D MARKS PARTNERSHIP & ORS v FC of T

Members:
Logan J
Griffiths J
Pagone J

Tribunal:
Full Federal Court, Queensland

MEDIA NEUTRAL CITATION: [2016] FCAFC 86

Decision date: 22 June 2016

Logan J

1. I have had the benefit of reading in draft the respective reasons for judgment of Griffiths and Pagone JJ.

2. Pagone J has set out the grounds of appeal and the resultant issues which fall for determination. His Honour has summarised in his reasons for judgment facts found by the Tribunal or otherwise uncontroversial on the hearing of the appeal. He has also summarised or extracted pertinent statutory provisions and the submissions of the respective parties. These I do not repeat, save only to the extent necessary to explain my reasons for judgment.

3. If the Marks Partnership were a limited partnership within the meaning of s 995-1 of the 1997 Act and a corporate limited partnership within the meaning of s 94D of the 1936 Act , it fell to be taxed as a company. If so, the parties to the Marks Partnership were entitled to imputation credits and that the loans were not, as the Commissioner and Tribunal in his place considered them to be, taxable as deemed dividends (s 109D issue).

4. The starting point in resolving which of these positions is correct must be the text of the 1997 Act and of the 1936 Act , rather than that of the 1988 Queensland Act . It is in the former, not the latter, that the definitions relevant to the taxation liability issues are found. Consideration of the 1988 Queensland Act will be necessary if and only to the extent made necessary by those definitions.

5. Working through those definitions leads to the question becoming whether, for the purposes of the s 995-1 definition of " limited partnership " , the Marks Partnership was:

[ A ] n association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory

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income jointly, where the liability of at least one of those persons is limited …

6. The utility, if any, in the review proceeding before the Tribunal of a certificate by the Registrar under s 8(3) of the 1988 Queensland Act was for such proof as it offered that the Marks Partnership was an association of persons with the characteristics described in the definition in s 995-1 of a " limited partnership " .

7. The Tribunal had before it a certificate under s 8(3) of the 1988 Queensland Act dated 23 October 2003 with respect to the formation that day and the composition of the Marks Partnership.

8. Approached, as I consider it ought to be, via the gateway of the s 995-1 definition of " limited partnership " , the question behind the second of the grounds of appeal is whether the Tribunal was obliged, in light of the certificate, to conclude that the factual elements of that definition were proved?

9. The effect of such a certificate is stated by s 8(4) of the 1988 Queensland Act :

(4) A certificate issued under subsection (3) -

  • (a) shall be conclusive evidence that the limited partnership to which it refers was formed on the date of registration referred to therein; and
  • (b) shall be evidence and, in the absence of evidence to the contrary, conclusive evidence that the partnership to which it refers consists or, as the case may be, consisted of the general partners and limited partners named therein as such.

10. The challenge to the objection decision might alternatively have taken the form of a taxation appeal in the original jurisdiction of this Court. Had the applicants availed of that alternative, and there being nothing to the contrary arising from the Constitution or a law of the Commonwealth, the effect of s 79(1) of the Judiciary Act 1903 (Cth) ( " the Judiciary Act " ) would have been that this Court was bound to give such evidentiary effect to the certificate as was required by the terms of s 8(4) of the 1988 Queensland Act .

11. Section 79(1) of the Judiciary Act did not apply to the proceeding in the Tribunal but the terms of s 8(4) of the 1988 Queensland Act were perfectly general in their application.

12. A provision such as s 8(4) of the 1988 Queensland Act is evidentiary in effect and " operates to change what otherwise would be the operation of the relevant laws of evidence " :
Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146 at 166, [ 65 ] per Gummow, Hayne, Heydon and Crennan JJ.

13. In contrast with the alternative of a taxation appeal in this Court, a proceeding in the Tribunal for the review of an objection decision is not one where the rules of evidence must be applied: s 33(1)(c), Administrative Appeals Tribunal Act 1975 (Cth) ( " the AAT Act " ). Thus, s 33(1)(c) of the AAT Act might be regarded as a Commonwealth law to the contrary, to the extent that the Tribunal would otherwise have been bound, by the generality of the application in Queensland of s 8(4), to apply it.

14. That does not mean that, if a relevant fact is, according to the law of evidence, which includes s 8(4) of the 1988 Queensland Act , proved as a consequence of the tender by a party in a Tribunal proceeding of a particular certificate, the Tribunal is entitled, without cause, to ignore that consequence:
Re Pochi (1979) 2 ALD 33 , at 40 - 41 per Brennan J (sitting as President of the Tribunal).

15. Here, the Tribunal did not proceed on the basis of ignoring the certificate; rather it proceeded on the basis of its understanding of its evidentiary consequence. That the Tribunal so proceeded makes it unnecessary to consider what may have been the operation of s 118 of the Constitution with respect to s 8(4) of the 1988 Queensland Act and any question of constitutional legislative competence to any extent, if at all, that s 33(1)(c) of the AAT Act in its application to the Tribunal as an arm of the executive government of the Commonwealth and in the review of a taxation objection decision, operated contrary to the giving of full faith and credit to that State law which specified part of what I later term to be the taxable substratum.

16. Approaching the subject first as a matter of ordinary language, my view is that a number of propositions flow from the text of s 8(4)(a)

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of the 1988 Queensland Act . The effect of the tender of the certificate was that a limited partnership formed under that Act by the name of the D Marks Partnership (termed the Marks Partnership in this appeal) on 23 October 2003 was conclusively proved. Also conclusively proved was that the Marks Partnership had all of the characteristics of a limited partnership in terms of that Act. The definition of " limited partnership " in s 4(1) of that Act was, " a partnership formed and registered in accordance with the provisions of this Act " . In other words, one element of what was conclusively proved was that what constituted a partnership for the purposes of that Act existed. Subsection 4(2) of that Act dictated that, subject to the provisions of that Act, it was to be, " read as one " with the 1891 Queensland Act . For the purposes of the latter Act and thus the 1988 Queensland Act , a partnership described, " the relation which subsists between persons carrying on a business in common with a view of profit " : s 5, of the 1891 Queensland Act . Thus, another element of what was conclusively proved was that the persons who constituted the Marks Partnership were in a subsisting relationship of carrying on a business in common with a view of profit. Yet another element of what was conclusively proved was that whoever was the limited partner in that limited partnership of that name had the limited liability for which s 10 of the 1988 Queensland Act provided. The words, " limited partnership … was formed " in s 8(4)(a) carry all of this with them in my view, either expressly or by necessary implication.

