Anglo American Investments Pty Ltd (Trustee) v FC of T

Members:
Logan J

Tribunal:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2022] FCA 971

Decision date: 19 August 2022

Logan J

1. Anglo American Investments Pty Ltd ( Anglo American ), in its capacity as trustee of the Anglo American Charitable and Cultural Trust ( AA Trust ), has exercised the right of appeal conferred by s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) ( TAA ) to appeal to the Court against an objection decision of the respondent Commissioner of Taxation ( Commissioner ) dated 1 June 2018.

PROCEDURE FOR DETERMINING APPEAL

2. Save where necessary separately to identify Anglo American or where context otherwise indicates, references in these reasons for judgment to the AA Trust are to be read as a reference to Anglo American in its capacity as trustee of the AA Trust. It is convenient to adopt that approach because, under Australian income tax law, the income of a trust estate falls for assessment and taxation as if the trust concerned were a separate legal entity, rather than, as is a trust under the general law, just fiduciary obligations assumed by or imposed on a person in relation to particular property.

3. For like reasons, and after identifying the trustee concerned, I have adopted this same practice in relation to other trusts relevant to this proceeding.

4. Although the TAA terms the chosen means of challenge an "appeal", the proceeding is one heard in the Court's original jurisdiction. The proceeding involves a determination by the Court about whether, on the evidence and having regard to the grounds of objection and the applicable taxation law, an applicant has proved the assessment(s) concerned to be excessive: s 14ZZO, TAA. In recognition of this feature, the initiating party, is termed an "applicant", rather than an "appellant" under the rules of court.

5. As to any facts entailed in this proof and because the proceeding is civil in character, it is both necessary and sufficient for an applicant to satisfy the Court of those facts on the balance of probabilities: s 140(1), Evidence Act 1995 (Cth)

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( Evidence Act ). Some facts I am asked by the Commissioner to find would entail conclusions that fraud or falsification of documents has occurred. Such conclusions may not be reached without adverting to the factors set out in s 140(2) of the Evidence Act. I have taken such factors into account in relation to whether to make any such conclusions.

6. At the time when judgement was reserved in this proceeding, the parties jointly requested that it be determined at the same time as the then pending and now heard separate taxation appeals (proceedings QUD 513 of 2018 and QUD 399 of 2019) were determined. This was because of an overlap, albeit not a complete symmetry, in relevant evidence and because an issue common to each proceeding was the credibility of a principal witness for the applicant in each proceeding, Mr Vanda Russell Gould ( Mr Gould ). The parties jointly requested that the Court's original jurisdiction in each proceeding be exercised by the same judge. It was not possible for all of the proceedings to be heard at the same time.

7. The adoption of such a procedure can be fraught to say the least, because it may give rise to an apprehension of bias:
Getswift Ltd v Webb (2021) 283 FCR 328. Pragmatic reasons intruded into this request and, given that it was jointly made by independently advised parties, my acceptance of it. At the time when the joint request was made, there was (and remain) a finite number of judges assigned to the Court's Taxation "National Practice Area". One had already heard a case in which Mr Gould was a witness. At the time, some other judges had such cases pending. It was therefore desirable to minimise the possibility that adoption of a rule of necessity might have to be considered, should it become necessary to constitute a Full Court for the purpose of exercising appellate jurisdiction. In those circumstances I considered it to be in the interests of justice that I hear and determine this proceeding, together with the related proceeding.

8. Given the course adopted and the reasons for it, it should not be left to assumption that, for the purpose of determining this proceeding, I have had regard solely to the evidence tendered and admitted in this proceeding. This proceeding must, and has been, determined solely by reference to that evidence alone. I have paid no regard to the evidence tendered in the proceeding later heard by me. It is not relevant. Nor have I had any regard to conclusions reached in relation to Mr Gould's evidence either by me in relation to the later heard proceeding or in any other taxation appeal already heard and determined by the Court. These, too, are not relevant.

9. A consequence of the course requested by the parties and adopted by me has been that judgment in this proceeding has been delivered later than would otherwise have been the case. Generally, in cases where questions of credibility arise, it is not desirable that judgement be reserved for such a lengthy period. Each party to this proceeding, for its or his own reasons nonetheless requested the adoption of a procedure which would necessarily entail a longer than usual reservation of judgement. A permitted re-opening of the proceeding has also contributed to the delay in its determination. As it happens, and quite apart from the benefit of extensive, contemporaneous trial notes, Mr Gould made an indelibly enduring impression on me throughout the course of his oral evidence.

ASSESSMENTS, OBJECTION AND ISSUES

10. By his objection decision, the Commissioner disallowed in full the AA Trust's objections to, and instead confirmed, the following assessments:

11. The AA Trust seeks to prove that the income tax assessments are excessive (and thus that there were no shortfalls to attract penalties) by establishing that it was, in the income years in question, entitled to certain deductions under s 8-1 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ). In respect of some of the claimed deductions, those concerning alleged bad debts written off, s 25-35 of the ITAA 1997 is also relied upon.

12.

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The deductions claimed fall into three broad categories:

13. Although it is necessary to reach a conclusion specific to each claimed dedication, it does not follow that evidence led in relation to one such deduction is completely irrelevant to one or more of the other claimed deductions. In particular, conclusions I have reached as to Mr Gould's credibility, the reliability of various general ledger entries or general practices have been informed by an assessment of the whole of the evidence. Ultimate control of particular entities is also an overlapping issue.

14. It was submitted on behalf of the AA Trust that it was a "distraction" to make findings in relation to the nature and extent, if any, of Mr Gould's involvement with or control over a number of companies shown on the evidence to have an interest, direct or indirect, in a party to an alleged transaction which was said to have resulted in one or more of the deductions claimed. More particularly, it was submitted that whether Mr Gould was the owner of the Cayman Islands incorporated company, JA Investments Limited ( JA Investments ) and whether Mr Gould was the owner of HWBB, or just the person who initiated HWBB's transactions, and the precise relationship between Mr Gould and two overseas businessmen, Mr Ian Gowrie-Smith ( Mr Gowrie-Smith ) and Mr Peter Borgas ( Mr Borgas ) were "distractions". It was put that, "These topics are too nuanced and complex to support a meaningful inference about Mr Gould's credibility as a witness". It was also submitted, and the fact is, that there are other proceedings in the Court, one to which Mr Gould personally and the Commissioner are parties and other audits conducted by the Commissioner in which such issues are not "distractions" but central.

15. Merely because some factual issues may be at large both in this proceeding and another is no reason not to resolve such an issue for the purpose of this proceeding if, truly, the resolution of that issue is relevant to whether, in this proceeding, the AA Trust has proved the assessments concerned to be excessive. Any such conclusion is res inter alios acta in another taxation appeal brought by a different applicant. That extends to the taxation appeals later heard by me. By agreement between the parties, the evidence tendered and admitted in this proceeding forms part of the evidence in those later heard proceedings. But it may be that, taken in conjunction with other evidence, including oral evidence, different conclusions are open in those later proceedings and reached, assuming those same issues are relevant in those later proceedings.

16. One, but by no means the only basis upon which the Commissioner submitted that the assessments were not proved to be excessive was that, on detailed analysis, Mr Gould was a pervasive, controlling, interested presence and the alleged deductions were the product of ex post facto, fiscal opportunism rather than contemporaneous legal relationships. In short, the Commissioner sought to paint Mr Gould as a fiscal Svengali. In truth, what the AA Trust terms a "distraction" is what the Commissioner terms

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a relevant, wider context. That wider context is, indeed, relevant.

17. Consideration of the deductions claimed in the wider context in which they occurred necessarily entails, in relation to each deduction claimed, detailing the ownership and control, including the making of findings on such subjects where controversial, of a large number of corporate actors, as well as detailing the roles undertaken by a number of individuals apart from Mr Gould.

MR GOULD AND HIS EVIDENCE

18. Before turning to individual deduction claims, it is desirable to make some general observations about Mr Gould as a witness.

19. The bulk of Mr Gould's evidence in chief was given by affidavit. However, I had the benefit of observing him over an extended period in which he gave oral evidence. His evidence was subject to a direction made pursuant to s 128 of the Evidence Act. In respect of his evidence in chief, Mr Gould was the subject of a wide-ranging, meticulously prepared and carefully conducted cross-examination, as well as a considered re-examination.

20. Mr Gould combines formal, post-graduate education in commerce with lengthy practical experience as a chartered accountant. He was an astute, engaged and engaging witness, of obvious high intelligence, possessed of great powers of sustained concentration, notwithstanding the length and detail of his cross examination. He was obviously well aware of the taxation consequences of particular types of receipts or expenditures. When he disagreed with propositions put to him in cross examination, which was not an infrequent occurrence, he did so firmly but politely. He was steadfast in this but this was, as a matter of distinct impression by observation, and with all respect to Mr Gould, tinged with a degree of stubborn pride, sometimes even superiority, in relation to counsel. The stubbornness was, I thought evident, when he was confronted in cross-examination, more than once, with documentary evidence inconsistent with his affidavit evidence or other explanations.

21. My impression in respect of these latter qualities was formed when observing, and listening to, his evidence on subjects such as to how he came in his various affidavits, long after an event, to offer transactional explanations, how apparently inconsistent financial records were to be explained, how recorded and claimed amounts of interest or management fees had come to be fixed, whether and to what extent he controlled various entities, steps taken for what was said to be "asset protection" in the early 1990s in the context of his and his then wife's divorce and matrimonial property proceedings in the then Family Court of Australia and whether the character of particular transactions was an ex post facto characterisation by him. All of this, and more, was the subject of detailed submission by the Commissioner in relation to Mr Gould's credibility.

22. As is revealed below, there is a good deal of merit in the Commissioner's submission on the subject of Mr Gould's credibility. The Commissioner went as far as to submit that Mr Gould had been actively dishonest both in respect of the claimed deductions, which were said to be grounded in sham transactions, and in his evidence relating to them. There was certainly a proper basis for the making of such a submission. It is clear that Mr Gould was a decisive presence in relation to various corporate actors. I do consider that there was a good deal of reconstructive extemporising from documents in Mr Gould's evidence, rather than truly recalled events, although less so, I thought, in relation to dealings between the AA Trust and HWBB. As I highlight below, Mr Gould was in effective control of each. HWBB was an important source of funds for the AA Trust for many years. Mr Gould had every reason to have a good, independent recollection of their dealings and, I thought, displayed that.

23. My mind has truly fluctuated as to whether Mr Gould's evidence about management fee, interest and other deduction claims was actively dishonest or just the result of his closing his eyes to the obvious and operating on a belief held at the time when particular deductions claimed, and still held, that he could equate deduction pretence with reality. In
Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265, at 279, Windeyer J referred to a belief, "that by doing what he did he could somehow make appearance and pretence into reality. In this he was not

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dishonest or fraudulent, merely mistaken". A finding that an alleged transaction or other state of affairs is a sham may, but need not, entail a finding of fraud or dishonesty on the part of the relevant human actors.

24. A tempering consideration in relation to a conclusion of dishonesty or fraud in relation to Mr Gould is that he is not by training or experience a lawyer. He is, however, a well-qualified and experienced chartered accountant and, as I have already indicated, displayed a good knowledge of the taxation consequences of particular transactions.

25. Recently, in
Stubbings v Jams 2 Pty Ltd (2022) 96 ALJR 271, at [165] - [166], Steward J drew attention to the understanding expressed by the High Court in
R v Crabbe (1985) 156 CLR 464 ( Crabbe ) of what in law constitutes "wilful blindness". In Crabbe, at 470, Gibbs CJ, Wilson, Brennan, Deane and Dawson JJ stated that "wilful blindness" exists:

When a person deliberately refrains from making inquiries because he prefers not to have the result, when he wilfully shuts his eyes for fear that he may learn the truth, he may for some purposes be treated as having the knowledge which he deliberately abstained from acquiring.

In that same case, at 470 - 471, their Honours also cited with approval this description of "wilful blindness" offered by Professor Glanville Williams:

A court can properly find wilful blindness only where it can almost be said that the defendant actually knew. He suspected the fact; he realised its probability; but he refrained from obtaining the final confirmation because he wanted in the event to be able to deny knowledge. This, and this alone, is wilful blindness. It requires in effect a finding that the defendant intended to cheat the administration of justice.

26. As I detail below, again and again in this case I was exposed to evidence in respect of deductions claimed where it was inherently improbable that the alleged expenditure liability concerned, if it was incurred in the amount claimed or at all to the entity concerned, was incurred prior to the close of the income year in relation to which the deduction was claimed. This pattern occurred in circumstances where Mr Gould was the relevant directing mind and will. And yet in listening to his oral evidence, and reflecting upon his evidence and the evidence as a whole, I was left with the strong and distinct impression that, for all of his knowledge and experience, he had convinced himself that it was possible, in relation to entities which he controlled and by an act of will on his part, to designate, after the end of an income year, that those entities had been in a particular relationship, and incurred particular liabilities in particular amounts, during that income year. That act of will then seemed to have been carried over into entries in general ledgers. I am not persuaded that he was actively dishonest. However, given his knowledge and experience and understanding of tax consequences of particular expenditures, I am quite sure, even allowing for the strictures of s 140(2) of the Evidence Act, that, again and again, he has closed his eyes to the obvious to the point of wilful blindness. In respect of the deduction claims concerned, it is not necessary to go further in order to hold that the AA Trust has not proved the assessments to be excessive.

27. I was disposed to reach this conclusion as to Mr Gould's overall credibility in any event on the evidence led prior to granting leave on 5 August 2021 to re-open the hearing of this proceeding: see
Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCA 974. I have additionally taken into account evidence, documentary and oral, introduced as a sequel to the order then made in deciding whether in any way to alter this conclusion.

28. Including evidence introduced on re-opening, the following emerged. At the time when Mr Gould initially gave evidence in this proceeding, he was the subject of a then unresolved criminal proceeding in the District Court of New South Wales. The indictment presented by the Crown in right of the Commonwealth in that proceeding alleged that he had attempted to pervert the course of justice, contrary to s 43 of the Crimes Act 1914 (Cth). The conduct particularised related to an attempt to influence Mr Borgas (of whom more below by reference to the evidence led in the present proceeding) in relation to oral evidence Mr Borgas was to give in a taxation appeal proceeding in this Court. Initially, a trial on this

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indictment resulted in a hung jury. A second trial was held in which the jury returned a verdict of guilty. On 17 December 2020, Mr Gould was sentenced to a term of imprisonment of 3 years and 4 months with a non-parole period of 1 year and 8 months to commence on 11 May 2020. Mr Gould sought leave to appeal against his conviction and appealed against the sentence imposed. The Crown also appealed against the sentence imposed. On 10 May 2021, the New South Wales Court of Criminal Appeal refused Mr Gould's application for leave to appeal against his conviction and also dismissed his appeal against the sentence. The Crown's sentence appeal was successful. The sentence imposed on 17 December 2020 was quashed. In lieu, Mr Gould was sentenced to a total term of imprisonment of 6 years, commencing on 11 May 2020 and expiring on 10 May 2026, comprising a non-parole period of 3 years and 6 months and a balance of term of 2 years and 6 months.

29. The outcome of these criminal proceedings was tendered, and could be admitted, solely in relation to credit. The reasons for judgment of the New South Wales Court of Criminal Appeal are not at all relevant. All that is relevant, and then only as to credit is the ultimate outcome in terms of conviction and sentence. Since then, Mr Gould has made a second, presently unresolved application to the New South Wales Court of Criminal Appeal for leave to appeal against his conviction.

30. However that may be, the position which presently obtains is that Mr Gould is a person who has been convicted of an attempt to pervert the course of justice in relation, as it happens, to a taxation appeal in this Court. Necessarily, the conduct with which this criminal proceeding was concerned occurred after the events which are at issue in this proceeding. As I have mentioned, even before this evidence was admitted, my mind had fluctuated as to whether Mr Gould was actively dishonest. Of course his conviction, in conjunction with evidence earlier tendered, could admit of a conclusion of active dishonesty, both in relation to earlier accounting for and claiming of particular types of expenditures and in giving later evidence about them. Equally however, there is no necessary symmetry between years later dishonestly seeking to influence a witness and a years earlier, mistakenly (to the point of wilful blindness) held view as to what was permissible in relation to a deduction claim. As to Mr Gould's credibility, the end result, on the whole of the evidence, remains as I have indicated above. Even on the basis of this conclusion, a corollary is that the accuracy of descriptive entries in various accounting records for which Mr Gould had supervisory responsibility is not to be regarded as reliable. I give numerous examples below of why this is so.

31. I turn now to consider each group of deductions claimed.

MANAGEMENT FEES

32. In respect of the 2007 income year, the AA Trust claimed as a deduction under s 8-1 of the ITAA 1997 an amount of $123,276.00 in respect of "management fees". This was said to be an amount owed to Southsea Investments Pty Ltd (subsequently renamed Southsea Nominees from 27 October 1998) as trustee for the Gould Family Trust ( GF Trust ).

33. Southsea Investments was trustee of the GF Trust from June 2001 until after the last of the income years with which this proceeding is concerned, the 2009 income year.

34. It was common ground that Mr Gould controlled both the AA Trust and the GF Trust.

35. Also in respect of the 2007 income year, the AA Trust claimed as deductions the following expenses:

36. In respect of the 2007 income year, the total of deductions claimed by the AA Trust was therefore $123,548.

37. As it happened, in respect of that same income year, the declared assessable income of the AA Trust was $123,548. That assessable income comprised interest recorded in the general ledger of the AA Trust as owed to it by Melbourne Insurance Co Pty Ltd ( Melbourne Insurance ).

38. Melbourne Insurance was another company controlled by Mr Gould.

39. The claimed management fee is the next (and last for the financial year) journal entry in that ledger. As recorded, it has the effect of increasing the debt owed by the AA Trust to the GF Trust.

40.

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It is opportune at this juncture to make reference to a submission by the Commissioner about the obscuring of the date ("5/08/201") on the general ledger of the AA Trust.

41. Such obscuring was characteristic of ledgers in evidence. These ledgers were printed out by Mr Ben Jones ( Mr Jones ), a then recently admitted solicitor employed by the firm acting for the AA Trust, who was engaged to undertake various record retrieval and summation tasks on behalf of the AA Trust. Mr Jones gave evidence in the proceeding. I thought he gave honest evidence in relation to the record retrieval and preparation of summary tasks consigned to him. Notably, he was not asked by the Commissioner to explain the obscuring mentioned. More particularly, it was not put to him that he had deliberately done this, either of his own volition or at the request of Mr Gould. Nonetheless, the Commissioner sought to make something sinister of this on the part of Mr Gould, who could not offer a definitive explanation in respect of the obscuring. But there was no evidence led of any tampering with the accounting software programme (MYOB) used for the storage and retrieval of the ledger data or of some manual process of redaction. The precise year omission in relation to print date is just unexplained.

42. Fabrication of the books of a corporation is a federal offence: s 1307, Corporations Act 2001 (Cth) ( Corporations Act ). Further reflection on the ramifications of such conduct, if proved, in respect of an exercise of Commonwealth judicial power would doubtless disclose other offences applicable to such conduct.

43. In the course of cross examination, Mr Gould accepted that an invoice dated 30 June 1994 for $1,000,000, which had been submitted to the Commissioner in respect of management fees as between other entities was "false" and had not been created on the stated date. That admission was consistent with the letterhead displaying a telephone number which did not exist as at the purported date of the invoice. His precise involvement in the creation of this false invoice is unclear. However, the provision of the false invoice to the Commissioner occurred after the issuing of an assessment in respect of an alleged understatement of income in the 1994 income year and so as to support an objection against that assessment.

44. It was put that the obscuring of the print year was serious, because alterations might have been made to a ledger at any time prior to their being printed out and disclosed to the Commissioner and then tendered. In truth, however, there is nothing in terms of any involvement of Mr Gould in the obscuring which rises beyond "inexact proofs, indefinite testimony, or indirect inferences":
Briginshaw v Briginshaw (1938) 60 CLR 336, at 362. Having regard to s 140(2) of the Evidence Act, that is no basis for the drawing of any sinister inference and I draw none in respect of the obscuring of the print year in the ledgers. Neither, in any event, is it necessary so to do to determine the fate of the claimed management fee (or other) deductions. That is because it does not follow from an absence of any sinister quality in the obscuring of a print year that what is recorded in a ledger should be accepted as accurate, be that for tax purposes or otherwise.

45. Taken in conjunction with the other deductions claimed in that income year, the claimed management fee was fixed in an amount which resulted in a nil taxable income for the AA Trust for the 2007 income year.

46. A management fee in the amount of $123,276 is recorded as an expense in the profit and loss statement for the AA Trust for the 2007 income year.

47. In respect of the 2007 income year, no corresponding management fee was recorded in the financial statements of the GF Trust. However, a management fee in a corresponding amount was included in the assessable income of the VR Gould Family Settlement Share Trust ( Gould Share Trust ) for the 2007 income year. Yet no management fee income was included in the financial statements of the Gould Share Trust for that year.

48. The trustee of the Gould Share Trust was South Seas Holdings Pty Ltd, another company controlled by Mr Gould. In the 2007 income year, the Gould Share Trust had assessable income exceeding the amount of the management fee. However, it also had available carry forward losses via the application of which its taxable income for that income year was nil. In contrast, in that same income year,

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the inclusion of this management fee in the assessable income of the GF Trust would have changed what was otherwise a declared nil taxable income into a taxable income equal to the amount of that management fee.

49. On behalf of the AA Trust, I was asked to accept that there had been some sort of informal novation of that trust's liability to pay the management fee as between the GF Trust and the Gould Share Trust or, alternatively, that Mr Gould had undertaken management services personally but directed that his remuneration take the form of a debt obligation to one of his private entities. It was submitted that, "It was definitely one of Mr Gould's entities that was the obligee, and the management services were definitely provided."

50. Reference was also made on behalf of the AA Trust to the closely held nature of each of the corporations and trusts concerned and to the ability and actuality of Mr Gould's control over them. It was put that in such circumstances, an absence of formal written agreements was hardly novel and not at all antithetical to the creation of binding legal obligations by informal agreements the outcome of which were evidenced by the transactions recorded in the ledgers.

51. Regard to the Commissioner's objection decision discloses that the better part of a decade had passed between the end of the 2007 income year and an inquiry made by the Commissioner by a letter of 12 January 2016 concerning the management fee claim and other transactions just described.

52. The submission made on behalf of the AA Trust was that the source of the obligation to pay the management fee was contractual.

53. I readily accept that the law of the land is that a valid contract can be formed or its existence inferred by conduct attended with much informality. The position is as stated by Allsop J (as his Honour then was), with the agreement of Drummond and Mansfield JJ, in
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 ( Branir v Owston Nominees ), at [369]:

… [A] number of authorities discuss the need not to constrict one's thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often, and perhaps generally do, arise in that way. They can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting i's and crossing t's or where they think they have done so. Here, the i's were not dotted and the t's were not crossed because of Mr Graham's conduct. Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: ''and we hereby agree to be bound'' in this or that respect. The essential question in such cases is whether the parties' conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract. The authority for the above can be found in, at least, the following:
Meates v Attorney-General [1983] NZLR 308 at 377 per Cooke J (as his Lordship then was);
Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117-11,118 per McHugh JA (Hope and Mahoney JJA concurring);
Vroon BV v Foster's Brewing Group [1994] 2 VR 32 at 81-83 per Ormiston J (as his Honour then was);
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 555 per McHugh JA (with whom Samuels JA concurred);
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601 at 611 per Bingham J (as his Lordship then was) affirmed on appeal at 615;
Pobjie Agencies v Vinidex Tubemakers [2000] NSWCA 105 at [22]-[24] per Mason P (with whom Meagher and Handley JJA concurred);
Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61 at [74] - [80] per Heydon JA; though see
Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 178 per Tadgell J (as his Honour then was); and in this context see also
Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473 at 489 per Kearney J and
Manzi v Smith (1975) 132 CLR 671 at 674.

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54. In relation to small business, it is an unremarkable given (although, with respect, the Commissioner's submissions in this case suggest he is unable or unwilling to accept or even understand this) that great informality can and often does attend the formation of legal relations. That is the point made in Branir v Owston Nominees. Even more this is so where the relevant corporate actors are or are represented by the same individual acting in different capacities or by individuals who are close family members or business associates. Sometimes the only documentary manifestation of that legal relationship may be a transaction recorded in a ledger or perhaps just an annually prepared profit and loss account and accompanying annotations. There may then, in a taxation appeal, be related oral evidence of the individual(s) concerned that the transaction was as so recorded, for example and relevantly, a fee for the rendering of a managerial service by or on behalf of one entity to another.

55. That the AA Trust incurred a management fee in the amount of $123,276 is proved prima facie by the entry in its accounts: s 1305, Corporations Act,
Federal Commissioner of Taxation v Clark (2011) 190 FCR 206 ( Clark ), at [65]; and see also in any event, s 69, Evidence Act.

56. As to the operation of s 1305 of the Corporations Act, the evidentiary effect of the tender of the general ledger with the management fee entry is as stated by Austin J in
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 ( Rich ), at 396, in a passage cited with approval by Edmonds and Gordon JJ in Clark, at [65]:

The statement in s 1305(1) that the company's books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a "first view". All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.

57. With respect to the discharge by the AA Trust of its onus of proof, much lies behind the qualification in Rich as to the effect of s 1305 of the Corporations Act, "all other things being equal".

58. One difficulty for the AA Trust is that there are inconsistencies as noted above as between its accounts for the 2007 year and the financial accounts of the GF Trust and the Gould Share Trust. These accounts, too, have a prima facie evidentiary status. These inconsistencies are not answered by a claimed "novation" of the AA Trust's management fee liability from the GF Trust to the Gould Share Trust. That is because the inconsistencies extend to an inconsistency between the 2007 income year taxation return for the Gould Share Trust, which records management fee assessable income and the financial accounts of the Gould Share Trust, which record no such income.

59. Assuming, however, that the 2007 taxation return for the Gould Share Trust is accurate, this does not prove a novation. At most, the taxation return reflects an assumption of, but it is not probative of, the occurrence of a novation. The same would be true even if the

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financial accounts of the Gould Share Trust recorded an entry in respect of a debt owed by the AA Trust in respect of a management fee:
Fitzroy Services Pty Ltd v Federal Commissioner of Taxation (2013) 93 ATR 855 (
Fitzroy Services v Federal Commissioner of Taxation); 2013 ATC 20-394, at [39].

