with him.
354. Secondly, every transaction carried out by the Bank was done on the instructions of Mr Gould. As in the case Mr Borgas, and his Swiss entity Anglore, the business of the Bank was formally transacted under the swaying palms of Samoa by employees of Asiaciti who were stationed there for that very purpose.
355. There were four such employees called in the proceedings. They were:
- (a) Mr Richard Lead;
- (b) Mr Bede Carran;
- (c) Ms Angela Nicolson; and
- (d) Mr Ross Hanning.
356. Each gave evidence that they transacted the decisions of the Bank in Apia doing so on every occasion at the direction of Mr Gould. This was so both in relation to the deposits and the loans.
357. None suggested that they had any commercial input into the decisions and it was clear that their role was, as the Commissioner put it, that of a 'back-office' nature.
358. Mr Carran, Ms Nicolson and Mr Hanning also gave evidence that they would not have transacted business which was in breach of fiduciary duty or otherwise unlawful. The evidence that they would not have acted in breach of their fiduciary duties is, I think, to be given little weight. Not knowing anything of the affairs of the Bank they cannot have been aware of any limitations which their fiduciary duties might have imposed upon them. For these statements to have been other than empty, it would have been necessary to show that these employees knew enough of the business of the Bank so that, for example, the fiduciary duty to avoid conflicts of interest had actual content. But the no-conflict rule could have no meaning if the putative fiduciary was entirely ignorant, as these individuals were, of what the interests of the Bank were. A similar observation might be made in relation to unlawful conduct. There was, perhaps unsurprisingly in those circumstances, no evidence of any transaction ever being refused by these employees on either ground. That was not their job.
359. The third matter concerns Ex 70, which I have mentioned already, and which was tendered after the trial when the Commissioner sought and was successful in re-opening his case. Exhibit 70 contained the Bank's application for a banking licence dated 7 April 1994. Paragraphs 9 and 10 of the application expressly stated that it was intended that the shareholder would hold its shares in the Bank as nominee for Mr Gould and that Mr Gould would have a 100% beneficial interest in the company. Paragraphs 15-18 of the application said:
- '15. The specific nature of the offshore banking business intended to be carried on from within Western Samoa is:
The bank will act as the financial intermediary for clients of Gould Ralph & Co and the related offshore entities of those clients. Gould Ralph & Co is a large chartered accountancy practice based in Sydney Australia and has substantial international clients.
The bank will act as the corporate treasurer for such international and Australian based clients.
- 16. The currency/*currencies in which the proposed off-shore banking business is to be transacted is/*are:
All major currencies.
- 17. The applicant intends to accept deposits of money and other valuable things from:
Gould Ralph & Co and clients of that firm.
- 18. Other information in support of the application:
Mr Vanda Gould is an experienced international tax consultant and is well experienced with the operation of offshore banks, insurance companies, and other offshore structures for his clients in a number of jurisdictions. He is a member of the International Tax Planning Association.
He is a long standing client of the Asiaciti Trust Group and a regular source of business referrals for Western Samoa International Companies.
The structure proposed in question 7 involves the use of a Western Samoa holding company for the bank. This holding company will be a creditor controlled company and not itself have any share capital. It will be controlled by bearer debentures, all of which will be held at all times by the beneficial owner of the Bank as detailed at questions 9 and 10. This structure is necessary to avoid attribution of Hua Wang Bank's profits to the beneficial owner under the Australian Controlled Foreign Corporations taxation laws. Should this structure not be approved the direct shareholder in the bank will be a British Virgin Islands company limited by guarantee.'
360. The contents of this are self-explanatory.
361. In a written submission made after the late receipt of Ex 70 the taxpayers submitted that I should prefer the evidence of Mr Gowrie-Smith to this document. I am not sure this proposition was advanced in the Bank's earlier submissions, however, I am content to consider it. Mr Gowrie-Smith gave evidence that originally he had owned the Bank and this had been organised by Mr Gould but that later Mr Gould had suggested that he did not need it any more. He understood that the Bank had then passed to Mr Borgas. Mr Gowrie-Smith thought that he had owned the Bank through his family trust, IR Gowrie-Smith Family Trust but he could not remember the name of the trustee. I did not find this testimony compelling. It was remarkably vague. I have never heard of a person owning a bank and being unclear about the circumstances of his ownership. Granted that I do not accept that Mr Borgas owned the Bank although he was certainly intended to look as if he did, I have grave concerns about Mr Gowrie-Smith's evidence. Whilst vagueness is not an indispensable feature of dishonesty, the circumstances of this Bank make it quite unsafe to rely upon such loosely expressed evidence.
362. Given that, I prefer the contents of Ex 70 which is a contemporaneous document explaining the precise circumstances of the Bank and showing Mr Gould as its owner. The Bank submitted that that document had been prepared by Mr Lead and not by Mr Gould, but Mr Lead acted on the instructions of Mr Gould so I give this no weight.
363. It is unnecessary for me to explore in any detail the Commissioner's submission that Mr Gowrie-Smith's evidence had been tainted by a conference held between Mr Gowrie-Smith and junior counsel for the taxpayers, Mr John Hyde Page. The Commissioner's point was that the questions which had been asked at that meeting were in leading form with the bottom line suggestion being what I heard in Court was Mr Hyde Page's evidence rather than Mr Gowrie-Smith's. Whilst this submission is most likely correct, I am able to reject Mr Gowrie-Smith's evidence without needing to reach a firm view on this issue.
364. My conclusions:
- 1. at all times Mr Gould has owned and controlled the Bank;
- 2. the directors of the Bank have at all times acted on his instructions; and
- 3. the directors were never placed in a position where they had to exercise the slightest judgment. Whilst they would not have knowingly transacted any illegal business they had no idea what the business of the Bank was and this was, therefore, an empty reservation.
365. I turn then to the position of the final taxpayer, Southgate.
(f) Southgate Investment Funds Limited
366. As I have already explained, Southgate was an investment vehicle managed by Mr Gould on behalf of Dr Ross and his wife. Mr Gould's control from Australia is the only issue which arises in this case and it is unnecessary to meditate upon why Dr Ross would wish to pass his money through an offshore entity in a way which concealed that the money was his.
367. As outlined above, Southgate was incorporated in the United Kingdom on 4 August 1998 apparently as a result of the actions of Lubbock Fine. There were two shares on issue, each held by the Lubbock Fine nominee entities Lordhall and Guardheath. I am satisfied that they held the shares beneficially for an entity called IRSS Nominees (4) Ltd, a Samoan entity. This is demonstrated by a letter of indemnity given to Lubbock Fine on the day of Southgate's incorporation. The letter began:
Southgate Investment Funds Limited
As the beneficial owners of the above named company...'
368. The letter was signed as follows:
'Yours faithfully, Westco Directors Ltd by
its duly authorized officer on behalf of
[signature] IRSS Nominees (4) Ltd
LJK Superannuation Fund'
369. Westco Directors Ltd was an entity run out of Asiaciti in Apia and served as a director of the entities conducted by Asiaciti in that place (this being permitted by Samoan law). Having a corporate director facilitated Asiaciti's ability to execute documents on behalf of its clients by relieving it of the need to change the officeholder each time one of its own employees tired of executing documents in Apia (a not infrequent occurrence - most of the Asiaciti employees stationed in Apia did not last long).
370. The document was, therefore, executed by IRSS Nominees (4) Ltd on behalf of the LJK Superannuation Fund. One need not spend too much time on IRSS Nominees (4) Limited which was merely a Samoan trust vehicle. The LJK Superannuation Fund is an international trust registered in Samoa pursuant to s 13(2) of the International Trusts Act 1987 of Samoa. It has two members, Dr Ross and his wife. During his testimony in these proceedings Dr Ross gave evidence that at one time before the global financial crisis his investment activities had meant that he had a net worth of more than A$350 million, which is a lot for a doctor. On 27 June 2002 the trustee of Dr Ross' family trust (and the nominated employer under the terms of the trust deed for the LJK Superannuation Fund) approved the payment to Southgate (its English vehicle) of over $3 million from funds held with the Bank (via a subsidiary of the Bank). I infer that Dr Ross' Samoan superannuation fund was a not insignificant actor in whatever it was that Dr Ross was doing. For completeness, and lest there be no confusion, neither Dr Ross nor his wife live in Apia or anywhere else in Samoa, preferring instead the Eastern suburbs of Sydney.
