Case Q50
Judges:HP Stevens Ch
BR Pape M
TJ McCarthy M
Court:
No. 1 Board of Review
H.P. Stevens (Chairman)
The principal question for decision in this reference is whether the taxpayer company, as trustee under a deed of trust, is entitled to a loss on ``share trading'' of $1,001,096 - brought about predominantly by the ``purchase'' of shares in a Norfolk Island company for $1,000,000 and their ``sale'' on the same day for $1 - in calculating its taxable income for the year ended 30 June 1977. A subsidiary question relates to sec. 226.
2. Prior to 1976 three families (U, V and W) conducted a number of different businesses whilst the taxpayer company had as its auditor one X - a member of a firm of accountants who was also financial and taxation adviser to the group of families. In 1976 the group acquired the shares in the taxpayer company (U, V and W becoming directors) whilst on 28 February 1976 a deed of trust was executed with the taxpayer as trustee and the three families as beneficiaries. Whilst the respective family percentages were fixed (U 50 per cent, V 40 per cent and W 10 per cent) the trustees could determine within each family the destination of any distribution - thus making it a discretionary trust. At a meeting of 5 March 1976 it was resolved to acquire the families' business ``in its capacity as Trustee for the Discretionary Trust''.
3. In its return of income for the year ended 30 June 1977 the trust disclosed a gross profit from general trading of $454,252.21, a gross loss from share trading of $1,001,096.41 and a net loss of $826,543.85. The statement of distribution of net income stated ``Nil Distribution''. The Commissioner disallowed the share trading loss claimed, reduced an investment allowance claim from $23,721 to $6,369 and disallowed a claimed trading stock valuation adjustment of $2,767 thereby arriving at a net income of $194,671. He assessed this amount to the
ATC 243
trustee in terms of sec. 99 and imposed additional tax under sec. 226 of $60,279 - having remitted 75 per cent of the statutory 200 per cent imposed by that section. By objection it was claimed that the returned net loss of $826,444 (sic) should be reinstated in that:- (a) there was a business of share trading with the result the loss was allowable (grounds 1-23 and 28-30);
- (b) the disallowed investment allowance and trading stock valuation adjustment should be allowed (part of ground 17),
and the additional tax was unauthorised or excessive (grounds 24-27). The final ground (31) of the objection stated:
``It is further contended that the assessment as issued, if correct in law, which is not admitted, should not have issued under sec. 99 of the Act but should have issued to various nominated beneficiaries under sec. 97 and 98 of the Act as per the Trustees Minutes dated 30 June 1977, a copy of which are attached.''
These minutes were in the following terms:
``The Trustees hereby declare, in pursuance of cl. 1(b) of the Discretionary Trust Deed, that the income as described in cl. 1(b) shall be distributed to the following nominated beneficiaries in the following proportions:
Group `A'
- 50% of the income as finally determined and more fully described in cl. 1(b), if any, shall be distributed as to
- One half to Simon L. (U)
- One half to Mark A. (U)
Group `B'
- 40% of the total trust income as finally determined, if any, shall be distributed as to
- One half to Tanya L. (V)
- One half to Kelly A. (V)
Group `C'
- 10% of the total trust income as finally determined, if any, shall be distributed as to
- One half to Lorraine C. (W)
- One half to Nicholas P. (W)
It was further decided that once the net income of the Trust estate is finally determined, the Trustee be empowered to distribute the final income, if any, to the above Beneficiaries in the previously mentioned proportions.''
4. Certain adjustments were made to the original assessment by amendment of 29 February 1980 (issued with the notice of disallowance of objection) and the net income increased to $198,562 (a further $3,131 in respect of the investment allowance claim was inter alia disallowed). The additional tax imposed in the original assessment was not increased and apparently, objection was not taken to the adjustments made. At the hearing the investment claim was abandoned whilst nothing was said in relation to the trading stock valuation adjustment claim and I would formally confirm the Commissioner's decision in relation to these items. Before proceeding further it might be convenient to deal with ground 31 of the objection.
