KEENHILT PTY LTD (AS TRUSTEE FOR CHC SERVICES TRUST) v FC of T

Members:
BJ McCabe SM

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2007] AATA 2095

Decision date: 21 December 2007

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BJ McCabe (Senior Member)

1. The Commissioner of Taxation says the CHC Services Trust was in the business of supplying tax minimisation and avoidance schemes to third parties. It says the supply of the schemes was a taxable supply within the meaning of the A New Tax System (Goods and Services) Tax Act 1999 (the Act) which meant the trustee of the trust was liable to pay GST.

2. The Commissioner acknowledges that each scheme involved a number of entities (in addition to the third party client) but insists the CHC Services Trust played a pivotal role in each case. The respondent also accepts the CHC Services Trust did not derive any money itself from the promotional activities. The fees collected from clients found their way into the pockets of other individuals or entities connected to the trust in some way. But that does not matter, the Commissioner claims: he says the activities of the trust still give rise to a liability to pay GST.

3. 

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The applicant denies there has been a taxable supply within the meaning of s 9-5 because it denies the CHC Services Trust did anything that amounts to a supply for consideration within the meaning of ss 9-10 and 9-15. The applicant has also raised objections to the Commissioner's use in these proceedings of information relating to the affairs of third parties. The applicant says the Commissioner has acted contrary to s 16 of the Income Tax Assessment Act 1936 (ITAA36).

4. The respondent has the better of the argument. I explain my reasons below.

Preliminary matters

5. There are some preliminary matters requiring attention before I proceed. Firstly, there is a question of jurisdiction. The applicant in these proceedings is Keenhilt Pty Ltd (Keenhilt) as trustee for the CHC Services Trust. Keenhilt was not the trustee in 2001 when the events in question took place. At that point, Cleary Hoare Consulting Pty Ltd ("CHC P/L") was the trustee. Keenhilt is bringing the application because it is exercising the rights of the trust. Trusts do not normally have rights and obligations, as they are not regarded as legal entities under the general law: see
Christie and Commissioner of Taxation 2005 ATC 2009; (2004) 58 ATR 1142. But the statute changes things. Section 184-1 of the Act says the trust is treated as a separate entity with rights and obligations in the circumstances we are dealing with in this case, albeit that the rights and obligations are actually exercised by the trustee.

6. The second matter is the operation of s 14ZZK(b)(i) of the Taxation Administration Act 1953 (the TAA). The respondent relies on s 14ZZK in these proceedings, as it is entitled to do. The provision has the effect of shifting to the applicant the burden of proving that the Commissioner's decision (in this case, with respect to GST liability) is wrong, and the extent to which the decision is wrong:
Richard Walter Pty Ltd v Commissioner of Taxation 96 ATC 4550; (1996) 67 FCR 243 at 259 per Hill J. The applicant in this case says the correct decision is to find that it does not have any liability for GST.

The facts

7. Messrs Ian Collie and Michael Hart are solicitors with the Brisbane law firm Cleary Hoare Solicitors. The firm provides a range of services to its clients, including legal advice. Messrs Hart and Collie are also directors of the applicant. During 2001, they were directors of CHC P/L. That company is the former trustee of the CHC Services Trust. They were also directors of a number of other companies that typically acted as trustees of various trusts. Mr Hart said in his affidavit that those trustee companies "came within what was usually referred to as the Cleary Hoare Corporate Group".

8. Mr Hart's statement is brief. It refers to and endorses the more extensive statement of Mr Collie. Mr Collie's statement traces the history of the Cleary Hoare Corporate Group. He explains that the CHC Services Trust was established on 30 July 1999 and commenced operations on 1 January 2001. He notes that CHC P/L was registered as the proprietor of the business name 'Cleary Hoare Corporate' on 16 February 2001. Prior to that date, the business name 'Cleary Hoare Corporate' belonged to Cleary Hoare Corporate Pty Ltd. That company changed its name to Clearcor Pty Ltd. Mr Collie said in his statement (at [8.4]):

"From about February 2001, [CHC P/L] became the entity generally regarded by its directors and their Cleary Hoare associates as the representative or 'parent' entity of a large number of a large number of 'subsidiary' companies and trusts (more than 40 at the time) which together made up the Cleary Hoare Corporate Group'. That role had previously been occupied by Clearcor."