371. It follows that the ultimate beneficial ownership of Southgate lay with Dr Ross and his wife. The evidence satisfied me, however, that for whatever reason Dr Ross had given over complete control of Southgate to Mr Gould. The evidence for this proposition emerges in its clearest form from the letter of indemnity of 4 August 1998. Paragraph 3 authorized Lubbock Fine to take their instructions from the person named in the schedule to the letter. In the schedule, there is only one name, Mr Gould's, and next to it is his signature.
372. The director of Southgate at all times relevant to this case was a company controlled by Lubbock Fine called Soleguard Ltd. I return shortly to explain how the board of Southgate reported but before doing so it is necessary to understand the kind of transactions in which Southgate was involved.
373. The Commissioner pointed to a number of activities of Southgate to show not only the nature of Southgate's activities but Mr Gould's presence in the middle of each of them. There were:
374. First, there is no dispute that Southgate engaged in the following amounts of trading in shares:
|Year||Total Purchases||Total Disposals|
375. As the Commissioner correctly submitted, the partners of Lubbock Fine never once considered any of these substantial transactions when holding meetings of the director of Southgate through their vehicle Soleguard. It is evident that the decisions proceeded from Mr Gould who either made them himself or implemented Dr Ross' instructions. It is not necessary to resolve which of them was making the actual decisions because, whichever it was, both were resident in Australia.
376. Southgate entered into a series of significant transactions in respect of which its board was either never consulted or only consulted after the transaction had occurred. The Commissioner invited the inference that this proved that the board was not in fact the body which was making decisions for Southgate and that decision-maker was either Mr Gould or Dr Ross. The transactions were as follows:
- • on 21 April 1999 Southgate lent a partnership including Chevron Developments Pty Ltd $2.5 million but there was no board resolution relating to it until 11 August 1999;
- • on 12 January 2000 Southgate lent LJK Nominees Pty Ltd $5 million under a loan document of that date. The board did not resolve to enter into this agreement until 17 February 2000;
- • security was given for this loan on 31 October 2001 but approved by the directors only on 8 November 2001;
- • between 2001 and 2003 Southgate borrowed money from the Bank of Commerce (Micronesia) to pay premiums on life insurance policies F122 and F123 and between 2005 to 2007 it borrowed for the same purpose from Fidelity Pacific Life Insurance. These premiums totalled many millions of dollars. There is no record of any decision of the board to engage in these puzzling transactions, other than a resolution approving two loans on 8 November 2004 after some funds had already been received;
- • as outlined above, on 27 June 2002 Dr Ross' LJK Nominees Pty Ltd transferred $3.016 million to a subsidiary of the Bank called HW Finance. On the same day the Bank transferred $3,005,000 to Southgate. There is no record of any consideration by the board of what should be done with this substantial sum;
- • on 22 April 2003 Southgate subscribed for $2 million worth of convertible notes in Vita Life Sciences Ltd. There is no record of any decision by the board to enter into this transaction; and
- • on 21 June 2004 Southgate received $4 million and on 1 July 2004 it then lent the same amount to LJK Nominees Pty Ltd. There was no meeting with respect to this transaction until 24 May 2005 nearly a year after the funds had been transmitted to Australia.
377. These matters all tend to suggest that the board of Southgate was involved in decision-making only after the decision had been made and sometimes not at all.
378. All of the above matters were, as a matter of legal form, actually transacted by Southgate and where its authority was needed there are letters from it on Lubbock Fine letterhead. Unlike the situation with Mr Borgas and Chemical Trustee (and Derrin and Bywater) none of the Lubbock Fine partners involved purported to say that they had made any of the commercial decisions involved. There were two relevant partners at Lubbock Fine who had at different times each been the director of Soleguard and who transacted Southgate's business. One was Mr Goodyear. Mr Goodyear's evidence was that the identification of all of the transactions entered into by Southgate was communicated to Lubbock Fine by Mr Gould.
379. Mr Goodyear said that Southgate was looked after by another partner Mr Shah and that his dealings with Southgate as its board resulted from his dealings with Mr Shah. His evidence was very plain that he regarded Southgate to be a nominee for IRSS Nominees (4) Ltd. He agreed that when a transaction was put to the board of Southgate the question was whether it was a transaction which the principal wished to see entered. To determine that he would ask Mr Shah.
380. It is clear, therefore, and Mr Goodyear did not seek to deny this, that he did not, in acting as Southgate's board, give any consideration to the merits of particular transactions. He did give this evidence in re-examination:
'MR HYDE PAGE: Now during the course of that exchange I believe you said that there were other judgments that had to be made by the directors? Yes.
Can you perhaps elaborate on what those other judgments were for the directors? The other judgments that one would be making is whether it's a legal transaction in - and - or there is some other ramification. The example I gave in connection with Mr Sober was a judgment about other responsibilities that Southgate may have to do in connection with the transaction, which was a compliance matter. We did not wish either the Southgate or the directors of the company to be in some dispute or become, shall we say, subject to criticism for doing something that was plainly wrong or might be considered as wrong.'
381. And, under cross-examination he had said that Southgate had been 'acting as a nominee, as you have said, therefore the question of what it was doing was more a question of the legality [scil: than] what that transaction was about.'
382. The other partner was Mr Shah. He gave largely similar evidence. The commercial decisions were communicated to the Southgate board for it to transact and these instructions came from Mr Gould. Mr Shah said that he had attended board meetings of Southgate. Some of these meetings concerned transactions and others more formal matters such as accounts. His review of proposed transactions was 'to make sure that it is a proper transaction, it's a legal transaction and it's in the interest of the company'. He was never asked to do anything as a director of Southgate that he thought was not in its best interests or was illegal or improper. If he had been asked to do such a thing he would have refused.
383. Consistently with this relationship of obedience to Mr Gould is the fact that it was Mr Gould who instructed Southgate where its funds were to be placed. On a range of dates between 2003 and 2007 it was, for example, Mr Gould who directed Lubbock Fine to deposit money into an account in Jersey.
384. What findings should be made in light of these matters? First, the board at Southgate did not make any decisions for Southgate but simply implemented Mr Gould's instructions. Secondly, the individuals comprising Southgate's board through the Lubbock Fine entity Soleguard - Mr Goodyear and Mr Shah - knew next to nothing about the business transactions to which they were giving effect. Thirdly, whilst I accept that as a matter of theory they would not have given effect to an unlawful transaction or one which was not in the best interests of Southgate, their ignorance of its affairs guaranteed that this would never be an issue for them. Consistent with that observation there is no evidence that any transaction was ever refused on this basis. I find therefore that on no occasion did the director of Soleguard ever exercise the slightest discretion or judgment and there were no circumstances in which they would ever do so. No actual management decisions for Southgate were ever made at the office of Lubbock Fine. I conclude that the decisions were made in Sydney by Mr Gould on behalf of Mr Ross.
385. I turn then to the legal issues.
4. Central Management and Control
386. Section 6-5(2) of the ITAA 1997 provides:
'(2) If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.'
387. The expression 'Australian resident' is defined in s 995-1(1) of the ITAA 1997 by reference to a person who is a resident of Australia for the purposes of the ITAA 1936. Section 6(1) of that Act defines a resident of Australia to mean (relevantly):
'a company which... not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.'
388. It was accepted by the taxpayers that their activities in buying and selling listed Australian securities in Australia in the relevant income years was sufficient to justify the conclusion that each was carrying on business in Australia. It was the taxpayers' contention (and their burden to prove) that each did not have its place of central management and control in Australia.
389. I am bound by the High Court's decision in
Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation (1941) 64 CLR 241. In particular I am bound by the reasons for judgment of Williams J. Separate reasons were given by Rich ACJ but he ultimately agreed with the reasons of Williams J. McTiernan J agreed with both. The remaining member of the bench, Starke J, concurred in the unanimous result that the appeal should be dismissed but delivered his own separate reasons for that conclusion.
390. Williams J said this (at 248-249):
'The decisions relating to the ascertainment of the residence of corporations for income tax purposes have been affected by the desire to apply by analogy, as far as possible, the principles governing the determination of the residence of individuals.
