Robinson v. Federal Commissioner of Taxation.
Judges:Rogers J
Court:
Supreme Court of New South Wales
Rogers J.
The taxpayer brings this appeal against the Commissioner's disallowance of his claim for a deduction in the sum of $29,679 in the year of income ended 30 June 1982. The appellant claims that amount to have been his share of the loss said to have been incurred in the year of income by an alleged trading partnership called ``E.E. Gold Traders''.
The appellant claims that he became a partner in E.E. Gold Traders on 28 or 29 June 1982. The managing partner was Goldstocks Pty. Limited, subsequently Goldstocks Limited. (I will refer to them both as ``Goldstocks'' without distinguishing between them unless that is required in the particular context.) On 29 June 1982, on behalf of the partnership, Goldstocks, with the backing of almost wholly borrowed funds, entered into eight contracts for the purchase, by delivery on future dates, of 2,637 oz. of gold. First delivery of 627 oz. was due by 1 June 1983 and there were to be equal deliveries of 670 oz. each on 1 June of 1984, 1985 and 1986. The amount payable by Goldstocks pursuant to the contracts was $1,120,000. That is the sum claimed by the partnership as a loss or outgoing in the year of income ended 30 June 1982, of which the appellant's share is the $29,679 in issue.
Members of the claimed partnership were assembled by accountants then practising under the firm name of Rollo & Company. Quite apart from the legal problems which necessarily attend the claimed deduction, a great deal of difficulty during the hearing and in the disposition of the appeal has been occasioned by the inefficiency with which the work of structuring the enterprise was carried out. In colloquial terms, if the accountants have not succeeded in shooting themselves and their clients in the foot, it was only because the rifle jammed. Their lack of attention to detail enabled the Commissioner to advance arguments which created wholly unnecessary difficulties. A great deal of time was required to be spent on identifying the particular partnership set up by the accountants, the transactions of which, by concession, were not appropriately documented prior to 30 June 1982. In the result, I am satisfied that the defective execution of contracts for the supply of gold by Buddha Gold Mines N.L. (``Buddha''), referred to in correspondence and in conversations with partners of Pigott Stinson & Co., was not of contracts with E.E. Gold Traders but with another gold trading partnership promoted by the accountants. Subject to argument, in my view, the costs
ATC 4786
incurred in the exploration of that question should, in any event, most appropriately be paid by the appellant who would no doubt be able to recover them from the accountants. Again subject to argument, the same order should be made in relation to the time spent on seeking to determine what document, if any, was the true minute of the meeting claimed to have been held on 29 June 1982.The best way of dealing with the massive amount of evidence is to recite so much of the factual matrix as is relevant to the particular argument under consideration.
Was there a partnership?
The partnership purported to be created by a written agreement (Exhibit 1). The document bears date 28 June 1982 and purports to be between the persons and companies whose names appear in the First Schedule. The document has been signed on behalf of each of the alleged partners either by Frederick Arthur Rollo or Klaus Heinrich Selinger purporting to act under a power of attorney given by the intending partner in question. The document headed Power of Attorney executed by the appellant is Exhibit E. As I understand it, all the powers of attorney executed by the intending partners are in the same form, although I do not know whether they all suffer the defect of non-completion of schedules evidenced by Exhibit E. The document appoints Messrs Rollo and Selinger as ``the attorney'' of the donor. Further, it authorises the attorney to enter into any documents for the purpose of acquiring or carrying on any interest in a partnership pursuant to the terms of a partnership deed, the provisions of which are said to have been communicated to the donor, and to sign any document or notice:
``relating to a capital contribution referred to in the Third Schedule hereto to be made by the donor in respect of the partnership or relating to the initial loan referred to in the Fourth Schedule to be borrowed by the donor in respect of the partnership.''
The Third Schedule and the Fourth Schedule were each left blank in the document executed by the appellant. As I have said, the purported partnership agreement was signed by one only of the two persons nominated as the attorney on behalf of each of the persons intending to become a partner.
It is well established that an authority to two or more persons is presumed to be given to them jointly unless a contrary intention appears from the nature or terms of the authority or from the circumstances of the particular case (Bowstead on Agency, 15th ed., p. 49). The appellant put no submission that the authority was other than joint. I so conclude.