5. During the course of evidence it was stated (see para. 20 hereunder) that there had been no trustees' meeting of 30 June 1977 and that there had been no resolution as claimed in ground 31 of the objection. Counsel for the taxpayer as his final argument submitted that since cl. 1(b) of the trust deed itself ``distributed'' the income (to whom precisely never was established), the assessment in terms of sec. 99 was incorrect and that ground 31 should be read as a general claim that sec. 99 was inapplicable rather than a claim that the section was inapplicable because of the trustees minute. He said the first part of the ground (i.e. up to the word ``Act'') could be isolated from the remainder commencing with the word ``but''. I am unable to so read ground 31. He also submitted that, ``even in the absence of the matter being raised in the objection'', the Board ``could still determine that the wrong taxpayer has been assessed'' by virtue of sec. 96. When asked to point to ``where we have the power'' since a ``taxpayer is limited to the ground stated in his objection'' counsel said ``I make that submission and perhaps not argue it any more than that''. I cannot accept this submission any more than I can that
ATC 244
referred to above. In view of this and para. 4 above the remainder of my reasons will be limited to the issues of whether a share trading loss of $1,001,096.41 is allowable, whether sec. 226 authorises the imposition of additional tax and, if it does, whether any further remission should be made.6. In or around January 1977 X had a discussion with U concerning surplus funds of the trust. X mentioned that share trading could be profitable and that there were fiscal advantages in being a share trader - such not being elaborated upon. U, in evidence, denied that X said anything about fiscal advantages and deposed that the decision was taken with a view to diversification. $20,000 was to be made available but, in fact, only two amounts of $3,000 (21 January and 8 February 1977) were provided to X who was, in terms of a resolution of 10 January 1976 (date altered from 76 to 77 but in right sequence in minute book for year 1976) to manage ``such buying and selling'' of ``shares, stocks and other securities quoted on the various Stock Exchanges of Australia for financial gain''.
7. The above transactions were mainly handled by Y (an employee of and later partner with X) whose only previous experience was some private transactions of his own. Y on occasions would consult X whilst U would be advised of the results from time to time. A share dealing ledger and cash book was kept and for the period to 30 June 1977 there were said to be 54 purchases (variety of share types, e.g. Hooker, Coles G.J., Eastmet, etc.) totalling $13,133 and 19 sales totalling $5,869 for an overall gross loss of $1,097.41 ($1,001,096.41 minus $999,999) before charging X's fee. Transactions continued (see hereunder) until April 1981 when it was said they were discontinued because the money was needed for other purposes. For the period January 1977 to April 1981 it was said there were 117 purchases and 78 sales - the discrepancy in numbers is due no doubt to there being more than one ``purchase'' to satisfy a buy order - with the result a loss overall (as well as for each taxation period).
8. For managing the transactions a fee based on the time actually spent was charged - X thought it was around $750 per year, Y thought it ranged from $500 to $700 per year whilst U thought it was $2,000. I would accept the evidence of X and Y rather than U on this score. The fee charged did not cover the particular transaction giving rise to the ``loss'' of $999,999 nor did the ledger and cash book record it. It was, in my view, not part of the ``ordinary'' share transactions nor intended to be part thereof (despite the minute referred to in para. 19 hereunder) and I find accordingly.
9. In or around May 1977 X became aware that the trust would have a substantial income for the year ended 30 June 1977 and he had a discussion with U relating to an opportunity to do something on Norfolk Island that would yield them a fiscal advantage. He gave an outline to U and suggested U see their legal advisers who were well versed in tax matters. U said he did so and it was agreed to take the opportunity. U deposed that he appreciated there would be no outlay of funds (other than for X's fee of $4,000) and that the sole purpose of the transaction ultimately entered into was to reduce the income tax liability of the taxpayer as trustee. He did not go to Norfolk Island (Y went) and when Y left U did not know who the trustees were buying from (he still doesn't) or the company they were buying into. Nor did he know the assets and liabilities of the company, its directors, business, date of incorporation, other shareholders, etc. Mention was made of borrowing to pay $1m for the shares (in respect of which he understood a loss of the same amount was to be made) and of a liability to repay but he had never been asked to repay and understood it would be arranged in such a way that it wouldn't happen. As indicated, apart from fees, the transaction was not to involve the trust in any outlay of funds but was nevertheless to yield a ``tax loss'' of $1m.
10. Before setting out the details of the transaction in which those involved were U, X, Y and a Mr. and Mrs. Z of Norfolk Island, and in respect of which there was much documentation, I should say that, to the extent that the evidence of U and Mr. Z conflicts as to the date of execution of certain documents, I accept the evidence of U whilst, to the extent that the evidence of Y and Mr. Z conflicts as to the place where certain documents were prepared (Australia or Norfolk Island), I accept the evidence of Y.
