CLOUGH ENGINEERING LIMITED v FC of TMembers:
TE Barnett DP
RD Fayle SM
Administrative Appeals Tribunal
TE Barnett (Deputy President) and Associate Professor RD Fayle (Senior Member)
This is an application by Clough Engineering Limited (``the applicant'') pursuant to s 14ZZ of the Taxation Administration Act 1953 to review an objection decision made by the Deputy Commissioner of Taxation (``the respondent'') on 14 September 1996, to disallow, pursuant to a determination under s 177F of the Income Tax Assessment Act 1936 (``the Act''), a deduction of $6,017,797 claimed in the year ended 30 June 1990 and to impose penalty tax pursuant to s 226 of the Act.
2. The applicant was represented by Mr R Norton of Norton Smailes, barristers and solicitors, assisted by Mr A Ross of that firm and the respondent was represented by Mr S Owen-Conway QC assisted by Ms L Price of the Australian Government Solicitor's office.
3. At the commencement of the hearing Mr Norton requested, pursuant to s 14ZZE of the Taxation Administration Act, that the proceedings be in public and it was so ordered.
4. The following persons, in addition to affidavits tendered, gave oral evidence, on behalf of the applicant:
Mr RM Reid, a director of the applicant;
Mr M Uchanski, group accountant for the applicant;
Mr P Knight, managing director of the applicant; and
Mr WH Clough, director and past managing director of the applicant.
5. The following persons, in addition to affidavits tendered, gave oral evidence on behalf of the respondent:
Mr J Jancey, an officer of the respondent; and
Mr P Haydon, a former officer of the respondent.
In addition, an affidavit of Mr M Hicks, an officer of the respondent, was tendered by the respondent.
6. The Tribunal had before it documents filed pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (``the T documents''), sixty two exhibits, including the affidavits mentioned, tendered by the applicant and thirty exhibits, including affidavits mentioned and related interrogatories, tendered by the respondent.
Broad outline of ``Facts''
7. It is common cause that during the year of income in question, the year ended 30 June 1990, the applicant claimed a deduction for interest expense of $6,017,797, being interest incurred to the Clough Group Trust. That deduction, whilst allowable pursuant to s 51(1) of the Act, was disallowed following a lengthy investigation carried out by the respondent. The respondent maintains that the interest is not allowable as a result of a determination made
ATC 2026pursuant to s 177F of the Act. In its notice of amended assessment issued to the applicant on 13 June 1996, (A56),
8. The applicant, Clough Engineering Limited (``CEL'') is a wholly owned subsidiary of Clough Limited. There are a number of other directly and indirectly wholly owned subsidiaries of Clough Limited, collectively referred to as ``the Clough Group'', included in which, at all material times, were Codelfa Constructions Pty Ltd (``Codelfa''), Clough Petrosea Pty Ltd (``Clough Petrosea'') and McLean & Sons Pty Ltd (``McLean''). Clough Petrosea was also trustee of the Clough Group Trust (``the trust'') which was created on 13 January 1989 and settled on 11 May 1989 (R 27A, p. 32-58).
9. The Clough Group (and its predecessors) has, for decades, carried on business, originally in the building industry, more recently in civil and heavy engineering contracting and associated fields both in Australia and overseas, in its own capacity and in joint ventures. Over the years the Group borrowed working capital from commercial lenders. Those funds and accumulated profits provided working capital funding of various subsidiaries' operations by way of interest free inter-company loans. In this respect, at 30 June 1989, the applicant owed its parent, Clough Limited, $33,541,445. Similarly, the applicant owed Codelfa $8,058,662 being an accumulation of amounts lent to it in the ordinary course of business. Further, the trust was indebted to the applicant in the sum of $1,455,037.
10. At 30 June 1989 the Clough Group and associated family interests of Mr WH Clough held directly and indirectly 85.8 per cent
11. ACL had, at all material times, a wholly owned subsidiary, Garrick Agnew Pty Ltd (``GAPL''). At 30 June 1989 that company was not operating, its only asset being two debts totalling $618,331 (of which $518,331 was owed by ACL), and liabilities of $845 leaving net assets of $617,486 (R5).
12. On 3 July 1989
13. On the same day, Codelfa called in its loan of $8,086,662 from the applicant and immediately on-lent it interest free to Clough Petrosea as trustee for the trust, which in turn immediately repaid its debt of $1,455,037 to the applicant and on-lent the balance, $6,603,625 to the applicant at interest. The total of the amounts lent to the applicant at interest by the trust on this day was therefore $27,353,625. That amount remained outstanding as at 30 June 1990.
14. On 27 June 1990, the applicant paid interest to the trust of $6,017,797, the amount in dispute. On that same day the trust distributed the same amount to GAPL, a discretionary beneficiary (R 27A, p. 33, cl. 1.2(B)(ii)).
15. GAPL, in its income tax return for the year ended 30 June 1990 offset its otherwise taxable income of $6,017,258 by losses
ATC 2027transferred to it from its parent pursuant to s 80G of the Act.
16. On 22 December 1989
17. The on-lending of $20,000,000 to the applicant, the deed of release and the equitable mortgage were duly entered into on that day (22 December 1989) by the respective parties and documented (T p. 103-106, T p. 100 and T p. 107-127 respectively).
18. The remaining $500,000 was deposited to the Westpac Bank account of GAPL on 27 December 1989 and immediately withdrawn and deposited in the Westpac Bank account of ACL (R3d), by way of an additional loan to its parent company. ACL immediately drew a cheque for $500,000 in favour of the applicant in part reduction of moneys owed, which sum was then paid into the account of the applicant. On the same day the applicant paid McLean $500,000 by way of loan (Tr. p. 200).
19. The income distribution of $6,017,797 subsequently received on 27 June 1990 by GAPL and mentioned above, was immediately used to repay partly its debt of $20,500,000 to McLean.
20. Whilst not within the year of income in question, it is common ground that on 6 July 1990 the applicant made a further interest payment to the trust. That payment was $14,482,203 being interest prepaid three years in advance. On the same day two transactions followed. First, the trust distributed $12,000,000 trust income to GAPL as a beneficiary, which company immediately repaid McLean that amount in part repayment of its loan of $20,500,000. Second, the trust immediately lent $2,482,203 to the applicant.
21. About a year later, on 27 June 1991 (also outside the year of income in question), McLean lent the trust $2,482,203 and the trust made a further distribution of income to GAPL of $2,482,203, being the balance of the interest income it had received from the applicant on 6 July 1990. GAPL immediately repaid McLean that sum, thus extinguishing its debt.
22. Again, whilst not within the year of income in question, it is common ground that in the years of income immediately following, the applicant claimed a deduction for interest expense of $14,482,203 pursuant to s 51(1) but subject to s 82KZM, whilst the trust returned a similar amount of assessable income in the year of income ended 30 June 1991 and offset losses transferred to it by ACL pursuant to s 80G of the Act. Those losses for both the 1989/90 and 1990/91 years of income totalled $20,499,499.
23. The Tribunal understands that the respondent concedes, whilst reserving its right to contest the actual time when decisions were taken and or implemented, that the above transactions are not considered to be shams.
24. The respondent relies on Part IVA of the Act. Broadly put, this requires it to identify a scheme which gives rise to a tax benefit, form the view based on certain statutory criteria, that the scheme was entered into for a dominant purpose or purposes of achieving the tax benefit and if so, the Commissioner may determine that the tax benefit, in this case a deduction allowable to the applicant, shall not be allowable in relation to the year of income. Having made such an adjustment, the Commissioner may make such compensating adjustments that he considers are fair and reasonable to make.
Section 177A interpretation
``177A(1) [Definitions] In this Part, unless the contrary intention appears:
- (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
- (b) any scheme, plan, proposal, action, course of action or course of conduct;
`taxpayer' includes a taxpayer in the capacity of a trustee.
177A(2) [Taxpayer] The definition of `taxpayer' in subsection (1) shall not be taken to affect in any way the interpretation of that expression where it is used in this Act other than this Part.
177A(3) [Unilateral scheme] The reference in the definition of `scheme' in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.
177A(4) [`Carrying out'] A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons.
177A(5) [Purpose of scheme] A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.
SECTION 177B OPERATION OF PART
177B(1) [Part not limited by other provisions] Subject to subsection (2), nothing in the provisions of this Act other than this Part or in the International Tax Agreements Act 1953 or in the Petroleum (Australia-Indonesia Zone of Cooperation) Act 1990 shall be taken to limit the operation of this Part.
177B(2) [Division 16C excluded] This Part shall not be taken to affect the operation of Division 16C of Part III.
177B(3) [Specific provisions to apply before Part IVA] Where a provision of this Act other than this Part is expressed to have effect where a deduction would be allowable to a taxpayer but for or apart from a provision or provisions of this Act, the reference to that provision or to those provisions, as the case may be, shall be read as including a reference to subsection 177F(1).
177B(4) [Deduction otherwise allowable] Where a provision of this Act other than this Part is expressed to have effect where a deduction would otherwise be allowable to a taxpayer, that provision shall be deemed to be expressed to have effect where a deduction would, but for subsection 177F(1), be otherwise allowable to the taxpayer.
SECTION 177C TAX BENEFITS
177C(1) [Obtaining a tax benefit] Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to-
- (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or
- (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;
and, for the purposes of this Part, the amount of the tax benefit shall be taken to be-
- (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; and
- (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph.
177C(2) [Exclusions] A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to-
- (a) the assessable income of the taxpayer of a year of income not including an amount that would have been included, or might reasonably be expected to have
ATC 2029been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out where-
- (i) the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a declaration, election or selection, the giving of a notice or the exercise of an option by any person, being a declaration, election, selection, notice or option expressly provided for by this Act; and
- (ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, election, selection, notice or option to be made, given or exercised, as the case may be; or
- (b) a deduction being allowable to the taxpayer in relation to a year of income the whole or a part of which would not have been, or might reasonably be expected not to have been, allowable to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out where-
- (i) the allowance of the deduction to the taxpayer is attributable to the making of a declaration, election or selection, the giving of a notice or the exercise of an option by any person, being a declaration, election, selection, notice or option expressly provided for by this Act; and
- (ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, election, selection, notice or option to be made, given or exercised, as the case may be.
177C(3) [Exclusions deemed attributable to declarations, etc] For the purposes of subparagraph (2)(a)(i) or (b)(i), the non- inclusion of an amount in the assessable income of a taxpayer or the allowance of a deduction to a taxpayer shall be deemed to be attributable to the making of a declaration, election or selection, the giving of a notice or the exercise of an option where the amount would have been included in that assessable income, or the deduction would not have been allowable, if the declaration, election, selection, notice or option had not been made, given or exercised, as the case may be.
SECTION 177D SCHEMES TO WHICH PART APPLIES
177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where-
- (a) a taxpayer (in this section referred to as the `relevant taxpayer' ) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
- (b) having regard to-
- (i) the manner in which the scheme was entered into or carried out;
- (ii) the form and substance of the scheme;
- (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
- (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
- (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
- (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
- (vii) any other consequence for the relevant taxpayer, or for any person
ATC 2030referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
- (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).
SECTION 177F CANCELLATION OF TAX BENEFITS ETC.
177F(1) [Commissioner's discretion to cancel tax benefit] Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may-
- (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or
- (b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income;
and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.
177F(2) [Inclusion of benefit in assessable income] Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.
177F(3) [Compensating adjustments] Where the Commissioner has made a determination under subsection (1) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the `relevant taxpayer' )-
- (a) if, in the opinion of the Commissioner-
- (i) there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and
- (ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income,
- determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or
- (b) if, in the opinion of the Commissioner-
- (i) an amount would have been allowed or would be allowable to the relevant taxpayer as a deduction in relation to a year of income if the scheme had not been entered into or carried out, being an amount that was not allowed or would not, but for this subsection, be allowable, as the case may be, as a deduction to the relevant
ATC 2031taxpayer in relation to that year of income; and
- (ii) it is fair and reasonable that that amount or a part of that amount should be allowable as a deduction to the relevant taxpayer in relation to that year of income,
- determine that that amount or that part, as the case may be, should have been allowed or shall be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income;
and the Commissioner shall take such action as he considers necessary to give effect to any such determination.
