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Clyne v. Federal Commissioner of Taxation.

Judges:
Yeldham J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 12 August 1983.

Yeldham J.

These are three appeals, which by consent were heard together, by Mr. Peter Clyne, pursuant to sec. 196 of the Income Tax Assessment Act 1936. The appeals are from three decisions of Taxation Board of Review No. 1 (now reported as Cases P100, P101 and P102,
82 ATC 489, 520 and 540) which disallowed objections lodged by the appellant against assessments made by the respondent, the Deputy Commissioner of Taxation, in respect of income said to have been derived by the appellant during the years ended 30 June 1978, 30 June 1979 and 30 June 1980. It was conceded on behalf of the respondent that questions of law arose in respect of the appeals, with the consequence that ``the whole decision of the Board, and not merely the question of law, is then open to review'' -
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148 at p. 151. On an appeal such as the present the Court must ascertain the facts for itself upon the evidence laid before it and not by an appellate review of the findings made by the Board, at least where no questions of discretion are involved.

The issues arising in the appeals were expressly narrowed by the appellant in this way:

``Mr. Clyne: There is no dispute about the receipts that were paid to me during the three relevant income years and what the Commissioner asserts was paid is not disputed as to quantum. The only question would be to whom it was paid. There is also, of course, no dispute about the outgoings disputed by the Commissioner and the disputes argued before the Board about male fides and the validity of the assessment and the question how far you can go as to whether you can challenge the bona fides of the assessment in view of Bloemen's case will not be argued in this case.

His Honour: The only point is to whom in law were these payments made.

ATC 4509

Mr. Clyne: Yes, the only issue is the so-called Warlock issue and that is, in my submission, on the evidence to be put before your Honour all moneys received during the relevant income years belonged to and were derived by an entity called Warlock Investments Anstalt and not to Peter Clyne and they were taxable to Warlock and not to Peter Clyne. That, of course, puts the assessments totally in issue because my submission is that I personally did not derive any income at all.''

By sec. 190(b) the burden of proof that the various assessments were excessive (i.e. the ordinary civil burden) lies upon the appellant, a burden which the latter recognised in his written submissions by saying:

``... the Court is invited to say that I have discharged the burden of proving, on a balance of probabilities, that the moneys received during the three income years in question belong to Warlock and not to me, and that they were taxable to Warlock, and not to me, i.e. that the assessments were excessive and should be reduced to nil.''

See also
McCormack v. F.C. of T. 79 ATC 4111; (1978-1979) 143 C.L.R. 284.

On 18 July 1977 the appellant wrote to the respondent in these terms:

``As you probably know, I returned to Sydney in June 1976, and have been living and working here since that time, waiting for my discharge from bankruptcy and possibly for re-admission to the bar.

Meanwhile, I have been working as agent for one of my own overseas companies, an establishment called WARLOCK INVESTMENTS ETABLISSEMENT (VADUZ). Copy of my agreement with Warlock is enclosed for your information. Indeed, a copy of this agreement will probably be printed in my next book: Incentives, Rewards and Tax-free Benefits to Executives.

My contention is that Warlock Investments Etablissement is a totally separate legal entity from myself; that its income is not my income; and that all moneys received by me during the financial year 1976-1977 are Warlock's income, in terms of the agreement subsisting between myself and Warlock.

It may very well be that you will not agree with this contention, and I am writing you this letter to make it quite clear that I am not trying to deceive you in any way. My return for the relevant financial year will be a nil return, since I claim that I have had no taxable income between 1/7/76 and 30/6/77.

Would you be kind enough to let me know -

  • (a) Do you agree with my view that I have earned no taxable income during the relevant financial year?
  • (b) If not, what is the best way of testing the matter?''

