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GROSS v FC of T

Members:
Lee J
Heerey J
RD Nicholson J

Tribunal:
Full Federal Court

Decision date: 3 February 1999

Lee, Heerey and RD Nicholson JJ

These are two appeals before the Court in respect of a decision of Wilcox J dismissing an application in respect of the disallowance of objections to amended assessments of income tax [reported at 98 ATC 4001]. The objections relate to claims by the appellant to deduct from his assessable income, in respect of the taxation years ending 30 June 1989 and 1991, money said to have been expended on the production of films, as permitted by Div 10B of Part III of the Income Tax Assessment Act 1936 (Cth) (``the Act'').

Material facts

2. The material facts as found by Wilcox J were as follows. The appellant's claims relate to films produced, or to be produced, by companies controlled by a Mr Robert MacLeod, a person whose whereabouts were unknown to the parties at the time of the application. On 18 April 1988 Mr MacLeod obtained a provisional certificate under s 124ZAB of the Act in respect of a three-part documentary film to be known as ``Toddler Taming''. Section 124ZAB is contained in Div 10BA of Part III of the Act. The amount of the deduction available under Div 10BA was reduced in May 1988 and perhaps for that reason, on 1 November 1988 Mr MacLeod wrote to the respondent seeking confirmation of deductibility under Div 10B of the Act of an investment in a film to be produced by MacLeod. On 24 November 1988 the respondent replied:

``... From the information provided, an investor who invests in a film under Division 10B of the [Act] will be eligible for

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a concession which reflects the total amount of his or her interest in the film, even though part of the investment may have been made with the assistance of a subsidy, loan or a gift.

The concession will be applicable where an investor acquires a share in the copyright (and equity) of the film and where the reason for investment is to acquire a beneficial interest in the proceeds and income derived from the film.''

Mr MacLeod set about marketing interests in ``Toddler Taming'' by reference to this letter.

3. The appellant carries on the practice of a chartered accountant in partnership with his wife. In May or June 1989 she attended a seminar on film investment during which Mr MacLeod spoke about ``Toddler Taming''. She took home a standard form letter in which the features of the investment were outlined. These included that it would be 100 per cent tax deductible under Div 10B and 10BA of the Act and, in the former case, that the producer had elected to state the life of the copyright over one year so as to qualify the investment for a 100 per cent tax concession in that period. It stated that investors would receive ``50 per cent pro rata income''. It referred to a ``70 per cent subsidy'' to give the investor ``a greater beneficial interest in the copyright and ownership of the film''. It also stated the ``benefit'' for an investment of $10,000 would be a taxation deduction of $33,500.

4. The appellant decided to invest in the film. Relying on the proposed ``subsidy'', he executed a deed on 22 June 1989 whereby he undertook to pay the production company (Trainex Pty Ltd - ``Trainex'') the sum of $17,000 by 30 June in return for an undisclosed share in the investors' 50 per cent interest in the copyright of the film. Apparently the figure of $17,000 was calculated as the sum of an investment of $5,000 and the ``70 per cent subsidy'' referred to in Mr MacLeod's letter. In fact the appellant paid only $5,000. That payment was made before 30 June 1989.

5. In his 1989 taxation return the appellant claimed a deduction for ``film industry incentives and management and investment companies as attached - `Toddler Taming' $17,000''. This was supported by an item reference reading:

``THE TAXPAYER INVESTED $17,000 WITH TRAINEX FILM PRODUCTIONS (COPY OF INVESTMENT CONTRACT ATTACHED) IN AN ELIGIBLE AUSTRALIAN FILM - `TODDLER TAMING' - A FILM CERTIFIED BY THE MINISTER FOR THE ARTS. THE INVESTMENT MADE PURSUANT TO DIVISION 10B OF THE INCOME TAX ASSESSMENT ACT IS A 100% ALLOWABLE DEDUCTION.

THE AMOUNT CLAIMED IS:-$17,000

PROVISIONAL CERTIFICATE NO: P2927 AMOUNT OF INCOME DERIVED: $36.95 LIFE OF THE COPYRIGHT: 364 DAYS''

6. Neither the deed nor anything in the appellant's 1989 taxation return revealed that he had invested only $5,000 of his money and that the balance of the claimed $17,000 had come from the Trainex ``subsidy''.

7. On 18 October 1989 the respondent issued a notice of assessment based on the return, allowing the claim of $17,000. On 7 December 1994 the respondent, after an investigation, decided that Div 10B, which provides deductions only in respect of a taxation year in which the relevant film is completed and used for the production of assessable income, did not apply and that the whole of the claim should be disallowed. Accordingly, a notice of amended assessment was issued on 14 December 1994. The appellant conceded that as the film ``Toddler Taming'' had not been completed and used for the production of assessable income in the 1989 taxation year, a deduction could not be claimed in that taxation year. The appellant contended, however, that the respondent was not empowered to issue the amended assessment in respect of the 1989 taxation year.