177F(4) [Deduction of compensating adjustment] Where the Commissioner makes a determination under subsection (3) by virtue of which an amount is allowed as a deduction to a taxpayer in relation to a year of income, that amount shall be deemed to be so allowed as a deduction by virtue of such provision of this Act as the Commissioner determines.
177F(5) [Request for determination under subsec (3)] Where, at any time, a taxpayer considers that the Commissioner ought to make a determination under subsection (3) in relation to the taxpayer in relation to a year of income, the taxpayer may post to or lodge with the Commissioner a request in writing for the making by the Commissioner of a determination under that subsection.
177F(6) [Decision of Commissioner] The Commissioner shall consider the request and serve on the taxpayer, by post or otherwise, a written notice of his decision on the request.
177F(7) [Objections] If the taxpayer is dissatisfied with the Commissioner's decision on the request, the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953.''
The scheme identified by the respondent
25. At the hearing the respondent identified the following scheme, as defined in s 177A(1) of the Act, upon which it relies for the purposes of these proceedings:
``The scheme is a series of transactions entered into by companies in the Clough Engineering Group and the Agnew Clough Group between 1989 and 1991 which enabled accumulated tax losses in Agnew Clough Ltd to be utilised by Clough Engineering Ltd (`CEL') in a manner not provided for in s. 80G of the Act and by which CEL obtained the tax benefit of such tax losses in the form of deduction in the 1990 and 1991 income years for interest paid by CEL on loans from the Clough Group Trust and set up deductions for the 1992 and 1993 income years, and at the same time provided for the amounts of interest paid by CEL on the loans from the Clough Group Trust to be returned to CEL as repayment of capital.
The companies which were parties to the scheme and the principal transactions which comprised the scheme are hereinafter particularised.
1. The agreement, arrangement, understanding, intention or expectation reached by Clough Ltd, Codelfa Construction Pty Ltd, Clough Petrosea Pty Ltd, Garrick Agnew Pty Ltd (`GAPL'), Mount Resources Ltd (formerly known as Agnew Clough Ltd), McLean & Sons Pty Ltd (`McLean') and CEL between June 1989 and December 1989:
- (a) that the transactions described at (2) to (12) below be operating together at or about the same time;
- (b) that CEL would pay interest income of $20,500,000 to Clough Petrosea Pty Ltd as trustee of the Clough Group Trust on the loan referred to in (7) below;
- (c) that Clough Petrosea Pty Ltd as trustee of the Clough Group Trust would distribute to GAPL the interest income of $20,500,000 received from CEL on the loan referred to in (7) below to enable GAPL to pay $20,500,000 to McLean in repayment of the loan referred to in (9) below;
- (d) that GAPL would pay the $20,500,000 income distributed to it by the Clough Group Trust to McLean in repayment of the loan of $20,500,000 referred to in (9) below;
- (e) that McLean would pay the $20,500,000 received from GAPL by way of loan repayments to CEL in repayment of the loan of $20,500,000 referred to in (12) below.
2. The repayment by CEL of an interest free loan from Codelfa Construction Pty Ltd of $8,058,662.
3. The repayment by CEL of an interest free loan from Clough Ltd of $20,750,000.
4. The interest free loan of $20,750,000 from Clough Ltd to Clough Petrosea Pty Ltd.
5. The interest free loan of $20,750,000 from Clough Petrosea Pty Ltd to Clough Group Trust.
6. The interest free loan of $8,058,662 from Codelfa Construction Pty Ltd to the Clough Group Trust.
7. The interest bearing loan of $27,335,625 from the Clough Group Trust to CEL.
8. The meeting of directors of CEL, GAPL, McLean and Mount Resources Ltd which took place on or about 20 December 1989 including the business and resolutions of each of those meetings.
9. The interest free loan of $20,500,000 from McLean to GAPL on or about 22 December 1989 on the conditions that GAPL immediately on lent $20,000,000 to CEL, immediately forgave the said loan to CEL and only made loan repayments to McLean out of income received by GAPL.
10. The interest free loan of $20,000,000 from GAPL to CEL on or about 22 December 1989.
11. The execution by GAPL of the Deed of Release on or about 22 December 1989 forgiving the loan of $20,000,000 from GAPL to CEL referred to in (10) above.
12. The interest free loan of $20,500,000 from CEL to McLean on or about 22 December 1989.
13. The payment by CEL of $6,017,797 interest to Clough Petrosea Pty Ltd as trustee for the Clough Group Trust on or about 27 June 1990 pursuant to the terms of the loan of $27,353,625 referred to in (7) above.
14. The distribution on or about 27 June 1990 by the trustee of the $6,017,797 interest income received by the Clough Group Trust to GAPL.
15. The payment on or about 27 June 1990 of $6,017,797 by GAPL to McLean as part repayment of the loan of $20,500,000 referred to in (9) above.
16. The payment on or about 27 June 1990 of $6,017,797 by McLean to CEL as part repayment of the loan of $20,500,000 referred to in (2) above.
17. The transfer of $6,017,258 losses from Mount Resources to GAPL pursuant to section 80G of the Act for the year ended 30 June 1990.
18. The payment by CEL on or about 6 July 1990 to the Clough Group Trust of $14,482,203 for 3 years' interest in advance on the loan referred to in (7) above.
19. The distribution on or about 6 July 1990 by the trustee of the $12,000,000 interest income received by the Clough Group Trust to GAPL.
20. The loan of $2,484,203 from Clough Group Trust to CEL on or about 6 July 1990.
21. The payment on or about 6 July 1990 of $12,000,000 by GAPL to McLean as part repayment of the loan of $20,500,000 referred to in (9) above.
22. The payment on or about 6 July 1990 of $12,000,000 by McLean to CEL as part repayment of the loan of $20,500,000 referred to in (12) above.
23. The loan of $2,482,203 from McLean to Clough Group Trust on or about 27 June 1991.
24. The distribution by the trustee of the Clough Group Trust of $2,482,203 to GAPL on or about 27 June 1991.
25. The payment on or about 27 June 1991 of $2,482,203 by GAPL to McLean to repay the balance outstanding on the loan of $20,500,000 referred to in (9) above.
26. The transfer of $14,482,241 losses from Mount Resources Ltd to GAPL pursuant to section 80G of the Act for the year ended 30 June 1991.''
The Tribunal notes that the respondent has not included the round robin of cheques for $500,000 (R3a-d) as part of the scheme because, as the Tribunal understands its submission, that is unnecessary.
26. In order to facilitate an orderly approach to dealing with the extensive evidence before it the Tribunal firstly identifies what it regards as relevant issues and considers the evidence in relation to each, concluding each with findings of fact.
27. The Tribunal identifies the following as relevant issues:
- (A) Whether the creation of the trust on 13 January 1989 (settled as a deed on 11 May 1989) and its subsequent conduct is explained in commercial terms.
- (B) Whether on 26 June 1989, at a meeting of the directors of Clough Petrosea as trustee for the Clough Group Trust those present, in their other capacities, made appropriate resolutions/decisions to require the applicant, on 3 July 1989, to repay in part the loan from its parent, Clough Limited; to repay its loan from Codelfa; to authorise Clough Limited to make an interest free loan of $20,750,000 to the trust; to authorise Codelfa to make an interest free loan of $8,086,662 to the trust; and to authorise the trust to lend the applicant and the applicant to borrow, the sum of $27,353,625 at interest and if so, at what rate.
- (C) Whether at the meeting of 26 June 1989 a decision was then taken to carry out the transactions, undertaken in December 1989 and June 1990.
- (D) (i) Whether the transactions undertaken on 22 December 1989 gave rise to a commercial benefit to GAPL.
- (ii) Whether the distributions of income from the trust to GAPL, in relation to the years of income ended 30 June 1990 and 1991, provided GAPL with a commercial benefit.
28. The above issues will now be considered in the light of the evidence.
(A) Whether the creation of the trust on 13 January 1989 (settled as a deed on 11 May 1989) and its subsequent conduct is explained in commercial terms.
29. A copy of the deed of trust appears as an annexure to the affidavit of Mr P Haydon (R27A, Annexure 3) which recites that Jeffrey Arthur Sydney Mews paid the trustee (Clough Petrosea Pty Ltd) $50.00 on 13 January 1989 to give effect to the creation of the trust as set out in the deed dated 11 May 1989. There is no dispute in this regard.
30. Mr Reid's evidence is that a purpose of establishing the trust was to provide a vehicle by which the Clough Group could derive income that could be distributed amongst the beneficiaries as their need dictated. Income would be generated from investments and from interest derived from loans advanced to companies within the Clough Group.
31. To this end, the trustee acquired units in the Zinco Unit Trust and an interest in the Morris Family Trust, as investments. On 8 February 1989 the trust acquired half the issued units in the Zinco Unit Trust (A35) and in the year ended 30 June 1989 received a distribution of income of $2,691,000 from that source and similarly, a distribution of income from the Morris Family Trust of $1,000,000 (A10) and for the following year ended 30 June 1990, $140,000 from that latter source. No further income distributions from those sources were anticipated nor have any been received since (T pp. 4, 160 & 253) as the units in the Zinco Unit Trust were subsequently disposed of.
32. The trust income for the year ended 30 June 1989 was distributed to Codelfa as to $2,295,000, to GAPL as to $100,000 and the balance of $1,296,000 to the applicant. In the year ended 30 June 1990, as stated, the trust received a distribution from the Morris Family Trust of $140,000 and also the interest income from the applicant mentioned above, of $6,017,797. On 27 June 1990 the trust distributed $6,017,797 to GAPL and $140,000 to the applicant.
33. The evidence of both Mr Reid and Mr Knight was that the Clough Group (which the Tribunal understands to be a reference to Clough Limited and its wholly owned subsidiaries generally) traditionally had borrowed money from outside lenders as and when required and money was lent within the Group to whichever operating subsidiary had a need. With one exception, intercompany loans were interest free. The exception was that the applicant should pay Clough Limited interest equivalent to that payable by it on money
ATC 2034borrowed from the R & I Bank and on-lent to the applicant. In the year ended 30 June 1989 those borrowings approximated $12,800,000 so the applicant paid Clough Limited $1,977,197 interest in this respect (A1, paras.16, 22). When the decision to rearrange inter-company loans was made
34. Mr Reid told the Tribunal that initially the trust was established to undertake the Zinco Unit Trust investment (Tr. p. 253) and as a group investment vehicle. Another purpose was for it to act as ``banker'' for the Group. It took the form of a discretionary trust of which all Group companies and related companies (which would include ACL and GAPL) were discretionary beneficiaries. The term ``banker'' was used in a limited sense, that is, it referred only to the trust being a borrower and lender and not to it making daily deposits or payments concerned with ongoing day to day business (Tr. p. 288).
35. It was proposed that the trust would charge interest on inter-company loans where applicable and distribute its net income to beneficiary companies which needed income for whatever reason or needed to build up assets without an offsetting liability.
36. The Tribunal accepts that these reasons, of themselves, found a commercially plausible justification for having created the trust. However whilst the evidence is that the trust made several investments including the units in the Zinco Unit Trust
``You see, if the strategy was that the Trust was to act as a Group banker, that was the strategy you say? - It was one of the strategies that we were considering.
Was that strategy ever put into effect, and if so by what means? - It wasn't properly put into effect.
It was never put into effect? - No.
Is that your evidence? - I said it wasn't properly put into effect.''
(Tr. p. 367)
The evidence does support the contention that the trust was formed to undertake investment for the Clough Group, but not necessarily exclusively. However, in the absence of appropriate minutes and having regard to the overt acts relating to loan transactions involving the trust since its creation, the evidence does not bear out the assertion by the applicant that the trust was used primarily or principally as group banker.
Findings of fact in relation to Issue A
37. The Tribunal makes the following findings of fact in relation to what it has called Issue A.
- • The trust was created on 13 January 1989, the relevant deed being settled on about 11 May 1989.
- • The trust was created for two main purposes: (i) as an investment vehicle for the Clough Group to allow flexibility in directing future profits from such investments to entities (beneficiaries) in the Clough Group where (it would be determined at the time) those would most benefit the Clough Group in a commercial sense; and (ii) to act as ``banker'' for the group as that term is discussed above.