17. Again as a matter of ordinary language, the effect of s 8(4)(b) of the 1988 Queensland Act was that the persons who were the members of the limited partnership known as the Marks Partnership, including the identity of the person whose liability was limited, was not necessarily proved conclusively by the tender of the certificate. In this regard, the certificate offered at least evidence of these facts and, in the absence of evidence to the contrary, conclusive evidence. There was no evidence to the contrary before the Tribunal other than that Quintaste was the general partner and Mr Marks, as trustee of the Marks Trust, was the limited partner.

18. Thus far, it might be thought that all of the necessary factual elements for the proof that a limited partnership in terms of the 1997 Act definition existed were proved, and, in the circumstances, conclusively proved, by the tender before the Tribunal of the certificate.

19. That is not how the Tribunal or, for that matter, the Commissioner, both earlier when assessing and in his submissions on the appeal, approached matters. That was because they considered that the parties to the deed by which the Marks Partnership was created did not carry on any business with a view of profit and that they were at liberty to treat the certificate as not extending to the proof of this fact.

20. That those parties did not carry on any business with a view of profit was, the effect of the certificate aside, accepted before the Tribunal. It should be recorded that the Tribunal did not find, and there was no suggestion in submissions, that the registration of the Marks Partnership was procured by fraud.

21. As, in the events which transpired, the relationship between the parties to the Marks Partnership was not one of carrying on a business in common with a view of profit, the Commissioner and, in his place, the Tribunal, considered that the foundation for the conclusiveness of the certificate disappeared. Their position was that there was, in truth, no partnership and thus no limited partnership with a characteristic of the limited liability of at least one member. In effect, their approach to the certificate was that it was a stream which could not rise higher than its source, which was the existence of a relationship having all of the characteristics of a partnership.

22. As it happens, the point is not free from recent authority in respect of the cognate conclusive evidentiary provision in the materially analogous legislation governing limited partnerships in the United Kingdom, the Limited Partnerships Act 1907 (UK). That authority is
Bank of Beirut SAL v Prince Adel El-Hashemite [ 2016 ] Ch 1 (Nugee J) ( Bank of Beirut SAL ) The relevant UK provision, s 8C, states:

(1) On registering a limited partnership the registrar shall issue a certificate of registration.

(2) The certificate must be -

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    (a) signed by the registrar, or
  • (b) authenticated with the registrar ' s seal.

(3) The certificate must state -

  • (a) the firm name of the limited partnership given in the application for registration,
  • (b) the limited partnership ' s registration number,
  • (c) the date of registration, and
  • (d) that the limited partnership is registered as a limited partnership under this Act.

(4) The certificate is conclusive evidence that a limited partnership came into existence on the date of registration.

23. Of this provision, Nugee J observed in Bank of Beirut SAL at 898, [ 85 ] :

Once a partnership has been registered, the plain effect of section 8C(1) is that the Registrar is under a duty to issue a certificate of registration; and the plain effect of section 8C(4) is that that certificate is conclusive evidence that a limited partnership came into existence on the date of registration. If that means what it says, it would appear to follow that whatever the circumstances which led to the registration, once the certificate has been issued the partnership must be regarded as having come into existence.

[ Emphasis added ]

Later, at 900, [ 91 ] , his Lordship introduced a detailed analysis of the authorities in that country concerning conclusive evidence certificates by summarising his understanding of their effect, which was, " There is no doubt that in general a conclusive evidence provision means what it says. " The view which I have already expressed as to what flows as a matter of ordinary language from s 8(4) of the 1988 Queensland Act accords, precisely, with the view of Nugee J in Bank of Beirut SAL as to the effect of the analogous UK provision.

24. Bank of Beirut SAL is not, in my view, distinguishable on the basis of a difference in language between the UK provision and the 1988 Queensland Act . Even so, it is persuasive not binding authority. In determining the weight to afford it, it is helpful to look first to the authorities in the United Kingdom which were applied by Nugee J in reaching his conclusion. Especially that is so because, as will be seen and hardly surprisingly, that line of authority has been influential in Australia.

25. The root authority in the United Kingdom for his Lordship ' s general proposition would appear to be
Bowman v Secular Society Ltd [ 1917 ] AC 406 ( Bowman v Secular Society ). That case, to adopt the accurate summary of it by Nugee J in Bank of Beirut SAL at [ 91 ] , " was concerned with the provision in s 1 of the Companies Act 1900 (UK) that a certificate of incorporation given by the Registrar in respect of any association should be conclusive evidence that all the requirements of the Act in respect of registration and of matters precedent and incidental thereto had been complied with, and that the association was a company authorised to be registered and duly registered under the Act. "

26. Section 1 of the Companies Act 1900 (UK) was, as Nugee J explains in Bank of Beirut SAL at [ 91 ] , a remedial provision, designed to address and overcome a perceived defect in a predecessor provision exposed by an earlier case,
In re National Debenture and Assets Corpn [ 1891 ] 2 Ch 505 ( In re National Debenture and Assets Corpn ):

This replaced a less extensive provision in section 18 of the Companies Act 1862 (25 & 26 Vict c 89) which had merely provided that the certificate should be conclusive evidence that all the requisitions of the Act had been complied with, and was passed to clear up doubts caused inter alia by the decision of Kekewich J in
In re National Debenture and Assets Corpn [ 1891 ] 2 Ch 505 where he found that a company had not been duly incorporated where there had only been six subscribers to the memorandum instead of seven …

27. The approach taken by Kekewich J in In re National Debenture and Assets Corpn was that, because a statutory condition precedent to incorporation namely, that the memorandum of association was signed by at least the statutory minimum number of subscribers was not, in truth, satisfied, a certificate of incorporation which was, by statute, " conclusive evidence that all the requisitions of this Act in respect of

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registration have been complied with " did not foreclose a conclusion by him that the company had not come into existence. On the basis of his conclusion as to the absence of satisfaction of the condition precedent, Kekewich J held that he lacked jurisdiction to make a winding up order, because the company did not exist. On a subsequent appeal to the Court of Appeal, the correctness of the approach to the certificate was upheld but because, by leave, further evidence was adduced which showed that the required number of subscribers had in fact signed the memorandum of association, a compulsory winding up was ordered:
In re National Debenture and Assets Corpn [ 1891 ] 2 Ch 505 at 517 - 519 (Lindley LJ), 519 (Bowen LJ) and 519 - 521 (Kay LJ).

