CC (NEW SOUTH WALES) PTY LIMITED (IN LIQ) v FC of T

Judges:
Sackville J

Court:
Federal Court

Judgment date: 3 February 1997

Sackville J

Introduction

The applicant (``CC NSW'') appeals against a decision of the respondent (``the Commissioner'') to disallow CC NSW's objections to amended assessments issued in respect of the years ended 30 June 1986, 30 June 1987, 30 June 1988 and 30 June 1989. The amended assessments included in CC NSW's taxable income for these years sums paid to CC NSW pursuant to two contracts entered into between it and the New South Wales Minister for Public Works and Ports (``the Minister''). Under these contracts, CC NSW provided services as construction manager for two projects to which I shall refer, respectively, as the Circular Quay Project and the Opera House Project.

The amounts in issue are shown in the following extract from an adjustment sheet:

 YEAR     PREVIOUS  INCREASE         AMENDED
          TAXABLE                (DECREASE) TAXABLE
          INCOME                      INCOME
 1986    6,114,005      77,700      $6,191,705
 1987   10,835,765   1,460,000      $12,295,765
 1988   11,321,347   1,588,000      $12,909,347
 1989    5,538,381     442,000      $ 5,980,381

In essence, CC NSW claims that in entering the two construction management contracts it acted as agent for Quay Apartments Pty Ltd (``QAPL'') as undisclosed principal, in the latter's capacity as trustee of the Quay Unit Trust (``QUT''). It follows, according to CC NSW, that the income received for services provided under the contracts was derived by QAPL and not by CC NSW.

At the relevant times, Concrete Constructions Pty Ltd (``CC PL''), the parent of CC NSW, owned all issued units in the QUT, which had accumulated losses relating to a project it was undertaking in Phillip Street, Sydney (``the Quay Apartments Project''). Although CC PL owned all units in the QUT, s. 80G of the Income Tax Assessment Act 1936 (Cth) (``ITAA''), which deals with transfer of losses within company groups, did not permit CC PL to offset its assessable income against QUT's losses.

The amended assessments issued by the Commissioner were based, in substance, on two contentions. The first was that an Agency Agreement between CC NSW and QAPL, bearing the date of 29 January 1986 (but not in fact executed until December 1986 or later), was ineffective at law to create the relationship of agent and principal between the parties in relation to the two construction management contracts. The second contention was that, insofar as the Agency Agreement was effective, valid determinations had been made by the Commissioner's delegate on 30 March 1993 in terms of s. 177F(1)(a) and (2) of the ITAA that the whole of the amounts in dispute should be included in CC NSW's assessable income.

The present appeal is brought pursuant to s. 14ZZN of the Taxation Administration Act 1953 (Cth) (``TAA''). On such an appeal, the appellant (referred to in this Court as the ``applicant'': Federal Court Rules, O. 52B, r. 4) has the burden of proving that the assessment is excessive: TAA, s. 14ZZO(b)(i). The Court hearing an appeal against any ``appealable objection decision'', such as the decisions made by the Commissioner in the present case, may make such order in relation to the decision as it sees fit, including an order confirming or varying the decision: TAA, s. 14ZZP.

Part IVA of the ITAA

Part IVA of the ITAA, insofar as is relevant to the present case, provides as follows:

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``Interpretation

177A(1) In this Part, unless the contrary intention appears:

`scheme' means:

(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;

...

177A(3) 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) 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) A reference in this Part to a scheme or 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.

...

Tax Benefits

177C(1) 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)...;

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)...

...

Schemes to which Part applies

177D This Part applies to any scheme that has been or is entered into after 27 May 1981... 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 referred 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

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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).

...

Cancellation of tax benefits etc.

177F(1) 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)...;

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) 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.''

The Commissioner's Case on Part IVA

The determinations made on behalf of the Commissioner for each of the relevant financial years were in substantially the same form. The determination in respect of the year ended 30 June 1987, so far as relevant, was as follows:

``I have concluded that C.C. (New South Wales) Pty Limited (now in liquidation, formerly known as Concrete Constructions (NSW) Pty Ltd) and other persons entered into and carried out a scheme for the sole or dominant purpose of enabling C.C. (New South Wales) Pty Limited to obtain a tax benefit within the meaning of para. 177C(1)(a) in connection with that scheme in the year ending 30 June 1987. I have determined that C.C. (New South Wales) Pty Limited has obtained, or would but for sec. 177F have obtained, a tax benefit in connection with a scheme to which Part IVA applies.

I have determined that the amount of the tax benefit is $1,460,000.00 and that this amount would have been included, or might reasonably have been expected to have been included, in the assessable income of C.C. (New South Wales) Pty Limited in its year of income ending 30 June 1987 if the scheme had not been entered into or carried out.

I hereby now determine by virtue of the powers conferred on the Commissioner of Taxation under sec. 177F(1)(a) that the amount of $1,460,000.00 shall be included in the assessable income of C.C. (New South Wales) Pty Limited in its year of income ending 30 June 1987 and I further determine pursuant to sec. 177F(2) that that amount shall be deemed to be so included by virtue of sub-section 25(1).''

The Commissioner provided particulars of the case upon which he relied for the application of Part IVA of the ITAA, as follows:

``(a) The scheme upon which the Respondent relies is the appointment (if in fact it happened, and if in law it was capable of having effect) by Quay Apartments Pty Ltd as trustee of the Quay Unit Trust of the Applicant as its agent under an undisclosed agreement of principal and agency to enter into contracts with the State Government of New South Wales in respect of the Circular Quay Central and Overseas Passenger Terminal Project [the Circular Quay Project] and the Opera House Forecourt and Lower Concourse Project [the Opera House Project] and the performance of those contracts by the Applicant as agent for Quay

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Apartments Pty Ltd together with all steps including negotiation, documentation and implementation of the alleged undisclosed principal and agency agreement and appointment.

(b) The tax benefit obtained in connection with the scheme was that, if the scheme was effective in fact and law, there was not included in the assessable income of the Applicant the income arising from the performance of the contracts with the NSW Government, which income would have been, or might reasonably be expected to have been, included in the assessable income of the Applicant if the scheme had not been entered into.

(c) The scheme was entered into after 27 May 1981.

(d) The persons who entered into or carried out the scheme included, but are not limited to, the Applicant, Quay Apartments Pty Ltd, the responsible officers of each of the Applicant and Quay Apartments Pty Ltd including in particular Messrs Gammel, Lewis, Lumb and White, and the professional advisers of the Applicant consulted in relation to the formulation and implementation of the scheme, including in particular Messrs Larcombe, Cowper and Weerden.

(e) Having regard to the matters specified in each of subparagraphs (i) to (viii) of section 177D(b), and in particular (but not only) to paragraphs (ii)-(iv), it would be concluded in respect of each of the persons who entered into or carried out the scheme (in whole or in part) that they did so for the dominant purpose of securing that the tax advantage identified should be obtained.''

The Principal Witnesses

Evidence was given by a number of former executives of, and advisers to, Concrete Constructions Group (``CC Group''). The principal witnesses from the CC Group were as follows:

• Mr Lumb, an engineer by training, the CC Group managing director from 1973 until his retirement in 1988, and chairman of directors of CC NSW from 1974 until 1986;
• Mr Gammel, an accountant by training, who was a director and the secretary of CC NSW and other companies within the CC Group during the relevant period; and
• Mr Bradstock, an accountant employed by CC NSW until 1985 and thereafter by the CC Group's new parent company, Concrete Constructions Group Pty Ltd (``CC Group PL'').

All three witnesses were cross-examined.

An affidavit sworn by Mr John Lewis was read. Mr Lewis himself was chairman of the parent companies (they varied from time to time) of the CC Group. Mr Lewis died shortly before the hearing. However, his evidence was not central to the case, since he did not play a major part in the relevant transactions.

The advisers to the CC Group who gave evidence included the following:

• Mr Weerden, a partner in the accounting firm of Price Waterhouse, whose area of expertise was corporate income tax;
• Mr Cowper, who was an employed solicitor at the relevant times with the legal firm then known as Westgarth Baldick;
• Mr Larcombe, a partner of the same firm.

Mr Weerden and Mr Cowper were cross- examined, but Mr Larcombe was not.

The most important events occurred in 1985, about nine years before the witnesses prepared their affidavits and about eleven years before those of them who gave oral evidence were cross-examined. The advisers, not surprisingly, had very little recollection of the events in which they participated, beyond what they could glean from contemporaneous documentation.

Messrs Lumb and Gammel and, to a lesser extent, Mr Bradstock gave more detailed evidence. Their accounts were broadly similar, although they differed on points of detail. It must be said, however, that each of these witnesses faced a difficult task. They were required to recollect and explain distant events. Not all of the apparently contemporaneous documentation was helpful in stimulating memory, since some important documents were backdated or created well after the relevant events.

In my opinion, it is clear that each of the witnesses from CC NSW was forced to reconstruct events. I formed the distinct impression that each of them, to varying degrees, reconstructed the events through the prism created by their understanding of the issues involved in the litigation. I do not think that any of the three deliberately falsified his

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evidence. However, I do think that the reconstruction of events by each witness was significantly influenced by his understanding that a great deal turned on the motivation underlying the proposal for the creation of an undisclosed agent-principal relationship between CC NSW and QAPL.

My lack of confidence in the reliability of some aspects of the accounts given by the principal witnesses was increased by the way in which the affidavits were prepared. Mr Gammel and Mr Bradstock (and other deponents) adopted the somewhat unfortunate course of attesting to the accuracy of Mr Lumb's account of critical conversations. I therefore did not have the benefit of affidavits in which Mr Gammel and Mr Bradstock gave independent accounts of critical events. Moreover, cross- examination suggested that, on some important issues, the accounts given by Mr Lumb and Mr Gammel, in particular, were not easy to reconcile with the objective circumstances or with reliable contemporaneous documentation.

It is also necessary to take into account the way in which some documentation within the CC Group was created. Mr Lumb readily admitted that he left record-keeping to Mr Gammel and that he would sign minutes and other documents without first reading them. For his part, Mr Gammel accepted that he had backdated documents and had frequently ``recorded'' meetings that had not been held.

Clearly enough, Mr Lumb was not a person concerned with the details of record-keeping, nor with the accuracy of those records that were kept. I do not regard his recollection of events occurring so long ago as likely to be precise or clear. Mr Gammel admitted to having ``mucked up'' some important record-keeping. Despite that admission, I formed the view that he tended, perhaps understandably enough, to minimise what he perceived to be the possible consequences of his default.

For these reasons, I have treated the evidence given by Messrs Lumb, Gammel and Bradstock with considerable caution. In some instances, I have not accepted evidence given by one or more of them, especially where the evidence is unsupported by, or apparently inconsistent with, genuinely contemporaneous documentation.