9. Mr Collie went on in his statement (at [8.8]) to say that CHC P/L was acting analogously to a holding company with many subsidiaries.

10. Mr Collie also explained the relationship between CHC P/L and Cleary Hoare solicitors (at [8.5]). He said control of the law firm Cleary Hoare solicitors changed during 2000. At that point, he said control of the Cleary Hoare Corporate Group (which meant control of CHC P/L and the CHC Services Trust and the other trustees and trusts):

"moved for the first time outside the then principals of Cleary Hoare [the law firm]. As a result, [CHC P/L and the CHC Services Trust] as well as relevant 'subsidiary' entities represented a 'stand alone' group."

11. 

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He said that the work of CHC P/L was separate from the work of the law firm, even though some of the correspondence on behalf of CHC P/L was on the law firm's letterhead. He said the law firm gave legal advice, including advice in relation to taxation matters, but CHC P/L and its 'subsidiaries' "engaged in transaction-based arrangements which did not involve the giving of legal advice or charges calculated on a time basis": at [8.9].

12. I turn now to the so-called 'NVI arrangements' that were provided to various taxpayers who paid a fee on which GST is said to be payable. The operation of the standard NVI arrangement was explained by the applicant in a diagram at p 356 of the T-documents. The diagram is incorporated into a notice of objection to assessment lodged on behalf of the applicant. The diagram depicts a chain linking various entities within the Cleary Hoare Corporate Group with the taxpayer who wished to reduce his or her liability to pay tax. The chain included a tax-exempt beneficiary (a charity). It is unnecessary for me to explain in detail how the tax advantage was achieved. It is enough that I identify the entities involved and describe their roles:

• • At the top of the chain was a trust controlled by a client. The client's trust would make a distribution of income in favour of a trust (Trust No 1). The trustee of Trust No 1 was a member of the Cleary Hoare Corporate Group and the directors were also directors of CHC P/L.
• • Trust No 1 would then distribute income in the same amount it had received to a fixed trust, the First Fixed Trust. The trustee of that trust was also an entity within the Cleary Hoare Corporate Group. The trustee company's directors were also directors of CHC P/L.
• • The First Fixed Trust would then distribute the whole amount it had received to a Charitable Fixed Trust - the trustee of which was also member of the Cleary Hoare Corporate Group, with CHC P/L directors in control of the trustee company's board.
• • The Charitable Fixed Trust would then distribute a small portion of the income it received to an exempt entity controlled by third parties. The balance of the income would be gifted to an Income Trust. The Income Trust was also a member of the Cleary Hoare Corporate Group, and the directors of the trustee of the Income Trust were also directors of CHC P/L.
• • The Charitable Fixed Trust would subscribe for 'A' class units in a unit trust. It does not appear that the 'A' class units cost anything. The Income Trust would purchase a number of 'B' class units in the same trust. The subscription cost was equal to the major part of the income that had been gifted to it by the Charitable Fixed Trust. The balance of the gifted amount was described as 'fees'.
• • The unit trust would pay the money it derived from selling units to the trustee of the Income Trust to a capital trust controlled by the client. The payment would be described as a gift. The funds received as a gift would then be loaned to the client. The funds would not be taxable.

13. The applicant says neither CHC P/L nor CHC Services Trust had any role to play in relation to any of the transactions occurring as part of the NVI arrangements. Neither entity received any money by way of fees from the participants. In those circumstances, the applicant argues, neither entity could have incurred a liability to pay GST. It acknowledges the trustee companies referred to in the documents formed part of the Cleary Hoare Corporate Group and that CHC P/L was the parent or holding company of that group - but insisted (at [8.2.2.6] of its submissions) that CHC P/L was:

"…not directly involved in the activities of each subsidiary and not independently responsible for any GST liability arising out of transactions any of them entered into since there was neither any basis, nor election, to group for GST purposes."

