Mobbs v FC of T

Members:
R Olding SM

Tribunal:
Administrative Appeals Tribunal, Canberra

MEDIA NEUTRAL CITATION: [2022] AATA 201

Decision date: 10 February 2022

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R Olding (Senior Member)

WHAT IS THIS CASE ABOUT?

1. This case is concerned with whether certain payments, and the benefit of share issues, relating to the service of the applicant, Mr Mobbs, as a director of three companies, are assessable income:

• (a) of the applicant's company, Hastcombe Pty Ltd (' Hastcombe '), as the applicant, Mr Mobbs, submits; or
• (b) of Mr Mobbs, as the Commissioner of Taxation maintains.

2. The payments were made to Hastcombe. But the Commissioner says that was at the direction of Mr Mobbs, so that they represent income derived by Mr Mobbs. The shares were issued to Hastcombe or in some cases to Mr Mobbs' superannuation fund.

3. If, under the general provisions of the tax law, the payments and shares would be taken to be assessable income of Hastcombe, the Commissioner submits that Tribunal should make a declaration, under the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936, negating the tax benefit said to have been so obtained.

4. In addition to the primary tax assessments, there is an administrative penalty assessed -

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only relevantly in respect of the shortfall said to arise in relation to the share issues - on the basis of a base penalty of 50% for recklessness, remitted to 25%.

THE ENTITIES, PAYMENTS AND SHARE ISSUES

5. There are three companies for which Mr Mobbs acted as director. The companies are:

• (a) ITL Health Group Limited (' ITL ');
• (b) Seeing Machines Limited (' SML ');
• (c) Connexxion Pty Ltd (' Connexxion ').

  (collectively, ' the Companies ').

6. Hastcombe issued invoices for Mr Mobbs' services as a director to the relevant company. The company either paid Hastcombe the amounts invoiced or, in some cases, issued shares in satisfaction of outstanding invoices.^[1] Apart from two instances where Connexxion made the payments without Hastcombe issuing an invoice.

Hastcombe

7. Hastcombe was incorporated in 1985. Mr Mobbs was the sole director during the periods under review. Mr Mobbs and his wife, Mrs Catherine Mobbs, were the only shareholders.

8. Mr Mobbs has expertise in information technology and working with innovative start-up companies that require funding and/or commercial experience. He commenced providing consultancy services through Hastcombe in 1985 utilising both his own expertise and the services of employees.

ITL

9. Mr Mobbs was a co-founder of ITL and previously served as a director. He was re-appointed as a director on 18 August 2010, becoming Executive Chairman on 12 October 2010 and continuing in this role through the periods the subject of this review.

10. ITL made payments and issued shares to Hastcombe as per the table below.

SML

11. Mr Mobbs was appointed as a director of SML on 18 October 2006, became Chairman in 2009 and resigned as a director on 31 December 2011.

12. SML made payments to Hastcombe and issued shares in connection with Mr Mobbs' service as a director, but not to Hastcombe. The shares were issued to William Mobbs ATF The Bilbo Superannuation Fund (' the Bilbo Superannuation Fund ').

13. The share issues occurred after Mr Mobbs had ceased to be a director. The issue of shares to the Bilbo Superannuation Fund was consistent with previous share issues made by SML to the Fund.

Connexxion

14. Mr Mobbs was a director of Connexxion from 13 April 2010 to 24 March 2014.

15. No relevant share issues were made by Connexxion.

16. The entities by and to whom payments and share issues were made over the years of the review are summarised in this table:

Payments/share issues - ITL, SML and Connexxion

Payments/share issues - ITL, SML and Connexxion

Year	Payment to Hastcombe by:	Shares issued by:	Shares issued to:
2010/11	ITL SML Connexxion	- SML -	Bilbo Superannuation Fund
2011/12	ITL SML Connexxion	ITL SML -	Hastcombe Bilbo Superannuation Fund
2012/13	ITL - Connexxion	ITL SML -	Hastcombe Bilbo Superannuation Fund
2013/14	- - Connexxion	ITL - -	Hastcombe

DECISION UNDER REVIEW

17. The Commissioner issued amended notices of assessment of primary tax and notices of assessment of administrative penalty for the 2011 to 2014 income years.

18. Mr Mobbs objected against those assessments. On 20 January 2020, the Commissioner allowed the objection in part, reducing the assessments accordingly.

19. Mr Mobbs applied to the Tribunal for review of the objection decision. Thus, it is the objection decision of 20 January 2020 that is before the Tribunal for review.

ISSUES AND BURDEN OF PROOF

Burden of proof

20. The applicant has the burden of proving the assessments are excessive and, if so, what amounts should be assessed.^[2] Taxation Administration Act 1953 , s 14ZZK.

21.