The Commissioner submitted that the partnership document was accordingly ineffective to create the proposed partnership and fulfil its designated purpose. As I understand his submissions, counsel for the appellant was prepared to accept that the document standing by itself ineffective to create the partnership relationship.
He submitted that none the less the appellant did become a partner in the proposed partnership. His argument was twofold. First, there was created, orally or by course of dealing, a valid and subsisting partnership on terms which are evidenced by the agreement. No formal document was required for the creation of a partnership. Second, in any event, the informal document has clearly been ratified by conduct and the ratification had retrospective effect.
It is undoubtedly correct that, as a general rule, a contract of partnership may be oral or even arise as a matter of inference from a course of dealing between the parties. As is said in Lindley on Partnership, 13th ed., p. 130:
``An agreement for a partnership may be evidenced by informal documents: as, for example, an unsigned memorandum or draft agreement acted on by the partners.''
The recitals in the written document called ``Partnership Agreement'' state that:
``the Partners have previously arranged and agreed to enter into partnership principally in a business of trading in gold bullion, gold coins and gold products generally AND WHEREAS the partners have agreed to execute this Agreement themselves or by their duly appointed Attorneys under power declaring the terms of their previous arrangement and the rights and duties of the Partners.''
In truth as the evidence shows (p. 20), the appellant not only did not make such an agreement with other partners, he did not even
ATC 4787
know personally the identity of all of the intending partners. Nor did he know the persons he was appointing as his attorneys. A Mr Davis, a Melbourne solicitor, called on the appellant together with the appellant's accountant, Mr Dollar. Mr Davis handed to the appellant a written document describing the proposal (Exhibit B). That merely stated that the form of the proposed structure would be a partnership.The Commissioner further pointed out that it was the appellant's belief that what he was entering into was a limited partnership permitted by the provisions of the Mercantile Act 1867 (Qld). There is no doubt that the appellant believed that he would be entering a limited partnership (pp. 13, 19 etc.). In fact, the document ultimately executed was not one providing for a limited partnership, a relationship in any event not known to New South Wales law, which was specifically designated as the governing law (cl. 22). Counsel for the Commissioner therefore submitted that all the appellant ever intended to enter into was a limited partnership and no limited partnership was ever created. Accordingly, he was never a member of the partnership, E.E. Gold Traders. In reply, the appellant draws attention to the statement in Higgins and Fletcher The Law of Partnership, 3rd ed., where the learned authors say (p. 43):
``Whether in the absence of an express agreement, partnership contract can be inferred from the conduct of the parties is purely a question of fact depending upon the joint and not the individual intention of the parties. That is to say, the intention is not to be determined by an examination of the private intentions of each party but is to be ascertained as a matter of the probable inference to be drawn from their conduct and actions, throughout the whole course of their dealings with each other.''
It was submitted that, so looked at, it should be held that there was brought into existence a partnership, albeit not a limited one, in which the appellant was a member. He contributed approximately $1,200 by way of capital, as provided for by the partnership agreement, as ``consideration to join the partnership''. The sum of $5,100 shown against his name as ``loan'' was borrowed on his behalf from Transia Corporation Limited (``Transia'') as part of the $158,154 borrowed by the various partners through the agency of Goldstocks. Other ``partners'' made similar contributions and arrangements. The moneys received from the intending partners and borrowed from Transia Corporation Pty. Limited (``Transia'') were deposited to a partnership management account (p. 40; Exhibit 12). The appellant signed the power of attorney authorising Messrs Rollo and Selinger to execute the partnership deed on his behalf. He received a document purporting to be the partnership document and purporting to be signed on his behalf and accepted it (pp. 12, 29). The partnership accounts were accepted by the appellant and he put in his income tax return on the basis that he was a member of the partnership. I infer that the same course was followed by the other ``partners''. Goldstocks accounted for the activities it engaged upon on the basis that the appellant and the other were partners. In all these circumstances, in my view, a partnership by conduct should be inferred.
Alternatively, I am satisfied that the appellant ratified the action of Mr Rollo in executing the partnership deed on his behalf. Once again, ratification may be express or implied. It must be evidenced by clear adoptive acts or by acquiescence equivalent thereto. In my view, all the matters I have earlier referred to as evidencing the existence of a partnership by conduct constitute clear ratification by acquiescence.