8. On 6 February 1995 the appellant objected to the amended assessment.

9. In his return for the 1991 taxation year the appellant claimed $45,000 for ``film industry incentives''. He supplied no particulars. The claim was allowed and an assessment issued accordingly in March 1992. In that year he had in fact invested $13,500, being $4,800 in the film ``The Nymph'' and $8,700 in a film ``The Paradise Kids''. He received ``subsidies'' of $11,200 for ``The Nymph'' and $20,300 for ``The Paradise Kids'', making his nominal

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investments in the amounts of $16,000 and $29,000 respectively.

10. In the letter to the appellant dated 7 December 1994 the respondent stated that no deduction was allowable in respect of ``The Nymph'' or ``The Paradise Kids'' because neither film had been completed or earned income in the 1991 taxation year and an amended assessment would be issued. The appellant conceded that the claim for investment in ``The Nymph'' could not be sustained. The respondent noted that in that year both ``Toddler Taming'' and the ``Health Promotion Series'' had been completed and that the appellant was entitled to a deduction in respect of contributions in earlier financial years, to their cost of production. The appellant had contributed $3,000 to the ``Health Promotion Series''. The deductions allowed were the proportion of the total cost of each film of the appellant's nominal investment in it. The relevant proportions were 6 per cent for ``Toddler Taming'', which entitled the appellant to a deduction of $1,020, and 8.7 per cent for the ``Health Promotion Series'', being a deduction of $870. The amended assessment for the 1991 taxation year was issued on 14 December 1994 and reduced the amount allowed for investment in films from $45,000 to $1,890.

11. The appellant objected to the amended assessment.

Deeds of investment

12. The deeds by which the appellant invested in the relevant films were in standard form. By each deed the appellant agreed to invest a sum identified in a schedule, being a sum arrived at by combination of the amount contributed by the appellant and the amount of the ``subsidy''. The consideration for the investment was expressed to be that the appellant would become one of the first owners of the copyright of the film on the basis of attached terms and conditions. Clause 8 of the attached ``Terms and Conditions'' contained an acknowledgment by the parties that on and from the ``Completion Date'' the copyright ``shall be owned by the parties and in the proportions set out in... the Schedule''. ``Completion Date'' was defined in subcl 1.1(f) to mean the date upon which the ``first answer print'' of the film is made to the reasonable satisfaction of Trainex. Item 9 of the Schedule to the deed stated that copyright was owned as to 50 per cent by the investors ``pro rata'' and by Trainex as to the balance. By cl 2 of the Terms and Conditions the appellant as investor was required to pay the amount of the investment to Trainex which in turn was required to deposit the moneys into a trust account. Subclause 2.4 provided those moneys would not become the ``Investment of the Investor'' until the ``Subscription Conditions'' had been met (subject to a qualifying condition not here relevant). Subclause 2.5 provided that on satisfaction of the ``Subscription Conditions'' Trainex would ``redeem'' any invested funds, accounting to the Investor for any interest earned on them, and then, before the Completion Date, ``pay any funds to be used for Marketing into the Marketing Account''.

13. Subclause 2.6 provided that:

``On satisfaction of the Subscription Conditions the moneys paid by the Investor shall become the Investment of the Investor and shall be deemed to be contributed towards the Budgeted Cost.''

14. ``Investment'' was defined in the Terms and Conditions to mean:

``the money actually paid or provided (otherwise than by way of loan or gift) by the Investor to the Production Company and accepted by the Production Company prior to the Completion Date by way of contribution towards the cost of production and marketing of the Film and being valuable consideration within the terms of s 93(3) of the Copyright Act for the acquisition of the Copyright or an undivided part thereof as the first owner of the Copyright.''

15. The Subscription Conditions were defined as set out in Item 6 of the Schedule to the deed and were conditions setting the terms of minimum subscription. By subcl 2.8 it was provided:

``In the event that the `Subscription Conditions' have not been met by the time that the production of the Film is required to proceed or by the date set out in Item 7 of the Schedule (whichever is the earlier) the Production Company shall immediately return to the Investor the moneys advanced by the Investor (less any Transaction Taxes) and all rights, responsibilities and powers of

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the parties under this Deed shall immediately be at an end.''

16. In the case of ``Toddler Taming'' the date in Item 7 of the Schedule was 30 June 1989. In the case of the ``Health Promotion Series'' the date in Item 7 was 30 June 1991.

Requirements of Division 10B

17. As at 30 June 1989 the operative section in Div 10B was s 124M(1) which provided:

``124M(1) Where, at any time during the year of income, a taxpayer is the owner of a unit of industrial property to whom this Division applies, an amount equal to the residual value of the unit in relation to the taxpayer as at the end of the year of income divided by a number equal to the number of whole years in the effective life of the unit in relation to the taxpayer as at the commencement of the year of income shall, subject to this Act, be an allowable deduction in respect of the unit.''