The agreement enclosed under cover of that letter, and which is dated 1st July 1976 was in these terms:

``AGREEMENT made this first day of July one thousand nine hundred and seventy-six between WARLOCK INVESTMENTS ETABLISSEMENT an etablissement duly established and registered at Vaduz in the Principality of Liechtenstein in accordance with the laws and usages of the said Principality of Liechtenstein (hereinafter referred to as the principal) of the one part and PETER CLYNE of the Palais Schwarzenberg, Schwarzenbergplatz 9, Vienna in the Republic of Austria presently residing at Sebels Town House, 23 Elizabeth Bay Road, Sydney in the State of New South Wales (Commonwealth of Australia) International Law and Finance Consultant (hereinafter referred to as the agent) of the other part NOW WHEREAS the principal pursuant to its articles of association (Statuten) has power to carry on and does in fact carry on the business and profession inter alia of an international consultant in matters of law, finance and taxation AND WHEREAS the agent is qualified to carry on and does in fact carry on the same business and profession AND WHEREAS the principal has requested the agent to practise his profession of international consultant in matters of law, finance and taxation as agent for the

ATC 4510

principal in relation to the districts and territories to which this agreement extends AND WHEREAS in consideration of the agent's agreeing to do so the principal has agreed to confer upon the agent a sole agency in relation to such districts and territories as aforesaid AND WHEREAS the parties have agreed to govern and regulate the agent's said agency by and in the terms hereinafter set forth NOW BY THIS DEED and in consideration of the matters hereinbefore set forth the parties for themselves their executors administrators and assigns covenant and agree as follows that is to say -

1. This agreement shall be of indefinite duration but may be terminated by three (3) months' written notice given by one party to the other.

2. The districts and territories to which this agreement extends are Austria, West Germany, Switzerland, France, Holland, Belgium, Italy, the United Kingdom, the Commonwealth of Australia, the United States of America, St Vincents, Bermuda, the Bahamas, Hong Kong, and such other countries, states, districts or territories as the parties may from time to time agree in writing should be included in the terms of this deed.

3. The agent will in all districts and territories to which clause 2 applies carry out his profession as international consultant in matters of law, finance and taxation as agent for the principal and not otherwise, and when carrying out his profession as aforesaid...

  • (1) The agent shall be deemed to be carrying out the principal's profession as aforesaid.
  • (2) The agent shall be entitled to carry out his professional activities in his the agent's own name and need not (though he may) disclose to his clients that he is acting on the principal's behalf.
  • (3) All moneys, fees, costs and payments paid to or held by the agent shall be deemed to be held by him for and on behalf of the principal and in trust for the principal and it is the intention of the parties that such moneys, fees, costs and payments and all banking and other accounts in which the same may be held from time to time shall be the property of the principal.
  • (4) Out of the funds held pursuant to paragraph (3) of this clause the agent shall be entitled, from time to time, to draw and disburse whatever may be required to carry out his professional duties, including the cost of accommodation, fares, postage, telephone, transportation, cables, telex, research fees, fees payable to solicitors and counsel, accountancy fees, valuation fees, and all other relevant fees and expenses.
  • (5) Any moneys held pursuant to paragraph (3) of this clause and disbursed for purposes other than those outlined in paragraph (4) of this clause shall be deemed to have been advanced by the principal to the agent and the agent undertakes to repay the same wholly or partly on demand. No interest is to be payable for such advances.

4. The principal hereby confers on the agent a sole and exclusive agency for the districts and territories hereinbefore referred to and will not during the term of this deed engage or employ any other person to perform similar duties in the said districts and territories or any part thereof.

5. Any books articles or written matter written or published by the agent in any of the districts or territories hereinbefore referred to during the operation of this agreement shall (insofar as the same relate directly or indirectly to law, international law, finance or taxation) be deemed to have been researched and written for and on behalf of the principal and it is the intention of the parties that if and insofar as the copyright of the said books or writings would but for the provisions of this agreement vest in the agent they shall vest and be deemed at all relevant times to have vested in the principal AND ALL MONEYS PAYMENTS FEES OR ROYALTIES received by or paid to the agent in relation to such books or writings as aforesaid or any of them shall be deemed to be received by and paid to the

ATC 4511

agent for and on behalf of and in trust for the principal and all funds and banking accounts in which such payments or receipts are held shall to the extent of such payments and receipts be dealt with in accordance with the provisions of clause 3 hereof and to be held for and in trust for the principal.

IN WITNESS WHEREOF the parties have hereunto set their hand and seal on the date hereinbefore mentioned.

