JAGELMAN v FC of T
Judges:Hill J
Court:
Federal Court
Hill J
The applicant, Mr Jagelman, appeals against the decision of the Administrative Appeals Tribunal, constituted by a Deputy President, upholding the decision of the respondent Commissioner of Taxation to disallow Mr Jagelman's objection against an assessment of income tax for the year ended 30 June 1988, subject to a reduction in penalties not the subject of the present dispute before me.
The appeal arises in the following circumstances. On 4 July 1986 Mr Jagelman had acquired certain shares and options in Moage Limited, a publicly listed company of which he was the chairman, at a cost of $345,520.80. Approximately one year later the opportunity arose to sell those shares at a considerable profit. As the shares had been acquired after the advent of capital gains tax, the profit would have been included in assessable income by virtue of the capital gains tax provisions in Part IIIA of the Income Tax Assessment Act 1936 (Cth) (``the Act''). Accordingly Mr Jagelman took legal advice.
The advice he was given was to take advantage of the rollover relief contained in s 160ZZN of the Act. Under that section, as it then stood, a taxpayer could sell to an Australian resident company wholly owned by the taxpayer, assets in consideration of shares in or securities of the transferee company and if an appropriate election were made, the consequence was that no taxable gain would be recognised in the hands of the transferor. As the section also stood at the time, the transferee company acquired the assets transferred at a cost base, not being that of the assets transferred in the hands of the transferor but consisting of the consideration for which it acquired the transferred property (and incidental costs). Thus if the transferee company acquired the assets for a consideration equal to or approximately equal to the price for which it might onsell them, the transferee company would likewise make no taxable gain from the transaction.
The advice was no doubt welcome to Mr Jagelman. He accordingly put in train steps for the incorporation of a company, Baseform Pty Ltd (``Baseform''), with two issued shares, one in his own name and one in the name of his wife, his wife being but a mere trustee for him. Mrs Jagelman was also a director of the company. There was then caused to be executed an agreement and subsequent transfer, transferring the shares in Moage Limited to Baseform for a total consideration of $2,542,968.60, to be satisfied by the issue to Mr Jagelman of a secured debenture by Baseform for the same amount. The appropriate election was signed. On the next day Baseform sold the shares in Moage Limited to a third party for a total consideration of $2,580,264.25. After payment of incidental expenses, Baseform made a small profit over and above its cost of the shares in Moage Limited which it returned as assessable income under s 26AAA of the Act.
The advice which Mr Jagelman was given, although correct so far as it went, was incomplete. In particular, no-one advised Mr Jagelman as to the tax consequences which would follow if the debenture was disposed of. As s 160ZZN then stood, the debenture was treated as having a cost base equal to Mr Jagelman's initial cost base of the shares in Moage Limited. A disposal of the debenture for its face value would thus have had a significant income tax consequence. Nor did anybody advise Mr Jagelman that the discharge of the debenture might operate as a disposal of it for its face value by force of s 160M(3) of the Act.
The debenture provided for the principal moneys owing under it, namely $2,542,968.60, to be repaid on 17 February 1988 with interest becoming payable until repayment at the rate of twelve percent per annum. The debenture was
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secured by a charge over the undertaking of Baseform and there was provision for early redemption by the giving of two months notice in writing and surrender of the debenture document.The cash proceeds of the sale by Baseform of the Moage Limited shares were invested initially on deposit with two financial institutions. From time to time, commencing on 17 September 1987, payments were made by Baseform to Mr Jagelman at his request. To enable the payments to be made Baseform drew upon the deposits or arranged for the institutions with which the deposits were made to make payments at the direction of Mr Jagelman. Between 17 September 1987 and 12 August 1988 there were nineteen such payments made, the total amount transferred being $2,751,910.21. Most of it, as the Tribunal found, was simply transferred to Mr Jagelman's cheque account. By the end of the year of income the amount of these payments totalled in excess of the face value of the debenture.
It was common ground between the parties that no records were kept by Baseform in the year of income. Mr Jagelman left Australia in April 1988 for the United Kingdom and it was not until 1990, following his return from that country, that he realised that no records had been kept by the company nor accounts or income tax returns prepared for the 1988 year. He then put in chain instructions to a chartered accountant to prepare accounting records, statutory accounts and tax returns.