The registration of a company, which brings it into existence corresponds to the birth of an individual. The place of registration and the situation of the registered office are therefore strong circumstances to be taken into account in determining its residence. But the crucial test is to ascertain where the real business of the company is carried on, not in the sense of where it trades but in the sense of from where its operations are controlled and directed. It is the place of the personal control over and not of the physical operations of the business which counts. This is shown by the statement which Lord Halsbury L.C. made in the
American Thread Co v. Joyce cited by Lord Sumner in
Egyptian Delta Land and Investment Co. Ltd. v. Todd, "I myself have taken the same view of this, I think, some years before the De Beers' Case, and that view has been since, I think, adopted in this House more than once, that the real test, which, after all, is only a question of analogy - you cannot talk about a company residing anywhere - and that which has been accepted as a test, is where what we should call the head office in popular language is, and where the business of the company is really directed and carried on in that sense."
Viscount Cave L.C. sums up the whole position in the Swedish Railway Co's. Case, where he says: "The central management and control of a company may be divided, and it may 'keep house and do business' in more than one place; and if so, it may have more than one residence."
The place of residence of an individual is determined, not by the situation of some business or property which he is carrying on or owns, but by reference to where he eats and sleeps and has his settled or usual abode. If he maintains a home or homes he resides in the locality or localities where it or they are situate, but he may also reside where he habitually lives even if this is in hotels or on a yacht or some other place of abode: See Halsbury's Laws of England, 2nd ed., vol.17, pp. 376, 377.'
391. This was written in 1941 but, apart from the acceptance that a corporation might be resident in more than one place, there was nothing novel in Koitaki. It was an application of principles which had been accepted as authoritative since Lord Loreburn LC's speech in
De Beers Consolidated Mines Limited v Howe  AC 455. There the Lord Chancellor had said (at 458):
'In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividend abroad. The decision of Kelly C.B. and Huddleston B. in the
Calcutta Jute Mills v. Nicholson (1876) 1 Ex. D. 428 and the
Cesena Sulphur Co. v. Nicholson (1876) 1 Ex.D. 428, now thirty years ago, involved the principle that a company resides for purposes of income tax where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule, and the real business is carried on where the central management and control actually abides.
It remains to be considered whether the present case falls within that rule. This is a pure question of fact to be determined, not according to the construction of this or that regulation or bye-law, but upon a scrutiny of the course of business and trading.'
392. It is apparent that Williams J regarded De Beers as authoritative. That this is so emerges from the passing reference to De Beers in the quoted passage and the utilization of the language of De Beers - that of central management and control - in the quote from Viscount Cave.
393. In the thirty years which followed Koitaki three justices of the High Court sat as trial judges and each applied the test enunciated in
De Beers: Malayan Shipping Company Limited v Federal Commissioner of Taxation (1946) 71 CLR 156 (Williams J);
North Australian Pastoral Company Ltd v Federal Commissioner of Taxation (1946) 71 CLR 623 (Dixon J);
Waterloo Pastoral Company Ltd v Federal Commissioner of Taxation (1946) 72 CLR 262 (Williams J);
Esquire Nominees Limited v Federal Commissioner of Taxation (1973) 129 CLR 177 (Gibbs J). Although the last mentioned decision of Esquire Nominees went on appeal to a Full Court the issue of residency was not in issue in that appeal (although Barwick CJ referred to it in passing). Throughout those decisions the principles to be applied have never once waivered. There are two:
- (a) a company is resident where its real business is carried on, and its real business is carried on where the central management and control abides; and
- (b) the question of where a company is resident is one of fact and degree.
394. The taxpayers submitted that the organic features of each of them was relevant to this inquiry. By organic features, they meant matters such as the following:
- • place of incorporation;
- • location of head office;
- • location of registered office;
- • location of the company seal;
- • location of the company's books and accounts;
- • place of the company's administration;
- • the provision that the articles make for governance of the entity;
- • location of directors' meetings;
- • place where the executive directors meet;
- • location of the company secretary;
- • location of shareholders; and
- • location of shareholders' meetings.
395. A similar list was compiled by Lindsay J in
Re Little Olympian Each Ways Ltd  4 All ER 561 at 569 and I have no difficulty in accepting the relevance of these matters to the inquiry at hand.
396. The taxpayers' submissions went somewhat further than this, however, by identifying a factor they referred to as 'the place of the company's superior direction and management' and then placing it, effectively, on an equal footing with the other features just referred to.
397. I do not apprehend that to be a factor referred to in the authorities. Instead, what the authorities say is that what one must determine is the location of the real business.
398. The taxpayers sought to buttress with authority the idea that somehow the real business question should be approached in a way that might somehow accommodate the crooked pantomime being conducted on Mr Gould's behalf in London (by Lubbock Fine), in Switzerland (by Mr Borgas) and in Samoa by the far-flung employees of Asiaciti. The authority which was selected to carry this distinctly heavy burden was the decision of Gibbs J in Esquire Nominees. The particular passage upon which reliance was placed was at 190:
'In the present case the appellant was incorporated in Norfolk Island and had its office there. All the directors resided in Norfolk Island. All the A class shareholders who were natural persons were residents of Norfolk Island and it seems proper to conclude that the other A class shareholder, Myee Ltd, was also a resident. All meetings of the company and of the directors were held in Norfolk Island. The business of the company was to act as trustee on Norfolk Island. These facts strongly support the conclusion that the appellant was a resident of Norfolk Island.'
399. In Esquire Nominees the taxpayer was a trustee company. As it happens, it was the trustee of some 12 trusts in favour of the Manolas family. They, it need hardly be said, were not resident in Norfolk Island. The evidence showed that the trustee company, as trustee, gave effect to the views of a firm of accountants in Adelaide in making decisions about what the trust should do. This did not deter Gibbs J from concluding that Esquire Nominees was resident in Norfolk Island.
400. But the reasons for this are obvious. The business decisions made by Esquire Nominees were decisions relating to its business as a trustee, not the trusts themselves. Whilst the accountants could tell the trustee what to do qua trustee they could not tell the directors of the trustee company what to do qua company. Insofar as the trustee's own business was concerned it made good sense for it to give effect to the wishes of those behind the Manolas trusts speaking through the vector of the accountants. But in doing so they were giving effect to their own view that it was in the trustee's best interests as a trustee company to do as it was told.
401. Gibbs J said this at 190-191:
'...It was said that at all relevant times the activities of the appellant were confined to acting as trustee of a number of settlements all of which had been set up on similar lines as a result of instructions received from Messrs. Wilson, Bishop, Bowes and Craig, and that the administration of the trusts of the settlements followed a general pattern which had been laid down in advance by that firm. The extent of the influence of the accountants was shown by the fact that they would not infrequently prepare in detail the agenda of a meeting of the directors of the appellant or of the company itself. These facts, according to the Commissioner, showed that in reality the activities of the appellant were directed from Australia. I am unable to accept this argument. As I have already indicated, it is obvious that what the appellant did in relation to the Manolas Trust was done in the course of carrying out a scheme formulated in Australia and that Messrs. Wilson, Bishop, Bowes and Craig not only communicated to the appellant particulars of the scheme but advised the appellant in detail of the manner in which it should be carried out. But if it be accepted that the appellant did what Messrs. Wilson, Bishop, Bowes and Craig told it to do in the administration of the various trusts, it does not follow that the control and management of the appellant lay with Messrs. Wilson, Bishop, Bowes and Craig. That firm had no power to control the directors of the appellant in the exercise of their powers or the A class shareholders in the exercise of their voting rights. Although it is doubtless true that steps could have been taken to remove the appellant from its position as trustee of one or more of the trust estates, Messrs. Wilson, Bishop, Bowes and Craig could not control the appellant in the conduct of its business of a trustee company. The firm had power to exert influence, and perhaps strong influence, on the appellant, but that is all. The directors in fact complied with the wishes of Messrs. Wilson, Bishop, Bowes and Craig because they accepted that it was in the interest of the beneficiaries, having regard to the tax position, that they should give effect to the scheme. If, on the other hand, Messrs. Wilson, Bishop, Bowes and Craig had instructed the directors to do something which they considered improper or inadvisable, I do not believe that they would have acted on the instruction. It was apparent that it was intended that the appellant should carry on its business of trustee company on Norfolk Island. It was in my opinion managed and controlled there, none the less because the control was exercised in a manner which accorded with the wishes of the interests in Australia. The appellant was, in my opinion, a resident of Norfolk Island.'
402. I do not accept, therefore, that Esquire Nominees requires the Court to treat situations such as the present in any different way to that indicated in De Beers. Indeed I regard the taxpayers' submission as fanciful.