CC NSW and the QUT

CC NSW, at all relevant times, was a subsidiary of CC PL and a member of the CC Group. CC PL was incorporated in 1929. Its primary business, and that of the CC Group was civil engineering, building and construction. The business was carried out on an Australia- wide basis, each subsidiary generally undertaking projects in a particular State or Territory. CC NSW undertook construction projects in New South Wales. The turnover for the CC Group, in 1984 was about $340 million and CC NSW was responsible for roughly one half of the Group's projects.

In August 1985, the structure of the CC Group changed. Shares in the previous holding company, Concrete Constructions Holdings Pty Ltd, which held all the shares in CC PL, were sold to a new holding company, Concrete Constructions (Canberra) Pty Ltd, which later became CC Group PL. Shares in CC Group PL were also issued to Kumagai Gumi Co Ltd (``Kumagai''), a Japanese construction company which had previously had a close working relationship with the CC Group. Prior to the reorganisation, the Lewis family held a controlling interest in the CC Group; thereafter the Lewis family held about 42 per cent of the voting shares in CC Group PL. Mr John Lewis was chairman of CC PL from 1970 onwards and from 1985 until his retirement in 1993 was chairman of CC Group PL.

In 1981, QAPL as trustee of the QUT, acquired land and buildings in Phillip Street, Sydney, for $4.2 million, for the purpose of demolishing the buildings and constructing a multi-storey residential apartment building. At this time, the principal beneficial unit holder and financier of the QUT was Trustees Executors & Agency Co Ltd (``TEA''). In July 1982, CC NSW was appointed construction manager of the Quay Apartments project under contract providing for construction of the apartments at a fixed price of approximately $21.5 million. In May 1983, TEA was placed in receivership.

When TEA went into receivership, CC NSW was owed about $1.2 million under the construction management contract. Sub- contractors were also owed substantial sums. Mr Lumb, the managing director of CC NSW, was concerned that, although CC NSW was not legally liable to the sub-contractors, commercial considerations made it important that the sub- contractors were duly paid for their work on the Quay Apartments project.

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Mr Lumb arranged for approaches to be made to other developers to take over the Quay Apartments project, which was then about 20 per cent completed. None was interested, apparently because it was regarded as a speculative venture. At this stage, the QUT owed about $3.5 million to Tricontinental Ltd under a secured loan and had losses for tax purposes of only about $50,000. Projections carried out at the time suggested that sales might be expected to yield anything from $33 million to $50 million, but suggested that the project could profitably be carried to completion.

Despite Mr Lumb's having concerns about the CC Group venturing into the field of residential property development, he reluctantly decided that the Group should acquire all the units in the QUT and all shares in QAPL. According to Mr Lumb, he made the decision that the acquisition should take this form, rather than CC NSW simply acquiring the assets of the QUT, for two main reasons. First, the acquisition of the units meant that QAPL's debts, which were substantial, did not have to be consolidated into the accounts of the CC Group; in other words the financing of QAPL could be ``off balance sheet''. This reflected the policy of the Group that it should not have significant debts and that the consolidated accounts should not disclose formal borrowings. Secondly, Mr Lumb had obtained professional advice that any losses incurred by the QUT could be offset by future income.

A deed dated 15 September 1983, entered into between TEA, CC PL and CC NSW, made provision for the following, subject to Court approval:

• CC PL to pay out the Tricontinental loans;
• CC PL to pay TEA $700,000 in return for all TEA's units in the QUT and all its shares in QAPL;
• TEA to procure the redemption of all other issued units;
• TEA to release QAPL from its indebtedness to TEA (totalling about $9.3 million);
• CC PL to complete the Quay Apartments Project on or before 28 February 1985 and provide the necessary finance;
• CC PL to assume all the liabilities of QAPL; and
• TEA to receive one half of the proceeds to take over $30 million up to $33 million, and 25 per cent of any excess over $33 million.

CC PL acquired the units and shares from TEA in accordance with the deed.

Although CC PL provided the funds to pay out TEA and Tricontinental, finance was ultimately arranged through the Commonwealth Bank of Australia (``CBA''). The CBA provided a bills discount facility of $21 million, together with provision for capitalised interest, on the security of a Sumitomo Bank letter of credit arranged by Kumagai in Japan. Kumagai, QAPL and CC NSW entered into arrangements whereby Kumagai became the head building contractor for the Quay Apartments Project, for a contract price of $17.95 million and CC NSW sub-contracted with Kumagai to complete the works for $17.89 million. The effect of these arrangements was that Kumagai was to receive a nominal profit and CC NSW was to derive virtually all the expected profit for completing the Quay Apartments Project. Ultimately, CC NSW earned a profit of approximately $2.4 million from the project.

Projections recorded by the CBA, in an internal memorandum, showed that the total anticipated cost of the project was $28 million. The units were due for completion by the end of 1984 and market surveys indicated that the units would all be sold within two years of completion. The facility afforded by the CBA provided for repayments to commence on 1 March 1985 and for the final repayment to be made no later than November 1986.

The Quay Apartments Project

The Quay Apartments building was completed on schedule towards the end of 1984. The accounts for the QUT, for the year ended 30 June 1984, which were finalised in December 1984, showed a net loss for the year of $5.287 million, making a total of $5.338 million in accumulated losses for the project. Mr Bradstock in his evidence described this figure as a ``tax loss which was locked up in the [ QUT]''.

The accounts prepared for the year ended 30 June 1985 showed that QUT's accumulated losses had increased by a further $1.089 million to $6.427 million. A note to the accounts stated that these losses were ``available for offset against future income''. The accounts showed

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that, as at 30 June 1985, the liabilities of the QUT totalled $11.403 million, of which $3 million was an unsecured loan from CC PL and $8.4 million represented the amount owing to the CBA under the facility. Of course, a further $9.3 million of debt had been forgiven by TEA; this figure was recorded in the accounts as a capital reserve. Other documentation showed that $8.4 million remained owing to the CBA in October 1985. This indebtedness was reduced by a repayment of $2.1 million in November 1985 and a further repayment of $2.3 million in December 1985.

On 12 March 1985, Mr Lumb had provided an optimistic assessment of the progress of the Quay Apartments project to the senior managing director of Kumagai. Mr Lumb wrote in these terms:

``As you are aware the project was completed in September last year and the number of sales that have taken place to date are very close to the projections made in the feasibility study.

At today's date the value of apartment sales contracts settled, exchanged or covered by lease commitments is $A13.5 million. Two additional apartments have been sold this week for a total of $A1,010,000.00 which increased current sales to $A14.5 million.

Strong buyer interest continues and a summary of prospective purchasers who are presently showing interest is attached.

Because of the nature of the development we had always allowed for a lengthy selling program and we fully expect to meet this projection.

The project cost to date including holding charges (interest) is approximately $A26.0 million while sales commitments mentioned above are $A14.5 million. This represents a sales factor of 55% which we consider to be quite satisfactory in relation to the projected sales program.''

An internal progress report dated 10 July 1985 tends to support the assessment made by Mr Lumb in his letter. The progress report showed that 18 units and some car spaces had been sold, yielding a total of about $13.5 million. Contracts had been exchanged and settlement was pending in respect of two additional units, for prices totalling $1.35 million. Projections prepared at 30 June 1985 forecast total gross sales of $30.4 million, less selling costs of $1.45 million. These projections suggested that future sales of the remaining units (about 25 in number) would yield about $16.9 million gross or about $16 million net. The projections also suggested that all units would be sold by 31 December 1986. A further progress report dated 30 September 1985 showed that the two contracts pending as at 10 July 1985 had been completed and that two further contracts, at prices totalling $2.375 million, had been signed. A contract had been called for in relation to another unit, at a purchase price of $1.9 million.

In the event, a total of approximately $30.7 million was ultimately received from sales in relation to the Quay Apartments project. By October 1986, the CBA facility was finally paid out and the Kumagai letter of credit duly released. The details of sales and repayment to the CBA are shown in the following chart, which records monthly figures from June 1985 to June 1988:

                       QUAY UNIT TRUST
                    QUAY APARTMENTS PROJECT
           BANK BILL BORROWINGS & SALES RECEIPTS BY MONTH

+----------------------------------------------------------------+
| Month  | CBA Bills   | Cumulative | Monthly Sales | Cumulative |
|        | Borrowing/  | CBA Bills  | Receipts      | Sales      |
|        | (Repayment) |            |               | Receipts   |
|----------------------------------------------------------------|
| Jun-85 | (1,500,000) | 8,400,000  |     3,082     | 13,684,039 |
|----------------------------------------------------------------|
| Jul-85 |          0  | 8,400,000  |   393,320     | 14,077,359 |
|----------------------------------------------------------------|
| Sep-85 |          0  | 8,400,000  |   790,000     | 14,867,359 |
|----------------------------------------------------------------|
| Oct-85 |          0  | 8,400,000  |    15,000     | 14,882,359 |
|----------------------------------------------------------------|
| Nov-85 | (2,100,000) | 6,300,000  | 1,587,640     | 16,469,999 |
|----------------------------------------------------------------|
| Dec-85 | (2,300,000) | 4,000,000  | 2,314,000     | 18,783,999 |
|----------------------------------------------------------------|
| Mar-86 |   (350,000) | 3,650,000  |    41,800     | 18,825,799 |
|----------------------------------------------------------------|
| Apr-86 |          0  | 3,650,000  |   360,000     | 19,185,799 |
|----------------------------------------------------------------|
| May-86 |    (50,000) | 3,600,000  |    73,500     | 19,259,299 |
|----------------------------------------------------------------|
| Jun-86 |   (800,000) | 2,800,000  |   529,106     | 19,788,405 |
|----------------------------------------------------------------|
| Jul-86 |   (350,000) | 2,450,000  |   647,094     | 20,435,499 |
|----------------------------------------------------------------|
| Aug-86 |   (800,000) | 1,650,000  |   461,500     | 20,896,999 |
|----------------------------------------------------------------|
| Sep-86 | (1,350,000) |   300,000  | 1,684,500     | 22,581,499 |
|----------------------------------------------------------------|
| Oct-86 |   (300,000) |         0  |   293,926     | 22,875,425 |
|----------------------------------------------------------------|
| Nov-86 |             |         0  |     4,849     | 22,880,274 |
|----------------------------------------------------------------|
| Dec-86 |             |         0  |   846,725     | 23,726,999 |
|----------------------------------------------------------------|
| Feb-87 |             |         0  | 1,095,000     | 24,821,999 |
|----------------------------------------------------------------|
| Mar-87 |             |         0  |   595,000     | 25,416,999 |
|----------------------------------------------------------------|
| Apr-87 |             |         0  | 1,645,000     | 27,061,999 |
|----------------------------------------------------------------|
| May-87 |             |         0  | 1,360,000     | 28,421,999 |
|----------------------------------------------------------------|
| Jun-87 |             |         0  |    39,000     | 28,460,999 |
|----------------------------------------------------------------|
| Jul-87 |             |         0  | 1,372,500     | 29,833,499 |
|----------------------------------------------------------------|
| Aug-87 |             |         0  |   496,585     | 30,330,084 |
|----------------------------------------------------------------|
| Sep-87 |             |         0  |   211,362     | 30,541,446 |
|----------------------------------------------------------------|
| Mar-88 |             |         0  |   110,000     | 30,651,446 |
|----------------------------------------------------------------|
| Apr-88 |             |         0  |    39,752     | 30,691,198 |
|----------------------------------------------------------------|
| Jun-88 |             |         0  |     4,802     | 30,696,000 |
+----------------------------------------------------------------+

This background is important in assessing the undisclosed agent-principal arrangement purportedly entered into between CC NSW and QAPL.

