PM Roach SM
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
In this reference the applicant claims a tax deduction on the basis that he was, and is, a member of a partnership which in the year of income ended 30 June 1980 suffered a ``partnership loss'': defined by sec. 90 of the Income Tax Assessment Act 1936 (``the Act'') to mean ``the excess (if any) of the allowable deductions... over the assessable income of the partnership calculated as if the partnership were a taxpayer...''. He rests his claim on the basis that sec. 92(2) of the Act provides that his
ATC 109individual interest in the partnership loss incurred in the year of income shall be an allowable deduction.
2. His claim is that his interest in such a partnership loss amounted to $265,059 at 30 June 1980 and that if followed his investment of $80,000 [sic] in that partnership on 19 June 1980. It is asserted that between 19 and 30 June 1980 the partnership suffered a net loss in that it incurred losses and outgoings allowable as deductions pursuant to sec. 51(1) of the Act in the sum of $8,556,103 and, because it had no assessable income other than interest ($8,012), that the sum of $8,548,091 constitutes the ``partnership loss''. It is further said that the ``individual interest'' of the applicant in that partnership loss was 3.1008% of the total loss and, accordingly, that the deduction allowable to him was $265,059. If he is unsuccessful in these proceedings his taxable income for the year will amount to $331,204. If he is successful it will be $66,145.
3. The claim arises out of an intricate set of arrangements skilfully and carefully prepared whereby a ``limited partnership'' established under the Mercantile Law Act 1867 for the State of Queensland, became involved in the production of three films, using for the purpose the capital subscribed in the partnership and borrowed funds. Unlike some ``paper-schemes'', in this case at least the films were made and marketed.
4. At the outset, it is appropriate to identify many of the terms to be used throughout these reasons for decision.
- Applicant: The Applicant before this Tribunal in these proceedings and one of 241 Investors in the Partnership.
- Investors: 241 persons and companies who became ``Special Partners'' in the Partnership.
- General Partners: Two companies, each with a paid up capital of $2 and no other assets, which became ``General Partners'' in the Partnership.
- The Partnership: The limited partnership registered in Queensland pursuant to the provisions of the Mercantile Law Act 1867 of that State constituted between the General Partners (as general partners) and the Investors (as special partners).
- GP-1: The first of two General Partners and a company under the control of Financier.
- GP-2: The second of two General Partners and a company under the control of Financier.
- Financier: A financial entrepreneur who arranged the establishment of the Partnership and the funding of its undertakings.
- F-CO: A public company controlled by Financier.
- F-Group: All the related companies and subsidiaries of F-CO.
- F-Credits: A proprietary limited liability company controlled by Financier and a company within the F-Group.
- G-CO: A company within the F-Group.
- Consultant: An expert in film production who was adviser to Financier in relation to the film industry and a director with Financier of some companies.
- Accountant: An accountant at all material times in the employ of a firm (``the Firm''), accountants to the F-Group. Accountant worked from office accomodation provided by Financier within his own office complex. The Accountant was the person particularly responsible for all matters of accounting arising from the activities of the F-Group in relation to the ventures hereafter mentioned.
- Solicitor: A solicitor in private practice and in partnership whose firm was retained by Financier to act professionally but only in relation to the establishment of the projects in question.
- S-CO: A ``family company'' controlled by Solicitor which, after the establishment of the projects here in question, accepted a retainer to advise Financier generally in relation to legal aspects of the film industry.
- U-Owner: A company which contracted as the owner of copyright in relation to U-Film.
- U-Film: One of two films produced under the control of Producer A by one or more companies controlled through Producer A.
- U-Film One and U-Film Two: Reference to the two companies (U-Film One and U-Film
ATC 110Two) associated with Producer A in relation to the production (or proposed production) of U-Film.
- V-Owner: A company which contracted as the owner of copyright in relation to V-Film.
- V-Film: The second of two films produced under the control of Producer A by one or more companies controlled through Producer A.
- V-Film one; V-Film Two; and V-Film Three: References to the entities associated with Producer A in the production (or proposed production) of V-film.
- W-Owner: A company which contracted as the owner of copyright in relation to W-Film.
- W-Film: A film produced under the control of Producer B by one or more companies controlled through Producer B.
- W-Film One; and W-Film Two: Reference to two entities associated with Producer B in the production and distribution of W-Film.
- Producer A: The individual who, directly or indirectly, controlled the making of U-Film and V-Film.
- Producer B: The individual who, directly or indirectly, controlled the making of W-Film.
- Film-Maker: A company within the F-Group incorporated in New South Wales and controlled by Financier.
- Film-Maker Qld: A company within the F-Group incorporated in New South Wales and controlled by Financier which contracted with GP-1 to procure production of the three films.
5. In about March 1980, the Applicant realised that he stood in prospect of being assessed in due course as having derived a taxable income to 30 June 1980 in excess of $300,000. Having heard that substantial tax advantages might be had by persons who invested in the film industry, he consulted Financier. He obtained a brochure outlining in general terms a proposal for investment in the film industry by way of limited partnership. The Applicant consulted his accounting advisers who informed him that they were satisfied that the concept was well-presented and, subject to his assessment of the character of Financier, apparently sound. Being so satisfied as to the character of Financier, the Applicant decided to invest and did invest $80,000 on 19 June 1980. At the time of doing so, he expected to become entitled to a tax deduction for the year ended 30 June 1980 at the rate of $3.50 for each $1 invested. If that had been the only consequence of his investment, his outlay of $80,000 within 12 months would have saved him an amount of the order of $170,000 in income tax. His evidence was that, in addition to expecting such a tax saving, he hoped that in due course he might receive a further return from the project. I do not think that that is untrue, but in my view, that was more a hope than an expectation. It was not the reason for investing and the absence of any such prospect would not have deterred him from investing.
6. Consultant had been actively interested in film production for cinema and television throughout his career. In about 1978 he first met Financier when they came to be personally associated in a venture unrelated to matters under consideration before me. When, during 1978, Consultant became aware of investment opportunities in relation to a particular film, he recommended investment in that film as a possibility for consideration by Financier. Financier accepted the recommendation and that led to the incorporation of Film-Maker as the vehicle for investment by Financier and F-Group in the film industry. Consultant became a Director of Film-Maker with Financier. In their personal working relationship. Consultant concentrated on the evaluation of feasibility of producing the films and the superintendence of production and marketing: and Financier concentrated on the financial aspects of projects.
7. Financier and Consultant, having become associated in relation to the last-mentioned film, became interested in the possibility of further investment and profit-making opportunities. In 1980, among those well-informed, there was a reasonably well-founded expectation that the last-mentioned film would be artistically and commercially successful. It was to prove to be so. That prospect encouraged Financier and Consultant and by May 1980, Financier was marketing investment proposals to persons such
ATC 111as the Applicant although, in doing so, endeavouring to avoid being exposed as infringing the prospectus provisions of companies legislation in force at the time. Whether he was successful in that attempt is not relevant.