ATC 245
11. X had had previous dealings with Z, an accountant, and arranged with him for the particular transaction in question (part of the $4,000 referred to in para. 6 to go to Z). It involved the incorporation of companies in Norfolk Island, the issue and allotment of shares, creation of trusts, etc., and Y was responsible for the preparation of much of the documentation required. Such documentation as required execution in Norfolk Island was taken by Y with him when he went there on 20 June 1977 - Y was not sure of the date but Z confirmed he arrived on Z's wedding anniversary. As well as the documentation to be referred to later Y took with him a cheque for $4,000 from the taxpayer together with authority to open, and operate on, a bank account on Norfolk Island for the taxpayer.
12. Either slightly before or on 20 June 1977 (Z could not recall and ``certificates of incorporation'' not produced) companies S, R, A, C, M1 and M2 were incorporated in Norfolk Island - the shareholders being a group of Norfolk Island residents with the relevant directors Mr. and Mrs. Z. A photocopy of S's share register (see later) gives 20 June 1977 as the date of issue of seven A ordinary shares to the seven original subscribers for S. The copy of the memorandum and articles of association produced for S (not an executed copy) shows the subscribers as subscribing for B class shares. What Y actually did during his stay is uncertain for the transactions we are concerned with were said to have taken place on 22 June 1977. There are other transactions recorded for S on 20, 21 and 22 June 1977 (X's firm being the only client of Z) and it would seem he was involved on other matters for his firm as well as the present transaction. All that can be said about Y's activities after his arrival and prior to 22 June 1977 is that apparently Z introduced him to the manager of the Bank of New South Wales and that an account for the taxpayer was opened on 20 June 1977 for $4,000.
13. Coming now to 22 June 1977 a multitude of items occurred on that day in Norfolk Island in relation to the taxpayer's transaction - Z stating they followed Y's ``mud plan'' - and these are dealt with hereunder in the order they are said to have occurred. Unless otherwise stated the relevant document was brought to Norfolk Island by Y and was said to be executed by Mr. and Mrs. Z in the proper order on 22 June 1977. The times stated are Norfolk Island time which is 1 ½ hours ahead of New South Wales time.
14. At 9.30 am the directors of R (Mr. and Mrs. Z) resolved to apply for 1,000 ``C'' class shares in the capital of S at par value of $1 each payable in full on allotment together with a premium of $999 per share. By letter of same date R made application to S enclosing a cheque for $1m. At 9.35 am Mr. and Mrs. Z resolved for S to issue share certificate no. 16 for 1,000 ``C'' class shares numbered C4201 to C5200 inclusive to R and to credit $999,999 to a share premium account. After this meeting Y is said to have telephoned X, told him the shares were available for purchase and asked could he get instructions to purchase - was told to do so. At 10.35 am the directors of R resolved to sell the 1,000 ``C'' class shares for $1m to the taxpayer, to affix the common seal to a deed relative to such sale (this was one of the documents taken with him by Y and although apparently executed on behalf of R on 22 June 1977 it was not executed by U until July 1977 when he signed a number of documents in X's office and to affix the common seal to a share transfer - for some reason this share transfer was prepared in Norfolk Island and was similarly executed by U in July 1977). At a time unstated on 22 June 1977 (minute also prepared in Norfolk Island) there was produced a duly executed shares transfer from R to the taxpayer and it was resolved to approve it for registration (there is no mention of the cancellation of share certificate no. 16 and the issue of a new one).