- • That the trust was used for the first main purpose above, particularly for the year of income in question in relation to its investment in the Zinco Unit Trust and its role as a beneficiary in the Morris Family Trust and distributions of income to beneficiaries from those sources were made for the years ended 30 June 1989 and 1990 respectively.
- • That the trust was not used as a ``banker'' during the relevant years of income as that term is discussed above.
- • That a significant use of the trust was to receive the interest free loans, one from Clough Limited and the other from Codelfa, said to be made on 3 July 1989, totalling $28,808,662, of which it immediately repaid the applicant a debt owed to it of $1,455,037, leaving $27,353,625 which was immediately on-lent to the applicant at interest.
- • That the trust received interest of $6,017,797 from the applicant during the year ended 30 June 1990 which it distributed to a beneficiary, GAPL.
- • That the trust received a distribution from the Morris Family Trust of $140,000 during the year ended 30 June 1990 which it distributed to the applicant as a beneficiary.
- • That on 6 July 1990 the trust received $14,482,203 from the applicant, being interest in advance (T p. 173).
- • That on 6 July 1990 the trust distributed $12,000,000 income to GAPL as a beneficiary (T p. 175).
- • That on 6 July 1990 the trust lent $2,482,203 to the applicant, interest free and repayable on demand (T p. 176).
- • On 27 June 1991 the trust borrowed $2,482,203 from McLean, interest free.
- • On 27 June 1991 the trust distributed $2,482,203 income to GAPL as a beneficiary (T p. 177).
(B) Whether on 26 June 1989, at a meeting of the directors of Clough Petrosea as trustee for the Clough Group Trust those present in their other capacities made appropriate resolutions/decisions to require the applicant, on 3 July 1989, to repay in part the loan from its parent, Clough Limited; to repay its loan from Codelfa; to authorise Clough Limited to make an interest free loan of $20,750,000 to the trust; to authorise Codelfa to make an interest free loan of $8,086,662 to the trust; and to authorise the trust to lend the applicant and the applicant to borrow, the sum of $27,353,625 at interest and if so, at what rate.
38. Relevant evidence in relation to this issue was given by Messrs Reid, Uchanski, Knight and Clough.
39. On 22 June 1989 a memorandum was sent by Mr Reid, on the applicant's letterhead, to ``WH Clough, AJ Scott, PJ Knight, DF Young, GJ Smith, cc JM Clough, IC Griffiths, BE Hewitt, BO Puncher, TR Humphry'' on the subject of ``Meeting of Directors - Clough Petrosea Pty Ltd''. The message was:
``Attached is the agenda for the inaugural meeting of the Clough Group Trust to be held next Monday. I need to have a quorum (any two directors).
Anybody else who wishes to attend is more than welcome.''
40. The agenda attached to the memorandum set out the proposed items of business after noting that ``JS Mews of Price Waterhouse has been invited to attend''. Beneath that appears:
1. Presentation by JS Mews of reasons for and rationale behind the Trust.
2. Confirmation of opening bank accounts.
3. Decision whether or not to have auditors.
4. Note of expected income before 30.6.89 and future income.
5. Discussion of disbursement of income received before 30.6.89 and future policy thereon.
6. Any other business.
(Signed by Mr Reid as Company Secretary)''
41. Exhibit A9 is a copy of the agenda with hand written inscription of the initials of those present at the meeting. Mr Reid identified these to be Messrs Clough, Knight, Smith, Griffiths, Scott, Reid, Uchanski and Mews.
42. Exhibit A10 is ``Minutes of the meeting of Directors of Clough Petrosea Pty Ltd as Trustee for the Clough Group Trust held at 6th floor, 251 St Georges Terrace, Perth on 26 June 1989''. They record the presence of Messrs WH Clough, PJ Knight, AJ Scott and GJ Smith with Mr Reid in attendance. The minutes record the following resolutions:
``The trustee resolved to distribute net income of the Clough Group Trust for the year ended 30 June 1989 as follows:
Codelfa Constructions Pty Ltd$2,295,000
Garrick Agnew Pty Ltd$100,000
and the balance of net income to be distributed to Clough Engineering Limited.''
There was no other business recorded.
43. That a meeting of those persons mentioned by Mr Reid (above) occurred on 26 June 1989 is not doubted. Messrs Knight and Clough attached to their respective affidavits copies of the relevant page from their diaries noting the meeting for 9.30am that day whilst that of Mr Reid was in evidence as A39. All three witnesses gave evidence of attending and of matters discussed.
44. The evidence is that at the meeting Mr Mews of Price Waterhouse and Mr Reid explained the purpose of the trust and outlined proposals for restructuring the inter-company loans such that the trust lends money to the applicant at interest.
45. Prior to the 26 June 1989 meeting, on 14 April 1989 Parker and Parker, solicitors, wrote to ``The Managing Director'' of the applicant and marked the letter ``Attention: Mr R Reid''. Neither Mr Knight nor Mr Clough recall seeing the letter. Mr Reid's evidence is that he received it and did at some time prior to the 26 June 1989 meeting mention it to both (Tr. p. 225, 237 & 443). Set out below are relevant extracts of that letter (T p. 31-48):
The Clough Group Trust - Financing Transactions
We refer to previous discussions in the matter and outline our detailed advice below.
In our opinion, and subject to our comments, the structuring of the transactions as proposed will be legally effective. There is a risk that the forgiveness of debt will be open to attack by a liquidator, and the funds so recovered will not automatically go to a secured creditor. It may be possible to overcome some of these problems by modifying the transactions to meet the particular problems. Our detailed reasons are set out below.
Step 1 - The Loan
Clough Engineering Limited (`CEL') proposes to lend the sum of $20 million to Company B (`B'), a shelf company presently with assets of $2.00. B will then lend a sum of $20 million to Company A (`A'), again a shelf company with assets of $2.00 only. Both B and A are wholly owned subsidiaries of CEL. A will then lend $20 million to CEL.
At this point the asset/liability position of each of the companies will be as follows:-CEL: Asset -- debt $20 million from B. Liability -- $20 million to A. Company B: Asset -- debt $20 million from A. Liability -- $20 million to CEL. Company A: Asset - debt $20 million from CEL. Liability -- debt -- $20 million to B.
Step 2 - The Forgiveness
B then forgives the debt of $20 million from A, for no consideration. This gives B a loss of $20 million and A a gain of $20 million.
Step 3 - Subsequent Steps
The intention is then that certain shares in B would thereafter also be issued to Company D (`D').
B will be used as a recipient of income through the Clough Group Trust and any profits so earned will go to repay the debt to CEL and off-set present tax losses in the hands of D.
We have been asked to confirm that the proposed transactions (`Proposal') will be legally effective. Our instructions do not include advising on any taxation issues.
The question of legal effect of the Proposal can be analysed by considering each of the following questions:-
- 1. Whether the Proposal, or any part of it can be treated as a fiscal or legal nullity;
- 2. Whether the forgiveness can be avoided, in particular on a liquidation of B;
- 3. If the forgiveness can be avoided, how the debt between B and CEL can be secured to ensure that on any avoidance the funds released through A are paid to
ATC 2037CEL (as secured creditor) and not to the liquidator.
We shall deal with each question in turn.
1. Whether the Proposal or any part of it can be treated as a fiscal or legal nullity?
(Then follows extensive advice, only parts of which were considered in evidence and those parts are reproduced below.)
The Articles of Association of a company usually provide for the management of the company to be undertaken by the directors. The inclusion of a provision of this nature delegating powers to the directors should be checked to confirm that any requirement for formal validity (such as the holding of board meetings and the declarations of any interest in the proposal) are met prior to entering into the Proposal. If the articles do not contain such a power (which would be unlikely) then consideration would need to be given to amending the articles to overcome this defect.
In some circumstances persons contracting with a company are entitled to rely on the `indoor management rule'. This Rule enables assumptions to be made about the due compliance of the company with matters of internal management. In view of the degree of association between the companies that assumption will not be appropriate in this context. It is for this reason that careful compliance with corporate requirements is recommended.
On the basis that the requisite powers have been delegated to the directors, the next question is that of the limit on those powers. In particular, directors are required to exercise company powers for purposes reasonably incidental to a company's business.
The test of whether the directors are exercising their powers properly was described by Pennycuick J in
Charterbridge Corporation Ltd v Lloyds Bank Ltd and Another  2 All ER 1185 at 1194 as being whether an intelligent and honest man in the position of a director of the company could in the whole of the circumstances have reasonably believed that the transaction was for the benefit of the company. It is not necessary for the directors to address their minds specifically to the interest of the company in connection with each particular transaction. This case was concerned with a transaction involving a number of companies in a company group, not all of which stood obviously to benefit from their participation in the transaction.
Accordingly, the risk posed by this limitation on the manner in which director's (sic) powers can be exercised can be cured by ensuring that each part of the Proposal is commercially justifiable. In the case of the loans differences between the terms upon which each loan is made should be established to highlight their commerciality and to remove the suggestion of A acting as a simple conduit.
In practical terms some protection could be provided to the Forgiveness aspect of the Proposal by the introduction of the following modifications to the loan between CEL and B:-
- (a) the increase of the amount lent to B to $21 million (whilst leaving the amount lent to A as $20 million);
- (b) a condition that B lend A $20 million and that B then forgive the debt;
- (c) a condition that the amount repayable by B to CEL only be payable out of (post tax) profits.
The effect of these changes is that a commercial justification is provided to B for entry into the transaction; the retention of $1 million. This should be used as working capital to underline the purpose of B in participating in the Proposal as a commercial purpose.
The classical test of whether a gift has been made within powers is that of Eve J in the case of
In re Lee, Behrens and Company Limited  2 Ch 46 at pages 51-52. This test was affirmed in the Rolled Steel Products Case for the purposes only of considering whether directors have abused their powers. It was expressly disclaimed as a test of company powers. The test is that the money of the company must be
ATC 2038expended for purposes reasonably incidental to the carrying on of the company's business. On this basis validity of gifts is to be determined as follows (pages 51-2):
- (i) Is the transaction reasonably incidental to the carrying on of the company's business?
- (ii) Is it a bona fide transaction?
- (iii) Is it done for the benefit and to promote the prosperity of the company?
In the absence of modifications to the Proposal, it would be difficult for the directors to meet the requirements of this test. If the Proposal will provide B with the sum of $1 million, repayable only out of profits the position must be much stronger. The $1 million provides working capital which is only repayable on advantageous terms to B. The amount forgiven prevents the position from being completely assured. If consideration were to be supplied by A, in a form that would assist B in meeting its obligations to CEL the position would be even stronger.
We set out below our conclusions in summary form:-
- (1) the Proposal, especially if modified in the manner suggested, is not ultra vires the companies;
- (2) the Proposal, if modified in the manner suggested, should not be ultra vires the directors;
- (3) there is some risk that the directors of B may breach their duties in entering into the Forgiveness, but the effect of this can be minimized in accordance with our advice;
- (4) there are no general doctrines of law that will set aside the Proposal as carried out;
- (5) a liquidator may set aside the Forgiveness within 2 years, with less ease within 4 years and with even less ease within 5 years;
- (6) a floating charge will not grip monies recovered by the liquidator from A to benefit CEL. This may not prove to be a problem, depending on who the creditors of B are at the time of the reversal and as to whether our suggestion as to different classes of shares will overcome this problem (your further review and consideration).
Please examine our advice and let us have your comments and further instructions.
(signed Parker & Parker).''
Pausing here for a moment, under cross- examination Mr Reid gave the following answer to a question put to him by Mr Owen- Conway:
``... do you agree with me that the proposal that is outlined on pages 1 and 2 of the letter [ above], in steps 1, 2, and 3, is similar to, although not identical to, the arrangement that was actually put into effect in due course? - Yes, I agree with that, yes.''
(Tr. p. 228)
46. On 26 May 1989 Mr Mews sent a facsimile to Mr S Cole of Parker & Parker (T p. 49) in the following terms:
``Further to your letter of 14 April 1989 we have reconsidered the structure. Leaving aside the need for slightly differing amounts (in relation to which we accept your advice), a broad outline of our new proposal is as follows:
- (a) McLean & Sons Pty Ltd, a wholly owned subsidiary of Clough Ltd will lend $20 million to Garrick Agnew Pty Ltd (GAPL). GAPL is a wholly owned subsidiary of Agnew Clough Ltd (ACL) and has been a wholly owned subsidiary for years. This loan will be repayable only out of income derived by GAPL and may be converted by the lender into ordinary shares of GAPL, such shares to be issued at par. McLean will be able to convert part only of its loan. GAPL will be required to ask McLean prior to each loan repayment if it wished to convert and to what extent. McLean will have an absolute right to convert if GAPL appoints a liquidator or receiver.