Accordingly, on either or both of the foregoing bases I conclude that the appellant was, at the relevant time, a member of the E.E. Gold Traders partnership.
Sham
Due, no doubt, to my own deficiencies I have been unable to appreciate the way this proposition has been advanced by counsel for the Commissioner. He said, ``What we are putting in this case is that there was an indifference as to whether or not there were the documents in existence that were legally binding on the parties''. I am afraid that proposition bears no relationship to the concept of sham as I understand it.
In the present case, there was no sham in the sense stated by Diplock L.J. in
Snook v. London and West Riding Investments Limited (1967) 2 Q.B. 786 at p. 802:
``acts done or documents executed by the parties to the sham which are intended by
ATC 4788
them to give to third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create... For acts or documents to be a sham... all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.''
Here the appellant, Mr Rollo, Dr Corbett and Mr Taylor all swore that the parties intended to be bound by the documents. I accept them on this point. There was no sham.
Fiscal nullity
This was put merely as a formal submission and I merely note it. A decision binding on me (
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718) precludes any possibility of my giving effect to the submission.
Does sec. 51 apply to the payment of $1,120,000?
The appellant relies on both limbs of the section. In turn the Commissioner denies that:
- 1. the partnership expended the $1,120,000 in gaining or producing assessable income; and
- 2. the partnership necessarily incurred the expense in carrying on a business for such purpose.
Alternatively, it was contended by the Commissioner that the expenditure was of a capital nature.
The submissions make it necessary to consider in some detail what the promoters of the partnership were about.
Mr Rollo said in his affidavit that Goldstocks Pty. Limited was incorporated on 16 February 1981. (In oral evidence he said ``beginning of 1982'' (p. 34).) He had been interested in the gold market since 1980. He said (p. 32) that he developed and refined the concepts which informed the gold trading partnerships, including E.E. Gold Traders, over a period of 18 months.
In May 1982, Goldstocks commenced to trade on the spot bullion market through the International Division of Hill Samuel Australia Limited and continues to do so to the present. On 10 May 1982 discussions were held with the chairman of Buddha who indicated the company's interest in the long term supply of gold to Goldstocks. Later in May, Transia, a merchant bank with a line of credit from a German Bank, indicated its interest in financing the acquisition of gold over a period of years where the supplying mines were associated with Dr John Corbett. At the end of May the structures and arrangements for trading proposed by Goldstocks were approved by senior counsel. Thereupon applications for participation were called for and accepted from individuals and companies. The form of participation proposed was in unlimited partnerships of gold traders. Each of the partnerships was to commence trading on the bullion gold market and enter into forward purchase contracts with one or more gold mining entities.
The proposal by Messrs Rollo and Selinger to gold miners is set out in a document intituled ``Memorandum Outlining Gold Miner's Position'' (Exhibit 14). It is desirable that I set out in full the provisions of this document:
``1. The miner will enter into four (4) separate contracts with each partnership for the supply of gold in the form agreed, at dates agreed.
2. (a) The contract for the first year delivery will provide for a contract price of gold at a negotiated premium over the spot price on the day prior to the execution of the contract.
(b) This contract will provide for 75% of the agreed consideration to be lodged interest free with a finance company nominated by Goldstocks Pty. Ltd., as a deposit (or stakeholding).
(c) The deposit in (b) can be drawn down on a pro-rata basis as deliveries of physical gold are made in accordance with the contract.
3. (a) The contracts for the second to fourth year deliveries will provide for a contract price of gold at an agreed premium over the spot price on the day prior to the execution of the contract.
(b) These contracts will provide for 100% of the agreed consideration to be lodged interest free with a finance company associated with Goldstocks Pty. Ltd. The
ATC 4789
prima facie interest rate will be 9½% flat, as a deposit or stakeholding.(c) The deposit in (b) can be drawn down at the time the appropriate delivery of physical gold is made in accordance with the contract.
(d) The deposits (or loan) made to the finance company associated with Goldstocks Pty. Ltd. may alternatively be repaid (as to both capital and interest) by the delivery of finite amounts of gold.