60. For there to have been a novation in the 2007 income year to the Gould Share Trust of the alleged debt constituted by the liability of the AA Trust to the GF Trust in respect of a management fee, a tripartite agreement as between each of those trustees would have been necessary:
Olsson v Dyson (1969) 120 CLR 365, at 388 per Windeyer J. Having regard to Branir v Owston Nominees and given that Mr Gould, in different capacities, controlled each of the trustees, it is theoretically possible that he might, before the end of the 2007 income year, have resolved informally and on behalf of each of them that the management fee liability be novated.

61. However, I am just not satisfied on the balance of probabilities that there was ever any management fee liability to novate, let alone that there was ever any novation.

62. Any contract for the performance of management services in the 2007 income year for the AA Trust by Mr Gould on behalf of the GF Trust would have to have been made at some stage either before or during that income year. Once again, it may be accepted, given that Mr Gould controlled each trustee and having regard to Branir v Owston Nominees, that great informality might have attended the making of any such contract. In theory, there might have been an informal agreement that services would be performed for a price to be determined. Or, services having been performed, it might have been agreed that a particular amount should be paid in recognition of those services. Or even, for business reasons, it might have been determined unilaterally that a particular amount should be paid for such performed services. But in all such cases, the liability in a particular event would have to be incurred before the end of the income year.

63. Yet, as the Commissioner submitted, it seems inherently likely, more probable than not, that this is what occurred.

64. The exact symmetry between the amount of the management fee and, in conjunction with the fees incurred, the total amount necessary completely to extinguish the assessable income for the AA Trust for the 2007 year is one indication of this. It is hardly coincidental. Further, that the amount of the management fee has been so calculated tells against it being fixed before the end of the income year. It also tells not just against this being any reflection of the value of any service performed for the AA Trust by the GF Trust via Mr Gould but also against whether any such expense was incurred at all.

65. Of course it must be accepted, as was put on behalf of the AA Trust, that it is not for the Commissioner to dictate to those in business how to run their businesses profitably or prudently:
Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1 ( Tweddle ), at 7. But in Tweddle, unlike in the present case, there was no question that the deduction claimed had in fact been incurred.

66. On the evidence, a history of claiming management fees of fortuitous amounts is revealed in relation to entities controlled by Mr Gould.

67. The AA Trust was settled on 30 June 1992. On and from its inception, the AA Trust has carried on business, in accordance with Mr Gould's instructions, serving his private business interests and those of his family and friends and charities of interest to him. The timing of the establishment of the AA Trust was no coincidence, given the then recent breakdown of Mr Gould's then marriage. That absence of coincidence may well mean there is substance in Mr Gould's asserted motivation, "asset protection" for the establishment of that trust. It is not necessary in these proceedings to determine whether the AA Trust was effective in that regard, only to recognise that his now former wife never had a role in it and that it thereafter served the interests mentioned.

68. On the very day the AA Trust was settled, a "management" fee" in the amount of $190,175.72 was purportedly incurred by that trust. The effect of a deduction in that amount was to reduce the taxable income of the AA Trust for that income year to $0.34. Mr Gould stated in evidence that there could have been

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"some pre-existing arrangement". Given the date on which the AA Trust was established, that seems not just speculation but unlikely. In truth, Mr Gould could offer no explanation as to how on the last day of the income year and on the first day of its existence the AA Trust could possibly have had any occasion to incur management services attracting a fee in that amount.

69. In the 2001 to 2014 income years, the only other income year in which a "management fee" was purportedly incurred by the AA Trust was the 2003 income year. In that income year, a liability to "Joynook Pty Ltd" in respect of management fees of $4,735 was purportedly incurred. As in the 2007 income year, the amount of this purported management fee debt was exactly equal to and negated the purported derivation of $4,735 in respect of management services provided to Melbourne Corporation Pty Ltd ( Melbourne Corporation ), another entity controlled by Mr Gould. Over this period and save for the 2003 and 2007 income years, the AA Trust continued to operate, and necessarily needed so to do via an individual, but otherwise, on the face of things, had a carry forward loss available to absorb declared assessable income. Viewing the evidence as a whole, there is persuasive merit in the Commissioner's submission that it should be inferred that the absence of even the purported incurring of a "management fee" by the AA Trust in those other years was not a coincidence. I find accordingly.

70. Mr Gould's evidence was that decisions concerning management fees were taken prior to the end of a given income year. Yet the symmetry or near symmetry with assessable income of the amounts of the management fees in the income years mentioned tells against this. Further, the absence of any consistency as to the provider of the claimed management service over the years tells against there being, prior to the 2007 income year, some standing agreement for the provision of such services from year to year by a given entity.

71. Also inconsistent with the fixing before the end of an income year of the amount of a management fee is a July 1997 memorandum in evidence directed by a Ms Christine Dyet ( Ms Dyet ) to Mr Gould in which Ms Dyet sought advice as to the management fees for the 1997 year for CVC Investment Managers Pty Ltd (renamed Leagou Pty Ltd on 18 April 2005) ( CVC IM ), another entity controlled by Mr Gould. Ms Dyet was apparently at the time a person working in or for Mr Gould's incorporated accountancy practice. In that income year and in respect of that entity, Mr Gould had evidently made no decision in respect of the amount to be charged in respect of management services prior to the end of the income year. As it happens, it is also CVC IM which is the recipient of the purported invoice for $1,000,000, acknowledged by Mr Gould to be false, mentioned above, in respect of management fees. Viewed in isolation, this memorandum of a decade before the 2007 income year and in respect of another entity could carry little weight in relation to whether the AA Trust had discharged its onus of proof in respect of the management fee expense it claimed in respect of the 2007 year. However, viewed against the presence in the 1992 and 2003 income years of management fee deduction claims of a fiscally convenient amount, and the absence of such a fee in income years where a loss was available, it enhances a conclusion that the prima facie position apparent from the accounts of the AA Trust is unreliable.

72. Mr Gould's evidence was that each year he would review the draft financial statements of an entity so as to decide whether he would cause accounting journal entries to be made and whether to term those entries management fees or interest income. He stated that:

I would certainly have a look at the prima facie taxable income. That's what I was interested in. The actual detailed accounting was of less interest to me, but the tax effect was certainly of interest to me.

Mr Gould stated in evidence that he considered it was possible, even though he may in providing services have been acting on behalf of a number of different entities over the course of a given income year, to decide, at the end of the year, that only one of those entities would charge the management fee in respect of the provision of those services.

73. Mr Gould admitted in the course of his evidence that, as a rule, he was not be terribly

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worried about working out the fairness of management fees between his "own individual companies" and that in most years, despite, as he claimed, having done work, he would not bother to cause management fees to be levied as between such entities. The AA Trust was such an entity.

74. I thought these were candid concessions, so candid that, looking at the whole of the evidence in this case, it made me doubt that Mr Gould, for all his education and experience, approached the fixing of management fees (and, as will be seen, interest), either before or, more likely than not, after the end of an income year, with a dishonest mind, as opposed to closing his eyes to the obvious and instead operating on the basis that he could cause whatever entity he controlled to fix or, as the case may be, to record the incurring of a management fee in whatever amount was fiscally advantageous, irrespective of whether it was that entity which, via him, had provided management services to another and irrespective of whether there was any anterior agreement, however informal, in respect of the provision of that service by that entity. I thought Mr Gould was less candid in relation to the evidence he gave when the July 1997 memorandum just mentioned was put to him in the context of a suggestion that, as a matter of practice by him, amounts only came to be fixed after the conclusion of an income year to which the amount purportedly related. He stated that he could not be certain in any year that accrued amounts were put into the accounts prior to the end of the year of income. This answer, I thought, concealed more than it revealed about whether the amounts were incurred at all before the end of a given income year.

75. I take a sham to be as described by Lockhart J (Foster J agreeing) in
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449, at 454, being a description subsequently approved by the High Court in
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, at [46]:

A "sham" is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.

76. As Scott No 2 illustrates and as Gleeson CJ, Gummow and Crennan JJ allowed in
Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 ( Raftland ), at [34] - [36], the term "sham" has ambiguous qualities but can be employed in a less pejorative sense to describe a document brought into existence "as a mere piece of machinery" serving some purpose other than constituting the whole of an arrangement. A document brought into existence as a disguise for no transaction at all can also be described as a sham:
Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 67 FCR 243 ( Richard Walter ), at 245 per Lockhart J and at 257-258 per Hill J. That need not involve fraud in the sense of a deliberate intention to deceive a third party in order for the mere piece of machinery to have no effect in law at all. At the very least, I am well satisfied that the entry in the general ledger was a mere piece of machinery, just the manifestation of a construct by Mr Gould. It was therefore in this sense a sham. It is quite possible that Mr Gould's intention was fraudulent, that his intent in causing the AA Trust to make the management fee claim was not just wilfully blind but more sinister. However, it is unnecessary to reach that conclusion in order to hold that the position apparently evidenced by the ledger entry was but a disguise for no transaction at all. It is not necessary to reach a more pejorative conclusion in order to hold, as I do, that the deduction claimed is grounded in a sham. I am well satisfied of this, even taking into account s 140(2) of the Evidence Act

77. In short then, the evidentiary position revealed by financial accounts is contradictory and at odds with Mr Gould's oral evidence. An onus of proof is not discharged by unresolved contradictions in evidence. On the balance of probabilities, the transaction recorded in the accounts which grounds the deduction claimed is just a sham.

78. For the reasons I have canvassed, it is unlikely, in the sense of less probable than not, that any liability to the GF Trust in the claimed

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amount in respect of management services was incurred prior to the conclusion of the 2007 income year. In contrast, it is more likely than not that the amount specified in the general ledger of the AA Trust is nothing more than a construct, a balancing amount selected by Mr Gould for fiscal advantage at some point after 30 June 2007. The apparent supporting accounting entry in the general ledger of the AA Trust was a mere façade for no anterior agreement at all for the GF Trust to furnish a management service, much less reflective of services which were rendered on behalf of the GF Trust pursuant to any such agreement.

79. The AA Trust has not proved on the balance of probabilities that any management service was provided to it by the GF Trust in the 2007 income year, let alone that it incurred a fee in the amount claimed in respect of any such service.

80. As to the submission that the AA Trust necessarily must have incurred some expense in respect of its management, as it could only act via an individual who undertook services, the deduction claimed is in a particular amount and said to have been provided by a particular entity, the GF Trust. The AA Trust has not discharged its onus of proving that it incurred the expense claimed. It does seem inherently likely that Mr Gould and perhaps subordinate staff performed services for the AA Trust in the 2007 income year. But the nature and extent of such services, much less via which entity and whether they resulted in the incurring of any expense by the AA Trust for them is not proved. Mr Gould's personal tax return for the 2007 income year does not disclose any income received from the AA Trust in respect of the provision of services to it.

81. The onus of proof in a taxation appeal is not discharged by judicial acknowledgement of a theoretical possibility. It is nothing to the point that, had an agreement, however informal, been made in advance, and my conclusion is that there was no such agreement, management services might have been provided on behalf of the GF Trust to the AA Trust for fees that resulted in the incurring by the AA Trust of a deduction under s 8-1 of the ITAA 1997.

82. It was also put on behalf of the AA Trust that the amount of the management fee claimed was not so disproportionate to the income derived as would lead to a conclusion that it had not been incurred for the purpose of gaining or producing assessable income or in the course of carrying on a business to that end. After all, so the submission went, in the 2007 income year, the AA Trust was "a business entity with assets in the order of $6,559,705". Thus, the observations made in
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 ( Fletcher ), at 18 with respect to a possible need, flowing from a "disproportion between the detriment of the outgoing and the benefit of the income" to resolve how the outgoing was to be characterised for the purposes of s 8-1 of the ITAA 1997 was said not to arise for consideration in the present case in relation to the management fees claimed.

83. I agree that Fletcher is distinguishable but not for the reason assigned on behalf of the AA Trust. In Fletcher, unlike the present case, the controversial, claimed outgoing had not been held to be a sham: see Fletcher, at 13 - 14. Given that finding, it is not necessary to consider the circumstance of a fee which was incurred but is said, as in Fletcher, to be of such a disproportionate amount as not to have been incurred for a purpose specified in s 8-1 of the ITAA 1997.

84. While these are reasons in themselves to dismiss the claimed management fee deduction, there are other bases which reinforce that conclusion.

85. One basis is that the arbitrary, ex post facto, fiscally advantageous assignment after the conclusion of a given income year of a label "management fee" to a claimed deduction in respect of an expense never actually incurred in that income year was also, on the evidence and as detailed below, followed in respect of purported interest deductions claimed by the AA Trust.

86. Another basis for concluding that the management fee deduction claim is but an artificial construct is revealed by examining, as the Commissioner contended it should be, a wider transactional context in which that claim has been made.

87. The 2006 general ledger of the AA Trust records a transfer from Melbourne Insurance to the AA Trust on 11 July 2005, resulting in a

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liability of the AA Trust to Melbourne Insurance in excess of $4 million. On 1 July 2005, a $900,000 liability to Normandy Finance and Investments Limited ( Normandy Finance ) was incurred. Normandy Finance was incorporated in the United Kingdom on 28 April 1983. It was, in 2005, ultimately controlled by Mr Gould. Also on 1 July 2005, the general ledger of the AA Trust discloses that a loan of $900,000 was purportedly made by the AA Trust to a Dr Robert Read (Dr Read). The general ledger also discloses that some of the funds received from Melbourne Insurance were also passed to Dr Read.

88. The evidence discloses that, in the 2007 income year, Melbourne Insurance had disposed of investments with profit. It will be recalled that, in that same income year and according to the general ledger of the AA Trust, that trust derived interest income of $123,458.00 from Melbourne Insurance.

89. In contrast, in the 2006 income year, Melbourne Insurance neither disposed of investments nor paid any interest. In respect of that income year, its general ledger also records no interest accrued in respect of the loan to the AA Trust (nor in respect of a sizeable loan to Southsea Investments, then known as Southsea Nominees. That suggests that these loans between these entities controlled by Mr Gould were interest free.

90. Via the purported incurring of an interest liability to the AA Trust in the 2007 income year, Melbourne Insurance was placed in a loss position for that income year. Yet the fiscally convenient, for Melbourne Insurance, purported incurring of that interest liability gave assessable income to the AA Trust; and hence a need (in conjunction with the modest fees undoubtedly paid to unrelated third parties) to cancel the tax effect of that by a purported incurring by the AA Trust of the claimed management fee expense.

91. That is sufficient to underscore why it was that the claimed management fee was conjured. There is, however, a yet wider context against which, the claimed management fee can be viewed. The 2006 income year loans by Melbourne Insurance to the AA Trust and Southsea Investments are, according to the financial accounts of Melbourne Insurance, sourced from a purported loan to Melbourne Insurance of $5,499,992 from Lubbock Fine , a firm of chartered accountants in the United Kingdom with whom Mr Gould dealt. It may be, as the Commissioner submitted, that in these movements of funds there is a "round-robin" evidenced; with the AA Trust being just a conduit for the movement of funds between Melbourne Insurance, Normandy Finance and Dr Read. However this may be, a corollary was a need to create a deduction for the AA Trust in the 2007 income year. The means chosen, inferentially by Mr Gould, given his overall, pervasive control, was a management fee grounded not in any anterior agreement on the part of the AA Trust to incur the same but rather in a fiscally convenient decision, a mere pretence, made by Mr Gould after the close of that income year.

92. In turn, the incurring by Melbourne Corporation of the recorded interest liability to the AA Trust in the 2007 looks also to have been "fiscally convenient", especially given the apparently interest free nature in the 2006 income year of loans as between entities controlled by Mr Gould. However, it is not necessary, in order to determine the present taxation appeal, to reach any concluded view on that subject.

93. The Commissioner also made a determination under Pt IVA of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ) by which he cancelled the tax benefit resulting from the claimed management fee deduction. It is not necessary to consider the correctness of that determination. Where the deduction is but a sham, there is no expenditure incurred or related deduction at all and thus nothing to cancel. I do no more than record that, were I mistaken as to the existence of a sham, it is clear to the point of demonstration that the dominant purpose of the management fee incurred in the 2007 income year was to gain a tax benefit. On the evidence, there is no evident association between the amount of the fee claimed and the provision of any service at all let alone services for which a comprehensible basis, commercial or even idiosyncratic, for the amount of the claimed fee is evidenced. The only relevant association is between the fee claimed and the amount of interest income

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derived by the AA Trust in the 2007 income year.

BAD DEBTS WRITTEN OFF?

94. The AA Trust has claimed five deductions under s 8-1 or alternatively s 25-35 of the ITAA 1997 in respect of alleged bad debts allegedly written off. These and the related income years are:

95. It is desirable first to set out some general principles governing eligibility to claim these particular deductions.

96. There is no mutual antipathy, as long ago there once was in income tax law, between the claiming of a deduction in respect of a bad debt written off under s 8-1 of the ITAA 1997 and s 25-35 of that Act:
Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153, at 162.

97. For a bad debt to be deductible under s 8-1(1) of the ITAA 1997 requires nothing more or less than that the debt constitute expenditure incurred which satisfies either or each of the positive limbs of that subsection (and does not fall within an exclusory limb). Contrary to a submission made on behalf of the Commissioner, it is not necessary (although it would be sufficient) in relation to the second positive limb (s 8-1(1)(b)), that the bad debt constitute expenditure necessarily incurred in carrying on a money-lending business for the purpose of gaining or producing assessable income. Instead, as was correctly submitted on behalf of the AA Trust, for a deduction to be allowable under this limb of s 8-1, all that is necessary in this case is that the AA Trust carries on a "business of some kind in which each of the loans was a profit-making enterprise such that any profits would have been ordinary income" on the basis upheld in Federal Commissioner of Taxation v Myer Emporium Ltd
(1987) 163 CLR 199 ( Myer Emporium ).

98. For a deduction to be allowed under s 25-35 of the ITAA 1997:

As can be seen, there can be an overlap of application as between s 8-1(1)(b) and a case falling within the alternative posited by s 25-35.

99. A debt will be a bad debt if it is reasonably regarded as irrecoverable:
GE Crane Sales Pty Ltd v Federal Commissioner of Taxation (1971) 126 CLR 177 ( GE Crane ), at 194 - 195. That is a question of fact. Necessarily, the answer to that question is inherently specific to the circumstances of a given case.

100. It was put on behalf of the Commissioner that, "Generally, one would expect to have seen appropriate steps being taken in an attempt to recover the debt before it is determined to be bad, such as obtaining and enforcing judgment against a debtor." This submission, with respect, is wrong. It is completely at odds with the advice of the Judicial Committee of the Privy Council in relation to a similar question which arose under Indian income tax law:
Dinshaw v Bombay Commissioner of Income Tax (1934) 50 TLR 527 ( Dinshaw ). Their Lordships make it pellucid in that case, at 528, that the question whether a debt is bad ought not to be approached on the basis of a priori assumptions as to what is necessary in order for a debt to be characterised as "bad". In that case, the flawed assumption was that, in respect of a corporate debtor, the company had to have ceased to be a going concern in order for a creditor to which it was indebted to write off the debt as bad. The

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flawed assumption in the Commissioner's submission is that appropriate steps must have been taken to recover the debt such as obtaining and seeking to enforce a judgement. The flaw in each of these approaches is that they impermissibly elevate a circumstance which undoubtedly can ground a reasonable conclusion as to irrecoverability into a rule of general application. In commercial practice, especially with small business, many a reasonable decision is taken for practical business reasons that even to initiate court proceedings in respect of a given debt, much less to prosecute them to judgement and attempted execution on a judgement is, given the costs of litigation and the amount of the debt, likely to be an exercise in throwing good money after bad. The debtor might have refused after repeated demands to pay the debt. Follow up phone calls or emails might no longer be answered or returned. This might, in turn, be a sequel to a period in which earlier debts were paid outside usual trading terms. Or it may just be that it is known that other creditors have already had such an experience. It might, objectively, against such a background, be perfectly reasonable, as a matter of practical business judgement (qv GE Crane at 187 per Menzies J), for the creditor to treat the extending of credit to the debtor as, in hindsight, a mistake and to write the debt off as bad. A variety of circumstances as infinite and varied as is the experience of conducting businesses in practice might reasonably yield a conclusion that a given debt is bad. Insularity of thinking on this subject is to be eschewed. The question as to whether, objectively, a debt is "bad" is inherently case specific, as Gordon J, applying the authorities mentioned in this, and the preceding paragraph recognised, in
BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746; 2009 ATC 20-097, at [121]. In answering this question, the subjective assessment of the creditor is a relevant but not determinative circumstance.

101. What is clear is that in order to be deductible under s 25-35, the debt must be written off as bad during the income year, not afterwards with reference to that income year:
Point v Federal Commissioner of Taxation (1970) 119 CLR 453 ( Point ), at 458.

102. I turn then to consider each individual bad debt deduction claim.

2005 year - loan of $90,000 to Auto France

103. It was put on behalf of the AA Trust that, "There is plentiful evidence of the Applicant making loans and receiving interest income through the period starting 1 July 1992 and concluding after 30 June 2009." From this it was said to follow that one business conducted by the AA Trust over this period was money lending.

104. At a general level of abstraction, it may be accepted that there is plentiful evidence that the AA Trust has at least purported to make loans and receive interest over this period. But the difficulty for the AA Trust, in terms of its discharging the onus of proof, is, as the Commissioner's submissions highlighted, that this evidence is contradictory. Further, the onus of proof is not discharged at a general level of abstraction. Particular proofs are required in order to show the deduction claimed falls within s 25-35 or even s 8-1 of the ITAA 1997.

105. The critique offered by the Commissioner in submissions of the flaws in the endeavour by the AA Trust to discharge its onus of proof in relation to the alleged writing off of the alleged Auto France debt is well-grounded in the evidence.

106. Mr Gould's evidence was that he made a $90,000 loan to Auto France "during the 1980s" "on a basis that would entitle the lender to a 'share of the company profits' and that, during the 1992 calendar year, the loan was assigned to AA Company by it incurring a debt to Darlington McCarthur. Darlington McCarthur was another company controlled by Mr Gould. Mr Gould stated that the debt was novated to Auto France (Aust) Pty Ltd ( Auto France (Aust) ) in or about May 1994. Mr Gould could not recall whether there was any document in existence by which this novation was effected. None was in evidence.

107. The documentary evidence, such as it is, is inconsistent with Mr Gould's recollection and also itself contradictory.

108. Mr Gould's recollection that the loan dated from the 1980s is not consistent with documentary evidence. There is evidence of a $195,000 debt owed by Auto France but that is recorded in the 1991 income year balance

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sheet of the GF Trust and it is also recorded as having been repaid in 1991. The 1990 accounts of the GF Trust record it received income from the "Auto France Unit Trust". Quite how that related to Auto France was not explained.

109. The alleged loan, if made, appears to have been made by another company controlled by Mr Gould, Yale Investments Pty Ltd ( Yale Investments ), not by the AA Trust. In evidence is a deed of assignment dated 30 November 1990, which records that Yale Investments assigned the debt to Darlington McCarthur. Yet, also inconsistently with the deduction claimed, the financial statements of Yale Investments record the debt as having been wholly repaid to it in 1992. Inconsistent, in turn, with that is a report dated 30 April 1993, prepared at Mr Gould's direction for the purposes of Family Court proceedings to which he and his now former wife were parties, which records that the debt remained owing to Yale Investments.

110. The existence of the alleged debt is not recorded in such of the general ledgers of the AA Trust as are in evidence in respect of the period from 1992 to 2005. The financial statements of the AA Trust first record the debt in 1992, not 1993, showing it as a non-current receivable. Yet in 1994 the debt is recorded in the financial statements of the AA Trust as a current receivable.

111. On 19 April 1994, Auto France changed its name to French Spare Parts Pty Ltd. From 12 September 1994, a corporate registration strike off action was in progress. The AA Trust continued to record the debt as owed by Auto France. As proximate to the 2005 income year as 2001, the AA Trust accounts continued to record the debt as a current receivable owed by Auto France. By that stage, Auto France had been deregistered for over 6 years. In itself, that recording is unexplained and odd. It is also inconsistent with Mr Gould's evidence that the debt had been novated.

112. There is no evidence that the AA Trust derived any income from the alleged debt.

113. Mr Gould stated that in 2005 he had investigated Auto France (Aust)'s capacity to repay the debt and concluded the debt was bad. As mentioned, the subjective view of a creditor is relevant but not determinative. The test is objective. Auto France (Aust) was not in external administration in 2005. There is no evidence that it was insolvent in 2005. Auto France (Aust) remained in operation until 17 July 2013. In light of Dinshaw, it is not essential that Auto France (Aust) have ceased operations in 2005 in order for it to be open to conclude that the alleged debt was, at that time, bad. But there needs to be some evidence reasonably capable of supporting a conclusion that the debt was bad in that income year. There is none.

114. Assuming that the claimed debt existed in the 2005 income year, there is also no evidence that, during that income year, as opposed to after that income year, the debt was written off as bad. Yet, as Point confirms in respect of the materially similar predecessor provision, that is an essential element of the allowance of a deduction under s 25-35 of the ITAA 1997.

115. There is nothing oppressive about the longstanding feature of income tax law, currently found in s 14ZZO(b)(i) of the TAA, that the burden of proving an assessment to be excessive lies on an applicant in a taxation appeal. Necessarily, the Commissioner, unlike a participant, is a stranger to transactions forming the taxable facts. Here, one of the non-strangers is the AA Trust and, more particularly, Mr Gould. Of course over a quarter of a century had passed between the time of the alleged and the time of trial and, of course, as in Clark, an accounting record might be a source of evidence which, all other things being equal, proves the existence of the debt concerned. But here, all other things are not equal in relation even to proof of the existence of the debt, let alone of other elements necessary to prove deductibility under s 25-35 or even s 8-1 of the ITAA 1997.

116. As at 11 May 1992, Mr Gould was, beneficially, a shareholder in Auto France. The evidence is that one of the recorded shareholders in Auto France held their share for him. He also held office as company secretary of Auto France (Aust) until 26 January 1994. The registered office of Auto France (Aust) remained at the offices of incorporated accountancy practices with which Mr Gould was associated Gould Ralph Pty Ltd ( Gould Ralph ) or Gould Ralph Services Pty Ltd

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( Gould Ralph Services ) from its incorporation on 2 May 1994 to 1 July 2013. Mr Gould was therefore an appropriate witness. I thought his recollection that there had been a long ago dealing with Auto France was not contrived but his recollection was imperfect and not sufficiently reliable to explain the inconsistencies mentioned.