8. When Financier determined to enlarge his interest in the film industry he consulted Solicitor, a legal practitioner well experienced in the legal aspects of the structure and management of the film industry and of legal problems and relationships arising in consequence. Solicitor was accustomed to industry practices whereby films were produced on a ``project'' basis. As that goes far to explain what later happened, I shall now outline the concepts involved.
9. Commercially successful film production requires the bringing together of diverse talents. There are the artistic talents of writers, actors, musicians and other artists; the organisational talents of producers and directors; the marketing skills of distributors; and the financial resources and skills of financiers, and of others such as ``completion guarantors''. Completion guarantors are persons who, for a fee - commonly 6% - guarantee that a film underwritten will be completed within budget, thereby protecting investors from further commitment. Completion guarantors protect their own interests by covenants entitling them to take over control of production and to effect completion of the project. As a result it commonly happens that a person, such as Producer A, has control of or access to copyright in a script suited to film-making and, possibly, has some additional capacity to contribute towards its successful production in artistic terms, but lacks the financial resources and marketing skills necessary to achieve its production: a prerequisite to any prospect of commercial success. He needs the assistance of persons with access to moneys. Solicitor had the legal skills and experience to effect the marrying together of those diverse interests, if they could reach agreement upon a project to be undertaken and the moneys could be found which were necessary to bring a marketable film into existence and to later market it successfully.
10. So it was that, in the early part of 1980, would-be film producers were approaching Consultant seeking the support of Financier for the development of their concepts. Of all the submissions received and considered, only three of those recommended by Consultant to Financier were ultimately to proceed. They were U-Film and V-Film, both promoted by Producer A, and W-Film promoted by Producer B. In and about the same period, Financier was organising financial resources in order to fund such of the contemplated projects as would proceed. In time portion of those resources would come to be provided by the Applicant.
11. A technique for bringing together those production and financial interests was determined upon. It became the responsibility of Solicitor to establish documentation which would bring into play a set of legal relationships which would give effect to those interests. Investors would come into a partnership relationship with each other. As they would exceed 20 in number and desirably have limited liability, it was decided that the Investors should become Special Partners, pursuant to the terms of an agreement by way of limited partnership to be registered under the provisions of the Mercantile Law Act 1867 of Queensland. As registration of such a partnership was conditional upon at least one partner being a General Partner, GP-1 was incorporated to assume that role. Since the second of two of Her Majesty's Counsel who were consulted advised that it would be prudent to have two general partners, GP-2 was incorporated to become the second General Partner.
12. To by-pass the difficulties which would be involved in having a single partnership agreement to be executed by all persons intended to become bound as partners, particularly as they were to come from several States, the method proposed in order to bind the Investors to the terms of partnership was to have each apply for an interest in the partnership by a short form of written application, to be attended by the provision of funds and by a written authority conferring severally on Financier and Accountant the power to execute the partnership agreement on behalf of the principal. The funds so subscribed, to the extent to which they were subscribed by partners prior to 30 June 1980, were initially deposited to accounts opened in the name of the Partnership and conducted with the one bank in both Sydney and Brisbane. On
ATC 11224 June 1980 the funds so deposited to the Sydney account were transferred to the credit of the Brisbane account.
13. On 24 June 1980 Financier and Accountant travelled to Brisbane to effect completion of the partnership agreement and its registration. At an earlier date, Accountant had taken the precaution of conducting a ``trial run'': effecting registration of another set of limited partnership documents. That was done as a matter of prudence, there being so few limited partnerships registered under that legislation. On 24 June 1980, Financier and Accountant between them completed in all respects the terms of the limited partnership agreement and its registration was effected and recorded by the Deputy Registrar of Titles on the same day. They then returned to Sydney. I am satisfied that by the close of business that day the partnership capital of $2,580,000 had been fully subscribed, although not in all cases advanced by the partner to whose name the capital was credited. In some instances, at the direction of Financier, moneys were advanced to the partnership to the credit of particular Investors. In my view nothing turns on that. One of the Investors was F-CO which subscribed $200,000. All of the partnership capital having been so raised, it was now necessary to proceed to the next stage of the plan.
14. The next step involved setting in train in relation to each proposed film a complex of arrangements whereby, first, persons entitled to the copyright in relevant materials would authorise the making of the films; secondly, the Partnership would be retained to make the films and would in turn arrange for that work to be carried out by others; thirdly, agreements would be entered into to ensure a sufficient money flow to enable the foregoing objects to be achieved; and yet further agreements would be entered into by the owners of copyright in the film providing for the distribution and exhibition of the films in Australia and overseas. So far as the Partnership was concerned, the objective was to ensure that the agreements relevant to its interest were entered into no later than 30 June 1980 and that obligations pursuant to those agreements would be performed to an extent sufficient to ensure the availability of a deductible partnership loss to the Investors in the Partnership by 30 June 1980. It was intended that what was to be done should be sufficient for that purpose even though at that time no-one had a capacity to embark immediately upon the making of any of the films: something well known to the Partnership.
15. To that end Solicitor, where appropriate in conjunction with the solicitors representing parties dealing at arm's length with his clients (the U-, V- and W-Film Groups), prepared documents for execution. Although the objectives were the same in all cases, differing circumstances touching the different interests concerned in relation to each particular film occasioned some differences. One principle followed by Solicitor was that, to minimise any risk of exposing the Investors to unlimited liability, he was concerned to ensure that the Partnership only contracted in accordance with, and became exposed to liability pursuant to, the law of Queensland. His view was that that could be achieved even though contracts were executed outside Queensland provided that both parties were resident in Queensland: the limited partnership being ``resident'' in Queensland by reason of its registration in that State. Film-Maker Qld, the company which was to contract with the Partnership for the making of the films, was incorporated in Queensland for that reason. The result was that all appropriate agreements having been prepared, Solicitor, Accountant, Consultant and representatives of Producer A and Producer B travelled to Canberra in the Australian Capital Territory on Friday, 27 June 1980. There, Solicitor superintended the due execution and exchange (as appropriate), according to a predetermined program, of all relevant contracts, documents and cheques. Following the execution of those documents, Solicitor in each case reported in writing to his client. Those reports were tendered in evidence by the Commissioner. I shall set out in some detail what related to U-Film. What occurred in relation to the other films - principally evidenced by the V- and the W-Exhibits - was not materially different for present purposes and will be referred to in less detail.