18. For the appellant to succeed in claiming a deduction under Div 10B in the 1989 income year it was necessary, therefore, for the following to be established:

  • (1) That the appellant was ``the owner'' of ``a unit of industrial property''. The words ``the owner'' were defined by s 124K(1) to mean the person who possesses the rights in respect of the unit of industrial property. The description ``unit of industrial property'' was relevantly defined to mean rights possessed by a person as the owner of a copyright subsisting in Australia and including ``equitable rights in respect of such... copyright... or in respect of a licence under such... copyright...''.
  • (2) The appellant must have become the owner of the unit by being the first owner of the copyright: s 124L(1)(a)(ii).
  • (3) The appellant must have incurred ``expenditure of a capital nature'' directly in relation to producing the subject-matter in which the copyright subsists before the unit came into existence: ss 124L(1)(a) and (4).
  • (4) The appellant must have, in the 1989 or any prior year of income, used the unit of industrial property or the work or other subject-matter to which that unit relates for the purpose of producing assessable income: s 124L(1).
  • (5) The quantum of any claim by the appellant for a deduction must be the ``residual value of the unit'' divided by the number equal to the number of whole years in the effective life of the unit in relation to the taxpayer as at the commencement of the 1989 year of income: s 124M(1). Pursuant to s 124S, relevantly, the ``residual value of the unit'' is the ``cost of the unit to the owner'': see also s 124R(1).

19. The provisions in force as at 30 June 1991 in Div 10B were to the same effect as those in force at 30 June 1989.

1989 amended assessment

20. As noted above the appellant concedes that he was not entitled to a deduction under Div 10B in respect of investment in ``Toddler Taming'' in 1989. The only question which arises is whether the respondent was entitled in 1994 to issue an amended assessment of income tax in respect of that year.

21. As Wilcox J pointed out, that issue turns on the application of s 170 of the Act to the case, the relevant portions of which at 30 June 1989 read as follows:

``170(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary; notwithstanding that tax may have been paid in respect of the assessment.

170(2) Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may-

  • (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
  • (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment,

amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct the assessment.

170(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made

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after the expiration of 3 years from the date upon which the tax became due and payable under that assessment.''

22. As the amended assessment had issued more than five years after the original assessment, it would be of no effect if the appellant had made a full and true disclosure before assessment of all material facts necessary for the assessment. After consideration of case law to which reference will be made, Wilcox J reached the following conclusion on this issue [at ATC 4009]:

``In the present case, in order to determine what attitude ought properly be taken to Mr Gross' claim to deduct $17,000 from his 1989 taxable income in respect of `Toddler Taming', it was necessary for the Commissioner to have information about two matters, at least. First, the Commissioner needed `in principle' information about the use of the film for the earning of assessable income. Mr Gross gave him information about this; relying no doubt on Mr MacLeod's letter to him of 14 July 1989. This information was wrong; the film was not completed until 1991 and could not have produced income in 1989. On this ground alone, it must be concluded the return did not make a true disclosure of all the material facts; it misstated a critical fact. Second, if the Commissioner was minded to allow a deduction, he needed to know the amount of Mr Gross' expenditure on the film. The amount of that expenditure was a material fact in determining the quantum of any deduction; therefore, it was material in relation to the assessment. It was misstated. Mr Gross did not reveal he had expended only $5,000; he stated he had `invested' $17,000. In the absence of any qualification or explanation, such a statement would naturally be understood as a statement that he had expended $17,000, a statement that was false. Whether or not Mr Gross consciously intended to deceive the Commissioner, it is apparent he did not make a full and true disclosure of all the material facts.

In my opinion it was open to the Commissioner to amend the original assessment, notwithstanding the expiration of three years since it was made.''

23. The grounds of appeal contend that Wilcox J was in error in so concluding and should have held the appellant had made a full and true disclosure of all the material facts so that s 170(3) of the Act precluded the respondent from issuing the amended assessment.

24. What is required for ``full and true disclosure of all the material facts necessary for [ a taxpayer's] assessment'' has been considered in a number of recent decisions of the Full Court of this Court. In
FC of T v Riverside Road Pty Ltd (in liq) 90 ATC 4567 at 4578-4579; (1989) 23 FCR 305 at 318 the Court (Northrop, Wilcox and Hill JJ) said:

``What is meant by full and true disclosure has been the subject of considerable discussion. In
Austin Distributors Pty Ltd v FC of T (1964) 13 ATD 429 at pp 432-433, Menzies J said:

`The requirement of s 170... is not met by anything less than full disclosure of all the material facts, and a disclosure which leaves the Commissioner to speculate as to some of the material facts is not sufficient... The matter can be tested in this way. If advice were to have been sought by the taxpayer whether or not the sum in question was a taxable premium, would the person from whom that advice was sought have required more information than this return disclosed to the Commissioner?'

In most cases, where the question of full and true disclosure has arisen, the discussion of failure to disclose was in the context of a matter which went to the liability, as a matter of principle, to tax of an income item or the allowability, as a matter of principle, of an outgoing. See for example
W Thomas & Co Pty Ltd v FC of T (1965) 115 CLR 58;
Chamber of Manufactures Insurance v FC of T 84 ATC 4315; (1984) 2 FCR 455;
AL Hamblin Equipment Pty Ltd v FC of T 74 ATC 4001 at p 4011; (1974) 130 CLR 159 at pp 174-175;
Stapleton v FC of T 89 ATC 4818, per Sheppard J.''