28. This background about the perceived defect which the parliament sought to address by the provision considered in Bowman v Secular Society is of importance not just in respect of the statements made by their Lordships in that case as to what was achieved by that measure but also for the present case. One issue in Bowman v Secular Society was whether the objects of the Secular Society Ltd, which had been registered under the Companies Acts , were unlawful and one argument was that the certificate of incorporation given under the remedial measure was conclusive to show that the objects of the society were not unlawful. The certificate ' s conclusiveness was held not to extend to this. The certificate was though held in Bowman v Secular Society conclusively to prove that the Secular Society Ltd existed as a duly incorporated company, the following pronouncements being made:

29. The reference by Lord Parker of Waddington to " all His Majesty ' s lieges " , with its feudal overtones, was, with respect, even for its time, an antiquated, albeit colourful, turn of phrase but doubtless intended by his Lordship to convey the pervasiveness of application of the statutory provision for conclusiveness via a certificate. If anything, to confine its application just to a liege was, strictly, to understate matters. The provision applied according to its terms to all those within the legislative competence of the United Kingdom Parliament, be they His Majesty ' s lieges or not. This aside, the statement by Lord Parker of Waddington is, in my view, of like application to what is made conclusive by s 8(4) of the 1988 Queensland Act . In my view, that Queensland provision is not materially distinguishable from s 8C of the Limited Partnerships Act 1907 (UK). Thus, subject to a possible fraud exception, which it is not necessary to discuss, the certificate, on its tender, precluded, per force of s 8(4)(a) of that Act, any allegation not just that the Marks Partnership was not a limited partnership but also that it did not have the " status and characteristics " of such a limited partnership. And one such characteristic was that it was a partnership and thus that the persons in it were in a relation of carrying on business in common with a view to profit.

30. Another pertinent United Kingdom authority is the Court of Appeal ' s judgment in
Exeter Trust Ltd v Screenways Ltd [ 1991 ] BCLC 888 ( Exeter Trust Ltd v Screenways Ltd ). I share the view of Nugee J that this is a case to like effect to Bowman v Secular Society in relation to the consequence of a conclusive evidence certificate issued under a provision analogous to s 8C of the Limited Partnerships Act 1907 . The conclusiveness issue in Exeter Trust Ltd v Screenways Ltd related to the registration of a charge with the Court of Appeal holding that the Registrar ' s certificate was conclusive that the requirements for registration had been met. That

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outcome is relevant by analogy in relation to the effect of a certificate issued pursuant to s 8(3) of the 1988 Queensland Act . It is consistent with a view that the effect of the certificate in the present case was that it was a partnership, with all of the attendant characteristics of a partnership, which was registered.

31. In Bank of Beirut SAL , it was further necessary for Nugee J to consider whether the court had power to go behind the Registrar ' s certificate in a case where it had been procured by fraud. His Lordship held, at 906, [ 105 ] , that such a power did not exist. For present purposes, what is relevant about that conclusion is his Lordship ' s acceptance, also at [ 105 ] , of a submission based on an explanatory document, issued in respect of amendments made to the legislation he was considering, of the policy rationale for the conclusive evidence provision. That rationale was that, in the absence of absolute conclusiveness, " any investor joining an existing partnership would be at risk of an allegation that the partnership had not been duly registered after all and should be removed, thereby raising the spectre of unlimited liability " . That policy rationale is just as apt for s 8(4) of the 1988 Queensland Act . Another way in which the risk presented by subversion would exist is if it were allowed to be put, in the face of a certificate, that there was not a partnership in existence. This rationale reinforces my view that the certificate proved, for the purposes of this case, the requisite elements of the definition in s 995-1 of the 1997 Act of " limited partnership " .

32. By virtue of s 23A of the 1988 Queensland Act , it is possible for the registration of a limited partnership to be cancelled on the basis that it no longer exists. That basis might be supplied by a cessation of the partnership ' s business or even by a conclusion that it had never carried on business. But the power to cancel registration is consigned to the Registrar, not to the Commissioner. Further, the registration cancellation process entails a public notice requirement, which reinforces my view as to the applicability of the policy rationale in respect of s 8(4) being the same as its United Kingdom analogue. The Commissioner and, in his stead, the Tribunal are strangers to the cancellation process. Unless and until cancellation of registration occurs, their place is to give effect to a certificate of registration according to its terms, not, as officious bystanders, to subvert them.

33. Is this view to be relinquished because of the effect of Australian authority?

34. The Commissioner submitted that
Mune v Centro Argentino of Victoria Inc [ 1996 ] 2 VR 82 ( Mune v Centro Argentino ) was an authority to the contrary. I disagree.