4. Technically, the goldminer will receive the consideration in respect of the four (4) delivery contracts prior to 30 June 1982. Those amounts will constitute exempt income for tax purposes (copy of Senior Counsel's opinion available). (Emphasis added.)
5. In conjunction with the contracts for the second to fourth year deliveries, the miner will be granted an option to repurchase the gold deliverable, on the following terms:
(a) for a consideration being the greater of 105% of the contract price, or the previous day spot price less 30%, with an overriding maximum consideration equivalent to 130% of the contract price;
(b) in addition, the miner will cause the interest payable by the finance company associated with Goldstocks Pty. Ltd. to be rebated for the relevant year.
6. Summary of salient points for discussion -
(i) Under these proposals, before the first year, the miner receives a cash premium in relation to the gold to be physically delivered during the first year of operation.
(ii) In addition to the premium, the miner also has the use of an effective cash advance of in excess of 11% (of the spot price) in relation to the gold to be physically delivered during the first year of operation.
(iii) Under these proposals, the miner does not need to compensate any other parties. All fees to the partners are charged as a separate exercise (i.e. procuration fees and retainer).
(iv) In the example partnership shown on the representative diagram, the miner would receive $1,000,000 cash, to be disbursed as follows:
Cash received $1,000,000 less: Stakeholding Deposit 750,000 Cash available to miner $250,000* * Made up of: Premium $150,000 Advance 100,000 $250,000(v) The first year contract will provide for delivery of the gold at the miner's convenience between say 1 July 1982 and 31 March 1983.
(vi) As deliveries are made, the miner is entitled to draw down from the stakeholding on a pro-rata basis.
(vii) The mechanisms built into the Years 2-4 arrangements are such as to leave the miner virtually untouched, until there is a considerable increase in the market price of gold as at the relevant delivery dates.
(viii) In the event of a considerable increase in the price of gold, it would be open to the miner (in Years 2-4) to exercise his option to repurchase the gold deliverable in those years. In that event, he would be required to pay a premium price, and cause his finance entity to rebate the interest otherwise due to it.
(ix) In practice, it is unlikely that the miner will need to exercise this option unless the market price exceeds the contract price by a considerable amount, because the partnership would still need to pass the gold through the loan chain back to the miner's finance entity (because of the cash interest that would otherwise be payable).
(x) The contracts for Years 2-4 will provide for deliveries to be made as at specific dates (e.g. 1st June each year), which coincides with the repayment dates of the loans from Finance Co. 2.
(xi) In the event that the gold price does not reach a price considerably higher than the contract price in Years 2-4, and the partnership elects to repay Finance Co. 2 in gold, the miner's finance entity may have a tax deductible `loss' created for later use (without any real loss being incurred).
NOTE; This is a discussion Memorandum only. E&OE Sydney 1/6/82.''
ATC 4790
The memorandum describing the proposal to prospective partners (Exhibit B) stated that the proposed partnership would purchase gold at a premium. Delivery would be deferred over four years. It went on:
``Attractive rates of return may be anticipated on a rising gold market. Many investment advisers are of the opinion that gold will rise dramatically in the future (refer to the `Elliott Wave Theory', and other analysts), particularly in the light of the current world political and economic climate.
However, commercial risks do exist. These risks include particularly, the possibility of downward variations in the market prices of gold. Summary charts illustrating the estimated profits (or losses) which could be expected at various price levels for gold, are attached, together with an outline of the relevant assumptions made for the calculations.''
The calculation assumptions showed the premium for the first year was likely to be approximately 17% over the prevailing market price and for years two to four it was to be market price plus 47%.
