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D MARKS PARTNERSHIP & ORS v FC of T

Members: Logan J
Griffiths J

Pagone J

Tribunal:
Full Federal Court, Queensland

MEDIA NEUTRAL CITATION: [2016] FCAFC 86

Decision date: 22 June 2016

Pagone J

131. This is an appeal under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from a decision by the Tribunal affirming decisions by the Commissioner disallowing objections in respect of the income years ended 30 June 2004, 2005 and 2006. The primary issue in dispute concerns the effectiveness of transactions by which Quintaste Pty Ltd ( " Quintaste " ) and the trustee of a trust called the D Marks Trust ( " the Marks Trust " ) claimed to have established a limited partnership called the D Marks Partnership ( " the Marks Partnership " ) within the meaning of s 995-1 of the Income Tax Assessment Act 1997 (Cth) ( " the 1997 Act " ).

132. Dividends were paid to Quintaste (in its capacity as general partner of the Marks Partnership) by HL Securities Pty Ltd ( " HL Securities " ) in each of the years in dispute and loans were made in the 2004 year by HL Securities and RMI Australia Pty Ltd ( " RMI " ) to Quintaste in its capacity as general partner of the Marks Partnership. HL Securities and RMI were two companies associated with Mr David Marks in connection with the business of insurance broking. A business of insurance broking which had been carried on by RMI for some years was sold for some $ 4 million which was paid in two tranches in early 2004 and 2005. The main business activity of RMI for the 2004 year was described as " general insurance broking " and that of the HL Securities as " investment operation other than shares, stock trading " . The financial statements for RMI reveal that it had traded profitably during the 2004 year and recorded $ 3,036,256 as an extraordinary profit relating to the sale of the insurance business during the 2004 year. Its balance sheet recorded total assets as at 30 June 2004 of $ 4,378,491 including receivables of $ 1,962,088 from the Marks Partnership and $ 291,982 from HL Securities. The balance sheet for HL Securities recorded total assets as at 30 June 2004 of $ 1,439,846 including loans of $ 676,009 from the Marks Partnership. Mr Marks had been the sole director of RMI as from 11 December 1995 and of HL Securities from 29 October 1995

133. A number of transactions were entered into during the 2004 year of income designed to enable Quintaste and the trustee of the Marks Trust to receive dividends and loans on the basis of being partners of a limited partnership for tax purposes. On 29 August 2003 Quintaste was registered with ASIC in Queensland. On 23 September 2003 the Marks Trust was created as a discretionary trust of which Mr Marks was described as the Principal Beneficiary. On 23 September 2003 Mr Marks was appointed as the sole director of Quintaste and held 12 issued shares in Quintaste for the Marks Trust.

134.

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On 10 October 2003 a deed prepared by Cleary Hoare solicitors was executed by Quintaste and Mr Marks. The deed is described as a " Deed of Limited Partnership " and is expressed to have been made by Quintaste as general partner and by Mr Marks as trustee of the Marks Trust. Clause 4 of the Deed expressed the purposes of the parties to the deed to include that they engage in business, but it was accepted that the parties to the deed did not carry on any business for profit and that they did not have between them the relation of carrying on business in common with a view of profit within the meaning of s 5 of the Partnership Act 1891 (Qld) ( " the 1891 Queensland Act " ) or under general law. On 24 October 2003, however, the Marks Partnership was registered under the Partnership (Limited Liability) Act 1988 (Qld) ( " the 1988 Queensland Act " ) and a " certificate of formation and composition " was issued pursuant to s 8(3) of the 1988 Queensland Act .

135. On 24 October 2003 HL Securities resolved to create a new class of shares known as Z Class shares with an issue price of $ 1 per share. Quintaste applied for and was allocated 10 Z Class shares in HL Securities on behalf of the Marks Partnership. Dividends were declared by HL Securities to Quintaste of $ 347,597 on 24 October 2003, of $ 471,932 on 30 November 2004, of $ 48,316 on 1 July 2005, and of $ 1,015,200 on 10 November 2005. In the 2004 financial year two loans were made to Quintaste for and on behalf of the Marks Partnership. One was by HL Securities in the sum of $ 676,009 and the other by RMI in the sum of $ 1,962,088.

136. The taxpayers maintained that they were to be assessed for tax on the dividends and loans upon the basis that they were a limited partnership for tax purposes and, therefore, that they were entitled to imputation credits for the dividends and that the loans were not to be taxed as deemed dividends. The Commissioner took a different view after an audit and assessed the taxpayers on alternative bases. The Commissioner ' s primary assessments were on the basis that the Marks Partnership was not a limited partnership for tax purposes and, therefore, that the parties to the Marks Partnership were not entitled to imputation credits and that the loans were taxable as deemed dividends. The alternative assessments treated the Marks Partnership as a limited partnership but treated the shares upon which the dividends were paid as debt interests under Division 974 of the 1997 Act which did not entitle the recipients to claim franking credits.

137. The Commissioner ' s assessments were issued in June 2010 and were referred to the Tribunal for review under Part IVC of the Taxation Administration Act 1953 (Cth) ( " the Administration Act " ). The first issue considered by the Tribunal was whether the Marks Partnership was a limited partnership within the meaning of s 995-1 of the 1997 Act and a corporate limited partnership within the meaning of s 94D of the 1936 Act which was to be taxed as a company. The second issue considered by the Tribunal was whether the shares issued by HL Securities were a debt or an equity interest within the meaning of Division 974 of the 1997 Act . The Tribunal also considered whether the position taken by the taxpayers was reasonably arguable for the purposes of s 284-15 in Schedule 1 to the Administration Act . The Tribunal decided that the Marks Partnership was not a limited partnership for the purposes of the 1997 Act , that the Z Class shares issued by HL Securities were a debt interest rather than an equity interest, and that the position adopted by the applicants was not reasonably arguable within the meaning of s 284-15(1) of Schedule 1 to the Administration Act .

138. The taxpayers challenge the Tribunal ' s decision on the following six grounds:

1. The Tribunal failed to give proper and adequate reasons for its decision.

2. The Tribunal erred in law in:

  • a. Failing or refusing to find that D Marks Partnership was a limited partnership
    • i. Under the relevant State law; and
    • ii. Under the ITAA 1936 and 1997;
  • b. Finding that a general law partnership had to exist before there could be a limited partnership;

3. The Tribunal erred in law in determining that the members of the D Marks Partnership were ' tax partners ' .

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4. The Tribunal erred in law in finding that the Z class shares issued by HL Securities Pty Ltd were a debt interest, and ought to have found that they were an equity interest.

5. The Tribunal erred in law in finding that s 109D of ITAA 1936 applied to the loans made by HL Securities and RMI Australia Pty Ltd.

6. The Tribunal erred in law in construing and applying s 284-15(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) in determining that the applicants ' contentions were not reasonably arguable, and ought to have set aside the objection decisions in so far as penalties and interest were imposed on the Applicant.