35. Each of these cases must be read in light of the particular statutory provision in respect of conclusiveness and what was sought to be proved by the certificate. In Mune v Centro Argentino , at 90 - 91, Ormiston JA (with whom Winneke P and Hayne JA agreed) held as much. The outcome in that case was the result of the section providing for the furnishing of a certificate having conclusive evidentiary effect saying nothing about the certifying of which hitherto unincorporated body of persons was incorporated or, put another way, whether the incorporated association was the successor to a particular unincorporated association. That being so, a certificate could not prove this, again in effect because the certificate stream could not rise higher than its statutory source. Ormiston JA added at 94, that his conclusion " should not be taken as denying the conclusive effect of a certificate of incorporation as to the valid registration and incorporation of a corporation named in such a certificate " . His Honour further added that it was " unnecessary to express an opinion as to precisely what matters ' precedent and incidental ' to the registration should be treated as conclusively proved by the certificate " . His Honour ' s use of the phrase, " precedent and incidental " was part of his discussion, at 94, of the sequel in the United Kingdom to In re National Debenture and Assets Corpn . As to that sequel, I have referred above to Bowman v Secular Society . Ormiston JA referred to another case decided shortly after the legislative response to
In re National Debenture and Assets Corpn, Moosa Goolam Ariff v Ebrahim Goolam Ariff (1912) 28 TLR 505 ( Ariff ).

36. Ariff was a Burmese appeal to the Judicial Committee in the course of delivering the advice in which, as Ormiston JA mentions, Lord Macnaghten, in discussing prior authority,

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observed that the " precedent and incidental " amendment which had followed In re National Debenture and Assets Corpn was unnecessary. One of the cases to which Lord Macnaghten referred in Ariff , at 506, in making that observation was
Oakes v Turquand (1867) LR 2 HL 325 . In that case, which concerned a statutory conclusive evidence certification provision which did not expressly refer to matters " precedent and incidental " , the then Lord Chancellor, Lord Chelmsford, had stated, at 354, " I think the certificate prevents all recurrence to prior matters essential to registration " .

37. In Mune v Centro Argentino , at 93, Ormiston JA also refers to what he describes as an " interesting discussion of the legislative history and the cases " by Evatt J in
H A Stephenson & Son Ltd (In liq) v Gillanders, Arbuthnot & Co (1931) 45 CLR 476 at 497 - 500 ( H A Stephenson & Son Ltd (In liq) v Gillanders, Arbuthnot & Co ). In the culmination, at 500, of that discussion, Evatt J refers with apparent approval to the statement, just mentioned, made by Lord Chelmsford in Oakes v Turquand .

38. On analysis, Mune v Centro Argentino is, in my view, nothing more in its outcome than a case in the same class as Bowman v Secular Society and thus one exemplifying the limits of a conclusiveness provision. Within those limits, and Mune v Centro Argentino also recognises this in the references to prior authority, matters " precedent and incidental " are made conclusive, even if the statutory provision for a conclusive evidence certificate does not expressly say so. Rather, so much follows by necessary implication in any event.

39. Thus far then, Australian authority leads to no different conclusion than that suggested by reference to the text and to overseas authority.

40. The Commissioner though submitted that another Australian authority,
Federated Engine Drivers ' and Firemens ' Association of Australasia v Broken Hill Proprietary Company Limited (1911) 12 CLR 398 ( FEDFA v BHP ), supported the Tribunal ' s conclusion that the certificate issued pursuant to s 8(4) of the 1988 Queensland Act did not prove conclusively that the Marks Partnership was a limited partnership.

41. FEDFA v BHP was not cited by Evatt J in his review of authority in H A Stephenson & Son Ltd (In liq) v Gillanders, Arbuthnot & Co . I rather doubt that was inadvertence on that part of that learned judge, especially given that FEDFA v BHP was a judgment of the High Court. Be this as it may but perhaps explanatory of the omission of reference to it in the judgment of Evatt J, FEDFA v BHP stands for a quite different proposition in relation to conclusive evidence certificates than that for which the Commissioner has cited it. The proposition is that a certificate by an administrative official as to a matter, even if parliament has purported to give it a conclusive quality, cannot deprive a court of competent jurisdiction from determining the legality of that matter.

42. In FEDFA v BHP, the High Court answered a number of questions of law stated for the opinion of that court by the then Commonwealth Court of Conciliation and Arbitration. Before the latter court, which had (at least so it was thought at the time) jurisdiction to determine the issue, an objection had been taken that the FEDFA was incapable of being registered. That industrial organisation had in fact been registered by the industrial registrar. There was provision in the then Federal industrial legislation for the Registrar to issue a conclusive evidence certificate in respect of the registration of an industrial organisation. Before the Commonwealth Court of Conciliation and Arbitration this had been said to be a complete answer to the objection taken in respect of the FEDFA. One of the questions which fell for answering by the High Court was whether this certificate prevented the Commonwealth Court of Conciliation and Arbitration from determining whether the objection concerning the registration of FEDFA. It was held that it did not. The statement by Griffiths CJ, at 413, in that case that, " The notion that a certificate by the Registrar, which is a mere ministerial act, should have the effect of validating a thing which the law does not allow to be done is prima facie improbable " must be read in light of the jurisdictional context in which the question fell for answering. The present context

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is altogether different. Neither the Tribunal nor this Court has any jurisdiction to determine whether the Marks Partnership met all of the preconditions for registration under the 1988 Queensland Act .

43. There is no disharmony between Australian and overseas authority in relation to conclusive evidence certificates in relation to the incorporation of a body corporate or the registration of a partnership. Even in the absence of express provision, they also carry with them conclusiveness in respect of matters " precedent and incidental " . To construe them otherwise so as to permit post-registration collateral questioning, other than in a court or by an official of competent jurisdiction, of conditions precedent, is subversive of their policy rationale.

44. The Tribunal was, in my view, upon the tendering of the certificate from the Registrar given pursuant to s 8(3) of the 1988 Queensland Act obliged in fact and in law to conclude that the Marks Partnership was an association of persons with the characteristics described in the definition in s 995-1 of a " limited partnership " .

45. The Commissioner is no more entitled to assess, in contravention of facts proved by this certificate than, in the face of a certificate given by the Australian Securities and Investments Commission under s 1389 of the Corporations Act 2001 (Cth) ( Corporations Act ) in respect of the registration of a company, he would be entitled to assess the members of the company on the basis that the company ' s income is really theirs ' jointly, because of a view on his part that the required number of corporators had not in fact sought the company ' s registration. The ASIC certificate would oblige him to treat the income as that of the company. And the same would apply in respect of any review by the Tribunal of an objection decision affirming an assessment subversive of a certificate of incorporation.