The Principal-Agent Arrangement

During 1984, Mr Lumb had a discussion with Mr Gammel about increasing the business activities of the QUT. Mr Lumb said in evidence that he was motivated both by the belief that QUT had a ``serious debt problem'' and the desire to utilise QUT's tax losses. Some discussions took place between Mr Gammel and a representative of Price Waterhouse at about this time concerning the issue raised by Mr Lumb, but the matter was not pursued.

The possibility of an undisclosed principal- agent arrangement was first raised by Mr Bradstock at a meeting with Mr Lumb in about early September 1985. At that time, Mr Bradstock was preparing the financial statements of the QUT for the year ended 30 June 1985. He had knowledge of agency arrangements, partly through his studies as a commerce student and partly because of his previous involvement in the construction industry. He suggested that consideration should be given to one of the CC Group's operating subsidiaries contracting as agent for the QUT as undisclosed principal.

Mr Bradstock's account was that he told Mr Lumb that the original projections for the Quay Apartments project were not being maintained and that

``we would have to do something about managing the debt because of the uncertainty of the way sales were going, things were very slow and that one thing I

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had thought about was the use of an undisclosed agency.''

Mr Bradstock conceded in cross-examination that one matter that drove him to see Mr Lumb was the tax loss of about $5 million ``locked up'' in QUT, although he disagreed that it was the most significant matter influencing him.

On 16 September 1985 (a date supported by a diary note), Mr Lumb met with Mr Gammel and asked him to obtain advice from Price Waterhouse on the proposal. Mr Lumb said in one of his affidavits that he was very concerned that QAPL should be able to repay its debts, specifically the amounts due to CBA and CC PL. He said that he was particularly worried about whether the bank bills could be repaid out of the proceeds from the sale of apartments, because he did not wish to imperil the confidence of Kumagai in the CC Group by exposing the Japanese company to a potentially serious loss. He took into account the slow rate of sales of units and the downturn in market conditions.

In his oral evidence, however, Mr Lumb all but acknowledged that the need to recoup tax losses was his principal motive for pursuing means of channelling income into the QUT. Mr Lumb was asked in evidence to explain why he was worried about the losses in the trust. He replied as follows:

``... if I knew that a loss was going to be in the trust at the end of the day, let's say we finished up with a $5 million loss or something, to me it only made sense that if we were paying tax on our construction activities in New South Wales, that we had a loss there which we had no other way of recovering in the trust, it made sense to generate some revenue into the trust.''

Later the following passage occurred in Mr Lumb's cross-examination:

``So that from Concrete's point of view, the investment in the Trust started with that $9,500 million advantage? - Right.

When you looked at the profit and loss account of the Trust as at June 1985 the $6 million loss showing there was the trading loss of the Trust? - Right.

And what you were really concerned about when you spoke to Mr Gammel about diverting income into the Trust was, as you said to His Honour yesterday, that it was silly to be paying tax in Concrete Constructions and having a tax loss in the Trust? - Yes.

And that was the real reason for diverting the income into the Trust? - We had already taken advice at the time that we took over the Trust that losses in the Trust were available for future projects.

And this was a way of taking advantage of that availability? - Well, if there's a loss there and the advice is it can be utilised in our projects, yes.

And setting up the agency arrangement in respect of the Public Works Department project was a way of doing that? - Yes.

And that was really why it was done? - That was one reason, yes.

And that was the main reason why it was done? - It was - well, it was - I think it was a combination of the concern that I had about the repayment of the Commonwealth Bank loans and also my concern about being left with a loss in the Trust at the end of the day and no way of utilising it.

But the concern about being left with a loss in the Trust was more important to you than the relatively small risk that the sales would not be enough to pay off the bank debt? - It's hard to apportion my interest but that could have been.''

I should add that I did not find convincing Mr Lumb's attempt to explain away the optimistic assessment made in his letter of 12 March 1985 to Kumagai. He explained the letter as ``political'' in nature, but in my view it reflected a fair assessment of the position at the time it was written. Circumstances had not changed so dramatically by October 1985 that the assessment made in the letter had been superseded or rendered irrelevant.

I find that the major factor motivating Mr Lumb to cause inquiries to be made about a principal-agent arrangement for the QUT was his belief that the tax losses locked in the Trust should be utilised for the benefit of the CC Group as a whole. While he may have been slightly concerned about the possibility that QUT would not have a sufficient income flow to pay out the CBA debt on time, I think that concern played a minor role in his decision to cause the inquiries to be made and, later, his decision to reactivate the proposal. His dominant purpose was to reduce the assessable

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income of the CC Group's operating companies and to channel that income to the QUT to take advantage of accumulated losses.

To the extent that Mr Bradstock's actions are relevant to the issues in this case, I find that, when making the suggestion of an undisclosed principal-agent arrangement to Mr Lumb, he specifically gave as the primary reason for doing so the liability of CC Group companies to pay tax on assessable income without the ability to offset the losses incurred by the QUT. If Mr Bradstock mentioned to Mr Lumb the possible difficulty QUT might experience in supporting its debt, that was very much subsidiary to the need (as he saw it) for the CC Group to ensure that tax losses in the QUT were utilised for the benefit of the Group as a whole. In reaching this conclusion I have taken account of Mr Bradstock's cross-examination, which showed, in my opinion, that his reconstruction of events was influenced by his understanding of the issues in the case.

I should add that, in my view, Mr Gammel's motivation was the same as that of Mr Lumb. Mr Gammel identified a number of factors as influencing his desire to set in train the principal-agent arrangement. These included taking advantage of tax losses in the QUT, but he maintained that the need to ensure that the QUT met its debts to CBA and to CC PL was at least as important. I am satisfied, however, that in his mind, the need to ensure that the tax losses were effectively utilised for the benefit of the CC Group was his paramount concern.

The Circular Quay Project Proposal

On 6 August 1985, CC NSW submitted to the New South Wales Public Works Department (the ``PWD'') a proposal for the management of the construction and development of the Circular Quay Project. The submission contained the following passage:

``The Construction Manager for this Project will require outstanding planning and co- ordination skills. It is also essential that the Construction Manager has the necessary industrial relations experience together with the correct philosophy in handling industrial disputes. Concrete Constructions has demonstrated these skills by successfully completing many complex and challenging refurbishing and renovation contracts.''

The attached documentation included curricula vitae of the proposed ``Concrete Constructions field staff''. It also provided a brief history of the CC Group and of CC NSW. It was said of the latter company that CC NSW

``is managed by a Board of Directors all of whom are active in the Company's commercial operations. Each project is assigned to a Director who assumes responsibility on behalf of the Company for the successful completion of the project. This policy provides our clients with unique access to a very senior level of the Company.''

On 17 September 1985, CC NSW submitted a further construction management proposal to the PWD, this time for managing the construction and development of the Overseas Passenger Terminal at Circular Quay. The letter recorded CC NSW's understanding that it was to be awarded the Central Circular Quay project and stressed the advantages to the PWD should CC NSW be awarded the second contract.

Following the conversation with Mr Lumb, Mr Gammel arranged a meeting on 25 September 1985 with Mr Weerden. Mr Lumb also attended that meeting. Mr Weerden asked why there was to be an undisclosed principal- agent agreement. He was told that QAPL could not perform the work itself, either because it was not a licensed builder or because it was not a pre-qualified contractor (the recollections of Mr Weerden and Mr Gammel differed as to which explanation was given). In any event, Mr Weerden advised that it was possible for the QUT to contract as undisclosed principal in the name of operating subsidiaries for future projects. He also advised that there was no obligation to disclose the existence of the agency to the client, but that he would recommend that any agency agreement be in writing.

As Mr Gammel accepted in his evidence, only three projects were identified at the meeting as possibly suitable for ``an agency type contract''. Those were the Waltons Bond, Chevron and Nikko projects. No mention was made at the meeting of the Central Circular Quay proposal, despite the fact that CC NSW was expecting the PWD to accept that proposal.

After the meeting of 25 September 1985, Mr Lumb had a conversation with Mr Gammel in which he said words to the following effect:

``I am satisfied that the agency proposal is the way to go. Can you arrange for a draft

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legal document between CC NSW and [the QUT] to be prepared as soon as possible. We can use this as a precedent document in the future.''

There was no discussion in this conversation about either of the Circular Quay projects. (On this point I do not accept Mr Lumb's oral evidence that he specifically referred to the Circular Quay proposals.) Mr Lumb did not follow up this conversation, but left the matter in Mr Gammel's hands.

On 27 September 1985, Mr Gammel and Mr Weerden met with Mr Cowper, a solicitor employed by Westgarth Baldick. The meeting would normally have been with Mr Larcombe, a senior partner of the firm, but he was overseas at the time. Mr Gammel gave instructions to Mr Cowper to the following effect:

``The QUT is in a loss situation. We have checked with John Weerden and he confirms that it is in order that we can have an agency agreement whereby CC NSW or one of the other subsidiaries can act as undisclosed agent for the QUT and we need you to draft an agreement that reflects the obligations and responsibilities of the parties.''

On 4 October 1985, Mr Larcombe forwarded a draft ``Principal and Agency Agreement'' to Mr Gammel and to Mr Weerden. The letter to Mr Gammel was as follows:

``We refer to our conference last week and enclose proposed form of Principal and Agency Agreement for your comment. We have forwarded a copy to John Weerden at Price Waterhouse with a view to ensuring that the document conforms with the taxation objectives which he has in mind.

Please let us have your comments in relation to the documents.