It may be convenient to deal first with the challenge to the Tribunal ' s conclusion, in the second ground of appeal, that the Marks Partnership was not a limited partnership able to be taxed as a company.

139. Whether the Marks Partnership was a limited partnership within the meaning of s 995-1 of the 1997 Act is a question which arose in the context of the claim that Quintaste was to be taxed as a company and was entitled to receive imputation credits on the dividends received from HL Securities in each of the three years of income in dispute. Division 5A of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act ) provides for certain limited partnerships to be treated as companies for tax purposes: see s 94A. A partnership that is a " corporate limited partnership " is taxed as a company subject to the modifications effected by Subdivision C in the Division: see s 94H. Such a partnership is not taxed as if it were an ordinary partnership (see s 94K) but is taxed as if it were a company or body corporate (see s 94J). Section 94D defines a corporate limited partnership for these purposes but applies only to a partnership which is " a limited partnership " .

140. The term " limited partnership " is relevantly defined by s 995-1(1) of the 1997 Act as:

[ A ] n association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited …

One of the elements of this definition is that the liability of at least one of the partners is limited. The Tribunal held that this requirement was not satisfied by the Marks Partnership because the members were not partners carrying on business together with a view of profit and, therefore, (a) that it was not a limited partnership within the meaning of the definition and (b) that it could not be treated as a corporate limited partnership for the purposes of Division 5A of the 1936 Act . The Tribunal reasoned that the Marks Partnership was not a limited partnership because registration under the 1988 Queensland Act contemplated registration of persons who were in business in common with a view of profit. The Tribunal found, therefore, that the Marks Partnership was not a limited partnership notwithstanding its registration under the 1988 Queensland Act . It reached that conclusion on the basis that the relationship between the entities did not create a partnership under s 5 of the 1891 Queensland Act or under general law notwithstanding that Quintaste and the trustee of the Marks Trust may fall within the extended definition of partnership in s 995-1 of the 1997 Act for tax purposes in the sense of being in receipt of income jointly.

141. The Marks Partnership was registered as a limited partnership under the 1988 Queensland Act . The Deed provided for the formation of the limited partnership in clause 2 of the Deed and was expressed to commence " on the date of this Deed " being 10 October 2003 as stated in Part 1 of the Schedule to the Deed. The parties to the Deed were identified to be Quintaste (as the general partner) and David Marks as the trustee of the Marks Trust (as the limited partner). The former was shown by Part 3 of the schedule to have an initial capital contribution of $ 1.00, being 1 % of the initial capital contribution, and the latter to have an initial capital contribution of $ 99.00, being 99 % of the total initial capital contribution. Clause 8.1.1 provided that the liability of the limited partner would not exceed the initial contribution.

142.

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The Marks Partnership was registered under the 1988 Queensland Act 13 days later (on 23 October 2003) and on that day a certificate of formation and composition was issued under s 8(3) of the 1988 Queensland Act. Section 10 of the 1988 Queensland Act limited the liability of a limited partner to contribute to the liability of the firm to the amount shown in the register in relation to the limited partner. A limited partnership to which those provisions applied was a partnership identified by s 6(1) of the 1988 Queensland Act which provided:

A limited partnership is a partnership -

(a) that exists between 2 or more persons, of whom 1 or more shall be a general partner or general partners and 1 or more shall be a limited partner or limited partners;

(b) that is formed under this Act.

A " limited partnership " contemplated by this provision was not any association of people or any association of entities but, rather, (as expressly provided) an association that was " a partnership " . The provision provided, in other words, for partners to a partnership to apply to have their partnership registered as a limited partnership.

Section 6(1) expressly specified the existence of a partnership as a quality of a limited partnership formed under its provisions. The association of persons could not be a limited partnership unless formed as such under the provisions of the 1988 Queensland Act , but it was only a partnership that could apply to become a limited partnership. Thus, s 6(1) begins by identifying the potential subject matter of its operation by reference to the words " limited partnership is a partnership " (emphasis added). The view that an association needed to be a partnership before applying to be formed as a limited partnership is supported also by the words " that exists " which appear in s 6(1)(a). Subsection 6(2) then provided that a corporate person could be either a general partner or a limited partner in a limited partnership. Section 7 provided for the formation of a limited partnership upon registration in the office of the registrar of a statement in a prescribed form containing, amongst other particulars, a statement in relation to each limited partner to the effect that he or she is a limited partner whose liability to contribute is limited to the extent of an amount of money specified in the statement. The provisions of the 1988 Queensland Act were replaced in 2004 by those in Chapter 3 of the 1891 Queensland Act. The provision in Chapter 3 of the 1891 Queensland Act are to much the same effect as those in the 1988 Queensland Act and s 49 of the 1891 Queensland Act provides that a limited partnership " is a partnership [ … ] that exists " between two or more persons where the liability of one or more is limited and that is formed under Chapter 3 of the 1891 Queensland Act .

143. The operation of s 6(1) of the 1988 Queensland Act , and subsequently of s 49(1) of the 1891 Queensland Act , depends upon the existence of a partnership before registration. The 1988 Queensland Act did not define " partner " but s 4(2) provided that its provisions were to be read " as one with the Partnership Act 1891 " which provided that a partnership was " the relation which subsist [ ed ] between persons carrying on a business in common with a view of profit " . The provisions of the 1988 Queensland Act did not purport to confer limited liability upon any association other than one which was a " partnership " as contemplated by that word in s 6(1). The Tribunal ' s decision was that the Marks Partnership was not a limited partnership because it did not exist as a partnership before registration as a limited partnership under the 1988 provisions. That was because the relationship that existed between those who obtained registration as a limited partnership did not have the relationship between them of persons carrying on a business in common with a view of profit. The Tribunal recorded at paragraph [ 32 ] that the Commissioner had concluded that no business had been carried on by the partners at any relevant time. The Tribunal went on to observe that this was supported by the evidence of an interview with Mr Marks, as the sole director of Quintaste, on 31 May 2011 which the Tribunal understood had not been contested. The Tribunal concluded that it had not been satisfied by the taxpayer that the entities claiming to be the Marks Partnership did carry on business or ever intended to carry on business.

144.

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The Tribunal ' s decision was, therefore, that an essential condition was absent for Quintaste to rely upon the relevant provisions of the 1936 Act and the 1997 Act . Quintaste could not rely upon the provisions because the Marks Partnership was not an association of persons whose liability had been limited by registration under the 1988 Queensland Act. Those provisions attached only to a partnership coming within its terms and did not purport to extend to a partnership, for example, created by the extended definition of partnership under Commonwealth legislation for tax purposes. The word " partnership " in s 6(1) of the 1988 Queensland Act is to be read as a reference to the meaning given to that word by s 5(1) of the 1891 Queensland Act by virtue of s 4(2) of the 1988 Queensland Act . Section 5(3) of the 1891 Queensland Act (before incorporation of the 1988 Queensland Act with it) provided that a limited partnership formed under the 1988 Queensland Act was a partnership within the meaning of the 1891 Act but that presupposed that the association of persons had first qualified for registration as a limited partnership. It was unnecessary to provide for the matters in s 5(3) once the terms of the 1988 Queensland Act were enacted as Chapter 3 of the 1891 Act .