16. The report of Solicitor relating to U-Film was Exhibit UA-11. That report identifies the means by which Solicitor sought to deal with the several problems of copyright; production contracts; distribution; and funding arrangements. First, he reported as to documents (not
ATC 113produced in evidence) directed to ensuring that there would be no problems as to copyright. Then he referred to a contract (not produced in evidence) providing for the production of U-Film for U-Owner by U-Film One (Exhibit UA-9). That agreement provided for the film to be made to specified standards; for copyright in the film to vest in U-Owner; for U-Owner to control marketing internationally but with U-Film One marketing the film in Australia and the Pacific on behalf of U-Owner. U-Film One was not to be paid for making the film as such. Instead it was to participate in the defined ``gross proceeds'' arising from marketing on the basis that:
``12.1 The gross proceeds shall as they become available be paid to (U-Owner) and applied by it as follows -
- (a) Firstly in payment of reasonable and proper expenses incurred with the prior consent of the (U-Film One) in relation to the marketing expenditure of the Film.
- (b) Secondly in payment to (U-Owner) of $US1,890,000.
- (c) Thirdly in payment to (U-Film One) of its Production Fees pursuant to Clause 9.1(a) hereof.
- (d) Fourthly in payment to (U-Film One) of Production Fees pursuant to Clause 9.1(b) hereof and as to the balance in payment to (U-Owner).''
Clause 9 provided:
``9.1 (U-Film One) shall be entitled to receive from (U-Owner)
- (a) a fee for making the Film equivalent to a sum representing the total cost of the production of the Film and after such fee is paid;
- (b) further fees for making the Film equivalent to 20.00 per centum of the gross proceeds after payments provided for in Clause 12.1 hereof;
all of which fees are due and payable in accordance with Clause 12.1 hereof and subject to that Clause.''
17. U-Film One then contracted with GP-1 acting on behalf of the Partnership (Exhibit U1). By that agreement the Partnership assumed an obligation that it would ``as soon as practicable proceed to make the film'' in accordance with ``the principal agreement'' - that is, Exhibit UA-9. As to fees, it was provided that the partnership would receive:
``amounts by instalments equivalent to all amounts receivable by (U-Film One), pursuant to Clause 9 of the principal agreement,''
but that that entitlement would
``not apply in respect of the first $2,000 received by (U-Film One) from (U-Owner) pursuant to Clause 9.1(a) of the principal agreement nor as from and after the date (the Partnership) has received from (U-Film One) fees equivalent to twice the total cost of the production of the film shall it apply in respect of amounts equivalent to 2½% of the moneys received by (U-Film One) from (U-Owner) pursuant to Clause 9.1(b) of the principal agreement.''
18. By the next agreement the Partnership contracted with Film-Maker Qld and U-Owner for the making of the film in accordance with the principal agreement for a fixed sum of $5,213,000 payable by the Partnership: ``all of which fees are payable upon the date of this agreement'' (Exhibit U6).
19. By a further agreement (Exhibit U8), Film-Maker Qld contracted with U-Film Two - a company controlled by Producer A - for the making of the film to the same standard for a fee of $5,000,000, as to which $70,000 was to be paid upon the execution of the agreement and the balance of $4,930,000 on 26 August 1980 or the date a completion guarantee would be provided, whichever should be later. The sum of $4,930,000 was to be paid to a special bank account where the moneys would be under the control of nominees of Film-Maker Qld and Producer A. Provision was also made that Film-Maker Qld could terminate the agreement at any time after 26 August 1980 if the promised completion guarantee (or acceptable substitute) had not been provided, or if the borrower had not repaid to Film-Maker Qld $3,580,000 due pursuant to a loan agreement yet to be mentioned.
20. As to funding of the project, the Partnership entered into two agreements with F-Credits (Exhibits U2 and U3) whereby it borrowed $3,110,000 and $470,000 respectively. In lieu of more conventional clauses providing for payment of interest, the
ATC 114return to F-Credits on the loan of $3,110,000 was principally to be regulated by the terms of cl. 3 which provided:
``It is hereby agreed that of the receipts the (Partnership) is to receive in respect of the licensing of the film -
- (a) (the Partnership) shall retain for its own use and benefit the first four hundred and seventy thousand dollars ($470,000) and subject thereto
- (b) (the Partnership) shall pay to the lender 45.80% of the moneys received by the borrower as and when the same are received until the lender has received repayment of the further sum of one million two hundred thousand dollars and subject thereto
- (c) (the Partnership) shall retain the next four million two hundred and sixty thousand dollars ($4,260,000) for its own use or benefit and subject thereto
- (d) (the Partnership) shall pay all further moneys to the lender until the lender has received repayment of the loan and interest at the relevant rate per annum calculated on daily rests on the amount of the loan from time to time unpaid from the date hereof until the loan is fully repaid provided that such interest shall not exceed the sum of four hundred and fifty thousand dollars ($450,000).''
21. In relation to the second loan of $470,000, cl. 3 provided:
``3. It is hereby agreed that of the receipts the borrower is to receive in respect of the licensing of the film the borrower shall pay to the lender all moneys received by the borrower as and when the same are received until the lender has received repayment of the loan.''
22. Both agreements went on to provide that the partnership charged in favour of F-Credits by way of security all moneys payable to the Partnership from the licensing of the film; and that the charges would be a first and second charge respectively. F-Credits in each instance covenanted that it would not have recourse against the Partnership:
``in respect of repayment of the loan (and that) the rights of the lender are restricted to being satisfied out of the property hereinbefore so charged''
23. Thereby the parties reflected their intent that the loans should be ``non-recourse'' loans in the sense that, in the manner of ``project funding'', F-Credits would have as its security the asset generated by the project and would have only that asset as a means of securing payment of the moneys due to it. From the point of view of the Investors, further assurance was to be had in the fact that it was intended that only the General Partners would be personally liable upon any debt. As the only asset held by the two General Partners was $2 each in paid up capital, it was important that the Investors as Special Partners would have no personal liability. The agreements for the production of the film, said to have been entered into in the interests of the Partnership, were entered into by GP-1 the first-named of the General Partners and, by their terms, did not acknowledge any obligation to the Partnership. I am satisfied that that is not a matter of any consequence in that GP-1 acknowledged to GP-2 and to the Investors that the transactions were partnership transactions and the Applicant, at least, has claimed the benefit of those transactions.
24. Having entered into those agreements, cheques were drawn on a bank by G-Co in favour of F-Credits and then endorsed by F-Credits in favour of the Partnership in sums of $3,110,000 and $470,000 respectively and delivered up to the Partnership. The Partnership then endorsed the cheques in favour of Film-Maker Qld and delivered them up, whereon Film-Maker Qld endorsed them in favour of and delivered them up to G-Co. Thereon F-Credits, in consideration of $3,110,500 and $470,500, assigned the debts of the Partnership so arising to G-Co, together with ``all the rights, benefits and powers conferred upon (F-Credits) to hold the same unto (the assignee) absolutely'' (Exhibits U4 and U5). The intended result to that point was that the Partnership had borrowed $3,110,000 and $470,000 respectively which funds were available to it together with subscribed capital to enable it to perform its obligation to pay for the production of the film.