You should obviously ensure that Quay Apartments Pty Limited has appropriate insurance in place to support the indemnities referred to in Clause 11 and to generally cover its responsibilities under the agreement as Principal.''

(Emphasis added.)

The letter to Mr Weerden invited him to ``comment particularly as to whether the document is in order having regard to the taxation objectives which you have in mind.''

The draft Principal and Agency Agreement was expressed to be between QAPL as ``Principal'' and CC NSW as ``Agent''. The agreement was drafted in a form which allowed the details of a particular project to be inserted in the schedule. Mr Gammel in his evidence described the draft as a ``catch-all agreement'', that could be filled out when he knew there was a project available to which it could be applied. The draft agreement recited that:

``A. The Principal is desirous of tendering for engagement as a contractor in the capacity referred to in the first Schedule hereto for the construction project referred to in the Second Schedule hereto (hereinafter called `the Project').

B. The Principal wishes to appoint the Agent as its agent to tender for and if successful to enter into a contract (hereinafter called `the Project Contract') on behalf of the Principal and the Agent has agreed to accept such appointment on and subject to the terms and conditions hereinafter appearing.''

Clause 1.01 of the draft referred to the undisclosed agency:

``1.01 With effect on and from the day of this Agreement the Principal appoints the Agent as an independent contractor to act as its undisclosed agent in respect of the Project and to enter into the Project Contract for the term and upon the conditions specified in this Agreement.''

On 8 October 1985, Mr Cowper spoke to Mr Weerden by telephone. In that conversation, Mr Weerden expressed his approval of the draft.

On the same day, 8 October 1985, CC NSW, as the ``Construction Manager'' and the Minister for Public Works and Parks as the ``Principal'', executed a construction management contract. The Circular Quay contract (as I shall describe it) was executed on behalf of CC NSW by Mr Woollard, a director of the company. Mr Woollard had no recollection of the circumstances in which the contract was executed.

The Circular Quay contract recited that the Principal required the services of a competent and experienced Construction Manager to provide design, procurement and management services in respect of the projects for Circular Quay Central and the Overseas Passenger Terminal, Circular Quay. It also recited that the Construction Manager had extensive experience in the management of large construction projects. The contract provided for the Construction Manager to enter contracts for the

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carrying out of construction work and the procurement of materials as agent for the Principal. The construction management fee was 3.52% of the cost of the project. This fee was to cover a variety of services, including head office support, senior supervisory services and computer and accountancy services.

Mr Lumb stated in his first affidavit that when he was advised that CC NSW's submission for the Circular Quay projects had been successful he ``resolved'' that the contracts would be executed by CC NSW, not in its own right, but as undisclosed agent for QAPL, as trustee of the QUT. Mr Lumb did not suggest in his affidavit that he communicated his resolution to anyone else. In the course of his cross-examination, Mr Lumb seemed to suggest that he had told Mr Gammel that the Circular Quay contract should be based on the undisclosed principal arrangement that had been discussed with Mr Weerden. It is not entirely clear whether Mr Lumb was intending to refer to a conversation other than the one that took place shortly after the meeting of 25 September 1985. In any event, I do not accept that Mr Lumb directed his mind specifically to the proposed undisclosed principal-agent arrangement in relation to the Circular Quay contract, between the time of his conversation with Mr Gammel shortly after 25 September 1985 and the date of execution of that contract. It follows that I do not accept that Mr Lumb had any conversations with Mr Gammel concerning an undisclosed principal arrangement in relation to the Circular Quay contract. If one thing was clear from Mr Lumb's evidence, it was that he paid very little attention to the documentation required to give effect to decisions. His consistent approach was to leave that task entirely to Mr Gammel or to others. Having made what he would have seen as a decision shortly after 25 September 1985 (although not one related to the Circular Quay contract), the probabilities are that Mr Lumb would have given no further thought to the undisclosed agent principal arrangement in relation to the Circular Quay contract, until the question was later drawn to his attention by Mr Gammel.

Mr Gammel took no steps to complete and execute the draft Principal and Agency Agreement prior to the execution of the Circular Quay contract. Indeed, he appears to have done nothing to advance any undisclosed principal arrangement until a conversation with Mr Lumb on 11 December 1985, some two months after the Circular Quay agreement had been executed. Mr Gammel's failure to take any steps until December 1985 to advance or implement any undisclosed principal arrangement supports the conclusion that the draft Principal and Agency Agreement had not been prepared with the Circular Quay agreement specifically in mind.

In any event, on 11 December 1985, a date which is supported by a contemporaneous diary note, Mr Gammel told Mr Lumb that the Circular Quay contract should have an agency agreement whereby CC NSW would act as agent for the QUT. He asked Mr Lumb whether he (Mr Lumb) wanted the matter followed up with the solicitor. Mr Lumb answered affirmatively, and said to contact Mr Larcombe of Westgarth Baldick. At this stage, work had not yet commenced on the Circular Quay site, although work did commence early in 1986. (I should add that the accounts of Mr Lumb and Mr Gammel of this conversation imply that it referred back to an earlier conversation between them relating specifically to the Circular Quay contract. I do not accept that there was any earlier conversation between them relating to an undisclosed principal arrangement being put in place for the Circular Quay contract.)

Mr Gammel was unable to shed much light on why action was not immediately taken to apply the Principal and Agency Agreement already drafted by Mr Cowper to the Circular Quay contract. In re-examination Mr Gammel said that he had been under pressure towards the end of 1985. He also went on leave from mid-December 1985 to mid-January 1986. In any event, it was not until mid-February 1986, according to a diary note, that Mr Gammel asked his secretary to gather documentation to enable Mr Larcombe to prepare an agency agreement.

Despite this request, a further substantial delay occurred. Mr Gammel's evidence was that at some time between May and December 1986 he received a draft agency agreement from Mr Larcombe. That document could not be located and thus was not in evidence. However, Mr Gammel recalled that the document, although referring specifically to the Circular Quay contract, incorrectly nominated CC NSW as the principal and QAPL as the agent.

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Upon noticing the apparent error, Mr Gammel had a conversation with Mr Larcombe to the following effect:

``Gammel: In preparation of the agency agreement the parties should be CC NSW as the agent and the QUT as the principal.

Larcombe: No. That's not right. I think you have the parties around the wrong way.''

Despite Mr Gammel's protests, Mr Larcombe was unwilling to accept that the capacities of the parties had been misdescribed. Mr Gammel was disinclined to persist in arguing the issue with a senior lawyer. The result was that, according to Mr Gammel, the document was ``shelved'' until some time

``in or after December 1986 when I [Mr Gammel] became aware that [CC NSW] had been awarded the Sydney Opera House Forecourt Project and Lower Concourse Project by the PWD.''

At about that time Mr Gammel contacted Mr Larcombe and said words to the following effect:

``Can you amend the draft agency agreement to include the Sydney Opera House Forecourt Project and Lower Concourse Project and send me an execution copy for signing.''

An ``Agency Agreement'' between CC NSW and QAPL was ultimately executed. The agreement was signed by Mr Woollard, on behalf of CC NSW, and by Mr White, a director of QAPL, on behalf of QAPL as trustee for the QUT. The agreement recited as follows:

``A. Pursuant to the Contract dated 8 October 1985 (`the Contract') between the Minister for Public Works and Ports, for and on behalf of Her Majesty the Queen (therein called the Principal) of the first part, and Concrete Constructions (NSW) Pty Limited (therein called the Construction Manager) of the second part, it was inter alia agreed that the Construction Manager would provide services to the principal as Construction Manager for the Circular Quay Central and Overseas Passenger Terminal Project (incorporating First Fleet Park, Campbell's Cove and Water Police) together with the Opera House Forecourt and Lower Concourse Project (`the Project').

B. It has been agreed between CC NSW and QA [that is, QAPL] that QA shall carry out the Works on behalf of and as agent for CC NSW.''

The operative provisions of the agreement were as follows:

``1. QA hereby agrees to carry out the Works in accordance with the Contract on behalf of and as agent for CC NSW and subject to all the obligations of CC NSW in respect thereof.

2. CC NSW hereby empowers QA in its name or otherwise to enforce all or any of the rights of CC NSW in relation to the Agreement or arising out of the Works as fully in all respects as CC NSW could enforce them and hereby irrevocably appoints QA to the Attorney of CC NSW in the name and on behalf of CC NSW for all purposes in connection therewith.

3. CC NSW will pay to QA such amounts as are agreed between them from time to time in connection with the Works.''

It is to be noted that this agreement provides for QAPL to carry out the ``Works'' as agent for CC NSW. This, of course, was not what was contemplated by the proposed arrangement considered in principle in September and October 1985. As Mr Larcombe acknowledged in his affidavits, he prepared the agreement upon the misconception that QAPL was to carry out the works on behalf of CC NSW.

In the meantime, on 5 December 1986, the Minister wrote to John Holland Constructions Pty Ltd, the construction manager for what was known as the Circular Quay East or Sydney Opera House project, terminating the company's services under its contract, as from 6 December 1986. On 9 December 1986, CC NSW submitted a construction management proposal for the completion of the construction of the lower concourse structure and forecourts works, partially completed under the previous contract held by John Holland Constructions Pty Ltd. The letter stated CC NSW's intention to administer and supervise the works using the existing Circular Quay team, supplemented as necessary by additional staff to handle the increased workload. The letter recorded CC NSW's understanding that the conditions of contract would be similar to those adopted for the Circular Quay Central and Overseas Passenger Terminal projects.

On 12 December 1986, the secretary of the PWD wrote to CC NSW to confirm that it had

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been appointed by the Minister for Public Works and Ports to replace John Holland Constructions Pty Ltd as construction managers of the Sydney Opera House Forecourt and Lower Concourse Project. The letter stated that

``the conditions of contract will be the same as those adopted for the Circular Quay Central and Overseas Passenger Terminal.''

A copy of those conditions was attached to the letter. The letter also stated that CC NSW would not be responsible for the acts or omissions of the previous construction manager.

It follows from this course of events that recital A in the executed Agency Agreement between CC NSW and QAPL inaccurately recorded the nature of the contractual arrangements between CC NSW and the Minister. The Circular Quay contract of 8 October 1985 did not in fact refer to the Sydney Opera House Forecourt and Lower Concourse Project. The agreement between CC NSW and the Minister relating to that project was constituted by the separate contract arising out of the PWD's letter of 12 December 1986. I shall refer to that contract as the Opera House contract.