25. The Court considered the facts in Riverside Road were not in either of those categories because the Commissioner was required to compute the amount of interest which was allowable (being related to plant and fittings used in a motel business or working capital) and that which was not allowable (being related to the purchase of a site in

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construction of buildings). It was therefore necessary for the Commissioner to know how much of the overall borrowings related to each of these matters and no amount of sophisticated analysis of the returns would otherwise permit that calculation to be made. The Court therefore held there was not full and true disclosure in the circumstances.

26. In
FC of T v The Swan Brewery Co Ltd 91 ATC 4637 at 4644; (1991) 30 FCR 553 at 562 the Full Court (Neaves, Lee and Olney JJ) said:

``The onus was on the taxpayer to show that it had made a full and true disclosure of all material facts and that there had not been an avoidance of tax. (See
McAndrew v FC of T (1956) 11 ATD 131 at 132; (1956) 98 CLR 263 at 269, per Dixon CJ, McTiernan and Webb JJ.)

The taxpayer will be unable to discharge the latter onus if the absence of full disclosure results in an assessment by the Commissioner of the taxpayer's liability to pay tax that is less than the liability that ought to have been assessed. (See
Australian Jam Co Pty Ltd v FC of T (1953) 10 ATD 217 at 222; (1953) 88 CLR 23 at 34, per Fullagar J.)''

27. In
MIM Holdings Pty Ltd v FC of T 97 ATC 4420; (1997) 36 ATR 108 the Court (Northrop, Hill and Cooper JJ) referred to the test in the judgment of Menzies J in Austin Distributors at 432 which it described as the most often-stated test. The Court continued [at ATC p 4431]:

``Sheppard J in
Stapleton v FC of T 89 ATC 4818 at 4829; 88 ALR 606 at 619 subsequently qualified what Menzies J had said because of the possibility that a prudent adviser might require further information, but on receipt that information might prove to be immaterial. As his Honour pointed out in the passage referred to, any omission must be a material one for the full and true disclosure of which the section speaks is a full and true disclosure of all the material facts.

As Sheppard J further pointed out, the purpose of the sub-section was to ensure that the Commissioner was given an adequate opportunity to consider properly whether a particular receipt was assessable income or a particular outgoing was an allowable deduction. Such questions are often notoriously difficult. A taxpayer may well in a return submit that a particular item has a capital character whereas the facts as ultimately disclosed bring about the result that a payment has an income character. The mere fact that there has been a submission in a return as to the character of a payment which turns out not to be accepted by a court does not bring about a lack of full and true disclosure if otherwise all relevant facts have been disclosed: W Thomas & Co Pty Ltd v FC of T (1965) 14 ATD 78 at 89; (1965) 115 CLR 58 at 76.''

28. It was on
W Thomas & Co Pty Ltd v FC of T (1965) 14 ATD 78; (1965) 115 CLR 58 which the contentions for the appellant on this aspect primarily rely. That was a case in which in large measure the taxpayer succeeded in having an amended assessment set aside on the basis the Commissioner was precluded by s 170(3) of the Act from amending the original assessment. The amount in issue was the sum of £ 5,082 claimed as repairs in respect of roof, walls, painting, basement floor and wooden floor. Windeyer J found (at ATD 88; CLR 74) the expenditure was of a capital nature so that it became critical to decide the question of true and full disclosure. He approached that on the basis it was to be decided in respect of each of the component parts of the sum claimed. He said it could not be found there had been a failure to make a full and true disclosure of all material facts simply because the Commissioner was not told everything elicited by examination and cross-examination where that amounted only to explanatory detail and was not contradictory (at ATD 89; CLR 75). He then said:

``Looking at the matter in this way, what did the Commissioner know? He knew that a building had been acquired during the year at a cost of £15,015. He knew that after its acquisition and within the year a total sum of £6,097 had been spent upon it of which £ 1,015 was for structural alterations and additions and the balance, £5,082, for work described as repairs. It was thus apparent that, whether or not this expenditure was properly described as for repairs, the work was extensive and costly considered in relation to the value of a building newly acquired. In my view the information that the Commissioner had would lead inevitably

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to the conclusion that prima facie this expenditure was of a capital nature.''

29. Subsequently (at ATD 89; CLR 76) Windeyer J said:

``... what must be disclosed are the material facts concerning a particular expenditure. It does not seem to me be correct to say that if these be truly and sufficiently stated the effect of doing so is neutralized by a claim based upon an erroneous view of their legal complexion and consequence.... there is I consider no failure of full disclosure because the taxpayer treats the expenditure as of a revenue and not of a capital nature in its own accounts and claims to do so for taxation purposes.''

30. Windeyer J found that except in the item ``painting'' there had been true and full disclosure of the material facts. In relation to painting, the taxpayer had not disclosed that the painting was done as part of an unusual and costly operation to get rid of odours and contamination resulting from the previous owner's activities and so to make the premises suitable for use by the taxpayer.