SIGNED SEALED AND DELIVERED by the aforesaid PETER CLYNE at Sydney aforesaid on the date hereinbefore set forth, on his own behalf

(Peter Clyne)

SIGNED SEALED AND DELIVERED by PETER CLYNE being the person entitled pursuant to the laws and usages of the Principality of Liechtenstein to authenticate documents on behalf of the aforesaid WARLOCK INVESTMENTS ETABLISSEMENT at Sydney aforesaid on the date hereinbefore set forth on behalf of the said etablissement

WARLOCK INVESTMENTS ETABLISSEMENT (VADUZ)

p.p.

(Peter Clyne)''

Two things in particular should be observed about that document. In the first place, because it is not witnessed, it did not operate as a deed but purely as an agreement under hand and, secondly, the first recital, which asserts that the principal ``does in fact carry on the business and profession inter alia of an international consultant in matters of law, finance and taxation'' is erroneous.

It is convenient to set out at some length the facts as found in the Board of Review concerning the establishment and operation of the anstalt named Warlock. I propose to take the judgment of the Chairman, Mr. H. P. Stevens, and set out verbatim what appears in para. 17-26 inclusive. Insofar as those paragraphs contain certain findings of fact, I would myself come to the same conclusions. But the findings are in substance (with some exceptions - e.g. para. 23) in respect of facts which are well documented and the findings were not, in general, the subject of challenge before me except the ultimate finding, made by each Member of the Board, that the agreement was a sham.

The paragraphs in question are as follows (at pp. 493-495):

``17. I turn now to the issue common to all three references. That is the Warlock agreement.

18. In relation to this agreement the taxpayer initially said `my object in entering into that agreement was to get out of having to pay taxes. There is no other reason for entering into that agreement with Warlock suggested.' Later he added another reason stating `I entered into that agreement as an experiment, you might say, in tax avoidance to see how it would work out, how the Commissioner would greet it and how the Courts would treat it.' The basic facts in respect of Warlock and the Warlock agreements are in (more or less) chronological order as set out hereunder.

19. Warlock, formed on 29 November 1973 under art. 534 et seq. of Das Personen und Gesellschaftsrecht (P.G.R.), was entered on the Commercial Register of the Principality of Liechtenstein, Vaduz, on the same date with a capital of SF20,000 fully paid up and not divided into shares with Dr. Beck, lawyer, as sole representative and member of the board of directors with signature rights. The objects of Warlock (as per the register entry which does not conflict with art. 2 of its Statuten) were:

  • `All kinds of commercial, financial and legal transactions for own account and for account of third parties, purchase and management of real estate as well as all business connected therewith.'

Article 7 of the Statuten provided that the founder (whom I find to be Dr. Beck) was

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the supreme organ being able to, inter alia:

  • (i) appoint and dismiss the administrator(s) (cf. directors) and beneficiaries,
  • (ii) alter the Statuten,
  • (iii) liquidate or dissolve the anstalt,
  • (iv) determine the distribution of profits.

The founder was able to transfer his rights by a written Zessionserklarung (transfer of rights) but, I find, did not do so. Article 8 gave the administrator(s) the right, inter alia, to represent Warlock vis-a-vis third parties whilst art. 11 required at the end of each calendar year for a balance sheet and profit and loss account `to be brought into existence in accordance with sound commercial principles' - this article also provided that the `founder may determine whether to hold moneys in reserve out of the resultant profits or whether that profit is to be distributed to the' beneficiaries.