46. That s 8(4) of the 1988 Queensland Act would operate in the same way and to the same end as a provision such as s 1389 of the Corporations Act was in the contemplation of the Queensland Law Reform Commission in the report which preceded the enactment of the 1988 Queensland Act : see Queensland Law Reform Commission, A Bill to Establish Limited Liability Partnerships , Working Paper No 27, July 1984, p 46 and the reference there to a predecessor to s 1389, being s 549 of the Companies (Queensland) Code .

47. There is, in my view, an analogy to be drawn between the position in which the Commissioner finds himself in this case in the face of the conclusive evidence certificate and the position in which the Commissioner found himself in
Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxes (South Australia) (1939) 62 CLR 545 . In that case, a State Supreme Court had determined the rights of beneficiaries under a will. The Commissioner was not a party to those proceedings but based his assessment of land tax on that determination. The taxpayers in that case submitted that the construction of the will adopted by the Supreme Court was wrong. In rejecting that submission, Latham CJ, at 561 - 562 observed:

But the commissioner cannot impose land tax upon interests in land which, if a contrary decision had been given, the taxpayer ought to have, but in fact does not have; nor can he impose tax upon income which the taxpayer does not derive but which, upon the hypothesis of a contrary decision, he would have derived.

See, also, per Dixon J at 569 - 570 and McTiernan J at 572.

In that case, the relevant right, which formed part of a taxable substratum, had been conclusively determined by a judicial determination in a court of competent jurisdiction. In this case, the relevant part of the taxable substratum is conclusively determined not by a judicial determination but rather by legislative provision and the consequential tender of a certificate given pursuant to that provision. Each, to adapt the language of Dixon J in that case, " controls the situation " . The underlying principle is no different. Absent anti-avoidance provisions, the Commissioner takes the taxable substratum, which includes taxable facts and matters arising under the general common and statute law, as he finds it and must assess accordingly.

48.

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It follows that the Tribunal should have concluded that the Marks Partnership was a corporate limited partnership in terms of s 94D(1) of the 1936 Act and, as a consequence, that it was entitled to be taxed as a company: s 94J of the 1936 Act .

49. On the view which I have reached as to the effect of the certificate, it is unnecessary to consider the alternative that the members of the Marks Partnership were " tax partners " . Necessarily, the s 109D issue does not arise.

50. The next issue is whether the Z class shares in HL Securities allotted to the Marks Partnership were a debt or an equity interest or both for the purposes of Div 974 of the 1997 Act ?

51. The appellants concede that the allotted Z class shares were an equity interest. Having regard to the meaning of equity interest in a company in s 974-70 and the test for an equity interest in s 974-75 of the 1997 Act , that concession was properly made.

52. That concession is not determinative, because in s 974-5(4) is to be found what Parliament has prosaically termed a " tie breaker " :

(4) If an interest satisfies both the debt test and the equity test, it is treated as a debt interest and not an equity interest.

So the question becomes whether the allotted Z class shares are also a debt interest, because they satisfy the debt test?

53. The test for a debt interest is found in s 974-20 of the 1997 Act , which Pagone J has excerpted in his reasons for judgment. For reasons which his Honour explains, of the elements of the test in s 974-20, only those in s 974-20(1)(b) and (c) were or remain controversial between the parties. In the circumstances of this case, if the appellants demonstrate that the Tribunal was in error in concluding that either or each of these elements was satisfied, its consequential conclusion that the debt test was satisfied will necessarily be in error.

54. As to s 974-20(1)(b), the Tribunal ' s conclusion (at [ 50 ] of its reasons) was that, by the allotment of the 10 Z class shares to the limited partnership, at a face value of $ 10, HL Securities received a " financial benefit " .

55. What constitutes a " financial benefit " is defined by s 974-160, which Pagone J has also excerpted. A feature of that definition is that it refers, materially, to " anything of economic value " .

56. The Tribunal concluded (at [ 50 ] of its reasons) that the payment of, or a liability to pay, $ 1.00 per share in return for the allotment of 10 Z class shares to the Marks Partnership indicated that HL Securities had received a financial benefit. The Tribunal considered that the sum of $ 10, paid or payable, was of economic value and hence a " financial benefit " to HL Securities. The Commissioner contended that this was correct.

57. The appellants ' submission was that the Tribunal ' s conclusion that HL Securities had received a financial benefit was necessarily predicated upon a preference for form over substance, which was antithetical, in the context of Div 974, to the concept of " economic value " .

58. As I understood it, the appellants ' submission was that the focus of Div 974, evident from s 974-5(1), on economic substance as the basis for distinguishing debt interests from equity interests carried with it ramifications as to the meaning that one afforded the adjective " economic " in governing the word " value " in the definition of " financial benefit " . From this it was said to follow that, when one had regard to the balance sheet of HL Securities as at the time of the allotment, which showed total assets of some $ 1.4 million and total equity of $ 1,111,434, the receipt (even if it was that) of $ 10 by HL Securities in respect of the allotment was, in substance, of no economic value when received. It was, so the submission went, in effect just a drop in the ocean.

59. This textually and contextually derived approach was said to be supported by passages in the relevant Explanatory Memorandum (extracted by Pagone J). I do not consider that these secondary materials either add to or detract from the appellants ' submission.

60. That " economic value " means something other than sentimental value may be accepted. Further, in the context of the debt interest test element found in s 974-20(1)(b), the question is has the relevant entity, here HL

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Securities, received or will it receive a financial benefit, something of " economic value " ? That means that the subject is not entirely an abstract one.

61. The point underlying the appellants ' submission was that, in its use of " economic substance " and " economic value " in Div 974, Parliament is directing recourse to economic or business concepts. They submitted that to treat " economic " just as a synonym for " monetary " , in the sense of capable of monetary measure, no matter how small, does not give effect to this direction. There is merit in this submission. Economic conceptualism is a feature of Div 974.