145. The taxpayers did not challenge the Tribunal ' s finding that the two entities constituting the Marks Partnership did not carry on business with a view to profit (and therefore were not partners in the sense required by s 5 of the 1891 Queensland Act ) but contended that the production of the certificate under s 8(4) provided conclusive evidence of the formation of a limited partnership notwithstanding the fact that the Marks Partnership would not have been a partnership under s 5(1) of the 1891 Queensland Act or under general law. Section 8 required the registrar to keep a register of all limited partnerships and provided for the issue of a certificate as to the formation and composition at any time of a limited partnership. Section 8 also provided for the issue of a conclusive certificate which was issued in the present case and upon which the taxpayers rely. In that regard s 8(4) provided:

(4) A certificate issued under subsection (3) -

  • (a) shall be conclusive evidence that the limited partnership to which it refers was formed on the date of registration referred to in the certificate; and
  • (b) shall be evidence and, in the absence of evidence to the contrary, conclusive evidence that the partnership to which it refers consists or consisted of the general partners and limited partners named in the certificate as such.

The taxpayer ' s submission about the tender of the certificate were rejected by the Tribunal and should not be accepted on appeal. The conclusivity conferred by s 8(4)(a) was limited to the fact that a limited partnership was formed " on the date of registration " referred to in the certificate. The conclusivity of the date of registration is important because it is the temporal reference point by which any liability is limited, but it does not confer conclusivity beyond that. It does not extend to confer conclusivity of the association being a limited partnership if the association which had sought registration was not a partnership. Conclusive evidence provisions are to be construed strictly: see
Mune v Centro Argentino of Victoria Inc [ 1996 ] 2 VR 82 at 83, 89 - 90, 92 and 94. The ordinary and natural meaning of the words in s 8(4)(a) describe the temporal aspect of formation and not otherwise to the fact that what was formed carried the legal characteristics of a partnership. The purpose of the 1988 Queensland Act supports that construction. The 1988 Queensland Act did not purport to create a more general system of limited liability for people, entities or other associations beyond those which existed as partnerships. It did not create a new fictional category of " limited partnerships " upon registration of associations which had not otherwise been partnerships. Those seeking registration as limited partnerships need not have commenced trading (and, therefore, need not yet have incurred liabilities) but they must have done sufficient to create the relations between themselves of " carrying on a business in common with a view of profit " : see
Khan v Miah [ 2000 ] 1 WLR 2123 , 2127 - 2128; Lindley & Banks on Partnership (19 th Edition, Sweet & Maxwell, 2010), 10 [ 2-03 ] , 456 [ 13-18 ] , 991 - 992 [ 29-02 ] - [ 29-08 ] . There is no suggestion that the association which came into

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existence on 10 October 2003 upon execution of the Deed were carrying on a business in common with a view for profit when they sought registration on 23 October 2003. Indeed, it might be added, although it is unnecessary to do so for the disposition of the issues in this proceeding, that the parties to the Deed intended to create on 10 October 2003 an appearance of legal relations between them which were not the true legal relations between them to obtain registration under the 1988 Queensland Act .

146. The recent decision of
Bank of Beirut SAL v Prince Adel El-Hashemite [ 2016 ] Ch 1 might be thought to express a contrary view. In that case Nugee J held that the effect of a conclusive evidence provision similar to that in s 8(4)(a) of the 1988 Queensland Act provided conclusive evidence that a limited partnership came into existence even if the registration had been procured by fraud or forgery. The case concerned a claim by a bank that Prince Adel El-Hashemite had falsely registered a limited partnership with the Registrar of Companies and had used the certificate of registration as an instrument of fraud. The bank sought orders which included the removal of the partnership from the register. Nugee J refused to make such an order reasoning, in part, that the conclusiveness of the certificate required the conclusion that " the partnership must be regarded as having come into existence " notwithstanding that it was based upon fraud or forgery.

147. The provision considered in Bank of Beirut which was similar to s 8 of the 1988 Queensland Act is found in s 8C of the Limited Partnership Act 1907 (UK) which provides:

(1) On registering a limited partnership the registrar shall issue a certificate of registration.

(2) The certificate must be -

  • (a) signed by the registrar, or
  • (b) authenticated with the registrar ' s seal.

(3) The certificate must state -

  • (a) the firm name of the limited partnership given in the application for registration,
  • (b) the limited partnership ' s registration number,
  • (c) the date of registration, and
  • (d) that the limited partnership is registered as a limited partnership under this Act.

(4) The certificate is conclusive evidence that a limited partnership came into existence on the date of registration.

Nugee J expressed the view that the effect of these provisions was that a limited partnership had come into existence on the date of registration and at [ 85 ] said:

Once a partnership has been registered, the plain effect of section 8C(1) is that the Registrar is under a duty to issue a certificate of registration; and the plain effect of section 8C(4) is that that certificate is conclusive evidence that a limited partnership came into existence on the date of registration. If that means what it says, it would appear to follow that whatever the circumstances which led to the registration, once the certificate has been issued the partnership must be regarded as having come into existence.

At [ 106 ] Nugee J concluded:

I conclude therefore that the certificates of registration of each partnership issued by the Registrar are indeed conclusive evidence that each partnership came into existence on the date of registration as section 8C(4) of the 1907 Act provides; and the fact that the registration of each partnership was procured by fraud and forgery does not make any difference to this.

The conclusion by Nugee J that the certificate provided conclusive evidence that the limited partnership must be regarded as having come into existence did not, however, result in the partnership being treated as a partnership for any purpose other than on the question of whether the registrar could be required to remove the registration. Other aspects of the judgment indicate an acceptance by Nugee J that the partnership did not in fact exist and that the register might be annotated in such a way to make that clear. Thus, for example, at [ 107 ] Nugee J said:

That leaves the question as to what should be done with the register. It is obviously unsatisfactory that the register should simply

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record the partnerships as if they were bona fide valid existing partnerships. This would simply be misleading. However it is to be noted that although the 1907 Act requires partnerships to be registered, it does not contain any provision for de-registration. [ … ]

At [ 108 ] Nugee J reasoned that the register could not be regarded as simply " a register of existing partnerships " but as a register of partnerships " that have come into existence " and approved the registrar ' s annotation clarifying the registration to indicate that an order had been obtained " declaring the application for registration to be false, fraudulent and made without the authority of the Bank of Beirut SAL " . The decision is not, therefore, authority for the proposition that registration gave legal effect to the falsely registered limited partnership.