15. At 10.40 am Mr. and Mrs. Z as directors of A resolved to apply for ten fifth redeemable preference shares at par value of $1 each and so applied. At 10.45 am Mr. and Mrs. Z as directors of S resolved to allot the shares and affix the common seal to share certificate no. 17 to be issued to A. At 11.00 am at a directors' meeting of S Mr. Z tabled an agreement between S and A whereby, in consideration of S agreeing to pay A a dividend of $999,000 on the ten fifth redeemable preference shares, A agreed to settle $996,000 on trust with C as trustee of a UVW family trust no. 2 (identical classes of
ATC 246
beneficiaries as for the trust of which taxpayer trustee) and $2,500 on trust with M1 as trustee of a T trust no. 2 (part of X's fee) and it was resolved to affix the common seal. It was similarly resolved at a meeting of A at 11.05 am. At 11.10 am Mr. and Mrs. Z as directors of S resolved to declare a dividend of $999,000 to A ex the share premium account subject to the approval of the shareholdings in general meeting - the general meeting at 11.15 am with Mr. and Mrs. Z only persons present (Mr. Z holding proxies for five named persons who with Mr. and Mrs. Z were the original subscribers to S - see para. 12 and 23) approved the directors' action. The minutes recorded, inter alia, that ``all members of the company being present personally or by Proxy it was unanimously resolved to dispense with the formal notice of the meeting''. However, it is noteworthy that there is no reference to the holders of the ``C'' class shares or the fifth redeemable preference shares (or the first, second, third or fourth redeemable preference shares - see para. 23). At 11.25 am at a directors' meeting of A Mr. Z advised a cheque for $999,000 had been received.16. Next at 11.28 am at a meeting of directors of C Mr. Z tabled a deed of settlement to be known as A ``Trust No. 5'' in which A settled $996,000 (as per para. 11) and it was resolved to accept appointment as trustee and to open a bank account to be operated on by Y ``solely''. After this meeting Y was said to have made a second call to X indicating he had a buyer for the taxpayer's shares in S and requesting approval to sell, which was given. At 11.30 am Mr. Z at a directors' meeting of M1 tabled a deed of settlement to be known as A ``Trust No. 5'' in which A settled $2,500 (as per para. 14) and it was resolved to accept appointment as trustee and to open a bank account to be operated on by Y ``solely''. At 11.35 am at a meeting of A, Mr. Z tabled the deed of settlement for A trust no. 5 and resolved that the sum of $998,500 be settled and the common seal be affixed. A directors' meeting of C was held at 11.40 am (according to its terms in Australia but obviously in Norfolk Island) with Mr. Z advising that the taxpayer had requested C to lend it $996,000 on the terms and conditions ``set out in an agreement'' which was tabled - it being resolved to do so and to affix the common seal to the agreement. The agreement (executed by U in Australia in July 1977) was another of the documents taken to Norfolk Island by Y, made no provision for the payment of interest and provided for the ``loan'' to be repaid ``on written demand being given by'' C or any assignee ``in accordance with sec. 12 of the Conveyancing Act, 1919, as amended, of the State of New South Wales'' - C has been liquidated and no evidence of any assignment was placed before the Board (Z said the liability had been extinguished by some uncertain means prior to C's liquidation about 1978).
17. Pursuant to a deed of 22 June 1977 (executed by U in July 1977) the taxpayer agreed to sell its shares in S to M2 for $1 and at a directors' meeting of M2 of 22 June 1977 (time not stated and document prepared in Norfolk Island) it was resolved by Mr. and Mrs. Z to enter into six (6) transactions for the purchase of shares (one being from the taxpayer). A transfer of shares prepared in Norfolk Island was executed by U in July 1977.
18. To complete the Norfolk Island occurrences there was the attendance at the Bank of New South Wales by Y and Z when all relevant cheques were dealt with. Z said the manager would only approve if all were simultaneous whilst Y said the manager wanted to see each account balanced before they left. As far as can be positively stated the situation with the various accounts was as follows (all dates 22 June 1977 except opening credit in taxpayer which was 20 June 1977):
Taxpayer (Y sole operator) $
Credit cheque brought by Y to open 4,000
Credit
"
loan
"
from C 996,000
Credit
"
sale
"
shares to M2 1
Debit
"
purchase
"
shares ex R 1,000,000
Balance
It will be noted that the result is that the $4,000 brought over by Y is the only ``real'' money going in fees to X and Z.
19. Turning now to happenings in New South Wales X said that following the calls to him from Y he arranged for directors' meetings of the taxpayer to be held and in the minute book tendered there are three minutes of 22 June 1977 - all pasted in recently having been obtained from the files of Y. The first purports to show U and W present at a meeting held at the office of X at 10.00 am New South Wales time at which U advised that R was the registered holder of 1,000 ``C'' class shares in S and recommended that they be purchased ``for inclusion in the Company's Share Trading Portfolio''. The second purports to show U and V present at a meeting at 11.45 am New South Wales time at which U advised that it was ``necessary to borrow funds for working capital purposes'' and it resolved to enter into an agreement with C to borrow $996,000. The third purports to record a meeting with U and W present at 11.50 am New South Wales time resolving to sell the 1,000 ``C'' class shares in S to M2 for $1.