Mr Gammel's affidavit did not specifically address whether the Agency Agreement was executed before or after 12 December 1986 and Mr Woollard had no recollection as to the circumstances of its execution. The language used by Mr Gammel in his affidavit suggests that he asked Mr Larcombe to include the Opera House project some time after 12 December 1986. Mr Gammel said that the conversation took place ``in or after December 1986'', when he became aware that the Opera House contract ``had been awarded'' to CC NSW. The Opera House contract was confirmed by the letter from the PWD of 12 December 1986, addressed to Mr Woollard, which was expressed to be ``confirmation that [ CC NSW] has been appointed by the Minister... to replace John Holland Construction Pty Ltd as Construction Managers of the [Opera House project]''. It is possible that Mr Gammel became aware of the impending award of the Opera House contract prior to 12 December 1986, since the PWD letter referred to ``confirmation'' of the appointment. However, the evidence does not establish that Mr Gammel had knowledge prior to 12 December 1986 of the impending award of the Opera House contract. It must also be borne in mind that only three days elapsed between CC NSW's submission of 9 December 1986 and the PWD's letter of 12 December 1986. In addition, the likelihood is that there would have been some delay between the conversation between Mr Gammel and Mr Larcombe and the drafting and execution of the Agency Agreement.

It was, of course, open to CC NSW to adduce evidence to clarify the statements made by Mr Gammel in his affidavit. No such evidence was adduced. In these circumstances, I find that the Agency Agreement was executed after 12 December 1986. To the extent that it matters, I also infer that the conversation between Mr Gammel and Mr Larcombe took place after CC NSW received the letter of 12 December 1986 from the PWD.

The Agency Agreement itself bears the date 29 January 1986. Mr Gammel accepted that he inserted that date himself, at about the time the document was executed. He backdated it to 29 January 1986 because, as he explained, that was approximately the date Mr Lumb had approved the proposal that the Circular Quay projects should be undertaken by CC NSW as agent for QAPL as undisclosed principal.

Mr Gammel did not limit himself to backdating the Agency Agreement. He altered the minutes of a meeting of directors of CC NSW held on 30 April 1986, to record approval of the ``Agency Agreement dated 29 January 1986''. The minutes were signed by Mr Lumb. The directors' meeting did not of course consider or pass any such resolution. Mr Gammel selected these minutes to alter because they recorded the first meeting of directors held after 29 January 1986.

Mr Gammel also created a minute of a meeting of directors of QAPL held on 29 January 1986. The minute records the directors' approval of the Agency Agreement. Again, no such meeting was held. These minutes were signed by Mr Lewis.

The Commissioner's Arguments on Undisclosed Principal Arrangements

The Commissioner submitted that CC NSW could not establish that it had entered into either the Circular Quay contract or the Opera House contract as agent for QAPL as trustee of the QUT. Mr Slater QC, who appeared with Mr Muddle for the Commissioner, contended that CC NSW's reliance on the doctrine of

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undisclosed principal was misplaced, for reasons that were summarised in their written submissions as follows:

``(a) There was no effective agency because:

(i) a contract may only be made by a party as agent for an undisclosed principal if, at the time of contract, there was actual authority from the principal to the agent to enter into the contract;

(ii) at the time the contracts between the applicant and the [PWD] were made-

• there was no actual authority from QAPL to the applicant for the applicant to contract with the PWD on behalf of QAPL

• no decision had been made that the applicant should enter the PWD contract as agent for QAPL

• the only agency arrangement in contemplation was one in writing, and no writing had been prepared or executed

(iii) Lumb did not have authority to commit the applicant and QAPL to an agency agreement;

(iv) an unexpressed and uncommunicated decision of one person cannot amount to the appointment by one company of another as an agent;

(v) in any event the PWD contracts were not such as could be entered into by the applicant as agent for QAPL, because the PWD was not willing to contract with anyone other than the applicant.

(b) No subsequent action could be relied upon to establish the agency:

(i) a party cannot become the undisclosed principal to a contract by subsequent ratification of it;

(ii) estoppel between putative principal and agent cannot create a contract between the putative principal and the other party;

(iii) there was no reliance on the terms of any convention by either the applicant or QAPL;

(iv) book entries do not create an estoppel;

(v) estoppel between parties binds only the parties and not the Commissioner;

(vi) the document prepared by Larcombe and executed after December 1986 does not purport to create the agency relationship and in any event could not do so retrospectively.''

The Commissioner did not argue that, even if CC NSW had authority from QAPL to enter into the agreements with the Minister on behalf of QAPL as undisclosed principal, the fees paid to CC NSW by the Minister were properly characterised as assessable income derived by CC NSW. There is much uncertainty about the doctrine of the undisclosed principal. The doctrine is often said to be anomalous, because it runs counter to principles of privity of contract: see
Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (PC), at 207, where the judgment justifies the doctrine on grounds of commercial convenience. The doctrinal difficulties are referred to in Bowstead and Reynolds on Agency (16th ed, 1996), para. 8070; Chitty on Contracts (27th ed 1994), para. 31-058; AC Goodhardt and C J Hamsom, ``Undisclosed Principals in Contract'' (1932) 4 Camb LJ 320. Whatever the doctrinal difficulties, the general principle is that where an agent makes a contract for the undisclosed principal, the contract is that of the agent and the agent may sue on the contract and is liable to be sued:
Allen v F O'Hearn & Co [1937] AC 213 (PC), at 218, per Lord Atkin; Bowstead and Reynolds on Agency, para. 9-011. The consequences of this principle were not, however, explored in argument in relation to the issue I have identified and I take it no further.

Authorisation

It is convenient to commence with the question of whether it was necessary for QAPL to authorise CC NSW to enter the Circular Quay contract as agent for QAPL as undisclosed principal and, if so, whether any such authority had been given. For this purpose I assume, as Mr Conti argued was the case, that Mr Lumb had authority from QAPL to authorise CC NSW to enter into the two construction management agreements as agent, on behalf of QAPL as the undisclosed principal.

The Privy Council in Siu v Eastern Insurance summarised the law relating to the doctrine of the undisclosed principal as follows (at 207);

``(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority.

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(2) In entering into the contract, the agent must intend to act on the principal's behalf.

(3) The agent of an undisclosed principal may also sue and be sued on the contract.

(4) Any defence which the third party may have against the agent is available against his principal.

(5) The terms of the contract may, expressly or by implication, exclude the principal's right to sue, and his liability to be sued.''

For present purposes, the first proposition is critical. The need for actual authority from the principal was accepted by McHugh JA in
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 (NSW CA), at 276:

``The case made for McNiece is that the policy was taken out by Blue Circle on behalf of itself and associated companies and the contractors and suppliers as principals and that McNiece subsequently ratified the act of Blue Circle in entering into the policy on its behalf. This contention means that McNiece must have been ascertainable as a principal at the time when the policy was made; for a contract cannot be made on behalf of an undisclosed principal unless, at that time, the agent had the principal's authority to make that contract:
Keighley Maxsted & Co v Durant [1901] AC 240 at 251. Ratification has no place in the doctrine of the undisclosed principal, and Blue Circle had no prior authority from McNiece to enter into the policy.''

This passage was not affected by the subsequent decision of the High Court in
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107.

In
Keighley, Maxsted & Co v Durant [1901] AC 240, to which McHugh JA referred, a unanimous House of Lords rejected the proposition that a person could ratify a contract made by a second person who intended to contract on behalf of the first person, but who acted without the authority of the first person: see especially at 251, per Lord James; at 261-263 per Lord Lindley. That principle has been accepted in Australia:
Howard Smith and Company Ltd v Varawa (1907) 5 CLR 68, at 82, per Griffith CJ;
Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 (NSW CA), at 150, per Hope JA (an appeal to the Privy Council was allowed in part:
Maynegrain Pty Ltd v Compafina Bank [1984] 1 NSWLR 258 (PC)).

Their Lordships in Keighley Maxsted & Co v Durant expressed approval of the dissenting judgment in the same case of AL Smith LJ in the Court of Appeal:
Durant & Co v Roberts and Keighley, Maxsted & Co [1900] 1 QB 629. AL Smith LJ formulated the question in the case this way (at 633):

``The question in this case is whether a contract made by a principal with, what I will call, an unauthorised agent in the latter's name, which contract does not purport or profess to be made by the unauthorised agent on behalf of any one excepting himself, and as regards which contract he has not when he made it assumed to be acting on behalf of any one excepting himself, is capable of being ratified by a stranger, if it be shewn that the unauthorised agent had at the time he made the contract the undeclared intention in his own mind of making the contract for a person who had never authorised him to make it.''

Later his Lordship summarised the effect of the authorities concerning ratification:

``It will be seen that every one of the learned judges whose judgments I have cited from, when dealing with the question of ratification, has always used the following expressions as to when a contract made by an unauthorised agent is capable of being ratified by a stranger. The contract must (a) have `professed' to have been made on behalf of another; (b) have `purported' to have been made on behalf of another; (c) have been made `on behalf of another'; (d) have been made `in the name of another'; or (e) the agent must have `assumed to act on behalf of another'; every one of which expressions, in my judgment, is wholly inconsistent with an unauthorised agent keeping locked up in his own mind a mere undeclared intention that another shall afterwards participate in the contract.''

In
Omaha Indemnity Company v Carpenter (1987) 5 ANZ Ins Cas Co 75,171 (Vic CA), Fullagar J (with whom Murray and Hampel JJ agreed) stated, at 75,177, the effect of Lord Lindley's speech in Keighley Maxsted & Co v Durant to be that:

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``when it is alleged that a man made a contract for an undisclosed principal, the proposition involves that, at the time of the contract, there really was in truth an existing authority from the principal to the agent to make the contract, although the existence of the authority was not disclosed by the contract and may have been unknown to the other party. The proposition also involves that the agent intended at the time of contracting to bind that particular principal.''

[Emphasis in original.]

Later, Fullagar J said this (at 75,178):

``I think Mr Hughes put the matter at its shortest and clearest when he said that, leaving aside ratification, a contract can be made on behalf of an undisclosed principal only if at the time of the contract the agent is actually authorised to make the contract.''

[Emphasis in original.]

In my view, the present case is even clearer than Keighley, Maxsted & Co v Durant. As I have said, I am prepared to assume that Mr Lumb had the necessary authority to take steps on behalf of QAPL to authorise CC NSW to enter the contract on its behalf as undisclosed principal. I am also prepared to assume, contrary to the submission made by the Commissioner, that authorisation could be given on behalf of QAPL otherwise than in writing. Even so, by 8 October 1985 nothing had been done by or on behalf of QAPL to authorise CC NSW to enter the Circular Quay contract as agent for QAPL as the undisclosed principal.