25. Thereby by one agreement (Exhibit U6) the partnership had contracted with Film-Maker Qld for it to procure the making of the film for $5,213,000, all payable - and paid - upon
ATC 115the date of the agreement. By a further agreement (Exhibit U8) Film-Maker Qld then contracted with U-Film Two for the production of the film for fees of $5,000,000.
26. All of those documents were executed and the contracts they sought to express were entered into on 28 June 1980. Thereby, it is contended, in relation to U-Film the Partnership incurred production costs in the course of its business of producing commercial films.
27. Once the intricacy of the network of contractual relationships is analysed, the essence of the overall arrangement can be fairly simply expressed. It was proposed that an unpublished screenplay should be made into a cinematographic film which would be distributed and exhibited before a fee-paying public. Production of the film required the artistic and organisational talents of the persons to participate directly in production; a sufficiency of financial resources to enable that production to be effected; the permission of the owners of the literary property which was to be used; and thereafter success in distributing and marketing the film. The production of U-Film was to cost $5,000,000, and capacity to make the film within that budgeted figure was to be assured by a production guarantee agreement. The funding of the film was to be effected by loans advanced on a ``non-recourse'' basis (secured only against the project) and by the provision of risk capital. The risk capital was to be introduced by investors by way of subscribed capital to a limited partnership. The funds needed by the film-producer to enable the film to be made were to be advanced to the film-producer through a series of contracts. By those contracts each successive person (other than U-Owner) in a series comprising U-Owner; U-Film One; the Partnership; Film-Maker Qld; and U-Film Two, would agree to produce the film for the person named immediately beforehand in that sequence.
28. The arrangements in relation to the other films applied the same principles in different circumstances.
29. In relation to V-Film what occurred within the year of income ended 30 June 1980 was that on 26 June 1980 several agreements were entered into and moneys were said to have been advanced pursuant to those agreements. The first agreement was one between V-Owner and V-Film One whereby V-Film One agreed to make the film for V-Owner. The agreement (Exhibit V.10) referred to a budgeted production cost of $2,500,000. V-Film One had to bear the costs of production and of providing a marketable film. Its reward was to be a share in the gross proceeds of distribution. V-Film One then contracted with GP-1, GP-1 acting for the Partnership (Exhibit V.1). GP-1 undertook to produce the film in accordance with the obligations of V-Film One under the principal agreement (V-10) and, in turn, it was to be rewarded for its services from the gross proceeds of distribution. GP-1 then contracted with Film-Maker Qld for the production of the film to the same standard. That agreement provided for payment to Film-Maker Qld to be made on the making of the agreement of $2,593,750 as the reward for the services it was to provide (Exhibit V.3). By a further agreement (V.4) Film-Maker Qld contracted with a second company in the V-Film Group (V-Film Two) for the making of the film for a price of $2,500,000 of which $42,500 was to be paid upon the execution of the agreement and the balance of $2,457,500 to be due and payable on 26 August 1980, or the date the completion guarantee referred to was given, or the date the Owner produced to Film-Maker Qld a notice as provided for in the agreement, whichever should be the latest of those dates. To enable GP-1 to effect the payment to Film-Maker Qld due to be made that day, GP-1 entered into an agreement (V.2) on the same day to borrow immediately from F-Credits $1,875,000. The lending was to be secured by a first charge against all moneys payable to GP-1 from the licensing of the film (cl. 4 and 8) and it was expressly provided (cl. 5) that the lender would have no right of recourse against the borrower. Cheques were delivered up bv the lender to GP-1 and endorsed by it in favour of Film-Maker Qld which, in turn, endorsed the cheque and caused it to be deposited to a No. 1 account to be controlled by both Film-Maker Qld and V-Film Two to provide a fund out of which the expenses of production were to be met. Several months later, on 28 November 1980, Film-Maker Qld released V-Film Two from its obligations to make the film (V.6). By that agreement V-Film Two was to repay the $42,500 initially paid to it. On the same day with consent of V-Owner, Film-Maker Qld entered into a new agreement (V.7) with a second film-making consortium (V-Film Three)
ATC 116for the making of the film. Although the new agreement provided once again for payment of $2,500,000 to the film-maker ``all of which fees shall be paid upon the execution of this agreement'' I am satisfied that that price was to be largely satisfied by use of funds previously held in the bank account under the control of PPQ and the original film-maker. Even so, film production was not able to commence and, by 16 June 1981, it was necessary for the agreements with V-Film Three to be further modified (V.9). In time the film was produced.
30. In relation to W-Film, again the arrangements were slightly different. By an agreement (Exhibit W-1) GP-1 agreed to make W-Film for W-Owner. In this instance, that agreement was the principal agreement. By a second agreement (Exhibit W.4) GP-1 sub-contracted the work of production to Film-Maker Qld at a price of $722,500 ``all of which fees are payable upon the date of this agreement'' (cl. 3). Film-Maker Qld further sub-contracted the work to W-Film One at a price of $700,000, $682,000 of which was to be paid into a bank account under joint control, to be applied towards the cost of production. To enable GP-1 effect the payment, it arranged to borrow amounts of $250,000 and $300,000 respectively from F-Credits (the former being a first charge), repayment being secured against ``All moneys payable to the borrower from the licensing of the film'' (cl. 4) but with the lender foregoing any right to claim payment from the borrower (cl. 5). Subsequently, on 28 November 1980, the sub-contract between Film-Maker Qld and W-Film One was cancelled with provision being made for $18,000 to be refunded to Film-Maker Qld (W.6), and a fresh sub-contract (W.7) entered into with a second film-maker (W-Film Two). In due course the film was produced.
31. The contention for the Applicant is that the Partnership was entitled to sec. 51(1) deductions for the total amount expended by it in purported discharge of its obligations to U-Film One, to V-Film One and to W-Owner to produce the films. The contention was put on the basis that its expenditure was expenditure incurred in the course of deriving its assessable income or in carrying on business - as those phrases are used in that sub-section. Furthermore, the contention is that the Partnership would be entitled to a deduction in the year of income ended 30 June 1980 because its expenditure would arise - and thereby be ``incurred'' - in that year even though the actual work of production, which would be carried out by others, would not - and did not - eventuate until later years.
32. The Partnership in fact entered into commitments in that way for the making of three films. In doing so, I am satisfied that, as a result of all that was done, the Partnership:
- (a) became obliged to procure the production of the three films;
- (b) became entitled to have the films produced by Film-Maker Qld at a cost to the Partnership of $5,213,000, $2,593,750 and $722,500; and
- (c) became entitled to participate in profits hoped to be generated by the distribution and exhibition of the films in due course; but
- (d) being aware that Film-Maker Qld had no capacity to make the films and that the making of the films would depend upon U-Film Two; V-Film Two; and W-Film One respectively to arrange the production of the films - something to later prove to be beyond the capacity of V-Film Two and W-Film One.