- (b) GAPL lends $20 million (less say $250,000) to Clough Engineering Ltd.
- (c) Clough Engineering Ltd lends the $19.75 million to McLean.
- (d) GAPL forgives the $19.75 million owing by Clough Engineering Ltd.
Do you have any comments?
47. On 2 June 1989 Parker & Parker sent a facsimile to Mr Mews and a copy to Mr Reid (T p. 50-52). The facsimile provides advice in relation to s 80G of the Income Tax Assessment Act suggesting that the issue of convertible preference shares by GAPL (to anyone other than ACL) would put the ability of transferring ACL's tax losses to GAPL in jeopardy, as well as other advice, concluding with the following paragraph:
``4. Amounts to be Lent
We note from your fax that the intention is for about $250,000 to remain with GAPL. As was indicated by our letter of 14 April 1989, there are certain difficulties in confirming that GAPL has the power to engage in the transaction and that the Directors of GAPL do not breach their duty to the Company through authorising entry into the transaction. On this basis, the larger the sum retained by GAPL the safer the position of the Directors and any lender will be. It is a matter of judgment as to whether $250,000 would be sufficient.''
48. On 8 June 1989 Parker & Parker wrote to Mr Reid at CEL. A copy of that letter appears at T p. 53. That copy has certain words crossed through and hand written inscriptions appearing. The letter is reproduced below, complete with the alterations showing the insertions, wherever appearing, in italics.
The Clough Group Trust
We refer to our previous correspondence in relation to this matter.
We understand the structure for the transaction has now been finalised as follows and as set out on the attached diagram:-
1. Step 1
Loan from McLean & Sons Pty Ltd (`McLean') of $20.5m (approximately) to
Madatdad Pty LtdGAPL (` Madatdad').
Written Offer to be accepted by performance (for stamp duty reasons). The Loan will be repayable out of future available net profits or upon liquidation of
Madatdad. It will be a condition of the Loan that $20m be on-lent from Madatdadto Clough Engineering Ltd (`CEL') and that Madatdadthen forgive the debt owing to it by CEL. As security for the loan by McLean to MadatdadGAPL Garrick Agnew Pty Ltd (`GAPL') ACL will grant a Mortgage to McLean over the shares to be held by GAPLACL in MadatdadGAPL.
2. Step 2
MadatdadACL lends $20m to CEL.
Letter of Offer of loan by
MadatdadGAPL to CEL accepted by performance by CEL of the terms of the loan. Loan repayable on demand.
3. Step 3
MadatdadGAPL forgives the debt owed to it by CEL.
Deed of Release of Debt.
4. Step 4
CEL lends $20m to McLean repayable on demand.
Letter of Offer of Loan accepted by McLean by performance.
5. Step 5
Sale of Shares in Madatdad from Clough Limited (`CL') to GAPL.
Standard Share Transfer form. The photocopy has the word ``No'' handwritten in the margin alongside this step.
6. Step 6
Mortgage granted by
GAPLACL to McLean over shares in MadatdadGAPL as security for the Loan of $20.5m.
Deposit of Share Scrip to create a Mortgage of Shares by Deposit upon terms to be embodied in a document entitled Memorandum of Deposit. The document to be executed in the ACT for stamp duty circumstances.
The documentation is to consist of Letters of Offer to be accepted by performance and the shares are to be mortgaged by deposit to avoid stamp duty of $.25 cents (sic) per $100 of money lent and secured. Nominal duty will be payable upon the Deed of Release.
We are now undertaking the preparation of the documents and will forward first drafts to you in the new (sic) future.
The letter has attached to it a diagram depicting each of the steps with the reference to Madatdad crossed through (T p. 56). Mr Reid's evidence is that it was later decided to substitute McLean because although Madatdad was a wholly owned subsidiary it ``didn't have continuity of ownership at all times between the losses [being] incurred and the income being generated.'' (Tr. p. 162)
49. On 22 June 1989, Parker & Parker wrote to Mr Reid confirming that McLean be substituted for Madatdad as the relevant party and enclosing all the relevant documentation being:
``1. Letter of Offer of Loan from McLean to GAPL;
2. Memorandum of Deposit of shares between ACL and McLean;
3. Letter of Offer of Loan from GAPL to CEL;
4. Deed of Release of Debt between GAPL and CEL;
5. Letter of Offer of Loan from CEL to McLean;
6. Letter of Direction as to payment of money from GAPL to McLean;
7. Letter of Direction as to payment of money from CEL to GAPL;
8. Section 230(8) Certificate under Companies (Western Australia) Code in relation to the mortgage of shares;
9. Power of Attorney granted by-
- (a) McLean;
- (b) ACL;
- (c) GAPL (minutes for two meetings);
- (d) CEL (minutes for two meetings).''
For convenience, the Tribunal refers to the above proposal as ``the GAPL loan transactions'' to distinguish them from the transactions which were purported to have occurred on 3 July 1989 (``the 3 July transactions'').
50. The evidence of both Mr Reid (Tr. p. 442) and Mr Clough (Tr. p. 825, 827) is that both the 3 July 1989 transactions, to rearrange the inter-company loans resulting in the trust making loans to the applicant at interest, and the GAPL loan transactions, were discussed at the 26 June 1989 meeting. Mr Reid said that he had with him at the meeting the various documents prepared by Parker & Parker referred to in their 22 June 1989 letter (Tr. p. 163). However, that meeting decided to proceed only with the former and to do so upon commencement of the next financial year. His evidence was that the GAPL loan transactions were deferred as at that time there was a prospect that ACL might be able to recommission its vanadium project and turn it to profits.
``The fact of the matter is, as you said in your evidence-in-chief, if the Nissho developments had proceeded and the outcome had been different and the plant was reactivated in November/December 1989 the GAPL loan transactions would never have taken place, would they? - I agree.''
(Tr. p. 206)
Mr Reid told the Tribunal that after the meeting on 26 June 1989 he instructed Mr Uchanski to undertake preparation of the necessary minutes and book-keeping entries to give effect to the decisions made at the meeting to proceed with the 3 July 1989 transactions.
51. On 12 January 1990, Mr Reid sent off the following memorandum on Clough Engineering Group stationery, addressed to ``All CEL Directors''. It was distributed to eleven persons including Messrs Clough and Knight, (T p. 139):
``INTERCOMPANY LOANS UTILISATION OF ACL LOSSES
I enclose for your information Directors' Minutes of Clough Engineering Limited, McLean & Sons Pty Ltd, Garrick Agnew Pty Limited and Agnew Clough Limited, evidencing a series of transaction in order to
ATC 2041enable the engineering companies to utilise Agnew Clough Limited's losses.
The net effect has been a transfer of $500,000 of real worth from the engineering companies to the ACL Group.
Peter Knight and I have discussed and are satisfied with the treatment of these intercompany loans.
If you wish to obtain further explanation of these transactions I will arrange a meeting on Wednesday January 31, 1990 at 9.00am.
Please advise either myself or Mirek Uchanski if you wish to attend.
(Signed RM Reid)''
Attached to the memorandum was a handwritten diagram depicting CEL ``on-lend $20m'' to McLean, McLean ``loan 20.5 million'' to GAPL, GAPL ``on-lend $0.5m cash'' to ACL, ACL ``re-pay existing loan $0.5m'' and GAPL ``(1) on-lend $20m (2) forgive loan'' to CEL (T p. 140).
52. The T documents contain copies of computer produced journal entries, prepared on 23 January 1990 and dated 3 July 1989 (T p. 66), showing that in the books of Clough Limited relevant entries recording the repayment of the applicant's loan of $20,750,000 and on-lending that amount to Clough Petrosea, the trustee of the trust, were processed.
53. The computer recorded journal entry for Clough Petrosea recording receipt of the loan on behalf of the trust and that for the applicant were also prepared on the same date, 23 January 1990 and dated 3 July 1989 (T p. 66 and 67 respectively).
54. In contrast, at T pages 69 and 70 is reproduced copies of hand written journal entries recording, in the trust's books, the loans by the trust to the applicant of $8,058,662 (ex Codelfa) and $20,750,000 (ex Clough Limited). These are noted as having been processed on 3 July 1989. However, the evidence is that instructions were not given by Mr Uchanski to Mr G Beaton, the accountant responsible for processing these journal entries of Codelfa, until 2 January 1990 (A29).
55. Further, in relation to the GAPL loan transactions, journal entries recording the loan of $20,500,000 from McLean to GAPL, GAPL's loan of $20,000,000 to CEL, the forgiveness, by GAPL, of the debt of $20,000,000 owed to it by CEL, the loan of $500,000 by GAPL to CEL then on-lent to McLean,
56. Mr Uchanski's evidence is that prior to the meeting of 26 June 1989 he had discussions with Mr Reid in relation to distributions of income to be made from the trust and also the proposed 3 July 1989 transactions and what eventually became the GAPL loan transactions and the way in which these could absorb ACL's tax losses. In this regard his evidence is that there was concern in the event of a liquidation of ACL that any distribution of income to a subsidiary may go to ACL's creditors as opposed to its shareholder, the Clough Group. He said that prior to the 26 June 1989 meeting Mr Reid had provided to him the Parker & Parker advice letter and draft documents in relation to what finally became the GAPL loan transaction. He further said that both loan transaction proposals were discussed at the 26 June 1989 meeting. His evidence is that there was no overt resolution of those present at that meeting to put the 3 July transactions into place at the beginning of the next financial year but that he simply assumed it was so resolved because there was no disagreement voiced. The Tribunal accepts the submission of Mr Owen- Conway in this regard - at best there was neither specific agreement nor disagreement.
57. Mr Uchanski said that Mr Reid gave instruction following the meeting, to prepare the various company (including the trustee) letters relating to the making and receiving of the loans on 3 July 1989. He said he prepared drafts immediately which were shown to Mr Reid who made an alteration in relation to the interest rate mentioned. However, the final forms of these were not prepared until late November 1989 due to more pressing work commitments at the time. When asked to produce these earlier drafts Mr Uchanski said they had been destroyed. It was submitted by Mr Owen-Conway that, having regard to the fact that Mr Uchanski had only been with the Group for about two weeks and that the letters themselves (T 10 to T 14 inclusively) are relatively brief and simple documents, this is
ATC 2042not a satisfactory explanation as to why they had not been settled soon after the meeting. In the light of this and other evidence discussed later in regard to the timing of the two loan transactions, the Tribunal does not accept Mr Uchanski's explanation but rather believes the delay was due to other exigencies.
58. When both Mr Reid and Mr Uchanski were asked why there were no relevant company minutes recording the resolutions to give effect to the 3 July 1989 transactions, their evidence was consistent in that it was company policy to confine the minutes to the bare necessities. This explanation does not sit comfortably with the fact that in relation to what became the GAPL loan transactions draft minutes for each company involved were prepared (prior to the 26 June 1989 meeting) by Parker & Parker and these became the minutes eventually adopted (T 5, T 16, T 18, T 19, T 21-23 inclusively). The fact is that the applicant and McLean, both wholly owned subsidiaries of Clough Limited were parties to those transactions and Clough interests controlled 85.8 per cent of the voting power of the ACL group. It is also apparent from a perusal of the applicant's Directors' Minutes (R9) that over the years it has minuted resolutions of Directors relating to management policy decisions.
59. As to why the relevant journal entries recording the loan transaction ostensibly resolved by the respective company Directors at their 26 June 1989 meeting were not made at the beginning of the next year of income, Mr Uchanski evidence is that there were some accounting issues to resolve and that the loan balances had not yet been ascertained and would not be until the completion of the year ended 30 June 1989 financial accounts. If the Tribunal were to accept this explanation as reasonable, it merely begs the question of how then did the various parties to the loan transactions know, on 3 July 1989, how much they had recalled and on-lent respectively? In the Tribunal's opinion, it is reasonable for two or more parties to agree in principle to become lenders and borrowers of an uncertain sum but until such time as that sum is ascertained then the relevant loans cannot be made. In the Tribunal's opinion, it defies common sense and commercial reality to say that A will lend to B and B will borrow from A, a sum of money today but that sum will not be ascertained until some time in the future and at the earliest, five months hence (as is the evidence in this matter (infra)).