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The principles I must apply in considering whether Mr Mobbs has discharged the burden of proof include the following:

• (a) Facts may be found on the basis of oral evidence alone.
• (b) There is no requirement that direct evidence by oral testimony may only be accepted if corroborated, for example, by documentary evidence; a fact may be found on basis of the uncorroborated evidence of a witness
• (c) However, self-serving statements should be given close scrutiny.
• (d) Nevertheless, evidence of a taxpayer is not to be regarded as prima facie unacceptable.^[3] For this and the preceding propositions, see, for example: Imperial Bottleshops Pty Ltd v Commissioner of Taxation (1991) 22 ATR 148 , 155 ; and Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212 .
• (e) If the taxpayer succeeds in 'weighing down [the] scales ever so slightly in [the taxpayer's] favour then [the taxpayer] has discharged the burden [the taxpayer] carries'.^[4] Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212 , [88] .

Primary tax assessments

22. The parties confined the issues in dispute to the tax treatment of the payments and share issues related to Mr Mobbs' service as a director of the Companies.

23. Accordingly, Mr Mobbs will satisfy the burden of proof if he proves the payments and the benefit of the share issues in each case are not part of his assessable income for the relevant income years.

Penalty assessments

24. If the applicant persuades the Tribunal that the benefit of the share issues is in each case assessable to Hastcombe (or otherwise not to the applicant) under the general provisions of the tax law, and that a Part IVA declaration should not be made, there will be no shortfall and no penalty in relation to these issues.

25. If the taxpayer is not successful on these issues, it will fall to the Tribunal to determine whether the applicant has proved that the penalty assessments are excessive - because the Commissioner's assessment of the base penalty amount is incorrect and/or a full or further partial remission of the base penalty should be allowed - and what amount should be assessed.

PRIMARY TAX ASSESSMENTS

The parties' main positions - in summary

26. The Commissioner defended the assessments on alternative grounds. However, the main battleground on which the case was fought is whether the payments and shares are ordinary income^[5] Income Tax Assessment Act 1997 , s 6-5. of Mr Mobbs or assessable income of Hastcombe.

27. The essential case for the applicant is that in each case the Companies did not agree to pay Mr Mobbs for his services as a director.^[6] To avoid prolixity, I use the expression ‘ director ’ to refer to Mr Mobbs’ various roles in the Companies, including CEO, executive chairman and director as the case may be. Rather, the applicant says, the Companies agreed to pay Hastcombe to make available Mr Mobbs' services as a director. On that premise, the payments and shares would not have been derived by Mr Mobbs.

28. The Commissioner's case is that the applicant has not discharged the burden of proving the payments and shares were not derived by Mr Mobbs directly and merely directed by Mr Mobbs to be paid to, or the shares issued to, Hastcombe or the Bilbo Superannuation Fund respectively. In making this submission, the Commissioner points mainly to the absence of contemporaneous documentary evidence, as outlined below, and says that Mr Mobbs' evidence of the existence of oral agreements should not be accepted without corroboration.

29. There lies the heart of the challenge for the applicant in this case is: there is no documentary evidence directly corroborating Mr Mobbs' evidence that the Companies agreed to pay Hastcombe to make available his services.

30. The applicant endeavours to meet this evidentiary challenge in a number of ways. These include:

• (a) Mr Mobbs' own evidence that there was an oral agreement in each case that Hastcombe would make available his services to the Companies in return for the invoiced amounts.
• (b) Evidence provided by his wife, Mrs Mobbs.
• (c) A submission that the most probable explanation for the fees invoiced by Hastcombe being paid by the Companies to Hastcombe, rather than to Mr Mobbs directly, is that Hastcombe contracted with

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  the Companies to make available Mr Mobbs' services as a director.
• (d) The long history of Mr Mobbs providing consultancy services to various clients through Hastcombe rather than in his own name.
• (e) A previous written agreement with Hastcombe that Mr Mobbs says was entered into, but which he says cannot be located, for the provision of his services as joint managing director of ITL.
• (f) That a written agreement between Hastcombe and ITL for the provision of consultancy services was in place before his appointment as a director of that company.
• (g) Evidence of Mr Nicholas Cerneaz, the Chief Executive Officer of SML at the relevant time, of a discussion in which Mr Cerneaz agreed that it would be acceptable for Mr Mobbs' services to be provided through Hastcombe as he was aware that SML had contracts with other companies in relation to board appointments.
• (h) A letter dated 30 August 2016 from ITL to Mr Mobbs, signed by two directors of ITL and countersigned by Mr Mobbs, purporting to continue Hastcombe's engagement to provide consultancy services (specified as Mr Mobbs' services as Chief Executive Officer and as Executive Chairman and director of ITL).
• (i) A submission that it is common practice for directors to make their services available to the boards on which they serve through their private companies.
• (j) The protection from personal liability said to attend the provision of Mr Mobbs's services through Hastcombe.
• (k) A submission that it would have been a breach of Mr Mobbs' fiduciary duty as a director of Hastcombe if he had made his services available to the Companies in his personal capacity, with the result that he would have been required to account to Hastcombe for fees earned personally.