33. The question in those circumstances is whether the moneys expended (inter alia) to procure the production of the films constitute losses or outgoings within the meaning of sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'') which provides:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
34. According to the income tax return of the Applicant, the Partnership loss for the year of income ended 30 June 1980 was made up as follows:
Income $ $ $ ------ Interest received 8,012 Expenses -------- Bank fees 3 Commission 6,850 Consultancy fees 20,000 Production Costs: ---------------- U-Film 5,213,000 V-Film 2,593,750 W-Film 722,750 8,529,250 8,556,103 --------- --------- --------- 8,548,091 ---------
35. A person may carry on business in the film industry by making films, by distributing films or by exhibiting films. A person may carry on business making films for others. A person may carry on business marketing films obtained from others. A person may even carry on business in the way of contracting for the making of films for others and contracting for the making of films by others with a view to profiting from doing so. That may be with a view to profiting by the derivation of a gross profit equal to the amount by which the price to be received exceeds the cost to it of producing the film it was obliged to produce; or by seeking its profit out of future distribution and exhibition of the films. For this Partnership, what was to generate its right to income was its performance of obligation it assumed contractually to deliver up commercially marketable films. That right to income was not to be the product of an exercise on the part of the Partnership in film production. That was to be a product of a financial exercise: the Partnership was to acquire the produced films by contracting in each case for their making by another. That other, like the Partnership itself, had no artistic or organisational capacity to produce a film. The work of film production was to be carried out at a later date by interests identified with Producers A and B. The role of the Partnership was to make that production possible by contributing risk capital by way of its own subscribed capital and funds borrowed on a ``non-recourse'' basis to the venture. Nor is that right to income to be identified with or confused with the derivation of income. Delivery of the films was a prerequisite to the right to derive income arising, but it did not give any assurance that any income would flow. Whether there would ever be any income would depend on marketing, and marketing which would provide a return to the Partnership.
36. The case for the Applicant is that the expenditure by the limited partnership constituted expenditure and outgoings on revenue account rather than on capital account. In determining whether or not that is so, no words are more appropriate to be considered than the famous passage from the reasons for decision of Dixon J. (as he then was), in
Sun Newspapers Ltd.; Associated Newspapers Ltd. v. F.C. of T. ((1938) 61 C.L.R. 337 at p. 359ff.), where his Honour said:
``The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organized method of serving their needs. At the other extreme it may consist in a great
ATC 118aggregate of buildings, machinery and plant all assembled and systematized as the material means by which an organized body of men produce and distribute commodities or perform services. But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income or consist in which has been called a `profit-yielding subject,' the phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue Commissioners. As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose...
In the attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or to revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made `once for all', and to a still greater extent upon a distinction to be discovered in the nature of the asset or advantage obtained by the outlay. If what is commonly understood as a fixed capital asset is acquired the question answers itself. But the distinction goes further. The result or purpose of the expenditure may be to bring into existence or procure some asset or advantage of a lasting character which will enure for the benefit of the organization or system or `profit-earning subject.' It will thus be distinguished from the expenditure which should be recouped by circulating capital or by working capital.
An asset or an advantage for the enduring benefit of a trade' is the phrase of Viscount Cave, a phrase which by constant use has become almost a formula...
But the idea of recurrence and the idea of endurance or continuance over a duration of time both depend on degree and comparison. As to the first it has been said it is not a question of recurring every year or every accounting period; but `the real test is between expenditure which is made to meet a continuous demand, as opposed to an expenditure which is made once for all' (per Rowlatt J., Ounsworth v. Vickers Ltd.). By this I understand that the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely. Thus, in Anglo-Persian Oil Co. Ltd. v. Dale the establishment and reorganization of agencies formed part of the class of things making the continuous or constant demand for expenditure, but the given transaction was of a magnitude and precise description unlikely again to be encountered. Recurrence is not a test, it is no more than a consideration the weight of which depends upon the nature of the expenditure.
Again, the lasting character of the advantage is not necessarily a determining factor. In John Smith & Son v. Moore the coal contracts which Lord Haldane and Lord Sumner thought were acquired at the expense of capital had a very short term. By reselling coal bought under the contracts the taxpayer made his profit. `But, said Lord Haldane, `he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by parting with them to other' (coal) `masters, but by retaining them, that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that, although they may have been of short duration, they were none the less part of his fixed capital.'...
There are, I think, three matters to be considered, (a) the character of the
ATC 119advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment...
In these circumstances I think that in principle the transaction must be regarded as strengthening and preserving the business organization or entity, the profit-yielding subject, and affecting the capital structure.''
37. Applying those considerations here, in my view what we have in the way of the ``profit-yielding subject'' is the right acquired under each of the three production agreements to share in the future earnings to be generated by the exhibition of the films. The outlay in each instance was to be ``once for all''. The return, should there be any, would be recurrent with the prospect of derivation being long deferred but then arising over a long period.
38. The activities of the Partnership which were directed to the production of income were embarked upon, performed, and carried to completion within the space of a few days. Indeed, on one view, those activities were confined to one day, with preparation for that day extending over some few days beforehand. Further, nothing to be done thereafter other than to ensure that the moneys to which the Partnership was entitled would be received and upon receipt would be dealt with in accordance with the terms of the partnership agreement. In the words of Dixon J.(ante) the expenses incurred were expenses of the
``business entity, structure, or organization set up or established for the earning of profit (rather than) the process by which such an organization operates to obtain regular returns by means of regular outlay;''
``expenditure and outlay upon establishing... the profit yielding subject (rather than part of) the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue.
In the circumstances the outlays were:''
``final or made `once for all' (rather than expenses which were) recurrent, repeated or continual...; the expenditure was made `to bring into existence or procure some asset or advantage of a lasting character which will enure for the benefit of the organization, (and, as such, to) be distinguished from the expenditure which could be recouped by circulating capital or by working capital.''
39. For the Applicant it was argued that decisions such as that in
Walker v. F.C. of T. (83 ATC 4168 - upheld on appeal 84 ATC 4553);
Lau v. F.C. of T. (84 ATC 4618 - upheld on appeal 84 ATC 4929); and
F.C. of T. v. Solling; F.C. of T. v. Pepper (85 ATC 4518); all point to a contrary conclusion. I find nothing in those decisions which suggests that the principles I have stated are no longer correct. Nor do I find anything in any of those decisions which persuades me that I should find the expenses to be expenses other than expenses of capital or of a capital nature. In Lau (ante at p. 4944), Beaumont J. concluded that the management fees and related expenses were ``directed not to the profit-yielding subject of the taxpayer's business but to the process of operating it''. In the circumstances established before me I make the opposite finding. That being so, I have concluded that the Partnership did not satisfy either of the positive requirements of sec. 51(1) of the Act, or avoid the effect of the negative provisions.