The Commissioner took the view that the debenture had been discharged in the year of income, with the consequence that there was a deemed disposal of it pursuant to s 160M(3C) of the Act. The consequence of this view was a liability for capital gains tax payable by Mr Jagelman in the year of income of $1,078,305.86. An amended assessment issued to Mr Jagelman for this amount together with additional tax totalling $716,092.58. Mr Jagelman objected to the assessment; his objection was disallowed and the application to the Administrative Appeals Tribunal was brought to review that objection decision.
Ultimately the Tribunal took the view that the debenture was redeemed on 17 February 1988, or perhaps at least by 30 June 1988, as a result of the payments made by Baseform to Mr Jagelman. It rejected the case put on behalf of Mr Jagelman that these payments had been by way of loan from Baseform to him. In reaching this conclusion the Tribunal formed an adverse view as to Mr Jagelman's credit, concluding that there was no convincing evidence that the payments to Mr Jagelman by Baseform were by way of a loan in respect of which no right of set off arose. The Tribunal said:
``The basic proposition of the applicant rests on an assertion that the 19 transfers constituted advances and that together they formed a loan account. In my opinion this assertion can not succeed. It relies upon the evidence of the applicant which I am not prepared to accept without corroboration. That corroboration is to be found only in one or two incidental references in the draft accounts prepared by the employed accountant. Because there were no accounting records, and because there was no guidance from the applicant, it is understandable that there were some inconsistencies in the draft accounts. There were no inconsistencies, however, in the final accounts that were adopted for 1988. The construction of an elaborate hypothesis of a parallel loan account with no right of set off is based on no convincing evidence. The applicant did not communicate the separate loan account idea to the solicitor, to the chartered account [sic], or to his wife. In my view it is not necessary to consider whether any... set off was authorised. The fact is that there was no loan account. It is a recent invention. It came into contemplation as a reconstruction of events after the danger of redemption emerged. All contemporary evidence leads me to believe that the payments from the company to the applicant were in reduction of the secured debt. No question of set off therefore arises.''
The Tribunal's conclusion clearly depended upon its finding that the payments to Mr Jagelman were made in reduction of the amount secured by the debenture, rather than by way of loan. Counsel for the applicant properly accepted that an appeal to this Court in its original jurisdiction is in accordance with s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (``the AAT Act''), an appeal on , that is to say limited to , a question of law. Accordingly it is not open for the Court to substitute its view of the facts for that of the Tribunal. To overcome this difficulty, counsel put what in essence where two submissions.
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First, it was submitted that for the Tribunal to find that the payments by Baseform to Mr Jagelman were not by way of loan to him involved a denial of natural justice. Alternatively, it was submitted that the Tribunal failed altogether to take into account evidence given by Mrs Jagelman and other material which corroborated the evidence of Mr Jagelman that the payments made to him were in fact by way of loan and not in reduction of the indebtedness under the debenture.
In order to consider the first of these submissions, it is necessary to outline in more detail the course the trial took and the evidence adduced.
Was the applicant denied procedural fairness?
The statement lodged with the Tribunal by the Commissioner under s 37 of the AAT Act disclosed relevantly, by way of background:
``On 17 February 1988 Baseform Pty Ltd redeemed the debenture and paid the taxpayer the full principal amount due on this account.''
Under the heading ``Findings'', the Deputy Commissioner wrote:
``In terms of clause 1 of the Debenture Deed the last date for repayment of the principal money was 17 February 1988.
Between 17 September 1987 and 26 February 1988, Baseform transferred to Jagelman's bank accounts amounts in excess of the disposal amount of the debenture.
These amounts were first debited to Jagelman loan account in Baseform's books and on the 17 February 1988, by crediting the Loan account, a sum of $2,542,968.60 was debited to Debenture account in full settlement of the debenture money.
Accordingly the liability on account of the debenture was extinguished from the company's balance sheet as at 30 June 1988...''