403. The question then is where was the real business of each of the taxpayers. It is useful to consider the position of each taxpayer separately.
404. This taxpayer was incorporated in the United Kingdom and its registered office was at the office of Lubbock Fine in London. Also present in the same offices were the company's books and accounts as well as the company's immediate shareholder, the Lubbock Fine entity Guardheath. The articles required the registered office to be in England. In addition, Mr Vara operated its bank account from London. The taxpayers submitted that Chemical Trustee had its head office in Switzerland at Mr Borgas' offices where Mr Borgas performed his function as the company's executive and the directors' meetings were held.
405. I have no doubt that Chemical Trustee's real business was conducted from Sydney by Mr Gould. The role of Mr Borgas was fake. He made no decision of any kind but simply implemented Mr Gould's instructions after which he generated a false document trail to make it appear otherwise.
406. Although the Commissioner did not allege it I would have inclined to the view that Mr Borgas' actions were so false that it is likely they lacked any legal quality, i.e., they were a sham. This was not alleged and I do not need, however, to make any such finding. It suffices to say that I find that Mr Borgas took no part to any extent in Chemical Trustee's decision-making processes. In saying so, I find that Mr Borgas' position was to do as he was told by Mr Gould without thought. I reject entirely the idea that Mr Borgas might have declined a transaction which he believed or suspected to be improper. Such an approach would have put him out of business.
407. Nor do I accept that Mr Vara's mechanical tasks in London of handling bank accounts as instructed or settling Australian share transactions locates any species of management in London. Mr Vara's role was to do as he was told by Mr Gould. This is what he did.
408. On the other hand, the case that Mr Gould ran this taxpayer in its every aspect from Sydney is overwhelming. It is overwhelming because he went to great lengths to conceal his role but these lengths, as events have transpired, have proved insufficient and the whited sepulchre exposed for what it is. It is Mr Gould who is the anonymous 'mutual client' referred to in Mr Borgas' careless correspondence. Once Mr Borgas is dismissed from the picture only Mr Gould remains.
409. I find that Chemical Trustee had its place of central management and control in Sydney with Mr Gould and nowhere else. I do not regard the Commissioner and the taxpayers as having been in a close race on this issue.
410. The same reasoning as in the case of Chemical Trustee applies, there being no material difference.
411. The same analysis again applies, with the slight, but irrelevant, wrinkle that it was incorporated in the Bahamas, held no directors' meetings and was otherwise somewhat light on when it came to paperwork.
412. I accept that all of Southgate's formal aspects were located in the United Kingdom. I find that the business it transacted was dictated to it by Mr Gould. This occurred through Lubbock Fine who transacted its business. I do not accept that the evidence given by Mr Goodyear or Mr Shah that neither would have transacted business which was unlawful or otherwise a breach of fiduciary duty means that they engaged in any discretionary decision-making. Being wholly ignorant of the taxpayer's business, there were no circumstances in which such a posture could ever have generated the need for any thought on their part.
413. Consequently, I find that Lubbock Fine were not involved in the management of Southgate. Their role was to provide cover for Mr Gould.
414. I find that Southgate had its place of central management and control in Australia.
Hua Wang Bank
415. For reasons I have already given I am satisfied that it was Mr Gould who owned his Bank. The elaborate, but unsuccessful, attempts to make it appear otherwise suggest the presence of dishonesty. Ultimately, however, that dishonesty is of little moment. This is because the taxpayers accepted that the individuals in Samoa who transacted the Bank's official business did so on Mr Gould's instructions. Ultimately, the taxpayers were reduced to two points:
- (a) the formal effusions of the Bank were all located in Samoa; and
- (b) the directors gave sufficient attention to their functions such that it could be said that they would not have entered into improper transactions.
416. I accept (a). It was incorporated in Samoa, had its offices in Samoa and all other such matters like books and seals. Its directors - who knew nothing at all about its business - were also located in Samoa. Many other formal links to Samoa existed.
417. The evidence was that the directors simply implemented Mr Gould's will. I do not accept that statements by them that they would not have caused the Bank to enter improper transactions suffice to mean they were exercising judgment in their capacity as its directors. Ignorance of its affairs necessarily made these statements hollow platitudes.
418. The business of the Bank appears to have been one of 'borrowing' money from various clients and lending it back to related persons or entities in a way which appears designed to conceal their original nature, or at least the original owner. From the Bank's perspective, it was the business of matching loans with deposits. There was never any occasion for the directors to exercise any judgment about these transactions and the evidence is that they did not. They simply did what Mr Gould told them to do.
419. Some of these very dubious circular transactions washed back to Mr Gould and some to his clients. Regardless, it was Mr Gould who was giving the instructions. It is not necessary for me to decide whether the Bank was in effect a commercial laundry. That will be for others to consider. Whatever it was, its real business was conducted by Mr Gould from Sydney.
420. In those circumstances, I conclude that each taxpayer was an Australian resident for tax purposes.
5. Double Taxation Issues
(a) United Kingdom after 2004
421. There were two steps in the argument. First, Southgate, Chemical Trustee and Derrin Brothers all submitted that they were 'necessarily' UK tax residents because they were incorporated in the UK. On the findings I have made so far this meant that they were resident for tax purposes both in Australia (under Australian law) and the United Kingdom (under its law).
422. Secondly, these taxpayers then submitted that the tie-breaker provision in the Convention Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, signed 21 August 2003,
 ATS 22 (entered into force 17 December 2003) would apply to resolve the conflict which would then exist on the issue of which country they were resident in. That treaty takes precedence over the ITAA 1936 and the ITAA 1997 by reason of s 4(2) of the International Tax Agreements Act 1953 (Cth). Article 4(4) of the treaty applies when a taxpayer is resident in both countries under their domestic laws and deems the taxpayer to be located where it has its 'place of effective management'. I return to their precise terms below.
423. I reject this argument. There was no evidence about the content of United Kingdom law on this issue. In such a situation I proceed on the basis that the law of the United Kingdom is the same as Australian law:
Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331 at 343 , 372 , 411  and 420 . As outlined above, the Australian law is in s 6 of the ITAA 1936 which 'resident of Australia' is defined to mean in relation to a company:
'a company which is incorporated in Australia or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia'
424. I incline to the view that when applied under private international law principles as the default rule for the purposes of residency, the references to 'Australia' should be taken as references to the 'United Kingdom'. There may be some interesting concepts underlying that tentative conclusion which are, perhaps, akin to certain renvoi problems: cf. Neilson. However, I do not find it necessary to consider the issue further in any detail, but will assume it in favour of the taxpayers.
425. The effect of the ITAA 1997 on the conclusions I have reached is to make these taxpayers Australian residents for tax purposes. Section 4(2) of the International Tax Agreements Act permits of the possibility of a different outcome by asserting the primacy of its provisions over those of the ITAA 1936 and ITAA 1997. It provides:
'4 Incorporation of Assessment Act
(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.
(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.'
426. Section 5 goes on to give various treaties entered into by Australia 'the force of law according to its tenor'. One of the agreements in the list is 'the United Kingdom convention' and this, in turn, is defined in s 3AAA(1) to mean the Convention done between the United Kingdom and Australia at Canberra on 21 August 2003. It was not in dispute, therefore, that if this Convention deemed the taxpayers to be resident in the UK then this would require the same conclusion under the ITAA 1997.
427. Article 4(1) of the Convention then provides, in a way not necessary to set out, that a person is resident in either State for the purposes of the Convention if it is resident for the purposes of either State's domestic income tax laws. On the findings I have made and on the renvoi-related assumption above, these taxpayers were therefore resident in both jurisdictions within the meaning of Article 4(1).
428. Article 4(4) then provides:
'Where by reason of the preceding provisions of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.'
429. The issue is whether, on the facts as I have found them, these taxpayers had their place of 'effective management' in the United Kingdom or Australia. This of course is an expression used in a treaty but the interpretative principles applicable in those situations do not require one to do more than work out what 'place of effective management' means in the context of the Convention. The Convention is based on the OECD Model Tax Convention and the OECD's Commentary thereon is a legitimate interpretative material:
Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 at 344, 356-357;
Commissioner of Taxation v SNF (Australia) Pty Limited (2011) 193 FCR 149 at 184-185 . The taxpayers submitted that
Russell v Commissioner of Taxation (2011) 190 FCR 449 at 455-456 - denied the permissibility of recourse to the commentary. That is simply not what Russell says: . Relevantly, the Commentary says:
'24. As a result of these considerations, the "place of effective management" has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.'