The Circular Quay contract was entered into by CC NSW, apparently on its own account as principal. Mr Lumb, as the decision-maker for QAPL, did not communicate to anyone, prior to 8 October 1985, an instruction or decision that CC NSW should enter the contract on behalf of QAPL. Mr Lumb had caused the draft Principal and Agency Agreement to be prepared. But this document, which was never executed, was drafted as a pro forma and had not been prepared with the Circular Quay contract specifically in mind. As I have found, Mr Lumb simply did not direct his mind to the Circular Quay contract until Mr Gammel drew it to his attention on 11 December 1985. In these circumstances, it cannot be said that QAPL authorised, whether expressly or by implication, CC NSW to enter the Circular Quay contract on its behalf. There was therefore no existing authority from the alleged undisclosed principal for the agent to enter the contract on behalf of the undisclosed principal.

The same conclusion must be reached in relation to the Opera House contract. The conversation of 11 December 1985 between Mr Lumb and Mr Gammel could not have constituted authority for CC NSW to enter the Opera House [contract] as agent for QAPL as undisclosed principal. The conversation related to the existing contract with the Minister, the Circular Quay contract, and did not address any future contracts with the Minister or the Public Works Department. Mr Lumb's own account of that conversation refers to Mr Gammel stating that there had been no final documentation of the agency agreement in relation to the Circular Quay project.

Between 11 December 1985 and the making of the Opera House contract on 12 December 1986, nothing was done which could constitute authority from QAPL for CC NSW to enter the Opera House contract on its behalf. At some time during that period Mr Gammel received a draft agency agreement from Mr Larcombe, which incorrectly nominated CC NSW as the principal and QAPL as the agent. But that draft did not refer to the Opera House contract, which was not awarded until 12 December 1986. The draft Agency Agreement was ultimately amended to include a reference (albeit incorrect) to the Opera House contract. However, as I have found, the Agency Agreement, which purported to establish the principal and agency relationship between CC NSW and QAPL (albeit with the parties' names reversed), was not executed until after 12 December 1986. The conversation between Mr Gammel and Mr Larcombe was incapable of establishing QAPL as the undisclosed principal of CC NSW in relation to the Opera House contract. In any event, I have found that the conversation did not take place until after CC NSW had received the letter of 12 December 1986 from the PWD.

It follows that QAPL did not authorise CC NSW to enter into the Opera House contract as agent for QAPL as the undisclosed principal.

The Agency Agreement

Mr Conti QC, who appeared with Mr Raphael for CC NSW, put forward an argument to overcome the obstacle presented by the absence of antecedent authority from QAPL to CC NSW, authorising the latter to enter the

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management contracts on QAPL's behalf as undisclosed principal. Mr Conti contended that, even if QAPL were not entitled to enforce the management contracts directly against the Minister, the Agency Agreement was effective as between the parties to it, namely, CC NSW and QAPL. That agreement, so he submitted, had the effect that QAPL was beneficially entitled to the fees received by CC NSW from the Minister.

Mr Conti submitted that the cases to which I have already referred addressed only the situation where a person claiming to be an undisclosed principal seeks to enforce the terms of a contract against the third party with whom the ``agent'' has contracted (and, presumably, the converse situation, where the third party seeks to enforce the terms of the contract against the undisclosed principal). He pointed out that in some circumstances, for example where the contract expressly confines the rights and duties to the named parties, an undisclosed principal cannot sue on the contract:
Teheran- Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 545, at 552, per Lord Denning MR; Siu v Eastern Insurance, at 207-208. Thus, the mere fact that QAPL could not sue the Minister under the management contracts did not prevent it from being beneficially entitled to the fees paid by the Minister pursuant to these contracts. It followed that the Agency Agreement operated from the date of its execution, as between QAPL and CC NSW, to entitle the former to all fees derived from the management contracts.

There are a variety of difficulties with this submission. It is not obvious, for example, that an undisclosed principal who cannot enforce a contract is beneficially entitled to payments made under the contract to the agent. Further, the Agency Agreement in the present case contained important errors that would have to be considered in determining its effect. The agreement wrongly identified QAPL as the intended agent and CC NSW as the principal. It also erroneously assumed that the Circular Quay contract covered the work to be performed by CC NSW in relation to the Opera House project, whereas in fact the later project was covered by the separate contract made in December 1986 (albeit a contract which incorporated the terms of the Circular Quay contract). I put these difficulties to one side, as I think the argument fails in any event.

I assume, for the purposes of the present argument, that the intended effect of the Agency Agreement was that CC NSW agreed to carry out its obligations under the management contracts as agent for QAPL, while QAPL empowered CC NSW to act on its behalf to enforce its rights under the contracts. Whatever the parties' intentions, for the reasons already given, the Agency Agreement could not constitute QAPL a party or otherwise entitle it to enforce the terms of the contract against the Minister as an undisclosed principal. QAPL had no rights and no duties under the contracts. Only CC NSW was entitled to enforce the terms of the contracts against the Minister.

All payments by or on behalf of the Minister under the contracts were made to CC NSW as a principal, in accordance with CC NSW's entitlements for work performed by it pursuant to its contractual obligations. The character of the moneys received, for income tax purposes, must be determined by reference to the contractual arrangements pursuant to which they were paid and received. Whatever obligations (if any) were created between the parties to the Agency Agreement, they could not alter the fact that CC NSW derived fees as a principal for work performed by it pursuant to the contracts. Those fees constituted assessable income in its hands. This conclusion is supported by considering the steps actually taken by CC NSW and QAPL in relation to the contracts. I refer to these steps in considering the arguments based on conventional estoppel.

Conventional Estoppel

CC NSW relied on the method by which the intended arrangement between QAPL and CC NSW was carried into effect as creating an estoppel. Mr Conti submitted that the accounting procedures adopted by CC NSW and QAPL and the book entries made in consequence of those procedures amount to a mutual acknowledgment that CC NSW was acting as QAPL's agent and that the revenues from the two management contracts beneficially belonged to QAPL. The effect of ``book-keeping protocol'' was that the revenues and expenditure of CC NSW relating to the projects were attributed to QUT. This created an estoppel by convention on the principle stated in
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, at 244:

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``Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted upon by a respresentee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying.''

On this aspect of the case, there was relatively little dispute as to the facts. Mr Gammel gave instructions to Mr Bradstock to record appropriate entries to give effect to what was thought by Mr Gammel to be the agency arrangement. The evidence does not make clear precisely when this instruction was given but Mr Bradstock's affidavit suggests that the relevant conversation occurred in early 1986, after work had commenced on the Circular Quay project. Mr Bradstock, in turn, gave instructions to Mr Jeffries, an accountant employed by CC NSW, and Mr Jeffries implemented the instructions. Mr Jeffries' affidavit, on which he was not cross-examined, explained in some detail the accounting practices he implemented.

Entries were made when the annual accounts were being prepared, usually in July or August following the close of the financial year. Although Mr Gammel and Mr Bradstock initially had in mind that entries should be made on a monthly basis, Mr Weerden's advice was to make journal entries only on an annual basis. The effect of the journal entries made each year was to attribute the whole of the revenue and expenditure for the Circular Quay and Opera House projects to the QUT, to the exclusion of CC NSW. (Of course, for the year ended 30 June 1986, revenue and expenditure were attributable only to the Circular Quay project.) The journal entries were reflected in the accounts and taxation returns prepared on behalf of CC NSW and the QUT, respectively.

Mr Gammel, in the course of his cross- examination, described what took place:

``I see, then there would have been a debit entry for expenses accrued during the year? - No, all of the expenses and accruals throughout the year and indeed at 30 June, right, to arrive at total cost, if you like, at 30 June, were done in the books of [CC NSW] as with any other construction contract. When that figure was arrived at it was that total figure that was credited out of the costs of work in progress in [CC NSW] and debited as cost of work in progress for that particular project into Quay Unit Trust.

So that was a single entry made when the accounts for the year were being done? - In respect of costs and then a similar entry was done in terms of revenue so the revenue in [ CC NSW] would have been debited out of the work in progress account and transferred into Quay Unit Trust as a credit of revenue into that particular project and then in the books of Quay Unit Trust after those entries had been made an assessment would have been made as to the progress of profit or loss in respect of that particularly - and taken up in those accounts of Quay Unit Trust.

...

And during the course of the year there was no sum of money paid by [CC NSW] to Quay Unit Trust in respect of those entries? - No.

During the course of the year all the available cash of the group stayed with one of the group companies and was put on money market deposit? - Any surplus cash within the group would have been put on deposit, that's correct.

So that the entries that were made were more in the way of notional entries recording what should have been the position under the undisclosed agency arrangement? - Yes, they had to be notional entries because [CC NSW] was not only the physical contractor of the project but it was also the actual bookkeeper, if I can use the term loosely, of the contract and not Quay Unit Trust.''

The principal difficulty confronting CC NSW's argument is that, even if the journal entries and accounting practices created an estoppel by convention as between CC NSW and QAPL, such an estoppel could not bind the Minister:
Gamer's Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236, at 277 per Gaudron J (dissenting, but not on this issue);
Tanning Research Laboratories Inc v O'Brien (1990) 8 ACLC 248 at 253-254; (1990) 169 CLR 332, at 339-340, per Brennan CJ and Dawson J. Any dealing between CC NSW and QAPL could not constitute QAPL a party to the management contracts, or allow it to enforce the contracts, as undisclosed principal or otherwise, against the

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Minister. As I have already said, the fees derived by CC NSW from its work under the contracts were paid to it as principal contractor. Whatever effect any conventional estoppel might have had, the estoppel could not alter the character of the revenue derived by CC NSW from its activities as construction manager under the contracts. That revenue was received by CC NSW as its income.

This conclusion is reinforced by the evidence as to what actually occurred in relation to the construction management contracts. CC NSW performed its contractual obligations; it collected and banked the fees; it invested the surplus funds; and it employed the staff who performed the management functions. The PWD, suppliers, sub-contractors and employees all dealt with CC NSW as principal. The fees paid under the contracts were not used to pay any of the liabilities of the QUT, in particular the debt due to the Commonwealth Bank. Apart from the book entries, reflected in the financial statements and tax returns, nothing was done to carry into effect the supposed agency arrangements. The conduct that is said to have constituted the estoppel occurred in each year after the income had been received by CC NSW pursuant to the contractual arrangements with the Minister.