14. The applicant went on to point out (at [8.2.2.6] of the written submissions) that the shares in all of the trustee companies in the group were actually owned by Clearcor Pty Ltd, not CHC P/L.

15. The Commissioner accepts CHC P/L and the CHC Services Trust are not mentioned as participants or beneficiaries in the description of the scheme. But the respondent insists CHC P/L and the CHC Services Trust played a pivotal role. The Commissioner relies in

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particular on correspondence between Cleary Hoare solicitors under the hand of Mr Collie and Mr Campbell Stewart, a prospective participant in the NVI scheme. The letter is dated 26 April 2001 and reads:

"Cleary Hoare Corporate (a division of Cleary Hoare Consulting Pty Ltd) in which the principals of this firm have an interest, would be able to implement the NVI proposal (discussed with you during our meeting last week) at a cost of $65,000 assuming a distribution of $650,000."

16. Remember that Cleary Hoare Corporate is the registered business name of the CHC Services Trust, and Cleary Hoare Consulting Pty Ltd is the applicant's predecessor as trustee of that trust. The Commissioner says this letter is the smoking gun that points to the central role of these entities in the promotion of the NVI arrangements.

17. The letter to Mr Stewart does not relate to other participants in the NVI arrangement but the Commissioner says there is other evidence in relation to other participants that is consistent with the conclusion that the scheme was promoted and facilitated by CHC Services Trust. For example, a letter from Cleary Hoare dated 28 June 2001 addressed to an accountant in relation to the BDL Discretionary Trust notes:

"We act on behalf of Cleary Hoare Corporate (a division of Cleary Hoare Consulting Pty Ltd in which principals of this firm have an interest)…"

18. Observations to similar effect can be found in letters written on 29 June 2001 in relation to the Vines Management unit trust and the S.D. Kay Discretionary Trust. I also note that various documents associated with Cleary Hoare's trust account that were reproduced in exhibit 6 list Cleary Hoare Corporate or Cleary and Hoare Corporate Pty Ltd as the addresses for correspondence relating to the various trusts.

19. I accept the letters I have referred to above establish that the participation of Chas Stewart Family Trust, the BDL Discretionary Trust, the Vines Management Unit Trust and the S.D. Kay Discretionary Trust in NVI arrangements was promoted and facilitated by the CHC Services Trust and CHC P/L.

20. What of the other NVI arrangements? The Commissioner points out all of the NVI schemes proceeded according to the same pattern. While there is not direct evidence of CHC Services Trust playing a role in relation to every one of the schemes, the Commissioner says I am entitled to infer the CHC Services Trust did play such a role in each case because all the arrangements proceeded in the same way - and they all had to be devised, facilitated and promoted by someone. If I accept CHC Services Trust and CHC P/L played a role in relation to some of the NVI arrangements, and there is no evidence of anyone else playing the same role in other cases, the Commissioner says I should assume CHC Services Trust and CHC P/L played the same role in relation to all of the NVI arrangements.

21. A decision-maker is entitled to draw that inference in the absence of credible evidence that someone else was promoting and facilitating the arrangements. Mr Collie's statement makes it clear that the law firm Cleary Hoare solicitors were separate from the members of the Cleary Hoare Corporate Group that participated in the arrangements. I have no reason to doubt that evidence, which puts the law firm in the clear. I do not accept the references to 'Cleary Hoare Corporate' in the documents were intended merely to confirm Cleary Hoare solicitors were not providing the arrangements: I think the references to Cleary Hoare Corporate support the conclusion that the CHC Services Trust (the registered proprietor of the Cleary Hoare Corporate business name) was actually involved in the process.

22. I also considered whether Messrs Collie and Hart might themselves be regarded as promoters. They figure prominently in every aspect of each scheme, after all. But that conclusion is not supported by the fact the correspondence under Mr Collie's hand in particular is on law firm letterhead and some of it refers to Cleary Hoare Corporate. None of the correspondence suggests Mr Collie or Mr Hart were acting on their own account while some of the correspondence makes it clear Mr Collie in particular was writing on behalf of the CHC Services Trust.