20. The times stated for the meetings do not correlate with the Norfolk Island happenings and cast doubts upon whether they actually took place - both U and X agree a meeting of 30 June 1977 distributing the trust income did not take place. U's recollection was not completely clear as to when the minutes were signed and he could recall only one meeting in X's office on 22 June 1977 - he and W being the persons present - whilst X was somewhat ambivalent in his recollection. On the basis they are correct the taxpayer resolved at 10.00 am New South Wales time, i.e. 11.30 am Norfolk Island time, to acquire shares in
ATC 248
S for $1m when S had already issued the preference shares to A and paid A a dividend of $999,000 out of the share premium reserve so that (as X agreed) such shares were valueless. In this regard it is interesting to note the agreement between the taxpayer and R provides that if $1m is not ``the full value in money of the Shares... then there shall be substituted for the said [price] the [amount] which [is] at the date of this Deed, the full value in money for such Shares''.21. No doubt because of these discrepancies X said the minutes were confirmatory only and that the taxpayer had already agreed to purchase and sell before Y went to Norfolk Island. Although in one sense this may be so the fact is, as set out in para. 9 above, that the taxpayer did not know the name or anything about the company involved whilst the minutes evidence an intention to proceed by way of written agreements.
22. To complete the factual position two matters remain for mention. First despite the reference to a number of deeds of settlement and the preparation thereof it would appear that only one was actually executed - this being between A and C in respect of the settlement of $996,000 with the beneficiary's clause being identical to that in respect of the trust deed of which the taxpayer was trustee. Secondly, there is the matter of the share register of S.
23. In October 1978 Y requested Z to, inter alia, forward all records (including cash book, ledger, journals, minute book, share and directors' register) for R, S, M2, A, M1 and C to him urgently as officers of the taxation department wish to see them and ``they will be up... early in November''. These were sent on 1 November 1978 and were taken away for inspection at the local office of the department when the officers arrived. After inspection and some photocopying they were returned by hand to X's office - the officer referring to the fact he carried them back himself. Although other records were apparently readily available for the hearing of the reference the share register of S was not one of them and the taxation officer who examined and photocopied the share register of S gave evidence and was cross-examined. I am satisfied that the photocopy tendered is a true and correct copy of all entries that were made in the original share register. The only entries therein are in respect of the ``A'' ordinary shares allotted on 20 June 1977 to the seven original subscribers. No entries appear in relation to ``C'' class shares or fifth redeemable preference shares - or for the first, second, third and fourth redeemable preference shares which may have been used for the 20 and 21 June 1977 transactions (see para. 12) and the second transaction that took place on 22 June 1977 (the actual credits and debits for S on that date being not the $1m and $999,000 set out in para. 18 but $1,600,020 and $999,000 and $599,400 respectively).
24. In his statement furnished in terms of reg. 35(1) the Commissioner gave his reasons for disallowing the ``share trading loss''. These included, inter alia:
- (a) the provisions of sec. 25(1), 28(2), 51(1) and 52 were inapplicable;
- (b) no part of the $999,999 claimed loss in respect of shares in S was allowable because
-
- (i) the taxpayer was never the beneficial owner of those shares;
- (ii) sec. 260 operates to void the transactions involved;
- (iii) the transactions should be disregarded as a ``fiscal nullity'';
- (iv) the transactions do not have the legal effect contended for by the taxpayer,
and counsel for the taxpayer addressed accordingly submitting that -
- (i) the taxpayer was a sharetrader;
- (ii) it did become a shareholder in S;
- (iii) a ``sham'' was not involved;
- (iv) sec. 260 was inapplicable; and
- (v) the ``fiscal nullity'' concept did not apply per se nor on the facts of the case.
Counsel for the Commissioner naturally argued to the contrary.