Under the heading ``Reasons for Decision'' the Deputy Commissioner wrote:
``All evidence points to an actual redemption of the debenture. The taxpayer's contention that `book entries of themselves do not amount to the making of payment' is not relevant to the facts of this case as there was an underlying liability between the parties and the payment was effected by the actual transfer of money . The proposition that the amounts paid to the taxpayer were partial repayments or separate loans made to him is contrary to all factual evidence and would discredit all book- keeping entries and financial statements of Baseform. Since 1988 (the company's balance sheet as at 30 June 1989 shows only amount of a $6,684 as loaned to the taxpayer).''
[emphasis added]
In accordance with the practice of the Tribunal, there were filed and exchanged by each party to the review, statements of facts, issues and contentions. On behalf of Mr Jagelman there was put in issue the discharge of the debenture. No particular reference was there made to the loans alleged to have been made by Baseform to Mr Jagelman. The Commissioner's statement of facts, issues and contentions, unhelpfully traversed in a formal way the matters put by the taxpayer but would clearly have left the Tribunal uncertain as to what the real issue between the parties was, other than that the ultimate issue was whether the debenture had been discharged.
Counsel for Mr Jagelman, in opening, adverted to the matter of loans having been made by Baseform to Mr Jagelman, but put the main issue for decision as being whether the accounts prepared well after the year of income showing the debenture as having been discharged, brought about what was described by him as being ``an unauthorised set off''. It was said that Mr Jagelman was not aware of the set off, did not authorise it or assent to it and was unaware that a set off had been implied by the accounts.
A statement of evidence had been filed by Mr Jagelman with the Tribunal shortly before the hearing commenced and was sworn by him to be correct. In that statement Mr Jagelman spoke of having borrowed substantial amounts from Baseform, those borrowings being separate from the debenture transaction and not intended to operate as a partial repayment of the debenture, or reduce the indebtedness under it. He referred to the fact that he had paid interest to Baseform for the 1988 year. Most of the statement is concerned with the matter of the preparation of the accounts in 1990.
Mr Jagelman was then called to give evidence. Some of the cross-examination was directed at securing an admission from Mr Jagelman that sooner or later he was to obtain cash from the company in repayment of the
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debenture. The Deputy President at one stage reformulated a question that had been put by counsel for the Commissioner in the following terms:``Yes, what I understood the question to mean was it wasn't contemplated, was it, that wouldn't get access to this cash that was paid by the third party and that this situation would continue indefinitely.''
He observed that this was one of the major points of contention in the case. After a short adjournment the questioning continued for some time along this line. It was put to Mr Jagelman that he did not contemplate that Baseform would owe the money the subject of the debenture for a substantial period of time. Mr Jagelman replied that no time for repayment had been considered.
There was some cross-examination about the payments that were made to Mr Jagelman or on his behalf and as to the procedure adopted. It is fair to say that at no time during the cross- examination did counsel for the Commissioner specifically put to Mr Jagelman that the various payments made to him or on his behalf by Baseform were made in repayment of the debenture, rather than, as he had asserted, by way of loan. It might be mentioned, so far as is relevant to the second set of submissions made, that in the course of the cross-examination Mr Jagelman indicated that his wife was aware that he had a loan account, that he was borrowing money from the company and that he was paying interest on that loan account. He said, when asked why the borrowings were not to be treated in reduction of Baseform's indebtedness to him, that this was a matter that had never been contemplated. Mr Jagelman reiterated, from time to time, that it was never his contemplation that the debenture would be discharged.
When the matter came to argument, counsel for Mr Jagelman commenced with the statement that the payments made to Mr Jagelman from Baseform moneys were not intended to be by way of debenture redemption but were intended to constitute loans. The core of his submission was that nothing had happened on 17 February 1988, as had been alleged by the Commissioner in the s 37 statement, to constitute a discharge of the debenture and in particular no payment or set off had then occurred. Detailed submissions were made concerning the necessary ingredients to establish a set off.
Counsel for the Commissioner presented the argument for the Commissioner on the basis that it was accepted that the payments made by Baseform to Mr Jagelman were loans, asserting that there had been a set off. I have read carefully what was said and there seems little doubt that this was the approach taken. For example, counsel said:
``So the question is not whether there is evidence that the funds advanced by Baseform to Mr Jagelman were treated as giving rise to a loan account. No doubt in the world that they were and that's perhaps not surprising. The question rather is whether the loan account liability - and I use that term loosely for the moment - was set off against the debenture liability, bearing in mind that the former was lesser and the latter was greater. And it is my submission that you would be entitled to conclude that the answer is that it was.''