The formalities of Goldstocks entering into partnerships to be established, designated by letters ranging from A.A. Gold Traders to G.G. Gold Traders, were the subject of resolutions at a meeting of directors of Goldstocks held on 15 June 1982 (Exhibit E). On 29 June 1982, Goldstocks formally became Managing Partner of E.E. Gold Traders. On that day it affixed its seal to four contracts with Buddha (Exhibits T1-T4) for the supply to E.E. Gold Traders of 527 oz. of gold deliverable as to 125 oz. between 1 July 1982 and 1 June 1983 and 134 oz. each by 1 June 1984, 1985 and 1986. Four other contracts (Exhibits AA1-AA4) of the same date were entered into with Zieta No. 103 Pty. Limited, later known as Corgold Pty. Limited (``Corgold''), to supply 2,110 oz. of gold at the same time as Buddha, the first parcel to be delivered of 502 oz. and 536 oz. each subsequent year. Each contract, except the two calling for delivery prior to July 1983, was matched with a parallel option to the vendor to repurchase (Exhibits O and Q). Four options were granted by Buddha (Exhibit P) and three by Corgold (Exhibit R) in favour of Goldstocks, on behalf of E.E. Gold Traders, in respect of relatively minor amounts of gold to be supplied at the same time as the gold under the other contracts. The agreements with Buddha were executed on behalf of that company in the offices of Goldstocks (p. 43). Mr Rollo witnessed the signatures of Mr and Mrs Taylor who signed on behalf of Buddha. The documents executed by Corgold were returned by Dr Corbett on 29 June.
It is appropriate to look now in a little more detail at the provisions of the agreements for the purchase of the gold (Exhibits T1-T4 and AA1-AA4). They are all in the same typewritten form and even the schedules which contain the particular information relating to the contract in question are in much the same form. It is sufficient if I refer to the provisions of Exhibit T1. By cl. 1(a) the vendor agrees to sell and the purchaser agrees to purchase gold, the transaction to take effect on and from the ``settlement date''. In each contract, the settlement date is specified as 29 June 1982. The delivery date is specified in the Sixth Schedule in each contract and, as I have already mentioned, is for dates in the future. Delivery of the gold could be effected in one of the specified ways or in a combination of the specified ways. There could be delivery of actual gold in bar or ingot form, delivery to a mint or gold refinery in Australia of sufficient quantities of gold, gold dust or of concentrated gold for refining, or delivery of a gold certificate in the purchaser's name issued by the Perth Mint or by Hill Samuel Australia Limited. Pursuant to cl. 3, pending delivery, it is the responsibility of the vendor ``to secure, insure and otherwise be solely accountable for the gold''. On delivery that becomes the responsibility of the purchaser. Clause 4 requires that, at the settlement date, a bank cheque or other negotiable instrument payable to the vendor representing the full consideration should be handed by the purchaser to the vendor. The vendor is to issue the purchaser with a gold delivery certificate in respect of the gold the subject of the agreement. Clause 5 is in the following terms:
``Pending delivery of the gold in accordance with the provisions of cl. 2 hereof, the vendor agrees and undertakes to place an amount equal to the sum specified and set out in the Seventh Schedule hereto on deposit with an entity nominated by the purchaser to be held as a stakeholding.''
ATC 4791
In respect of each of the contracts calling for delivery between 1 July 1982 and 1 June 1983, the Seventh Schedule specified 75% of the purchase price to be deposited. In respect of the other contracts calling for later delivery, 100% of the money was to be lodged on deposit. The vendor was entitled to draw against the deposit contemporaneously with the delivery to the purchaser of gold in accordance with the agreement.
On 29 June 1982, Lava Finance Pty. Limited (``Lava''), a Rollo/Selinger entity, applied (Exhibit M) to Zieta No. 79 Pty. Limited (``Zieta'') for a loan of $716,800 repayable with interest on 1 June 1984, 1985 and 1986 by equal instalments of $329,728 or by handing over 536 oz. of gold in each of those years. Lava signed by Mr Rollo. Zieta was associated with Dr Corbett and Corgold. By another application of the same date (Exhibit N), Lava applied to Bulbo Pty. Limited for a loan in the sum of $179,200 to be repaid at the same time as the Zieta loan in equal sums of $82,432 or 134 oz. of gold. Bulbo was associated with the Taylor family and Buddha. Each of the two applications for loan required that the borrower would on-lend the moneys in question to Goldstocks.
That on-lending was effected by a loan agreement (Exhibit H), again bearing date 29 June 1982, signed by Mr Selinger on behalf of Goldstocks, which was entering into the agreement on behalf of E.E. Gold Traders. That agreement with Lava provided for the latter to advance to the partnership the sum of $896,000, being the total of the moneys borrowed from Zieta and Bulbo. The loan was repayable by three equal instalments on 1 June 1984, 1985 and 1986. Interest at the rate of 10% was likewise to be paid by three equal instalments on the dates mentioned. The loan was to be available only for the purpose of purchasing gold. The borrower was to have the option of repaying instalments of capital and interest either in cash or in gold or in gold delivery certificates. A cheque for $896,000 was received from Lava and banked in the partnership bank account. Goldstocks then drew a cheque for the identical amount in favour of Corgold. Corgold in turn paid $134,400 to Transia to hold as a stakeholding deposit. Transia made available $158.154 as loans to the individual partners which, together with the capital contributed by the partners of $44,800, and partners' loans provided the money needed to pay the stakeholders, Partnership Pacific Limited and Hill Samuel Australia Limited.