62. Given this feature of Div 974, there are subtleties about the term " economic value " which are not fully revealed just by recourse to standard dictionary definitions of the adjective, " economic " ( Macquarie Dictionary , (online edition) https://www.macquariedictionary.com.au/ viewed 1 June 2016 - " relating to the production, distribution, and use of income and wealth " ; Oxford English Dictionary (online edition) http://www.oed.com/ viewed 1 June 2016 - " of or relating to the management of domestic or private income and expenditure; relating to (personal) monetary considerations, financial " ). Those subtleties become evident when one looks to reference works about what is the meaning of " economic " and " value " when conjoined in the term, " economic value " . As found in the Cambridge Business English Dictionary, the term is defined as " the value of an asset calculated according to its ability to produce income in the future " : Cambridge Business English Dictionary (online edition) http://www.cambridge.org/gb/cambridgeenglish/catalog/business-professional-and-vocational/cambridge-business-english-dictionary viewed 1 June 2016. A similar meaning of " economic value " is offered by the Oxford Dictionary of Finance and Banking, " the present value of expected future cash flows " : Oxford Dictionary of Finance and Banking (4 th rev. ed, Oxford University Press, 2008, p 137).

63. Without more, these definitions, reflecting, as they do, understandings of the term, " economic value " derived from usage in business and finance and in economic theory and practice, suggest that something will have economic value if it has income earning potential and that one values it by reference to the present value of that potential.

64. However, the term, " economic value " must also be construed in context. Within Div 974, that context relevantly includes s 974-35(1)(a).

65. There is a direction in s 974-35(1)(a)(i) that " the value of a financial benefit received or provided under a scheme " is " its value calculated in nominal terms if the performance period … must end no later than 10 years after the interest arising from the scheme is issued " . " Nominal value " is used in contradistinction to " present value terms " , which is the calculation method ordained in respect of those cases to which s 974-35(1)(a)(ii) applies (which have a " performance period " greater than 10 years).

66. The Tribunal thought its approach was in accordance with s 974-35(1)(a)(i). And so the Commissioner contended. But it remains the case that it is a " financial benefit " as defined which must be valued in accordance with the direction found in s 974-35(1)(a)(i), not that term as undefined. And the definition of " financial benefit " - " anything of economic value " - does not change according to whether the applicable calculation method is that found in s 974-35(1)(a)(i) or s 974-35(1)(a)(ii).

67. When the specialist meanings that the term " economic value " generally carry are understood, the reference to nominal value as a method of calculating economic value in s 974-35(1)(a)(i) may well to economists or some in banking or business introduce a confusion of concepts. Even so, there is a need, if possible, to reconcile the provisions within Div 974. That Parliament has introduced nominal value as an alternative in some cases to present value as a method of calculating the value of a thing of " economic value " does suggest that the specialist meanings to which I have referred cannot apply in their full rigour. The term " economic value " in the definition of " financial benefit " must therefore carry a meaning at a more general level of abstraction. The point though remains that unless the thing which is said to be a financial benefit is one of

ATC 18776

" economic value " , and that the relevant entity has received or will receive " economic value " , it does not fall within the debt interest test element found in s 974-20(1)(b) at all.

68. To accommodate each of the valuation calculation methods, the present value element, which would otherwise be a feature of a specialist meaning of the term, " economic value " must necessarily be excised. Even so, the term must still carry with it a qualitative connotation in keeping with the economic conceptualism which is a feature of Div 974. It is possible to derive a meaning of " economic value " at a more general level of abstraction which is consistent with economic theory.

69. According to the internet based, Business Dictionary.com (online edition) http://www.businessdictionary.com/definition/value.html, viewed 1 June 2016, " value " in economics is:

The worth of all the benefits and rights arising from ownership. Two types of economic value are (1) the utility of a good or service, and (2) power of a good or service to command other goods, services, or money, in voluntary exchange.

70. This definition of " economic value " sits well with the discussion of value by the Scottish economist and philosopher, Adam Smith, in his classic work, The Wealth of Nations (5 th ed, Metheun & Co Ltd, 1776) at ch 5, http://www.econlib.org/library/Smith/smWN2.html # B.I, % 20Ch.7, % 20Of % 20the % 20Natural % 20and % 20Market % 20Price % 20of % 20Commodities viewed 1 June 2016: See Book 1, ch 5, where Smith moves from the labour required to obtain a thing to exchange as a measure of value. It is that work which is generally regarded as the foundation of modern economics (The New Encyclopaedia Britannica, " Economic Theory " , (15 th ed, Encyclopaedia Britannica Inc., 1990) vol 17, p 942).

71. From this, the meaning which I derive for " economic value " is value either in terms of the use to which a thing can put or in terms of its ability to be exchanged for other goods or services.

72. This is not the approach which the Tribunal adopted. Rather, what the Tribunal did was to conflate the measure of value with the relevant " thing " , two separate although not unrelated issues. It looked just to a nominal, monetary value without first asking whether the thing received or which will be received was of " economic value " at all. On this approach, one might say that the receipt of a 5c coin, the lowest in the Realm, for the allotment of a share would have economic value but it is extremely difficult to see that such a receipt would be of any economic value in the sense described. A fortiori this is so when its economic value is examined from the perspective of the relevant entity recipient, in this case HL Securities. In the same way, the receipt of $ 10 for the allotment of 10 shares is, effectively, worthless, both in an absolute sense and even more so to a company with net assets of $ 1,111,434 and issued and paid up capital of $ 763,835 (HL Securities Pty Ltd Financial Statements for the year ended 30 June 2004 - Appeal Book, tab 4.133).

73. The appellants also sought to rely upon certain observations made by Barwick CJ (with whom McTiernan J agreed) in
Ord Forrest Pty Ltd v Commissioner of Taxation (1974) 130 CLR 124 ( Ord Forrest ). Before turning to those observations, it is necessary to understand the context in which they were made.