31. I address each of these submissions below, along with some other matters.

(a) Mr Mobbs' evidence

32. Adopting the principles outlined earlier, I approach Mr Mobbs' evidence, which is necessarily self-serving, with care. However, I do not treat his evidence as prima face unreliable. Nor do I take as my starting point that I cannot accept Mr Mobbs' evidence without corroboration. However, in the particular circumstances of this matter, I am not prepared to accept Mr Mobbs' evidence of the oral agreements said to have been entered into with the Companies without corroboration.

33. Those circumstances include evidence that emerged in cross-examination of Mr Mobbs revealing an attitude towards compliance with his obligations under tax laws that would make ready acceptance of his testimony an unsound foundation upon which to decide this case. For example, claims for substantial deductions for patently private expenses emerged in the Commissioner's audit processes.^[7] Transcript, P-150, ln 46 – P-151, ln 38. Substantial deductions were also claimed for management fees said to have been paid to an associated family trust for which Mr Mobbs agreed no services of any kind were provided.^[8] Transcript, P-122, ln 29-33.

34. Mr Mobbs essentially sought to wipe his hands of these matters by saying he gave all the records to his accountant to decide what to claim. Additionally, a submission was made on his behalf that some of the disallowed deductions would not have been apparent in the relevant financial statements as they were aggregated with other expenses.

35. However, Mr Mobbs is not an unsophisticated man. He is a businessman and director of various public and private companies of many years' experience. With due care, he would be expected to be aware that some of these not insubstantial deductions were at the least of highly doubtful validity. There were also a number of aspects of his witness statement and oral testimony that Mr Mobbs' had to correct.

36. In the circumstances, I am not prepared to accept, on the basis of his evidence alone, that Mr Mobbs took the care necessary to ensure that his interactions with the Companies in fact established a contractual relationship of the type he maintains was entered into. It may be that Mr Mobbs intended that would occur, but it does not follow from his evidence that he took the care to ensure that such an agreement was entered into. Mr Mobbs'

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subjective intention is not determinative. The question is whether, objectively, the evidence establishes that a contract of this kind was entered into with each of the Companies.

(b) Mrs Mobbs' evidence

37. Mrs Mobbs gave evidence that Mr and Mr Mobbs agreed they would each be paid a salary for their work for Hastcombe; that her role was to manage the administrative work for the company; and that the company had numerous employees over the years working on IT projects.

38. I accept that Mrs Mobbs gave her evidence to the best of her ability. However, other than confirming that various consulting work was carried out through Hastcombe, this evidence does little to advance Mr Mobbs' case regarding the arrangements with the Companies.

(c) The submission that the most probable explanation for the invoices and payments is that payments and share issues were made for Hastcombe making available Mr Mobbs' services

39. Mr Fraser, who appeared with Mr Kulkarni for the applicant, referred to various cases in support of the propositions that whether a contract has been entered into is to be determined objectively rather than by reference to the subjective intentions of the parties and that conduct subsequent to the time a contract is said to have been entered into is relevant in that regard. I accept that proposition as did the Commissioner.

40. I also accept that it is, as the cases suggest, common sense that subsequent conduct may in fact be the best evidence of what parties have agreed orally.^[9] BH Australia Constructions Pty Ltd v Kapeller (2019) 100 NSWLR 367 , [68]-[70] .

41. The applicant submitted that the invoicing and payment of the invoices is 'relevant, if not decisive'. I accept that it is relevant and give the evidence substantial weight. I accept that, on the face of the matter, the issue and payment of the invoices more strongly supports the applicant's case than the Commissioner's.

42. However, I do not accept that it is decisive in the context of this matter. This evidence cannot be considered in a vacuum, devoid of context. Here, that context is in each case a public company that was, despite formal notices issuing, unable to produce evidence (other than the invoices) of any kind whatsoever of any agreement with Hastcombe. That is surprising in the context of the substantial amounts paid to Hastcombe over the years. It is also surprising that Mr Mobbs would not take the care to ensure that there would be an unequivocal written record that the substantial remuneration which in substance became payable as a consequence of services he provided personally was in fact for services provided by Hastcombe.

(d) The history of Mr Mobbs providing consultancy services through Hastcombe

43. I accept that the long history of Mr Mobbs providing consultancy services through Hastcombe rather than in his own name lends some support for an inference that he would have sought to take the same approach with the Companies. However, there are some countervailing considerations.