25. Whilst I have some reservations in relation to the share transactions relating to listed shares (the nature of the dealings could indicate another purpose) I am prepared to
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find that, in relation thereto, the taxpayer was a sharetrader. Accordingly the fundamental issue is, in my opinion, whether the transaction in respect of the shares of S can be regarded as part thereof. I do not accept the proposition that any dealing by a sharetrader must be part of his share trading activities - any more than that any acquisition by a developer, builder, etc., must be on ``business'' account. The authorities are to the contrary (indicating that, it is in each case, a matter to be determined according to the facts of each case) and, during the course of argument I remarked that I was quite prepared to accept the listed company dealings but needed assistance in relation to the particular transaction in question.26. After being referred to
Investment and Merchant Finance Corp. Ltd.
v.
F.C. of T.
71 ATC 4140
;
(1971) 125 C.L.R. 249
;
Patcorp Investments Ltd.
&
Ors.
v.
F.C. of T.
76 ATC 4225
and
Deane
&
Croker
v.
F.C. of T.
82 ATC 4112
, I said:
``(Is) it... not what the High Court said, on the facts of the cases before them the transactions were an integral part of the share trading businesses that they were considering? Is that not as far as you can take the High Court decisions? They have not said that in every case, isolated transactions that have a fiscal advantage only are to be taken as part of the share trading activities.''
On reflection I can see no reason to depart from what I said and, having regard to the admitted fact (para. 9) that the sole purpose of the transaction was to reduce the tax liability of the trustee and to the fact that a commercial loss of $999,999 (accepting for this purpose the genuineness of the transaction) was from the outset intended, I am unable to find that it was a ``share trading'' transaction.
27. In view of this conclusion it is presently unnecessary to consider the other arguments based on sec. 260 ``sham'', etc. and I refrain from so doing.
28. For the above reasons I would allow the share trading loss claimed of $1,001,096 to the extent of $1,097 only - this will result in the taxable income being reduced to $193,574 with a consequent reduction in the additional tax imposed from $60,279 to $59,922.70.
29. Turning now to the sec. 226 issue, subsec. (2) thereof provides for the imposition of additional tax where, inter alia, a taxpayer ``includes in his return as a deduction for... expenditure incurred by him an amount in excess of the expenditure actually incurred by him...''. In the present case the amount imposed represents 50 per cent of the tax assessed on the taxable income and the first question that arises is whether sec. 226(2) is applicable. If it is, the second question is whether any further remission is warranted.
30. On the first question counsel for the taxpayer submitted that, even if the transaction was not part of the share trading nevertheless the Board should find that the trustee ``incurred an amount in paying for the shares. A cheque for a million dollars was tendered and accepted and debited to their bank account''. The fact that contemporaneously an amount of $996,000 came into that account ``does not matter for the purpose of sec. 226(2), it is still an amount actually incurred and [sec.] 226(2) does not enable the Commissioner to impose a penalty in those circumstances''. On the other hand senior counsel for the Commissioner formally submitted that
Cyprus Mines Corporation
v.
F.C. of T.
78 ATC 4468
and
Rabinov and Anor.
v.
F.C. of T.
82 ATC 4517
(subject to appeal to Federal Court) were wrongly decided. He also contended that if ``the Board comes to the view that the whole transaction is a sham, then quite clearly the expenditure was not actually incurred... there was no real payment''
-
similarly if it be decided on the ground of ``fiscal nullity'' (no mention was made of sec. 260).
31. The term ``sham'' has been considered in many cases, e.g.
Snook
v.
London
&
West Riding Investments Ltd.
(1967) 2 Q.B. 786
at p. 802
per
Diplock
L.J.;
Albion Hotel Ltd.
v.
F.C. of T.
(1965) 115 C.L.R. 78
per
Windeyer
J. at pp. 91-92;
Arbuckle
v.
F.C. of T.
(1964) 13 A.T.D. 378
per
Windeyer
J. at p. 388;
Coppleson
v.
F.C. of T.
81 ATC 4019
at pp. 4021-4022
and, having regard to the facts of this case I am of the view that it falls within the doctrine of sham. Being of this opinion it follows that I consider the provisions of sec. 226(2) are applicable.
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32. Before leaving the issue of whether sec. 226(2) is applicable I should add that I am aware of the views expressed by my colleague Mr. Pape in para. 22-29 of his reasons. However, since I agree with what is set out in para. 30 of Mr. Pape's reasons, I do not think it appropriate to express an opinion. I would prefer to await a reference wherein the matter is covered by the grounds of objection and is the subject of argument before the Board.