20. On 4 December 1973 Dr. Beck provided copies of the Statuten, certificate of formation, extract from Commercial Register and an acknowledgement by the Liechtenstein Tax Office that the initial tax of 3% on paid up capital had been paid. Despite the taxpayer being in Liechtenstein subsequent to 29 November 1973 there was no contact between the taxpayer and Dr. Beck until 1982 when he was contacted in order to obtain documentation in connection with the 1977 appeal to the Supreme Court. Dr. Beck then, by letter of 9 March 1982, provided copies of a power of attorney dated 29 November 1973 and a Mandatsoertrag (mandate contract) of the same date. The mandate contract between the taxpayer (as principal) and Dr. Beck (as instructee) appointed Dr. Beck the `legal representative and member of the [administration] with sole right of signature of' Warlock (at an annual fee of SF1,500) and required, inter alia, the taxpayer to `retain all business papers for ten years', to `keep proper books or cause proper books to be kept' and to `prepare balance sheets and profit and loss accounts annually' - the taxpayer did not do so. The power of attorney given by Dr. Beck to the taxpayer empowered the taxpayer to carry out the firm's business and to act for Warlock `in its relations with third parties'. It has been assumed that this power of attorney was never revoked by Dr. Beck but, as Dr. Beck subsequently put Warlock into liquidation, it is uncertain whether this assumption is correct.

21. It is not known what activities (if any) were carried on by Warlock from November 1973 to 30 June 1976. However by agreement of 1 July 1976 between the taxpayer personally and Warlock (the taxpayer signing on behalf of Warlock) it was, inter alia, recited that Warlock `does in fact carry on the business and profession inter alia of an international consultant in matters of law, finance and taxation', that the taxpayer did the same, that Warlock had requested the taxpayer to practise his profession as agent for Warlock and that, `in consideration of the' taxpayer so agreeing, Warlock conferred upon him `a sole agency' for particular areas (including Australia). Clause 3 related to the carrying out of the agency's duties providing that:

  • (i) the taxpayer need not disclose he was acting for a principal (he did not do so);
  • (ii) all moneys, etc., are deemed on behalf of Warlock and moneys disbursed (other than for relevant expenses) shall be deemed to be interest free advances by Warlock repayable on demand.

As no records were kept the amount of any interest free advances cannot be determined. Clause 4 provided that Warlock would not during the term of the taxpayer's `sole and exclusive' agency `engage or employ any other person to perform similar duties'. Despite this Warlock by agreement of 1 July 1978 (signed by the taxpayer as administrator) entered into an agreement with one H.F.H. Walsh, inter alia, engaging him `as its sole representative for' various countries including Australia. The address given for Warlock in the

ATC 4513

agreement was not its correct registered address and the taxpayer conceded no one there would have known of Warlock. Under this agreement there was to be an accounting each year of the moneys received by and paid out by Walsh and on behalf of Warlock but such did not occur. Nor was it ever intended to occur, for item A (in the formula in the agreement A + B = C - D) was able to be varied at will to ensure a nil result - thereby rendering the apparently precise calculations a mere facade never effected as such.

22. In addition to the agreement with Walsh of 1 July 1978 a further agreement of 20 May 1979 (`deemed to have been executed and to take effect within the Principality of Liechtenstein on and as from the 1st day of July 1978') records that the taxpayer set the seal of Josef Reissi (Consulting Engineers) Anstalt Vaduz (`formerly known as Warlock Investments Etablissement (Vaduz)') `to this agreement at Vaduz in the Principality of Liechtenstein on the day hereinbefore set forth'. The taxpayer was in Europe at the relevant time - left Australia April 1979 and returned 24 July 1979 - and initially he pleaded the Fifth Amendment in relation to this transaction. Later he attempted to resile from an earlier statement that a client Gray had acquired Warlock (consistent with the change of name and new seal) but this was unconvincing. He did concede that it would be sensible for Gray `not only to sell his business to [Warlock] but also to acquire [Warlock] itself' and I find this was part of the package despite the fact the change of name was never registered.

23. The taxpayer was not, in my view, completely frank in relation to the Gray matter - even accepting that he admitted a failure to comply with sec. 264 was to enable documents to be kept `as far as possible out of the hands of' taxation investigators (such now being out of the country). If he was in fact in Liechtenstein on 20 May 1979 and had done a search of records, he would have found that Dr. Beck placed Warlock in liquidation on 23 April 1979 - resolution of same date. Whatever the reason, despite being executed, this agreement of 20 May 1979 was later regarded as void ab initio - presumably this means as far as the taxpayer is concerned that the acquisition of Warlock by Gray and the sale to it by Gray of his business did not eventuate even though no contrary documentation was referred to (let alone produced).