44. The first, already mentioned, is that these public companies have no record of such an arrangement other than the payment of the invoices. Secondly, despite his senior positions in the Companies, and the significance of the issue, he did not take the care to have the arrangements put in writing or reflected in minutes or elsewhere. Thirdly, it seems to me that there is a relevant distinction between consultancy services, which are commonly provided through a company, and the acceptance of a personal appointment as a director. It does not follow that, because consultancy services were provided through a company, service as a director would necessarily be provided in the same way. Finally, the reference to Mr Mobbs receiving superannuation payments from ITL in 2009 cast doubt upon whether all contracts over the years were with Hastcombe and not with Mr Mobbs personally.

45. In the circumstances, I take this history into account. It is plainly relevant, but not determinative of the issue in the proceedings.

(e) Previous written agreement with ITL for Hastcombe to provide director services?

46. Mr Mobbs gave evidence that Hastcombe was previously engaged by ITL to provide Mr Mobbs' services as joint

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managing director. The agreement, he says, was terminated in 2008.

47. On one view, the existence of such a prior agreement might be said to support an inference that future agreements would also be to this effect. But, again, there are countervailing considerations.

48. First, there is no corroborating evidence of this prior written agreement for Mr Mobbs' services as a director being made available by Hastcombe. For the reasons already given, I am not prepared to accept this uncorroborated evidence. Further, even if a written agreement was in fact entered into, how can I be satisfied that Mr Mobbs took the care to ensure that it had the effect for which he contends?

49. Secondly, there is a considerable period of time between when the written agreement is said to have been entered into and when the oral agreement covering the periods under review was said to have been made with ITL. The longer the period between the two events, the weaker the case for the drawing of an inference that the same approach would be taken.

50. Thirdly, in contrast to the applicant's argument, it might be thought that, if a written agreement was entered into on the first occasion, and it was intended that ITL would again contract for Hastcombe to provide Mr Mobbs' services, a written agreement would have been entered into on the next occasion. It is not the applicant's case that there was a written agreement which cannot be located, but rather that an oral agreement governs the relevant years. Why a written agreement for Mr Mobbs' services as a director in 2003, but only an oral agreement in 2010?

(f) The prior written agreement for consultancy services

51. Hastcombe was engaged by ITL to provide consultancy services delivered by Mr Mobbs under a written agreement dated 23 October 2008.

52. For similar reasons to those outlined in the previous section, I take into account this factor in Mr Mobbs' favour. However, I do not accept that the existence of the written agreement for Hastcombe to provide consultancy services to ITL provides unequivocal support for an inference that a similar oral agreement for Hastcombe to provide services as a director was entered into.

(g) Evidence of Mr Cerneaz that he had agreed it would be acceptable for Mr Mobbs' services to be provided through his company

53. Although the events occurred many years previously, I accept that Mr Cerneaz did his best to provide an honest account of his recollection.

54. However, even if this conversation occurred in the way Mr Cerneaz now recalls, it does not establish that an agreement in the terms Mr Mobbs contends was subsequently entered into. There is no evidence that Mr Cerneaz had authority to bind the board of directors and, as already mentioned, there is no evidence that the board considered or made a decision to enter into such an agreement. Nor is such an agreement reflected in board minutes, or the annual reports or audited remuneration reports.

55. Nevertheless, Mr Cerneaz's evidence is consistent with the applicant's case that Hastcombe was engaged to provide his services to SML. In these circumstances, I take the evidence of Mr Cerneaz into account as lending some support to an inference that the board of SML entered into such an agreement with Mr Mobbs.

(h) The letter provided by two directors of ITL

56. The letter of 30 August 2016 signed by two directors of ITL is in the form of an agreement for Hastcombe to provide Mr Mobbs' services to ITL from 1 July 2016. However, in its opening paragraph, the letter recites that Hastcombe has been appointed as an independent contractor of ITL since 18 August 2010. It is dated long after the time Mr Mobbs says his oral agreement with ITL for the provision of his services as a director was entered into.

57. Mr Mobbs was the driving force behind this letter issuing, which action he agreed he 'possibly' took to try to convince taxation officials of his case. Although this was not stated in Mr Mobbs' witness statements, and only emerged in cross-examination, I do not see this alone as fatal to the probative force of the letter: there is no necessary inconsistency between the content of the letter and the motivation for it issuing.

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Nevertheless, it does not reflect well on Mr Mobbs - and adds to my reservations about his evidence generally - that the letter was put forward to the Commissioner earlier as evidence of the position in 2010 but with this context of how the letter came into existence only emerging in cross-examination.

58. The greater difficulty for Mr Mobbs is that the authors of the letter were not directors at the time the agreement is said to have been entered into. Thus, they cannot have first-hand knowledge of whether an agreement was entered into or the terms of the agreement. Further, the authors do not reveal the source of their knowledge of the agreement and nor were they called to give evidence.

59. In those circumstances, at best the Tribunal might infer that the authors obtained the information from sources within the ITL, either written records or advice from personnel with historical corporate knowledge. However, since neither were disclosed or brought forward for testing, I give this evidence limited weight.