In the result, in substance, the purchases of gold were dependent on and effected largely by finance made available by the gold miners and their associates. Furthermore, the money so lent, with the exception of the moneys paid to Transia, Partnership Pacific Limited and Hill Samuel Australia Limited, was returned to the miners. Even more importantly, it is necessary to analyse the financial implications of the transactions. The prices payable and the relevant particulars of the eight principal contracts were as follows:
``A Budda Gold Mines N.L.
Contract Quantity Price Delivery Price
date per ounce
$ $
Ex T(1) 125 ozs 44,800 01.07.82 --
01.06.83 358.40
Ex T(2) 134 ozs 59,733 01.06.84
Ex T(3) 134 ozs 59,733 01.06.85 445.77
Ex T(4) 134 ozs 59,733 01.06.86
B Zieta No. 103 Pty. Ltd.
Ex AA(1) 502 ozs 179,200 01.07.82 --
01.06.83 356.97
Ex AA(2) 536 ozs 238,933 01.06.84
Ex AA(3) 536 ozs 238,933 01.06.85 445.77
Ex AA(4) 536 ozs 238,933 01.06.86''
ATC 4792
However, the price payable in respect of gold deliverable in the second and subsequent years was, of course, only part of the cost to the partnership. The interest worked out at a further $178.31 per oz. It was common ground between the parties that, unless in years two to four the price of gold was in excess of $624.08 per oz., it would be to the advantage of the partnership to discharge its obligations by passing on the gold certificates (pp. 59-60). Accordingly, for the partnership just to break even in those years, it required a 100% increase on the spot price of $304.50. Absent tax advantages, was this a transaction for the purpose of gaining assessable income?
Mr Rollo said in chief (p. 91) that, at the time of negotiations, ``we had done some rough projections'' which suggested that ``on the current rate of increase, we could be looking at a price in excess of $500, $600 within the ensuing twelve to eighteen months term''. Not until re-examination was any later period addressed. The following evidence was then given (pp. 209-210):
``Q. Mr Rollo, you gave evidence in chief in respect of a prognostication that you had at the time the contracts were negotiated that the price of gold would go to $500 or $600 within twelve to eighteen months? A. Yes.
Q. Did you have any prognostication beyond twelve to eighteen months to which the price of gold might go? A. Well, we had some projections and had sought some advice from various dealers and we thought it may go as high as $800. We didn't have any great feeling about it.
Q. Had the price of gold reached $800 at any time? A. It has reached $800 on previous occasions, in U.S. terms, U.S. dollars.
Q. $US800? A. Yes.
Q. It would be something a little lower than $A800 at that time? A. Yes at that time it would have been less.''
(Emphasis added.)
Thus it can be seen how tenuous was any expectation of the obtaining of assessable income in years two to four. As I have said, to make any assessable income required a price of more than $624. Where is the evidence to be found that anyone entered into the contracts in question for the purpose of realising a profit? I have seen no projections unless they be the hypothetical calculations in Exhibit B. The answer ``we didn't have any great feeling'' to me conveys the impression of no relevant expectation or purpose. Furthermore, as the evidence stands, the partners did not even have the projections and advice Mr Rollo spoke of. The evidence shows only the memorandum (Exhibit B) referring to the Elliott Wave Theory. Certainly, the appellant did not suggest that he had any basis on which to expect receipt of assessable income. In August 1982, after the contracts were entered into, Goldstocks sent a memorandum to the partners (Exhibit C). It states the position in guarded terms:
``Having regard to the present uncertain world financial, political, and social climate, many investment advisers are of the opinion that gold is destined to rise dramatically against paper currencies in the future. (Some of these views are summarised in Appendix 1 of this report.)''