24. What other `transactions' Warlock was `involved with' is unknown but it is relevant that in cross-examination the taxpayer said:

  • `Warlock has had no commercial transactions, it has had no what you might call normal transactions. It has been used as a pawn in the game of taxopoly that I play with the Commissioner in different kinds of transactions, this being one of them, and the Walsh transaction being one of them and perhaps one or two others similar to the Walsh transaction. But it has had no normal transactions.'

25. Consonant with the lack of communication with Dr. Beck until 1982, Dr. Beck was never informed of anything in relation to the agreements of 1 July 1976, 1 July 1978 and 20 May 1979 (or any other `transactions'). Nor was he paid any amounts in respect of his fees or annual Liechtenstein taxes - unless he used the paid up capital for this purpose. If the taxpayer was correct in his initial claim that a loan for this purpose could be obtained and the capital withdrawn immediately after registration, such avenue would not have been available to Dr. Beck. Warlock was finally struck off on 21 November 1980 - `cancellation of the firm after liquidation carried out'.

26. The taxpayer did not register Warlock as a foreign company operating in Australia nor did he obtain Reserve Bank approval for transactions (including the agreement of 1 July 1976) entered into and to be carried out on behalf of an overseas entity. Nor did he obtain either for himself or Warlock registration as a tax agent in terms of Pt. VIIA of the Income Tax Assessment Act 1936.''

Although I do not set out the facts found by the other two Members of the Board, I am

ATC 4514

satisfied that they too have accurately summarised the evidence, and their findings are similar to those which I myself would make.

The Power of Attorney dated 29 November 1973 to which reference is made in para. 20 of the reasons of Mr. Stevens, was (as translated) in these terms:

``GENERAL POWER OF ATTORNEY whereby the firm WARLOCK INVESTMENTS ETABLISSEMENT represented with sole right of signature by its administrator Dr. Ivr. Ivo Beck, Attorney-at-Law, Vaduz grants to

  • Mr. Peter Clyne
  • Palais Schwarzenberg
  • Schwarzenbergplatz 9
  • A-1030 Vienna

the power to act for the said firm as its general and special attorney, and in particular on its behalf to acquire and sell things and rights, to lend and borrow money, to accept and acknowledge moneys or moneys' worth on behalf of the firm, to receive postal articles addressed to the firm, to give valid legal receipts for cash payments.

Furthermore, the attorney is empowered to carry out the firm's objects, these being

...

  • Trade, finance and legal business of every kind, on its own behalf or on behalf of others, acquisition and administration of real estate, investments of every kind, and all business in connection therewith

to conclude contracts on the firm's behalf and generally to act for the Anstalt in its relations with third parties.

The firm is not responsible for obligations assumed by the attorney other than those covered by the firm's own means and the attorney is responsible personally for such obligations.

The firm disclaims, as does the Verwaltungsrat (administrator) signing this power of attorney, responsibility for any actions undertaken by the attorney that are in breach of the economic or currency-control measures of Liechtenstein.

Vaduz, 29th November 1973

Principal: WARLOCK INVESTMENTS ETABLISSEMENT (VADUZ)

(Sgd) Ivo Beck''

In his written submissions to me Mr. Clyne said (inter alia):

``3. I concede that in one respect I have changed my approach fundamentally, but on the above authorities I am quite entitled to do so.

4. The change of approach is that instead of looking only at the 1976 document, and treating the 1973 document as relevant only in terms of whether or not it authorised me to sign the 1976 document on behalf of Warlock, I am now asking the Court to say that the basic document was the document of 29/11/73; that even without the aid of the document of 1/7/76 this created a principal-and-agent relationship between me and Warlock, and led to the result that the moneys I received belonged to my principal (Warlock).

5. What the document of 1/7/76 did was to confirm, implement, supplement and complement the document of 29/11/73; spell out what activities were to be agency activities, and what geographic areas of activity were involved; confirm that those activities, and activities in those geographic areas, were agency activities so that the resulting fees and royalties belonged to the principal (Warlock); confirm that I was entitled to pay my expenses out of those moneys; and add a sole agency which certainly had not been part of our relationship before.