(i) Common practice for directors to make their services available through their private companies

60. Although this assertion is supported by little independent evidence other than Mr Cerneaz's recollection of his conversation with Mr Mobbs some 15 years earlier, I assume it is correct for the sake of the following discussion.

61. The applicant's submission appeared to be that because it is common for the services of directors to be made available through their companies, but the remuneration section of the annual reports did not refer to other directors being so appointed and remunerated, little could be drawn from the absence of reference to Hastcombe in the annual reports.

62. Acceptance of that proposition would entail something of a leap, since it would require the Tribunal to assume that at least one other director - that is, at least two directors in total counting Mr Mobbs - caused their services as directors to be made available by their companies. I have no way of knowing how likely that would be.

63. In any case, I am still left with the absence of corroborating evidence in the board minutes, annual reports or audited remuneration reports. Accordingly, while I take into account that other directors are engaged through their companies in assessing the probability of Mr Mobbs' assertions, I otherwise give this factor limited weight.

(j) Protection from personal liability?

64. Mr Peadon, who appeared for the Commissioner, in cross-examination and submissions sought to undermine Mr Mobbs' reliance upon asset protection as a factor supporting an inference that he would have contracted with the Companies for his services as a director to be made available by Hastcombe.

65. Mr Mobbs accepted that he was aware of the limited utility of a company in that regard and that he could not avoid exposure to personal liability in this way. Further, in accordance with common practice, the annual reports indicated that ITL indemnified and insured the directors for claims against them in their capacity as directors.

66. I do not accept the Commissioner's submissions in this regard. While use of a company may provide far from absolute protection, it would nevertheless be an objectively rational consideration for Mr Mobbs to take into account in deciding to provide services through a company. That would be so even if the protection is limited, some protection being better than none. The interposition of a company between the recipient of services and the controller of the company is at the least a complication not present in the case of a direct provision of services by an individual which might feature in the balance if one of the Companies was contemplating the initiation of proceedings. However, it would be unlikely to provide substantial asset protection in the context of legal proceedings against Mr Mobbs by a shareholder or other third party.

67. Accordingly, I give this factor limited weight in favour of Mr Mobbs' position.

(k) Contracting for payments to be made to Mr Mobbs in his personal capacity would be a breach of fiduciary duty requiring Mr Mobbs to account to Hastcombe for any fees earned?

68. I understand this submission to be to the effect that it would be expected that the director services would be provided through Hastcombe because, if fees for such services were derived by Mr Mobbs, he would be required to account

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to Hastcombe for the fees. I do not understand that, as a director of a company providing consultancy services, Mr Mobbs would be in breach of any duty to Hastcombe by providing his services as a director to another company. The duties and requirements of a director are quite different to consultancy services in the nature of strategic and other advice.

69. Even if it would be such a breach, Mr Mobbs controls Hastcombe and it is owned by Mr and Mrs Mobbs. If Mr Mobbs was engaged directly, it would be expected that they would explicitly or implicitly consent to Mr Mobbs' appointment and waive or indemnify Mr Mobbs against any consequences that might otherwise attend a breach of fiduciary duty. There would be no reason to assume that Hastcombe would initiate proceedings to cause Mr Mobbs to account to it for fees received and every reason to think it would not.

70. Accordingly, I consider this submission provides little support to the applicant.

(l) Other matters raised by the Commissioner

ITL and SML shares issued under executive share schemes

71. The Commissioner in submissions also referred to the rules of the ITL and SML executive share plans under which the shares were issued to Hastcombe and the Bilbo Superannuation Fund. Those rules confine eligibility to ITL/SML employees and directors.

72. I consider that does not weigh against Mr Mobbs' position. Although the shares were issued in satisfaction of outstanding invoices issued Hastcombe, Mr Mobbs was nevertheless a director of each company and, in the case of ITL, chief executive officer. He met the conditions for issue of shares.

References in the ITL remuneration reports to other executives contracting through their companies but no similar reference to Hastcombe

73. Taking the ITL annual report for 2011 as an example, the Commissioner noted that there is a specific reference to companies through which other Key Management Personnel (' KMP ') were engaged but no mention of Hastcombe. From that absence, I am invited to draw an inference that Mr Mobbs was not engaged through his company.

74. However, close examination of the wording of the annual report suggests another explanation that is not inconsistent with Mr Mobbs' submission. The heading and opening sentences of this part of the annual report are as follows:

Employment Contracts of Directors and Senior Executives

Remuneration arrangements for some KMP are formalised in employment agreements. Details of these contracts are provided below.

[Followed by summaries of the employment contracts of some but not all of the directors and other KMP and their companies when engaged through a company.^[10] Tribunal Book, 1020.

75. The natural reading is that only those KMP who had entered into formal agreements feature in this part of the report. In my view, the absence of any reference to Mr Mobbs or Hastcombe does not provide a foundation for the inference the Commissioner urges me to draw.