148. The decision in Bank of Beirut should not, however, be followed to the extent that it may be thought to state a wider proposition, namely, that the conclusiveness of the certificate conferred upon the registered association the legal qualities of a partnership which it otherwise did not have. The conclusiveness provisions in the UK legislation considered by Nugee J are not the same as those in s 8 of the 1988 Queensland Act. Section 8(4)(b) of the latter expressly excludes the composition of a partnership from the conclusive effect of a certificate where there is evidence to the contrary. The composition of a partnership, limited or otherwise, is fundamental to the identity of a partnership which cannot exist apart from those who comprise it. A certificate under s 8(3) of the 1988 Queensland Act , however, is by s 8(4)(b) not conclusive evidence that the limited partnership consists of the general and limited partnership named in the certificate where there is contrary evidence. The UK provision had no equivalent to s 8(4)(b) and the impact of such a provision was not an issue for consideration by Nugee J. The decision in Bank of Beirut seems also not to have considered the argument that the terms of s 8C(4) required the more narrow reading advanced by the Commissioner in the present appeal, namely, that the conclusiveness was limited to the date of registration as distinct from whether that which was registered had the legal effect of being a partnership when it otherwise was not. It may not be surprising that an argument to that effect was not put or considered in Bank of Beirut because in that case the proceeding was directed to whether the Registrar had the power to expunge the register, and whether the Court had power to require the Registrar to expunge the register, in circumstances where the limited partnership ought never to have been registered. The issue before the Court in that case was not whether the limited partnership existed as a limited partnership but, rather, whether there was power to correct the register in circumstances where it was clear that the registration ought never to have occurred.

149. The appellants also criticised the Tribunal for not having decided one of three points of construction which had been raised by the taxpayers. The taxpayers submitted that the Tribunal did not decide whether the first and second elements in the definition of " limited partnership " in s 995-1 of the 1997 Act are alternatives. However, the Tribunal did not err in not expressly dealing with the point of construction which the taxpayers had relied upon because the issue that was not considered did not arise on the Tribunal ' s construction of the provisions. The Tribunal had referred to the submissions made by the taxpayers at paragraphs [ 8 ] to [ 11 ] as follows:

8. Under s 995-1(1) of the Income Tax Assessment Act 1997 (Cth) ( " ITAA 1997 " ), a limited partnership is defined, relevantly, as:

an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited.

9. The applicants contend there are three elements to this definition. The first of these, constituted by the words " an association of persons carrying on business as partners … " is referred to as the general law definition of partnership.

10. The second element is said to be constituted by the words " … or in receipt of ordinary income or statutory income jointly … " . This, it is contended, is an

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alternative to the first element, so that the legislation contemplates a situation in which two or more persons receive ordinary or statutory income jointly, and are not in a general law partnership.

11. D Marks Partnership was, it is said, in receipt of ordinary or statutory income, in the form of dividends. So much is conceded by the respondent. (Emphasis in original)

It was unnecessary, however, for the Tribunal to consider whether the first and second elements are alternatives in relation to whether the Marks Partnership was a limited partnership because the Tribunal considered at [ 30 ] that the 1988 Queensland Act did not apply to an association of persons " in receipt of ordinary income or statutory income jointly " . The Queensland legislation providing for a limited partnership applied, as the Tribunal found, only to partnerships within the ambit of its provisions and not to associations which might have been deemed to be partnerships for other purposes in other legislation. The Tribunal had no need, therefore, to consider whether the first and second elements in the definition were alternatives.

150. It is next convenient to consider the other main issue identified by the Tribunal, namely, whether the Z Class shares issued by HL Securities were a debt or equity interest. The significance of the issue, as the Tribunal identified, was that the recipient of the dividends was entitled to claim franking credits if the shares were an equity interest. The fourth ground of appeal in this appeal is that the Tribunal ought to have found that the Z Class shares were an equity interest within the meaning of Division 974 of the 1997 Act .

151. On 24 October 2003 the Constitution of HL Securities was amended to increase its capital by issuing 1000 Z Class shares at an issue price and value of each share at $ 1. On the same day Quintaste as General Partner of the Marks Partnership resolved to apply for 10 Z Class shares in HL Securities and upon application was issued 10 Z Class discretionary dividend shares on that day as General Partner of, and on behalf of, the Marks Partnership for a total of $ 10.

152. HL Securities declared a fully franked dividend of $ 347,597 to Quintaste on the 10 Z Class shares on the day that they were issued, namely, on 24 October 2003. Fully franked dividends were subsequently declared in each of the next two years of income of $ 471,932 on 30 November 2004, $ 48,316 on 1 July 2005 and $ 1,015,200 on 10 November 2005. Quintaste contended that it was entitled in each of the years to the franking credits that would flow with the dividends unless the Z Class shares are to be regarded as a debt interest rather than an equity interest.

153. Division 974 of the 1997 Act applies to determine whether an interest is a debt interest or an equity interest with the consequences that flow from the difference. Section 974-1 explains that Division 974 tells a taxpayer whether an interest is a debt interest or an equity interest for tax purposes. The section goes on to explain that whether an interest is a debt interest or an equity interest matters because returns on debt interests are not frankable. Section 974-5(1) explains that the test for distinguishing between debt interests and equity interests focuses upon " economic substance rather than mere legal form " and is designed to assess " the economic substance of an interest in terms of its impact on the issuer ' s position " . The section contemplates that an interest may be both a debt interest and an equity interest and that in such circumstances the interest is to be treated as a debt interest and not as an equity interest: see s 974-5(4).

154. The parties in this proceeding agreed that the issue before the Tribunal, and on appeal, was whether the test for a debt interest in s 974-20(1) had been satisfied. There was no dispute about whether there was a " scheme " but the parties disagreed about whether HL Securities would receive a " financial benefit " within the meaning of s 974-20(1)(b) or had " an effectively non-contingent obligation " within the meaning of s 974-20(1)(c). The section relevantly provides:

974-20 The test for a debt interest

Satisfying the debt test

(1) A * scheme satisfies the debt test in this subsection in relation to an entity if:

  • (a) the scheme is a * financing arrangement for the entity; and

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  • (b) the entity, or a * connected entity of the entity, receives, or will receive, a * financial benefit or benefits under the scheme; and
  • (c) the entity has, or the entity and a connected entity of the entity each has, an * effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when:
    • (i) the financial benefit referred to in paragraph (b) is received if there is only one; or
    • (ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and
  • (d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and
  • (e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil.

The scheme does not need to satisfy paragraph (a) if the entity is a company and the interest arising from the scheme is an interest covered by item 1 of the table in subsection 974-75(1) (interest as a member or stockholder of the company).

Note: Section 974-30 tells you when a financial benefit is taken to be provided to an entity.