60. In a similar vein, the evidence is (infra) that the actual interest rate for the loan of $27,353,625 ostensibly made by the trust to the applicant on 3 July 1989 was not fixed until, at the earliest, 24 November 1989. At T 11 (page 72) the letter evidencing the loan agreement between the applicant and the trust states the conditions of that loan to be:
``Repayment: at call when mutually agreed.
Interest: at commercial rates plus a margin until mutually agreed otherwise.
Interest on the loan is to commence from 1 July 1989.''
In the Tribunal's opinion commercial reality would dictate that the parties to such a loan would have fixed the covenanted interest rate at the time the loan was made. ``Commercial rates'', as that term must have been understood by the parties, would have been then known. The fact that ``commercial rates'' of interest are likely to fluctuate would suggest a fluctuating rate, but that was not the case as the evidence shows. The evidence is that a fixed interest rate for the period from 1 July [sic] to 30 June 1989 was struck by Mr Reid, at the earliest, on 24 November 1991.
61. Copies of the letters from Clough Limited and Codelfa instructing the applicant, to repay its loans in the amounts of $20,750,000 and $8,058,662 respectively and directing that those repayments be made direct to the trust, and the letters acknowledging the lending of those amounts to the applicant by the trust on terms, are all dated 3 July 1989 and signed by Mr Reid in his various capacities as company secretary (T p. 71-75). As mentioned, the two letters from the trust to the applicant in relation to the loans (T p 72, 73) state the terms as being ``repayment at call'' and ``interest at commercial rates plus a margin until mutually agreed otherwise... to commence from 1 July 1989''.
62. In his evidence-in-chief Mr Reid said that as drafts of these letters were sent by facsimile to Mr Mews on 24 November 1989 (A27/R25, attachments A1-A7 inclusively) then they would have been prepared about then (Tr. p. 305). Those drafts refer to an amount of $33,541,445 as being the proposed loan repayment by the applicant to Clough Limited (attachments A5-7), not $20,750,000 as is the
ATC 2043amount of the recorded transactions. In his affidavit of 30 May 1996 (A1, para 22), Mr Reid said that ``the final letters... were prepared some time in December 1989... bearing the date 3 July 1989 as being the date from when the transactions were agreed to take effect''.
63. In cross-examination Mr Owen-Conway raised the question of how the amount of interest of $6,017,797, paid by the applicant to the trust, was arrived at. The transcript records the following exchange between Mr Owen- Conway and Mr Reid:
``Now interest was calculated at the rate of 22 per cent on the principal sum, correct? - Yes.
Who struck that rate of interest? - I would have been involved in the knowledge of interest rates at that time. I would have known it was reasonable. I wouldn't have done the actual calculation.
Yes, was there a particular reason why 22 per cent was chosen? - It would have been a round sum finally calculated or determined, it wouldn't have been an exact number.
The percentage that was struck had to be sufficiently high to ensure that approximately $6 million of interest income left the Trust, correct? - That would have been a determining factor.''
The Tribunal notes that 22 per cent p.a. of $27,353,625 for 12 months is $6,017,797.(Tr. p 201)
Findings of fact in relation to Issue B
64. Based on the evidence the Tribunal makes the following findings of fact in relation to Issue B:
- • That a meeting took place on 26 June 1989. That meeting was attended by Messrs WH Clough, Knight, Reid, Uchanski and Mews as well as others named by Mr Reid and whose initials appear on A9, being Messrs Smith, Griffiths and Scott.
- • That those in attendance, or at least some of them, in their capacities as directors and or managers, had the power to authorise, on behalf of the respective companies, the various transactions referred to in these reasons as the ``3 July transactions'' and the ``GAPL loan transactions'' including the resolution of the trustee of 26 June 1989 to distribute the net income of the trust for the year ending 30 June 1989 (A8).
- • That the only resolution made at that meeting was that of the Trustee of the trust distributing its income for the year ending 30 June 1989 to the named beneficiaries (A8).
- • That the meeting authorised Mr Reid to implement, in principle, both the ``3 July transactions'' and the ``GAPL loan transactions'' subject to him being satisfied about certain matters of detail, especially possible risks attached to GAPL forgiving moneys owed to it by the applicant.
This finding is not entirely supported by what has been so far determined but will be the subject of further discussion when evidence relating to issue (C) is considered below, which evidence, in the opinion of the Tribunal, supports the finding.
- • That the final amounts of the ``3 July transactions'' were not settled until after 24 November 1989 at the earliest and most likely on or about 20 December 1989, the date of the relevant minutes recording the GAPL loan transactions (T p. 83-85 & 89-92).
- • That the 3 July 1989 transactions, evidenced by letters exchanged amongst the respective parties, did not occur until, at the earliest, 24 November 1989 and more likely on or about 20 December 1989.
Evidence supporting the likely date of 20 December 1989 is considered in Issue C below.
- • That concomitantly upon settling the amounts of the ``3 July transactions'', action was taken, at the instigation of Mr Reid acting under what he understood to be authority vested in him at the 26 June 1989 meeting,
It is noted that Mr Clough, in his evidence, told the Tribunal that Mr Reid had complete authority to negotiate, on behalf of the Clough Group financial dealings, including committing the Group to loans and disbursing loan funds.to implement the ``GAPL loan transactions''.
- • That the interest rate charged by the trust on loans made to the applicant were set by Mr Reid alone and not before 24 November 1989.
- • That the interest rate set, of 22 per cent flat, was fixed to provide the desired product, being the interest of $6,017,797.
(C) Whether at the meeting of 26 June 1989 a decision was then taken to carry out the transactions undertaken in December 1989 and June 1990.
65. To a large extent this issue has already been resolved in the Tribunal's consideration of Issue B above. The Tribunal has found that whilst it was agreed at the 26 June 1989 meeting ``in principle'' to proceed with the GAPL loan transactions, as with the 3 July 1989 transactions, their implementation was subject to further decisions and investigations to be undertaken by Mr Reid and or others. That aspect is now considered.
66. Mr Reid, in his affidavit, outlined a brief history of ACL. It resulted from a merger in 1969 of the then Clough Group of companies with those of Sir Robert David Garrick Agnew which had interests in salt, gypsum, iron ore and vanadium. The merger resulted in the Agnew interests having two-thirds ownership with the remaining one-third held by the Clough interests. By 1977 the engineering division of the group (the Clough side) was leading the mining side (the Agnew side) and this led to some dispute resulting in an ownership split whereby the Agnew side, including ACL, remained two-thirds owned by Agnew interests and one-third by Clough whilst the Clough/Engineering side became two-thirds owned by Clough interests and one-third by Agnew interests.
67. Between 1979 and 1983 ACL built a vanadium plant at Wundowie in Western Australia.
68. On 23 July 1979 ACL entered into an agreement with Nissho-Iwai Co Ltd of Japan (``Nissho'') to borrow from Nissho funds for the purchase of plant and equipment to develop ACL's vanadium mineral lease at Coates near Wundowie in Western Australia. Nissho's objective in entering into the loan agreement was to secure a steady supply of vanadium pentoxide (``vanadium'') and a condition of the loan was that the parties enter into what was termed the ``Exclusive Sales and Purchase Agreement'' for the continuous supply of vanadium to Nissho. The amount of the loan was $US6,500,000 bearing interest at 8.75 per cent per annum calculated daily. Interest was payable quarterly. The security given to Nissho was ACL's Coates vanadium mineral lease, all buildings, plant and equipment relating to the vanadium project as well as deferred payments due to a subsidiary of ACL by Cliffs International (A2).
69. Commencing in December 1981 through to October 1987 the parties entered into a series of eight amending deeds (R10, a-h) which, in effect, acknowledged ACL's failure to make due payments under the loan agreement of principal and interest and provided that those unpaid amounts became a debt due to Nissho repayable on demand. The evidence of Mr Reid is that no such demand was ever made by Nissho (see Tr. p. 266) nor was there ever any pressure from Nissho to wind up ACL (Tr. p. 267). The evidence of Mr Clough is that the Clough Group had never given up hope of reactivating the vanadium plant and that the applicant had advanced money to ACL to preserve it whilst in ``mothballs'' and to fund experiments relating to alternate processes to produce vanadium. Many meetings took place between representatives of Nissho and Clough on behalf of ACL. Eventually, in February 1992, and after unsuccessful attempts to sell the vanadium assets,
``You refer to discussions with Nissho-Iwai at that time [being a reference to June 1989] on the possible reactivation of the vanadium plant? - We were also in close discussion with Nissho at that time, and the price of vanadium as I have mentioned before was quite high, we were very optimistic that we might do a deal with Nissho, and in that case we wouldn't need to do these loan arrangements.''
(Tr. p. 163)
Under cross-examination Mr Reid gave the following responses to questions put to him by Mr Owen-Conway:
``In November 1989 negotiations with Nissho were still proceeding, were they not? -... They were still proceeding.
And in November 1989 no decision had been made by the group to engage in this round robin of transactions with the GAPL loan had it? -... No decision had been made.
But a decision was made to proceed with that proposal when it became clear, and only when it became clear, that further negotiations with Nissho to reactivate the plant had come to a grinding halt, correct? - Not correct, not necessarily correct.
And then I want to suggest to you that the directors of ACL decided that they would revalue the assets downwards in ACL by something in the order of 26 million because there was no prospect by that stage of the vanadium plant being reactivated, correct - That occurred in July and August 1990.
At a time when it became clear that the Vanadium project could not be reactivated? - Well, that's not true because even now
ATC 2045Mr Clough is of the hope that the vanadium project will be reactivated. So, that is wrong for a start.
Well, the vanadium plant was sold? - It was to... Clough.
Yes. And a consideration to buy the release of the debt was a payment of a million dollars to [Nissho]? - Yes.
No other consideration was paid to reduce the debt of 15 million? - No.
No side deals were done? - No.''
(Tr. p. 208-209)
70. By 1987 ACL was incurring losses. The vanadium plant had become unprofitable due to rises in oil prices (its fuel), soft prices for vanadium and production difficulties. In that year the Agnew interests in Clough were bought out and the Clough Group became wholly owned by Clough interests. No change occurred in the Agnew Group, Clough remaining a one-third equity holder in ACL and its subsidiaries.
71. After the death of Sir (Garrick) Agnew in 1987 the Clough interests in ACL and its subsidiaries were increased. By 30 June 1990, the financial year in question, they stood at 85.8 per cent as mentioned. It is common ground that the Clough Group has provided much needed cash from time to time to meet various outgoings of ACL. At 30 June 1988 and 1989 the amount owed was around $375,000 (R2 p. 102 & A34 p. 135).
72. ACL revalued its ``vanadium ore body'' and its ``Coates Vanadium Plant and Equipment'', as at 30 June 1990, to what the directors believed to be their net realisable value by writing off $6,782,862 and $15,208,027 respectively (A24 p. 161). The auditors' report attached to ACL's financial statements for that year states at note 2:
``Note 1 to the accounts indicates that company's bankers have requested payment in full of their secured debt and subsequent to year end, the directors have accepted an offer to purchase the major income producing assets of the group which will cause the company and group to cease trading. As a consequence, the directors have reviewed the carrying value of all assets and written them down to their estimated net realisable values where appropriate resulting in a substantial deficiency of capital and reserves at 30 June 1990. The directors have stated that the company is not in a position to pay its debts as and when they fall due.''