117. In the present context and as a starting point, the AA Trust had to prove that the debt still existed such that, in the 2005 income year, it could be, and was, written off. It was not obliged to prove this to absolute demonstration, only on the balance of probabilities. That is not achieved by inconsistent evidence, which leaves the position as to whether the debt still existed in the 2005 income year conjectural. It was incumbent upon the AA Trust, not upon the Commissioner, to provide a satisfactory explanation of the apparent inconsistencies which yielded satisfaction that it was more likely than not that the debt still exited in that income year. This it did not do.

118. The deduction claimed is not made out, either under s 25-35 or s 8-1 of the ITAA 1997.

2005 year - loan of $120,000 to St Wenn

119. Mr Gould's evidence was that he made a loan $120,000 to St Wenn Investments Pty Ltd ( St Wenn Investments ), not St Wenn, "during the 1980s" and "on a basis that would entitle the lender to a share of the company profits". His evidence was also that, during the 1992 calendar year, this loan was assigned to the AA Trust by it incurring a debt to Darlington McCarthur.

120. Quite how a loan said to have been made personally by Mr Gould became a debt which Darlington McCarthur could assign was, as the Commissioner submitted, not clear on the evidence. It was for the AA Trust, albeit just on the basis of the balance of probabilities, to tender evidence that yielded that clarity.

121. Such evidence as there was about this deduction claim, apart from Mr Gould's personal evidence, yielded only inconsistencies, including inconsistencies with his recollection of events.

122. There is evidence of a loan made by the GF Trust to St Wenn. There is no evidence that the GF Trust or, for that matter, Yale Investments, assigned the loan to Darlington McCarthur. The 1992 financial statements for the AA Trust record a debt owed by St Wenn as a non-current asset. By 2004 that debt is recorded in the financial statements of the AA Trust as a current asset. In themselves, these are evidentiary inconsistencies in the claim made by the AA Trust. This apart, St Wenn and St Wenn Investments are separate legal entities. Mr Gould's recollection was that the loan was made to St Wenn Investments. Yet, overwhelmingly, the reference in accounting records in evidence of the any form of indebtedness record St Wenn, not St Wenn Investments.

123. In itself, and for reasons already given, the absence of a document, in this case a loan agreement, evidencing, in this instance a legal relationship occasioning the indebtedness claimed and an assignment or novation is not fatal. But the case illustrates a difficulty which, years afterwards, can attend discharging the onus of proof in respect of an alleged event where there is an absence of such documentary evidence and where there are inconsistencies evident in such accounting records as are in evidence.

124. There is no evidence that the alleged debt, if it existed, ever generated any income for the AA Trust or, for that matter, any earlier alleged creditor, nor even of any partial repayment. Neither, given the inconsistencies and unexplained gaps mentioned, am I satisfied on the balance of probabilities that the debt as claimed existed, much less that it was novated to the AA Trust either at all or in the gaining or producing assessable income for that trust or in the carrying on a business by that trust for the purpose of gaining or producing the assessable income.

125. Yet further, I am not satisfied that the AA Trust has by evidence proved that any such debt, if it existed, was bad. Mr Gould's evidence is that, in 2005, he investigated the capacity of St Wenn Investments to repay the alleged debt. His evidence was that his conclusion was that the debt was bad. Once again, Mr Gould's opinion, which was not that of a layperson, is relevant but not determinative. The evidentiary foundation for it is not exposed. Such evidence as there is about St Wenn Investments in 2005 does

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not support a conclusion that, in that income year, the alleged debt was bad. During that year, the company was not in external administration. There is no evidence of any corporate insolvency at all. St Wenn Investments remained registered until 18 August 2013. It was not placed under external administration until 20 March 2012. The company's registered office was Gould Ralph or Gould Ralph Services from at least 3 April 1994 to its deregistration. Mr Gould's then colleague, Mr Philip Ralph ( Mr Ralph ), remained a secretary of the company until it was deregistered. Mr Ralph was not called to give evidence.

126. None of this entails a conclusion that Mr Gould's evidence about his lending money to St Wenn Investments during the 1980's was just a fabrication. It is just that there are inconsistencies which are not explained or satisfactorily explained, and gaps in necessary proofs, as indicated above.

127. It is not for the Commissioner to remedy those gaps. A vague recollection does not proof of an allowable deduction make. The deduction claimed is not made out, either under s 25-35 or s 8-1 of the ITAA 1997.

2005 year - loan of $50,000 to Walsh Family Holdings

128. Mr Gould's evidence is that, in or about June 1995, the AA Trust made a loan of $50,000 to Walsh Family Holdings. This loan was said to be in exchange for repayment and also 30% of the profits of a "development project" of Walsh Family Holdings.

129. Such contemporary evidence as there is is consistent with an acquisition by the AA Trust of a 30% interest in three Walsh Family Holdings projects but not with the making of any loan to that company: see the letter of 20 June 1995. It is also consistent with an evidenced derivation of income (not expressed to be by way of a payment of interest) by the AA Trust from Walsh Family Holdings in the 1998 income year. In truth, there is no evidence, even if there were such a loan debt, that it arose in the course of the gaining or producing that trust's assessable income or, for that matter, in the carrying on by that trust of a business for the purpose of gaining or producing the assessable income.

130. As with other claimed bad debts, Mr Gould gave evidence that he had investigated the position of the loan in 2005 and concluded that it was unlikely that Walsh Family Holdings would have the capacity to repay it. Once again, Mr Gould's opinion is not that of a layperson. It is relevant but not determinative. Further and fundamentally, its foundation is not exposed in evidence. There is no evidence of any insolvency on the part of Walsh Family Holdings in the 2005 income year. That company was not placed in external administration until over a year after the conclusion of that income year - 6 July 2006. It remained registered until 14 August 2008.

131. At least purportedly, Walsh Family Holdings had a loan account with HWBB until 2006. HWBB was incorporated in Samoa on 17 January 1994. On the evidence and at the very least, as detailed below, HWBB was customarily operated in accordance with Mr Gould's instructions, if not also controlled outright by him for the benefit of him personally or that of entities controlled by him. Until 2006, there was corresponding interest payable by Walsh Family Holdings to the Milling Engineers Superannuation Fund. How the apparent existence in the 2005 income year of this other Walsh Family Holdings loan account and the related incurring of interest was to be reconciled with a conclusion that the claimed separate loan indebtedness of that company to the AA Trust was, in that income year bad was left unexplained.

132. The registered office of Walsh Family Holdings was Gould Ralph or Gould Ralph Services from at least 3 April 1994 to its deregistration. That connection with Mr Gould notwithstanding, no financial records of Walsh Family Holdings which might evidence the existence and continuance of the claimed loan or provide a foundation for the opinion expressed by Mr Gould were in evidence.

133. The Commissioner also relied upon an error of recollection on Mr Gould's part in relation to the death of an individual associated with Walsh Family Holdings, Mr John Walsh ( Mr Walsh ). Mr Gould recalled attending Mr Walsh's funeral in the 1990's. The true position was that Mr Walsh died on 7 February 2006. In itself, I do not consider this error of

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recollection tells definitively against Mr Gould's credibility, as opposed to highlighting the frailties of human memory. Mr Gould's recollection was that Mr Walsh was no longer alive. I have no reason to doubt that Mr Gould attended Mr Walsh's funeral. Mr Walsh's company, Walsh Family Holdings was a client of the incorporated accountancy practices with which Mr Gould was associated. But well over a decade after the funeral event, inferentially, must have occurred, Mr Gould's recollection of the time of its occurrence is flawed. Similarly, it does seem more likely than not that Messrs Gould and Walsh dealt with one another, one on behalf of the AA Trust, the other on behalf of Walsh Family Holdings, with respect to the acquisition of an interest in some Walsh Family Holdings developments but more than two decades later, Mr Gould's precise recollection is unreliable and, as mentioned above, inconsistent with such limited contemporaneous evidence as there is.

134. Mr Gould's evidentiary assertion that the AA Trust loaned funds to Walsh Family Holdings in 1995 in circumstances where the available contemporary evidence points to the taking up of an interest in a project by that company is similar to the contemporary evidentiary position revealed in relation to Trenton (see below). So it may be that, in the 1990's, as occasion arose and circumstances permitted, Mr Gould caused the AA Trust to take up an interest in client company projects. This, however, is nothing more than an interrogative note sounded in my mind when reviewing the evidence. I do not make anything of it in deciding whether the deduction claimed is or is not proved.

135. In short, I am not satisfied on the balance of probabilities that the alleged loan debt existed, much less that it was "bad" in the 2005 income year.

2008 year - loan of $173,295 to Trenton

136. Mr Gould's evidence is that, in or about June 1993, the AA Trust loaned $100,000 to Trenton.

137. No related written loan agreement or other loan documentation is in evidence. For reasons already given, the absence of such documentary evidence is not fatal to the successful discharge by the AA Trust of its onus of proof. However, apparently contemporaneous documentation which is in evidence is, as Mr Gould admitted in cross examination, not consistent with the existence of the alleged loan.

138. A letter of 15 June 1993 in evidence and signed by Mr Gould, purportedly in his capacity as a director of Anglo American, suggests that an agreement or at least an understanding to be formalised by referenced Heads of Agreement was reached at that time with Trenton whereby Anglo American would acquire a 40% interest in the pre-tax profits derived by Trenton in respect of proposed joint venture activities in New South Wales and Queensland. The Heads of Agreement mentioned is not in evidence. However, there is no reference in the letter to a loan. When the letter was put to him, Mr Gould agreed that the letter reflected a joint venture investment and not a loan.

139. On its face, the letter makes no reference to the AA Trust but this is not necessarily inconsistent with Anglo American acting in that capacity in relation to the acquisition.

140. It is odd that Mr Gould signed the letter in the apparent capacity as a then director of Anglo American. That is because he ceased to be a director of that company on 30 June 1992 and did not resume office as a director of it until 1 December 1997. When this was put to Mr Gould in cross examination, he stated that he was "obviously mistaken". In submissions, the Commissioner put that this answer was indicative of unreliability in Mr Gould's evidence, as I should infer Mr Gould was as at 15 June 1993 engaged in unresolved matrimonial property proceedings with his now former wife and thus conscious at the time of his earlier but related relinquishment of office in Anglo American. But the Commissioner did not submit that the letter was a falsity and instead relied upon it to submit that it contradicted the then existence of the asserted loan. If anything, Mr Gould's signing as director looks to be an indication that he retained de facto control of Anglo American's decision-making on 15 June 1993, even though not formally a director. However this may be, the point is that the letter is

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in evidence, is a contemporaneous document and, as was candidly conceded by Mr Gould, not consistent with a loan having been made to Trenton in the 1993 income year.

141. There are other evidentiary inconsistencies which support a conclusion that the AA Trust has not proved the existence on the balance of probabilities of the loan which grounds the debt allegedly written off as bad.

142. Mr Gould gave evidence of a conversation towards the end of the 1998 year in relation to the AA Trust then having a profit share with Trenton of $73,295. There is a handwritten annotation on the letter of 15 June 1993 which makes reference to accrued income from Trenton in 1998 but what to make of this is at best moot. What is clear is that the AA Trust's 1998 general ledger contains no reference to Trenton. Its 2000 financial statement records only a $100,000 debt in the 1999 year.

143. The financial statements of the AA Trust indiscriminately group "joint venture investments" and "loans" jointly as assets. These accounts also routinely refer to companies by their former names as well as their current names (e.g. Hagar and Trenton). Thus, in respect of a separate, purported loan, the financial statements of the AA Trust record $760,000 income received from Trenton under the heading "joint venture investments and loans". This is in addition to that sum being separately recorded as income.

144. Mr Gould's evidence was that, in 2008, he formed the view that the AA Trust would not get paid any "further" money from Trenton. Once again, Mr Gould's view is not that of a layman but its foundation is not disclosed. There is, for example, no evidence that Trenton was insolvent in the 2008 income year. It was not under external administration in that income year. That did not occur until 17 November 2011. Trenton remained registered until 28 May 2012. From its incorporation on 13 February 1991 to its deregistration Trenton's registered office was Gould Ralph or Gould Ralph Services.

145. Such evidence as there is about Trenton in 2008 does not suggest it was unable to repay the alleged loan either in the 2008 income year or in the one that followed.

146. There is evidence that, on 3 September 2008, Trenton transferred $700,000 to Anglo American, probably received as trustee of the AA Trust.

147. Trenton's directors were a Mr Benjamin Chow ( Mr Chow ) and a Mr David Kennedy ( Mr Kennedy ). Entities controlled by Mr Gould had numerous ongoing financial dealings with Trenton and its directors. Neither Mr Chow nor Mr Kennedy gave evidence. It was not for the Commissioner to call them. The evidence discloses transfers between HWBB and Mr Chow, dealings between HWBB and Kitson Pty Ltd ( Kitson ) (controlled by Mr Kennedy), a loan from Anglo American to "D&J Kennedy" in existence between at least 1996 and 2000, a loan from Anglo American to Kitson, "consulting fees" from Anglo American to Trenton and fees paid (accrued income) from Trenton to Anglo American AA Company. If there were some feature, based on Mr Gould's experience of these later than June 1993 dealings, which informed his view in the 2008 income year that the alleged debt was bad, it was for Mr Gould to explain that. One way of doing that would have been to call either or each of Mr Chow and Mr Kennedy to give evidence.

148. Trenton was not just a corporate client of these incorporated accountancy practices. At one stage, half of the issued shares in Trenton were held by Normandy Finance and half by Phillips River Pty Ltd ( Phillips River ). Phillips River is yet another company controlled by Mr Gould. Mr Gould has held all of its issued shares since 21 December 1999. Once again, if this more intimate and frequent association with Trenton or with Messrs Chow and Kennedy gave cause for his view in the 2008 income year that the alleged dent was bad, it was for Mr Gould to detail this.

149. The Commissioner also submitted that the documentary evidence:

[appeared] to indicate… that rather than there being a loan which became a bad debt, money was simply being moved between entities controlled by Mr Gould and nominally said to be "loans" despite simply being transfers of funds.

Perhaps that is so. But, as in Clark, if there were a supporting entry in a corporate book of

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account for that income year which evidenced this long ago transaction as a loan then, all other things being equal, I might accept that there was a loan. However, for reasons given above, all other things are not equal. The limited contemporaneous evidence tells against the existence of the alleged loan. There is other evidence, mentioned above, which is inconsistent with the existence of the alleged loan. It is unnecessary to reach any concluded view about this particular submission of the Commissioner. As it is, I am just not satisfied that there was a loan in 1993 as alleged. Nor, even if there were a loan, am I satisfied that the loan debt was "bad" in the 2008 income year. These are reasons enough to hold that the AA Trust has not discharged its onus of proof in respect of entitlement to a deduction under either s 8-1 or s 25-35 of the ITAA 1997.

2009 year - loan of $185,000 to Dr Read

150. Mr Gould's evidence about this alleged loan has varied. Initially, he related a complicated series of transactions, leading to an ability by the AA Trust to write off as bad in the 2009 income year a debt by then owed to it by Dr Read.

151. The series of transactions which he claimed yielded this position was as follows. On or about 13 December 2004, Normandy Finance lent $900,000 to Melbourne Insurance; on or about 16 December 2004, Anglo American (as trustee of the AA Trust) lent $900,000 to Robert Read Pty Ltd ( Robert Read ) (a company controlled by Dr Read) at an 11% or 12% interest rate, with potential for further drawdowns, these funds being transferred from Melbourne Insurance directly to Robert Read; from 2005 Robert Read paid interest to Melbourne Insurance (including $123,548 on 1 June 2007 and an amount on 10 July 2008), which was treated as reducing the AA Trust's debt to Melbourne Insurance; on or about 30 June 2006 and 1 August 2006 Melbourne Insurance transferred further sums of $95,000 and $90,000 respectively to Robert Read, which were loans from the AA Trust to Robert Read; on 1 June 2009 Mr Gould made "a note" writing off $185,000 of interest as a bad debt; and the amount written off was in respect of a loan from the AA Trust to Robert Read.

152. Mr Gould later varied his evidence so as to state that it was Melbourne Insurance which entered into the loan agreement with Robert Read with the loan being subsequently novated to the AA Trust. The account he gave should be rejected.

153. Neither as originally related nor as varied is Mr Gould's evidence consistent with such documents that are in evidence. The evidence includes a loan agreement dated 1 December 2004 between Melbourne Insurance as lender and Robert Read as borrower. This makes no reference either to Anglo American or to the AA Trust. No written deed of novation is in evidence. For reasons already given, that is not, in itself, fatal. But Mr Gould has not offered an explanation as to when the claimed novation occurred or on what terms, let alone why the debt was novated to the AA Trust. Also unexplained by him is his initial, mistaken recollection of which entity had lent to Robert Read.

154. Yet further, the AA Trust's general ledgers record interest from Dr Read, received via Melbourne Insurance, that the loan was between "Normandy Finance Limited" and Dr Read, and facility drawdowns by Dr Read. Melbourne Insurance's general ledgers also record that transfers were made to Dr Read, not Robert Read.

155. Two 2009 general ledgers of the AA Trust are in evidence. One has the partially obscured date earlier mentioned, "05/08/201". That shows a 30 June 2009 write off of a $1,085,000 loan to Dr Read and $185,000 of interest. A different 2009 general ledger of the AA Trust, produced in response to a notice to produce, bears a printing date of "20/09/20". That general ledger does not include any write off of the loan or any interest amount. The Commissioner submitted that this showed that the purported write offs of loan principal and interest had been added at some later date. This is possible but, in truth, the discrepancy is just another unexplained inconsistency.

156. Closer examination of the general ledgers discloses other inconsistencies with Mr Gould's evidence, notably in respect of the dates of transfers. Mr Gould's evidence was that Robert Read paid $123,548 to Melbourne Insurance on 1 June 2007. The

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general ledger records the payment (from Dr Read) as not having been received by Melbourne Insurance until 21 June 2007, yet accounted for to the AA Trust on 1 June. Mr Gould also stated that the $123,548 was income received by AA Trust during the 2007 year. It was, as already mentioned above, returned as such by the AA Trust. Also as mentioned above, and not by coincidence, the deductions claimed by the AA Trust in respect of that income year were precisely $123,548. These deductions included a purported management fee, which I have already concluded was but a sham.

157. Once again, the Commissioner submitted that the documentary evidence suggested that "money was simply being moved between entities controlled by Mr Gould and merely labelled as loans". Perhaps that is so, although, once again, as in Clark, all other things being equal, I may well have concluded that I should act in respect of these alleged, long ago transactions on a supporting entry in a corporate book of account. But, for reasons given above, all other things are not equal. There are inconsistencies in the documentary evidence and as between that and Mr Gould's oral evidence which leave me in the position of not being satisfied on the balance of probabilities that the loan allegedly written off was ever made.

158. A corollary of this conclusion is that I am not satisfied that there was ever a debt as claimed which arose in the course of the gaining or producing of the assessable income of the AA Trust or in the carrying on a business for the purpose of gaining or producing the assessable income of the AA Trust.

159. The foundation for Mr Gould's view in the 2009 income year that the alleged debt was bad is not disclosed. Such evidence as there is about Robert Read and its controller, Dr Read, does not offer support for Mr Gould's view. Dr Read did not give evidence. Once again, it was not for the Commissioner to call him in order to give enlightenment to the deduction claim where Mr Gould could not. The evidence disclosed that Dr Read, Robert Read and an associated superannuation fund, Read Medical Super Fund continued, to have dealings with HWBB. Dr Read was a client of Mr Gould's incorporated accountancy practice. Dr Read's 2009 income tax return declares a taxable income of $341,765.596. Robert Read remains registered. In the 2009 income year and until 18 August 2015), its registered office was Gould Ralph.

160. Prior to the institution of these proceedings and in response to an inquiry by the Commissioner, Mr Gould asserted that $195,000 of bad debts written off in 2009 related to Dr Read and were, by agreement between the parties, "reversed". Error in respect of the debtor party apart, what had occasioned a change in circumstances of Robert Read warranting the writing off in the 2009 income year of the claimed debt as bad and then warranting the reversal of this position was left unexplained.

161. An incidental feature of this correspondence is that Mr Gould stated that no related loan agreements could be located, whereas the evidence at trial discloses a loan agreement did then exist. It is just that the AA Trust was not a party to that loan agreement. Of course, that statement might reflect nothing more than an incomplete search at the time. So I make nothing adverse of that feature.

162. The Commissioner also submitted that, viewed in a wider context, the evidence indicated nothing more than a round-robin of transfers between entities. Perhaps that is so. Although, it bears repeating that if what the Commissioner terms a "transfer" were evidenced in a corporate book of account as a loan then, all other things were equal, I might well have concluded that that was its character. Had the Commissioner made a determination under Pt IVA, such a characterisation viewed in a wider context might have seen the cancellation of a related tax benefit upheld. But such a question does not arise for resolution in relation to this alleged bad debt deduction claim.

163. As it is, I am not satisfied that there was a loan as alleged or that the debt concerned was bad. The AA Trust's related deduction claim must therefore fail.

164. If only for completeness, I should record why I have allowed that it is possible that the Commissioner's round-robin contention has merit.

165.

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The documentary evidence, constituted by the loan agreement dated 1 December 2004 between Melbourne Insurance as lender and Robert Read as borrower, states that $900,000 of the facility had already been drawn. There is also documentary evidence which records that, on 8 December 2004, Chemical Trustee Limited ( Chemical Trustee ) transferred $900,000 to Normandy Finance. There is further evidence that, on 10 December 2004, Normandy Finance transferred those funds to Melbourne Insurance. Likewise evidenced is that, on 13 December 2004, Melbourne Insurance received that transfer. Also evidenced is that, on 16 December 2004, Melbourne Insurance transferred those funds to Robert Read. In turn and evidenced is that, on 17 December 2004, Dr Read transferred $900,000 to Hua Wang Finance Ltd ( Hua Wang Finance ). There is then documentary evidence that, on 20 December 2004, $899,971.84 was deposited into Robert Read's on call account with Hua Wang Finance. In turn and evidenced is that, on 30 December 2004, $900,000 was transferred from Hua Wang Finance back to Chemical Trustee, the original source of the $900,000.

166. Chemical Trustee is a private limited company incorporated in the United Kingdom on 1 June 1961. Its shares were held by Guardheath Securities Limited ( Guardheath ). Guardheath was owned and controlled by partners of Lubbock Fine. It was, as Mr Gould put it, an office nominee of that firm. From 4 March 1998, Guardheath held its shares in Chemical Trustee as nominee for JA Investments. Chemical Trustee's accounts in 2001 named its ultimate parent company as JA Investments. I have already mentioned JA Investments and explore further its relationship with Mr Gould below. Chemical Trustee's directors during the relevant times were Mr and Mrs Borgas and their son, Mr Timothy Borgas. A sometime director of Chemical Trustee was a Mr Bede Carran ( Mr Carran ).

167. Mr Carran gave evidence in the proceeding. He was, I thought, a candid and honest witness. He related in evidence that he had discussed the affairs of Chemical Trustee with Mr Gould on the basis that Mr Gould was the litigation agent, tax agent and "ultimate sort of beneficiary of those funds [in Chemical Trustee]". He also stated in evidence that he resigned from being a director of Chemical Trustee because "I felt Mr Gould was being overbearing and wanting to exert his influence". The impression I formed of Mr Carran's use of the description "overbearing" in relation to his dealings with Mr Gould was that it might well have been generated by the tinge of superiority I discerned in some of Mr Gould's exchanges with counsel when under cross-examination.

168. In the course of his cross-examination, Mr Gould admitted being involved in the 8 December 2004 transaction from Chemical Trustee to Normandy Finance and that, through Chemical Trustee, he financed Dr Read repaying his indebtedness to HWBB.

169. Oddly, despite Mr Gould's control of the entities other than Robert Read (and, obviously, Dr Read personally) the parties involved in the above transfers, the dates of the transfers, and that Dr Read was then a client, the 2006 financial statements of the AA Trust record a loan between the AA Trust and Dr Read first arising in the 2006 year in the amount of $995,000. It is not necessary to resolve that oddity. For the reasons given, this deduction claim fails.

INTEREST DEDUCTION CLAIM

Interest deduction claim - Onshore Debt

170. I begin consideration of this group of deductions by setting out my understanding of what constitutes a "loan" and "interest".

171. A loan, stated Sackville and Lehane JJ in
Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300, at 313, referring with approval a discussion in C L Pannam, The Law of Money Lenders in Australia and New Zealand (1965), at p 6, "involves an obligation on the borrower to repay the sum borrowed". That obligation may be to repay the money borrowed on demand or at a fixed date but obligation to repay there must be in order for a payment by one to another to be a loan. Conventionally, the sum borrowed is referred to as the "principal" of a loan.

172. In turn, "interest" is "the compensation to the lender for being kept out of the use and enjoyment of the principal sum"

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with its essence being that it is referable to that principal sum: Myer Emporium, at 218.

173. I have referred to what constitutes "novation", especially its tripartite feature, above.

174. The origin of the deductions claimed was said to lie in a loan of $3,063,050 made by Darlington McCarthur to the AA Trust on 30 June 1992. That sum was said to have been used to acquire a portfolio of assets. The AA Trust, it will be recalled, was settled on 30 June 1992.

175. The existence, inferentially, of that loan but not its terms, as well as an apparent, related acquisition of assets, is supported by a number of entries in books of account which are in evidence. The financial statements of the AA Trust as at 30 June 1992 record total assets of $3,173,981.06 (asset details being specified in the notes to the accounts) and a debt owing to Darlington McCarthur of $3,063,050. There is a corresponding entry in the financial statements of Darlington McCarthur at 30 June 1992 recording a current asset being a loan to Anglo American of $3,063,050. At the time, Anglo American was the trustee of the AA Trust (on and from the settlement of that trust on that very day, 30 June 1992).

176. The $3,063,053 loan debt of the AA Trust is said by the AA Trust to have been acquired by Swire Investments Limited ( Swire Investments ) from Darlington McCarthur in November 1992 in partial discharge of a debt that Darlington McCarthur owed to Swire Investments.

177. Swire Investments was incorporated in the United Kingdom on 25 November 1982 under the name Perigee Limited. It changed its name to Swire Investments on 15 October 1986. At all material times, its ultimate beneficial shareholder was Wah Dak Limited ( Wah Dak ). Its directors were Mr Borgas and his wife, Mrs Winny Borgas. Swire Investments was dissolved on 23 July 1996.

178. Mr Gould accepted in evidence that he "had a fair degree of influence and control over the day-to-day operations", that he had practical control of Swire Investments. For reasons which I shall now detail, this was an understatement. It displayed an absence of candour.