430. There is no doubt that the key management and commercial decisions were made by Mr Gould in Sydney. Consequently, the taxpayers' place of effective management was Sydney as well. The Convention does not assist these taxpayers.
(b) United Kingdom prior to and including the 2004 year
431. In these income years the matter was governed by an earlier Convention reached in 1967, the Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, signed 7 December 1967,
 ATS 9 (entered into force 8 May 1968). That agreement is an 'agreement for an earlier period' within the meaning of s 3AAB of the International Tax Agreements Act. Section 5A provides that such a treaty continues to have the force of law in relation to income tax issues to which it relates. Again assuming in the taxpayers' favour that they are resident in the United Kingdom the matter is then governed by Article 3(3) which provides:
'Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is both a United Kingdom resident and an Australian resident -
(b) it shall be treated solely as an Australian resident if it is managed and controlled in Australia.'
432. It is plain that the management and control of these taxpayers took place wholly in Australia. Accordingly, Article 3(3) is of no assistance to the taxpayers.
433. It was submitted that Chemical Trustee, Derrin Brothers and Bywater should be found to be tax residents in Switzerland by reason of Mr Borgas' activities in Switzerland.
434. I reject this argument. The relevant treaty is the Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income, signed 28 February 1980,  ATS 5 (entered into force 13 February 1981). Under that treaty a person will be resident in Australia for tax purposes if he or she is resident in Australia for the purposes of tax: Article 4(1)(a). On the findings I have made, each of Chemical Trustee, Derrin and Bywater were resident in Australia for the purposes of Article 4(1)(a).
435. A taxpayer will also have been resident in Switzerland under the treaty if they were 'subject to unlimited tax liability in Switzerland': Article 4(1)(b).
436. If, under Article 4(1), a corporation is resident in both Australia and Switzerland then, by Article 4(3), it is solely resident where 'its place of effective management situated'.
437. To succeed, therefore, Chemical Trustee, Derrin and Bywater need to establish that:
- (a) they were 'subject to unlimited tax liability in Switzerland'; and
- (b) their place of effective management was Switzerland.
438. As a matter of Swiss law, a company will be subject to unlimited tax liability if it has its place of effective management in Switzerland. Experts in Swiss law - Professor Simonek and Dr Oberson - gave evidence about the content of Swiss law in this regard and were in agreement that one was required to look to the place of 'effective management' to answer this question.
439. They were also in agreement that this would be where the day-to-day business decisions were made; that strategic decisions were relevant to the issue although not as relevant as day-to-day decisions and that administrative activities were irrelevant.
440. Applying this test, it is apparent that each company had its place of effective management in Australia, not Switzerland. All the decisions were made there by Mr Gould. Nothing beyond the most mechanical acts of administration happened in Switzerland. Consequently, the treaty does not assist the taxpayers. They did not have unlimited tax liability under Swiss law and the treaty is therefore inapplicable. All roads lead to Rome.
6. The Capital/Revenue Distinction
441. The taxpayers next contended that the profits they had derived from the sale of their shares had been profits which had been made on capital account. This was because they were purchases made, so it was said, with the purpose of realizing gain from growth in the value of the underlying companies rather than from cyclical fluctuations in their share price.
442. Ordinarily this would mean that the profits would be subject to capital gains tax. However, if the taxpayers had succeeded in showing that they were not resident in Australia for tax purposes then they would not have been liable to that tax on these profits unless the shares in question had also had 'the necessary connection with Australia': ITAA 1997 s 136-25 Table Item 5 (now repealed). The Commissioner's primary submission was that the shares were held on revenue account, not capital account. In the event that he was unsuccessful on this ground, however, the Commissioner submitted that the 'necessary connection with Australia' was established in the cases of two stocks, CVC and Sunland. The taxpayers conceded that the test was satisfied by CVC in relation to Derrin and the Bank but otherwise denied it in the case of CVC. Insofar as Sunland was concerned, they denied the entitlement of the Commissioner to pursue the point.
443. In this area there were therefore four debates:
- (a) were the profits on the sale of shares on capital account;
- (b) if yes, were the taxpayers non-residents;
- (c) if yes, was 10% of the value of the shares in CVC and Sunland held by the taxpayers or associates thereof within the preceding 5 years; and
- (d) was it open to the Commissioner to pursue this point in relation to Sunland.
444. It will follow from my conclusion that the taxpayers were Australian residents that this set of questions does not arise because of the negative answer to (b). In case that conclusion is reversed it is necessary to make factual findings about (a) and (c).
7. Capital or Revenue Account?
445. The taxpayers submitted that one should attend to the purpose with which the taxpayers had acquired the shares. They pointed to the evidence of Mr Gibbs and Mr Codd on this issue. The evidence of Mr Gibbs upon which reliance was placed was at paragraphs 20-21 of his affidavit. He thought that Chemical Trustee, Derrin and Bywater were professional investors who did not engage in speculative trading but generally sought investments with medium-term growth prospects. I accept his evidence. Mr Codd gave evidence of what he believed Mr Borgas' purpose to have been. Whilst I have found it unnecessary to conclude that Mr Codd was complicit in Mr Gould and Mr Borgas' web of deception, I have done this by concluding that he too was a victim of Mr Borgas' dishonesty. Consequently, whilst I accept that Mr Borgas may have intimated to Mr Codd that he was interested in stocks with long-term growth I do not think this should be given any significance since Mr Borgas' statements were very rarely true.
446. Perhaps fearing that their lay evidence might pull up short in the absence of Mr Gould, who was not called, the taxpayers also relied upon two experts. The first was Mr Mark Bryant. I accept his evidence in its entirety. However, it is of no assistance to the taxpayers. Mr Bryant was asked to address three issues: what were the relevant accounting standards; what procedures would have been adopted by an accountant to classify the share transactions in question according to the relevant accounting standards; and, what questions would have been required to have been asked of the directors to form a view about the share transactions. Mr Bryant answered each of these questions. However, the question before me is whether the shares were held on capital account. About this Mr Bryant says nothing which is understandable since he was not asked to do so.
447. The second expert was Dr Lepone. He is an Associate Professor at the University of Sydney and specialises in corporate and quantitative finance. I found his report, with respect, very interesting and insightful. Again, however, it did not really assist the taxpayers and, indeed, it seemed to me to be much against them. His opinion was that there was a particular kind of investor in the share market who was interested in making profits from price movements driven by the economic performance of the companies in whom the investment was made. Dr Lepone thought, and I have no reason to doubt, that long-term investors (as he called them) traded in large amounts and in stocks which were not as liquid and held these stocks for longer. He then analysed the position of the five taxpayers and came to the conclusion that they traded in quantities above the market average, that the stocks they held were consistent with a long-term portfolio designed for capital growth and that their trading frequency was below the market average. He therefore thought that the five taxpayers invested in a way which 'was consistent with normal longer-term investor behaviour'.
448. Profits made in the ordinary course of carrying on a business constitute income:
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 209. Accepting the evidence of Dr Lepone and Mr Gibbs, it seems to me that the taxpayers were carrying on a business of generating profits from investing in securities on a long-term basis. It does not matter whether the taxpayers intended that profit to derive from short-term fluctuations in the stock prices or long-term increases caused by an increase in the underlying economic value of the company. The point is that the business they were conducting was making profits from buying and selling shares. The taxpayers pointed to three decisions which they submitted assisted their contention that holding for long-term investment purposes resulted in the profits being on capital account. These were
Trent Investments Pty Ltd v Federal Commissioner of Taxation (1976) 10 ALR 58;
Federal Commissioner of Taxation v Equitable Life and General Insurance Co Ltd (1990) 93 ALR 609 and
AGC (Investments) Limited v Federal Commissioner of Taxation (1992) 92 ATC 4239. These do not establish that proposition, however. Each involved a factual finding that the profits had not been made as part of the ordinary course of the business or with the intention of making a profit. In this case my finding is that the profits were made as an ordinary part of the taxpayers' businesses and with the intention of making a profit. Accordingly, issue (a) is to be answered adversely to the taxpayers as well - the profits were on revenue account and the issue of capital gains does not arise.