In the light of the conclusion I have reached, it is not necessary to determine whether an estoppel was created as between CC NSW and QAPL and, if so, the effect of that estoppel. The object of the doctrine of estoppel in pais is to prevent an unjust departure by one person from an assumption adopted by another on the basis of some act or omission which, unless the assumption is adhered to, would operate to that other's detriment:
Thompson v Palmer (1933) 49 CLR 507, at 547, per Dixon J. An estoppel by convention cannot be established unless it can be shown that the parties have adopted the relevant assumption as to the basis of their relationship: Con-Stan Industries v Norwich, at 244. Generally speaking, book entries record transactions having legal consequences and do not themselves constitute transactions:
Albion Hotel Pty Ltd v FC of T (1965) 13 ATD 435 at 443; (1964-1965) 115 CLR 78, at 92, per Windeyer J;
Manzi & Ors v Smith & Ors (1975-1976) CLC ¶40-237 at 28,400; (1975) 132 CLR 671, at 674, per Barwick CJ; at CLC 28,400; CLR 675, per Jacobs J;
Temples Wholesale Flower Supplies Pty Ltd v FC of T 91 ATC 4387 at 4393-4394 (1991) 29 FCR 93 (FCA/FC), at 100-102 and cases there cited.

It is, at the least, doubtful whether the making of the journal entries, of themselves, established a course of conduct that shows CC NSW and QAPL adopted the assumption that all revenues from the construction contracts were derived by QAPL and not by CC NSW. Whether the necessary course of conduct was established by the preparation of financial statements and tax returns was not explored in the submissions and I express no view on it.

A Further Argument?

In the course of his oral submissions Mr Conti suggested, for the first time, that there may have been a series of ``ad hoc contracts'' pursuant to which fees were paid to CC NSW. The point of this suggestion was that discrete contracts may have been entered into by CC NSW as undisclosed principal for QAPL, pursuant to the authority conferred by Mr Lumb in his conversation of 11 December 1985 with Mr Gammel. The argument, which assumes that the convention was sufficient without documentation to confer such authority, was not foreshadowed in the applicant's Statement of Facts, Issues and Contentions. Indeed, that Statement clearly proceeded on the basis that there were two management contracts, namely the Circular Quay contract and the Opera House contract and that the issues in the proceedings concerned whether CC NSW had derived income out of performing such contracts in the relevant years of income.

I find it very difficult to see, on the documentary evidence, how it could be suggested that CC NSW derived fees from a series of ad hoc contracts. Furthermore, there was nothing, either in the evidence, the Statement of Facts, Issues and Contentions or the submissions, that identified the separate contracts said to have come into existence, let alone the income attributable to each of those contracts. In any event, as Mr Slater pointed out, had this argument been foreshadowed earlier, it is likely that the Commissioner would have wished to explore some of the factual issues, either by further documentary evidence, cross-examination or both. The Commissioner would be deprived of that opportunity if the belated argument put by Mr Conti were to be addressed by reference to the existing evidence. Insofar as Mr Conti is to be taken as seeking an adjournment to adduce further evidence, I think

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that such a course cannot be justified. The case had been set down for hearing for some time; the issues had been identified in the parties' statements; the case was fought on those issues, which did not include the argument belatedly raised on behalf of CC NSW; and it would disrupt the orderly conduct of the litigation if a case, which concerns events occurring over a decade ago, were to be further prolonged.

Conclusion on Principal-Agent Arrangement

It follows that no effective principal-agent arrangement was entered into between QAPL and CC NSW in relation to the construction management contracts. Accordingly, the challenge to the amended assessments by CC NSW must fail. It is not necessary to deal with the other arguments raised by the Commissioner in support of the contention that any principal-agent arrangement between QAPL and CC NSW did not affect income derived from these contracts.

Application of Part IVA

Because I have concluded that a principal- agent relationship was not established between QAPL and CC NSW in relation to the Circular Quay and Opera House contracts, it is not necessary to consider the application of Part IVA of the ITAA to the principal-agent arrangement. However, since the application of Part IVA has been argued, it is appropriate to state my views, although I do so more briefly than if this had been the only issue in the case.

I consider the application of Part IVA on the assumption, contrary to the conclusion I have already expressed, that income from the Circular Quay and Opera House projects was derived beneficially by QAPL, as an undisclosed principal pursuant to the principal- agent arrangements entered into between it and CC NSW. On this assumption, the question is whether the Commissioner was authorised to make the determinations he purported to make pursuant to s. 177F of the ITAA. As the joint judgment (Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ), of the High Court in
FC of T v Spotless Services Ltd & Anor 96 ATC 5201; (1996) 141 ALR 92, points out the making of a determination pursuant to s. 177F(1) ``is the pivot upon which the operation of Pt IVA turns''. If the Commissioner was so authorised, the effect of the determinations was to include in CC NSW's assessable income the amount referred to in each of the determinations.

The Spotless Decision

The present case was heard and argued before the unanimous decision of the High Court in Spotless. It is therefore necessary to consider the position in light of that decision, bearing in mind that the parties were given an opportunity to make supplementary submissions on the effect of the decision. I have taken into account those supplementary submissions.

In Spotless the High Court reversed the decision of a majority of the Full Federal Court, in
FC of T v Spotless Services Ltd & Anor 95 ATC 4775; (1995) 62 FCR 244 (FCA/FC). The scheme identified by the Full Court in Spotless was the proposal of the taxpayers to invest $40 million on deposit in the Cook Islands and to pay Cook Islands withholding tax on the interest earned. The Cook Islands levied withholding tax at the rate of 5% of the amount of interest. The taxpayers wished to take advantage of s. 23(q) of the ITAA. At the relevant time, that section provided that the interest received from the investment was exempt from income tax in Australia on the basis that it had been derived in the Cook Islands and that withholding tax had been paid in the Cook Islands. The interest rate actually payable to the depositors was about 4% below the Australian bank bill buying rate.

One of the arguments put on behalf of CC NSW in the present case was that the agency arrangement was supported by commercial considerations and thus could not be characterised as ``tax driven''. Mr Conti submitted that the incidence of taxation was a legitimate factor for CC NSW and QAPL to take into account when deciding to adopt the agency arrangements and that the increased cash flow resulting from the ability to take advantage of the tax losses, otherwise locked into the QUT, provided significant commercial advantages to the CC Group.

This argument sets up what the joint judgment in the High Court in Spotless describes as a ``false dichotomy''. The joint judgment (at ATC 5205-5206; ALR 96-97) quoted and commented on two extracts from the judgment of Cooper J in the Full Federal Court (95 ATC 4775 at 4811-4812; (1995) 62 FCR 244, at 287-288), with whom Northrop J agreed. The extracts are as follows:

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``[C]an it objectively be said that the dominant purpose of the taxpayers in making the investment was to obtain a tax benefit? In my view it cannot be said that such was their intention. In coming to this conclusion I accept that but for the operation of s 23(q) the investment would not have been made because of the operation of s 25 and other provisions of [the Act] leading to a liability to pay Australian tax on the interest earned. However a decision not to invest in the Cook Islands would be made, not for the reason that Australian tax would be payable but rather because the interest rate offered on the investment in the Cook Islands would be insufficient to admit of a rational commercial decision to invest in the Cook Islands in preference to Australia. If the interest rates offered in the Cook Islands were sufficiently high that after paying both Cook Islands and Australian tax, the net after tax return was higher than investing in Australia at lower interest rates and paying Australian income tax, the rational commercial decision would be to invest in the Cook Islands notwithstanding the incidence of double taxation.

...

Where by the operation of the foreign taxation laws and the existing Australian taxation laws the net return after the payment of all applicable tax and other costs of the investment is higher investing offshore than within Australia, it cannot be said that, objectively, the dominant purpose of the investor investing offshore is to get a tax benefit; the purpose is to obtain the maximum return on the money invested after the payment of all applicable costs, including tax. In 1986, Australian tax was not payable on income derived in the circumstances specified in s 23(q) of [the Act] because it was exempt income.''

[Emphasis added by the High Court.]

The joint judgment in the High Court said (at ATC 5260; CLR 97) that the

``... references in this passage on the one hand to a `rational commercial decision' and on the other to the obtaining of a tax benefit as `the dominant purpose of the taxpayers in making the investment' suggest the acceptance of a false dichotomy....

A person may enter into or carry out a scheme, within the meaning of Pt IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business.''

Later, their Honours said this (at ATC 5260; CLR 97-98):

``A taxpayer within the meaning of the Act may have a particular objective or requirement which is to be met or pursued by what, in general terms, would be called a transaction. The `shape' of that transaction would not necessarily take only one form. The adoption of one particular form over another may be influenced by revenue considerations and this, as the Supreme Court of the United States pointed out, is only to be expected. A particular course of action may be, to use a phrase found in the Full Court judgments, both `tax driven' and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Pt IVA, a person entered into or carried out a `scheme' for the `dominant purpose' of enabling the taxpayer to obtain a `tax benefit'.

Much turns upon the identification, among various purposes, of that which is `dominant'. In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose. In the present case, if the taxpayers took steps which maximised their after-tax return and they did so in a manner indicating the present of the `dominant purpose' to obtain a `tax benefit', then the criteria which were to be met before the Commissioner might make determinations under s 177F were satisfied. That is, those criteria would be met if the dominant purpose was to achieve a result whereby there was not included in the assessable income an amount that might reasonably be expected to have been included if the scheme was not entered into or carried out.''

A second point to be made is that CC NSW's submissions proceeded on the twin bases that the actual motivation of the persons involved in any ``scheme'' is relevant to the question posed by s. 177D(b) of the ITAA, and that the

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motivation of Messrs Lumb, Gammel and Bradstock was primarily to provide liquidity to QAPL to assist it to meet its liability to CBA and the exposure of the QUT to CC PL in the latter's loan account. The first of the two bases does not appear to be justified. In
Peabody v FC of T 93 ATC 4104; (1993) 40 FCR 531 (FCA/ FC), Hill J. observed as follows (at ATC 4113; FCR 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 Part 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).''

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.''

[Footnotes omitted.]

In any event, as I have explained, I have not accepted the evidence of Messrs Lumb, Gammel and Bradstock, insofar as each of them suggested that his primary purpose or objective in proposing or implementing the principal- agent arrangement was not to ensure that the tax losses of QUT were offset by income from a company or companies within the CC Group. The dominant purpose of each was to obtain a tax benefit by channelling income from CC NSW to the QUT, in order to offset the tax losses ``locked'' into the QUT.

The Scheme

I did not understand Mr Conti to dispute that there was a scheme in the present case, within the meaning of s. 177A(1) of the ITAA. Nor did I understand him to dispute that the scheme was that identified by the Commissioner. The scheme so identified (assuming the principal- agent arrangement was otherwise effective) was the appointment by QAPL of CC NSW as its agent, by an undisclosed agreement, to enter into the Circular Quay and Opera House contracts and the performance of those contracts by CC NSW as QAPL's agent, together with all steps implementing the appointment and the undisclosed agreement.