For present purposes it may be accepted, as was agreed by the parties, that the conditions in (a) and (e) are not in issue in the appeal. Whether (d) had been satisfied had been in issue before the Tribunal but that ceased to be an issue during the appeal because it was accepted by the taxpayers that the scheme was governed by s 974-35 and that the scheme had a performance period under 10 years which required that the value be worked out in the nominal terms of the money amounts of $ 10 for the issue price and the redemption amount of the Z Class shares.

155. The first matter remaining in dispute between the parties in the appeal in respect of the debt or equity interest issue, therefore, was whether the $ 10 payable to HL Securities for the Z Class shares was a " financial benefit " within the meaning of s 974-20(1)(b). The words " financial benefit " are defined in s 974-160 in broad terms, namely,:

974-160 Financial benefit

(1) In this Act:

" financial benefit " :

  • (a) means anything of economic value; and
  • (b) includes property and services; and
  • (c) includes anything that regulations made for the purposes of subsection (3) provide is a financial benefit;

    even if the transaction that confers the benefit on an entity also imposes an obligation on the entity.

(2) In applying subsection (1), benefits and obligations are to be looked at separately and not set off against each other.

(3) The regulations may provide that a thing specified in the regulations is a financial benefit for the purposes of this Act. (Emphasis in original)

The Tribunal found these words to be satisfied by the " payment of $ 1 per share for 10 shares, or the entitlement to receive such payment " . At [ 50 ] the Tribunal said:

The applicants submit that conferring a $ 10 benefit on HL Securities is inconsequential especially having regard to that entity ' s other assets. I reject this approach. An amount of $ 10 is still a financial benefit; something of economic value. I do not think that the legislation contemplates a comparison of the value of the alleged benefit with the relevant entity ' s net worth. I should mention, although I do not consider it strictly necessary, that I am not satisfied that the $ 10 was not paid.

In doing so the Tribunal accepted that the definition of " financial benefit " in s 974-20(1)(b) was " in broad terms " .

156. The applicants challenged this conclusion and the Tribunal ' s reasoning. They submitted that the Tribunal had failed to analyse the meaning that the word " economic " appearing before the word " value " in the definition of " financial benefit "

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in s 974-160(1)(a), and submitted that a consideration of the financial statements in the 2004 financial year of HL Securities would show that a receipt of $ 10 " could hardly be regarded as a matter of economic substance to the issuer, nor [ the ] sort of transaction contemplated as being caught by the legislation, as adverted to in the Explanatory Memorandum [ … ] " .

157. The Tribunal was correct in its conclusion and reasons. The operative words for the Tribunal to construe were " anything of economic value " and their breadth was correctly applied to the conclusion that they encompassed the payment of an amount of $ 10 notwithstanding that $ 10 might not be a significant amount to a company with the assets of HL Securities. It is plain from the language of the provisions, and the Explanatory Memorandum, that the definition was intended to operate broadly and was not made to depend upon an evaluation of the economic significance of a receipt to a recipient . The provisions do not require any consideration of whether what is received represented market value or an arm ' s length consideration or might be judged to be desirable or significant by a recipient. It is sufficient that the benefit, in this case the $ 10 paid or payable, was something which could be described as something of economic value. The word " economic " preceding the word " value " does not require the qualitative analysis of the significance of the receipt to the recipient as submitted by the appellants. The presence of the word " economic " no doubt excludes from the meaning of " value " that which may not be regarded as " economic " in character (like, perhaps, something that might have emotional or sentimental value) but it does not require any analysis of whether what was received was economically significant to the recipient.

158. The taxpayers sought to gain support for the contrary view from a passage in paragraph 1.6 of the Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001 (Cth), but that passage does not require a contrary conclusion. Paragraph 1.6 of the Explanatory Memorandum stated, in part:

… [ T ] he tax law draws the borderline separating the 2 (debt/equity border) in such a way that the legal form of an interest cannot be used to result in a characterisation at odds with its economic substance.

At paragraph 2.2 of the Explanatory Memorandum it was said:

… The new rules classify an interest in a company as equity or debt according to the economic substance of the rights and obligations of an arrangement rather than its mere legal form [ … ]

The Explanatory Memorandum explained at paragraph 2.5 that a relevant inquiry in addressing the threshold question about whether something was an equity interest was whether the scheme was a financing arrangement. Each of these statements in the Explanatory Memorandum explain, in broad terms, an overall objective sought to be achieved through Division 974, but the statements point against a conclusion that the broad definition of " financial benefit " is to be construed in the way submitted for the appellants. None of the statements in the Explanatory Memorandum to which reference was made suggest that the provisions were intended to operate in a way that narrowed the meaning of " financial benefit " to capture something which the recipient might regard as economically desirable. The provisions neither require, nor are made to depend upon, such analysis as may be found in a requirement that the financial benefit be at market value or be an arm ' s length consideration. It is sufficient to the operation of the provisions, and it is consistent with the objectives of the Division as a whole, that the words " financial benefit " have the meaning given and applied by the Tribunal. It also follows that it is not relevant to consider the observations in
Ord Forest Pty Ltd v Federal Commissioner of Taxation (1974) 130 CLR 124 , 140 - 142, which were concerned with considering whether the subscription price for shares was the same as the true worth of the shares.

159. The next requirement that needed to be satisfied in application of the debt/equity test was that HL Securities had an " effectively non-contingent obligation " under the scheme to provide a financial benefit after the time when it

ATC 18796

received the financial benefit. For present purposes one may accept the broad description of this requirement given by the appellants, namely, that " the debt has to be repaid " . On that view the provisions of the section operate in circumstances where something of financial benefit is received which in due course is to be repaid.

160. The Tribunal found this condition satisfied in the amendment to the Constitution of HL Securities at the time of the creation of the Z Class shares. The amendments to the Constitution included sub-clause (ii)(b) which provided that the shares were redeemable in the following terms:

Each share shall be redeemable at the direction of the directors, at any time, for the issue price, and, at the end of 47 months following its issue, shall be automatically redeemed at its issue price and cease to exist at the expiration of that time, whether or not its redemption price has been paid.

The Tribunal referred to this provision at [ 51 ] of its reasons and at [ 52 ] concluded by saying:

In my view this is " an effectively non-contingent obligation under the scheme " satisfying this requirement of the debt test. I do not accept the applicants ' submissions to the contrary, including that the amendment to the constitution does not impose any obligation on HL Securities to repay the issue price. On my reading of the amendment, in full, that obligation arises irrespective of whether the shares are redeemed at the direction of the directors or automatically redeemed.

The appellants criticised this paragraph by claiming that there was " effectively no reasoning " . However, a fair reading of the Tribunal ' s reasons shows that it explained that its reading of the provision resulted in the automatic redemption of the shares at the issue price unconditionally at the expiration of 47 months. The Tribunal may not have explained in detail why the appellants ' submissions were not accepted, but the Tribunal ' s reasons did explain that it reached its conclusion on the basis of the words found in the amendment to the Constitution which the Tribunal correctly considered to mean that the redemption was not made to depend upon any prior payment by Quintaste of the issue price.