6. The sole agency was the only obligation cast on Warlock by the 1976 agreement; and even if the 1976 agreement was void for some reason, this would invalidate only the sole agency, and would not alter the principal-and-agent relationship which that agreement confirmed; nor could this aspect alter the ownership of the relevant receipts if these in fact belonged to the principal.

ATC 4515

7. The Court is invited to draw the conclusion that probably since 29/11/73, and certainly since 1/7/76, my receipts as a tax and finance consultant, and as a writer, belonged to Warlock and not to me.''

However, in the course of argument, it appeared that it might well be said that the mere existence of a power, without any evidence that it had been exercised or that the appellant had purported to exercise it might be fatal to this ``fundamentally changed approach'' and hence, during oral submissions, Mr. Clyne receded somewhat from his submission that the power of attorney was ``the basic document''.

It was not disputed that Warlock was properly formed in accordance with the laws and usages of the Principality of Liechtenstein and that it constituted a separate juridical entity. What was submitted by the respondent was that the appellant never intended that the Warlock agreement should be a legally binding agreement and give rise to legal rights and obligations and that the transaction was a sham, the gross income in all relevant years being in fact derived by the appellant himself and for his own benefit. Alternatively, it was submitted that Warlock was itself a mere cloak or sham for masking the effective carrying on of business by the appellant for his own benefit. It was further argued that the agreement was never legally effective because the appellant was never duly authorised to execute it in a way binding on Warlock; and finally, the Commissioner argued that sec. 260 operated to treat it as void as between him and the appellant.

The appellant, who argued his own case, submitted that he had established that the relationship of principal and agent did exist between Warlock and himself, and that the income during the years in question had been derived by Warlock, albeit through his agency. This followed, he said, from the power of attorney of 29 November 1973 and the agreement of 1 July 1976 which were regular on their face and deliberately entered into with intention that they should take effect. In these circumstances, he submitted, the respondent must show positive reasons why they should be disregarded and treated as a sham and must demonstrate why the conclusion should be drawn that at the time when the documents were entered into the parties did not intend them to have legal effect. He claimed that although the ``parties'' here were both in reality himself, the intention was that the documents should take effect according to their terms and he observed that it was not suggested by the respondent that the power of attorney of 1973 was a sham.

A transaction is a sham if it is intended to be a mere facade behind which activities might be carried on which were not to be merely directed to the stated purposes but to other ends. In
Scott v. F.C. of T. (No. 2) (1966) 40 A.L.J.R. 265 at p. 279 Windeyer J. identified the question to be asked in this way:

``It was urged for the appellant Associated Provident Funds that it is a real company and that the Deed was really executed by it; and that, it was said, is the end of the question. But it is not. A disguise is a real thing; it may be an elaborate and carefully prepared thing; but it is nevertheless a disguise. The difficult and debatable and philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction: see the cases referred to by Jordan C.J. in
Perpetual Trustee Co. v. Bligh (1940) 41 S.R. 33 at p. 39 and
Hawke v. Edwards (1947) 48 S.R. 21 at p. 23 and
Collis v. Magroarty and O'Sullivan (1913) S.R. Qd. 25, affirmed 15 C.L.R. 692.''

See also
Snook v. London and West Riding Investments Ltd. (1967) 2 Q.B. 768 at p. 802 and the other cases collected by Hunt J. in
Coppleson v. F.C. of T. 81 ATC 4019 at p. 4022 (his Honour's decision in this respect not being affected by the decision of the Federal Court upon appeal - 81 ATC 4550).


Albion Hotel Pty. Ltd. v. F.C. of T. (1964-1965) 115 C.L.R. 78 was a case in which Windeyer J. disregarded, at least in