179. The evidence establishes that Wah Dak was incorporated in the then British Crown Colony of Hong Kong on 30 April 1985. It had its registered office in Kowloon in Hong Kong. Its day to day management was conducted by Mr Roman Tse, an accountant based in Hong Kong. From around 1992, Wah Dak held shares in Melbourne Corporation and in Philadelphia Investments Pty Ltd ( Philadelphia Investments ). These two companies, as Mr Gould acknowledged in evidence, were within his private group of companies from 1990 to 2015. In other words, these were companies which he controlled and which served his private interests.

180. One indication of that control and service is that the directors of Melbourne Corporation and Philadelphia Investments over this period included employees of Mr Gould's incorporated accountancy practice, Ms Jenness Dunne ( Ms Dunne ), Ms Merrilee Lisle ( Ms Lisle ) and Ms Lewis. Mr Gould accepted that these persons would conform to his wishes. Another director of Melbourne Corporation is stated in an Australian Securities and Investments Commission record in evidence to be Mr Russell Vanda Gould. That is the name of Mr Gould's father although the date of birth in the record is that of Mr Gould and the related address is Mr Gould's personal address. On this basis, and on the basis of the similarity of their names, I infer that the record is in error and that it was Mr Gould who was the director, not his father. Another indication of that and of Mr Gould's control of it is that Melbourne Corporation was the registered owner of suites 301 and 302 and a basement storeroom in BMA House, 135 Macquarie Street, Sydney and Philadelphia Investments was the registered owner of Suites 401 and 402 of BMA House. Melbourne Corporation and Philadelphia Investments participated in the settlement of Mr Gould's Family Court proceedings on 13 September 1994. Pursuant to that settlement, Melbourne Corporation sold its property at suite 302 in BMA House and paid the proceeds to Mr Gould's former wife. Further, an asserted liability of Darlington McCarthur's liability to Swire Investments of $3,132,312.28 as at 31 December 1992 was secured by a mortgage of BMA House premises.

181.

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The Commissioner submitted that there was no plausible explanation for this other than that Mr Gould controlled Wah Dak. I agree. The only plausible explanation for Wah Dak's shareholders participating in Mr Gould's matrimonial property settlement was his control of them; hence my observation as to Mr Gould's absence of candour.

182. There were other indications in the evidence that Mr Gould controlled Swire Investments. The accounts of Swire Investments for the year ended 30 June 1989 record that Wah Dak was the ultimate holding company of Swire Investments. In a facsimile dated 21 August 1991, Lubbock Fine requested Mr Gould's authorisation to pay the Swire Investments final fee note. In the ledger and accounts of the AA Trust for the year ended 30 June 1993, Swire Investments is shown as a "related corporation" whereas loans to clients were not. When asked about this feature of the ledger and accounts, Mr Gould stated that the ledger was possibly incorrect and that it depended on the meaning of "related corporation". Once again, in the face of so many indications to the contrary, I thought these answers lacked candour.

183. The point of this excursion into the control of the shareholders of Wah Dak is that it is a corollary, and I find, that, via his control of its shareholder Wah Dak, Mr Gould controlled Swire Investments.

184. Mr Gould's oral evidence was that he acted for Mr Gowrie-Smith in relation both to Swire Investments and to Wah Dak. He was, he stated, "like Ian's power of attorney". But the facts I have recited in the preceding paragraphs, especially the matrimonial property proceedings involvement dimension, tells against Mr Gould being merely an influential agent or attorney. So, too, does an absence of reference to Mr Gowrie-Smith in contemporary documentary evidence. Mr Gowrie-Smith was another notable absentee from the witness box.

185. I just do not accept this aspect of Mr Gould's evidence. Perhaps a different conclusion might have been open if Mr Gowrie Smith had been called as a witness but he was not. Once again, it was for the AA Trust, on whom the onus of proof lay, not for the Commissioner, to do this.

186. More particularly, the evidence which supports the existence of the alleged loan and its novation to Swire Investments was summarised by the AA Trust in submissions to be as follows:

187. These accounting entries offer some evidence, inferentially, of the claimed loan: Richard Walter, at 247, per Hill J. However, they offer no evidence as to the terms of the loan, including whether any interest was payable in respect of the loan and, if so, on what basis. Further, they are not, on the balance of probabilities, conclusive as to the existence of the claimed loan.

188. As was submitted for the AA Trust, a possible explanation for the $2,263,050 figure for the debt in the 1993 balance sheet of the AA Trust may well be that, that on 29 June 1993, it paid Swire Investments $800,000, reducing the its debt to Swire from $3,063,050 to $2,263,050. Further, it is possible that this $800,000 payment occurred in response to the letter from Swire Investments, dated 19 January 1993, already mentioned.

189. Acknowledging then that there is some evidence to support the bringing into existence of the alleged loan debt, its existence beyond 1 June 1994 is conjectural, even accepting that this need only be proved on the balance of probabilities. In evidence is an application dated 1 June 1994 by Anglo American, (not expressed to be in its capacity as trustee of the AA Trust, although that, in itself is neutral as to whether it was acting in that capacity) for a loan from HWBB and signed by Ms Lisle on behalf of Anglo American. It is stated in that application that Anglo American and thus the AA Trust had at that time "nil" current borrowings. Mr Gould sought in evidence, to dismiss this statement not on the basis that Ms Lisle had no authority but rather because she would have misconstrued the application form as only requiring information relating to bank borrowings. But it was for Ms Lisle, not Mr Gould, to state, if that be the case, that she had misconstrued the requirements of HWBB in respect of the application. And Ms Lisle was neither called as a witness by the AA Trust nor was her absence explained. As it is, there is in evidence in this loan application a representation that the asserted loan as by then allegedly acquired by Swire Investments, no longer existed as at 1 June 1994.

190. It is necessary to view the alleged loan against the background of a matrimonial property proceeding to which Mr Gould and his now former wife were parties, which commenced in the Family Court in early 1992. As I have already mentioned, that the AA Trust was settled on 30 June 1992 was no coincidence but part of what in this proceeding was described on behalf of the AA Trust as an "asset protection strategy" adopted by Mr Gould. The existence of that strategy in the context of that Family Court proceeding was embraced by the AA Trust in submissions as a reason why it should be concluded that the loan was not a fiction and that assets did exist. Hence the submission:

As a matter of ordinary human experience, a person does not implement an asset-protection strategy to preserve assets that are fictional or devoid of financial value. The objective evidence confirms that in 1992 an asset protection strategy was put in place. All the objective evidence fits: the commencement of the Family Court proceeding in early 1992, the settlement of the Applicant as a trust on 30 June 1992, the appointment of John Leaver as director of the trustee on 30 June 1992, Vanda Gould's resignation as a director, the nomination

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of a John Leaver company as Protector. These steps were taken for a reason. It was not to protect non-existent assets.

191. The John Leaver mentioned in this submission was a then associate of Mr Gould in the incorporated accountancy practice. He and Mr Gould are longstanding business associates. I did not have the benefit of evidence from Mr Leaver. Once again, given the onus of proof, it was for the AA Trust, not the Commissioner, to call Mr Leaver.

192. The firm of solicitors which acted for Mr Gould in the Family Court proceeding was Henry Davis York. It did not prove possible for Mr Gould to access, much less for the AA Trust to tender in evidence, copies of documents held in the files of that firm which might have assisted in deciding whether there was a loan as alleged. I draw no adverse inference from this. The matrimonial property proceedings were compromised by agreement in 1994. On the evidence, it was not until the second decade of the 21st century that Mr Gould might have had occasion to wish to access that firm's file in relation to the present income tax controversy. A quarter of a century passed between 1994 and the trial of this proceeding. I readily accept that the absence in evidence of any documents from that file is referable to record destruction in accordance with ordinary archival practices of a law firm.

193. In his affidavit of 23 January 2019, Mr Gould placed the novation of the debt from Darlington McCarthur as having occurred in the latter part of the 1993 calendar year. At the time when he made this affidavit, Mr Gould did not have access to certain relevant documents later produced pursuant to a notice to produce. In contrast, in his affidavit of 19 February 2019, Mr Gould placed the novation in the latter part of the 1992 calendar year, following the settlement of the AA Trust. This later affidavit evidence is consistent with the entry in the 1992 accounts of the AA Trust, mentioned above. Further, as was submitted on behalf of the AA Trust, I accept that these two affidavits of Mr Gould are generally consistent with the affidavit he long ago made for the purposes of the Family Court proceeding.

194. When asked about the difference between his initial affidavit and these 1992 accounts, Mr Gould asserted that there would be an explanation for it but that he could no longer recall what that was. In that initial affidavit, and by reference to the 1993 financial statements of the AA Trust, Mr Gould had explained the inclusion of the non-current liability owed to Darlington McCarthur as at 30 June 1992 by saying that, because the AA Trust was established on 30 June 1992, the comparative figures in the 1993 accounts were from a date later in the 1992 calendar year. When cross-examined about that affidavit evidence, Mr Gould conceded under cross-examination that this affidavit evidence was a "construction" based on "some assumptions" and that he had no independent recollection in respect of the whole transaction. That concession, I thought, was not just candid but, to observation, patently so.

195. Mr Gould also stated in his affidavit evidence that he had given instructions for the preparation of a novation agreement to be executed by Darlington McCarthur, Swire Investments and the AA Trust and that he had executed such an agreement. No agreement executed in November 1992 is in evidence. But there is secondary evidence as it its contents.

196. In the course of the Family Court matrimonial property proceedings, Mr Thompson investigated Mr Gould's financial position including related corporations and trusts. This is how he came to sight and to make notes in respect of various documents referring to related corporations and trusts. He was, unsurprisingly, well aware of a corporation acting in its own right and one acting as a corporate trustee. In an affidavit of 14 June 1994, Mr Thompson stated that, on 15 June 1993, he observed a document dated 17 November 1992 between Swire Investments and Anglo American stating "the amount drawn down is (in a typed form) $2,260,050 and (in a handwritten form) $3,063,056". It will be recalled that the handwritten amount of $3,063,056 accords with what the AA Trust alleges to be the amount of the debt owed to Darlington McCarthur novated to Swire Investments. Further, $2,260,050 is similar to the $2,263,050 in the 1993 balance sheet of the AA Trust.

197.

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Mr Thompson's evidence was that, in 1994, if he had been describing a company acting as a trustee, he would have referred to it in that way. Hence his evidence was that the reference in his affidavit of 14 June 1994 to a document in which Anglo American was named was not a reference to that company acting as a trustee. His evidence was that the only parties to the document he saw were Swire Investments and Anglo American with Mr Gould as guarantor. His further evidence was that the document he saw was a "revolving credit facility" contract. Mr Thompson also stated that, if Darlington McCarthur had been a party to the document he saw, he would have noted that.

198. There is no reason to doubt, and I do not doubt, Mr Thompson's evidence, including in particular the account he gave by affidavit in 1994 for purposes unrelated to the present proceeding.

199. The Commissioner submitted that Mr Thompson's evidence cannot be reconciled with that of Mr Gould's conceded reconstruction, well over a quarter of a century after the event.

200. The Commissioner also put that Mr Thompson's evidence was inconsistent with the letter dated 17 November 1992, signed by Mr Borgas, which mentioned Anglo American, rather than the AA Trust.

201. In Mr Gould's concession as to reconstruction and assumptions may lie an explanation as to why his recollection of events, including his recollection of a novation agreement, does not completely accord with that of Mr Thompson. Based on Mr Thompson's evidence, it does seem likely that, in November 1992, there was a plan to involve Swire Investments in a debt acquisition transaction. But the difference of recollection in relation to an involvement of Darlington McCarthur in this plan remains. Further, no resultant, executed agreement is in evidence.

202. In the context of the Family Court proceedings "asset protection" is not necessarily, as the AA Trust would have it, a benign explanation supportive of the existence of a genuine loan and later novation in June and November 1992 respectively. Camouflaging a true position is also a form of "asset protection", albeit an unlawful stratagem in the context of an extant Family Court matrimonial property proceeding. However, as was put for the AA Trust, any such conclusion would be inconsistent with the participation of, amongst others, Wah Dak, in the settlement of his Family Court property proceedings.

203. It is not necessary to reach any conclusion about whether the more sinister view, to which s 140(2) of the Evidence Act is applicable, is preferable. That is because of a conflict of evidence which leaves me unsatisfied, on the balance of probabilities, that there was ever a novation or acquisition by Swire Investments of any loan debt owed by the AA Trust to Darlington McCarthur.

204. I have already referred to the inconsistency apparent in the 1994 loan application to HWBB.

205. Mr Thompson's evidence, as I have indicated, does point to an involvement of Swire Investments in a debt acquisition in November 1992 and his noting of Anglo American rather than the AA Trust could, I accept, be regarded as neutral, as its acting in a trustee capacity may not have been disclosed. However, it does seem inherently likely, given his then role and what he did note, that his not noting any reference in a document to Darlington McCarthur was either inadvertent or negligent.

206. More telling is that the balance sheet of Swire Investments as at 12 March 1993, after the supposed novation, records debtors of only £5,000. Further, the 1994 income year balance sheet of the AA Trust records an amount of $281,802, owing to Darlington McCarthur, after the supposed novation to Swire Investments of the AA Trust's liability to Darlington McCarthur. The 1995 balance sheet of the AA Trust shows that the amount owing to Darlington McCarthur has been reduced to nil.

207. All in all, I am just not satisfied, on the balance of probabilities, that, as at 30 June 1992, the AA Trust was indebted to Darlington McCarthur, let alone that this debt was, in November 1992, novated to Swire Investments. There is just too much unexplained, inconsistent evidence to the contrary.

208. Assuming, however, that there was such a loan debt to Darlington McCarthur and a

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novation of that debt to Swire Investments, the AA Trust must prove yet further novations. The AA Trust alleges that, on 1 June 1995, Cheung Wah Bank Limited ( Cheung Wah Bank ) assumed a debt of $2,265,050 that the AA Trust owed to Swire Investments in exchange for $2,265,050 from CVC Fund Managers Pty Ltd ( CVC Fund Managers ).

209. Cheung Wah Bank was incorporated in the then Western Samoa (now the Independent State of Samoa) in May 1991. Cheung Wah Bank was managed by Asiaciti Trust Group ( Asiaciti ), an international fiduciary services provider with an office in Samoa. An employee of Asiaciti, Ms Faalelei Sua ( Ms Sua ) gave evidence in the proceeding. I thought that Ms Sua gave honest evidence, to the best of her recollection. In essence, her evidence was that both HWBB and Cheung Wah Bank were managed in the same way both by and for Mr Gould. Notably for present purposes, Cheung Wah Bank was another participant in the settlement of Mr Gould's Family Court proceedings on 13 September 1994. This participation is proof perfect of the honesty and accuracy of Ms Sua's evidence as to Mr Gould's control of Cheung Wah Bank and of its acting in accordance with his directions and in his personal interest and those of the clients of his incorporated accountancy practice as and when he directed. Cheung Wah Bank's participation in the matrimonial property settlement is explicable only on the basis that it was under Mr Gould's control and, on that occasion, acting in his interest by his direction.

210. CVC Fund Managers was registered on 20 April 1993 and deregistered 10 September 2001. On the evidence, CVC Fund Managers was one of the entities which served the private interests of Mr Gould and his associate, Mr Leaver. In practice, Mr Gould was responsible for its administration.

211. There is a representation in a letter dated 1 August 1995 from Cheung Wah Bank to CVC Fund Managers that a novation as alleged occurred. For reasons just given, it is inherently likely that this letter was written in accordance with a direction given by Mr Gould. Mr Gould's control of each of Swire Investments, Cheung Wah Bank and CVC Fund Managers was such that a novation might have occurred informally. The difficulty about accepting this, or acting on the representation in the letter of 1 August 1995 is, as the Commissioner submitted, that there is an unexplained inconsistency between the reaching of such a conclusion and the position as disclosed in the accounts of Swire Investments. These accounts record that, between 30 June 1992 and 12 March 1993, its receivables of £4,950,000 had reduced to nil, as had the creditors of £5,195,196,335. They also disclose that, as at 12 March 1994, Swire Investments still had no significant receivable. In short then, the Swire Investments accounts disclose a contradictory evidentiary position. In the circumstances, I am not satisfied, on the balance of probabilities, that the claimed further novation occurred.

212. The next in the claimed chain of novations is an alleged novation on 30 June 1999 of the AA Trust's debt to CVC Fund Managers to CVC IN. CVC IN, was an entity like CVC Fund Managers which fulfilled a like role, also administered by Mr Gould. It changed its name to "Sub Prime Nominees Pty Limited" on 16 September 2008. Once again, Mr Gould's control over the AA Trust, CVC Fund Managers and CVC IN was such that a novation as alleged might have occurred informally. There is some evidence to support this in the financial statements of the AA Trust and CVC Fund Managers, and in an extract from the general ledger account of CVC IN. However, quite apart from the failures of proof in respect of the existence in the alleged original indebtedness and earlier alleged novations thereof, there are other reasons, which I now detail, why I am not satisfied on the balance of probabilities that this particular novation as alleged by Mr Gould occurred.

213. The case for the AA Trust was that this particular novation was funded by a loan from CVC IN to Normandy Finance and HWBB. As detailed below, HWBB was operated in accordance with Mr Gould's instructions, if not also indirectly beneficially owned by him.

214. For reasons which follow, I am not satisfied on the balance of probabilities that CVC IN had any loans from Normandy Finance and HWBB. In turn, I am not satisfied that the

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AA Trust had any obligation to repay to CVC IN a loan.

215. The AA Trust has not put in evidence any financial statement for CVC IN in respect of the income year ended 30 June 1999. The earliest in evidence is a balance sheet CVC IN for the 2001 income year. This does record a debt of $25,092,000 to Normandy Finance. At most, that is not inconsistent with that debt having arisen before that income year. However, even that position is contradicted by the balance sheet of Normandy Finance, which records no such loan debt.

216. As to whether CVC IN had an indebtedness grounded in a loan to it from HWBB, the evidence is contradictory. The 2002 financial statements of CVC IN are in evidence. These contain an entry described as a debt owing to HWBB of $7,968,000. If the entry concerned is viewed in isolation, a like position for HWBB is evidenced by the 2002 HWBB "Analyze Balance Sheet". However, that same HWBB "Analyze Balance Sheet" records a corresponding amount of $7,968,000 to be owing by HWBB to CVC IN. The net position on the face of the 2002 HWBB "Analyze Balance Sheet" is therefore one of no indebtedness from one to the other. How this apparent position was to be reconciled with the case as put for the AA Trust was not explained.

217. The final claimed novation was said to have occurred in June 2001, when the AA Trust's then debt to CVC IN, said to have been $3,431,950.17 at 30 June 2001, was novated to the GF Trust. This was said to be evidenced in the financial statements of the GF Trust. However, regard to the general ledger of the AA Trust discloses a succession of entries reducing its debt to CVC IN to nil with corresponding entries against the accounts of the VRG Family Settlement Share Trust (of $503,877.84), Melbourne Corporation (of $50,000) and Southsea Nominees (of $2,878,072.33). These corresponding entries do total $3,431,950.17 but there was no satisfactory explanation in the evidence led by the AA Trust as to why it should be accepted that these entries evidenced a novation of a debt hitherto owed by the AA Trust to CVC IN to a debt of that amount owed by the AA Trust to the GF Trust.

218. Another unanswered, interrogative note is sounded by an entry in these financial statements which describes the total debt owing by AA Trust to the GF Trust at the end of 30 June 2001 as being $3,354,638, including $476,565.98 reallocated from the "VRG Family Settlement Trust". Subtracting this reallocated amount from the total debt yields a sum equivalent to the corresponding entry in respect of Southsea Nominees mentioned in the preceding paragraph. However, how that amount is attributable to the novation relied upon by the AA Trust in support of its claim is unexplained.

219. For these reasons, I am not satisfied on the balance of probabilities that any of the claimed novations occurred.

220. Assuming, however, that there was a loan and that it was novated and varied in amount owing from time to time as alleged, I am just not satisfied on the balance of probabilities that the loan ever carried interest, as opposed, assuming it existed at all, to the balance owing from time to time was just being repayable on demand. More likely than not, the claimed amounts of interest are just ex post facto constructs by Mr Gould, mere artifices which are shams of no effect in law at all. They are just a form of fiscal balancing charge on the revenue account side of the ledger in the same way as the alleged management fees are, for reasons already given, a like balancing charge on the expenditure side of the ledger. The invoices in evidence, which purport to record an interest liability, are mere pretences.

221. I consider that, in the course of his cross-examination, Mr Gould came as close as he was disposed to come to admitting just this. His evidence in cross-examination included these responses. He stated that in determining the amount of interest he would "look at the tax planning of all the companies together", including that:

when you're making an accrual you will also be picking up - another company is going to have to pay - return the interest as assessable income. So that is true, that would be a factor. More often though would be the need to actually move money to a point where I could pay some of the external bills.

222.

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Mr Gould also stated in cross-examination that:

the factual basis [for charging the interest] has to exist [that is, there must be a debt between the entities] and then … after discussions, an invoice has been prepared.

The discussions to which Mr Gould referred were, he claimed, between him and the staff of his incorporated accounting practice and directed to whether or not the proposed interest was "reasonable". He stated that he would each year review the draft financial statements for the purpose of deciding whether he would make entries and call them management fees or interest income and that:

I would certainly have a look at the prima facie taxable income. That's what I was interested in. The actual detailed accounting was of less interest to me, but the tax effect was certainly of interest to me."

The latter was, I thought, as candid a concession as Mr Gould was disposed to make.

223. What I do not accept of this evidence is that the amounts of the interest liabilities claimed by the AA Trust were fixed prior to the end of the financial year to which, as returned and claimed, they purportedly related.

224. My reasons for this non-acceptance are multi-factorial. Underpinning all of them is Mr Gould's eventual concession under cross-examination that his affidavit evidence was largely a re-construction from documents. I have also had regard to the memorandum of 18 July 1997, mentioned already, in relation to the fixing of management fees for the preceding income year. As to the interest claims in respect of "On Shore" loans, I regard this as supportive of a conclusion already otherwise established on an examination of the evidence with respect to particular interest deduction claims, for reasons which I detail below.

225. First I should set out particular passages from cross-examination, cited by the Commissioner, which I accept tell in favour of a conclusion that Mr Gould has engaged in a process of reconstruction from documents. Under cross-examination, Mr Gould accepted that he had "no independent recollection of this conversation, apart from looking at the documents", that "I have to use the documents as an aide-memoire…. I have no independent recollection", that "I rely on documents telling me the date" … "I'm not strong on dates", and that "in general terms you're right" that the dates used in his affidavit evidence for events occurring between the 1980s and around 2010 had been arrived at by a process of reconstruction.

2000 income year - interest claim of $900,000 - CVC IN

226. Mr Gould's evidence was that the loan, as novated from time to time, carried interest at a rate fixed annually. Such was his control over the AA Trust and the alleged creditor in respect of the alleged loan debt, the amount of any interest so fixed could be just an act of will on his part. In theory therefore, the requisite tripartite agreement might readily and lawfully have been made with great informality. Also in theory and for like reasons, the new creditor, CVC IN and the AA Trust might, with similar informality, have agreed that, in consideration for the payment of a sum by way of interest, no demand for re-payment would be made before the expiry of 12 months.

227. The result of the novation claimed was said to be that an amount of $2,288,050.17 was owed by the AA Trust to CVC IN on 30 June 1999. In respect of the 2000 income year, interest of $900,000 on this novated loan debt was claimed. That equates to an interest rate of 39.3%, for that year.

228. Quite how that interest rate for that income year as compensation for the use of the allegedly borrowed sum for a year, could be reconciled at all with the amount of capital borrowed, let alone with very different interest rates for other income years or was explicable other than on the basis that it was a arbitrarily and conveniently chosen amount for fiscal purposes was never satisfactorily explained by Mr Gould. Further, fiscal convenience was not just limited to the position of the AA Trust by interest of that amount. In the 2000 income year, CVC IN had carry forward losses of $48,373 but the effect of the inclusion of this alleged interest in its assessable income meant that, in conjunction with these carry forward losses and other deductions it had available was that, almost precisely, CVC IN had no taxable income for the 2000 income year.

229.

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This aside, there are unresolved evidentiary inconsistencies which leave me unsatisfied on the balance of probabilities as to whether interest in the amount of $900,000 was incurred by the AA Trust in the income year ended 30 June 2000. The profit and loss statement for the AA Trust for that income year has an expense entry for "interest paid " (emphasis added) of $1,590,142. However, there is no note to this statement which details the components of this amount. Neither is that detail otherwise evidenced in the case for the AA Trust. For example, there is no general ledger for either the AA Trust or CVC IN in evidence. Interest as recorded in the "general journal" does not correspond with the interest expense in the profit and loss statement. The trial profit and loss statement for the AA Trust also does not correspond. The general ledger of the AA Trust for the 2001 income year records an increase in the loan from CVC IN of $600,000 on 3 August 2000 and $300,000 on 4 August 2000. These entries do total the claimed $900,000 and might be thought to be some evidence that interest in that amount as incurred in the prior income year had been capitalised. However, any such conclusion would be inconsistent with the "interest paid" entry in the 2000 profit and loss statement.

230. Mr Gould's evidence was that the interest was paid but in the 2001 year. That is inconsistent with the 2000 year profit and loss statement for the AA Trust. It is, however, consistent with evidence that discloses that the AA Trust paid $600,000 to CVC IN on 3 August 2000 and $300,000 to it on 4 August 2000. However, the evidence also discloses that, also on these days, CVC IN paid back to the AA Trust on $600,000 and $300,000 respectively. In other words, on each day, a self-funding round-robin occurred. Even if there were a novated loan as alleged, this round-robin demonstrates, as the Commissioner submitted, that the sums of $600,000 and $300,000 were just incurred and paid not to gain or produce assessable income or in carrying on a business for that purpose but just for the purpose of funding themselves. In itself, that would mean that the claim for a deduction under s 8-1 of the ITAA 1997 failed.

231. As it is, contrary to the position shown on the face of an invoice dated 30 June 2000 for interest in the sum of $900,000, I am just not satisfied that any interest was incurred by the AA Trust in respect of the 2000 income year. Such is the amount of the alleged interest and its convenient fiscal consequence both for the AA Trust and CV IN, it is more likely than not that the figure of $900,000 was just a mere ex post facto choice made by Mr Gould. The claimed interest was a mere façade, a sham, with the invoice being camouflage for that pretence.