(A24 p. 151)
73. The Audit Report was signed on 26 February 1991, the same date as the signing of the Directors' Report.
74. By 30 June 1989 GAPL had ceased carrying on business (Tr. p. 243). Its assets were two debts totalling $618,331 of which $518,331 was owed by ACL. Its liabilities totalled $845 resulting in total shareholder's equity of $617,486 (R5). By 30 June 1990, after the receipt of the McLean loan, the forgiving of the debt owed by the applicant and the loan of $500,000 to ACL (and a provision of $1,000,000 for non-recovery against that asset), its assets totalled $110,812 whilst its total liabilities were $14,482,663, being $14,482,203 owed to McLean and $460 in other debts. This gave a shareholders' deficiency of $14,371,851. It is noted that a net operating loss of $15,100,340 for the year ended 30 June 1990, was incurred after having received the trust distribution of $6,017,797. The loss was principally brought about by the forgiveness of the applicant's indebtedness of $20,000,000 and the provision of $1,000,000 against the loan to ACL, its parent. That provision was made because the directors of GAPL, in their report to the financial accounts for the year ended 30 June 1990, in relation to ACL's vanadium assets and its financial circumstances, said:
``Due to the general economic conditions prevailing in Australia and elsewhere the directors now consider it unlikely the vanadium project [of ACL] can be recommissioned in the near future or sufficient funds obtained to enable the project to proceed.
Subsequent to year end, the directors have accepted an offer from a third party to purchase the major income producing assets of the company and group [a reference to ACL in particular]....
As a consequence of the foregoing matters the directors have reviewed the carrying value of all assets and written them down to their estimated net realisable values where appropriate, resulting in a deficiency of capital and reserves at 30 June 1990 of $20,563,954 and $30,283,248 for the company and group respectively.''
The directors of GAPL therefore reviewed the carrying value of that company's assets and made the provision of $1,000,000 referred to above (R4). The Directors' Report is undated but the accompanying audit report bears the date 16 November 1990.
75. On 6 November 1989 Mr Clough sent a facsimile from Tokyo to Messrs Smith and Reid following a meeting with Messrs Sokich, Ekeda, Eiji, Takano and Tanaka of Nissho (A21). The facsimile set out eight points arising from that meeting and then proceeded to set out matters of discussion for a continuation of the vanadium project into the future. The eight points were:
``1 Want to reactivate project
2 Not interested in Barrack proposal
3 Want to work with Clough
4 Want Clough to guarantee project
5 Will not guarantee sales - may do so for part of project
6 Cannot/will not write-off debt
7 Only require payment when project profitable
8 May put up 10 per cent of capital as indicated... (indecipherable)''
Similarly, on 8 November 1989, Mr Reid sent a facsimile to Mr Smith who was then in Tokyo (A22). The facsimile is quite extensive and raises a series of queries in relation to the proposals to be put to Nissho concerning the reactivation of the vanadium plant.
76. It is clear from these and the evidence of Messrs Reid and Clough that Nissho were at that time willing participants in exploring every reasonable avenue of reactivating the vanadium plant and that there was no thought on the part of either Nissho or the Clough interests of abandoning it. At no time did Nissho press ACL for repayment of its debt. Indeed, Nissho was extremely forbearing as is evident from the eight amending deeds mentioned and it was not until June 1991 that they became aware that the assets of ACL had been written down to scrap value (R20).
77. The Tribunal draws the conclusion that by the end of November 1989 Mr Reid was satisfied that there was little risk, if any, of Nissho making a demand for repayment of its debt owed by ACL and as a consequence taking steps to have it liquidated before 30 June 1990. According to Mr Reid there was some pressure on him to arrange the GAPL loan transactions by December 1989 so that there would be a lapse of at least six months before 30 June 1990, in keeping with what he understood to be the advice of Parker & Parker (T4) ``and it would then make it harder for a liquidator to overturn those... transactions'' (Tr. p. 265).
78. The evidence suggests that Nissho eventually reluctantly accepted the fact that it was highly unlikely that the vanadium plant would be reactivated and at best its security would realise scrap value.
79. On 20 December 1989 directors of CEL, McLean, GAPL and ACL met and resolved to carry out the GAPL loan transactions (T p. 83-84, 85-86, 89, 90 & 91-92). The minutes of McLean (T p. 78-79) and GAPL (T p. 83-84) resolved to make and accept the Offer of Loan (T p. 80-82 & 93-94 respectively). The minutes of GAPL (T p. 83) also resolve to forgive $20,000,000 owed by the applicant and execute the deed of release (T p. 100). The minutes of the applicant resolve to accept the loan from, and forgiveness of debt by, GAPL (T p. 85-86 & 91-92) and enter into the deed of release accordingly (T p. 91). Another set of minutes of McLean (T p. 89) resolve to accept a loan of $20,000,000 from the applicant. Minutes of ACL (T p. 76-77) resolve to enter into the equitable mortgage of its shareholding in GAPL in favour of McLean (T p. 107-127).
80. A letter from GAPL to McLean dated 21 December 1989 directs McLean to split its loan of $20,500,000 to GAPL making payment on its behalf direct to the applicant as to $20,000,000 and $500,000 to it (T p. 95). The former was achieved by McLean endorsing to the applicant its promissory note for $20,000,000 issued in favour of GAPL (T p. 128) and the latter by McLean's promissory note for $500,000 in favour of GAPL (T p. 129). As previously mentioned, cheques for $500,000 passing between GAPL, ACL and the applicant, on 27 December 1989, are evidenced at R3a-d.
Findings of fact in relation to Issue C
81. Having regard to the evidence as discussed not only under the heading of Issue C but in its entirety, the Tribunal finds as fact:
- • That the GAPL loan transactions in principle only and not in detail were discussed at the meeting on 26 June 1989 and Mr Reid was authorised to implement the various transactions subject to him being satisfied that there was no real risk of Nissho calling in the debt owed to it by ACL nor of a receiver being appointed to recover that debt or as a consequence a liquidator being appointed.
- • That by late November 1989 Mr Reid was satisfied that Nissho would not take any action in the foreseeable future against ACL to recover its debt.
- • That by November 1989 Mr Reid was satisfied that GAPL had no outside creditors likely to be prejudiced should it enter into the proposed deed of release of debt of $20,000,000 in favour of the applicant.
- • That as, in effect, the only creditor of GAPL at 20 December 1989 was the applicant there was no likelihood of it taking any action against GAPL in relation to it making a gift of $20,000,000 to the applicant.
- • That Mr Reid was empowered to finalise the necessary directors' resolutions and documentation to put into effect the GAPL loan transactions.
- • That in or before June 1989 Mr Reid took the necessary steps to arrange with the applicant's solicitors to prepare the necessary directors' minutes and documentation (undated) to put into effect the GAPL loan transactions and that the relevant meetings were held on 20 December 1989 and the necessary documentation was executed on or about 22 December 1989 (T p. 76-129).
(D) (i) Whether the transactions undertaken on 22 December 1989 gave rise to a commercial benefit to GAPL?
(ii) Whether the distributions of income from the trust to GAPL, in relation to the years of income ended 30 June 1990 and 1991, provided GAPL with a commercial benefit.
82. As will be seen the two parts to Issue D are intricately related and cannot be isolated.
83. The evidence is that, at 20 December 1989 and prior to the GAPL loan transactions, GAPL was owed by its parent, ACL, about $500,000. After the GAPL loan transactions it had received a loan of $20,500,000 of which it on-lent $500,000 to ACL making that loan, in total, about $1,000,000. The 30 June 1990 financial accounts for GAPL (R4) make a provision against the ACL debt of $1,000,000 leaving it at $10,812.
84. The evidence is that at the time when the GAPL loan transactions were made, ACL had little or no prospect of ever turning to profit as it had by then disposed of all of its assets except its vanadium assets (A24) and that its vanadium assets were unlikely to be recommissioned in the foreseeable future. That in any event any surplus funds realised by a sale of the vanadium assets would go to Nissho in part settlement of their debt. Therefore, having regard to the common directors of GAPL and ACL, at that time (the mind of) GAPL must have known that any loan of $500,000 it should advance to ACL was unlikely to be recovered, at least in the foreseeable future.
85. The evidence is that GAPL had received a loan from McLean on what, in its form, represents most advantageous conditions - the loan of $20,500,000 was only repayable ``as and when GAPL has available profits from its operations to meet a demand (but then only to the extent of the amount of those available profits less an amount reasonably required by GAPL (as determined by [McLean] in its absolute and conclusive discretion) for ongoing working capital purposes of GAPL)'' (T p. 80). Objectively these terms are extraordinarily favourable to GAPL as, at that time, it had ceased operations and had no income producing assets and therefore no real prospect of ever being in a position to repay the loan without employing the funds borrowed in a profit- making venture and or an income producing investment. If any such investment resulted in losses then the loan, in effect, was treated as equity. Objectively, if the $20,500,000 had been invested in gilt edged securities then at worst it would have had to repay ``available profits'', which might be interpreted to be those left after income taxes and provisions according to the agreement. Therefore, at worst, GAPL was in what is euphemistically called a ``zero sum gain'' position, that is, it cannot be worse off under those conditions nor was it likely to be
ATC 2048better off. Should GAPL have invested the $20,500,000 in a (successful) business venture then the prospects of it benefiting were even better - hypothetically, future profits, after tax, if any, could be used to repay the McLean debt leaving GAPL with capital.
86. However, an attendant condition of GAPL accepting the loan from McLean was that it must on-lend $20,000,000 to the applicant, therefore removing any degree of freedom it may otherwise have had in making an investment decision. It is further noted that such a loan was to be free of interest (T p. 87). Objectively, such a loan, taken in isolation, makes no commercial sense - it borrows interest free and lends interest free (T p. 81). Only the balance of $500,000 is left with GAPL to use at will. But the evidence is that it was on- lent to its parent, ACL, and would most likely be irrecoverable.
87. Another attendant condition of GAPL accepting the loan from McLean was that it enter into the deed of release forgiving the applicant of any obligation to repay the loan. Objectively, this removes most significantly any otherwise perceived benefit that might be construed as attaching to the receipt of the loan in the first place.
88. Under these circumstances it is difficult for the Tribunal to conclude that GAPL received any commercial benefit from the borrowing, lending and forgiving transactions in question. Indeed, the financial accounts as at 30 June 1990 indicate that the company was severely prejudiced as a result of those transactions alone.
89. It is only when one realises that the GAPL loan transactions would be accompanied by discretionary distributions of income from the trust over the next eighteen months or so, aggregating to the sum of the loan, $20,500,000, that it begins to make any sense. In the Tribunal's opinion, at the time of the GAPL loan transactions there was more than just a reasonable expectation that the trust would distribute income to GAPL as a discretionary beneficiary - in the circumstances it was a certainty. And further, only if it is understood that those discretionary trust distributions would not be subject to income tax (because of GAPL's access to group tax losses), does the full picture emerge.
90. In regard to the source of the trust income and distributions, the evidence is that the applicant made the following payments of interest to the trust:
Year ended 30 June 1990 - $6,017,797
Year ended 30 June 1991 - $15,691,138 (T p. 197)
91. The evidence is that the trust made the following income distribution to GAPL in relation to the above:
Year ended 30 June 1989 - $6,017,797 (received on 27 June 1990 - T p. 149)
Year ended 30 June 1991 - $14,482,203 (T p. 183).
92. The evidence is that on 3 July 1990 GAPL received $12,000,000 of the above income distribution and on 27 June 1991 it received the balance, $2,482,203. On 27 June 1990, presumably pursuant to the terms of the McLean loan of $20,500,000, McLean received from GAPL a part repayment of $6,017,797. Similarly, on 3 July 1990 a part repayment of $12,000,000 was made to McLean and the final repayment of $2,482,203 was made on 27 June 1991.
93. Before the receipt of the net income distribution from the trust, the beneficiary, GAPL, had a debt of $20,500,000 to McLean as discussed above. After the receipt of the above three income distributions and payments to McLean that debt was extinguished. Objectively then, as a result of those two sets of transactions taken in isolation, GAPL's wealth was increased by $20,500,000. But this advantage was diminished to the extent of $20,000,000 by the release of the applicant from its debt to GAPL.
94. Viewed in isolation, at the conclusion of the GAPL loan transactions and the trust income distributions, GAPL was ostensibly better off by $500,000 but ACL's group tax losses of $20,500,000, or thereabouts, had been absorbed. That is-
- - before the GAPL loan transactions: ACL had tax losses;
- - after the loans and before the forgiveness: ACL still had tax losses; ACL owed GAPL $500,000, GAPL owed McLean $20,500,000 and the applicant owed GAPL $20,000,000; and
- - after the loan forgiveness and the distributions of trust income to GAPL: ACL owed GAPL $500,000 but ACL's tax losses had been reduced by $20,500,000.