449. Although it does not matter, what then of issue (c) - whether 10% or more of CVC or Sunland was held by the taxpayers or entities associated with them? At the relevant time Division 136 of the ITAA 1997 (which has now been repealed) provided, in summary, that a non-resident taxpayer makes a capital gain where the CGT event is the disposal of a CGT asset if the asset has the 'necessary connection with Australia': s 136-10. A share in a company will have the necessary connection if a taxpayer or its associates own at least 10% by value of the shares in the company at any time during the 5 years before the CGT event: s 136-25 table item 5.
450. What is an associate? Section 995-1(1) ITAA 1997 defines associates to have the same meaning as in s 318 of the ITAA 1936. That section provides:
(1) For the purposes of this Part, the following are associates of an entity (in this subsection called the "primary entity") that is a natural person (otherwise than in the capacity of trustee):
- (a) a relative of the primary entity;
- (b) a partner of the primary entity or a partnership in which the primary entity is a partner;
- (c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;
- (d) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;
- (e) a company where:
- (i) the company is sufficiently influenced by:
- (A) the primary entity; or
- (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or
- (C) another company that is an associate of the primary entity because of another application of this paragraph; or
- (D) 2 or more entities covered by the preceding sub-subparagraphs; or
- (ii) a majority voting interest in the company is held by:
- (A) the primary entity; or
- (B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or
- (C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.
(2) For the purposes of this Part, the following are associates of a company (in this subsection called the "primary entity"):
- (a) a partner of the primary entity or a partnership in which the primary entity is a partner;
- (b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;
- (c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;
- (d) another entity (in this paragraph called the "controlling entity") where:
- (i) the primary entity is sufficiently influenced by:
- (A) the controlling entity; or
- (B) the controlling entity and another entity or entities; or
- (ii) a majority voting interest in the primary entity is held by:
- (A) the controlling entity; or
- (B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);
- (e) another company (in this paragraph called the "controlled company") where:
- (i) the controlled company is sufficiently influenced by:
- (A) the primary entity; or
- (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or
- (C) a company that is an associate of the primary entity because of another application of this paragraph; or
- (D) 2 or more entities covered by the preceding sub-subparagraphs; or
- (ii) a majority voting interest in the controlled company is held by:
- (A) the primary entity; or
- (B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or
- (C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;
- (f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).
(3) For the purposes of this Part, the following are associates of a trustee (in this subsection called the "primary entity"):
- (a) any entity that benefits under the trust;
- (b) if a natural person benefits under the trust - any entity that, if the natural person were the primary entity, would be an associate of that natural person because of subsection (1) or because of this subsection;
- (c) if a company is an associate of the primary entity because of paragraph (a) or (b) of this subsection - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or because of this subsection.
(4) For the purposes of this Part, the following are associates of a partnership (in this subsection called the "primary entity"):
- (a) a partner in the partnership;
- (b) if a partner in the partnership is a natural person - any entity that, if that natural person were the primary entity, would be an associate of that natural person because of subsection (1) or (3);
- (c) if a partner in the partnership is a company - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or (3).
(5) In determining, for the purposes of this section, whether an entity is an associate of another entity at a particular time (in this subsection called the "test time"):
- (a) an entity (in this subsection called the public unit trust entity) that, apart from this subsection, is the trustee of a public unit trust at the test time is to be treated as if it were a company instead of a trustee; and
- (b) the public unit trust entity is taken to be sufficiently influenced by another entity or other entities if the public unit trust entity is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the other entity or other entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); and
- (c) another entity or other entities are taken to hold a majority voting interest in the public unit trust entity if either of the following percentages is not less than 50%:
- (i) the percentage of the income of the trust represented by the share of the income to which the other entity or other entities are entitled, or that the other entity or other entities are entitled to acquire;
- (ii) the percentage of the corpus of the trust represented by the share of the corpus to which the other entity or other entities are entitled, or that the other entity or other entities are entitled to acquire.
(6) For the purposes of this section:
- (a) a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts; and
- (b) a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); and
- (c) an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.
(7) In this section and any other provision of this Act that has effect for the purposes of this section, a reference to the spouse of a person does not include:
- (a) a spouse who is legally married to the person but living separately and apart from the person on a permanent basis; or
- (b) a spouse within the meaning of paragraph (a) of the definition of spouse in subsection 995-1(1) of the Income Tax Assessment Act 1997 who is living separately and apart from the person on a permanent basis.
451. All of the taxpayers are 'associates' of MH Investments and JA Investments since they are all (apart from Southgate) ultimately owned by those two entities: s 318(2)(d). Mr Gould holds a majority voting interest in MH Investments and JA Investments because he is in a position to control more than 50% of the votes at a general meeting. This is either because he is the actual beneficial owner by reason of the declared (but hidden) trust or because of the practicalities attending his office as appointor. As such he is the beneficial owner of JA Investments and MH Investments: s 318(2)(d)(ii)(A). Symmetrically MH and JA Investments are associates of Mr Gould (s 318(1)(e)(ii)(A)) and therefore of each other (s 318(2)(f)). Sliding down in the opposite direction all of the subsidiaries of these two entities will also be associates because of the majority shareholding those companies have: s 318(2)(d)(ii) combined with s 318(6)(c). Although not owned by MH Investments or JA Investments, Southgate is an associate of Mr Gould because Southgate's directors are accustomed or under an obligation to act in accordance with his instructions: s 318(2)(d)(ii) and s 318(6)(b). Section 318(2)(f) then leads to the result that all of the taxpayers are associates of each other.
452. The Commissioner submitted therefore that the following companies were associated with MH Investments and JH Investments and therefore Mr Gould:
- • Chemical Trustee;
- • Derrin Brothers;
- • Bywater Investments;
- • Hua Wang Bank;
- • City and Westminster;
- • Indo-Suez;
- • Abasus Ltd;
- • Lloyds & Casanove;
- • Neuchatel Gestion Fiduciare PLC;
- • Normandy UK;
- • Southsea (Australia) Ltd; and
- • Penalton Ltd.
453. The taxpayers made no submission that I ought not to accept this to be the case and I propose to do so. In particular, no submission was made that the debt-capital structure of Hua Wang Bank makes any difference to this analysis and this point is, so far as I am concerned, not in play. I take a similar position in relation to Southgate Investments and Apollo. Between them it is plain that these entities owned more than 10% of CVC in the relevant years. Since Mr Gould was CVC's chairman he was also an associate of CVC. It follows that associates of the taxpayers together with the taxpayers owned more than 10% of CVC and no exemption from capital gains tax would have been available even if the profits had been on capital account and even if the taxpayers had been, as they were not, non-resident. I reject the taxpayers' contention at  of their submissions in reply that it was not open to the Commissioner to put a case in relation to CVC. The issue was flagged in the taxpayers' statement of issues. The taxpayers complain that they could have led evidence about the issue. The real point is that it being an identified issue at the start of the trial and with the taxpayers bearing the onus of proof, they should have led evidence.
454. That leaves the issue of the Sunland shares. The taxpayers disputed the entitlement of the Commissioner to rely upon the Sunland shares by pointing out that the Sunland issue was not raised in the Commissioner's appeal statement. The Commissioner did not accept that he was prevented from relying upon this matter just because it was not in the appeal statement but out of more abundant caution applied to amend the statement to cover the Sunland issue. The taxpayers were not able to point to any prejudice arising from this amendment which I then granted on day 22 of the trial. I did so because all of the material necessary to deal with the issue had been led and the taxpayers could not point to any prejudice.
455. Sunland was an associate of all of the same entities for the reason that CVC owned more than 10% of its share capital throughout the period.
456. In those circumstances, all of the taxpayers arguments about the capital nature of the profits fail.
8. Trading Stock Issue
457. On the assumption that they were Australian resident taxpayers and that the profits they had made on the purchase and sale of the shares were on revenue account, the taxpayers next claimed that they were entitled to call in aid of the trading stock provisions. 'Trading stock' is defined in s 70-10(1)(a) of the ITAA 1997 to mean (relevantly):
'anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a * business'.
458. The asterisk may be ignored for present purposes. If the shares acquired by the various taxpayers constitute trading stock within this definition then the provisions of s 70-35 would apply and the taxpayers would be entitled to claim as a deduction the amount by which the shares' value at the start of the income year exceeded their value at its end: s 70-35(3). Correspondingly, they will be obliged to return additional income to the extent to which the shares' value at the end of the income year exceeds their value at the start: s 70-35(2). The calculation of the value of the trading stock at the end of a year of income can be done on three bases between which the taxpayer must elect: s 70-45(1). These methods are: cost, market selling value and replacement value. The value of the trading stock at the start of the year, by contrast, is its value at the end of the previous year or nil if the provisions have not been earlier applied: s 70-40. The taxpayers' formal claim in the present context is that the shares were trading stock and they are entitled to make trading stock elections in each relevant year.