161. The appellants also submitted that sub-section 974-20(1)(c) could never be satisfied if the prior financial benefit of $ 10 had not been paid in the first place by the limited partnership. They also contended that there was " an obvious contingency to the repayment, namely the shares ceasing to exist and repayment not being made, an event [ said to be ] contemplated by the clause [ referred to above ] " . It was also contended that there were further contingencies to the redemption price being paid by reason of the shares being under the control of the directors " who can impose conditions, terms and the like " including the power to forfeit shares for non-payment of a call. However, the Tribunal was not required to consider hypothetical possibilities in the construction and application of s 974-20(1)(c). Whether there is an " effectively non-contingent obligation under the scheme to provide a financial benefit " does not depend upon having to discount future possibilities that are not part of the obligation according to its terms. The relevant provision in the Constitution provided for the redemption of the shares for the issue price whether at the direction of the directors or automatically at the end of 47 months. There was no need for the Tribunal to explain how sub-section 974-20(1)(c) could be satisfied if the financial benefit had not in fact been paid because the terms of the clause, as correctly construed by the Tribunal, was that the issue price was payable upon redemption and was not made to depend up on the prior payment.

162. The third ground of appeal challenged the Tribunal ' s determination that the members of the Marks Partnerships were " tax partners " in the sense of being in receipt of income jointly for the purposes of s 995-1(1) of the 1997 Act . The fifth question of law was linked to this ground and was posed in the following terms:

Whether the Tribunal failed to identify and properly apply the relevant legal test in the proper construction of ' tax partners ' in s 995-1(1) ITAA 1997 as it applied to the members of the D Marks Partnership.

The appellants submitted that the members who had claimed to be limited partners of the

ATC 18797

Marks Partnership could not be partners under tax law if they were not members of a limited partnership or members of a general law partnership.

163. The Tribunal found that the individuals who had claimed to be members of a limited partnership were partners for tax purposes notwithstanding that they were not members of a limited partnership or a partnership at general law. That is because the definition of " partnership " for Commonwealth tax purposes includes an association of persons who are not otherwise partners but who are " in receipt of ordinary income or statutory income jointly " . This category of association of people need not be carrying on business with a view of profit but are treated by Commonwealth tax law as partners merely because they are in receipt of income jointly. The Tribunal reasoned as follows at [ 58 ] - [ 62 ] :

58. I have found that D Marks Partnership was not a corporate partnership, a limited partnership, or a partnership at general law. However, s 995-1 of the ITAA 1997 defines partnership as follows:

" partnership " means:

  • (a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or
  • (b) a limited partnership.

59. It is common ground, as I have said, that Quintaste and the David Marks Trust were in receipt of income jointly. I accept the respondent ' s submission that D Marks Partnership was a partnership for tax purposes, pursuant to s 995-1 of the ITAA 1997.

60. As D Marks Partnership is not a corporate partnership, but is a partnership as defined by s 995-1 of the ITAA 1997, then the partners are assessed on the dividends. The respondent submits that the apportionment of that income should be in conformity with their interests under the deed: 99 % as to the trustee of the David Marks Trust, and 1 % to Quintaste.

61. The applicants submit that if there is no limited partnership, as I have found, then there is no occasion for giving effect to that apportionment: " If the respondent says the limited partnership must go, so too must that apportionment. "

62. The deed, however, contains a sufficient expression of each partner ' s interest in joint income. Quintaste was to receive 1 % of joint income, and the trustee of the David Marks Trust was to receive 99 % of joint income. I am not satisfied that the same apportionment should apply to the partners as members of a tax partnership.

The appellants submitted that the Tribunal ' s decision erroneously ignored the legal reality that the shares had been issued to Quintaste and not to Quintaste and the trustee of the Marks Trust jointly. The basis of the Tribunal ' s apportionment, however, took into account the undoubted fact that those who had sought to be partners had agreed amongst themselves to an apportionment of the income which they had intended to receive as limited partners. The Tribunal ' s conclusion that they had failed in achieving their objective of securing the benefit of being a limited partnership did not mean that the Tribunal could or should ignore the agreement between them about the proportions each was to receive of the income to be derived through the association they had intended. The Z Class shares were not applied for by Quintaste in its own right or as undisclosed agent for a principal but expressly as the general partner of, and on behalf of, the Marks Partnership. The resolution by HL Securities to accept the application for the Z Class shares, and to issue the shares accordingly, was not to accept the application for Quintaste in its own right, or to issue the shares to Quintaste in its own right, but to do so expressly as partner of, and on behalf of, those who had intended to constitute the Marks Partnership. The dividends declared by HL Securities to Quintaste were likewise not expressed to be declared to Quintaste in its personal capacity but rather as one of, and on behalf of, those who had intended to constitute the Marks Partnership. The parties to the Deed may not have succeeded in giving to themselves the legal character of a limited partnership but they had agreed upon how their receipts were to be apportioned between themselves. In those

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circumstances the Tribunal was correct to conclude that Quintaste was to receive 1 % of the joint income and that the trustee of the David Marks Trust was to receive 99 % of the joint income.

164. The fifth ground of appeal effectively raises the same issue as that in the third ground of appeal but in the context of the application of s 109D of the 1936 Act in respect of the loans made by HL Securities and RMI to Quintaste. The Marks Partnership was lent, in the 2004 year of income, $ 676,009 by HL Securities and a total of $ 1,962,088 by RMI. Each of the loans was made pursuant to a loan agreement which described the borrower as " Quintaste Pty Ltd ACN 106 133 984 as General Partner of, and on behalf of, the D Marks Partnership (a Limited Partnership) " . The submissions by the appellants were, in essence, that the loans were made by each lender with Quintaste in its own capacity and not on behalf of itself and the Marks Trust. The submission was summarised by the Tribunal at paragraph [ 64 ] as a contention " that if there is no limited partnership then there is no loan agreement to which the trustee of the David Marks Trust is a party " . On appeal the submissions were put to the same effect, namely, that the agreements were between the lenders and Quintaste. At paragraph [ 68 ] of the appellant ' s written submissions it was contended that there was " no loan agreement to which the trustee of the D Marks Trust is a party " . However, this submission ignores the description of the borrower in each of the loan agreements. In each case it cannot be said that Quintaste was borrowing on its own account or to the exclusion of the Marks Trust. Quintaste may incorrectly have described itself as borrowing on behalf of itself and the trust " as limited partners " but it was not borrowing to the exclusion of the other entity which was claimed to be a limited partner. That is what the Tribunal decided saying at [ 63 ] to [ 67 ] :

63. I refer now to the loans. There were two loans each to D Marks Partnership and each in the 2004 financial year: from HL Securities in the sum of $ 676,009; and from RMI Australia Pty Ltd of $ 1,962,008.