There is some doubt about the actual amount of the tax losses absorbed because of the difference between the accounting income distributed and the amount assessable to GAPL under s. 97 of the Act — see previous footnote.
However, as mentioned, there was no real prospect of ACL repaying GAPL the $500,000 so that asset was of dubious value.
Findings of fact in relation to Issue D
95. Having regard to the evidence generally and particularly the immediately preceding analysis, the Tribunal makes the following findings of fact in relation to Issue D:
- • That GAPL suffered a commercial detriment as a result of the GAPL loan transactions (that is, before the distribution of income from the trust).
- • That the GAPL loan transactions would not have been carried out unless GAPL was to receive discretionary distributions of income from the trust totalling $20,500,000.
- • That after the trust had distributed income to GAPL totalling $20,500,000 and GAPL had repaid its debt of $20,500,000 to McLean, GAPL was ostensibly $500,000 better off.
- • That because ACL had no real prospect of repaying GAPL the loan of $500,000 then GAPL received no perceived commercial benefit as a result of the GAPL loan transactions and the receipt of the trust income distributions.
These findings complete the survey of the evidence. It will be necessary, in the discussion to follow, to refer to the above findings and other relevant aspects of the evidence not yet considered.
96. Any application of Part IVA requires a determination by the Commissioner of Taxation (the respondent) pursuant to s 177F (Brendan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ in
FC of T v Spotless Services Limited & Anor 96 ATC 5201; (1996) 141 ALR 92). That determination appears at T 58, page 205 as follows:
``I, Phillip Leslie Foster, in the exercise of the powers and functions conferred upon me as Deputy Commissioner of Taxation, by delegation from the Commissioner of Taxation pursuant to section 8 of the Taxation Administration Act 1953, DO HEREBY DETERMINE for the purposes of subsection 177F(1) of the Income Tax Assessment Act 1936 (`the Act');
IN RESPECT OF Clough Engineering Limited (`the taxpayer') who in the year of income ended 30 June 1990 has obtained, or would but for the operation of section 177F obtain, a tax benefit in connection with a scheme to which Part IVA of the Act applies, namely $6,017,797, being the amount of the deduction otherwise allowable to the taxpayer in respect of interest paid to Clough Petrosea P/L as trustee for the Clough Group Trust;
THAT the whole of the amount of $6,017,797 shall not be allowable to the taxpayer in relation to the year of income ended 30 June 1990.
AND in the exercise of the power conferred upon me as Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation, I HEREBY REMIT, pursuant to subsection 227(3) of the Act, to an amount equal to 45 per cent flat plus a per annum component of 14.026 per cent for the period up to 30 June 1992 and 10 per cent thereafter, of the additional tax that the taxpayer would otherwise be liable to pay by virtue of section 226 of the Act.
(Signed) Phillip Leslie Foster, Deputy Commissioner of Taxation
Determined by me as authorised officer, (signed) Kenneth Li, Case Manager 31 March 1993''
97. Mr Owen-Conway, on behalf of the respondent submitted that the scheme identified above meets the criteria of a ``scheme'' as defined in s 177A(1). This is no doubt correct since the term is defined so as to cast a very wide net. Mr Norton correctly pointed out that the mere labelling of an arrangement or series of transactions as a ``scheme'' is not to be taken to imply any pejorative context on that arrangement or those transactions. One needs to go further and in terms of s 177C(1)(b) determine whether the applicant has obtained a tax benefit in connection with the scheme. And that requires a finding that the scheme was carried out
ATC 2050whether hypothetically the whole or part of the deduction would not, or might reasonably be expected not to, have been allowable, is to be made by reference to the eight criteria of s 177D(b).
98. In this regard Hill J observed in
Peabody v FC of T 93 ATC 4104 at 4113; (1993) 40 FCR 531 at 542:
``... the determination of what schemes fall within s 177D requires an objective conclusion to be drawn, having regard to the matters referred to in par (b) of the section, but no other matters. It is notable that the actual subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion. In this way, the provisions of Pt IVA stand in contrast to similar provisions subsequently enacted in other legislation, for example, s 67 of the Fringe Benefits Tax Assessment Act 1986 (Cth).''
That paragraph was referred to with approval by Sackville J in
CC (New South Wales) Pty Ltd (in liq) v FC of T 97 ATC 4123 at 4147 where his Honour said:
``This proposition was not considered by the High Court in Peabody. Nor was it expressly considered by the High Court in Spotless. However, Hill J's observations are consistent with the way the joint judgment in Spotless states the question required by s 177D(b) to be considered (at ATC 5210; ALR 102):
`The eight categories set out in par (b) of s 177D as matters to which regard is to be had ``are posited as objective facts''. That construction is supported by the employment in s 177D of the phrase ``it would be concluded that...''. This phrase also indicates that the conclusion reached, having regard to the matters in par (b), as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person. In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme.' [Footnote omitted.]''
99. The applicant's case, as the Tribunal understands the submissions, is that the 3 July transactions and the GAPL loan transactions were set in place at different times and whilst each would fall within the definition of ``scheme'' for the purposes of Pt IVA it is unreasonable to treat them together as a scheme. It was submitted that the two arrangements were separate and independent: the 3 July transactions were carried out to establish a source of income to be used within the Clough Group as needs dictated and to build up assets within entities as deemed prudent. On the other hand, it was submitted, the GAPL loan transactions were undertaken to protect any income distribution made by the trust to GAPL from creditors of either GAPL or ACL and that this must be viewed as independent of the 3 July transactions. Further, it was submitted, GAPL derived a commercial benefit, being a $500,000 increase in working capital as a result of the GAPL loan transactions.
100. Mr Norton, on behalf of the applicant, submitted that even if the Tribunal was to find, as fact, that the two arrangements were put in place contemporaneously (which he submitted was contrary to the evidence) then that does not lessen the submission - the two are by their very character independent.
101. Mr Norton further submitted that the Clough Group, as at 30 June 1990, had effective control of ACL and its subsidiaries because by that time arrangements were well in hand to acquire the minority shareholding interest in ACL.
102. In a separate but related submission, Mr Norton argued that the taxable income of the applicant for the year of income in question was assessed as $128,359 (after the disallowance of the claimed $6,017,797). In terms of s 177C(1)(b) then, the only deduction which could be allowable in that year in respect of the $6,017,797 was limited to $128,359 and, it was submitted, that is the extent of any possible tax
ATC 2051benefit for that year. Whilst accepting the logic of this submission, the Tribunal does not see how it assists the applicant since the scheme identified by the respondent covers transactions entered into in the following year of income also. But notwithstanding that, s 177C does not speak of ``taxable income'' nor place any limit on the amount of the deduction or part of a deduction being allowable in the year of income. It is the amount of the deduction, otherwise allowable, claimed in the year of income which is the focus of Part IVA. It is common ground that the $6,017,797 was allowable to the applicant pursuant to s 51(1). Therefore, that is the amount of the deduction being considered in terms of s 177C. That only part of it, namely, $128,359, could be allowed in that year of income is not to the point.
103. In a further submission Mr Norton put it to the Tribunal that in any event, in applying s 177C in relation to the respondent's identified scheme, the Tribunal should find that there would be a reasonable expectation that the Clough Group Trust loan arrangements and the payment of the interest by the applicant would have occurred. Therefore, the payment of the interest under the circumstances does not amount to a tax benefit. The Tribunal deals with this proposition in the course of its analysis pursuant to s 177D below.
104. Mr Owen-Conway, for the respondent, submitted that one needs to look for an objective explanation of why income distributions were made by the trust to GAPL at the time. Those distributions, taken in the light of the GAPL loan transactions, resulted in no benefit to either GAPL or ACL but rather, a detriment to ACL in that its tax losses were materially diminished. Granted, those tax losses were of little value to ACL at the time. It had no real prospect of absorbing them, either itself or its subsidiaries - it was impecunious, heavily in debt and had no viable business nor any real prospect of reactivating the vanadium plant. He submitted that the evidence of Mr Knight in particular indicated that the Clough interests desired to access ACL's tax losses (Tr p. 686-688).
105. Mr Owen-Conway further submitted that but for the intended distribution of income by the trust to GAPL there was no need to put in place the GAPL transactions. If the Clough Group wished to provide GAPL with $500,000 of working capital, as was submitted by the applicant, then why go to all the trouble of arranging the GAPL loan transactions? His response to this rhetorical question was that a mere loan to GAPL, even if secured (as was the McLean loan), would not have allowed GAPL to ``mop up'' ACL's tax losses with the corresponding benefit of a similar reduction in the taxable income of the applicant, without the Clough Group suffering any overall economic disadvantage. Therefore, he submitted, objectively one needs to ask why the elaborate arrangement instead of a simple loan? And he submitted, the only reasonable objective conclusion one could reach is that the 3 July transactions and the GAPL loan transactions were interdependent and had the purpose of increasing the applicant's tax deductions by $6,017,797 whilst the corresponding amount of income derived by GAPL was tax free due to its access to tax losses of its parent ACL, pursuant to s 80G of the Act. And an objective view of the end result of all these transactions shows that, before the tax effect, the Clough Group suffered no detriment - what went out to GAPL came home to McLean and the applicant. It was further submitted that as the applicant was not a ``group company'' of ACL, for the purposes of s 80G (a conceded fact) then ACL's tax losses were, in the ordinary course of events, beyond the reach of the applicant.
106. The task of this Tribunal is to determine, having regard to the eight matters specified in s 177D(b), whether it would be concluded that one or more of the persons who entered into or carried out the scheme identified by the respondent did so for the purpose of enabling the applicant to obtain a tax benefit, in the form of the deduction for interest paid of $6,017,797 pursuant to s 51(1) of the Act. That is, based on the previous findings of fact, is it reasonable to conclude
Subparagraph 177D(B) analysis
107. Section 177D is set out above.
(i) the manner in which the scheme was entered into or carried out;
Sackville J observed, in this regard, that in the Spotless joint judgment of the High Court the word ``manner'' and the phrase ``entered into'' are not to be given any restricted meaning:
``... `Manner' includes consideration of the way in which and method or procedure by which the particular scheme in question was established.''
(at ATC 5209; ALR 101)
108. Findings of fact in relation to Issues B, C and D above indicate that the scheme was undertaken, in a sense, unilaterally. That is, it was undertaken by persons who were associated with all the companies (including the trustee of the trust) either as directors of some or all of them or in an authorised capacity as was the case for Mr Reid, Mr Uchanski and the applicant's Melbourne based accountant. The 3 July transactions were evidenced by exchange of back dated internal letters and the GAPL transactions established by authority of directors' resolutions of the various companies involved. The documentation supporting the ``round robin'' of funds essential to the scheme in the latter was by way of internally created bills of exchange and legal documents prepared at first instance before 26 June 1989, settled in November 1989 and executed in December 1989. The income distributions and repayments of the GAPL loans was by way of trustee's minutes and internal book-keeping entries. There were no outside parties involved in the various transactions (apart from a power of attorney). It should be borne in mind that the depositing and withdrawing of the $500,000 (R3a-d) on 27 December 1989 is not identified by the respondent as part of the scheme, but even so, those transactions could be regarded as ``in-house'' in the sense that they required no bargaining or negotiating with parties unrelated to the Clough Group. None of these facts suggest a dominant purpose of the scheme other than the obtaining of the tax benefit.
(ii) the form and substance of the scheme;
109. It was submitted by the applicant that, viewed objectively, the form of the 3 July transactions suggest a purpose of providing the trust with income which it could distribute at the discretion of the trustee, to those entities within the Clough Group which could best benefit from such a distribution. It was further submitted that the form of those transactions, viewed objectively, provided the applicant with working capital. The Tribunal does not accept this latter submission since the applicant had no greater amount of working capital after the transactions than it had immediately before and indeed, after the transactions it had exposed itself to an accruing liability for interest which it did not have previously.