459. The legal question then is short and is generated by the text of the definition in s 70-10(1)(a) of 'trading stock' (above). It not being in dispute that the shares were 'acquired', the issue was whether they were 'held' by the taxpayers 'for purposes of....sale or exchange in the ordinary course of a * business'.
460. I have already concluded that the profits made by the taxpayers were made as part of their ordinary business activities being the business of buying and selling shares on a long-term investment basis. The Commissioner submitted that whilst the profits made by the taxpayers were on the revenue account because they had been made by reason of the taxpayers' ordinary business of buying and selling shares to make profits from increases in the underlying value of the shares in question on a long-term basis, the shares in question had not been held for the purposes of sale in the course of that business.
461. I accept the Commission's submission that it is possible for profits made on the sale of shares to be on revenue account whilst the underlying shares themselves are not trading stock:
Federal Commissioner of Taxation v Radnor (1991) 102 ALR 187 at 197. This outcome is likely to occur where the profits in question are on revenue account, not because they arise from the ordinary business of share trading, but where a particular share trade had been engaged in for the purpose of making a profit other than in the ordinary course of business. A person who on a one-off basis bought a parcel of shares with a view to making a profit would have to return the profit as a revenue item but the shares would not be trading stock because the taxpayer would not hold the shares for the purpose of sale in the ordinary course of a business.
462. The question of whether there is a business being conducted in which shares are being sold in its ordinary course is a question of fact. Whilst I accept the Commissioner's theoretical point that merely because I have concluded that the profits were on the revenue account does not mean inevitably that the shares were held as trading stock, the fact is that I have concluded the profits were on the revenue account because they were derived in the ordinary course of a business of making profits by buying and selling shares. The Commissioner emphasised that purchases and sales were sporadic and infrequent and I accept that they were not regular. But I do not think that that prevents them from arising out of the ordinary course of the taxpayers' businesses.
463. Accordingly, I accept that the taxpayers are entitled to make trading stock elections in each of the relevant years.
9. Nominee Transactions
464. It was not in dispute that the taxpayers were not liable to pay tax on the profits made from the share sales if the shares had not been beneficially owned by them. Only Hua Wang Bank and Bywater were involved in this debate.
(a) Hua Wang Bank - Sunland shares
465. The Bank submitted that of the 4,122,146 Sunland shares it had sold in 2004 (and the profits upon which the Commissioner had assessed as income) some 122,146 had in fact been held on trust for the Phillips River Superannuation Fund. The Bank relied upon two letters to make good this point. The first of these was a letter dated 17 January 1995 from Mr Gould to the directors of the Bank. It was in these terms:
HUA WANG BANK BERHAD
It would be appreciated if the directors would approve an investment of $400,000 into the ordinary shares of an Australian company called "Sunland Group Limited".
In addition $50,000 will be required from the Phillips River Superannuation Fund in relation to an investment on behalf of one of the funds members into shares in Sunland Group Limited.
We understand the Phillips River Superannuation Fund monies may be on 30 day deposit and accordingly it would be appreciated if these funds could be made available in say, the next 14 days.
We annexe the relevant application forms which should be completed by both the abovementioned parties at your convenience.'
466. The second was a letter dated 20 August 2004 from the Bank to Mr Jamie Saba of 'Wilson HTM' in these terms:
'Dear Mr Saba
As you are aware, in June 2004 you incorrectly sold 122,146 shares in Sunland Group Limited which were subsequently bought back and the proceeds returned to your trust account,.
It appears that these shares have been registered in the name of Hua Wang Bank Berhad with a Singapore address and consequently a different SRN has been issued for this holding.
Would you please rectify the situation to ensure that the holding of 122,146 shares (SRN I0030011198) is transferred to the main holding of 377,584 shares (SRN I003002270), making a total holding of 500,000 shares in the name of Hua Wang Bank Berhad.'
467. I am unable to deduce from these documents that the Bank was holding the 122,146 shares for the Phillips River Superannuation Fund. The first letter may suggest that the Phillips River Superannuation Fund was to invest in $50,000 worth of Sunland shares but I am hard pressed to see that this is the same as the 122,146 shares referred to by the taxpayers. Further, the letter suggests that applications were to be made by both the fund and the Bank which is inconsistent with the suggested nominee arrangement under which only the Bank would be buying the shares. As for the second letter, I am unable to deduce from it anything about the Phillips River Superannuation Fund which is not referred to.
468. In those circumstances, I conclude that the Bank has not shown that it was not the beneficial owner of these shares.
(b) Hua Wang Bank - Cyclopharm shares
469. The Bank submitted that it held shares in Cyclopharm on behalf of clients of Normandy Finance and Investments Asia Ltd. It was said that the testimony of Mr Yunus assisted in reaching this conclusion. That evidence is, to say the least, murky. Involved are two letters from Normandy Finance and Investments Asia Ltd. The first is dated 27 November 2006 and was signed by Mr Yunus. The text of this letter is as follows:
Cyclopharm Ltd Shares ("CYC Shares")
We refer to our letter of 16 October 2006 where in we confirmed payment for the following shares which were purchased at a public auction:
Nos of Vita Life Shares Vita Life Sciences Ltd shares beneficially owned by: Normandy Finance & Investments Asia Ltd ("NFIA") 1,027,946 Mr Bernard Salin 200,000
Hua Wang Bank by virtue of the Vita Life's rights issue was allotted 2,630,250 CYC Shares at a cost of A$131,512.50 '($0.05 each). The CYC shares are beneficially owned in the same proportion as the Vita Life shares. That is:
CYC Shares Hua Wang Bank 1,198,531 NFIA 1,198,530 Mr Bernard Salim 233,189 2,630,250
We have today transferred A$65,756.25 to your account being 50% of the total cost of the CYC Shares acquired via the Vita Life's rights issue.
Please note that Bernard Salin has not paid for his Vita Life or CYC Shares. Hua Wang Bank and NFIA have financed his investment as follows:-
VLS Shares CYC Shares Hua Wang Bank 5,118.55 5,829.73 NFI 5,118.54 5,829.72 A$10,237.09 A$11,659,45
We will arrange for Mr Salin to pay the amount due to our respective company's [sic] as soon as possible.'
470. This letter appears to suggest that the Bank acquired 2,630,250 shares in Cyclopharm and that it held 1,198,531 for itself, 1,198,530 for Normandy Finance and 233,189 for a Mr Salin whose investment was paid for by way of loans from the Bank and Normandy Finance. This is immediately inconsistent with the Bank's submission that all the shares were held for clients of Normandy Finance. No clients of Normandy Finance appear to be referred to in this letter unless one makes the assumption - which I do not - that Mr Salin was such a person. There is also the problem that the Bank appears to hold 1,198,531 for itself. Mr Yunus was asked about this letter and at T543 he said that he did not find out that the Bank held its shares for Normandy Finance from either Mr Gould or a Mr Townsing. But he also said that he signed the letter after discussing the matter with Mr Townsing which is somewhat confusing. I was left none the wiser by this letter or Mr Yunus' evidence about it.
471. A second letter was dated 23 December 2009 and was also from Normandy Finance and Investments Asia. This letter was signed by the mysterious Mr Townsing. It is as follows:
Shares held by Hua Wang Bank Berhad on behalf of Normandy Finance & Investments Asia Ltd ("NFIA")
By letter dated 27 November 2006 (copy attached) NFIA confirmed to Hua Wang Bank Berhad ("HWB") that HWB was holding Vita Life Sciences Ltd ("VLS") and Cyclopharm Ltd ("CYC") shares on behalf of NFIA.
As advised NFIA and HWB both purchased VLS and CYC shares on behalf of Mr Salin and further we advised Mr Salin had not paid for the shares. Mr Salin never paid NFIA or HWB for the shares.
As it has been 3 years since the VLS and CYC shares were purchased and Mr Salin has not paid for them, NFIA requests HWB transfer the shares to it. In addition NFIA requests that VLS shares beneficially owned by NFIA held by HWB be transferred to NFIA.