232. Even were the incurring of an interest expense other than a sham, the amount of the interest is so disproportionate to the capital sum borrowed that, having regard to Fletcher, it could not be characterised as incurred to gain or produce assessable income or in carrying on a business for that purpose but merely to gain a tax deduction.

233. In short, there are multiple reasons why this deduction claim fails.

2001 Income year - interest claim of $75,000 - GF Trust

234. The AA Trust claimed that a payment of $75,000 to the GF Trust made on 13 June 2001 was interest in respect of the loan as novated. Yet, if it ever occurred, the alleged novation of the loan concerned from CVC IN to the GF Trust such that the GF Trust became the creditor, did not, on the case of the AA Trust, occur until 30 June 2001. Quite how a payment to an entity not then a creditor by novation could constitute interest paid to that creditor was never explained by Mr Gould.

235. This feature of the payment, taken in conjunction with the disproportionate amount of the interest relative to the then amount of the alleged loan and its fiscal convenience (discussed below) suggests to me that the adoption of the characterisation "interest" for it was a mere contrived pretence on the part of Mr Gould, just an ex post facto label, another sham. However, that may be, that the amount was paid other than to the then alleged creditor is itself fatal to the payment having the character of an amount paid to the creditor as compensation for the use of the loaned funds.

236. How in the 2000 income year, interest of $900,000 relative to the outstanding loan balance could be characterised as compensation for the use of the then loan balance whereas in

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the 2001 income year $75,000 was such compensation was never satisfactorily explained by Mr Gould, More likely it is that the amount is wholly answered by his interest in the "prima facie taxable income". Some support for that conclusion is found in the prima facie tax positions of the AA Trust and the GF Trust for the 2001 income year. The purported interest deduction of $75,000 was a contributor to an absence of taxable income for the AA Trust for that year while the purported derivation of corresponding interest income by the GF Trust had no adverse tax consequence for it because, prima facie, it incurred its own interest expense of $1,600,000 to CVC IN. Assuming then that this alleged interest payment was other than a sham, the better conclusion in respect of it, again having regard to the discussion in Fletcher, it is to be characterised as incurred just for tax purposes, not as compensation for the use of the loaned funds.

2005 income year - interest claim of $1,205,000 GF Trust

237. When the AA Trust made a payment of $1,205,000 to the GF Trust on 8 October 2004, it was treated in the AA Trust's general ledger as a repayment of the loan from the GF Trust, not as interest. Only after the end of the 2005 financial year, in the financial statements of the AA Trust, was this amount characterised as interest.

238. An explanation for this may well lie in an analysis offered by the Commissioner in submissions, as I now detail.

239. Also on 8 October 2004, the AA Trust paid $1,780,700 to CVC IN. This was treated in the general ledger as a reduction in the loan from the GF Trust. This same general ledger records total "interest paid" for the year of $461,120. In the profit and loss account for the year "interest paid" is recorded as $1,666,120. The difference between the interest paid in the general ledger and in the profit and loss account is $1,205,000. This correspondence is inherently unlikely to be a coincidence. Hence, it might be inferred that this difference is the $1,205,000, which is no longer being treated as a repayment but is now being treated as interest.

240. Support for this inference is found in the closing balance ($1,238,648.79) of the loan to the AA Trust from the GF Trust in the general ledger. This differs by $103,000 from the closing balance ($1,135,648.79) in the financial statements. This difference is attributed to the fact that in the general ledger the loan is reduced by a distribution on 30 June 2005 of $1,308,000 to the Gould Share Trust. This distribution apparently did not eventuate, as is consistent with the Gould Share Trust not including such a distribution in its 2005 income tax return.

241. Thus, as the Commissioner submitted, it appears that the original intention (inferentially likely to have been that of Mr Gould, given his pervasive control) was for the AA Trust to distribute $1,308,000 to the Gould Share Trust but after the end of the income year it was, instead, decided to describe $1,205,000 of the "repayment" as interest and claim a deduction for this - a difference of $103,000.

242. Also as the Commissioner submitted, further support for such a conclusion is found by an examination of another flow of funds that occurred on 8 October 2004. On that day, Anglo American (probably as trustee of the AA Trust) received $2,000,000 from CVC IM. This receipt in turn funded the payment of $1,780,700 to CVC IN on the same day. In the general ledger of the AA Trust, this $2 million payment was described as a "loan repayment", although it was treated partly as a loan repayment and partly as interest received. Such a treatment is apparent comparing the earlier general ledger of CVC IM, which records the payment as a repayment with the later general ledger which records it partly as interest and partly as a repayment. It does, as the Commissioner submitted, seem inherently likely that this payment was originally treated as a repayment and then this description also was later changed to treat the payment partly as interest.

243. Although Mr Gould also controlled it, the GF Trust did not include the interest income of $1,205,000 in its 2005 income tax return. This is inconsistent with the characterisation of that sum and related deduction under s 8-1 of the ITAA 1997 claimed by the AA Trust in that income year.

244. In my view, the description of the sum of $1,250,000 as interest paid by the AA Trust

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is, for reasons given in the preceding paragraphs, just an ex post facto pretence, a sham. Its intended effect was to give the appearance that the AA Trust made a net loss in the 2005 income year of $105,553,396, after taking into account this purported deduction.

245. However this may be, the changed accounting position leaves me unpersuaded on the balance of probabilities that the payment of $1,205,000 was interest. Further and in any event, as in previous years, the amount of the alleged interest was completely disproportionate to the alleged loan balance and, again having regard to the discussion in Fletcher, is more correctly characterised as incurred solely for tax purposes rather than as compensation for the use of money deployed in gaining or producing assessable income or in the carrying on of a business to that end.

246. These are reasons enough to conclude that this particular deduction claim fails.

247. The Commissioner advanced a further submission, based on evidence of a yet wider context of movements of funds on 8 October 2004. He submitted that the payment by Anglo American (as trustee of the AA Trust) to CVC IN that day was one of a number of payments that day which the effect of moving most of a $4 million fee received from CVC Ltd to entities controlled by Mr Gould offshore. The evidence does offer support for this submission but it is unnecessary to reach any concluded view in respect of it as there are other reasons in any event to deny the deduction claimed.

2009 income year - interest claim of $395,000 - GF Trust

248. There is an entry in the accounts of the AA Trust which, prima facie, supports a conclusion that the AA Trust incurred an interest expense in the amount of $395,000 in the 2009 income year. That it had that character is also supported by a corresponding declaration of this amount as income in the GF Trust's 2009 year income tax return. However, a number of factors tell against reaching such a conclusion.

249. On the evidence, the alleged interest remained outstanding at 30 June 2016. Although it was correspondingly returned by the GF Trust as income in the 2009 income year, that had no adverse tax consequence for the GF Trust for that income year, as its at least prima facie returned overall position for that income year was a net loss, largely occasioned by alleged interest expenses of $1,596,500 to CVC Fund Managers. In turn, although this formed part of what CVC Fund Managers returned as assessable income, its net taxable income was $1,260, resulting in a tax liability of $378. Even this modest liability was offset by tax credits for PAYG instalments of $1,359, resulting in no income tax payable.

250. Viewed yet more widely, in CVC Fund Managers' 2009 return, a deduction was claimed for interest accrued of $3,192,000 to Derrin Brothers Properties Ltd ( Derrin Brothers ). This interest accrued caused the loan from Derrin Brothers to be precisely $30 million. That was precisely an amount purportedly lent by Derrin Brothers to CVC Fund Managers Pty Ltd ACN 120 950 (CVC FM) in 2007. CVC FM was registered on 27 July 2006. It was yet another company under Mr Gould's control. CVC FM, whilst sharing the same name, is a separate and distinct entity to CVC Fund Mangers. This, too, was un-coincidental symmetry without adverse fiscal consequence.

251. Such seemingly felicitous fiscal outcomes are, in my view, inherently more likely than not to be the result of ex post facto designations by Mr Gould. However this may be, as with other interest claims, the amount of $395,000 is disproportionate relative to the outstanding loan balance and inexplicable relative to earlier claimed amounts of interest as compensation for the use of funds. Once more, the discussion in Fletcher is relevant and the claimed deduction is better characterised as just incurred for tax purposes, rather than in gaining or producing assessable income or in the carrying on of a business to that end. The more likely explanation in respect of the claimed interest deduction is, as the Commissioner submitted, that it was calculated to ensure CVC Fund Managers utilised all of its deductions and was placed in sufficient taxable income to utilise the tax credits it had available to it.

252. An overarching requirement in respect of each of the above interest deduction claims is that they be incurred in gaining or producing assessable income or in the carrying on of a

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business to that end. The loan was said by the AA Trust to have been used for the purpose of acquiring a portfolio of income producing assets. With two possible exceptions, none were. One possible exception is a purported loan to CVC IM, which purportedly generated interest income on 8 October 2004. I have used the adjective "purported" deliberately to describe that alleged interest income. For reasons already given, I am not satisfied on the balance of probabilities that this was interest. The other exception, promoted by the AA Trust in submissions, was said to be interest in the 1993 income year. However, as the Commissioner submitted, the ledger accounts relied upon are inconclusive in this regard.

253. Although I have made separate reference to each of these interest deduction claims, in reaching my conclusion that no individual deduction as claimed is proved, I have also considered the collective import of those interest claims in terms of Mr Gould's credibility and of the likelihood that each claim was a mere ex post facto pretence created by him via his overall position of control. That collective consideration has fortified my view that Mr Gould's evidence in chief about these interest claims must be treated with caution and that it is more likely than not that each was but a sham.

2005 income year - interest claim of $2,090 - Photo Advertising

254. There is some evidence, in the form of reallocations recorded in accounts, that the AA Trust incurred an interest expense of $2,090 in the 2005 income year in respect of a loan. It is true, as the Commissioner submitted, that there is no evidence to show that either the loan itself or the claimed interest were paid. This is not necessarily fatal. However, as the Commissioner also submitted, and which was not credibly explained in the case for the AA Trust, there is no apparent relationship between the claimed interest amount of $2,090 and the purported underlying loan, said originally to have been $200,000 on 26 June 2003. In this instance, the alleged interest is so disproportionately low in the 2005 income year as to make it more likely than not that this, too, was a mere ex post facto pretence or in any event, not incurred for the purpose of gaining or producing assessable income or in the carrying on of a business to that end, as opposed purely for taxation purposes. I therefore hold that this deduction claim fails.

2009 income year - interest claim of $93,000 - Melbourne Insurance

255. Mr Gould's evidence in chief was that the AA Trust incurred interest of $93,000 in respect of a loan from Melbourne Insurance to the AA Trust on 11 July 2005. The alleged interest was expensed by the AA Trust on 3 September 2008 by journal entries,

256. This evidence is inconsistent with the position as disclosed by the financial statements (general journal and profit and loss statement) and income tax return of Melbourne Insurance in respect of the 2009 income year.

257. As already mentioned, Melbourne Insurance is another company controlled by Mr Gould.

258. In the face of this inconsistency, I am not satisfied on the balance of probabilities that the claimed interest expense was incurred. In this instance also, Mr Gould's evidence and an apparently supporting journal entry is unreliable.

259. The Commissioner also submitted that there was no evidence of any obligation to repay the alleged loan. He pointed to evidence of a wider context which he submitted showed that the alleged loan was but part of a round-robin of fund transfers within companies controlled by Mr Gould that purported to repay the AA Trust's purported loan from HWBB. He also pointed to evidence that the alleged loan was reduced by $350,000 by a reallocation of indebtedness between Australian entities controlled by Mr Gould on 30 June 2008 and then eliminated altogether by a further such "reallocation" of indebtedness on 30 June 2009. These features are not necessarily inconsistent with the existence of a loan. As mentioned above, it is quite possible within a closely controlled group of entities for a binding contract, in this instance a loan agreement a necessary feature of which is an obligation to repay, to be formed with great informality. Granted in such circumstances much depends on the credibility one gives to the evidence of those in control and the financial accounts under their control and

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that there is reason to doubt Mr Gould's credibility. However, given that, even assuming there was an alleged related loan, the claimed interest deduction has failed, it is unnecessary to reach a conclusion as to whether there was in fact a loan.

2000-2005 income years - Deductions claimed for facility fees and interest to HWBB

260. HWBB was incorporated in then then Western Samoa on 17 January 1994. Like Cheung Wah Bank, management services were provided to it by the Samoa office of Asiaciti.

261. Ms Sua's evidence, which on this subject also I accept, was that HWBB was administered for Mr Gould and that the directors of HWBB acted on the instructions of Mr Gould.

262. Ms Sua's evidence was corroborated by that of a director of HWBB, Mr Carran. His evidence was that Mr Gould's instructions were followed in relation to the operations of HWBB.

263. The principal business of HWBB was the provision of financial services to clients (or entities controlled by clients) of Mr Gould's incorporated accountancy practice. Typically, such clients settled money on a Samoan superannuation fund. The superannuation fund then placed that money on deposit with HWBB, and HWBB then advanced an interest-bearing loan to an Australian entity. That Australian entity would be related to the contributory to the superannuation fund. The financial statements of HWBB accurately reflect this principal business.

264. The share capital of HWBB was held by Pacific Securities Inc, a Creditor Controlled Company with one bearer debenture issued to JA Investments. From 1998 onwards, Pacific Securities Inc was owned JA Investments. JA Investments was thus the ultimate corporate owner of HWBB.

265. JA Investments is a company incorporated in the Cayman Islands. Its Memorandum and Articles of Association contain some features which are unusual, if viewed from an Australian perspective. However that may be, they provide that members of the company can only be admitted if nominated by the "Appointer". Directors can be appointed and removed by the members. On winding up, all but $100 must be paid at the direction of the Appointer. Mr Gould was the Appointer of JA Investments and MH Investments Ltd.

266. Shares in JA Investments were held by Offshore Nominees Ltd ( Offshore Nominees ) between 14 April 2003 and 6 February 2009, when they were transferred to Mr Borgas. Offshore Nominees held the shares in JA Investments for Mr Gould pursuant to a Nominee Agreement dated 31 August 2005 under which the nominee agreed to deal with the shares as Mr Gould directed.

267. I agree with the Commissioner's submission that there is no plausible reason why Mr Gould entered into the Nominee Agreement with Offshore Nominees unless he both controlled and was the ultimate beneficial owner of JA Investments.

268. The address given for Mr Borgas in the 2004 annual return for HWBB was in Switzerland, care of a Swiss company Anglore SARL. In evidence, Mr Gould referred to Anglore SARL as Mr Borgas' company. In correspondence in evidence, Mr Gould referred to it as Mr Borgas' "family company". Other corporate records and correspondence in evidence record Mr Borgas and his wife giving Anglore SARL as their address. On the whole of the evidence, Mr Borgas is a corporate service provider providing either directly or via a corporation nominee services to others in return for a fee. Unlike Mr Gould, he had no ultimate beneficial interest in JA Investments. It is inferentially likely that the appearance of his name on the share register of JA Investments was just a manifestation of a nominee service for Mr Gould. That is consistent with Mr Gould's evidence that a "corporate service provider" administers companies and other entities for its external clients in exchange for a fee, including providing directors of companies, and that throughout his career he regarded such arrangements as an ordinary aspect of commercial life.

269. Mr Borgas was not called as a witness. However, for the avoidance of doubt, I record that I consider that the pendency of criminal proceedings against Mr Gould at the time of the hearing of this proceeding offered a reason why Mr Borgas was not called by the AA Trust. I

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have not drawn any adverse inference against the AA Trust based on a failure to call Mr Borgas. All that it means is that on subjects in relation to which he might have given evidence findings have been made without the benefit of his evidence. This same explanation is not as readily apparent in relation to other witnesses whom I mention elsewhere, who may or may not have corroborated Mr Gould's evidence but who were not called by the AA Trust.

270. My conclusion as to Mr Gould's ultimate beneficial ownership of HWBB accords precisely with the practical control of HWBB to which each of Ms Sua and Mr Carran attested. HWBB was one of many corporate alter egos of Mr Gould.

271. That conclusion also accords with statements in HWBB's application for a Samoan "offshore banking licence" lodged on 7 April 1994. This indicates that the shareholders of HWBB acted as agent or nominee for Mr Gould, that Mr Gould was the beneficial owner of HWBB, and that the nature of the business to be conducted by HWBB was to "act as the financial intermediary for clients of Gould Ralph and the related offshore entities of those clients." Gould Ralph, it will be recalled, was the incorporated accountancy practice of which Mr Gould was then a principal. The letters in support of that application refer to Mr Gould (and notably not to Mr Gowrie-Smith).

272. Mr Gould's evidence was that, when he assisted in the formation of HWBB, he "expected that the … directors of the Bank in Samoa would manage [HWBB] broadly in accordance with what [he] suggested they should do" and that he was the person with "prime responsibility for the day to day control of what happened with [HWBB]". This statement was true in so far as it went but an understatement as to his interest in HWBB. It is another example of Mr Gould's lack of candour in his evidence.

273. A corollary of this conclusion is that I do not accept Mr Gould's evidence that a Mr Richard Lead of HWBB put "the initial formation" in Mr Gould's name rather than in Mr Gowrie-Smith's name because Mr Lead had "all the information relating to [Mr Gowrie Smith] available". On this subject, too, perhaps evidence from Mr Gowrie-Smith might have cast a different complexion, but I did not have the benefit of any evidence from him. So, too, might evidence from Mr Lead have cast a different complexion. However, Mr Lead was another notable absentee from the witness box.

274. The Commissioner's case was that Mr Gould's interest in and control over HWBB was a necessary prism through which to view each of the interest and facility fee dedication claims involving HWBB. I agree.

275. It does not necessarily follow that so viewing the interest and facility fee deduction claims leads to the primary conclusion for which the Commissioner contends, which is that the loans to which these claims relate were shams. What it does do is to place Mr Gould as the person in ultimate control of the AA Trust as the alleged borrower and HWBB as the alleged lender.

276. It is tempting just to reason that, because, management fee deduction claims and other interest deduction claims were, for reasons given above, mere ex post facto constructs by Mr Gould, just shams, because one might well regard as questionable the loans made by HWBB to client Australian entities as part of its principal business as described and because of his absence of candour both about his effective beneficial ownership of HWBB and otherwise as noted above, it must follow that the alleged loans from HWBB and related, alleged interest and facility fees now in question were also shams. However, for reasons which follow, that temptation is one to be resisted. The foundation for those interest and facility fee deductions is very different to those other deduction claims and purported loans.

277. The case for the AA Trust is that the alleged loans were made pursuant to written loan agreements made between it and HWBB.

278. On or about 1 June 1994, the AA Trust made an agreement in writing with HWBB for a loan facility with an interest rate of 5% over LIBOR ( 1994 loan agreement ). "LIBOR" refers to London Interbank Offered Rate. This agreement contained a repayment obligation. This facility was replaced by a later agreement in 1999.

279. By a letter dated 1 July 1999 HWBB made an offer to the AA Trust to enter into a

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loan agreement on terms set out in that letter. Included in that letter were the following:

PURPOSE OF LOAN: Working capital finance

TERM OF LOAN: Five (5) years

REPAYMENT DATE: 30 June 2004

SECURITY: A Deed of Loan supported by:

  • 1. A registered Fixed and Floating Charge over the assets and undertakings of Anglo American Investments Pty Limited.
  • 2. Other such security that the Hua Wang Bank solicitors and accountants may consider necessary upon further investigation.

Such securities are to be verified by Hua Wang Bank's solicitors as satisfactorily meeting Hua Wang Bank's requirements as Mortgagee.

GUARANTEE: Hua Wang Bank requires the loan to be jointly and severally guaranteed by Vanda Russell Gould.

INTEREST RATE:

The Higher Rate reducing to the LOWER RATE FIXED provided payments are made on time and there is no default under any of the securities or any other terms and conditions of the loan.

The Higher Rate will the sum of the Lower Rate plus 5% p.a.

The Lower Rate will be the LIBOR rate prevailing at the date of the advance in the London money market for borrowings by prime banks such as Hongkong & Shanghai Banking Corporation Limited plus a margin of 5%.

Hua Wang Bank will arrange for the Facility Amount to be available on the appointed settlements date. If settlement should not occur for any reason, you will be responsible to pay interest from the nominated date.

INTEREST REVIEW: The interest rate will vary during the term of the loan in accordance with movements in LIBOR.

AMOUNT AND METHOD: Interest on the advance will be calculated on daily rests, with the annual interest cost being charged to the account on 30 June each year.

280. The records of HWBB contain a form of acceptance signed on behalf of Mr Gould dated "1999", with no month or day recorded, which includes agreement by him to the provision of the requested personal guarantee.

281. Also on 1 July 1999, the AA Trust entered into what, on its face, was a loan facility agreement with HWBB for $4,000,000 ( 1999 loan agreement ), consequential to this loan offer.

282. The 1999 loan agreement contains the following.

Clause 7 ESTABLISHMENT FEE

The Borrower must pay to Hua Wang Bank on or before the date of this document a non-refundable establishment fee as set out in the Offer Letter or otherwise advised by Hua Wang Bank to the Borrower.

Clause 4.3 Drawdown

  • (a) The Borrower may request an Advance by giving a Drawdown Notice to Hua Wang Bank by 11.00 a.m at least 2 clear Business Days before the date the proposed Advance is required.
  • (b) An Advance must not be for an amount which when added to the Outstanding Principal (if any) will cause the Facility Limited to be exceeded.

Clause 17.8 Amendment

This document may only be varied or replaced by a written document duly executed by Hua Wang Bank and the Borrower.

In Schedule 1:

Item 3: Collateral Security

Personal guarantee of Vanda Russell Gould

Item 4: Facility Limit

Four million Australian dollars (A$4,000,000)

Item 6: Repayment Date

30 June 2004

Item 7: Unused Facility Fee

One and one-half per centum (11/2%) on the unused portion of the Facility calculated monthly.

283. Clause 6 of the 1999 loan agreement contains a repayment obligation.

284.

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On 8 October 1999, notification of the details of a charge over the fixed and floating assets of the AA Trust was registered with the Australian Securities and Investments Commission ( ASIC ). This evidences compliance with one of the requests for provision of security for the loan.

285. The evidence discloses an annual pattern, from 1994 up to and including the income years in question, whereby HWBB invoiced the AA Trust in respect of an interest liability and a facility fee, at least prima facie in accordance with the prevailing contractual loan arrangement between it and the AA Trust. Also part of this annual pattern is that, shortly after the receipt of each invoice the AA Trust transferred a corresponding amount (less 10% Australian withholding tax), usually to the bank account of HWBB but sometimes to that of its wholly owned subsidiary, Hua Wang Finance Ltd ( HWF ).

286. The annual pattern, as revealed by the evidence, may be summarised as follows:

Date Invoice Total Amount Paid
1 30 June 1995 $85,923 $77,892
2 30 June 1996 $186,250 $169,083
3 15 May 1997 $177,250 $160,225
4 30 June 1998 $241,672 $220,055
5 30 June 1999 $305,259 $277,358
6 30 June 2000 $390,958 $354,249
7 30 June 2001 $435,900 $393,990
8 10 June 2002 $259,470 $234,588
9 30 June 2003 $264,618 $239,221
10 1 June 2004 $439,650 $396,776
11 1 June 2005 $469,680 $423,777

287. An example of this pattern is offered by an HWBB invoice dated 14 June 2000. By this HWBB invoiced the AA Trust for the payment of an interest amount of $365,833, a facility fee of $5,125 and a fee for the increase in the facility of $20,000 on the advance of $3,700,000. As to the facility increase, the invoice contains a statement by HWBB that approval had been granted to increase the facility from $4,000,000 to $5,000,000, effective 1 July 2000. By a consequential facsimile communication, HWBB requested the AA Trust that to transfer from its bank account (nominated) to that of HWBB (nominated) the sum of $354,249.70 on 19 July 2000. A related withdrawal of $354,249.70 and $36,583.30 occurred on 20 July 2000. The smaller sum appears to relate to withholding tax of $36,833, which was remitted to Commissioner.

288. The accounting records and bank statements of the AA Trust are consistent with the claimed incurring of interest and facility fees. So, too, are those of HWBB.

289. By a letter dated 1 June 2004, HWBB advised the AA Trust that it was prepared to roll over the existing facility to 30 June 2009. The facility was rolled over but did not run its full new term. Instead, on 11 July 2005, Melbourne Insurance loaned $4,275,000 to the AA Trust. The AA Trust then used this money to discharge its debt to HWBB by transferring $4,290,000 to HWF.

290. The discharge in this manner of the debt of the AA Trust can, on the evidence, be viewed in a wider context. The funds loaned by Melbourne Corporation to the AA Trust were sourced in Chemical Trustee. After the transfer by the AA Trust to HWF, HWF transferred the funds to Chemical Trustee. The debt discharge transaction was, therefore, part of a "round-robin" of funds transfers between entities, each of which was controlled by Mr Gould. That there was such a round-robin is not contested by the AA Trust. However, the point made for the

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AA Trust is that the fact that, in the 2006 income year:

[Mr] Gould's onshore interests paid off the [rolled over loan from HWBB] by taking a loan from a different member of the same offshore group of companies does not affect the status of interest liabilities which were incurred on the [earlier loans from HWBB] in 1995 - 2005.

There is merit in that point. And it tells against a conclusion that any of the loan agreements, advances thereunder or related interest and facility fee payments was a sham.

291. Mr Gould's evidence was that he intended the 1999 loan agreement with HWBB, its predecessor and its successor roll-over to be binding. Necessarily, that reflects an intention held by one and the same person who controlled both the alleged lender, HWBB, and the alleged borrower, the AA Trust. On this subject, I consider an observation made by the New Zealand Court of Appeal in
Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230, at [63], to be apposite:

Whether these transactions are shams depends primarily on the states of minds of Dr Muir and Mr Bradbury as to their genuineness. Given that it is not to their advantage that the transactions be shams, it might be thought a little perverse to attribute to them states of mind which are inconsistent with their best interests.

It was likewise not to Mr Gould's advantage for either the 1994 loan agreement, the 1999 loan agreement and its rollover, consequential funds transfers said to be loans or, as the case may be, interest payments and facility fees to be shams. Here, too, it would be more than a little perverse to attribute to Mr Gould a state of mind contrary to his best interests.

292. As it happens, although each was a functionary who routinely implemented directions given by Mr Gould in relation to the operations of HWBB, Ms Sua and Mr Carran each also intended that the 1999 loan agreement (applicable during their tenure) make provision for loans, that monies paid thereunder to the AA Trust were loans and that related monies received by HWBB from the AA Trust were interest or, as the case may be, facility fees.