Leave and superannuation entitlements

76. In cross-examination, Mr Peadon drew to Mr Mobbs' attention that the 2010 ITL annual report lists, in the 2009 comparatives, a superannuation payment against Mr Mobbs' name.^[11] Exhibit 13. Payment of superannuation contributions in respect of Mr Hascombe is, of course, inconsistent with Mr Mobbs' contention that he always contracted through Hastcombe and not in his own name.

77. Mr Mobbs agreed that, as is to be expected, he carefully checked references to himself in the annual reports but was unable to offer any explanation of why this report included these superannuation contributions against his name.

78. The absence of an explanation for this apparent inconsistency in Mr Mobbs' evidence provides another reason for the Tribunal not to readily accept his evidence at face value without corroboration. However, the annual reports of ITL for the years under review show nil leave and superannuation entitlements relating to Mr Mobbs. That is consistent with Mr Mobbs' submission that he did not personally receive a salary or director's fees in those years.

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SML's Constitution requires directors to be paid personally?

79. The Constitution of SML^[12] Exhibit 6, clause 6.3. provides, unsurprisingly, that the directors 'may be paid such remuneration as may be determined from time to time by the Company in general meeting' and goes on to provide that such remuneration accrues from day to day. The Constitution also provides for a fixed total amount to be agreed in general meeting, to be divided amongst the directors (other than any director who is a salaried officer) in the proportions they agree, or in default of agreement, equally.

80. On the evidence before the Tribunal, it is difficult to see how the Commissioner's submission that Mr Mobbs became personally entitled to payment for his services as a director under these provisions (at least once the distribution of the total amount agreed in general meeting had been determined) can be denied. It may be that SML's board obtained authority to depart from the director remuneration arrangements contemplated by the Constitution but there is no evidence that it did so. Nor, in my view, is the fact that payments were made to Hastcombe a sufficient foundation for an inference that the board obtained authority to engage Hastcombe (or other directors' companies) to make the director's services available, as opposed to a mere administrative process carried out under instruction by staff who processed payment of the fees (plus creditable GST) to Hastcombe.

81. As the applicant did not put the Constitutions of ITL and Connexxion in evidence, I cannot exclude the possibility of similar issues arising in respect of those companies.

Uncertainty regarding terms of alleged contract

82. The Commissioner submitted that the dearth of evidence of the terms of the contracts said to have been entered into between Hastcombe and the Companies meant that any such purported agreements would be void for uncertainty. I have not given any weight to this submission; the terms required to be inferred are minimal: service as a director in return for the fees invoiced to and paid by the Companies.

(m) GST included in invoices and payments

83. Mr Peadon made the following comments regarding his submission that Mr Mobbs merely directed the ITL to pay to Hastcombe amounts that were due to him personally for his services as director:

If Mr Mobbs was capable of getting two directors to sign a letter to assist him with a tax audit , it is no great leap to suggest that Mr Mobbs could have walked down to accounts payable and said, look, I want to be paid through Hastcombe. I want you guys - I'm going to issue invoices every month, and I want you to pay them, and I'll treat that as payment of my salary. There is no reason that that should not be the inference that's drawn. Again, as I say, there's nothing wrong with it. I don't suggest that there is. It's a payment. By direction, it happens every day of the week, in the sense of people making payments by direction - I'm not going to go into the practices of directors for a moment. It is simply Seeing Machines on the one hand and ITL on the other following a direction by Mr Mobbs to pay his company by way of discharging their obligation to him. That is a readily - that readily explains what occurred. It is the natural inference to draw from the evidence.^[13] Transcript, P-209, ln 30-42.

84. However, the matter is not quite as straightforward as this submission suggests. The amounts specified in the invoices and paid by the Companies were not the same as the amounts that would be Mr Mobbs' income on the Commissioner's premise. That is because the consideration specified in the invoices included GST.

85. It is to be expected that the Companies claimed input tax credits for that GST, so that their net cost was the amounts specified in the invoices before GST. But it cannot be a case of Mr Mobbs being entitled to director's fees or a salary of, say, $40,000 per month, and directing that that amount be paid to Hastcombe. The amount actually invoiced and paid was 10% more because of the addition of GST.

86. That is inconsistent with the Commissioner's proposition that the arrangements with the Companies were merely that Mr Mobbs directed amounts, to

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which he was entitled, to be paid to Hastcombe. It is consistent with Mr Mobbs' claim that the payments were consideration for Hastcombe's supply of making available Mr Mobbs' services to the Companies.

87. However, it is also not inconsistent with the possibility that there was no agreement by the boards of the Companies to engage Hastcombe to make Mr Mobbs' services available. The payment of the invoices, plus creditable GST, could be as a consequence of administrative staff being instructed to process Hastcombe's invoices on the basis that the additional amount representing GST would be credited to and therefore not a cost of the Companies. Again, I am confronted with the absence of a written record, that would be expected to exist, to resolve this uncertainty.