74. Ord Forrest was a gift duty case. The Commissioner had issued an assessment predicated on the proposition that an allotment of eight (8) ordinary shares of $ 1, at a premium of $ 99, in circumstances where, on a winding up, the holder of those shares would be entitled to receive all of the assets of the company, less a sum representing the par value of the company ' s issued preference shares. The amount of the alleged gift was calculated by deducting from the total assets of the company the total of an amount in respect of the rights of the preference shareholders and the amount in consideration of the allotment of the eight (8) ordinary shares.

75. In the original jurisdiction Stephen J dismissed the challenge to the gift duty assessment. On the subsequent appeal, the Full Court of the High Court was evenly divided. Barwick CJ and McTiernan J were disposed to allow the appeal and Gibbs and Mason JJ were

ATC 18777

disposed to dismiss it. By statute, that even division of judicial opinion meant that the appeal was dismissed.

76. While the observations made by Barwick CJ formed part of a chain of reasoning that led to his conclusion about the merits of the gift duty assessment, they state a number of propositions the correctness of which is not, in my view, affected by the outcome of the appeal. Those observations with some necessary addition so as better to give context to them, were:

at 140:

The assignment of a money sum to the shares in the capital of a company incorporated with limited liability under the company legislation performs several functions in the structure and operation of the company. The amount at which the share is rated in the capital of such a company sets the upward limit of the amount the shareholder can be called upon to contribute to the company ' s financial affairs: it also operates, along with the number of shares respectively held by shareholders, to fix their relative participation in the assets and income of the company so far as they are at any time distributed by the company. But, in my opinion, that sum, though spoken of as the " par value " of the share, is not in any presently relevant sense the value of the share, nor in any proper sense is the amount paid on allotment a price paid for the share. The amount is the contribution to the capital of the company which the company requires for the possession of a share in that capital. The amount paid on allotment is a liability of the company, so shown in its balance-sheet .

…

at 141:

There is, in my opinion, no necessary relationship between the amount paid for or paid up upon a share in a company and the value of that share. There may be no exclusive method of determining that value but at any rate it is not to be ascertained by finding the " par value " or the amount paid on allotment for a fully paid up share.

…

at 142:

A company in allotting a share in its capital does not sell or transfer the share. Having its capital divided into shares of a nominal or par " value " , it allots a share to an applicant therefor on payment of a sum of money. In no sense, in my opinion, is there a transfer or alienation of property by the allotment: nor is the allotment money what it purports to be - a contribution to the capital of the company. It is not in any relevant sense a consideration. The company does not part with any property, though by the allotment it diminishes its capacity to continue to allot shares: i.e. it reduces the amount of its unissued capital. But, of course, taking suitable steps, it may increase that capital. When it does so, it does not increase its property any more than it diminishes its property when it allots a share.

[ Emphasis added ]

77. The appellants ' point was that, when these observations about par value were taken into account, " it is plain that the issue price [ for the allotted Z class shares ] was not a financial benefit to the issuer " . They did not, in their submissions, seek to develop any argument, based on Ord Forrest and the net assets of HL Securities at the time, that, to allot a Z Class share just for $ 10, given the rights attached to that share, was effectively to confer a gift on the Marks Partnership and thus that the payment or amount payable in return for that allotment was of no economic value to HL Securities, perhaps even a detriment. Such an analysis of the facts does not seem to have been pursued by the appellants before the Tribunal. In a matter of this kind that would be the place for any such factual evaluations and conclusions.

78. Neither did the appellants advance a submission that the amount paid on the allotment was, in law, a liability of the company and thus of no economic value to it. Rather, the point of the reference to Sir Garfield Barwick ' s observations seems to have been that

ATC 18778

the par value of a share was not in any sense a measure of its value. That is true. But the relevant questions were whether the amount paid or payable to HL Securities for the share allotment was of economic value as received and, if so, of what value?

79. Of greater assistance, given that it is the relevant entity which must be held to have received (or will receive) something of economic value are cases decided in the Family Court on the subject of value to an owner, which take into account additional economic benefits which are conferred by ownership of that thing. This has particularly arisen in that court in relation to rights conferred by the ownership of shares in proprietary companies, even if the open market value of those shares may be modest: see, for example,
Reynolds and Reynolds [ 1985 ] FLC 91-632 at [ 80111 ] ;
Turnbull and Turnbull [ 1991 ] FLC 92-258 at [ 78738 ] and
Harrison and Harrison [ 1996 ] FLC 92-682 at [ 83087 ] . The related rights may give particular shares economic value if received or held even though those shares may not be readily realisable or only of modest value on an open market. Of course here, HL Securities allotted rather than received shares. Nonetheless, for it, what was paid or payable in return for that allotment was so inconsequential as necessarily to be of no " economic value " .

80. As it is then, acceptance of the appellants ' textual and contextual submission as to the meaning of " economic value " is sufficient to show that the Tribunal erred in law in relation to its conclusion with respect to s 974-20(1)(b).

81. I turn then to s 974-20(1)(c) of the 1997 Act . One reason why the Tribunal ' s conclusion that this element was satisfied was in error flows from the error which it made in concluding that HL Securities received any financial benefit. In the absence of any such benefit, neither of the specified conditional alternatives in s 974-20(1)(c) could be applicable. I took this to be a facet of the appellants ' submission that, if the $ 10 for the allotment for a Z class share were not paid (and the Tribunal recorded an absence of satisfaction in this regard at [ 50 ] ) s 974-20(1)(c) could not be satisfied. But even if it were paid, on the true meaning of " economic value " , there was no financial benefit.

82. This aside, the appellants ' submission that the amendment of HL Securities ' constitution so as to make provision for the Z class shares did not create an effectively non-contingent obligation should be accepted.

83. The meaning of the term, " effectively non-contingent obligation " is supplied by s 974-135. The Tribunal ' s reasons for its conclusion that there was such an obligation are, with respect, compressed. They do not engage with the detail of the term as defined but are said to reflect a view reached as to the effect of the amendment to the constitution.