293. In
Hitch v Stone (Inspector of Taxes) [2001] STC 214, at 230, at [65] - [69], Arden LJ (with whom Kay LJ and Sir Martin Nouse agreed) offered these observations in relation to the determination of whether a documented transaction is a sham:

Her Ladyship's reference in this passage to Snook is a reference to the leading modern English authority on sham,
Snook v London & West Riding Investments Ltd [1967] 2 QB 786, at 802, per Diplock LJ. In Raftland at [149], these

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same five points were made by Kirby J as to considerations which were relevant in deciding whether an impugned transaction was a sham. I do not understand there to be any difference as between the law of the United Kingdom and that of Australia in respect of the determination of whether a transaction is a sham.

294. It is necessary not to conflate the operations of HWBB in relation to clients of Mr Gould's incorporated accounting practice with its separate dealing with the AA Trust.

295. HWBB's audited annual financial statements disclose that most avowed loans made by it had a matching deposit owed to a Samoan superannuation fund. Whether these were loans may be questionable but it is not necessary for the purposes of this proceeding to determine whether such avowed loans were shams, only to recognise that this pattern of conducting business differed in relation to the loans allegedly made pursuant to the 1999 loan agreement.

296. In all, there were 14 transfers from HWBB to the AA Trust, each of which is said to be a loan. They total $4,280,000. The table below is a summary of them, which also shows the related source of funds for HWBB.

Date Loan advance Source of funding for the loan advance
1. 18 July 1994 $300,000 A $850,000 deposit by Normandy Finance and Investments Ltd (NFIL) on 11 July 1994. NFIL was a UK entity associated with Mr Gould.
2. 18 July 1994 $215,000
3. 9 May 1995 $350,000 A $350,000 deposit by Derrin Brothers on 4 May 1994. Derrin Brothers was a UK entity associated with Vanda Gould.
4. 3 August 1995 $500,000 - $177,612 from HWBB's retained earnings
- $230,000 from the contributed capital of HWBB
- $77,892 paid to HWBB by Anglo American as interest in response to an invoice dated 30 June 1995.
- $149,930 from Lagosta Ltd, a UK entity associated with Mr Gould.
5. 26 July 1996 $175,000 $169,043 that was paid to HWBB by Anglo American as interest on the date, in response to HWBB invoice dated 30 June 1996.
6. 28 July 1997 $450,000 Money held by HWBB on two different term deposits of $300,000 and $150,000.
7. 2 September 1997 $150,000 A $199,975 deposit by Chemical Trustee on 22 August 1997. The balance of $1,000 was already in HWBB's bank account.
8. 24 June 1998 $500,000 A $500,000 deposit by Chemical Trustee on 22 June 1998
9. 16 September 1998 $250,000 $220,000 that was paid to HWBB by Anglo American as interest on 10 September 1998, in response to HWBB invoice dated 30 June 1988.
10. 26 July 1999 $300,000 Money held by HWBB consisting of retained earnings.
11. 9 August 1999 $250,000 A $277,313 payment of interest by Anglo American to HWBB on 29 July 1999, in response to HWBB invoice dated 30 June 1999.
12. 20 August 1999 $250,000 A $640,800 term deposit on 17 August 1999, held by HWBB with the Samoan branch of the ANZ bank.
13. 25 August 2000 $200,000 A $354,219 payment of interest by Anglo American to HWBB on 24 July 2000, in response to HWBB invoice dated 14 June 2000.
14. 17 July 2001 $390,000 A $393,960 payment of interest by Anglo American to HWBB on 12 July 2001, in response to HWBB invoice dated 4 June 2001.

297. By reference to the evidence summarised in this table, the AA Trust offered in submissions a persuasive analysis which demonstrated how the advances in question in this case differed from the invariable, superannuation fund matching deposit method employed with clients of Mr Gould's incorporated accounting practice. Reference to this table discloses that many of the occasions when the AA Trust borrowed back a payment of interest and facility fees occurred as part of a larger draw-down from HWBB which resulted in a net increase of funding for it (rather than simply reversing the effect of the interest payment). Further, the AA Trust re-borrowed less than half the interest and fees that it paid to HWBB. Over the life of the loan the AA Trust paid a total of $3,256,611 to HWBB, and it re-drew only $1,306,935 of this amount.

298. Yet further, the evidence also discloses that, on many occasions when the AA Trust promptly borrowed back as a loan advance a payment of interest, it was otherwise short of funds. The following comparative analysis of advances and account balance of the AA Trust is instructive.

Date Loan advance Bank balance
1. 18 July 1994 $300,000 $2,064.30
2. 18 July 1994 $215,000 $2,064.30
3. 9 May 1995 $350,000 $273,337.28
4. 3 August 1995 $500,000 $56,260.36
5. 26 July 1996 $175,000 $18,144.05
6. 28 July 1997 $450,000 $31,836.39
7. 2 September 1997 $150,000 $87,120.41
8. 24 June 1998 $500,000 $81,092.82
9. 16 September 1998 $250,000 $17,871.21
10. 26 July 1999 $300,000 $9,308.28
11. 9 August 1999 $250,000 $50,831.92
12. 20 August 1999 $250,000 $200,816.92
13. 25 August 2000 $200,000 $10,375.32
14. 17 July 2001 $390,000 $16,884.61

While the 26 July 1996, 16 September 1998 and 9 August 1999 advances were each funded almost exclusively by an anterior payment of interest; the first two of these loan advances occurred when the AA Trust had less than $20,000 in its account. On the other occasion the AA Trust had $50,831 in its account. Even on these three occasions, the AA Trust did not re-borrow the entirety of the interest payment it had made. These occasions aside, overall an advance occurs when the AA Trust has an apparent need for working capital.

299. These are features which distinguish the advances to the AA Trust from other lending practices of HWBB. It was submitted for the AA Trust that, objectively, re-borrowing after payment of interest was related to an assessment of its need for capital. I agree. In

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relation to the AA Trust and within a group of companies controlled by Mr Gould, HWBB is fulfilling a role of in-house financier. One of the ways in which it derived its income was via the making of interest bearing advances to the AA Trust and the receipt of related facility fees. The way in which it fulfilled its role might be unconventional by the standards of a major public bank but that does not make the alleged loans shams.

300. The Commissioner submitted that the fact that income tax returns and asset and liability statements for Mr Gould as guarantor and the financial statements of the AA Trust were not supplied by the AA Trust to the HWBB indicated that the 1999 loan agreement and alleged loans made hereunder were shams. So, too, it was submitted did the absence of compliance with the requirement for a drawdown notice in advance of a drawdown. Each of these, on the face of the 1999 loan agreement (and in terms of the preceding offer) was a contractual requirement. The evidence of Ms Sua and Mr Carran confirmed such departures. But that same evidence also contained avowals that the transfers in question were indeed loans.

301. I accept that in certain circumstances departure from or the ignoring of contractual terms can be an indication that the parties never intended to be bound by a supposed contract but that is not always so. It can reflect a consensual variation.

302. Given Mr Gould's control over both the AA Trust and HWBB, he was able to cause HWBB to waive contractual requirements which might otherwise be thought to be for its benefit, eg the provision of financial information about him and the AA Trust. The financial information requirements which were waived concerned information he already well knew. In these circumstances, non-compliance is better viewed as a consensual waiver.

303. In contrast, Mr Gould had no control over the consequence that the remittance abroad of funds said to be by way of interest attracted withholding tax. Such tax was paid. It is distinctly odd to do that if the loan and the apparent interest in respect thereof are shams. Also distinctly odd if the 1999 loan agreement is a sham is the registration of a charge. So, too, is the ultimate payment of the outstanding loan balance. Subsequent conduct is relevant. And the conduct noted is inconsistent with the existence of a sham. Indeed, Mr Gould, Ms Sua, Mr Carran and subordinates have gone to a great deal of bother for a great many years in preparing and rendering invoices and preparing and, in the case of HWBB, auditing accounts if these alleged loans and related interest and facility fees were but shams.

304. The Commissioner also pointed to the absence in the 1999 loan agreement of a specific definition of the interest rate. However, neither in that agreement nor in the preceding offer which Mr Gould caused to be accepted nor in the administration of the agreement was the subject of interest ignored. The agreement provided for the fixing of interest within a range. That is what occurred.

305. I had the benefit of hearing expert evidence from a Mr Russell Good ( Mr Good ) a former bank executive. I thought Mr Good amply fulfilled the role expected of an expert witness and gave honestly held opinions as to banking practice as he had experienced it. The Commissioner pointed to his evidence as to how the absence of precise specification of the interest rate in the 1999 loan agreement was to be contrasted with banking practice as he experienced it in 1999 as another indicator that the agreement and all that purportedly flowed under it were but shams. This does not necessarily tell in favour of a conclusion that the 1999 loan agreement was a sham and that each of the advances thereunder and related interest and facility fees was a sham. Mr Good also described the rate of interest which came to be fixed from time to time as "very competitive and attractive" and offered the opinion "I do not believe an Australian lender would have provided the facility at a rate as attractive as that offered". Mr Good accepted that the interest rate was competitive having regard to the asset position of the AA Trust and market conditions.

306. The point is that, although ultimately controlled by an Australian resident (Mr Gould), HWBB was neither an Australian based lender nor a major bank conducted by a public company. Observations made by the Full Court in
Federal Commissioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526 ( BHP Billiton Finance ), at [1], [2] and [33], taken up in this way by Edmonds J (with whom Bennett and Middleton JJ agreed) in
Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325 ( Ashwick ), at [31], are apt:

what is or is not in the ordinary course of a taxpayer's business of lending money must be determined by reference to the context in which the business is carried on, not by reference to the way in which a major bank might carry on its business.

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The context in which HWBB carried on its business had two dimensions, one as a provider of financial services with respect to clients of Mr Gould's incorporated accounting practice, the other as an in-house source of funds for the AA Trust, as occasion required and the resources of HWBB permitted. The latter dealings may well have been idiosyncratic by the standards of a major public bank but that does not mean that either the 1994 loan agreement, the 1999 loan agreement and the rollover or advances thereunder were shams.

307. For these reasons, I am satisfied that the 1994 loan agreement, the 1999 loan agreement and the rollover and the advances were what they were purported to be. In form and in substance the agreements provided, for the making of loans. That was a reflection of the intention of the parties to those agreements. They were not shams. And neither were the advances consequentially made thereunder.

308. That neither of the loan agreements (or the rollover) was a sham means that, Pt IVA of the ITAA 1936 apart, I am not entitled to treat them as if in substance they were something else. Recently, in
WorkPac v Rossato (2021) 95 ALJR 681 ( WorkPac v Rossato ), at [97], of the joint judgment, it is stated that, "The character of the relationship between the parties is established by the rights and obligations which constitute the relationship." Earlier in the joint judgement in WorkPac v Rossato, at [62], it is stated:

62 To insist upon binding contractual promises as reliable indicators of the true character of the employment relationship is to recognise that it is the function of the courts to enforce legal obligations, not to act as an industrial arbiter whose function is to synthesise a new concord out of industrial differences. That it is no part of the judicial function to reshape or recast a contractual relationship in order to reflect a quasi-legislative judgment as to the just settlement of an industrial dispute has been emphatically the case in Australia at the federal level since the Boilermakers Case.

[Footnote references omitted]

309. The relevance of these recent statements is not confined to industrial law. Pt IVA apart, it is likewise no part of the judicial function to reshape or recast a contractual relationship in order to reflect a quasi-legislative judgment as to the just taxation of a particular corporate or natural person or a trust. In this regard observations made in
Slutzkin v Federal Commissioner of Taxation (1977) 140 CLR 314, at 319;
Inland Revenue Commissioners v Europa Oil (NZ) Ltd [1971] AC 760, at 771 and, in the application thereof, by Bowen CJ in
Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375, at 387, remain good law.

310. The Commissioner also put that the claimed deductions of interest and facility fees in respect of the loan advances from HWBB were not what they purported to be. This submission also owed much to an assimilation of the deduction claims of the AA Trust for these items with the position in respect of the practices of HWBB in relation to Samoan superannuation funds. It is neither necessary nor desirable to reach any general conclusion about whether such practices entailed sham transactions. An example was considered in Fitzroy Services v Federal Commissioner of Taxation, In that case, Edmonds J concluded that the alleged loans on which interest was said to be payable were not a disguise for some other transaction which was the real transaction. In this proceeding, that conclusion is res inter alios acta. All it is necessary to note is that, even with a client, a sham loan would not have been an efficacious source of any deduction under Australian income tax law in respect of what purported to be interest. However this may be, as already pointed out in relation to the Commissioner's submission with respect to the loan agreements (and rollover) with

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the AA Trust and the advances made thereunder, these are a different aspect of the operations of the HWBB.

311. Once again, Mr Gould, Ms Sua and Mr Carran and others went to a very great deal of trouble over many years consistently to carry the 1999 loan agreement (and its predecessor and the rollover) into effect in terms of invoicing, the making of related payments, including withholding tax, and accounting for the same. With only a single exception, every interest liability that the AA Trust has claimed as a deduction was satisfied by a transfer of funds by it. Each had a contractual foundation. In the exceptional case, the capitalisation of the interest liability occurred, inferentially, consensually, given Mr Gould's over-arching control, capitalised. The point is that liability was not ignored.

312. The facility fees charged and paid have a contractual foundation. Clause 7 of the 1999 loan agreement made express provision for a fee in respect of the renewal of the facility. Clause 14.1(a)(3) of that agreement provides for a charge in respect of an increase in the facility limit. Clause 5.6 of that agreement makes provision for a fee in respect of the un-used portion of the loan facility. Such fees were charged for the 2001 to 2005 income years. Over these years, the undrawn portion of the facility varied between $1.3 million and $710,000. Thus, the facility fees charged, paid and claimed each had a contractual foundation which was observed in practice.

313. In reaching my conclusion that none of the loan agreements or advances thereunder were sham I have expressly taken into account an inquiry made of Mr Gould on behalf of HWBB by another employee of Asiaciti, Ms Sharlene McFarland, by a facsimile dated 4 December 2002. She requested Mr Gould to advise how he had arrived at a customer deposit figure of $4,290,000, given that the records of HWBB indicated a deposit of $2,950,000 for Anglo American (then acting as trustee of the AA Trust). Mr Gould responded by a letter dated 6 December 2002 and sent by facsimile in which he advised it would be appropriate to identify the deposit as flowing from Chemical Trustee in the amount of $4,290,000. This was taken up in the financial statements of HWBB. By way of background, on the evidence, the deposit concerned was, at one stage, identified in the accounts of HWBB as being held by Derrin Brothers, and then by Chemical Trustee. HWBB's 2001 audit file contains a list of deposits and deposit-holders in which the identity of one depositor, Chemical Trustee, has been crossed out in handwriting, and the words "Anglo American Investments Pty Ltd" written in its place. The final version of HWBB's 2001 financial statements records Anglo American as both a deposit-holder and a borrower from HWBB. Ms Sua's evidence was that not every entity recorded in HWBB's financial statements as a deposit-holder had actually transferred money to HWBB. Mr Gould and Mr Carran agreed with this in their evidence. In the 2002 financial statements of HWBB, Chemical Trustee was recorded as holder of the deposit. Consistent with this position, when in July 2005, the AA Trust discharged its loan indebtedness, HWBB transferred the entire repayment amount to Chemical Trustee. The advice given by Mr Gould in December 2002 confirms the otherwise apparent control which he exercised over HWBB. However, viewed in context, it does not have the consequence that the AA Trust has failed to discharge its onus of proving that the loan agreements, advances, interest and facility fees were indeed what they purported to be.

314. The same reasoning which grounds my rejection of the Commissioner's submission that the loan agreements and advances were shams grounds my rejection of his submission that the interest and facility fees paid were anything other than what they purported to be. The payments compensated HWBB for the use of its money and for the provision of the facility.

315. Insofar as some interest amounts differed from the amount one might prima facie have expected, in this respect also Mr Gould's effective control of both lender and borrower enabled him to cause an agreed variation. But the end to which such variations occurred was always compensation for the use of funds advanced. It bears repeating that it was in Mr Gould's interest, and thus that of the AA Trust, for the payments to HWBB to be what they purported to be. I just have no doubt,

ATC 25760

for all of my reservations on other subjects about Mr Gould's candour, that this was his intention in relation to these payments to HWBB.

316. It does not follow from a conclusion that neither the advances from HWBB nor the interest and facility payments to it were not shams that the AA Trust is entitled under s 8-1 of the ITAA 1997 to claim them as deductions from assessable income. The AA Trust must additionally prove that the funds advanced were deployed for income producing purposes. First and foremost, that is dependent on the characterisation of the claimed expenditure so as to determine whether it is incidental and relevant to the end of gaining or producing assessable income: Fletcher, at 17.

317. One submission made by the Commissioner was that, in an economic sense, particular advances had returned to the AA Trust the interest paid by it to HWBB; hence those advances should not be treated as having an income-producing purpose. However, this submission, with respect, does violence to longstanding, binding authority. The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure. The character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: see, in addition to Fletcher at 17;
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337, at 363;
Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428, at 445-447, 454.

318. However, what the Commissioner may have been suggesting is that the Court should avoid what Professor Parsons (R W Parsons, Income Taxation in Australia - Principles of Income, Deductibility and Tax Accounting, paragraphs 9.17 to 9.26) memorably termed a "judicial approach characterised as 'form and blinkers'". If so, then I accept that characterisation depends on an examination of the whole of the circumstances in which a particular claimed expenditure has been made to determine whether there exists "a genuine and not colourable relationship between the whole of the expenditure and the production of such income": Fletcher, at 18.

319. HWBB made 14 separate advances by way of loan which were each paid into to a bank account of the AA Trust. In submissions, these bank account deposits were given alphabetic designations, the first being termed "Deposit A" and so on to "Deposit N". They totalled $4,280,000. An analysis of the bank account discloses that the funds advanced were applied via 209 separate expenditures.

320. The AA Trust initially offered, via a summary prepared by Mr Jones, a "Last In First Out" ( LIFO ) analysis of the expenditures. However, it came also to promote, and primarily to rely upon, a "First In First Out" ( FIFO ) analysis.

321. The root authority in respect of a FIFO analysis is Clayton's Case ,
Devaynes v Noble (1816) 1 Mer 572; [1814-23] All ER Rep 1. It adopts a principle that where, as is the case here, sums have been mixed in a bank account as a result of a series of deposits, withdrawals are treated as withdrawing the money in the same order as the money was deposited. Other types of analysis are possible. As Woolf LJ (as his Lordship then was) pointed out in
Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22, at 35, other methods are known and have been adopted where they are more fair. Another such method is what is known as the "rolling charge" or "North American solution". The latter name is referable to a view expressed in some Canadian and United States authorities that it is fairer than the rule in Clayton's Case. As Woolf LJ described it, at 35:

This solution involves treating credits to a bank account made at different times and from different sources as a blend or cocktail with the result that when a withdrawal is made from the account it is treated as a withdrawal in the same proportions as the different interests in the account … bear to each other at the moment before the withdrawal is made.

322. The Commissioner did not contend for the adoption of this or any other alternative on the basis that, in the circumstances of the present case, a FIFO analysis was an arbitrary, inappropriate way of discharging the onus of

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proof that fell on the AA Trust to prove that the funds advanced to it from time to time by HWBB had been deployed to income producing ends. The Commissioner's analysis, as it came to be made, was directed to demonstrating that, irrespective of whether a FIFO or a LIFO analysis was adopted, the AA Trust had not discharged its onus of proving that the claimed expenditures were deductible under s 8-1 of the ITAA 1997.

323. As was put on behalf of the AA Trust in submissions, a weakness in a LIFO analysis in the circumstances of the present case is illustrated by advance of $390,000 of HWBB that occurred on 17 July 2001, when that amount was deposited in the bank account of the AA Trust. Thereafter, in quick succession, a series of further deposits to that account occurred. Were a LIFO analysis to be adopted such that later deposits must be exhausted before there could be any attribution of expenditures to this particular HWBB advance, the expenditures that are ultimately attributed to that advance would not be fully applied until July 2005. This truly does seem arbitrary and unfair as a means of identifying the purpose of expenditures proximate to the advance.

324. Upon my initial analysis of the submissions and related evidence with respect to both a FIFO and a LIFO analysis of the claimed expenditures, it became apparent that there was a significant and unfortunate absence of supporting detail in the submissions made on behalf of the AA Trust, especially with respect to a FIFO analysis. This had, in turn, it seemed to me, handicapped the Commissioner in offering a correspondingly detailed critique in submissions in reply. In these circumstances, I considered it would be procedurally unfair and also inordinately wasteful of time for me just to embark on that detailed analysis. Instead, I considered that the interests of justice required that the AA Trust be offered an opportunity to make a supplementary submission providing such better supporting detail and analysis of the evidence as it could, with the Commissioner being afforded an opportunity to make a corresponding supplementary submission in reply.

325. I have considered the resultant, supplementary submissions of the parties. As a general proposition, the outcomes and related analysis offered by the Commissioner in these supplementary submissions should be accepted. What follows is therefore based upon the Commissioner's analysis, varied by me so as to highlight which parts I accept and which I do not and why. Proceeding in this way also has the advantage of highlighting the essence of the supplementary submissions made on behalf of the AA Trust.

326. The AA Trust submitted that Deposits A and B were transferred by it between its several bank accounts. Having regard to such evidence as there is concerning these bank accounts, it is more likely than not that this is true. Thus, the bank statements of the AA Trust's bank accounts ended 107811, 124339 and 124247 over the period in question evidence that the AA Trust made many transfers between these three accounts, while simultaneously making payments from and receiving payments to each of the three accounts. The Commissioner submitted that, for this reason, in order to determine the use of each of Deposits A and B, it was necessary to consider these three accounts as if they were one combined account held by the AA Trust and to then conduct the LIFO and FIFO analyses on that combined account. I agree, and do so for the reason given by the Commissioner. It follows that I agree with the approach adopted by the Commissioner in submissions in analysing Deposits A and B.

327. The Commissioner also submitted that some bank statements necessary to complete the LIFO analysis had not been adduced by the AA Trust in its evidence, in particular:

328.

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In the Commissioner's analysis, these untraceable (on the available evidence) proportions of expenditure were allocated to the AA Trust's category 13, i.e. unidentified payments. This, it seems to me, is the inevitable consequence of these evidentiary gaps. As the Commissioner correctly submitted, it would be speculation to allocate them to any other category of expenditure. An onus of proof is not discharged by speculation.

329. The Commissioner submitted that the result as to deductibility of each of the relevant HWBB interest invoices was as follows:

Invoice Date Invoice amount Amount deductible on a LIFO analysis Amount deductible on a FIFO analysis
30 June 1999 $305,259.00 $203.34 $175.52
14 June 2000 $390,958.00 $226.35 $227.52
4 June 2001 $435,900.00 $293.47 $1,454.39
10 June 2002 $259,470.00 $170.60 $800.11
Undated (but for year ended 30 June 2003) $264,618.00 $173.99 $811.59
1 June 2004 $439,650.00 $289.07 $1,348.42
1 June 2005 $469,680.00 $308.28 $1,440.52
Totals   $1,665.10 $6,308.07

330. I agree that this is all that the AA Trust has, on the evidence and subject to any operation of Pt IVA of the ITAA 1936, established to be deductible. Indeed, for reasons which I give below in relation to particular deduction categories where a claim has been allowed, such agreement could be regarded as generous to the AA Trust. In these circumstances, a de minimis consideration dictates that there is no virtue in delving further into the relative merits of whether a LIFO or a FIFO analysis is the more preferable in the circumstances of this case. While I accept the submission of the AA Trust as to the weakness in a LIFO analysis, the end result of that acceptance is of no relative moment given the overall amount allowed and the difference in result as between a LIFO and a FIFO outcome in that regard.

331. The following explains why the AA Trust has not established any greater deductibility than that just tabulated.

332. The loans which I have found HWBB made to the AA Trust, and the related deposit designations, are:

Date Advances Deposit Total advances
18-Jul-94 $300,000.00 A $300,000.00
18-Jul-94 $215,000.00 B $515,000.00
9-May-95 $350,000.00 C $865,000.00
4-Aug-95 $500,000.00 D $1,365,000.00
26-Jul-96 $175,000.00 E $1,540,000.00
31-Jul-97 $450,000.00 F $1,990,000.00
2-Sep-97 $150,000.00 G $2,140,000.00
24-Jun-98 $500,000.00 H $2,640,000.00
16-Sep-98 $250,000.00 I $2,890,000.00

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26-Jul-99 $300,000.00 J $3,190,000.00
9-Aug-99 $250,000.00 K $3,440,000.00
20-Aug-99 $250,000.00 L $3,690,000.00
25-Aug-00 $200,000.00 M $3,890,000.00
17-Jul-01 $390,000.00 N $4,280,000.00

333. The amount of these loans from HWBB as received by the AA Trust are:

Date Amount Total received
18-Jul-94 $299,992.00 $299,992.00
18-Jul-94 $214,992.00 $514,984.00
9-May-95 $349,992.00 $864,976.00
4-Aug-95 $499,992.00 $1,364,968.00
26-Jul-96 $174,992.00 $1,539,960.00
28-Jul-97 $449,992.00 $1,989,952.00
2-Sep-97 $149,992.00 $2,139,944.00
24-Jun-98 $499,978.39 $2,639,922.39
16-Sep-98 $249,978.21 $2,889,900.60
26-Jul-99 $299,985.00 $3,189,885.60
9-Aug-99 $249,985.00 $3,439,870.60
20-Aug-99 $249,985.00 $3,689,855.60
25-Aug-00 $199,985.00 $3,889,840.60
17-Jul-01 $389,985.00 $4,279,825.60

334. The difference between the $4,280,000.00 total in loan funds advanced and the $4,279,825.60 received is $174.40. It seems inherently more likely than not that this difference comprised bank fees. The Commissioner's point in respect of this difference is a sound one. Such fees could only deductible (if at all) in a proportion consistent with the ultimate use of funds.