Conclusion

88. Because of the substantial overlapping of considerations, it has been convenient to set out the evidence and arguments in respect of the payments and share issues by ITL, SML and Connexxion collectively. However, I have considered each separately.

89. The applicant's case in respect of ITL and SML is stronger than in respect of Connexxion.

90. In the case of ITL, the earlier contractual arrangement with Hastcombe for provision of consultancy services provides some additional support to the applicant. However, as already noted, that earlier written contract related to the provision of advice rather than the services of a director. Overall, weighing up the factors I have indicated, especially the absence of any record of the kind one would expect to be maintained by a public company, the case for the view that I should not persuaded that Mr Mobbs took sufficient care to achieve the outcome that the payments and shares were provided in return for Hastcombe making his services available to ITL has considerable force.

91. Similarly, in the case of SML, the evidence of Mr Cerneaz provides some support for the applicant's submissions. However, for the reasons I have given, that evidence is of only limited value. Overall, particularly the absence of any corroborating contemporary record of the kind one would expect to find lends the Commissioner's case considerable force.

92. The applicant's case in respect of Connexxion is weaker and indeed, in the case of two payments, invoices were not issued by Hastcombe to Connexxion. There is little independent evidence apart from the making of the payments in response to the invoices to support Mr Mobbs' assertions. There is insufficient evidence in my view to conclude that Mr Mobbs caused Hastcombe to enter into a contract to make his services available to Connexxion and that the payments made were not in consideration of Mr Mobbs serving as a director of Connexxion.

93. In respect of all three companies, what I am left with is this:

• (a) The only direct evidence supporting the applicant is Mr Mobbs' assertion that there were oral agreements to the effect that Hastcombe is to be remunerated for making available Mr Mobbs' services as a director.
• (b) However, Mr Mobbs does not identify with any specificity when, where or with whom any oral statements that might constitute an offer and acceptance were made by a person or persons with authority to do so.
• (c) There are no references to such an agreement in:
  • (i) minutes of board meetings of any of the Companies;
  • (ii) minutes of meetings of the board of Hastcombe;
  • (iii) the audited remuneration reports in the annual reports of the Companies;
  • (iv) contemporaneous correspondence; or
  • (v) any other records of Hastcombe or the Companies.
• (d) SML's Constitution contemplates payment of fees to directors personally and there is no evidence of any decision of the Board of SML to depart from that requirement. Nor can I exclude the same position prevailing in respect of ITL or Connexxion.

94. That leaves the primary evidence in support of the applicant Mr Mobbs' own self-serving statements (an expression I do not use in a pejorative sense but simply to describe

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their objective character) which, for the reasons I have indicated, I am not satisfied I should accept without corroboration - and the issuing and payment of the invoices. I remind myself that what the applicant seeks to achieve is for the remuneration for his personal service as a director to be treated as derived not by Mr Mobbs, who provided the services, but by his company.

95. As already noted, Mr Mobbs is not an unsophisticated man; he is an experienced director and business adviser. As a director of each company - and particularly as CEO and executive chairman of ITL - Mr Mobbs was in a position to ensure that any such arrangement was properly recorded in the records of the Companies. He was also in a position to obtain for his own records written evidence that, although it was Mr Mobbs himself who provided the services, the remuneration was required to be paid to Hastcombe as consideration for Hastcombe making his services available to the Companies. It is to be expected that a director in such a position would take these basic steps, especially in the context of the substantial remuneration payable for services rendered entirely by Mr Mobbs as CEO and executive chairman of ITL. Mr Mobbs did not do so.

96. It is not the mere absence of any documentary records of the asserted arrangements that is troubling. It is the absence of such records in circumstances where it would ordinarily be expected such records would exist. In that regard, I note that the absence of documentary evidence one would ordinarily expect to find is a feature of the arrangements with all three of the Companies.