40. Furthermore, it is consequence of that finding that an alternative argument advanced on behalf of the Applicant must also fail. The contention was that, in the alternative, so much of the ``expenditure'' as represented the capital contributions of the partners, namely $2,580,000, should be allowed as a deduction: $80,000 in the case of the Applicant. I reject the argument because the conclusion I have reached depends upon the nature of the outlay and not upon any consideration as to what was outlaid.
41. Further, the evidence did not persuade me that either the amount claimed as commission ($6,850) or the amount claimed as consultancy fees ($20,000) was so incurred as to be allowable as deductions. I would allow a deduction in respect of ``Bank fees $3'', but I recognise that a 3.1008% interest in that sum may fairly be described as ``de minimis''. In any event, the Commissioner has not sought to assess the $8,012 interest to the Partnership.
ATC 120That being so, I conclude that the Partnership did not satisfy to any extent either of the positive requirements of sec. 51(1) of the Act, or avoid the effect of the negative provisions. However, lest I be incorrect as to that, I proceed to address some other issues which were argued.
42. I am well satisfied that great care was taken in order to ensure that legally enforceable relationships were brought into existence so as to achieve the making of the films; their availability for distribution and marketing; and the payment of all the costs to be incurred in the course of their making. It was intended to be done, and was done, so as to generate not only the commercial and financial consequences necessary for the making and marketing of the films but also so as to create (it was thought) an entitlement in investors such as the Applicant to tax deductions. It was planned to provide tax savings substantially in excess of the moneys to be invested. It was also intended to achieve that end by restricting the loss to each investor to the sum of the capital subscribed by him. I am satisfied that the transactions which were entered into and which were evidenced before me were not designed as a cloak to conceal the reality of other transactions. They were, in my view, anything but shams. They were intended to bring into existence the legal relationships they purported to create and, through those relationships, to result in the production of marketable films. In so far as the films were made and marketed, those objectives were achieved. Further, in the circumstances of the case, I am not persuaded that the fact that $2,369,259 of the total expenditure was financed by a ``round robin of cheques'', or that $3,580,000 was provided by endorsement of Bills of Exchange having an aggregate value of that amount renders those transactions ineffective as ``shams'' (cf. Lau - ante - at p. 4940).
43. I accept that it is not open to the Commissioner to rely upon sec. 260 of the Act to defeat, in whole or in part, any ``arrangement'' giving rise only to a claim to a deduction otherwise allowable under sec. 51 (
Cecil Bros Pty. Ltd. v. F.C. of T. (1962-1964) 111 C.L.R. 430 at p. 438; and Lau (ante) at p. 4946). The circumstances in this case stand in contrast to those considered recently in Case NT85/2030 (decided 24 October 1988).
44. The Commissioner, by his counsel, also relied on the provisions of Subdiv. D (``Losses and Outgoings Incurred Under Certain Tax Avoidance Schemes'') of Div. 3 (``Deductions'') of the Act. The existence of the Subdivision reflects a perception widely held in the late 1970s - but held less widely and with diminishing confidence since - that the Parliament had so ineffectively expressed itself in framing the terms of the Income Tax Assessment Act that, as correctly interpreted by the courts, what had been enacted allowed persons easily to cast up and participate in transactions so as to lawfully achieve the result of placing themselves beyond the reach of the Act. From 1979 in particular the Parliament responded by amending the Act extensively to introduce provisions such as Subdiv. D of Div. 3. As initially enacted (by Act No. 12 of 1979) the Subdivision was in relatively short form. At that time it was directed only to certain claims for deductions in respect of prepaid outgoings (sec. 82KJ) and some schemes designed to postpone tax liability (sec. 82KK). By Act No. 146 of 1979 the Subdivision was substantially extended in its scope. To effect that extension sec. 82KH(1) was amended to define ``additional benefit''; ``expected tax saving''; and ``relevant expenditure''; to introduce subsec. (1A), (1B), (1C), (1D), (1E), (1F), (1G), (1H), (1J), (1K), (1L), (1M), (1N) and (1P); and to introduce sec. 82KL, including especially subsec. (1). It is the latter subsection which is the provision which must now be applied.
45. The operative provisions of sec. 82KL(1) state that:
``..., notwithstanding any other provision of this Act but subject to this section, a deduction is not and shall be deemed never to have been, allowable to the taxpayer in respect of any part of that amount of eligible relevant expenditure.''
46. It is first necessary to identify ``the taxpayer'' referred to in the subsection. I am satisfied that, in the circumstances of this case, that reference to ``the taxpayer'' is a reference to the Partnership. The Partnership in the year of income ended 30 June 1980 derived interest
ATC 121income, albeit only $8,012, and thereby satisfied the sec. 6(1) definition of ``taxpayer'' which provides that:
``Unless the contrary intention appears,... `taxpayer' means a person deriving income.''
In addition, sec. 82KH(1), in its definition of ``associate'', by subpara. (d) provided that a partnership may be a ``taxpayer''. Thirdly, the Subdivision by relating the concept of ``relevant expenditure'' to sec. 51 and not to sec. 92, indicates in a context such as this, it is the partnership rather than an individual partner which is to be considered.
47. Section 82KL(1) stipulates, as conditions for rendering a deduction not allowable, the following:
``(1) Where the sum of the amount or value of the additional benefit in relation to an amount of eligible relevant expenditure incurred by a taxpayer and the expected tax saving in relation to that amount of eligible relevant expenditure is equal to or greater than the amount of the eligible relevant expenditure...''
To determine whether those conditions are satisfied, it is necessary to ascertain whether there was any ``eligible relevant expenditure''. Determination of that question requires that regard first be had to the concept of ``relevant expenditure''.
48. The definition of ``relevant expenditure'' contained in sec. 82KH(1) has been amended on a number of occasions. The element of the definition which was relied on in the argument for the Commissioner in relation to this application, touching as it does the year of income ended 30 June 1980, is not to be found in editions of the Act published for that year. That arises because the relevant amendment was only enacted by the Parliament in Act No. 108 of 1981 - an Act which came into operation on the day on which it received the Royal Assent, namely 24 June 1981. Section 15(1) of Act No. 108 of 1981 provided for the amendment of the definition of ``relevant expenditure'' in the Assessment Act; and sec. 15(2) provided:
``... any amendments made by sub-section (1) apply in relation to a loss or outgoing or expenditure incurred after 24th September 1978.''
The latter provision makes the 1981 amendments operative in relation to events giving rise to the application under review.
49. The definition of ``relevant expenditure'' in so far as it is material is:
``82KH(1) In this Subdivision, unless the contrary intention appears -
- `relevant expenditure' in relation to a taxpayer, means
- (g) a loss or outgoing incurred by the taxpayer in respect of -
- (i) the production, marketing or distribution of a film; or
- (ii) the acquisition of a copyright subsisting in a film,
to the extent to which a deduction would, apart from section 82KL, be allowable to the taxpayer under section 51 in respect of the loss or outgoing;''
I find the ``relevant expenditure'' to be $8,529,250 (cf. para. 34). Alternatively, upon the assumption that expenditure not directly in relation to film production is also to be included, then I find it to be $8,556,103 (ibid.).