Appendix 1 hardly supports, even as a speculation, expectation of a doubling in the price of gold over the ensuing two to four year period. Appendix 3/2 contains the following note, ``The profit potential is subject to a number of variables which are very difficult to graph''. If I may say so, the variables made the venture so far in the future a gamble of high order. The only aspect, of course, that made the gamble acceptable was the forecast tax saving.
As well as entering into the contracts, in the remaining days of the financial year the partnership made purchases of physical gold in bars at a cost of $92,118, sold $61,606 worth and had on hand $30,551 worth. It made a gross profit of $26.
These transactions were conceded by Mr Rollo to have been unusual. On 30 June 1982, Goldstocks entered into a contract through Hill Samuel Australia Limited for the purchase of 98.968 oz. of gold at a price of $30,551. In the normal course of events, the delivery date should have been two days after the transaction date (p. 159). Mr Rollo was asked:
ATC 4793
``The reason why this particular transaction was abnormal was that you wanted to be able to say in the accounts of E.E. Goldtraders for the financial year ended 30 June 1982 that at midnight on that day it owned the gold the subject of this contract?''
He answered ``yes''. According to contract note 8523A (Exhibit 16) also on 30 June 200 oz. of gold were acquired for $US314.70 per oz. and sold on the same day for $US314.90 per oz. Goldstocks made a profit of $US40 which, at that wonderful point in time for the Australian dollar, was worth $A39.13. According to contract note A8564 (Exhibit 16) on 1 July the two gold bars acquired on 30 June were disposed of. In the result there was a loss on those two bars of $139. At all this time, the only available funds which E.E. Gold Traders had to carry out the operations totalled $11,000 (p. 163). There was no money available to pay the balance of the purchase price owed to Hill Samuel Australia Limited for the two gold bars and there was no money to pay the interest. At p. 169 the following evidence was given:
``Q. As far as E.E. was concerned, it does not matter how much in dollar terms ran through the accounts which related to E.E. either directly or indirectly, E.E. was never exposed for more than two bars of 100 ounces each? A. It would be something like that at any one time.
Q. And the exposure was usually for less than a day and never more than four working days? A. Very seldom more than four working days.''
In the result, in my opinion, this aspect of the partnership activity reflected the same situation as that which confronted Tadgell J. in
McLean v. F.C. of T. 86 ATC 4288. His Honour said (at p. 4303):
``I infer that the stock exchange transactions engaged in by the partnership from 24 to 30 June 1977 (presumably nominally by Mr Davidson and with or without the assistance of Mr Colquhoun) were designed to give verisimilitude to an otherwise unconvincing attempt to display share trading activity.''
I understand that any business has to start at some point. Further, the transactions may well be constrained by availability of finance. Taking all that into account, I have no doubt that the transaction in physical gold prior to the end of the financial year were not for the purpose of bona fide trading but to confer the spurious garments of a trader on the skeleton of a tax minimisation venture.
Buddha failed to deliver gold on 1 June 1983 as required by its agreement. Goldstocks issued proceedings in the Supreme Court. Buddha thereafter caused the 125 oz. of gold to be made available to Goldstocks by Hill Samuel Australia Limited on 24 June 1983.
Corgold also failed to deliver gold on 1 June 1983 in accordance with the terms of its agreement. However, on 30 June 1983, it caused 561 oz. of gold to be made available to Goldstocks by Citizens Gold Bullion Exchange Pty. Limited.
Included in the 561 oz. was an additional 59 oz., the subject of the exercise by Goldstocks of an option to purchase further gold and gold to make up for the late delivery under the agreement. The price payable by the partnership was $357.26 whereas the price of gold stood at $497.75. It must be said at once that, certainly at this point, the expectations of Mr Rollo were most handsomely realised.