31. In the present case the Commissioner knew the investment occurred on 22 June 1989; the film was at that stage a proposal only; subscription was to be filled by 30 June 1989; and completion of the film was due by 30 August 1989. For the appellant it is therefore contended that, as in Thomas, so here - namely the information which the Commissioner had - would inevitably have led to the conclusion by way of inference that the film was not produced and made in the 1989 income year so that the claim for the deduction of $17,000 should have been disallowed. The submission is that the only ``material fact'' was whether or not the film had been made. It is submitted the word ``material'' must be understood in relation to what is ``necessary for his assessment''. Consequently, it is submitted, issues of quantum relating to the amounts actually contributed by the appellant and the amount of the subsidy were not ``material''. Critical to the submissions for the appellant on this point was the contention that, because the film had not been produced, copyright had not vested and that was a complete answer to the claim and should have been apparent to the Commissioner.

32. For the respondent it is contended that, as the appellant claimed a deduction under Div 10B of the Act, the ``material facts'' are those relevant to enabling the Commissioner to decide such a claim; that is, they are multiple in character. It is submitted the principal requirements of Div 10B as outlined above do not give rise to separate assessments but rather are composite questions which are required to be answered to arrive at an assessment. It is submitted what must be disclosed are all the elements needed to resolve the claim for the deduction and lead to the assessment. Therefore it is said the fact the claim may be resolved adversely on the first or second element does not mean the taxpayer is not obliged to make full and true disclosure of the material facts on the remaining elements. In short, the ``material facts necessary for his assessment'' is a reference to assessment under the provisions relating to the deduction claimed and not the provisions proving to be relevant as a consequence of the assessment actually made.

33. The critical question in this regard was whether the taxpayer made full and true disclosure of all material facts concerning the ``expenditure of a capital nature'' which he had incurred directly in relation to producing the work or other subject-matter in which the copyright would subsist. Under the Copyright Act 1968 (Cth) the first owner of a copyright in a film is the maker: ss 97(2) and 98(2). However, where a film or sound recording is made by a person for valuable consideration pursuant to an agreement with another person, that other person displaces the maker as the first owner of the copyright: ss 97(3) and 98(3). In
FC of T v Faywin Investments Pty Ltd 90 ATC 4361; (1990) 22 FCR 461 Hill J said (at ATC 4384-4385; FCR 489) ``a person who, for valuable consideration agrees to purchase an interest in a copyright as and when granted, can properly... be said to have `purchased' the interest in the copyright... as and when the film is created''. He would have allowed the taxpayer in that case a deduction under Div 10B. (Bowen CJ and French J did not consider that Division because they allowed the deductions under Div 10BA but did accept that copyright would not arise until the production process was complete.) As the claim made by the appellant was founded on an alleged acquisition of an interest in copyright, it was a material fact to the resolution of that claim, as made, for the Commissioner to be aware of the actual expenditure incurred by the taxpayer to

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effect the purchase of that interest. It was this which was ``the particular expenditure'' in relation to which full and true disclosure of material facts was required: cf Thomas at ATD 89; CLR 76 per Windeyer J.

34. The claim by the appellant for a deduction in respect of the sum of $17,000 under Div 10B required the Commissioner to apply the provisions of that Division to the amount claimed. At the time the claim was made it was not apparent upon which of the elements of the Division the claim would be resolved. For the particular expenditure to be assessed as a deduction under the Division it was necessary for true and full disclosure to be made to enable the Commissioner to apply all the elements of the Division.

35. That this must be so may be illustrated by reference to the Subscription Conditions. The appellant had to establish that the Subscription Conditions were met by 30 June 1989. If the Subscription Conditions were not met by 30 June 1989 the deed was automatically discharged, so that rights which may otherwise have accrued to the appellant under the Terms and Conditions did not accrue. The rights which did not accrue to the appellant included the right to an interest in the ``copyright'' pursuant to subcl 8.1 of the Terms and Conditions.

36. There is a further reason why disclosure of that character was required. The effect of subcl 2.6 of the relevant deed was that only ``the money actually paid or provided (otherwise than by way of loan or gift)'' became the ``investment'' of the appellant. It was the sum of $5,000, not the sum of $17,000, which satisfied that requirement.

37. There is a sound reason of legal policy why the construction of s 170(3) contended for by the appellant is not correct. If the Commissioner was placed in the position where taxpayers claiming deductions, believing themselves to be likely to succeed or be precluded on a particular limb, would withhold from the Commissioner information requisite for a consideration of other limbs, the intention of the provision to facilitate the making of an assessment would be frustrated.

38. We also consider that the approach taken by Wilcox J is that which best accords with the authorities previously referred to. Those authorities post-date Thomas. The issue in Thomas was the relatively straightforward single issue of whether the expenditure was on capital or income account. Because of the nature of the provisions providing deduction for expenditure on films, there was no such simple single issue before Wilcox J.

39. The applicant's contentions also relied upon the statement in
White v FC of T (1954) 10 ATD 413 at pp 420-421; (1954) 6 AITR 147 at 157 to the effect that, in order that disclosure be both full and true, it is not necessary to state further facts which would or may have put the Commissioner's officers on their guard against gratuitously allowing a claim to which the taxpayer was not entitled - cited in
Slater Holdings Ltd v FC of T 80 ATC 4136 at 4140; (1980) 10 ATR 711 at 714 per Hunt J, who also relied upon Thomas. On appeal at 80 ATC 4534 at 4538 the Full Court (Bowen CJ, Brennan and Lockhart JJ) concluded the statements made in the return of income in Slater's case, while able to be regarded as true, were not sufficiently full to prevent the making of a mistake that a particular company was in liquidation. Furthermore, the statement in White at ATD 420-421; AITR 157 is referable to the statement which shortly precedes it to the effect that it is not necessary for a full and true disclosure to be made that the taxpayer direct the Commissioner's attention to the non-existence of all facts which, if they existed, would entitle the taxpayer to the benefit of exemptions which the taxpayer does not claim and which the taxpayer has no reason to suppose may be thought applicable to him or her. That is not this case. (See also:
Watson v FC of T 83 ATC 4336 per Kennedy J at 4351-4352.)