84. A number of contingencies are evident on the evidence before the Tribunal:

(a) having regard to the terms of the amendment to the company ' s constitution, the Z class shares could cease to exist at the end of 47 months, " whether or not its redemption price has been paid " ;

(b) by cl 6.1 of the company ' s constitution, shares are in the control of the directors, who have a power to forfeit shares for non-payment of a call (cl 13 and 21 of the constitution), in which event, the redemption price would not be paid (and note also cl 16, by which a sum payable on allotment of a share is taken to be a call); and

(c) if the " financial benefit " is not the redemption price but rather dividends, whether or not these are ever paid depends on a resolution of the directors (cl 102.1) and whether there are any profits to form the basis for such a resolution.

85. As to the last of these contingencies, s 974-135(3) must be taken into account:

An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation.

The " ability " to pay a dividend might be regarded as referring to a power to pay a dividend and a " willingness " might be regarded as a disposition by the directors to

ATC 18779

pass the requisite resolution. Even so, if the " economic performance " of the company were such that there were no or no sufficient profits the dividend could not be paid. To equate " ability " with the existence of profits would be to subvert the deliberate inclusion of economic performance as a contingency.

86. For these reasons, the Tribunal erred in law in concluding that s 974-20(1)(c) was satisfied.

87. It follows that the Tribunal was in error in concluding that the debt test was satisfied. The Z class shares in HL Securities did not constitute a debt interest, only an equity interest. That has the consequence that any recipient of the dividends in respect of those shares, be that the Marks Partnership or otherwise, was entitled to the benefit of the related imputation credits.

88. As to the adequacy of the Tribunal ' s reasons, I have already described them in one respect as compressed. They are though comprehensible and do address the issues which fell for determination. Further, their adequacy must be measured against the way in which those issues emerged and related proofs were offered in the particular case. When that is taken into account and for the reasons which Pagone J gives, I do not consider that the reasons of the Tribunal failed to meet the statutory minimum (s 43(2B), AAT Act). Some might think that is to damn them with faint praise but the Tribunal was required to do no more than this, however much others might have chosen to offer a more detailed treatment of the submissions and issues. It is not a matter of deciding whether the reasons would warrant a grade of pass conceded or a pass with high distinction or a grade in between, only whether they meet that statutory minimum.

89. For the reasons set out above, I am in respectful disagreement with Pagone J both as to the limited partnership issue and the debt interest issue. That is in contrast with Griffiths J, who does agree with Pagone J on these issues.

90. On the view which I have reached in respect of these issues, there could be no administrative penalty under Div 284 of Sch 1 to the Administration Act . I would allow the appellants ' appeals in full.

91. Were it necessary to consider the administrative penalty issue, and in the view of the majority it is, Griffiths J has identified and then elaborated upon five bases which cause him to disagree with the analysis of Pagone J in relation to that issue. With respect, I likewise disagree with Pagone J, for the five bases identified by Griffiths J and those which I set out below.

92. On the authorities, the test with respect to a " reasonably arguable position " is an objective one. On the corporate limited partnership issue, the appellants ' " position " was that a certificate given under s 8(3) of the 1988 Queensland Act was, given the conclusiveness for which s 8(4) of that Act provided, determinative of the status of the Marks Partnership as a corporate limited partnership. It had no need before the Tribunal, which stood in place of the Commissioner in respect of penalty as well as tax liability issues, to make other than a formal submission that its position was reasonably arguable, because its position had already been made clear in the " carefully and skilfully " presented submissions (Tribunal reasons at [ 73 ] ) made in relation to the effect of the certificate. Necessarily, that formal submission was a submission that the Tribunal ought to conclude, on the basis of those submissions, that the position was reasonably arguable.

93. Objectively, the appellants ' position on this issue was always at least reasonably arguable, as it was in respect of the other controversial issues. Indeed, for all of the reasons set out above, I consider the appellants ' positions to be the correct ones.

94. As to the conclusiveness issue, the authorities discussed reveal that the extent to afford certificates conclusiveness has been an enduringly controversial issue for at least 150 years. When the course of authority over this time is recalled and with all due respect to the Tribunal, the appellants ' position about the effect of the certificate hardly entailed, as the Tribunal described it, a " strained construction " .

95. Because the appellants ' positions were reasonably arguable, no " shortfall amount " could arise, unless an alternative

ATC 18780

foundation existed. The existence of that shortfall is a pre-requisite to the ascertainment of a base penalty amount: see ss 284-75(2), 284-80 and 284-90 of Sch 1 to the Administration Act . One alternative foundation for a shortfall amount can be the making of a false statement to the Commissioner: ss 284-75(1) of Sch 1 to the Administration Act . Here, upon the view reached by Pagone and Griffiths JJ in relation to grounds 1 to 5, an alternative foundation does exist, because it necessarily follows from that view that the appellants made a false statement to the Commissioner. What is " reasonably arguable " and what is a failure to take " reasonable care " are two different concepts:
Commissioner of Taxation v Traviati (2012) 205 FCR 136 at 144, [ 36 ] - [ 37 ] . The appellants did not choose to contest their liability to penalty on the basis that they took reasonable care. Thus, on the basis that it is necessary to consider ground 6, I agree with Griffiths J that the appellants have not shown a sufficient basis upon which to set aside or vary the administrative penalties. To conclude that their position was reasonably arguable neither removes the alternative false statement foundation nor demonstrates that they took reasonable care. Pagone J has set out something of the history of the present administrative penalty regime. It is possible further to trace that history to the penalty and remission regime found in ss 226(2) and 226(3) of the 1936 Act as originally enacted. That provided for a fixed penalty formula, subject to a minimum penalty ( £ 1), coupled with a discretion on the part of the Commissioner to remit that penalty for reasons which he thought fit. Over time and for reasons of good public administration the Commissioner developed guidelines in an endeavour consistently to inform the exercise of that discretion but reserving always the application of common sense in the circumstances of an individual case. We have now in Sch 1 to the Administration Act and at elaborate length an intricate, codified form of what were once only terse guidelines but with the notable omission of common sense. That there can be differences such as those exposed by the present appeal as to whether a position is " reasonably arguable " ought to give pause for thought about whether, truly, the current regime is an improvement over the historic.

 

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