The appellant submits that the contracts with Buddha and Corgold were commercial, trading transactions entered into in the course of a business of trading in gold carried on by the partnership for the purpose of gaining assessable income. It is submitted that the transactions provided protection for both miners on the one hand and partners on the other. Whilst the miners were paid a fixed rate for the four years' production of gold they were protected against a price rise by an option to repurchase from the partnership. Furthermore, they received a 17% premium over the price of gold as at the date of the agreement in respect of gold to be delivered during the first year and a 46% premium for the gold to be delivered in subsequent years. In turn, the partners were protected in that, if the price of gold was low at a time when an instalment of pricipal and interest fell due, under the agreements (Exhibits M and N) the obligation could be discharged by the delivery of a fixed quantity of gold. On the other if the price of gold rose and the miners exercised their option to repurchase, the price formula for the repurchase guaranteed the partnership a minimum return of 5% on the original purchase price for the gold together
ATC 4794
with a rebate of interest payable under the loan agreement providing for a maximum return to the partners of 30% on the original purchase price plus 5% on every incremental dollar thereafter together with an interest rebate.It seems to me that the question posed for decision is: did the partnership enter into the eight contracts for the purpose of producing assessable income, or for the purpose of obtaining a tax loss, or both? Mr Rollo, the moving spirit of the partnership, acknowledged, as indeed he had to, the importance of obtaining a tax advantage. However, counsel for the appellant submitted that a tax deferral was not the sole purpose of the transactions in question.
The requirement of sec. 51 of the Act for a connection between an item of expenditure on the one hand and the gaining of assessable income in the carrying on of the business on the other has been the subject of frequent judicial consideration. At present, the necessary degree of connection is commonly tested by application of the principles enunciated in the joint judgment in
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4559:
``The controlling factor is that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business being carried on for the purpose of earning assessable income.''
The application of the test has been the subject of recent exposition by the Full Court of the Federal Court in
F.C. of T. v. Gwynvill Properties Pty. Limited 86 ATC 4512. As was pointed out by Jackson J. (at p. 4525), the authorities recognise ``that there should be some objectively discernible relationship between the expenditure incurred and the carrying on of the business in question'' (emphasis added). Later in his judgment, his Honour pointed out that the Court was not required, indeed not entitled, to take into account that the same economic result might have been achieved for the taxpayer if a different procedure had been adopted. He then went on (at p. 4526):
``Having said that, however, there seems no reason why the economic results achieved by the transactions may not be examined in order to cast some light on whether the outgoings by way of interest were capable of being regarded as being desirable or appropriate from the point of view of the business ends of the respondent's business as a property owner, developer etc.''
In the present case, there is not the slightest doubt that the transaction was constructed so as to achieve the greatest possible tax advantage for members of the partnership. There is no doubt that essential elements of the transaction are wrapped in an air of complete artificiality. If the price of gold was to increase in the 12 to 18 months ensuing, as Mr Rollo thought possible, to $500 or $600, the partnership still could not make a profit in years two to four. The ``prognostication'' of an increase in price to a higher figure was not sought to be supported in any realistic fashion. As I have indicated, the shadowy $800 figure emerged only in re-examination. Was there in truth any expectation of a profit being earned on the gold contracts? On the evidence produced, I am not satisfied that any such expectation was entertained. In my view, the contracts were entered into simply and solely as a means of obtaining a tax advantage to the partners and commissions to the promoters. The most that could be said is that, if coincidentally the world economy threw up a high price of gold at precisely the right times, and a profit could be realised, that would be a most acceptable bonus.
In Gwynvill (supra), the majority concluded that the obtaining of a tax deduction was the only purpose of the taxpayer. On that basis the claim of the taxpayer was disallowed. Jackson J., a member of the majority, said (at p. 4527):
``the outgoings appear reasonably capable only of being seen as an attempt to obtain a large tax deduction for the borrower in the year ended 31 July 1978 at a net cost to the group of some $86,000 odd''
(Emphasis added.)
In my view, the facts here mandate the same conclusion. Even if the view should be taken that the contrived transactions with Hill Samuel in the dying days of the financial year were the beginning of a business of trading in gold, in my view the eight contracts in question were no part of that business.
In the light of this conclusion, it is unnecessary for me to examine the other
ATC 4795
submissions of the Commissioner. I note that the Commissioner reserved the opportunity to issue an amended assessment based on the provisions of Pt VIA should that ever become necessary.In the result, it is unnecessary for me to make any special order for costs but, should it become necessary, I grant liberty to apply in that regard on seven days' notice.
The appeal is dismissed. I order the appellant to pay the respondent's costs. Exhibits may be handed out on the expiration of 28 days unless, in the meantime, a notice of appeal is filed.
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