Costs on preliminary point

40. In
Gross v FC of T 96 ATC 5260 Wilcox J considered the preliminary issue whether the appellant was required to make an election under s 124ZAE that Div 10BA not apply to expenditure was a condition precedent to being entitled to claim a deduction under Div 10B. He held that an election under that section was not always a condition precedent to a taxpayer obtaining a deduction under Div 10B. The matter was stood over for mention without orders being made. He also held that if an election was needed it had been made within the time required by the section.

41. For the appellant it is submitted it was he who was wholly successful on the preliminary issue. The Commissioner had contended the appellant had not made an election and accordingly was not entitled to claim a

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deduction under Div 10B. This was not a matter raised by the Commissioner in amending the assessments or disallowing the objections. It is therefore submitted for the appellant that as the successful party on the discrete issue he was entitled to costs.

42. For the respondent it is said the decision of Wilcox J was the exercise of a discretionary judgment which cannot be interfered with in the absence of some ground to justify interference:
House v The King (1936) 55 CLR 449 at 505. Reference was also made to
Queensland Wire Industries Pty Ltd v BHP Co Ltd & Anor (1988) ATPR ¶40-841 at 49,077; (1987) 17 FCR 211 at 222 where the Court declined to interfere with the exercise of a discretion awarding costs made by a judge pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth), referring in doing so to the ``well-known guidelines'' stated by Toohey J in
Hughes v Western Australian Cricket Association (Inc) (1986) ATPR ¶40-248 at 48,136. There the Full Court (Bowen CJ, Morling and Gummow JJ) said that, while the result may have been unusual, it was not satisfied the discretion had miscarried or that the appellate court should substitute its exercise of discretion in accordance with the principles in House at 507.

43. In
Rosniak v Government Insurance Office (1997) Aust Torts Reports ¶81-440 at 64,462; (1997) 41 NSWLR 608 at 615 Mason P, in discussing an issue of indemnity costs, rejected the contention that
Mok v Minister for Immigration, Local Government and Ethnic Affairs (No 2) (1993) 47 FCR 81 stood for the proposition that a court's power to order a successful party to pay the costs in respect of an issue raised by the party on which the party has failed, ought to be exercised only where the court, on a consideration of all the circumstances, has concluded the raising of that issue by the applicant was so unreasonable that it is fair and just to make the order. Mason P said no such principle exists in the sense of a fixed proposition of law. He continued by stating that in a proper case, the party that is successful overall may be ordered to pay the costs of a discrete issue. In support of this latter proposition he referred to two cases.

44. The first was
Armstrong v Land Mark Corporation Ltd [1967] 1 NSWLR 13. Street J there exercised his discretion to exclude the cost of a portion of the proceedings when ordering the defendant to pay the plaintiff's costs of the suit. The second was
Byrns v Davie [ 1991] 2 VR 568. There Gobbo J held there can be an apportionment of costs according to issues against a defendant that is ultimately successful even though such defendant fails on particular issues or in respect of particular parts of proceedings. In so deciding Gobbo J followed
Woolf v Burman (1939) 13 ALJR 431.

45. The authorities relied upon for the appellant's contentions on the issue of costs do not provide any appropriate ground for an appellate court interfering with the exercise of discretion by the primary judge. These authorities would have required consideration by the primary judge but they provide no basis upon which this Court can interfere with the exercise of discretion. In so saying we do not consider this is a case where, the respondent having succeeded, the exercise of discretion is so unreasonable or plainly unjust that there is an opportunity for this Court to infer there has been a failure to properly exercise the discretion arising under s 43 of the Federal Court of Australia Act 1976 (Cth).

The 1991 amended assessment

46. Before Wilcox J it was contended that the Commissioner was in error to limit the permissible deduction by reference to ``your share of the actual cost of producing the film''. It was submitted the Commissioner should have allowed deduction of the whole of the moneys actually paid by the appellant.

47. After reviewing relevant statutory provisions Wilcox J said the critical question was what expenditure had the appellant incurred directly in producing ``Toddler Taming'' and the ``Health Promotion Series''. It was not in issue that as set out in the deeds the ``effective life'' of the unit of industrial property for the purpose of s 124M(1) was one year.

48. Counsel for the appellant submitted to Wilcox J that the whole of the appellant's cash contributions were so incurred and that it did not matter that the amount expended by him and others greatly exceeded the amount to produce the films. In support it was argued the word ``directly'' in s 124L(1)(a) should be interpreted broadly. Reliance was placed on the decision in Faywin.