ATC 4516

part, the terms of a written document between a company and its own subsidiary, and held that it did not record an agreement that the parties to it really intended should govern them. The case does not lay down any new principles but is an example of circumstances in which for reasons set out in the report, and which embrace the character of the documents themselves, the nature of the transactions entered into, the position of the parties who entered into them, the absence of entries in books and other circumstances, a Court might hold that a transaction evidenced by legal documents was nonetheless a sham. Mr. Clyne argued, both in his written submissions and orally, that the principal distinction between the Albion case and the present was that in the former all the matters, acts and omissions relied upon in support of the conclusion that the document was a sham were contemporaneous or substantially contemporaneous with the purported execution of the agreement for the payment of interest, whereas in the present case, so he submitted, all the facts, acts and omissions relied upon by the respondent were subsequent in time to the execution of documents which the parties thereto (in this case the appellant himself) intended should have legal effect in accordance with their terms. The appellant's written submissions concerning the distinction between the present appeal and the Albion case are contained on pp. 7-10 inclusive of such submissions. I have considered them all and I need not repeat them or deal with them because, as I have said, my view is that the Albion case does not lay down any new principles. In particular it does not deny to a tribunal, whether Board or Court, the right to look at events subsequent to the execution of written documents in an appropriate case for the purpose of seeing whether or not those documents were intended at the time of their execution to operate according to their terms or to have any legal effect. But because of the submissions which Mr. Clyne has made to the effect that such subsequent facts, acts or omissions cannot be taken into account, and because the Members of the Board considered, and counsel for the respondent in the present appeal has submitted, that subsequent matters play a role of considerable importance in determining whether or not the 1976 agreement was a sham, it is necessary to give some consideration to that issue.

It is well settled that it is not legitimate to use as an aid to the construction of a contract anything which the parties to it said or did after it was made -
James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd. (1970) A.C. 583;
L. Schuler A.G. v. Wickman Machine Tool Sales Ltd. (1974) A.C. 235. Some possible exceptions were referred to by Gibbs J. (as the Chief Justice then was) in
The Administration of the Territory of Papua New Guinea & Anor. v. Daera Guba (1972-1973) 130 C.L.R. 353 at p. 446. See also
Australian Mutual Provident Society v. Allan & Anor. (1978) 52 A.L.J.R. 407 and
Commr. of Pay-roll Tax (Vic.) v. Mary Kay Cosmetics Pty. Ltd. 82 ATC 4444; (1982) V.R. 871. But the present case does not involve any problems of construction. I was not referred to any decision, nor am I aware of any, where it was said that a Court may not have regard to subsequent acts of parties to an agreement for the purpose of ascertaining whether or not that agreement was a sham. Indeed I know of no legal principle which would support such a proposition, and logic certainly does not support it.

In answering the question whether the parties who entered into an ostensible transaction meant it to be in truth their transaction, their subsequent conduct, in my view, is a highly relevant consideration. Indeed, it may be the only material which throws any light upon the question of their intention as at the date of the signing of the agreement. In the Albion Hotel case, Windeyer J., in determining whether an agreement executed in 1956 but bearing date March 1954 was a sham, took into account, in arriving at his conclusion that the document was merely colourable and never intended by the parties to be operative according to its tenor, the terms of the balance sheet of the appellant dated 30 June 1962 as well as entries in and omissions from books of account in respect of the period after the date of the document. Other matters arising after 1956 (e.g. the terms of income tax returns) were also taken into account.

In
K. Porter & Co. Pty. Ltd. v. F.C. of T. 74 ATC 4093; (1974) 1 N.S.W.L.R. 536

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Mahoney J., in dealing with the question whether persons had entered into ``a contract, agreement or arrangement'' of the kind referred to in sec. 80B(5)(b) and (c) of the Income Tax Assessment Act 1936, after referring to the general rule that subsequent acts of the parties to a written contract may not in general be considered in aid of its construction, added (at ATC p. 4102; N.S.W.L.R. p. 547):

``In my opinion that principle is not applicable in the case of arrangements of the kind here in question. The fact that parties subsequently acted in a particular way may, in an appropriate case, be evidence from which, in all the circumstances, it can be inferred that they earlier made an arrangement of a particular kind.''

So also here, where the question is that which I have indicated, I am of the opinion that the acts and omissions of the parties do afford evidence, and perhaps the best evidence, of what their intentions were at the date when the ostensible transaction was entered into and whether they meant it to be and did ``in fact use it as'' merely a disguise or a sham. It was not without relevance to observe that in the passage from Scott's case which I have earlier set out, Windeyer J. expressly used the words which I have quoted and which involve an examination of the use in fact made or not made of ``the ostensible transaction''.