64. The applicants submit that if there was no limited partnership, then the issue is who borrowed the moneys. They contend that if there is no limited partnership then there is no loan agreement to which the trustee of the David Marks Trust is a party.

65. In those circumstances they argue that the loan agreements are between the lenders and Quintaste. They accept that the two loans are then caught by s 109D of the ITAA 1936, and properly treated as dividends forming part of Quintaste ' s assessable income.

66. Consistent with what I have said above, I do not accept there can be no loan to D Marks Partnership if that entity is not a limited partnership. There was a tax law partnership and the rights and obligations of the partners, where permitted, were subject to the deed.

67. I accept the respondent ' s contention that the loans were made to the tax law partnership being an entity within s 109D(d) of the ITAA 1936.

The Tribunal was correct in reaching its conclusion and to reason as it did. The loan agreements expressly provided that Quintaste was borrowing for itself and for another, albeit that the borrowers may erroneously have been described as a limited partnership. The loans were always intended to be received jointly by Quintaste and the Marks Trust albeit that they intended their receipt to be in a capacity with the legal character that they did not achieve.

165. The first ground of appeal was that the Tribunal failed to give proper and adequate reasons for its decision. It follows from the foregoing that this ground is not established. The case was conducted in the Tribunal without oral testimony or affidavits. The facts were largely set out in the Tribunal documents including primary documents and some records of interview conducted by representatives of the Commissioner. The Tribunal was not called upon to make any findings of disputed fact but to determine issues presented by the parties in their respective statements of issues and contentions by reference to detailed written and oral submissions. The Tribunal was not required to consider every argument put and it explained its conclusions adequately to enable the parties to understand the reasons for its decision.

166.

ATC 18799

The last ground of appeal was that the Tribunal erred in construing and applying the penalty provision in s 284-90(1) of Schedule 1 to the Administration Act . In this context the appellants ' written submissions at [ 77 ] were as follows:

It is submitted that the Appellants ' arrangements and the application of the tax legislation was open to be construed as the Appellants contended on the language of the relevant State legislation, and the tax legislation; being a construction as to which some other construction was reasonably open.

The test of whether something is reasonably arguable requires careful application of s 284-15. Section 284-15 is concerned with when a matter is reasonably arguable. The relevant text of the section relied upon by the parties provides:

284-15 When a matter is reasonably arguable

(1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.

(2) To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with law.

(3) Without limiting subsection (1), these authorities are relevant:

  • (a) a * taxation law;
  • (b) material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901 ;
  • (c) a decision of a court (whether or not an Australian court), the AAT or a Board of Review;
  • (d) a * public ruling.

The text of the provision in these terms was introduced with effect from 2005 by the Tax Laws Amendment (Improvements to Self Assessment) Act (No 1) 2005 (Cth) which inserted the word " about " after the words " argued for " .

167. Provisions to broadly the same effect as those now found in s 284-15 were previously found in s 222C and 226K of the 1936 Act . Section 226K of the 1936 Act imposed a penalty by reference, in part, to whether a taxation statement by a taxpayer treating an income tax law as applying in a particular way was not " reasonably arguable " when the statement was made. Section 222C(1), however, supplied a specific meaning to the words " reasonably arguable " , namely:

(1) For the purposes of this Part:

  • (a) the correctness of the treatment of the application of a law …

    is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied … it would be concluded that what is argued for is about as likely as not correct.

Section 284-15(1) substituted the words " that what is argued for is [ about ] as likely to be correct as incorrect, or is more likely to be correct than incorrect " for the test in s 222C(1), namely, " that what is argued for is about as likely as not correct " .

168. Hill J considered the correct approach to the application of s 226K in the context of s 222C(1) in
Walstern v Commissioner of Taxation (2003) 138 FCR 1 and said at 26 - 7 [ 108 ] :

[ … ]

1. The test to be applied is objective, not subjective. This is clear from the use of the words " it would be concluded " in para(1)(b) of the section;

2. The decision-maker considering the penalty must first determine what the argument is which supports the taxpayer ' s claim;

3. That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision-maker at this point will need to compare the taxpayer ' s argument with the argument which is considered to be the correct argument;

ATC 18800

4. The decision-maker must then determine whether the taxpayer ' s argument, although considered wrong, is about as likely as not correct, when regard is had to " the authorities " ;

5. It is not necessary that the decision-maker form the view that the taxpayer ' s argument in an objective sense is more likely to be right than wrong. That this is so follows from the fact that tax has already been short paid, that is to say the premise against which the question is raised for decision is that the taxpayer ' s argument has already been found to be wrong. Nor can it be necessary that the decision-maker form the view that it is just as likely that the taxpayer ' s argument is correct as the argument which the decision-maker considers to be the correct argument for the decision-maker has already formed the view that the taxpayer ' s argument is wrong. The standard is not as high as that. The word " about " indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer ' s argument can objectively be said to be one that while wrong could be argued on rational grounds to be right;

6. An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be " about as likely as not correct " when regard is to be had to the material constituting " the authorities " ; and

7. Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of " authority " a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer ' s view is ultimately seen to be wrong it is nevertheless " about " as likely to be correct as the correct view. A question of judgment is involved.

That approach was adopted by the Full Court in
Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 , [ 108 ] . The Full Court in
Allen & Anor v Federal Commissioner of Taxation (2011) 195 FCR 416 at 436 [ 75 ] , however, expressed the view that Stone and Allsop JJ (as the Chief Justice then was) had taken a " somewhat less strict " approach of whether a question was " open to debate in the sense of being arguable " in
Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468 at [ 70 ] : see also
Sent v Federal Commissioner of Taxation (2012) 85 ATR 1 , 44 [ 216 ] .

169. The decision of the Full Court in Allen , like that in Cameron Brae , and in contrast to that in Walstern , turned on a question of statutory construction which was free from statutory authority squarely covering the point: see at 436 [ 78 ] and [ 79 ] . In Cameron Brae Stone and Allsop JJ (as the Chief Justice then was) said at 488 [ 70 ] :

In our view, the question of construction and interpretation of s 82AAE was reasonably open and arguable. No authority squarely covered it. The proper interpretation depended upon the construction of s 82AAE informed by a full appreciation of the statutory history. The argument about the applicability or satisfaction of s 82AAE was arguable. That question can be seen as subsuming s 8-1, if it were answered one way. If it be necessary to decide, we are also prepared to conclude that the issue as to the characterisation of the outgoing as capital or

ATC 18801

revenue was arguable. Whilst in our view it is clear that it was a payment of a capital nature, the question is open to debate in the sense of being arguable.

In Allen the Court said at 436 [ 77 ] - [ 78 ] :

77. The present case, like Cameron Brae , and in contrast to Walstern , turns on questions of statutory construction. Walstern was a case where the erroneous position advanced in a taxpayer ' s return was founded upon an unreasonable view of, or a disregard for, the facts. See Walstern at [ 113 ] .