97. For these reasons, I am not persuaded that the applicant has discharged the burden of proving any of the payments and share issues are not income of Mr Mobbs according to ordinary concepts. On that basis, Mr Mobbs did not obtain a tax benefit in connection with the arrangements for the payments and share issues and therefore there is no occasion to consider the making of a Part IVA declaration.^[14] I have considered whether, in case I am wrong in concluding that the payments and share issues are ordinary income under s 6-5 of the Income Tax Assessment Act 1997 , I should set out whether on that premise the Tribunal should make a Part IVA declaration. However, the appropriateness of the Tribunal proceeding to do so was a matter of controversy. The applicant submitted that, even if the conditions for the making of a Part IVA declaration were present, as a matter of discretion it ought not be made. In that regard, I observe that this case is different to the more common tax case in which the Commissioner has made an assessment on alternative grounds – the application of the primary taxing provisions and a Part IVA determination – and the Tribunal is called upon to determine whether the assessment is excessive. Here, the Commissioner urges, in the alternative to his primary submission that the payments and share issues are ordinary income, that the Tribunal itself make the declaration. Although I express no firm view, it may be doubtful whether, having made a determination of the character of the payments and share issues that implicitly denies the existence of a key condition for the making of a Part IVA declaration – the existence of a tax benefit – it would be appropriate for the Tribunal to nevertheless purport to make such a declaration. That particular issue was not the subject of submissions. In the circumstances, given the complexity and relative novelty it entails and having regard to the statutory objects of the Tribunal, I have concluded that the better course is not to embark upon a detailed consideration of whether, contrary to my finding as to the character of the payments and share issues, a Part IVA declaration should be made. Nor is it necessary to consider other alternative bases on which the Commissioner sought to defend the assessments.

PENALTY ASSESSMENTS

98. As noted above, the penalty assessments relating to the issues the subject of this review, and remaining after objection, relate only to the shortfalls arising in respect of the failure to include the share issues by ITL and SML to Hastcombe and the Bilbo Superannuation Fund respectively in Mr Mobbs' income tax returns for the relevant years. As noted above, the base penalty was assessed at 50% but remitted on objection to 25%.

99. The applicant is entitled to have the penalty assessment set aside if he proves that he exercised reasonable care: Taxation Administration Act 1953, Schedule 1, s 284-75(5) The applicant submits that he took reasonable care because his understanding that Hastcombe derived the income was rational, citing these observations of Steward J in Sole Luna Pty Ltd as trustee for the PA Wade No 2 Settlement Trust v Commissioner of Taxation:

What follows applies equally for the taxpayers and their agents . . . for the purpose of making a claim in a tax return, ordinarily a taxpayer is not required in exercising reasonable care to have the capacity to know what might or might not be admissible in court or be probative as a matter of the law of evidence. All that is required is that a taxpayer should form a view of the taxable facts underpinning a statement made in a return in a reasonable way and at a standard suitable for that taxpayer . Where transactions are not documented, the taxpayer (for the purpose of making statements in a return) may rely on recollection, hearsay statements, and in a given case, even the collective corporate assumption about what might have happened in the past, so long as, on each occasion it was reasonable to do so. It may rely on logical deductions flowing from the adoption of a given corporate structure, and measure their probability by broader commercial practices and by any particular mercantile culture pursued by the taxpayer. But it cannot rely on speculation or conjecture. . .^[15] [2019] FCA 1195 , [129] .

(Emphasis added.)

100. The difficulty with this submission is the absence of any significant evidence of the

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care actually taken by Mr Mobbs. The returns were prepared by his accountant, but there is no evidence drawn to my attention regarding what information Mr Mobbs provided to the accountant.

101. As the applicant correctly submits, the substantive issue in the proceedings involved a question of fact. But what evidence was given to the accountant to enable him to make an informed judgement regarding the facts? Was the accountant told that there was no written agreement under which ITL and SML agreed to pay the director's fees in consideration of Hastcombe making the services of Mr Mobbs available. Or that there is no mention of Hastcombe in the board minutes, audited remuneration reports or otherwise in the records of those companies (other than the receipt and payment of the invoices)?

102. The circumstances in which the shortfall arose could conceivably range from the accountant being fully informed and carefully weighing up the considerations in favour of and against the treatment of the share issues adopted in the returns to mere acceptance of Mr Mobbs' view that they were derived by Hastcombe. In the language of Steward J in the passage from the Sole Luna case cited above, I am unable to determine whether Mr Mobbs or the accountant determined the adopted position in a reasonable way. It may be that Mr Mobbs or the accountant exercised reasonable care. I simply do not know.

103. In those circumstances, there is no evidentiary foundation upon which I could determine that Mr Mobbs exercised reasonable care.

104. Similar considerations apply in respect of whether the penalty should be further remitted. The discretion to remit is broad: the authorities establish that the Tribunal must simply decide whether it is appropriate in all the circumstances for the penalty to be wholly or partly remitted.^[16] Taxation Administration Act 1953 , Schedule 1, s 298-20(1); Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2012] FCAFC 50 , [249] .

105. But a decision to remit must be made on a rational basis having regard to all the circumstances. I am unable to determine that remission is warranted in the absence of any significant evidence regarding the circumstances in which the decision to treat the share issues as derived by Hastcombe, notwithstanding that the occasion for their issue was the satisfaction of outstanding invoices for services that were rendered personally by Mr Mobbs as a director.

DISPOSITION OF THE APPLICATION FOR REVIEW

106. For the reasons given, I am not persuaded that Mr Mobbs has discharged the burden of proving that the primary tax or penalty assessments are excessive. It follows that the objection decision must be affirmed.