49. Before Wilcox J counsel for the Commissioner relied on the deeds governing the appellant's investment in the films and

ATC 4206

made two submissions in relation to provisions of them. Firstly, he pointed out there was no evidence as to when the Subscription Conditions were met and therefore no evidence when the moneys paid by the appellant became an investment in the film. Secondly, he noted subcl 2.5(c) contemplated that money subscribed by investors, and held in trust until satisfaction of Subscription Conditions, may be used for marketing. However s 124L(1)(a) extended only to ``expenditure of a capital nature directly in relation to... producing the work''. It was said marketing costs are not production costs.

50. Wilcox J found it unnecessary to resolve the first submission. He considered that the second submission was well taken in respect of both films. He continued [at ATC pp 4011-4012]:

``... The Taxation Office investigations established that a large proportion of the money subscribed in connection with these films was spent otherwise than on production. Possibly some of that proportion was expended on marketing, as was permissible under the relevant trust deeds. Other money may have been used for purposes falling outside the trust deed; in the absence of Mr MacLeod, it is impossible to know. The sad fact, from Mr Gross' point of view, is that he is quite unable to demonstrate what part of his subscription was expended on the production of the film; that is, what expenditure he incurred `directly in relation to producing the work... in which copyright subsists.' The 1991 amended assessment, made in 1994, allowed him the proportion of his total contribution that corresponded with the proportion of the total public subscription that was used for the production of the films. It seems to me that was a fair approach, reflecting the objective of Division 10B in allowing the deduction of moneys expended on the production of the work the subject of the taxpayer's copyright, but only that expenditure.''

51. Wilcox J therefore disposed of the appeal in relation to the two films on a ground of fact, namely the inability of the appellant to demonstrate what part of his subscription was expended on the production of the film.

52. The issue on appeal remains the same as that before Wilcox J. That is, whether what was expended on the two films by the appellant in the 1991 year was ``incurred expenditure of a capital nature directly in relation to... producing the work... in which the copyright subsists''.

53. Under Div 10B for a deduction to be allowable it is necessary that the appellant incur expenditure of a capital nature directly in relation to producing the work or other subject- matter in which the copyright subsists. Under the deeds the Investment was ``by way of contribution towards the cost of production and marketing of the Film''. Contributions to the marketing of a film are not expenditure of a capital nature directly in relation to producing the work or other subject-matter in which the copyright was said to subsist.

54. The total amount invested by members of the public (excluding any purported subsidy) in ``Toddler Taming'' was at least $3,427,599.57. The amount spent on the production of the ten episodes of ``Toddler Taming'' was $501,767.00. Thus only about 14 per cent of the total amount of money contributed was used in the production of the ten episodes of ``Toddler Taming''.

55. In the amended assessment the respondent allowed as a Division 10B deduction in the 1991 year an amount of $1,020 referable to ``Toddler Taming''. The appellant has not demonstrated that he is entitled to a Division 10B deduction of any greater amount than that allowed by the respondent. The ground on which Wilcox J resolved this aspect of the matter is not shown to be in error in itself.

56. However, the contentions for the appellant also argue the relevant expenditure was nevertheless ``incurred''. It is submitted ``incurred'' does not require that the moneys payable have been actually paid over to the payee in the relevant year of income:
FC of T v Lau 84 ATC 4929 at 4940; (1984) 6 FCR 202 at 216. Expenditure, it is said ``incurred'' upon the applicant entering the deed at which point the applicant was ``definitely committed''. Then it is said that the phrase ``directly in relation to... producing the work'' in s 124L(1)(a) should be given a wide meaning: cf Faywin at ATC 4371-4372; FCR 472-473.

57. What is required by s 124L(1)(a) of the Act is that the owner of the unit has incurred expenditure of a capital nature. We accept the submission for the respondent that the

ATC 4207

jurisprudence on s 51(1) of the Act as to the meaning of ``losses or outgoings incurred'' does not translate to this context where the relevant concept is different. The precondition to the application of s 124L(1)(a) relevantly is that it is ``expenditure'' which must be incurred. ``Expenditure'' is defined in the Macquarie Dictionary at p 610 to mean ``1. The act of expending; disbursement; consumption. 2. That which is expended; expense.'' Expenditure, by its nature, must be made: it is not, like losses and outgoings, able to be incurred. We therefore accept the submission for the respondent that ``expenditure'' connotes something passing from the owner of the unit and not a subsidy provided by another.

58. There is good reason for interpreting the word ``expenditure'' in its normal meaning in the context of s 124L(1)(a). Section 124S requires the quantum of the deduction to be determined by reference to ``the cost of the unit to the owner''. That in turn is taken to be ``the expenditure referred to in s 124L(1)(a)'' - see s 124R(1)(a)(ii). To construe s 124L(1)(a) in the way contended for by the appellants would in turn distort the concept of ``cost'' in the Division.

59. This understanding cannot be affected by the ascription of any wide meaning to the word ``directly'' or the words ``in relation to''.