Counsel for the Commissioner thus posed the question for determination as being whether there was a tacit or implied agreement in the year of income, such as to constitute a set off of the loan moneys against the debenture.
It is in these circumstances that counsel for Mr Jagelman now raises the question of procedural fairness. It is said that there was an obligation on the part of the Commissioner, if seeking to have the Tribunal find that the payments to Mr Jagelman were not loans, to put that to him. Further, so far as the Tribunal found that the categorisation of the payments as loans was a ``recent invention'', there was an obligation that this be put both to Mr Jagelman and his wife. It was put to neither.
An alternative basis upon which the submission is put was that the Tribunal had determined the case on a basis which had not been part of the case of either party. Reference was made in this context to the decision of the full court of this Court in
Fletcher & Ors v FC of T 88 ATC 4834; (1988) 19 FCR 442.
The first way in which the submission was put relies upon the rule in
Browne v Dunn (1894) 6 R 67. The rule, as enunciated by Lord Herschell LC, with whom Lord Halisbury and Lord Morris both concurred in separate judgments, was stated as follows (at 70-71):
``Now, my Lords, I cannot help saying that it seems to me to be absolutely essential to the proper conduct of a cause, where it is
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intended to suggest that a witness is not speaking the truth on a particular point, to direct his attention to the fact by some questions put in cross-examination showing that that imputation is intended to be made, and not to take his evidence and pass it by as a matter altogether unchallenged, and then, when it is impossible for him to explain, as perhaps he might have been able to do if such questions had been put to him, the circumstances which it is suggested indicate that the story he tells ought not to be believed, to argue that he is a witness unworthy of credit. My Lords, I have always understood that if you intend to impeach a witness you are bound, whilst he is in the box, to give him an opportunity of making any explanation which is open to him; and, as it seems to me, that it is not only a rule of professional practice in the conduct of a case, but is essential to fair play and fair dealing with witnesses.''
It may be accepted that where a tribunal makes a finding contrary to the evidence of a witness in circumstances where the matter found was not put to the witness, it will generally be a denial of natural justice on the part of the tribunal so to do. It would then follow that the decision of the tribunal might be set aside as involving an error of law:
Marelic v Comcare (1993) 47 FCR 437 at 444.
However, it has been pointed out in a number of cases that the application of the rule in Browne v Dunn must depend upon the circumstances of the case. Where the issues in a case are such that it would readily be apparent to a party that a particular imputation has been made, there will be no necessity to put that imputation to a witness who denies it and, in consequence, there will have been no denial of procedural fairness: see
Seymour v Australian Broadcasting Commission (New South Wales Court of Appeal, 3 June 1977, unreported) discussed by Hunt J in
Allied Pastoral Holdings Pty Ltd v FC of T 83 ATC 4015 at 4031-4032; [1983] 1 NSWLR 1 at 21-22. In the latter case Hunt J said (at ATC 4032-4033; NSWLR 23):
``In many cases, of course, counsel for the party calling the witness in question will be alert to the relevance of the other material in the case to be relied upon for the challenge to the truth of the evidence given by his witness or to the credit of that witness, and in those circumstances counsel will be able to give his witness the opportunity to deal with that other material in his own evidence in chief.''
Thus in
Trade Practices Commission v Mobil Oil Australia Ltd (1984) 3 FCR 168 per Toohey J and
Dolan v Australian and Overseas Telecommunications Corporation (1993) 42 FCR 206 per Spender J, both discussed by Beazley J in Marelic v Comcare (supra at 442), it was held in the particular circumstances that a failure to put a matter to a witness produced no unfairness in the conduct of the proceedings.
The present case may be thought to be on the borderline. The issue between the parties was whether the secured debenture had been discharged. Mr Jagelman's objection clearly stated his assertion that the debenture had not been redeemed in full. The circumstances of the case were such that there had been payments made by Baseform to Mr Jagelman. There had been no contemporaneous recording of the transactions underlying those repayments by way of accounting entries. Unless the parties were agreed that the payment were loans, I do not think there was any obligation in the circumstances upon counsel for the Commissioner to put to Mr Jagelman that his evidence that the payments were loans was false. It was, or should have been, evident both to Mr Jagelman and his counsel in the course of evidence that the question whether the payments operated to extinguish the debenture in the year of income was a real issue in the case.