78. In this case, as in Cameron Brae , the questions of statutory construction on which the case turns were free from authority squarely covering the point. And as our reasons on the substantive issues show, the taxpayers ' position was debatable. [ … ]

It was submitted on behalf of the taxpayers that their position that they were a limited partnership was reasonably arguable.

170. The test in s 284-15(1) requires a conclusion that " what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect " . Those words informed the approach taken by Hill J in Walstern , and Stone and Allsop JJ in Cameron Brae did not purport to adopt a different test from that which had been enunciated by Hill J in Walstern and which had been adopted by the Full Court in Pridecraft. The test is not whether a position argued for is arguable in a more general sense and the test is not satisfied because something has been argued cogently or at length by senior counsel. Penalties imposed under tax legislation are an integral and underpinning feature of the taxation regime. The imposition of penalties is not dependent upon whether an incorrect position is " arguable " in a general sense, but the penalties may be reduced if the specific test of " reasonably arguable " is satisfied. It is a test which contains a statutory standard ( " that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect " ) and a reference point by which that standard is to be applied ( " having regard to the relevant authorities " ).

171. The approach adopted by Hill J in Walstern took into account the legislative context introducing the " reasonably arguable " test and the mischief it sought to address. His Honour noted that the same Act introducing the test of " reasonably arguable " had also introduced a provision imposing by way of penalty additional tax where a taxpayer failed to take " reasonable care " : Walstern at [ 106 ] . The legislature plainly intended the test of " reasonably arguable " to be different from, and be a more rigorous standard than, the test of " reasonable care " : see Walstern at [ 106 ] - [ 108 ] . The legislature also intended the test to be objective and to be determined by reference to authorities. The provisions were aimed to ensure that people who had made an honest and genuine attempt correctly to determine their taxable income would not be penalised. The provisions were not intended to support or encourage doubtful or dubious positions to be taken but to be relied upon where the taxpayers arguments were, to adopt the language in the Explanatory Memorandum referred to in Walstern at [ 107 ] , " cogent, well-grounded and considerable in its persuasiveness " .

172. The taxpayers in the present case relied only upon their construction being " open " . Their written submissions were that their " arrangements and the application of the tax legislation was open to be construed " as they had " contended on the language of the relevant State legislation, and the tax legislation; being a construction as to which some other construction was reasonably open " . However, those are not the words of the statutory test for a matter to be reasonably arguable. The submissions do not engage with the statutory standard or the reference point by which that standard is to be applied.

173. A taxpayer claiming a matter to be reasonably arguable within the meaning of s 284-15(1) must show that it would objectively be concluded that what was argued for was " about as likely to be correct as incorrect, or [ was ] more likely to be correct than incorrect " . That must be done by having regard to relevant authorities. In some cases a taxpayer may be able to establish the statutory test by pointing to a favourable court decision or dicta , or to a passage from some ruling giving positive

ATC 18802

support to the matter claimed to be reasonably arguable. In Walstern Hill J held that the claim for deductions was not reasonably arguable because it turned not upon the construction of a provision but upon the particular findings of fact made by his Honour upon which the deductions depended: Walstern at [ 113 ] - [ 114 ] . His Honour also held that whether the contributions were on capital account was a question that was not " sufficiently " open as to be reasonably arguable: Walstern at [ 114 ] .

174. Statutory construction often confronts courts with choices (see
Nezovic v Minister for Immigration and Multicultural and Indigenous Affairs (No 2) (2003) 133 FCR 190 , [ 52 ] ), but s 284-15 is not to be construed as making the imposition of penalties to depend upon whether a proposition argued for by a taxpayer is merely " open " . The application of s 284-15 will usually require some reference point by which an arguable proposition may be said to be both " open " and " sufficiently " open. A taxpayer relying upon s 284-15 will generally need to show that the matter argued for was despite being wrong, cogent, well-grounded and considerable in its persuasiveness. Showing arguability or openness does not engage with the statutory test that what is argued for is " about as likely to be correct as incorrect, or is more likely to be correct than incorrect " . In Cameron Brae Stone and Allsop JJ did not apply the reasonably arguable test on the basis merely that the construction maintained by the taxpayers was arguable. Their Honours said at [ 70 ] :

In our view, the question of construction and interpretation of s 82AAE was reasonably open and arguable. No authority squarely covered it. The proper interpretation depended upon the construction of s 82AAE informed by a full appreciation of the statutory history. The argument about the applicability or satisfaction of s 82AAE was arguable. That question can be seen as subsuming s 8-1, if it were answered one way. If it be necessary to decide, we are also prepared to conclude that the issue as to the characterisation of the outgoing as capital or revenue was arguable. Whilst in our view it is clear that it was a payment of a capital nature, the question is open to debate in the sense of being arguable.

Their Honours ' conclusion that the construction and interpretation of s 82AAE was relevantly reasonably arguable was based upon their Honours ' earlier construction of s 82AAE by the full appreciation of its statutory history. The fact that there had been no authority that squarely covered the question of construction and interpretation of s 82AAE was one factor leading to their Honours ' conclusion in the context of complex questions of interpretation informed by a full appreciation of the statutory history leading to the provision. The additional observation about the characterisation of the outgoing as capital or revenue being " arguable " was otherwise obiter and could not have been intended to substitute arguability for the statutory test of reasonably arguable or to depart from the analysis of Hill J in Walstern which had been adopted by the Full Court in Pridecraft.

175. The considerations which led the Full Court in Cameron Brae and Allen to hold that a position was reasonably arguable are not present in this case. The taxpayers in the present case depended primarily upon their contention that they could take advantage of s 8(4) of the 1988 Queensland Act in circumstances where they had not been partners seeking registration as limited partners. They are entitled to make an argument that the effect of s 8(4) extended to those obtaining registration notwithstanding that they were not otherwise partners, but had no objective reference point to support their construction beyond their argument. The same is true about each of the other constructions for which they contended in the appeal. It was for the taxpayers to establish that their construction was not just argued, but that it satisfied the statutory test of being reasonably arguable, and they have failed to do so. The taxpayers did not, for instance, rely upon or point to a public ruling or an opinion by experienced independent senior counsel or other adviser dealing with the specific point (c.f Walstern at [ 112 ] ) which independently supported the construction they advanced. A taxpayer relying only upon the terms of a provision to advance an unsuccessful construction of a provision must do more than argue for its construction for

ATC 18803

it to be reasonably arguable in the statutory sense. There needs to be a foundation for the court to conclude that the unsuccessful argument was, despite its rejection, nonetheless ' a close call ' (to use a popular expression). I am unable to regard the taxpayers ' unsuccessful argument in this case as a close call. The construction was argued, and at length, but it lacked substance and merit. It was not persuasive.


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