In the present case I have come to the conclusion that the document of 1 July 1976 was a sham and that this is plainly established by the subsequent acts and omissions of the appellant who entirely ignored any legal obligations imposed upon him under the agreement and acted on every occasion as though it simply did not exist. He himself conceded that he did act inconsistently with it in some cases but denied that this provided any ground for concluding that it was a sham. But in my opinion there is probably no better means of testing whether or not parties who enter into an ostensible transaction mean it to be in truth their transaction or whether they do not than by observing what they did or did not do thereunder and whether, as in the present case, they completely ignored its existence in circumstances where they should have acted otherwise. By finding that the 1976 agreement was a sham I do not make any similar finding in relation to the power of attorney of 29 November 1973, and indeed it was not suggested by the Commissioner that that document was other than what it purported to be. However, there is no evidence that at any stage the appellant, in earning taxable income, did act in pursuance of the power of attorney, although presumably he relied upon it to enable him to sign the document of 1 July 1976 on behalf of Warlock (as principal) as well as on his own behalf as agent.

Matters which persuade me that the appellant never intended that the Warlock agreement should reflect a legally binding contract between himself and the anstalt include the following:

  • (a) failure of the appellant to keep any records of the transactions to which he claims he entered as agent for Warlock;
  • (b) the failure of Warlock to keep any records as required by the law of Liechtenstein;
  • (c) the failure of the appellant to communicate at all with Dr. Beck or to account to him for moneys alleged to have been received on behalf of Warlock or to pay him his fees;
  • (d) failure to make any remittances on account of tax due to the Liechtenstein authorities, a course which could only lead to the dissolution of the anstalt, as the appellant knew;
  • (e) failure on the part of the appellant to be aware of the anstalt being put into liquidation;
  • (f) failure to mention to any persons other than the respondent that he was acting as agent for Warlock;
  • (g) the failure to register the anstalt as a foreign company with the consequence that it had no official place of business in Australia and could not be served here with process (and it has no assets in this country);
  • (h) the failure of the appellant to seek the consent of the Reserve Bank to various transactions supposedly carried out on behalf of the anstalt, which of course is a

    ATC 4518

    non-resident, and also to the Warlock agreement itself;
  • (i) the purported assignment by the appellant of certain bank deposits to Patricia Peacock (see
    Clyne & Anor. v. D.F.C. of T. & Anor. 81 ATC 4429 where the facts are summarised) such assignment taking place on 4 September 1979 and being inconsistent with the claim of the appellant that such moneys in law were those of Warlock and not of the appellant himself. It should here be observed that in those proceedings the appellant did not raise as a defence the existence and effect of the agreement of July 1976 which may well have provided a complete answer to what was there asserted against him.
  • (j) the use of Warlock in the transaction concerning Henry Frederick Walsh which is summarised in para. 14 (with which I agree) of the reasons for judgment of Mr. Pape and which I need not repeat, this being inconsistent with what the appellant now asserts is the true meaning and effect of the agreement of July 1976;
  • (k) the use of the Warlock agreement in the transaction concerning Robert Alfred Gray, details of which are summarised in para. 15 of Mr. Pape's reasons (with which I agree);
  • (l) the omission of any reference to the agreement in bankruptcy proceedings concerning a scheme of arrangement and also in an affidavit sworn on 14 November 1977 and filed in bankruptcy proceedings before Deane J.

These various matters, most of which were relied upon also by the Members of the Board of Review, when considered together lead clearly to the conclusion that the agreement of 1 July 1976 was a sham. I have already said that in my opinion the appellant was not at any time acting under the earlier power of attorney, which has not been attacked, in deriving his taxable income.

Thus I am satisfied that the gross income in the three relevant years was in fact derived by the appellant on his own behalf. In view of my finding that the agreement in question was a sham it is not necessary for me to deal with any of the other matters argued. I would merely indicate that I see no reason to interfere with the penalty imposed under sec. 226. Thus the appeals will each be dismissed and the assessments confirmed. The appellant is to pay the costs of the respondent.


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