335. The invoices issued by HWBB in respect of interest and facility fees were as follows:

Date Interest Facility fee Fee for increase in facility Invoice total
30-Jun-95 $80,110.00 $5,813.00 $0.00 $85,923.00
30-Jun-96 $171,875.00 $14,375.00 $0.00 $186,250.00
15-May-97 $170,500.00 $6,750.00 $0.00 $177,250.00
30-Jun-98 $216,422.00 $5,250.00 $20,000.00 $241,672.00
30-Jun-99 $279,259.00 $1,000.00 $25,000.00 $305,259.00
14-Jun-00 $365,833.00 $5,125.00 $20,000.00 $390,958.00
4-Jun-01 $419,400.00 $16,500.00 $0.00 $435,900.00
10-Jun-02 $248,820.00 $10,650.00 $0.00 $259,470.00
Undated (but for year ended 30-
Jun-03)		 $253,968.00 $10,650.00 $0.00 $264,618.00
1-Jun-04 $429,000.00 $10,650.00 $0.00 $439,650.00
1-Jun-05 $459,030.00 $10,650.00 $0.00 $469,680.00

336. As the Commissioner correctly highlighted, the amounts in the first four of these invoices are not in issue in this proceeding. The next two (those dated 30 June 1999 and 14 June 2000) are in issue by way of carry forward loss. The last five of the invoices,

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being income tax years which are directly before the Court for determination, are in issue. The sum of these seven invoices is $2,565,535. It is therefore this amount in respect of which deductibility falls to be determined.

337. The Commissioner submitted that the deductibility of the invoiced amounts in each of the seven invoices must be separately determined, by reference to the actual use of all loan funds advanced by HWBB prior to that date. The reason for this, so it was submitted, was that it was not the use of each loan advance which was relevant to determining deductibility but rather the use of all loan funds advanced prior to the date of each of the relevant invoices. This was said to be:

… because any interest or facility fees incurred were incurred by reference to the totality of the funds said to be advanced, not simply by reference to the last instalment of funds said to be advanced.

338. With respect, the correct approach is that ordained by the text of s 8-1 of the ITAA 1997 itself, as that text has been authoritatively construed. In his regard, two introductory points made in Fletcher, at 16, about what is now s 8-1 of the ITAA 1997 are pertinent. One of those points is that the qualification "to the extent to which" in the first limb of s 8-1 contemplates apportionment. That means that, in respect of each loan advance, it is necessary to determine "the extent to which" the funds advanced were incurred for one or the other of the ends made deductible by s 8-1. The other introductory point made in Fletcher, at 16, is that, in s 8-1, "the assessable income":

is not to be read as confined to assessable income actually derived in the particular tax year. It is to be construed as an abstract phrase which refers not only to assessable income derived in that or in some other tax year but also to assessable income which the relevant outgoing 'would be expected to produce'".

Thus, in respect of each invoiced amount, it is necessary to examine whether and to what extent it was incurred for a deductible end, accepting that this end need not necessarily be found in income actually derived in that income year but requiring a conclusion on the evidence as to what the expenditure incurred would be expected to produce.

339. To these introductory points made in Fletcher might also usefully and relevantly be added another made by Lockhart J (with whom Northrop and Fisher JJ agreed) in
Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd (1979) 43 FLR 217 ( Total Holdings ), at 224:

If a taxpayer with a continuing business incurs a liability for interest being incidental to or connected with the operations or activities regularly carried on for the production of income, the interest is an allowable deduction. The circumstance that each item of expenditure cannot be traced to a particular item of income does not prevent the deduction of the expenditure.

340. In support of his submissions concerning some categories, the Commissioner cited a taxation ruling published by him. Such citation, with respect, ought not to have occurred. Taxation rulings serve an important public interest in seeking to achieve consistency in public administration within the Australian Taxation Office. They also give the legal and accountancy professions, and the wider public, the benefit of the Commissioner's view of the meaning and effect of legislation under his administration. Yet further, such rulings, and the extent to which they have been consulted, can have relevance in determining the level of penalty in relation to any tax shortfall. However, in relation to substantive taxation liability issues in a taxation appeal in this Court, they are no more than an expression of opinion by a party to such an appeal, as irrelevant as is an opinion furnished by counsel, solicitor or accountant to a taxpayer. On such issues, views expressed in a ruling may well, subject to the exercise of an independent value judgment by counsel in keeping with a duty owed to the Court, inspire a submission by counsel but the appropriate support for any such submission must be found by the citation of the text of legislation, related supporting materials and case law, not a taxation ruling.

341. In relation to some categories of deduction, it was also put on behalf of the Commissioner, "we are instructed that the ATO has reviewed its records and has no record

ATC 25765

of having received any of these funds". With respect, this is no evidence at all. It is merely the equivalent in writing of a statement from the Bar table which has not been adopted by an opposing party so as to become an admission. As I stated in
I-MED Radiology Network Limited v The Director of Professional Services Review [2020] FCA 1645, there are circumstances in which pursuant to s 7E(1) of the Evidence Act 1905 (Cth) or s 69(4) of the Evidence Act 1995, negative search evidence in respect of a public administration or business record may be admissible to prove that a particular event did not occur. These provisions are not engaged by an assertion in submissions of counsel.

342. In his affidavit evidence, Mr Gould deposed to 42 categories of expenditure in respect of funds advanced from HWBB. In the supplementary submissions of the AA Trust, 16 categories of claimed deductible expenditure were put forward. A difficulty with this new categorisation is, as the Commissioner submitted, that the contemporaneous source documents in evidence in some respects do not support the particular categorisation.

343. In response, the Commissioner put forward a modified and also enlarged number of categories. These categories both narrowed and supplemented the 16 categories of the AA Trust in light of the available evidence. This approach does indeed better accord with the available evidence. It may be summarised in the following table, noting the explanations provided immediately under that table:

Category number Category name and brief description
1 Purchase of shares - for Anglo American
Money claimed to have been used to purchase shares for the AA Trust.
2 Onshore debt
Money claimed to have been used to repay debt owed to Darlington McCarthur (as novated).
3 Payment of the debts of the AA Trust
Money claimed to have been used to repay other debts owed to Australian entities.
4 Loan advances to related entities
Money claimed to have been used to advance loan funds to related entities.
5 Loan advances to unrelated entities
Money claimed to have been used to advance loan funds to unrelated entities.
6 Payments to HWBB in respect of HWBB loan
Money claimed to have been paid to HWBB in respect of the HWBB loan.
7 Bank fees
Money claimed to have been paid in respect of bank fees.
8 ASIC fees
Money claimed to have been paid to ASIC for fees levied.
9 Commonwealth tax liability - withholding tax
Money claimed to have been paid to the Commonwealth for withholding tax liabilities.
10 State tax liability
Money claimed to have been paid in respect of State tax liabilities.
11 Charitable contributions
Money claimed to have been paid in respect of charitable contributions.
12 Management fee
Money claimed to have been paid in respect of a management fee.

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13 Unidentified payments
Payments for which the AA Trust has not sought to identify the nature of the expenditure.
14 Payment for secretarial services
Money claimed to have been paid in respect of secretarial services.
15 Trust distributions
Money claimed to have been paid in respect of a trust distribution.
16 Loan to a member of the Gould family
Money claimed to have been paid by way of a loan advance to a member of the Gould family.
17 Bank fees on HWBB loan advances
This is the difference between the total advances and the amount received in the AA Trust's bank account.
18 Commonwealth tax liability - for other entities
Money claimed to have been paid to the Commonwealth for tax liabilities of entities other than the AA Trust.
19 Purchase of shares - for other entities
Money claimed to have been paid to purchase shares for entities other than the AA Trust.
20 Payments to or for Fennelltown
Money claimed to have been used to make payments to or for Fennelltown Pty Ltd ( Fennelltown ).
21 Loan advances to unrelated entities - Dennis Flynn
Money claimed to have been used to advance loan funds to a Mr Dennis Flynn.

Explanatory notes:

  • 1. Where this table narrows the scope of a category put forward by the AA Trust, this is indicated by a hyphen and additional words of limitation after the original category name, with an explanation given. Categories numbered from 17 onwards are new categories.
  • 2. In this table the terms "loan", "debt" (and "interest" or "fees") and "management fees" are used as a shorthand descriptor.

344. The Commissioner's submissions as to the deductibility of each of these categories and my related acceptance of the nature and fate of the deduction claims made by the AA Trust may conveniently be summarised in the table set out below.

Category number Category name Is interest on such a use generally deductible? Has Applicant discharged onus of proving
categorisation? 		Therefore, is interest on use deductible?
1 Purchase of shares
- for AA		 Yes No No

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2 Onshore debt Only if debt
used for s 8-1 purpose		 No No
3 Payment of Anglo American's debts Only if debt used for s 8-1
purpose		 No No
4 Loan advances to related entities Only to the extent that the loan is made for a s 8-1
purpose		 No No
5 Loan advances to unrelated entities Only to the extent that the loan is made for a s 8-1
purpose		 No No
6 Payments to HWBB in respect of HWBB loan Only to the extent that the balance of the interest on the borrowing is
deductible		 Yes Only to the extent that the balance of the interest on the borrowing is
deductible
7 Bank fees Dependent on purpose of underlying transaction Yes Conceded by the Commissioner in the interest of
proportionality
8 ASIC fees Yes No No
9 Commonwealth tax liability - withholding tax Only to the extent that the balance of the interest on the borrowing is
deductible		 No No
10 State tax liability Dependent on purpose of underlying debit or deposit Yes Conceded by the Commissioner in the interest of
proportionality
11 Charitable contributions No No No
12 Management fee Potentially, yes No No

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13 Unidentified payments No No No
14 Payment for
secretarial services		 Yes No No
15 Trust distributions Only if the interest is sufficiently connected with the assessable income earning activity, or business, carried on by the trustee in its capacity as trustee of the
trust estate		 No No
16 Loan to a member
of the Gould family		 Does not need
to be determined		 Does not need
to be determined		 No
17 Bank fees on HWBB loan advances Only to the extent that the balance of the interest on the borrowing is
deductible		 Yes Only to the extent that the balance of the interest on the borrowing is
deductible
18 Commonwealth tax liability - for other entities Only to the extent that the loan is made for a s 8-1 purpose No (neither as to categorisation as tax liabilities nor loan
advances)		 No
19 Purchase of shares
- for other entities		 Only to the extent that the loan is made for a s 8-1
purpose		 No No
20 Payments to or for Fennelltown Only to the extent that the loan is made for a s 8-1
purpose		 No No
21 Loan advances to unrelated entities
- Dennis Flynn		 Only to the extent that the loan is made for a s 8-1
purpose		 Yes Yes

345. The AA Trust conceded in its supplementary submission that, in relation to Category 16, the claim in respect of interest incurred on this category of use was not deductible.

346. An explanation is now required as to why the remaining categories yield the outcomes summarised above in relation to deductibility.

Category 1 - Purchase of shares - for AA Trust

347. The Commissioner submitted that "interest incurred on borrowings used to purchase an investment (i.e. shares) is deductible under s 8-1 where it is anticipated that assessable income (i.e. dividends) will be derived from the investment". Confined as it is to prospective dividends, this submission puts the scope of an allowable deduction too narrowly. Conceivably, interest on funds borrowed to engage in a business of share trading might also, for example, yield a deduction under s 8-1 of the ITAA 1997. Further, on the revenue account side, Myer Emporium instructs about the fallacy of adopting overly narrow conceptions about what may fall within the scope of "income" for the purposes of income tax law. Thus, while in some cases it may be accepted, as the Commissioner submitted, that interest incurred on borrowings used to purchase options to acquire shares may not be deductible (because options do not give rise to an entitlement to dividends such that the outgoing is both preliminary to and remote from any possible derivation of assessable income), that may not be the case where the circumstances reveal derivation of income by trading in such options.

348. Given that some of the allocations by the AA Trust to this category have, for good reason, been moved to a more apt category 19 - Purchase of shares - for other entities, there are three expenditures in Category 1:

349. In respect of each of these expenditures, I am not satisfied, on the balance of probabilities, that the AA Trust has discharged its onus of proving that the expenditure was made to purchase shares at all. As to bank statements relied upon, these do not disclose for what purpose the expenditures recorded were made. The handwritten notes on these bank statements are anonymous and of no probative value. For reasons given above in relation to management fee and interest claims, the general ledgers do constitute prima facie evidence of for what purpose the expenditures recorded were made. However, also for reasons there given, I am not satisfied that entries these general ledgers are reliable. Further, and also for reasons there given, I am not satisfied that Mr Gould is a reliable historian in relation to these expenditures. More particularly, Mr Gould's affidavit evidence as to the purpose and categorisation of expenditures (the Prior Attribution ), is unreliable as proof of the purpose of expenditures, given that it was not conducted by him and he did not know who performed the categorisation or why items were given any particular categorisation.

350. For these reasons, I uphold the Commissioner's submission that interest incurred in respect of this category of use is not deductible.

Category 2 - Onshore debt

351. The Commissioner submitted that "interest incurred on borrowings used to repay interest incurred on a pre-existing loan will be

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deductible only if those other loan funds were used for a s 8-1 purpose". I agree.

352. In this category, three items of expenditures are claimed:

Date Amount Purported lender
(including post novation)
6 June 1995 $865,394.00 Swire Investments
13 August 1997 $368,210.00 CVC Fund Managers
29 September 1998 $125,000.00 CVC Fund Managers

353. For reasons given above, I am not satisfied that there was a loan from Darlington McCarthur to the AA Trust. Likewise for reasons given above, even if, contrary to this conclusion, there was any such loan, I am not satisfied that any such loan was either assigned or novated to Swire Investments or subsequently to CVC Fund Managers. It follows that on these bases alone, interest on such sums is not deductible.

354. Yet further and also for reasons given above, the AA Trust has failed to discharge its onus of proving that the claimed expenditures were in respect of the payment of interest on any such novated Darlington McCarthur loan.

355. For like reasons, also given above, I am not satisfied that the evidence tendered by the AA Trust to support the interest claims in respect of loans for which CVC Fund Managers is purported lender (by novation or otherwise) is reliable.

356. Accordingly, I uphold the Commissioner's submission that interest incurred in respect of Category 2 is not deductible.

Category 3 - Payment of the debts of the AA Trust

357. Given that there is good reason to consider in a separate category, Category 20, items concerning payments to or for Fennelltown, there is one remaining deduction claim in Category 3. That is in respect of the sum of $163,903, said to have been a partial repayment on 26 July 1994 of the principal of a loan from Darlington McCarthur. As, for reasons given above, I am not satisfied that there was a loan from Darlington McCarthur, a deduction claim in respect of funds said to be referable to this alleged loan must, necessarily, fail.

358. This apart, the AA Trust submitted, by reference to
Federal Commissioner of Taxation v Roberts & Smith (1992) 37 FCR 246 ( Roberts & Smith ), that interest incurred on loan funds used to repay a pre-existing debt were necessarily deductible. The submission had as its source, an observation by Hill J (with whom in this regard Jenkinson J agreed) in Roberts & Smith, at 257, with reference to the borrowing from one bank to repay working capital originally borrowed from another, that, "the character of the refinancing takes on the same character as the original borrowing and gives to the interest incurred the character of a working expense". Even were I not bound to accept that observation as correct, I would unhesitatingly accept the correctness in principle of that observation. The Commissioner, I note, did not submit it was erroneous.

359. However, the citation of propositions in the abstract, however sound in law these propositions may be, does not discharge an onus of proof. The AA Trust did not contend that the HWBB loan was used to fund working capital. This aside, the AA Trust did not prove the original use of the loan funds from Darlington McCarthur (if there were such a loan). Thus, there is no evidentiary foundation for any conclusion that the original loan funds were used for a s 8-1 purpose.

360. Yet further, the AA Trust has not discharged its onus of proving that the expenditure claimed was a loan repayment. For reasons already given, I am not satisfied that either the financial statements tendered or Mr Gould's Prior Attribution are reliable.

361. It follows that the interest deduction claim in respect of this category is not allowable.

Category 4 - Loan advances to related entities

362. In respect of this deduction category also, the claim made by the AA Trust was, with respect, characterised by the citation of propositions supported by authority as if this

ATC 25771

were a substitute for the proof of facts to establish those propositions.

363. As a general proposition, it may be accepted that interest incurred on borrowings used to make loan advances to related entities is deductible if that on-lending has an income producing purpose for the on-lender. It was common ground between the parties, and I agree, that the on-loan does not necessarily need to be interest bearing for the interest on the head-loan to be deductible.

364. It does not follow from this, as the AA Trust appeared to contend, that interest incurred in respect of a head borrowing is always deductible whenever an on-loan is made intra-group. The AA Trust put forward that Total Holdings supported such a proposition and that a deduction under s 8-1 of the ITAA 1997 was made out. However, Mr Gould was no Monsieur Dalemont. In Total Holdings it was the acceptance of the evidence of a Monsieur Dalemont as to the purposes of the loans advanced by the ultimate French corporate owner to its principal Australian subsidiary which, in turn, were on-lent interest free to a subordinate entity in the corporate group which enabled a conclusion to be drawn on the facts that the interest-free loans to the subordinate entity were incidental and relevant to the derivation of income by the taxpayer, the principal Australian subordinate and formed part of its business activities. On this basis, a deduction was allowed under s 51(1) of the ITAA 1936 in respect of the interest-free loans. The outcome in respect of the deductibility of the inter-free loans in Total Holdings was inherently fact specific. It does not stand for any wider proposition of general application. The same is true in respect of another case cited by the AA Trust,
Federal Commissioner of Taxation v EA Marr & Sons (Sales) Ltd (1984) 2 FCR 326.

365. Within Category 4, the AA Trust alleged that these expenditures were loan advances made to the following entities and deductible under s 8-1:

Date Amount Purported borrower
10 August 1994 $35,000.00 Russell Gould Pty Ltd
9 August 1995 $120,000.00 Darlington McCarthur
9 August 1995 $79,258.50 Melbourne Corporation and Philadelphia
Investments
26 July 1996 $8,175.92 South Seas Holdings Pty Ltd ( SSH ) ATF
the VR Gould Family
Settlement Share Trust ( VRGFSST )
30 July 1996 $1,409.10 SSH ATF the VRGFSST
1 August 1996 $14,119.00 SSH ATF the VRGFSST
6 August 1996 $11,713.52 SSH ATF the VRGFSST
8 August 1996 $13,917.30 SSH ATF the VRGFSST
14 August 1996 $5,636.40 SSH ATF the VRGFSST
30 August 1996 $19,827.78 SSH ATF the VRGFSST
3 September 1996 $4,034.79 SSH ATF the VRGFSST
11 September 1996 $357.12 SSH ATF the VRGFSST
30 September 1997 $21,000.00 SSH ATF the VRGFSST
17 October 1997 $3,000.00 Vanda Gould

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21 October 1997 $2,000.00 Darlington McCarthur
24 October 1997 $330.00 Southsea Investments Pty Ltd ( SI )
28 October 1997 $10.00 SI
3 November 1997 $20.00 SI
4 November 1997 $4,000.00 SI
11 December 1997 $5,000.00 SI ATF the GFT
15 December 1997 $399.00 SI
23 December 1997 $503.00 SI
31 December 1997 $112.00 SI
2 January 1998 $251.40 SI
8 January 1998 $1,354.80 SI
13 January 1998 $25.00 SI
16 October 1998 $110,000.00 Malackey Holdings Pty Ltd ( Malackey Holdings ) ATF the
Malackey Trust
21 September
1999		 $100,000.00 SSH ATF the VRGFSST
10 November 1999 $100,000.00 SSH ATF the VRGFSST
2 December 1999 $20,000.00 Southsea Nominees Pty
Ltd (" SN ") ATF the GFT
11 September 2000 $200,000.00 SSH ATF the VRGFSST
16 August 2001 $200,000.00 SN ATF the GFT
31 August 2001 $5,000.00 Fennelltown ATF the VR Gould Family
Settlement Trust
31 August 2001 $5,000.00 Phillips River ATF the
Christian & Charitable Trust
10 September
2001		 $50,000.00 SSH ATF the VRGFSST
19 September
2001		 $60,000.00 SSH ATF the VRGFSST
9 October 2001 $50,030.00 CVC IM
25 October 2001 $15,000.00 Melbourne Corporation
28 June 2002 $340,000.00 CVC IN

Notes to Table

  • 1. The claim in respect of the alleged expenditure on 4 November 1997 appears on the Southsea Investments liability account in the general ledger of the AA Trust for the 1998 financial year. In his analysis, the Commissioner accordingly treated this expenditure as an advance to Southesea Investments, rather than a charitable contribution or donation made by the AA Trust. This appears to me to be the preferable approach on the evidence.

    ATC 25773

  • 2. The claim in respect of the claimed expenditure on 13 January 1998 appears on the Southsea Investments liability account in the general ledger of the AA Trust for the 1998 financial year. In his analysis, the Commissioner accordingly treated this expenditure as an advance to Southsea Investments rather than a charitable contribution or donation made by the AA Trust. Once again, this appears to me to be the preferable approach on the evidence.
  • 3. The claim in respect of the claimed expenditure on 31 August 2001 appears as a debit in an asset account in the general ledger of the AA Trust for the 2002 financial year. In his analysis, the Commissioner accordingly treated this as a loan rather than a trust distribution. Once again, this appears to me to be the preferable approach on the evidence.

366. The Commissioner's submission was that, at the respective times identified in the above table, none of the corporate entities mentioned in the above table were wholly-owned subsidiaries of the AA Trust. On the evidence, this is true. Thus, even if there were any substance in the general proposition advanced by the AA Trust in respect of interest-free loans intra-group, and for the reasons given there is none, a necessary underlying factual premise could not be made out. This aside, and as the Commissioner correctly submitted, save for three loans, identified below, which the AA Trust alleged to have been at interest, no other reason was identified by the AA Trust as to why any of these asserted borrowings would be income producing for it. The Commissioner's submission that "an income producing purpose cannot be presumed merely because the [AA Trust] submits that the entities belong to some broader corporate group" is unquestionably correct.

367. The Commissioner's further submission was that, in respect of the purported borrowing by Mr Gould personally, no reason was advanced (and nor was one easily apparent) why this advance would be income producing for the AA Trust. I agree. It was on this subject also for the AA Trust to discharge the onus of proof by admissible evidence. This it did not do.

368. The three loans which the AA Trust alleged in its submissions were interest bearing were those to SSH ATF the VRGFSST, CVC IM, and Malackey Holdings as trustee for the Malackey Trust. The evidentiary foundation for these expenditures being loan advances were general ledgers and Mr Gould's Prior Attribution. For reasons already given, I am not satisfied that either is reliable. Also referenced were the handwritten notes of unidentified persons, which are just not admissible and in any event are not shown to be reliable. Thus, the Commissioner's resultant submission that the AA Trust has not proved that there were any such loans made or that these particular expenditures were loans should be accepted.

369. The AA Trust also put forward that any loan advances to SSH ATF the VRGFSST were interest bearing. However, the foundation for this was nothing more than an assertion by Mr Gould, which I do not accept as reliable, and a handwritten document the authorship of which is unknown. The latter is not admissible and, even if it were, is of no probative weight.

370. One claimed loan advance to CVC IM was submitted by the AA Trust to be interest bearing because:

371. Mr Gould's bare assertion is not, for reasons given, reliable. The same is true in respect of the 1996 letter which in any event, is not proof of the terms of a dealing five years beforehand. An anonymous worksheet is no proof at all. In short, the Commissioner's submission that the evidence is insufficient to prove either that there was a loan or that the loan was in fact interest bearing is well-made and should be accepted.

372. As to that the claimed loan advance to Malackey Holdings as trustee for the Malackey Trust, the alleged evidentiary foundation put forward by the AA Trust for a conclusion that it was interest bearing was Mr Gould's assertion in evidence that he had said to Mr John Nichols (inferentially, in around October to November 1998) "We can sort out interest on the loan later", a letter dated 8 November 2003 (over 5 years after the relevant payment in the above table) signed by Mr Gould referencing that prior loans did "not bear interest", a memorandum dated 17 February 2005 signed by Mr Gould to "Sytara" stating:

I have arranged with Chemical Trustee Limited for a drawdown of $550,000 to be made to Malackey Holdings Pty Limited. Upon receipt of these funds would you please ensure that the monies are used to: … 3. in addition, the interest which you have calculated (compound 4%) should be paid to Anglo-American (?).

(The question mark being in the text), and a general ledger entry referencing interest at 4%. For the reasons already given, Mr Gould's evidence is not reliable and neither are the general ledger entries. I am not satisfied that any such loan was interest bearing.

373. Further and in any event, in the light of the letter 8 November 2003 and, even on Mr Gould's evidence as to there being no agreement reached as to interest prior to the purported loan being advanced, I am just not satisfied any such loan was in fact interest bearing.

374. It follows that the deduction claimed in respect of this expenditure category has not been proved to be allowable.

Category 5 - Loan advances to unrelated entities

375. The Commissioner submitted that, "interest incurred on borrowings used to make loan advances to unrelated entities is deductible provided that the on-lending has an income producing purpose". Once again, this, with respect, puts what might be allowable too narrowly. It is both necessary and sufficient that the purpose be either or each of those specified in s 8-1 of the ITAA 1997. True it is, however, as the commissioner also submitted, that "this is most easily proved by a taxpayer where the on-lending is at interest".

376. Given that, for good reason, one of the AA Trust's allocations to Category 5 is more aptly considered under the new Category 21 - Loan advances to unrelated entities - Dennis Flynn, there are six expenditures in Category 5. These are:

Date Amount Purported borrower
1 September 1994 $50,000.00 PBT International Pty Ltd
11 August 1995 $316,000.00 Wenola Services Pty Ltd
17 September 1996 $50,000.00 Planette Thoroughbred Trading Pty Ltd
30 June 1998 $100,000.00 Gould Ralph Services
3 November 1999 $20,030.00 Peter Jamieson
17 November 1999 $6,000.00 IGL Enterprises Pty Ltd

377.

ATC 25775

The AA Trust did not contend that the asserted loans to PBT International Pty Ltd, Wenola Services Pty Ltd, Planette Thoroughbred Trading Pty Ltd, Gould Ralph Services or IGL Enterprises Pty Ltd were interest bearing. No such interest was revealed on the evidence. Neither was it proved that in some other way these loans were productive of assessable income or made in the course of the carrying on of a business for the purpose of gaining or producing assessable income. It follows that interest incurred in respect of these loans is not deductible under s 8-1 of the ITAA 1997. Further, as the Commissioner correctly submitted:

… the use of any purported repayment of principal of these on-loans has no relevance to the question whether interest on funds borrowed to make the initial loans is deductible.

378. As to the loan said to have been made to Mr Jamieson, the AA Trust contended that it was interest bearing. In support of this was Mr Gould's Prior Attribution evidence. This, as I have already indicated, is not reliable evidence. The only other evidence tendered in respect of there being an interest bearing loan made to Mr Jamieson was a document which, on its face, was a letter dated 15 March 2000 from Mr Jamieson to Mr Gould. There is reference whatsoever to the AA Trust (or its trustee) in this letter. Instead what is stated (emphasis added) is:

Please find enclosed cheque for $20 000 made in favour of Gould Ralph Services Pty. Ltd. to repay our loan. As discussed the interest due will be used to establish an ongoing shield to be awarded on the College's presentation night.