110. The first submission above requires the Tribunal to consider the 3 July transactions in isolation. When considered in concert with the scheme as identified, there is no substance to the various loan transactions - the Clough Group's external liabilities and assets remain the same. The applicant's inter-company debt remains the same albeit principally now owed to the trust instead of associated group companies. The applicant paid out $20,500,000 in interest to the trust but received a release of a liability of $20,000,000 and an interest free loan of $500,000. So in substance, the applicant's financial position remained almost unchanged, save and except that it now had a substantial accruing liability for interest which it did not have previously. There was no evidence that as a result of the 3 July transactions, the GAPL loan transactions and the trust distributions that, apart from the tax benefit, there was any change in the underlying business of the entities involved. Objectively, the enriching of GAPL by $500,000 as a result of the scheme is more illusory than real since it contemporaneously lent the amount to ACL whose financial predicament at the time strongly suggests that it would be unable to repay that debt. In any event there is no objective explanation as to why GAPL could not have been provided with $500,000 of working capital by a simple loan to it by McLean. And objectively, it is not apparent why GAPL, a dormant company with no plans to carry on business, would want $500,000 of working capital at the time.
111. It is also relevant to note that one of the steps of the GAPL loan transactions was to provide McLean with security for its advance of $20,500,000 to GAPL by way of a mortgage over ACL's shareholding in GAPL. Objectively this security became virtually worthless as and when, pursuant to the terms of the very same loan, GAPL was required to forgive a debt of $20,000,000 owed to it by the applicant,
ATC 2053rendering GAPL technically insolvent - its debts far exceeding its assets.
112. The form and substance of the scheme strongly suggests that the dominant purpose of the scheme was to obtain a deduction for interest for the applicant whilst accessing the tax losses of ACL such that there was a tax benefit not otherwise available.
(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
113. The scheme was conceived in early 1989, at a time when ACL had accumulated in excess of $13,200,000 of tax losses which were anticipated to increase beyond $20,000,000 by 30 June 1991. That company had virtually no prospect itself of generating enough taxable income in the foreseeable future to absorb that part of the tax losses subject to the time limitations of s 80(2) or indeed the balance of those losses. The trust was created in January 1989 and its deed settled in May 1989.
114. The applicant paid interest of $6,017,797 to the trust on or about 27 June 1989 and prepaid interest of $14,482,203 to the trust on 6 July 1990. The sums of $6,017,797 and $12,000,000 were immediately returned to it after passing through GAPL and McLean. The balance of the 6 July 1990 interest payment, being $2,482,203, was immediately lent back to the applicant and, in June 1991, was distributed by the trustee to GAPL which paid it immediately to McLean which became the end lender to the applicant. The evidence is that the scheme was conceived, in principle, in early 1989. It was carried to effect between December 1989 and June 1991, over a period of about 18 months. The reasons for the delay from June to December 1989 were, firstly, for the decision makers to be assured that there was no real risk of any funds falling under the control of a receiver or liquidator who may be appointed by ACL's principal creditor, and secondly, to be assured that ACL had sufficient tax losses available to absorb the subsequent distribution of income of $2,482,203 to GAPL.
115. The timing of the scheme lends considerable support to the objective conclusion that it was carried out predominantly to achieve the tax benefit in question.
(iv) the result in relation to the operation of [ the] Act that, but for [Part IVA], would be achieved by the scheme;
116. The result that would have been achieved by the scheme, but for the operation of Part IVA of the Act, is that the applicant would have had no taxable income in the year of income compared with its assessed taxable income of $128,359. Further, in those circumstances the applicant would have had to carry forward tax losses pursuant to s 79E of around $6 million and, in relation to the following three years of income, the applicant would have been entitled to a deduction for interest prepaid in July 1990 subject to the provisions of s 82KZM of the Act. Concomitantly, ACL would have had its available tax losses reduced significantly, absorbing around $6 million of those losses due to expire by 30 June 1993. The evidence is that ACL had little or no prospect, at the time, of ever being able to absorb those losses in the ordinary course of business.
(v) any change in the financial position of the [ applicant] that has resulted, will result, or may reasonably be expected to result, from the scheme.
117. The only change manifest in the financial position of the applicant as a result of the scheme is that it began accruing a liability for interest on funds used for working capital previously advanced interest free. These were at all material times inter-company advances although the lender changed from the applicant's parent to an associated company (the trustee) wholly within the same group. Because the applicant was, in effect, the donee of a gift of $20,000,000 it suffered a net detriment of only $500,000 as a result of having to pay $20,500,000 in interest under the scheme. However, this net detriment was
ATC 2054compensated for by an interest free loan of $500,000 received from an associated company, McLean and, but for the application of Part IVA of the Act, the applicant would have saved income tax on future income totaling $20,500,000 or thereabouts.
(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
118. The evidence shows that the Clough Group, of which the applicant was a part, suffered no change in its financial position as a result of the scheme save and except that, but for Part IVA of the Act, it had effectively transferred to it, or more particularly, to the applicant, the benefit of (if not the actual) $20,500,000 of tax losses from ACL. That company was then only partly owned by Clough and those tax losses could not be transferred to any Clough entity pursuant to s 80G of the Act. To this extent ACL's position deteriorated but, as the evidence shows, ACL then had little or no prospect of absorbing its tax losses. So in that respect its financial position was not affected. Also, inasmuch as GAPL, the other non-Clough entity involved in the scheme, suffered a detriment by releasing the applicant from its liability to repay $20,000,000, GAPL suffered no net detriment since it received, within a relatively short space of time, discretionary distributions of income from the trust totaling $20,500,000.
(vii) any other consequence for the [ applicant], or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out;
119. Apart from a guarded suggestion by the respondent that the scheme may have some implications at law in relation to the release of debt, which implication the Tribunal considers is by way of opinion only, the scheme has no other apparent consequences.
(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi).
120. The evidence is that the Clough interests held 85.8 per cent of the issued capital of ACL. Mr Reid's evidence is that at the time of the scheme being put into effect negotiations were in hand with the trustee of the estate of the late Sir (Garrick) Agnew to acquire the remaining shares in the ACL group. ACL was controlled by the Clough interests at the time of the entering into of the scheme. Therefore, objectively, any detriment suffered by ACL as a result of the benefit of its tax losses, in effect, passing to the applicant was of little concern to the companies involved as no arm's length party would be likely to suffer a detriment.
121. The evidence and findings of fact together with the above objective analysis of those facts, having regard to the matters specified in s 177D(b), leads to the proposition that a reasonable person would conclude that Mr Reid and other directors and officers of the Clough Group, ACL and GAPL carried out the scheme for the dominant purpose of achieving the tax benefit described. Having reached that conclusion one needs to consider the effect of that finding on s 177F which applies where a tax benefit has been obtained, or would, but for s 177F itself, be obtained by a taxpayer in connection with a scheme.
The effect of the s 177F determination
122. The tax benefit identified in this matter is the deduction of $6,017,797 claimed by the applicant in the year ended 30 June 1990 which would have been allowed to the applicant pursuant to s 51(1) but for the provisions of s 177F. Taken as a whole, the evidence is that had the scheme not been entered into then the interest of $6,017,797 would not have been paid to the trust. This is particularly so when the evidence of Mr Reid in relation to the fixing of the interest rates and the desire to achieve a particular level of interest for each of the years of income ended 30 June 1990 and 1991 is considered. In the circumstances the determination made by the respondent pursuant to s 177F is justified.
123. For these reasons, insofar as the Tribunal is reviewing that part of the objection decision before it, it is affirmed.
124. As stated, the respondent has imposed additional tax pursuant to s 226 of the Act, of $33,117.00 (A56). This is based on a ``culpability component'' of 45 per cent of the taxable income assessed, that is, 45 per cent of $50,060.01, being $22,527, plus the ``per
ATC 2055annum'' component of $10,590. The ``culpability component'' was remitted from 200 per cent
125. The Tribunal had before it affidavits of Messrs Hicks, Haydon and Jancey, officers of the respondent directly involved in the complex audit of the applicant which culminated in the disallowance of the deduction of $6,017,797 following the s 177F determination. Those affidavits, when taken together with the T documents, indicate the very extensive and wide ranging nature of the respondent's audit, involving many issues of which this is but one, albeit the most significant, and several officers over a considerable length of time, commencing some time in mid 1992 extending through to some time in late 1994.
126. The affidavits indicate that the applicant was principally represented by Messrs Reid and Uchanski with Messrs Mews and Corbett of Price Waterhouse. There are no indications in those affidavits of any lack of co-operation on the part of those persons, indeed there is clear evidence of co-operation (see T p 237 in particular). However, whilst one is left with an impression of willing co-operation on the part of the applicant's representatives it is clear from those records that it vigorously defended its actions in relation to the opposing view of the respondent's representatives, that there was a Part IVA scheme in relation to the 3 July transactions, the GAPL loan transactions and the interest paid by the applicant now disallowed. The Tribunal finds nothing untoward in this, taking the view that it is every taxpayer's right to take a reasonable position in relation to its income tax return disclosures, providing that position is accompanied by an attitude of co-operation.
127. However, the Tribunal is conscious of what can only be regarded as ``back-dated'' documents:- the various letters exchanged by the parties to the 3 July transactions all dated 3 July 1989 (T 10, T 11, T 12, T 13 & T 14) but which, the evidence shows, were created in final form five or six months later; and the journal entry dated 3 July 1989 recording the repayment of the loan of $8,058,662 from Codelfa to Clough Limited and on-lending $20,750,000 to the applicant, which is marked as having been processed on 3 July 1989 (T 9, p. 69) when the evidence is that this entry could not have occurred until late November 1989 at the earliest since that is when the decision was taken to put the 3 July transactions into place. The respondent submitted that these documents were back-dated to give a false impression to anyone having a need to inspect them.
128. In the Tribunal's view the back-dating of those documents, which of course is unnecessary if they merely record proper decisions taken some time earlier, is naive to say the least and, in the mosaic of the scheme in question, more than likely reflecting a deliberate intent to create a false impression that those documents came into being on 3 July 1989. If that had been the case then it may well have assisted the applicant, but only if there had been a finding that the two loan transactions were independent.
129. In the Tribunal's opinion, the back- dating of the documents mentioned establishes a basis for a penalty whilst this is mitigated by the applicant's willingness to co-operate in what can only be seen as a demanding, costly and time consuming audit by the respondent, carried out in the course of its statutory duties.
130. On 26 October 1989 the respondent issued a public ruling, Taxation Ruling IT 2564, which addresses the question of remission of penalties imposed by s 226. It states at paragraph 9:
``... Participation in a tax avoidance scheme, per se, attracts the operation of the provisions. In tax avoidance cases covered by sections... 226, where there is reasonable co-operation with official enquiries, the statutory penalty imposed... should be remitted to a `per annum' component plus a 'culpability' component of 45 per cent of the tax avoided.''
At paragraph 12 the ruling states:
``..., the basic penalty may be reduced where mitigating factors exist. For example, where there is a full complete and voluntary disclosure of all the material facts at the time of lodging all the relevant income tax returns, some further remission may be warranted depending on the nature, extent and timing of the disclosure and if the matter is clearly contentious. However, having regard to the general legislative intent, it is considered the penalty generally should not be remitted to below a flat rate of 10 percent
ATC 2056plus the `per annum' component unless there are very exceptional circumstances.''
There is no suggestion of capriciousness on the part of the respondent in assessing the additional tax in question.
131. The 30 June 1990 income tax return for the applicant was lodged on or about 17 April 1991 (T 41 p. 152), at a time when company income tax returns were self-assessed pursuant to s 166A of the Act. There was no obligation on the part of the applicant to make any particular disclosure in its return other than that specifically requested in the return form itself (T p. 152-153). At all material times the applicant was receiving professional advice and both Messrs Reid and Uchanski are qualified and experienced accountants. Objectively, in these circumstances there may have been little reason for the applicant to have doubted the income tax efficacy of the arrangement. For these reasons the Tribunal finds that the disclosures made in the 30 June 1990 income tax return by the applicant were not, of themselves, misleading. However, because the respondent was only likely to become aware of the details of what it determined later to be the scheme for the purposes of Part IVA, upon it carrying out an audit of that income tax return, in the Tribunal's opinion, the back-dating of documents was, in that light, at least potentially misleading.
132. Having considered the applicant's submissions on penalty the Tribunal sees no reason, in the particular circumstances of this case, to vary the exercise of the respondent's remission decision pursuant to s 227(3) of the Act, reducing the ``culpability component'' to 45 per cent of the tax avoided.
133. For the above reasons the decision under review is affirmed.