60. The submissions for the appellant then contend, alternatively, the capital expenditure incurred by the appellant falls within s 124L(1)(b) as expenditure incurred of a capital nature on the purchase of the unit of industrial property: Faywin at ATC 4383-4385; FCR 489 per Hill J. On the facts this argument cannot assist the appellant. The valuable consideration remained in trust and was never applied to the purchase (subcl 2.4) and the purchase was not made because the Subscription Conditions were not met (subcl 2.6). This was not a case where there was a consummated purchase of an interest arising in the future.

61. The other film in which the appellant invested in the 1991 year, ``The Paradise Kids'', was intended as a television drama series consisting of fifteen episodes each of thirty minutes duration. The respondent contended that the appellant did not obtain copyright in the industrial property contracted to be created, namely, fifteen episodes of ``The Paradise Kids'', but that does not resolve the issue of entitlement to a deduction if the appellant, nonetheless, obtained copyright in a unit of industrial property to which s 124M(1) applies. His Honour was prepared to assume that the appellant did acquire such property upon creation of the pilot film. His Honour was not prepared to find that the property was used in the 1991 taxation year for the purpose of producing assessable income.

62. Affidavit evidence before Wilcox J established that a marketing pilot of seven minutes and twenty seconds duration was produced at a cost of $25,000. It had not earned income. Wilcox J said in relation to the claim for a deduction in respect of that investment [at ATC p 4012]:

``For Mr Gross to be entitled to deduct his investment in `The Paradise Kids', it is necessary for him to show that, in a relevant year of income, he has used the unit of industrial property of which he is one of the first copyright owners `for the purpose of producing assessable income': see s 124L(1) of the Act. Assuming, in his favour, that he was one of the owners of copyright in the pilot for `The Paradise Kids', that film was never used for the purpose of producing assessable income. It was used only for the purpose of seeking pre-production sales.''

63. It is submitted for the appellant that the fact the films were being marketed is enough to satisfy the test that the investment was used ``for the purpose of producing assessable income'': see Case W19,
89 ATC 228.

64. In that case the Administrative Appeals Tribunal constituted by Mr PM Roach, Senior Member, concluded [at ATC pp 232-233]:

``... The question is not whether the use of a film produced income, or the right to income. The question is whether the owner `has used (the film)... for the purpose of producing assessable income'. In my view it never was necessary that a direct nexus should be established between the use of the film and identifiable assessable income attributable to that use. If the film had been used to promote the image of AA; or to simply entertain its clients; or as an `in- house' teaching aid (even if only to instruct staff as to experiences to be avoided), it would have been used `for the purpose of producing assessable income'. In my view the significance of the reference to `the year of income or a previous year of income' preceding the reference to use of the unit is

ATC 4208

only to indicate that no `unit of industrial property' exists until such a unit of industrial property exists; but that, once it exists, the right of amortisation commences once the unit of industrial property is put to use for the purpose of producing assessable income. I am satisfied that, from as early as November 1982, AA was seeking opportunities to derive assessable income by use of the film, but at that early day no deduction was allowable because the film did not then exist as `a unit of industrial property'. However, once the film was complete as a `unit', once it existed as a marketable item, it was being `used... for the purpose of producing assessable income.'''

65. In the present case the pilot film, which was complete, was found to be used for the purpose of seeking pre-production sales. That finding of fact is consistent with it having been used for the purpose of producing assessable income. It was not necessary the pilot itself be productive of actual assessable income. Any pre-production sales would lead to the inference they were made for the purpose of yielding income. The purpose of the pilot therefore involved a use to produce assessable income. In relation to his conclusion on the deduction denied for the investment in ``The Paradise Kids'' we consider Wilcox J was in error in that his finding was founded on the view that the use of the pilot film for pre-production sales precluded a finding that the purpose of such use was the production of assessable income. In our opinion the statutory test in s 124L(1) in respect of that film was satisfied. However, as there may be issues of fact requiring resolution that aspect should be remitted to the respondent for redetermination.

66. The amount invested by all investors for the production of ``the Paradise Kids'' was $1,000,700 and the proportion of the appellant's contribution to that sum is approximately 1 per cent. His investment of capital in the pilot film is, therefore, of the order of $250.

Conclusion

67. Pursuant to the foregoing reasons, the appeal (NG 69 of 1998) in respect of the disallowance of the objection to the amended assessment issued for the 1989 taxation year will be dismissed and the appeal (NG 68 of 1998) in respect of the disallowance of the objection to the amended assessment issued for the 1991 taxation year will be allowed, the respondent's decision to disallow the objection set aside and the matter remitted to the respondent for redetermination in accordance with these reasons.

THE COURT ORDERS THAT:

A. In matter NG 68 of 1998:

1. The appeal be allowed, the orders of Wilcox J made 23 December 1997 be set aside and in lieu thereof it be ordered that:

  • a. the decision of the respondent disallowing the appellant's objection to the amended assessment issued on 14 December 1994 be set aside;
  • b. the matter be remitted to the respondent for redetermination in accordance with these reasons;
  • c. the respondent pay the costs of the appellant of the hearing before his Honour limited to 50 per cent.

2. The respondent pay the appellant's costs of the appeal limited to 50 per cent.

B. In matter NG 69 of 1998:

1. The appeal be dismissed.

2. The appellant pay the respondent's costs of the appeal.


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