33. Insofar as the question of whether any further remission is warranted counsel for the taxpayer submitted that ``either no additional tax or additional tax of a lesser amount'' be imposed ``in view of the fact that the taxpayer in... its return... was only claiming a deduction which on the advice that it received it believed it was entitled to...''. It was also relevant that the investigation officer had ``received full co-operation from [X] and from [Y] in respect of obtaining details of the transaction being entered into''. No other reasons for remission were advanced. Senior counsel for the Commissioner said ``no case had been made by the taxpayer for partial reduction'' and he referred to my remarks in Case P121, 82 ATC 611 at p. 616.
34. In Case P121 I set out in para. 17 of my reasons the arguments advanced and at para. 18 said:
``Whilst accepting much of what counsel put I cannot accept that a taxpayer can `escape' the provisions of sec. 226(2) by virtue of acting on someone's advice. If that advice is wrong then he is in the same position as if he had never received any advice. Nor can I accept that a taxpayer can `escape' on the basis that the Commissioner's officers would be alert so that the revenue was never at risk. The operative factor is the claiming of a deduction or omission of income. I would accept that, if there has been a full and true disclosure of all relevant material to the Commissioner in support of a claim for a deduction or to support the omission of an amount because it is considered not to be income, then any additional tax arising under sec. 226(2) should be remitted in full. However that is not the situation here and I can see no reason to grant any further remission.''
In the present case there was not a full and complete disclosure and later co-operation with an investigation officer is not, in my view, a reason (any more than acting on someone else's advice) for a complete remission.
35. Whilst in
Jolly
v.
F.C. of T.
(1935) 53 C.L.R. 206
Rich
and
Dixon
JJ. at p. 214 referred to ``a review of the ascertainment, including the discretionary remission, of an amount which may prove a ruinous imposition'' and such remarks have been adopted in considering other references, e.g.
Case
K45
(1959) 10 T.B.R.D. 247
(wherein the Board had acquired in the course of a lengthy review a knowledge of the ramifications of the taxpayer's affairs), it is perhaps significant that there has been no submission made, nor any evidence led, in the present reference in relation to the additional tax not remitted constituting ``a ruinous imposition''. In the absence of such evidence I find it difficult to see how such a proposition could be established.
36. Admittedly with the increased rates of tax that now apply (although see
Case
C108
(1953) 3 T.B.R.D. 639
), additional tax at 50 per cent of the tax avoided can, as here, mean a total tax liability (after allowance of $1,097
-
para. 28) of an amount almost equal to the taxable income itself (here tax assessed $119,845.40, additional tax $59,922.70, total $179,768.10 in respect of a taxable income of $193,574), but can it be said, where it does not exceed the taxable income, that it is ``a ruinous imposition''? I do not think that it can be so said per se. Some may say the original tax itself of $120,558.45 on $194,071 (or $241,116.90 with provisional tax) is ``ruinous'' (particularly as the trust balance sheet as at 30 June 1977, including the $996,000 ``loan'', gave net assets of only $198,916.55) but that is what the legislature imposes (there being no claim that sec. 99A was the more appropriate section) so it cannot be ``ruinous'' in the appropriate sense. As my colleague Mr. Pape has pointed out (para. 20 of his reasons), the trust was obtaining a return on net assets employed of 105 per cent and I am unable to accept that an additional amount of $60,279 (to be reduced to $59,922.70) due and payable on 30 June 1978, i.e. one year after the end of the year of income concerned, is ``a ruinous
ATC 251
imposition''. It certainly adds up to a substantial total liability but I cannot regard $60,279 (or $59,922.70) as tipping the scales past the imaginary dividing line. Additionally, although I do not regard it as a determining factor, $60,279 (or $59,922.70) in relation to the overall current end future tax benefit sought of $650,000 (para. 19 Mr. Pape's reasons) is hardly ``ruinous''.37. Having regard to the overall facts I would make no further remission.
38. By Ruling IT 2012 effective from 14 February 1983 the Commissioner has set out certain ``guidelines for remission of sec. 226(2) additional tax'' and, whilst strictly unnecessary, it perhaps should be stated now that these are the Commissioner's guidelines. Such will not be binding in any way upon the Board which will be required to consider the facts of each case before it and give a decision based thereon.
39. For the above reasons I would uphold, except to the extent indicated in para. 28, the Commissioner's decision on the taxpayer's objection. Assessment for the year ended 30 June 1977 to be adjusted accordingly.
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