50. The next question to be considered is whether any portion of that ``relevant expenditure'' constituted ``eligible relevant expenditure''. The concept of ``eligible relevant expenditure'' is defined by sec. 82KH(IF), as amplified by other provisions to be later referred to. Section 82KH(1F) provides:
``For the purposes of this Subdivision, an amount of relevant expenditure incurred by a taxpayer shall be taken to be an amount of eligible relevant expenditure if
- (a) that amount of relevant expenditure was incurred after 24 September 1978 by reason of, as a result of or as part of a tax avoidance agreement entered into after that date;
- (b) by reason of, as a result of or as part of the tax avoidance agreement the taxpayer has obtained, in relation to that relevant expenditure being incurred, a benefit or benefits in addition to -
- (i) in the case to which sub-paragraph
- (ii)does not apply
- (A) the benefit in respect of which the relevant expenditure was incurred; and
- (B) any benefit that resulted directly or indirectly from the benefit in respect of which the relevant expenditure was incurred and is a benefit that, in the opinion of the Commissioner, might reasonably be expected to have resulted if the benefit in respect of which the relevant expenditure was incurred had been obtained otherwise than by reason of, as a result of or as part of a tax avoidance agreement; or
The omitted provisions are not material to any present problem.
51. The first element which must be satisfied if the Commissioner's argument is sound is that the ``relevant expenditure'' must have been incurred after 24 September 1978. I am satisfied that it was. The second element is that the expenditure should have been incurred in relation to a ``tax avoidance agreement'' entered into after that date. I find that all the relevant agreements were entered into after that date and before 28 May 1981 - a date subsequently made relevant to the definition by reason of later amendments to the Act.
52. As to what constitutes a ``tax avoidance agreement'', sec. 82KH(1) provides:
``In this Subdivision, unless the contrary intention appears -
- `agreement' means any agreement, arrangement, understanding or scheme, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings;
- `tax avoidance agreement' means an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into or carried out, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into or carried out;
I am well satisfied that the arrangements to which the Applicant was a party and in which he participated through his membership in the Partnership constituted a ``tax avoidance agreement'' in so far as the Applicant was concerned. In so finding, I do not consider it necessary to invoke sec. 82KH(1A) which provides:
``In determining for the purposes of this Subdivision whether an agreement is a tax avoidance agreement, no regard shall be had to a purpose that is a merely incidental purpose.''
The purpose of reducing tax was the dominant purpose of the Applicant as an individual and of the Partnership. The commitments to film production were incidental to that purpose. Reduction in tax liability was not merely ``incidental'' to an artistic, commercial or other non-tax oriented purpose of film production.
53. The next element of sec. 82KH(1F) to be considered relates to the concept or concepts of ``benefit'' as it appears in that subsection. The term ``benefit'' is not defined by the Subdivision. However, analysis of the terms of subsec. (1F) indicates that a distinction is to be drawn between three possible kinds of benefit:
- 1. ``the benefit in respect of which the relevant expenditure was incurred'';
- 2. ``any benefit that resulted directly or indirectly from (that) benefit''; and
- 3. any benefit in addition to such benefits.
54. It is the latter category of benefit which constitutes what the subdivision refers to as an ``additional benefit''. Section 82KH(1) provides:
``In this Subdivision, unless the contrary intention appears -
- `additional benefit', in relation to an amount of eligible relevant expenditure,
ATC 123means the additional benefit, or the aggregate of the additional benefits, as the case may be, referred to in paragraph (1F)(b) in relation to that eligible relevant expenditure;''
55. The benefit in the first category is precisely defined by sec. 82KH(1G). It provides:
``The reference in sub-section (1F) to the benefit in respect of which relevant expenditure was incurred by a taxpayer shall be read as a reference to -
- (g) in a case where the relevant expenditure was incurred by the taxpayer in respect of the production, marketing or distribution of a film or the acquisition of a copyright subsisting in a film and is relevant expenditure to which paragraph (g) of the definition of `relevant expenditure' in sub-section (1) applies - the production, marketing or distribution of the film, or the acquisition of the copyright by the taxpayer, as the case may be;
56. There is no definition within the Subdivision of the second type of ``benefit'' but, by the terms of subsec. 1F(b)(ii), the only benefit to be considered in this category is one which
``resulted directly or indirectly from the benefit in respect of which the relevant expenditure was incurred;''
``is a benefit that... might reasonably be expected to have resulted if the benefit in respect of which the relevant expenditure was incurred had been obtained otherwise than by reason of, as a result of or as part of a tax avoidance agreement.''
It follows that, what constitutes an ``additional benefit'' for the purposes of the Subdivision and, in particular of sec. 82KL(1), is a benefit additional to the foregoing which arises ``by reason of, as a result of or as part of the tax avoidance agreement...'' I find that the films and all the rights to participate in the moneys to flow from their production and marketing constitute the ``benefits'' referred to in para. (b)(i)(A) and (B) of subsec. 82KH(1F). The ``additional benefit'' must be something else.
57. The concepts of sec. 82KH(1F)(b) are further developed by sec. 82KH(1J) which provides that -
``For the purposes of paragraph (1F)(b), but without limiting the generality of that paragraph, where -
- (a) an amount of relevant expenditure is incurred by a taxpayer by reason of, as a result of or as part of a tax avoidance agreement;
- (b) in relation to that relevant expenditure being incurred and by reason of, as a result of or as part of the tax avoidance agreement or by reason of an act, transaction or circumstance occuring as part of, in connection with or as a result of the tax avoidance agreement -
- (i) a debt becomes owing by the taxpayer or an associate of the taxpayer; or
- (ii) a debt becomes owing, before or at the time of incurring of the relevant expenditure, by the taxpayer or an associate of the taxpayer; and
- (c) it may reasonably be expected that, by reason of, as a result of or as part of the tax avoidance agreement or by reason of an act, transaction or circumstance occurring as part of, in connection with or as a result of the tax avoidance agreement, the person to whom the debt is owed will release, abandon or fail to demand repayment of the debt or of a part of the debt.
the taxpayer shall be deemed to have obtained, by reason of the tax avoidance agreement and in relation to the relevant expenditure being incurred by the taxpayer. a benefit of an amount equal to the amount of the debt or that part of the debt, as the case may be.''
58. As a result of those provisions in sec. 82KH(1J) it was argued for the Commissioner that the non-recourse loans by F-Credits to the Partnership (Exhibits U2, U3, V2, W2 and W3) constitute such ``additional benefits''. That was said to be so because the agreements do not make provision for any demand for
ATC 124repayment. However, in my view that was for the simple reason that the loans were constituted as ``non-recourse'' loans against the security of the films rather than as loans supported by a personal promise of the borrower to repay.