The second way the argument is put, based on Fletcher's case, has greater force. In that case it was held that a decision of the Administrative Appeals Tribunal should be set aside because the Tribunal had decided the matter on a ground which had not been agitated before it. The case was one where at no time prior to or during the hearing was any reference made at all by either side to the anti-avoidance provisions of Part IVA of the Act. There was no reference to the Part in the objection and at no time did the Commissioner suggest any intention to rely upon its terms. Nevertheless, the Tribunal found against the taxpayer on the basis of Part IVA, without affording to the taxpayer the opportunity to submit to the contrary.
In the present case, counsel for the Commissioner seems at all times to have put his case upon the basis that the payments to Mr
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Jagelman were loans but that there had been a set off. This being the case, there was no need for counsel for Mr Jagelman to make submissions as to what findings the Tribunal should make as to the payments or the impact of the evidence on that question. He made no such submissions. For the Tribunal, in those circumstances, to make a finding on a matter apparently not in issue between the parties without one of the parties having the opportunity to make a submission to the contrary, amounts to a denial of procedural fairness which requires that the decision of the Tribunal be set aside. It may well be that there would have been little counsel for Mr Jagelman could have said in defence of the proposition that the payments were to be treated as loans had the opportunity been given to him, but that is not to the point. Procedural fairness requires a party to be given the opportunity to put his or her case before an adverse finding against the party was made.The finding of no corroboration
The second set of submissions was put in a number of different ways. First, it was submitted that the finding of the Tribunal that Mr Jagelman had not communicated the ``separate loan account idea'' to his wife was in direct conflict with the evidence of Mrs Jagelman. Second, it was submitted that the finding that the fact that the loan account was ``a recent invention'' was likewise contrary to the evidence of Mrs Jagelman and was also contradicted by other accounting evidence. Third, it was submitted that the finding that Mr Jagelman's evidence that the payments were loans had not been corroborated, again was inconsistent with Mrs Jagelman's evidence and the accounting evidence, both of which afforded corroboration. Finally, it was submitted that the Tribunal had overlooked Mrs Jagelman's evidence entirely and that, in so doing, it committed an error of law.
There was tendered in the proceedings a witness statement of Mrs Jagelman which she swore to be correct. In it she said, after referring in cl 4 to the deposit of the sale proceeds into accounts controlled by Baseform:
``5. Shortly after the events in paragraph 4 took place, my husband informed me that he intended to borrow funds from Baseform.
6. I always understood my husband's borrowing from Baseform to be separate from the debenture. My understanding was that my husband would have to repay to Baseform the money that he had borrowed.''
In cross-examination she reaffirmed the understanding that she had stated in para 6. The cross-examination was very brief; no question of credit arose. The following passage appears on the transcript:
``Is it again that's something that you've been told by him?... He told me that he was going to borrow money from Baseform. Yes. Apart from that, do you have any detailed knowledge about those borrowings?... No, I didn't ask him much. Did he ever discuss with you the question of redeeming the debenture?... Never. Paying it off?... No. Were the affairs of Baseform something that he discussed with you regularly?... Not regularly.''
From this evidence, totally uncontradicted, it seems clear that Mr Jagelman had discussed with his wife that he proposed to borrow money and that Mrs Jagelman was aware that moneys had been paid to Mr Jagelman which she understood were borrowings. That evidence was in no way in conflict with the evidence of Mr Jagelman who made clear that his wife was aware that moneys had been advanced to him by way of loan.
It is difficult to see, when Mrs Jagelman's evidence was not challenged, how the Tribunal could take the view that it should not be accepted. Further, Mrs Jagelman's evidence did operate as some corroboration of her husband's evidence and negated the concept of recent invention.
The accounting records to which the submission refers are, it must be said, somewhat of a double-edged sword.
