Case Q50

Members: HP Stevens Ch
BR Pape M

TJ McCarthy M

Tribunal:
No. 1 Board of Review

Decision date: 16 June 1983.

---

T.J. McCarthy (Member)

I have had the advantage of reading the reasons prepared by the Chairman and I agree with the findings of fact stated in para. 1-23 of his reasons. In respect of most of the issues, I think it is sufficient to merely indicate my conclusions.

2. Looking at the overall circumstances, and having considered the matters relied upon by Mr. Bennett Q.C. (at pp. 225-226 of the transcript), I am prepared to find that the trustee was carrying on a business of trading in shares in listed companies in the period from 14 January 1977 to 30 June 1977. Thus the net income of the trust estate should be reduced by $1,097.

3. Assuming there was no sham involved, the purchase of the 1,000 ``C'' class shares in S Ltd. for $1 million and the sale of those shares the same day for $1 did not form part of any share trading business. I accept the fully developed submission of Mr. Bennett Q.C. that there was ``a huge number of differences and factors which put this transaction totally outside the buying and selling of shares in listed companies''.

4. However, I am unable to accept that there was any purchase or sale of shares in S Ltd. by the trustee. In view of the absence of any adjustment to the share register, the circumstances surrounding the ``loan'' to the trustee, the execution of related documents well after the alleged transactions took place, the lack of interest in the alleged transactions shown by the participants, the fiasco in relation to the times shown in the minutes

---

ATC 264

and the other factors relied on by Mr. Bennett Q.C., I find that the alleged purchase and sale of shares in S Ltd. by the trustee, if not all the ``transactions'' in the scheme, were shams (see
Snook v. London & West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802 and
Albion Hotel Ltd. v. F.C. of T. (1965) 115 C.L.R. 78 at pp. 91-92 ).

5. As was admitted by U in cross-examination, the only outlay of funds by the trustee was the expenditure of $4,000 for fees. In contrast to the factual situation considered in
Rabinov & Anor. v. F.C. of T. 82 ATC 4517 (currently on appeal), where on the day the transactions occurred a bank cheque for $25,000 was initially purchased from the taxpayer's own funds, in this reference the evidence claimed to support payment merely showed that, under the supervision of the bank manager, cheque forms with words and figures thereon were passed around and entries were made in bank accounts; but these entries do not create transactions, nor do they necessarily mean that expenditure was actually incurred. In the particular circumstances, where the cheque form with $1 million shown thereon was not given to discharge any liability or for any other consideration and could not be, and was not intended to be, sued upon, there being a total failure of consideration, I find that the claimed expenditure of $1 million for the ``purchase'' of the shares was not actually incurred for the purposes of sec. 226(2).

6. In relation to the argument that the Commissioner should have applied sec. 97 and 98, I am of the opinion that para. 31 of the objection did not contain a ground that, because cl. 1(b) of the trust deed provided for an automatic distribution to the beneficiaries (assuming cl. 1(b) did so provide), the assessment was not authorised by sec. 99.

7. The Commissioner's disallowance in the original assessment of certain deductions claimed for investment allowance and T.S.V.A. should be confirmed by reason of sec. 190(b) of the Act.

8. Section 226(2) (when read with sec. 254) imposes additional tax of 200 per cent of the tax properly payable by the trustee, as no tax would have been payable if the deduction claimed of $1 million had been allowed. The amended assessment, which increased the tax assessed in the original assessment, is not properly before the Board, so the tax properly payable by the trustee, after reducing the net income of the trust estate (as shown in the notice of original assessment) by the amount of $1,097 referred to above, is $119,845.40 and the statutory additional tax is $239,690.80.

9. In relation to the additional tax imposed by sec. 226(2), sec. 226(3) gives a discretion to the Commissioner to remit this tax for reasons which he thinks sufficient, so the initial question is: what part, if any, of the amount of $239,690.80 should be remitted? Standing in the Commissioner's place, the Board exercises the discretion vested in the Commissioner. However, I do not think it follows that the assessment could be increased if the Board was prepared to remit less than the amount remitted by the Commissioner. Whilst sec. 195(1) empowers a Board to increase an assessment, in my opinion, this provision must be read in the light of the clear legislative intention that the Board's role is to review the Commissioner's decision upon the objection and where appropriate to substitute, and by direction give effect to, the decision which he should have made upon the objection.

10. By way of illustration, assume the Commissioner in an original assessment remits an amount which is 75 per cent of the additional tax imposed by sec. 226(2) and an objection thereto claims that the amount of additional tax shown in the notice of assessment is excessive and should be remitted in whole or in part; the Commissioner partly allows the objection and amends the assessment to remit a further amount, so that the total percentage remitted is 85 per cent; a reference comes before the Board which, after hearing the evidence, is prepared to remit an amount which is only 70 per cent of the additional tax imposed by sec. 226(2). In such a case, the Board could increase the amended assessment which is before it (see sec. 191 and 195(1)) and reduce the percentage remitted to 75 per cent. However, in my opinion, the Board is not empowered to reduce the percentage remitted to 70 per cent, because such action could not give effect to a decision which the Commissioner should have made upon the objection.

---

ATC 265

11. In relation to determining what part of the statutory additional tax of $239,690.80 should be remitted, I do not think I should be deterred by the difficulty of selecting an appropriate amount. In my opinion, there are two main factors which point in favour of a substantial remission. First, the claimed transaction in respect of shares in S Ltd. was so extraordinary, that this disclosure should have been sufficient by itself to reduce the risk to the revenue, even though full details were not supplied. In fact, the return was lodged on or about 26 April 1978 and the original assessment, which disallowed inter alia the claimed deduction of $1 million, was the subject of a notice issued on 31 May 1978. This is not to say that additional tax should be remitted merely because the Commissioner's officers are, or should be, alert to protect the revenue, but rather to emphasise that the absence of a full and true disclosure in the return was not as significant as it would be, for example, where income was simply not disclosed. Secondly, the Taxation Office investigation officer who gave evidence, and who was investigating various Norfolk Island tax schemes at the relevant time, agreed that the trustee's representatives had been open and co-operative and all related documentation had been supplied to him. Taken together, these two factors suggest to me that a remission of 80 per cent would be appropriate. The amount remitted should therefore be $191,753. After this remission, additional tax of $47,938 is imposed and in my view this is a sufficient penalty in the circumstances.

12. I would reverse in part the Commissioner's decision on the objection and would reduce the assessment before the Board by reducing:

• (i) the net income of the trust estate by $1,097, and
• (ii) the additional tax from $60,279 to $47,938.

Objection allowed in part