59. I am not persuaded that subsec. 82KH(1J) has the effect contended for. I accept that the question whether ``it may reasonably be expected'' is a question to be addressed at the time of assessment and I accept that, at that point of time, it was reasonable to expect that neither the Applicant nor his partners would ever be called on to effect payment of any moneys in relation to the loan agreements. I also accept that, by the terms of the loan agreements, the Partnership could not be called on to repay. But subpara. 82KH(1J)(c), in so far as it refers to someone who ``will release, abandon or fail to demand repayment of the debt'', is directing attention to a consideration of the actions of the lender. In my view, the circumstance that a lender may not make, or be entitled to make, any claim upon a borrower for want of any personal convenant in relation to the loan but who instead will rely upon security only is not to be aptly described as a person who has released or abandoned his claim to be repaid the moneys lent. Nor, given that he has no entitlement to demand repayment of the debt, is it appropriate to say that it was reasonably to be expected that he would ``fail to demand repayment''.
60. However, in my view, there was a further or additional ``benefit'' for the purposes of subsec. 82KH(1F) in that a ``benefit'' was conferred by the very terms of the arrangement whereby the loan was made on a basis of ``non-recourse'' against the Partnership of the borrowers; and by reason of the circumstance that the borrower was a limited partnership and the General Partners lacked capacity to repay. The ``benefit'' lay in the circumstance that the loan transaction was, or purported to be, effected on terms which, upon the application of the moneys borrowed, would support a claim by the Partnership to have ``incurred'' an outgoing by its use of the borrowed moneys without the Partnership (or the Investors as limited partners) ever being liable to effect repayment of the moneys so borrowed. I adopt the words used by Fox J. in
F.C. of T. v. Lau (84 ATC 4929 at p. 4935):
``... the enquiry is one as to what benefits, if any, were additional to those for which the relevant expenditure was incurred,''
and find that the benefit was having the use of the borrowed money without having any obligation to repay it. In my view that was an ``additional benefit'' which was obtained, and which was not obtained otherwise than as part of the ``tax avoidance agreement''. That being so, in my view, it was ``a benefit... in addition to'' the benefit specified in subpara. 82KH(1F)(b)(i). That benefit was equal to the total of the moneys borrowed: $6,005,000.
61. It was also submitted for the Commissioner that the sec. 92 deduction claimed by the Partnership and which, but for Subdiv. D, would be allowable as a deduction is an "additional benefit". That was said to be because sec. 82KH(IP) provides:
``For the purposes of this Subdivision, any benefit that has been obtained by an associate of a taxpayer by reason of, as a result of or as part of a tax avoidance agreement, being a benefit that was obtained in relation to the incurring by the taxpayer, by reason of, as a result of or as part of that tax avoidance agreement, of relevant expenditure, not being relevant expenditure to which sub-section (1Q) or (1R) applies, shall be taken to be a benefit that was obtained by the taxpayer by reason of that tax avoidance agreement and in relation to that relevant expenditure being incurred by the taxpayer.''
It was argued for the Commissioner that, in construing that subsection, the reference to ``the taxpayer'' is a reference to the Partnership and the reference to an ``associate'' is apt as a reference to each member of the Partnership. That may be so but I am not persuaded that the submission is sound. I consider the better view to be that such savings are to be considered in the context of ``expected tax saving'' (cf. below) rather than as ``additional benefits''.
62. The next element to be considered is the concept of ``the expected tax saving'', a phrase defined by sec. 82KH(1) as:
``Unless the contrary intention appears -
- `expected tax saving', in relation to an amount of eligible relevant expenditure incurred by a taxpayer, means -
- (a) where only one amount is, under sub-section (1B), a tax saving amount for the purposes of the application of this definition in relation to the eligible relevant expenditure - that tax saving amount; and
- (b) where 2 or more amounts are, under sub-section (1B), tax saving amounts for the purposes of the application of this definition in relation to the eligible relevant expenditure - the sum of those tax saving amounts;''
``(1B) For the purposes of the application of the definition of `expected tax saving' in sub-section (1) in relation to an amount of eligible relevant expenditure incurred by a taxpayer -
- (a) where -
- (i) if a deduction were not allowable in respect of any part of that eligible relevant expenditure, a person (whether the taxpayer or another person and whether in the capacity of a trustee of a trust estate or otherwise) would be liable to pay income tax in respect of the year of income; and
- (ii) if a deduction or deductions were allowable under this Act in respect of that eligible relevant expenditure, that person would be liable to pay a lesser amount of income tax in respect of that year of income,
the amount by which the amount of the tax referred to in sub-paragraph (i) exceeds the amount of the tax referred to in sub-paragraph (ii) is a tax saving amount; and
- (b) where -
- (i) if a tax benefit were not allowable in respect of any part of that eligible relevant expenditure, a person (whether the taxpayer or another person and whether in the capacity of a trustee of a trust estate or otherwise) would be liable to pay income tax in respect of the year of income; and
- (ii) if a tax benefit or tax benefits were allowable under this Act in respect of that eligible relevant expenditure, that person would not be liable to pay income tax in respect of that year of income
the amount of the tax referred to in sub-paragraph (i) is a tax saving amount.''
63. In the circumstances of this case it is clear that the tax saving to be considered is the tax saving to the partners. Further, the section calls for a measurement of the difference between what might have been if the deduction had been allowed and what might have been if it had not been allowable. It is not necessary to consider questions as to whether the individual partners, or any of them, actually claimed the deduction; or whether it was allowed; or whether - as appears to have been the case - the differences between some partners and the Commissioner were resolved. Calculations were presented on behalf of the Commissioner which were intended to demonstrate the extent of the contemplated tax savings. The calculations were intricate and detailed. They related to the affairs of all other participants in the arrangement. The task of preparing such calculations was a substantial one, but it was also necessary because, in order to determine the application of the formula set forth in sec. 82KL(1), it was not sufficient to contemplate substantial tax savings, nor would it have been appropriate to assume that tax savings to others were to be measured on the same scale as the tax saving to the Applicant.
64. I accept the evidence so presented for the Commissioner and, upon the basis of that evidence, I am satisfied that the ``tax savings amounts'' or the ``expected tax savings'' in aggregate were not less than $2,885,196.
65. Applying the findings so made to the test set forth in sec. 82KL(1), I am satisfied that the amount of ``additional benefit'' ($6,005,000) and the ``expected tax savings'' ($2,885,196) - in total $8,890,196 constitute a sum greater than ``eligible relevant expenditure'', whether it be $8,529,250 or $8,556,103.
66. Accordingly, I conclude in the alternative that, for these reasons also, the decision of the Commissioner upon the objection under review is to be affirmed.
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