It will be recalled that no accounting records were made of any kind recording the payments to Mr Jagelman until 1990. Then accounting records were prepared by a Mrs Rowe, a practising accountant, instructed by Mr Jagelman to prepare accounting records and tax returns. It seems Mrs Rowe was given no instructions as to carrying out her task and worked from primary documents. The accounts, as prepared in these circumstances, can hardly, as such, provide much corroboration. They do, however, treat the payments made by Baseform to Mr Jagelman, when made, as loans. They also show interest accruing to Baseform on
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these loans. Ultimately, the accounts also set off the loans against the debenture debt. Even accepting that Mr Jagelman assented to that treatment (he probably signed a director's statement to the accounts), the assenting to it took place well outside the year of income and could not be treated as being a sufficient signification of agreement to constitute a set off in the year of income.On the whole I think it was open to the Tribunal to ignore the accounts, having regard to the case that Mr Jagelman was making that these accounts should basically be ignored.
The question thus becomes whether the Tribunal failed to take into account the evidence of Mrs Jagelman and if so whether this constituted an error of law. I should say that it would be expected that the Tribunal, if it did take the evidence of Mrs Jagelman into account, would have at least referred to it if only to reject it.
I approach this submission conscious that it will generally be right for the Court on appeal to adopt a ``restrained approach'' to examining the adequacy of the reasons of the Tribunal:
Blackwood Hodge (Australia) Pty Ltd v Collector of Customs (NSW) (1980) 47 FLR 131 at 145. The Tribunal has a busy caseload which it is under a statutory duty to hear and determine without undue technicality. Its members may, as in the present case, but need not, be legally trained. I accept, as Sheppard J observed in
Bisley Investment Corporation Ltd v Australian Broadcasting Tribunal (1982) 59 FLR 132 at 157 that there should not be imposed upon the Tribunal a standard of perfection which may be well nigh unattainable. As Sheppard J there said, it is ``substantial compliance'' with the provisions of s 43(2B) of the AAT Act that is required. That section, which follows the requirement in s 43(2A) upon the Tribunal to give reasons for its decision, provides:
``Where the Tribunal gives in writing the reasons for its decision, those reasons shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based.''
Clearly it can not be expected to flow from s 43(2B) that the Tribunal will refer in detail to every piece of evidence which may be adduced during the course of a hearing. There will need to be the occasion to be selective. However, in the present case the assertion in the reasons of the Tribunal that Mr Jagelman did not communicate the idea of a separate loan account to his wife, that the idea of a loan account was a recent invention and that no corroboration was to be found in the evidence of a loan account is wholly contrary to the evidence and leaves no conclusion open other than that the Tribunal must in the circumstances have overlooked the evidence of Mrs Jagelman. In part this may have arisen because the parties did not in their submissions put weight on the matter of whether the payments from Baseform to Mr Jagelman were in fact loans. The essence of the dispute between the parties in the submissions made by counsel lay in the issue of set off.
In these circumstances I have reached the conclusion that in overlooking the evidence of Mrs Jagelman, as well as in denying procedural fairness to Mr Jagelman, the Tribunal erred in law, with the result that its decision should be set aside and the matter remitted to a Tribunal differently constituted for rehearing. It will be a matter for that Tribunal whether the rehearing should proceed by reference to the evidence already given or whether evidence should be taken afresh. I note in this regard that if, as one might expect it would be, the question of whether loans were made is an issue in the new hearing, the question of credit, both of Mr Jagelman and Mrs Jagelman, may arise for decision and in this event it may be preferable for evidence to commence afresh.
I would make the following orders.
- 1. Application allowed.
- 2. Decision of the Administrative Appeals Tribunal dated 5 October 1994 be set aside.
- 3. The applicant's application to review the objection decision of the Commissioner of Taxation be remitted for rehearing to a Tribunal differently constituted to be heard again with or without the admission of fresh evidence as the Tribunal should think fit.
- 4. Respondent to pay the applicant's costs of the application to this Court.
THE COURT ORDERS THAT:
(1) Application allowed.
(2) Decision of the Administrative Appeals Tribunal dated 5 October 1994 be set aside.
(3) The applicant's application to review the objection decision of the Commissioner of
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Taxation be remitted for rehearing to a Tribunal differently constituted.(4) Respondent to pay the applicant's costs of the application to this Court.
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