Dominant Purpose

The major question agitated on this aspect of the case was whether, having regard to the eight matters specified in s. 177D(b), it could be concluded that one or more of the persons who entered into or carried out the scheme did so for the purpose of enabling CC NSW to obtain a tax benefit. In Peabody Hill J commented (at ATC 4113-4114; CLR 543) that the criteria specified in s. 177D(b) are often likely to point in different directions. However, in my view, in the present case the criteria all point towards Messrs Lumb and Gammel (and doubtless others) having the dominant purpose specified in s. 177D(b).

(i) The manner in which the scheme was entered into or carried out.

In Spotless, the joint judgment noted (at ATC 5209; ALR 101) that the expressions ``manner'' and ``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.''

The principal-agent agreement between QAPL and CC NSW was undisclosed, save for the officers, advisers, auditors and agents of each company. In particular, it was not disclosed to the Minister or the PWD. The

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PWD wished to deal with CC NSW, not some other entity which had no skills or experience as a construction manager. The Agency Agreement, which was not in fact executed until some time after 12 December 1986, was backdated to 29 January 1986 in order to cover income derived by CC NSW after the earlier date. Implementation of the scheme was undertaken by book entries made after the close of each financial year and the subsequent preparation of accounts and tax returns. During each financial year nothing was done to acknowledge or implement the scheme in relation to work performed or income derived during that year, other than the execution of the Agency Agreement itself. CC NSW not only performed all work under the contracts, but received all income and paid all expenses in relation to them. It employed all staff and, so far as appears, bore all risks associated with the performance of its contractual obligations. The cash position of the CC Group was not affected by the book entries and other action taken in relation to the principal-agent arrangements, except insofar as a tax benefit was obtained. QAPL had never carried on business as a construction manager and had no infrastructure to enable it to do so. None of this suggests a purpose, on the part of those entering into or carrying out the scheme, other than obtaining a tax benefit, in the form of excluding income from CC NSW's assessable income and diverting it to the QUT.

(ii) The form and substance of the scheme.

It was submitted by CC NSW that, viewed objectively, the substance of the scheme was to ensure that the CBA debt was paid out, and that Kumagai was not exposed to a potential liability or otherwise embarrassed. Yet the circumstances prevailing immediately before the Circular Quay contract was entered into show that the risk of the CBA debt not being paid on time out of the proceeds of sale was, if not utterly remote, then at least very low. Despite Mr Gammel's reluctance, in particular, to accept this proposition, the projections and progress reports to which I have already referred, proceed on the basis that the CBA debt and the moneys due to CC PL would be repaid from sales of units. This is in fact what occurred. In any event, even if there had been a difficulty, as Mr Lumb accepted, the CC Group had ample resources to advance moneys to QAPL to pay off the CBA debt and to prevent any embarrassment being caused to Kumagai.

The form and substance of the scheme strongly suggest that the dominant purpose of the scheme was to divert income from CC NSW to QAPL and thereby obtain 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.

The scheme was conceived at a time when the objective circumstances suggest that the Quay Apartments project was likely to yield sufficient funds to repay the CBA and the moneys due to CC PL. The Agency Agreement, although back-dated, was actually executed after the CBA debt had been discharged and was expressed to apply to the Opera House contract at a time when there could be no possible question about the repayment of that debt. None of the commercial reasons put forward to support the Agency Agreement could explain its application to the Opera House contract.

(iv) The result in relation to the operation of the ITAA that, but for Part IVA, would be achieved by the scheme.

Had the principal-agent arrangement been effective then, but for Part IVA, the scheme would have diverted assessable income from CC NSW to QAPL, thereby enabling the former to reduce its tax liability and the latter to take advantage of its tax losses.

(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.

Apart from the tax benefit accruing to the CC Group, the scheme was very likely to leave CC NSW in a substantially worse financial position. It was liable to the Minister to perform the two contracts, yet all profits earned as the result of its endeavours accrued to QAPL. In short, CC NSW remained liable under the contracts, but received no substantial benefit from them. As Mr Slater pointed out, in cash flow terms the scheme changed nothing, except the benefit to the CC Group derived from its reduced tax liability.

(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,

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being a change that has resulted, will result or may reasonably be expected to result, from the scheme.

QUT was affected by the scheme, in that it derived (but for Part IVA) assessable income, which enabled it to offset some of its tax losses. The crediting of income by means of both entries would have given it additional resources to pay its creditors. However, viewed prospectively, it was very unlikely that QAPL would require the additional income to meet its obligations. And, as events transpired, it did not require the income for that purpose.

(vii) Any other consequence for the relevant taxpayer, or for any other person referred to in (vi), of the scheme having been entered into or carried out.

Theoretically, the Minister was affected by the scheme, since he may have been able to enforce the contracts against QAPL as undisclosed principal and may have been liable at the suit of QAPL. However, it was plainly not intended that the Minister should be affected by the undisclosed principal-agent arrangement and in fact neither he nor the PWD was so affected.

(viii) The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in (vi).

The shares in both CC NSW and QAPL were held by companies within the CC Group. All units in the QUT were held by CC PL, the parent of CC NSW. The effect of the principal- agent arrangement, if implemented, was to transfer assessable income from CC NSW to the QUT, where it was available to be offset against losses.

In my opinion, having regard as objective facts to the matters specified in s. 177D(b) of the ITAA, a reasonable person would conclude that Messrs Lumb and Gammel, and others, entered into or carried out the scheme identified by the Commissioner for the dominant purpose of enabling CC NSW to obtain a tax benefit in connection with the scheme.

Tax Benefit

Section 177F 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. A reference to a tax benefit includes a reference to an amount not being included in the assessable income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer if that year of income of the scheme had not been entered into or carried out: s. 177C(1)(a). The Commissioner identified the tax benefit obtained in connection with the scheme as follows: if the scheme was effective in fact and law, the income derived from the Circular Quay and Opera House contracts was not included in CC NSW's assessable income; that income would have been or might reasonably be expected to have been included in CC NSW's assessable income if the scheme had not been entered into.

Mr Conti submitted that, had the scheme not been entered into, other steps would or might have been taken by CC NSW to reduce the assessable income derived by it from the Quay Apartments project, thereby obtaining a similar result to that achieved by the scheme itself. However, there was no evidence that any such steps would have been taken by CC NSW had the scheme not been entered into.

The question is whether, having regard to the matters identified in s. 177D(b) as objective facts, a reasonable person would conclude that an amount not included in CC NSW's assessable income would have been included if the scheme had not been entered into: Spotless, at ATC 5211; ALR 104. During the relevant years, CC NSW had in place the Circular Quay and Opera House contracts from which it was entitled to derive payments. But for the scheme, these payments would have formed part of its assessable income. It could reasonably be concluded that in the absence of the scheme, which (if effective) diverted the profits to the QUT, CC NSW would have continued to derive net income from the contracts. There is nothing in the evidence to suggest that any other conclusion should be reached. Thus, in each of the relevant years of income there was a tax benefit to CC NSW by reason of the scheme, equivalent to the profits diverted to the QUT.

Penalty

The Commissioner approached the imposition and remission of additional tax on the basis that CC NSW had made false or misleading statements in material respects relating to the implementation of the Agency Agreement between it and QUT. By reason of the false or misleading statements, CC NSW was liable to pay, under s. 223(1) of the ITAA

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which was then in force, additional tax equal to double the amount of tax. Pursuant to s. 227(3), which empowers the Commissioner to remit the whole or any part of the additional tax, the Commissioner remitted the additional tax to the following:

• an amount of 45% of the permanent tax difference calculated by reference to the net tax paid by CC PL and 15% on the timing difference; and
• a per annum component calculated by reference to the net tax paid by CC PL and the relevant due dates.

Additional tax is imposed by the Act, not the Commissioner:
Re Dymond; Ex parte The Debtor (1959) 12 ATD 1 at 4; (1958-1959) 101 CLR 11, at 22, per Fullagar J. The issue on appeal is not whether the Commissioner's determination as to the extent of the remission was appropriate, but whether it is excessive having regard to the established facts, or whether there is some error that vitiates the exercise of discretion:
Avon Downs Pty Ltd v FC of T (1949) 9 ATD 5 at 10; (1949) 78 CLR 353, at 360, per Dixon J.

CC NSW submitted that the Commissioner erred by acting as if s. 223 applied, rather than s. 226, which provides for additional tax where Part IVA applies. However, in the light of the findings I have made, it was open to the Commissioner to make a determination on the basis that s. 223 applied.

CC NSW also submitted that the Commissioner erred by failing to take into account the terms of Taxation Ruling IT 2141. In particular, it was said that the Commissioner should have taken into account paras. 14, 19 and 21. Paragraph 14 provides that a statement as to a particular view of the proper operation of the law is not false or misleading, even though it may be inaccurate. Paragraph 19 states that a penalty is not normally imposed if the general substance of a statement is clearly arguable as a matter of law. Paragraph 21 accepts that if a taxpayer makes a statement based on information provided by another person who might reasonably have been in a position to provide it, the statement should generally be treated as being to the effect that the information was provided by the other person.

I think that the short answer to this submission is that the evidence justifies the inference that, to the extent relevant, the Commissioner did take into account the terms of IT 2141. Particulars provided by the Commissioner and internal documentation show that the Commissioner relied on Taxation Ruling IT 2517. That ruling expressly refers to and summarises critical provisions of IT 2141. In these circumstances, I would draw the inference to which I have referred.

In any event, I do not think that, having regard to the findings I have made, paras 14, 19 and 21 of IT 2141 were material to the Commissioner's determination under s. 227(3). On the facts, this is not a case where CC NSW simply made statements which were arguably correct as a matter of law. Nor is it one where CC NSW simply acted on advice, having revealed all material facts to the advisers. The backdating of the Agency Agreement and the creation of minutes of meetings, for example, were not revealed to the Commissioner until a relatively late stage. In some important respects, I have not accepted the account of events given by officers of CC NSW; it was their account which was given to the Commissioner.

I see no basis for interfering with the Commissioner's determination under s. 227(3).

Conclusion

For the reasons I have given and subject to any further argument, CC NSW's application should be dismissed and the Commissioner's decisions confirmed. The parties have indicated that there may be some debate as to costs. There was also a suggestion that the parties might wish to be heard on the form of final orders, depending on the reasoning in the judgment.

In these circumstances, I shall direct the Commission to bring in short minutes of order giving effect to the judgment. I shall provide the parties with the opportunity to make written submissions on the form of orders to be made and on costs.

THE COURT ORDERS THAT:

1. The Respondent file and serve within seven days short minutes of order to give effect to the judgment.

2. Unless the parties agree as to the form of short minutes, the Applicant file and serve, within seven days of receipt of the Respondent's short minutes of order, written submissions addressing the appropriate form of orders and costs.

ATC 4151

3. The Respondent file and serve, within seven days of receipt of the Applicant's written submissions, its written submissions in response.

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