Details of the shares NFIA proposed to be transferred to it are as follows:-
1. VLS Shares
Number of Shares Pre Consolidation* Post Consolidation* Beneficially owned by NFIA 1,027,946 256,987 Salin shares owned by NFIA 100,000 25,000 1,127,946 281,987
* VLSA shares were consolidated on a 4:1 basis in 2007.
Number of VLS shares proposed to be transferred by HWB to NFIA: 281,987 shares.
2. CYC Shares
Number of Shares Beneficially owned by NFIA 1,198,530 Shares Sold (1,000,000) 198,530 Salin Shares (233,18912) 116,594 315,124
Number of CYC shares proposed to be transferred by HWB to NFIA: 315,124 shares.
Please do not hesitate to contact us if you have any queries.'
472. This letter appears to suggest that the Bank held 315,124 Cyclopharm shares which were proposed to be transferred to Normandy Finance. The earlier letter suggested that the Bank held 1,198,530 shares in Cyclopharm for Normandy Finance and this letter now suggested the same thing although it appeared that 1,000,000 had been sold. The letter intimated that Mr Salin's unpaid for portion should now be transferred to Normandy Investments too so that the total parcel was of size 315,124. Even accepting this at face value, it simply does not establish what the taxpayers allege, namely, that the shares were held for clients of Normandy Finance. It may tend to prove that the shares were held by the Bank for Normandy Finance itself - indeed it appears to say that - but that is not what the taxpayers allege.
473. In the end I am left with the shares in question not identified in the taxpayers' submissions; two transactional letters which are baffling in their obscurity; a non-alignment between what I can glean from the letters and what the taxpayers' allege; the evidence of Mr Yunus which is difficult to grasp and a failure by the taxpayers to try explain what all of this means. Not being inclined, here at paragraph 473, any further to divine the obscure, I conclude that the Bank has not discharged the onus of proving that it was not the owner of Cyclopharm shares in the manner for which it contends.
474. In closing submissions the taxpayers withdrew their similar contentions that the Bank should not be taxed on the sale of shares in CVC Limited and Genetic Technologies due to nominee agreements.
(c) Bywater - Russell Associates
475. Bywater submitted that all of its transactions had been done on behalf of Russell Associates. Mr Vara gave evidence that Bywater was the nominee for Russell Associates and that Russell Associates was the source of the funds for its purchases. The taxpayers also submitted that Mr Borgas' evidence at T1426-1427 assisted but I am unable to see anything on those pages which assists. Bywater submitted that documents prepared by Mr Vara showed that all of Bywater's funding came from Russell Associates and that the profits were repatriated back to Russell Associates. Mr Vara had examined all of Bywater's bank statements and prepared spreadsheets summarising the receipts and payments on those accounts. That summary shows significant flows of money coming in from Russell Associates, substantial share trading activity evidenced by flows in and out of the bank accounts of stockbroking firms and substantial flows of moneys to Russell Associates. There are also dividend payments, sundry payments to creditors such as Lubbock Fine and some moneys which are advanced to Derrin.
476. The Commissioner submitted, and I accept, that a close reading of the bank statements makes it very difficult to connect individual transfers of money from or to Bywater with identifiable purchases or sales of shares. Further, he submits that neither Mr Borgas nor Mr Gould gave any evidence about the topic. One may put aside Mr Borgas as I have concluded that his evidence is not credible, but the absence of Mr Gould does raise more serious questions. Then again there is also the fact that Mr Vara gave evidence that Bywater did act as a nominee for Russell Associates.
477. Mr Vara explained his role in relation to these companies as processing and preparing transfer instructions. His evidence about the nominee role of Bywater was that 'I believe Bywater also acted as nominee for Russell Associates'. As I have explained above, I do not accept that Mr Vara is a credible witness and I do not think it wise to act on his testimony. I am therefore left with the bank statements. I do not accept that they establish the suggested nominee arrangement. I reject the argument that Bywater held its shares on trust for Russell Associates. I have not found it necessary, in that circumstance, to rely upon the failure of Mr Gould to give evidence.
10. Chemical Trustee - Penalties
478. The Commissioner imposed a 75% administrative penalty on Chemical Trustee. The Commissioner reasoned that s 284-75(3) of Schedule 1 to the TAA 1953 applied to Chemical Trustee. It provides:
284-75 Liability to penalty
(3) You are liable to an administrative penalty if:
- (a) you fail to give a return, notice or other document to the Commissioner by the day it is required to be given; and
- (b) that document is necessary for the Commissioner to determine a *tax-related liability of yours accurately; and
- (c) the Commissioner determines the tax-related liability without the assistance of that document.
479. There is no doubt that Chemical Trustee satisfied (a) and (c). Chemical Trustee submitted that (b) was not satisfied for two reasons. First, as I understood the submission, the provision only applied if the Commissioner required the document in question (here a return) in order to make an accurate assessment. There was an unstated assumption in the submission which was that the Commissioner did not need Chemical Trustee's return in order accurately to assess its income. There was no exploration by Chemical Trustee in its submissions as to why I should find as a fact that it was possible for the Commissioner to assess its income without a return accurately and the Commissioner gave several good reasons why I should not. These included matters such as the fact that share transfers need not happen at public market prices (particularly, as here, in illiquid stocks) and that public records show one nothing about any trust relationships which might exist. I reject the proposition that the Commissioner could accurately assess Chemical Trustee's income without its returns.
480. The second submission was that the word 'necessary' in subsection (b) required one to focus on the reasonableness of the taxpayer's conduct in light of the circumstances of the taxpayer. I reject the contention. The word 'necessary' imports nothing of the sort. Further, the circumstances of Chemical Trustee would not satisfy the requirement even if the construction were open.
11. The Charging Orders
481. At an earlier time in the litigation the Deputy Commissioner obtained summary judgment against the taxpayers. He also sought to levy execution against them by forcing the sale of shares under charging orders. I refused an attempt to stay execution of most of those judgments in
Deputy Commissioner of Taxation v Hua Wang Bank Berhad (No 3)  FCA 594. However, in the case of two of them - the Bank and Bywater - an issue arose which made it sensible to refuse enforcement of the judgments until after the trial. They sought to resist enforcement of the judgments on the basis that the shares against which the charging orders were sought did not belong to them. This was essentially the same issue which those two companies put forward in the appeals as to why they were not liable to tax on the profits arising from the sale and purchase of those shares. In Hua Wang Bank Berhad (No 3) I referred that issue to trial at the same time as the taxpayers' appeals. Procedurally it took the form of an interlocutory application for charging orders in the Commissioner's original proceeding to enforce the notices of assessment. After the case was heard, Southgate paid the amount due under the judgments against it and I made orders by consent on 10 July 2014 disposing of the enforcement proceeding against it (VID 888 of 2010).
482. Therefore there remains the Deputy Commissioner's claim for charging orders against the Bank and Bywater. The taxpayers' argument that charging orders should not be made rests on the idea that they do not own the shares. Above, I have rejected that argument, holding that the Bank and Bywater have not proven this. Accordingly, there is no reason why the Deputy Commissioner should not be permitted to have charging orders issued.
12. Miscellaneous Matters
483. There were a number of other matters mentioned in the statements of issues but about which no submission has been made. I proceed on the basis that if no submissions were made about the matter it was no longer in issue by the end of the trial.
484. Each of the taxpayers was resident in Australia and liable to pay income tax. Assuming that Chemical Trustee, Derrin Brothers, Bywater and Southgate were also resident in the United Kingdom and/or Switzerland the provisions of the treaties lead to the conclusion that they are to be taxed under Australian law. The profits of all the taxpayers were made on revenue account but they are entitled to make trading stock elections. All held their shares beneficially. The taxpayers' appeals should be allowed in relation to the trading stock issue but no other.
485. The parties are to bring in short minutes of order on or before 7 January 2015. I will hear them on costs. In particular, I will hear them and Mr Gould on whether the latter ought not to bear the costs of this litigation on a full solicitor-client basis. I direct the solicitors for the taxpayers to furnish Mr Gould with a copy of these reasons and to draw to his attention this costs issue. I direct the Registrar to forward a copy of these reasons to the Commonwealth Director of Public Prosecutions, the Australian Securities and Investments Commission and the Australian Federal Police. The facts I have found strongly suggest widespread money laundering, tax fraud of the most serious kind and, possibly in some instances, insider trading. The conduct revealed in this case is disgraceful.