23. The applicant pointed out a number of the clients who participated in the NVI arrangements during 2001 had participated in

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similar arrangements in previous years. I was invited to infer that they were simply revisiting an old arrangement, rather than being procured by the CHC Services Trust. I do not agree that accurately describes what occurred. I note in particular that several of the returning clients received correspondence referring to the role of the CHC Services Trust. I do not accept they were bypassing that entity and dealing directly with the members of the Cleary Hoare Corporate Group that were involved in each arrangement.

24. I accept CHC Services Trust and CHC P/L as trustee of the CHC Services Trust played a pivotal role in all of the arrangements. The CHC Services Trust in particular procured participants and facilitated their involvement in the NVI arrangements during 2001.

The legislation

25. GST is payable on taxable supplies. Section 9-5 of the Act provides that one makes a taxable supply if:

• (a) it is made for consideration;
• (b) it is made in the course or furtherance of an enterprise carried on by the taxpayer;
• (c) it is connected to Australia; and
• (d) the taxpayer is (or should be) registered.

26. Only the first two elements of the provision are in issue here.

27. Section 9-10 gives a broad meaning to the word supply. Procuring and facilitating participation in the NVI schemes is clearly covered. The word consideration is also defined broadly: it is taken to include any consideration…in connection with the supply. The word is defined in more detail in s 9-15, which says consideration includes:

• (a) any payment, or any act of forbearance, in connection with the supply of anything; and
• (b) any payment, or any act of forbearance, in response to or for the inducement of a supply of anything.

28. The applicant points out the CHC Services Trust did not receive any payment from any participant in the NVI arrangements. Payments under the terms of the NVI arrangements were made into the Cleary Hoare solicitors trust account. In its submissions, the applicant pointed out the payments made by the Chas Stewart Family Trust - the principal example of an NVI scheme offered by the respondent - were credited to the account of another trustee company involved in the arrangement. That does not matter. The law does not require that the payment be made to the person supplying the service. It merely requires that the payment (in this case, the 'fees' referred to in the applicant's diagram at p 356 of the T-documents) be paid in connection with the supply. Mr Collie accepted in his evidence that he and Mr Hart would not proceed to execute all of the documents required to bring a particular NVI arrangement into life unless the client paid the money contemplated under the terms of the arrangement into the Cleary Hoare solicitors trust account. If one has regard to the commercial reality of the situation, it is clear clients realised they were not able to participate in the fruits of the arrangement if they did not pay the fee as required. The fee was the price of participation. Whether or not the fee ended up in the CHC Services Trust, it was clearly paid in connection with (in the sense it was related to, or has to do with) the supply of the procuration and facilitation services I have already found the CHC Services Trust provided.

29. Given my finding that the CHC Services Trust and its trustee, CHC P/L, procured fee-paying clients to participate in NVI arrangements that it facilitated, I have little difficulty in concluding that entity was in the business of promoting and facilitating NVI schemes. I accept that the supplies of services under consideration here amounted to supplies that occurred in the course of carrying on a business.

30. I am satisfied the CHC Services Trust made taxable supplies, and that a liability to pay GST on those supplies has arisen.

Penalty

31. That leaves the question of penalty. The respondent says the CHC Services Trust should have known there was a problem with what it was doing. Messrs Collie and Hart, who collectively formed the directing mind and will of the entity, have extensive experience in taxation matters. The Commissioner says they should have known better.

32. 

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The applicant's submissions assert that a penalty should not be payable because GST does not arise. That is an unhelpful submission, given my conclusions with respect to liability.

33. I am not satisfied the evidence justifies a conclusion that the applicant or its officers or predecessors intentionally disregarded the law. There is nothing to suggest the applicant consciously decided not to meet its obligations - it merely failed to do so, when it should have known better.

34. The respondent initially decided to issue a penalty assessment equal to 75% of the GST shortfall amount. The Commissioner subsequently decided to reduce the penalty to 50% of the shortfall on the basis that the CHC Services Trust or its trustee was reckless as to the operation of the GST law. I am satisfied that is the correct decision in the circumstances.

Conclusion

35. The objection decisions under review are affirmed.