379. Thus, the representations in the letter are that either Mr Gould personally or perhaps Gould Ralph Services made a loan to Mr Jamieson, that Mr Gould and Mr Jamieson had a discussion about repayment of the loan and payment of interest, either that Mr Gould directed Mr Jamieson to repay the $20,000 to Gould Ralph Services or that it was always so repayable, and that Mr Gould either on his own behalf or on behalf of Gould Ralph Services directed Mr Jamieson to use the interest owed to establish an ongoing shield to be awarded on a college's presentation night. None of this proves that the AA Trust made any interest bearing loan to Mr Jamieson or otherwise incurred expenditure which would be deductible under s 8-1 of the ITAA 1997. It follows that any interest incurred in respect of this alleged loan is not deductible.

Category 6 - Payments to HWBB in respect of HWBB loan

380. Subject to the Commissioner's over-arching submission in relation to the HWBB loan, dealt with above, this category of expenditure is not controversial. It is common ground that interest incurred on funds borrowed to pay interest liabilities to HWBB is deductible to the extent that the balance of the interest on the borrowing is deductible. This reflects a correct understanding of the meaning and effect of s 8-1 of the ITAA 1997. How much, if anything, is deductible in respect of this expenditure category is therefore dependent on the extent to which the AA Trust proves that expenditure falling within other categories is deductible.

Category 7 - Bank fees

381. The supporting evidence in respect of the bank fees category of expenditure consists of bank statements which themselves give particulars such as "Transfer fee", "Transaction fee", "Cheque account fee", "Fee for telephone transfer" or "Interest" (the latter specified where the account was overdrawn). The admissibility of this under the Evidence Act to prove the claimed expenditure was, unsurprisingly, uncontroversial. Accordingly, there is no issue between the parties in respect of categorisation.

382. In point of law and as with Category 6, what, if anything, of this expenditure is deductible under s 8-1 of the ITAA 1997 is dependent on the extent to which the AA Trust proves that expenditure falling within other categories is deductible. However, the Commissioner has chosen not to contest this category of expenditure. That is because the amounts at issue are so relatively minimal as to be out of proportion to any detailed submission or related consideration as to their deductibility. There are 20 expenditures in Category 7, ranging from $1.50 to $1,027 and totalling $1,164.32.

383.

ATC 25776

A difficulty about the Commissioner's proportionality approach may well be that expediency is no panacea for an obligation to exercise judicial power according to law in the determination of a taxation appeal. A taxation appeal is not to be assimilated with a civil penalty proceeding in which, subject to an overarching discretion as to whether an agreed outcome is within an acceptable range on the facts a court ought to impose penalty accordingly:
Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482. However, this point was not argued. Given this, I do not propose further to explore the subject but instead to treat the deductibility of the sum claimed as conceded.

Category 8 - ASIC fees

384. It is common ground that interest incurred on funds borrowed by a corporate taxpayer to pay fees charged by ASIC is generally deductible. I agree.

385. The Commissioner's point was of difference with the AA Trust in respect of this category was wholly one of proof. In support of the claimed expenditure on ASIC fees, the AA Trust relied upon bank statements. These, however, did not expressly reference ASIC but instead made only generic debit references such as "withdrawal/cheque". Beyond this, the AA Trust relied upon entries in general ledgers and Mr Gould's Prior Attribution, neither of which is reliable, for reasons already given and handwritten notes by unidentified authors (which are no proof at all).

386. It follows that the AA Trust has not discharged its onus of proof in respect of interest incurred in relation to this category of expenditure.

Category 9 - Commonwealth tax liability - withholding tax

387. As with Category 6, what, if anything, of this expenditure is deductible under s 8-1 of the ITAA 1997 is dependent on the extent to which the AA Trust proves that expenditure falling within other categories is deductible. This is common ground.

388. Some of the AA Trust's prior allocations to this category have been moved to a more apt category, Category 18 - Commonwealth tax liability - for other entities. What remains in Category 9 are four items of expenditure:

389. The point of difference between the AA Trust and the Commissioner in relation to this category of expenditure is wholly one of whether the onus of proof has been discharged. The related evidence put forward by the AA Trust to discharge that onus is of the same kind as tendered in respect of Category 9. It suffers from the same deficiencies. Accordingly, the amounts claimed are not allowable.

Category 10 - State tax liability

390. No onus of proof issue arises in respect of this category of expenditure. The supporting evidence is to be found in bank statements specifying debit particulars such as "Govt. tax on debits" or "Govt. duty on deposits".

391. State taxes are not per se deductible under s 8-1 of the ITAA 1997. Rather, as with a Commonwealth tax liability, the position in relation to deductibility is as stated in respect of Category 6.

392. There are 77 expenditure items in this category, ranging from $0.07 to $660.11. They total $4,354.79. Given this relatively modest amount, even in total, the Commissioner adopted a like position to that which he did in respect of bank fees. I repeat the observations which I made in respect of that stance in respect of that expenditure category. For like reasons, I treat the deductibility of the sum claimed as conceded.

Category 11 - Charitable contributions

393. The claim made by the AA Trust in respect of charitable donations was not advanced under Division 30 of Part 2.5 of the ITAA 1997, which regulates deductibility in relation to payments to "deductible gift recipients" or under any predecessor statutory regime in respect of donations. Instead, a deduction was said to be allowable under s 8-1 of the ITAA. That section makes no special provision in relation to donations for charitable purposes. Rather, the expenditure must, as with any other claim under s 8-1, fall within either or each of the positive limbs in that section and

ATC 25777

not fall within one or the other of the exclusions. The same applies in respect of interest expenses incurred in relation to funds borrowed to fund charitable donations or gifts:
Federal Commissioner of Taxation v Munro (1926) 38 CLR 153. The borrowed funds so deployed must constitute a loss or outgoing:
  • (a) incurred in gaining or producing the taxpayer's assessable income; or (or also)
  • (b) necessarily incurred in carrying on a business for the purpose of gaining or producing the taxpayer's assessable income.

394. The difficulty of the AA Trust in respect of these basal requirements in respect of this deduction category was two-fold. Its evidence was not reliable, consisting as it did of entries in general ledgers and Mr Gould's Prior Attribution evidence. This aside, it was not shown by this how either (or each) positive limb of s 8-1 was satisfied in relation to the AA Trust in respect of this expenditure claim. Nothing is therefore allowable in respect of this category.

Category 12 - Management fee

395. Interest incurred on funds borrowed by a corporate taxpayer to pay management fees can be deductible if they fall within either or each of the positive limbs in s 8-1 of the ITAA 1997. This was common ground.

396. There is one item of claimed expenditure in this category (relating to a $500 fee of 31 December 1997, purportedly incurred to Photo Advertising). The difficulty for the AA Trust in respect of its claim is that it has not discharged the onus of proof. Its evidence consists of general ledger entries and Mr Gould's Prior Attribution evidence, neither of which is, for reasons already given, reliable. The deduction claim is in respect of this category fails accordingly.

Category 13 - Unidentified payments

397. The AA Trust submits that interest incurred in respect of funds borrowed to make payments the character and purpose of which is not unidentified:

can be deductible if the court is sufficiently satisfied the HWBB loan as a whole had an income-producing purpose, and that the unidentified payments, as 7% of the total, can be put to one side.

[emphasis added]

This, with respect, does violence to the terms of s 8-1 of the ITAA 1997 and in particular the qualification, "to the extent to which". To the extent to which there is no evidence that the borrowed funds were used for a purpose falling within either or each of the positive limbs of s 8-1, the claim must fail.

398. As it happens, 7% understates the extent to which the claim must fail. As the Commissioner correctly highlighted in his submissions, in fact 10.09% or 8.57% of the total loan funds advanced are, on LIFO and FIFO analyses respectively, properly allocated to this category.

Category 14 - Payment for secretarial services

399. In relation to the allowance of a deduction under s 8-1 of the ITAA 1997 in respect of interest incurred on funds borrowed to pay for secretarial services, the position is identical to that, described above, in relation to a like sourced payment for a management fee. This was common ground between the parties.

400. The difficulty for the AA Trust in respect of this category was not one of principle but rather one of discharging the onus of proving that the expenditures of borrowed funds were for secretarial services.

401. There are two expenditures in this category, each purportedly to Joynook Pty Ltd ( Joynook ):

  • (a) 31 January 2000 - $1,750; and
  • (b) 1 May 2000 - $1,700.

402. In part, the AA Trust relied upon entries in general ledgers, handwritten annotations by an unidentified person on bank statements and Mr Gould's Prior Attribution evidence. For the reasons already given, neither the general ledger entries nor Mr Gould's Prior Attribution evidence is reliable. The unidentified annotations are worthless. Also relied upon is what on its face is an invoice dated 28 November 2002, issued by Joynook for $2,640 (GST inclusive) for "secretarial and administrative services rendered for the period from 1 March 1998 to 28 November 2002". Given the date of issue, quantum and date range in this invoice for services rendered, it provides no support for the attribution either in amount or income year for the two

ATC 25778

expenditures claimed. This difficulty is not resolved by the bank statements of the AA Trust in evidence, as, save in respect of bank fees and the like, these just contain debit entries which are neutral (for example, "withdrawal/cheque").

403. The claim in respect of this category has not, therefore, been proved to be allowable.

Category 15 -Trust distributions

404. It was not, with respect, completely clear from the submissions of the AA Trust whether it was conceded that this category of expenditure had not been proved to be deductible. In these circumstances, it is as well to proceed on the basis that the claim is pressed.

405. An accurate, pithy summary of how s 8-1 of the ITAA 1997 falls to be applied in relation to this claim (and for that matter all other such interest deduction claims) was offered by Hill J (with whom Jenkinson J agreed in this regard) in Roberts & Smith, at 255:

The mere act of borrowing money, burdened with the obligation to pay interest, does not of itself gain or produce assessable income. The amount borrowed is not assessable income. What operates to gain or produce assessable income is the manner in which those moneys are used, so that the necessary connection between the outgoing for interest and the activities which more directly gain or produce assessable income will be found, in the ordinary case, in the use to which the borrowed funds are put. That is not to say that there may not be cases where motivation or subjective purpose will play a part in the question of characterisation.

406. It is possible to envisage circumstances in which interest on funds borrowed so as to preserve the corpus of income producing capital held on trust, in lieu of using that trust capital to make a distribution, might be deductible. Such reasoning would, in my view, be consistent with the deductibility reasoning of Davies J in
Yeung v Federal Commissioner of Taxation (1988) 88 ATC 4,193, at 4,204, and may well offer an explanation for why
Begg v Deputy Commissioner of Taxation (SA) [1937] SASR 97 was not incorrectly decided. In Roberts & Smith, at 257 - 258, Hill J seems to me to have accepted that this type of reasoning was open in relation to the allowance of a deduction under what is now s 8-1 of the ITAA 1997.

407. However this may be, it is not necessary to reach a concluded view as to matters of principle, only to assume in favour of the AA Trust that reasoning of the kind just mentioned might support a claim for the deduction of interest. That is because the AA Trust has failed to discharge its onus of proving that one or the other or each of the positive limbs of s 8-1 of the ITAA 1997 has been engaged in relation to this deduction category. Further, the AA Trust has failed to discharge its onus of proving that these expenditures were trust distributions. As to the two relevant expenditures ($500,000 on 30 June 1998 and $14,000 on 10 January 2000), the AA Trust relies on general ledgers, handwritten notes by unidentified persons and Mr Gould's Prior Attribution evidence, none of which is reliable. It also relies on a Westpac telegraphic transfer request but this is non-specific as to the purpose of the expenditure. The deduction claim therefore wholly fails.

Category 16 - Loan to a member of the Gould family

408. As already noted, the AA Trust has conceded that interest incurred in respect of this category of expenditure is not deductible.

Category 17 - Bank fees on HWBB loan advances

409. It is common ground that bank fees incurred on the HWBB loan advances are deductible, but only to the extent that the borrowed funds are used for a purpose falling within s 8-1. For reasons already given, this common ground reflects a correct position in law in relation to the meaning and effect of s 8-1 of the ITAA 1997.

Category 18 - Commonwealth tax liability - for other entities

410. There are three expenditures in this category. The amounts at issue, together with what I understand to be the alleged recipient of funds or funds paid on their behalf from or by the AA Trust and sourced in funds borrowed by the AA Trust in respect of which an interest deduction claim is made are set out in the table which appears below.

Date Amount Purported borrower
15 September 1997 $160.00 Darlington McCarthur
23 October 1997 $8,205.80 SSH
3 December 1997 $4,540.00 SI

ATC 25779

411. I have already set out under Category 4 my understanding as to the deductibility of interest incurred on borrowing so as to fund loans to related entities. This deduction category is but a variation of Category 4. No different principles are entailed as to whether a deduction is allowable under s 8-1 of the ITAA 1997.

412. The difficulty for the AA Trust in respect of this category of claimed expenditure is in the discharge of the onus of proof.

413. There are entries in bank statements which record each of these expenditures but these entries do not record them as having been made to the Commissioner, much less on whose behalf any such payment was made. The relevant bank statement entries merely record the drawing of cheques. So as to prove the recipient of the expenditures, and that they were loans, the AA Trust relies upon entries in general ledgers and Mr Gould's Prior Attribution evidence. For the reasons already given, these are not reliable.

414. Yet another deficiency in proof is in the establishment by evidence by the AA Trust as to how either or each of the positive limbs of s 8-1 of the ITAA 1997 is satisfied in respect of each claimed expenditure in this category. At the times respectively identified in the above table, none of the purported borrowers mentioned was a wholly-owned subsidiaries of the AA Trust. The AA Trust has not adduced evidence as to why any of these alleged borrowings would be income producing for it. This is not a matter for presumption.

415. For these reasons, the deductions claimed in this category are not allowable.

Category 19 - Purchase of shares - for other entities

416. There are seven expenditures in this category. The amounts at issue, together with what I understand to be the alleged recipient of funds or funds paid on their behalf from or by the AA Trust and sourced in funds borrowed by the AA Trust in respect of which an interest deduction claim is made are set out in the table which appears below.

Date Amount Purported borrower
18 September 1995 $5,000.00 Phillips River
16 September 1997 $6,089.40 SSH
27 October 1997 $1,170.00 SSH
29 October 1997 $9,750.00 SSH
29 October 1997 $1,170.00 SSH
5 November 1997 $3,900.00 SI
19 November 1997 $19,123.50 SSH

417. No different principles to those discussed in respect of Category 4 are entailed as to whether a deduction is allowable under s 8-1 of the ITAA 1997 in respect of this category.

418. The deficiency in respect of this category of claimed expenditure is one of proof. In the main, because the same types of evidence is said by the AA Trust to prove deductibility, the position in relation to these deficiencies is the same as that set out in respect of the Category 18 claims.

419. In addition, so as to prove the deductibility of the first expenditure item in this category, the AA Trust relies upon a dividend statement. However, as the Commissioner correctly submitted, this neither proves that the expenditure of $5,000 on 18 September 1995 was for the purchase of those shares nor that the

ATC 25780

expenditure was a loan advance to Phillips River (making no mention of $5,000, 18 September 1995 or Phillips River).

420. For these reasons, nothing has been proved to be an allowable deduction in respect of this category.

Category 20 - Payments to or for Fennelltown

421. There are six expenditures in this category, as detailed in the table below. The case for the AA Trust is that these expenditures were loan advances to Fennelltown.

Date Amount
3 December 1997 $415.00
5 December 1997 $246.60
22 December 1997 $742.00
19 January 1998 $200.00
20 January 1998 $418.33
9 February 1998 $75,000.00

422. Once again, no different principles to those discussed in respect of Category 4 are entailed as to whether a deduction is allowable under s 8-1 of the ITAA 1997 in respect of this category.

423. At the respective dates identified in the above table, Fennelltown was not a wholly-owned subsidiary of the AA Trust. The reason why any of these alleged borrowings would be income producing for the AA Trust rises no higher than a general assertion in evidence by Mr Gould that:

As with other loans between my Australian private entities, I determined how much interest should be payable by the VR Gould Family Settlement Trust in respect of this loan shortly before 30 June of each year.

(Mr Gould also stated that these advances were to Fennelltown in its capacity as trustee of the VR Gould Family Settlement Trust).

However, for reasons already given, Mr Gould's evidence as to any of these expenditures being a loan, being an interest bearing loan or as to the timing of any such determination being made is not reliable proof of any of those facts. Further, that either or each of the positive limbs of s 8-1 of the ITAA 1997 is satisfied is not a matter of presumption, because entities belong to some broader corporate group. No purpose falling within either or each limb of s 8-1 in respect of the making of each of the alleged advances has been proved by the AA Trust.

424. Further, in respect of each of the 6 expenditure items in this category, the AA Trust has not proved that the expenditure was in fact made as a loan advance to the specified entity or the VR Gould Family Settlement Trust. The AA Trust relies on entries in general ledgers, financial statements and Mr Gould's Prior Attribution evidence, none of which, for reasons already given, is reliable. In respect of the three payments alleged to have been made to third parties on behalf of Fennelltown, there is no document in evidence that proves that Fennelltown had incurred such expenditure or directed the AA Trust to pay it by way of loan advance.

425. For these reasons, the deduction claim in respect of this category of expenditure wholly fails.

Category 21 - Loan advances to unrelated entities - Dennis Flynn

426. The case for the AA Trust is that interest incurred on funds borrowed to make this loan was deductible on the basis that the loan was interest bearing. This expenditure category consists of a 14 February 2001, $100,000 payment to Mr Dennis Flynn. Subject to the Commissioner's overarching submission about the HWBB loan, there is no issue between the parties in respect of categorisation or as to the deductibility of the interest incurred to the extent to which this payment was sourced in a loan from HWBB.

PART IVA

427. Given the conclusions reached in respect of a failure to discharge the onus of proof in relation to each of the deduction claims save, subject to the operation of Pt IVA of the ITAA 1936, the very few as detailed above concerning interest and facility fees paid to HWBB, it is only necessary to consider Pt IVA in relation to a tax benefit arising from those interest and facility fee deduction claims. Indeed, so limited has been the discharge of the onus of proof by the AA Trust in respect of such deduction claims, it may seem superfluous to consider Part IVA at all. However, the

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subject was fully argued and it is as well to express a conclusion about the application of Part IVA in any event against the contingency that the conclusions reached above concerning the various categories of expenditure alleged to have been sourced in funds borrowed from HWBB by the AA Trust are erroneous.

428. Materially, the Commissioner came to posit two alternative schemes:

429. It was submitted on behalf of the AA Trust that such a refinement entailed a denial of procedural fairness to it. I do not accept this. These have always been said to be a feature of a scheme as identified by the Commissioner. The AA Trust has, accordingly, suffered no evidentiary embarrassment by the way in which the Commissioner came to posit the schemes.

430. In relation to Pt IVA, as with other grounds upon which it alleges the assessments concerned to be excessive, the AA Trust bears the onus of proving that that there is no tax benefit in connection with a scheme:
Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164, at [154] per Middleton and Robertson JJ. That does not necessarily mean that the AA Trust must establish that each counterfactual posited by the Commissioner is unreasonable or that, if it does not do this, then, on that ground, it has failed to prove that the assessment is excessive. Even if the AA Trust were to establish that the Commissioner's counterfactual was unreasonable, it would not necessarily follow that it had established that the assessment was excessive. That is because the issue which flows from the text of Pt IVA is not whether the Commissioner puts forward a reasonable counterfactual. As was observed in
RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785; 2011 ATC 20-275, at [131], the error in such an approach is in the conception:

… that if the Commissioner's counterfactual is reasonable that is the end of the matter; even if the court were to conclude, on all the evidence, inferences and logic referred to, that if the scheme had not been entered into the taxpayer would have or might reasonably be expected to have done something which did not give rise to a tax benefit, or which gave rise to a tax benefit less than that thrown up by the Commissioner's counterfactual.

It is possible, in such circumstances, that before reaching any such conclusion, the taxpayer and the Commissioner might, for procedural fairness reasons, have to be afforded an opportunity to be heard by the Court. However, the question is always one for the Court to determine objectively, and on all of the evidence, as well as the apparent logic of events, what would have or might reasonably be expected to have occurred if the scheme had not been entered into.

431. What constitutes a "scheme" for the purposes of Pt IVA is defined by s 177A of the ITAA 1936. The definition is broad. As to this, Gummow and Hayne JJ observed in
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 ( Hart ), at [43]:

It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to ''action'' in the singular) the taking of but one step. The very breadth of the definition of ''scheme'' is consistent with the objective nature of the inquiries that are to be made under Pt IVA.

432. I accept that each of the alternatives identified by the Commissioner constitutes a "scheme" in terms of s 177A. That is not to say that, in the present case, consideration of the narrower scheme can be contextually divorced from the borrowing to which it related. Further and in any event, an error in detailing a scheme would not necessarily vitiate a determination to cancel the alleged tax benefit. That is because, "the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connection with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner'':
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, at 382.

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433. More particularly, having regard to s 177D, the question is whether the relevant taxpayer (here, the AA Trust) has obtained, or would but for s 177F, obtain a tax benefit in connection with the scheme; and, having regard to the matters referred to in s 177D(b):

… it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer … to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer …)?

434. The eight matters referred to in s 177D(b) may be considered either individually or in combination. It is neither necessary nor desirable to adopt a mechanical, check-list approach to these eight matters, only to take such of them as are raised on the evidence into account in the making of an overall assessment of purpose. The test posited in s 177D is an objective one. That does not mean that it is irrelevant to take into account the subjective purpose of a relevant actor, only that any such purpose is not determinative and cannot prevail over what, objectively and taking into account such of the matters in s 177D as are applicable, is the purpose. Consideration of the matters specified in s 177D extends to considering a posited scheme in a wider context in order objectively to determine purpose.

435. The effect of the definition in s 177A(5) is that "purpose" in s 177D refers to the "dominant purpose".

436. Having regard to paragraph (1)(b) of the definition in s 177C of "tax benefit", the tax benefits of present relevance, are the deductions otherwise allowable under s 8-1 of the ITAA 1997 in respect of interest and facility fees.

437. Given that the tax benefits in question were interest and facility fees, what, objectively, was the dominant purpose in relation to each posited scheme cannot be divorced from the borrowing. Even though the narrower formulation of the scheme does not specify borrowing, the borrowing was "an indispensable part of that which produced the tax benefit": Hart, at [9] per Gleeson CJ and McHugh J. As already mentioned, the borrowing provides the context in which each deduction claimed was incurred.

438. Both in form and in substance, what the AA Trust incurred were liabilities in respect of interest and facility fees in respect of advances under a prevailing loan facility. In keeping with that form and substance, withholding tax was paid by the AA Trust in respect of its remittances to HWBB.

439. One submission made by the Commissioner was that:

the AA Trust has not proven the use of the funds for the reasons set out above concerning the use of the HWBB funds and the reasons why these have not been proven to be for the purposes of deriving assessable income or carrying on a business for such purpose.

But one matter to which s 177D(b), by sub-paragraph (iv), directs attention is, "the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme". The AA Trust has proven, to the very limited extent revealed above, that, but for the operation of Pt IVA, the result would be that it obtained a deduction under s 8-1 of the ITAA 1997, because it satisfied the elements of that provision.

440. Other postulates put by the Commissioner which arise for consideration under s 177D(b)(iv) are:

441. The relationship between the AA Trust and HWBB was qualitatively different to the relationship between HWBB and the clients (or their entities) of Mr Gould's

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incorporated accountancy practice who invested in Samoan superannuation funds and, as part of another scheme, already described above, came to take what at least purported to be loans from HWBB. Those clients were not part of a group controlled by Mr Gould and Mr Gould was not causing the entities within that group, including the AA Trust and HWBB, to operate for altruistic reasons.

442. As already highlighted above when considering the subject of sham, the evidence discloses that the funds held the AA Trust fluctuated markedly. The AA Trust had a need for capital. To the very limited extent to which it has succeeded in relation to its s 8-1 claims in respect of interest and facility fees and the like, it had a need for capital for purposes which fell within either or each of the positive limbs of s 8-1 of the ITAA 1997. Advances from HWBB to it pursuant to the loan facility in place from time to time coincided with when its own financial resources were relatively depleted, including on occasion because it had made a payment of interest which it was obliged to make pursuant to that loan facility. Not just as a result of a matching deposit (as with the clients), HWBB had funds available which it could and did lend to the AA Trust.

443. Again, to the limited extent so proved by the AA Trust, as far as HWBB was concerned, the change in financial position as a result of the making of an advance attracting an interest and facility fee liability was that HWBB's capital was diminished in return for any an obligation to repay that capital in accordance with the prevailing loan agreement and, in the meantime, an obligation to pay interest as compensation for the use by the AA Trust of that capital. In return for the making available of the facility, HWBB received the facility fee for which the prevailing loan agreement provided. As for the AA Trust, in return for an obligation to pay a facility fee, it obtained an ability, subject to the prevailing facility limit, to receive advances from HWBB as required to meet a need for working capital. Its financial position changed from time to time as it drew down advances which augmented its working capital but at the cost of incurring a liability to pay interest.

444. Once again, to the limited extent proved in relation to its s 8-1 claim, as far as the AA Trust was concerned, the dominant purpose in each instance was the obtaining of working capital in order to carry on its business as identified above. That, in so doing, a deduction was allowable in respect of interest and facility fees was merely an incidental purpose or consequence:
Federal Commissioner of Taxation v Metal Manufacturers Ltd (2001) 108 FCR 150;
Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27.

445. So far as HWBB was concerned, the dominant purpose was the obtaining of a return by way of interest on capital deployed by advances under the prevailing loan facility and a facility fee in respect of any unused amount within the prevailing facility limit, not the obtaining of a tax benefit for the AA Trust. Within the group controlled by Mr Gould, HWBB could, and did, act as a banker or in-house financier, relative to, materially, the AA Trust. In this regard, that was the business which it carried on. It is nothing to the point that, in relation to its dealings with what I have termed "the clients", one might question whether HWBB was just a banker or financier. It may well be that, in relation to those clients, a better description of the business of HWBB would be "facilitator of avoidance of Australian tax and laws governing superannuation funds". Even so, it did not carry on this or any other aspect of its business for free. To operate, HWBB needed to, and did, derive income from its various activities.

446. The Commissioner put forward that HWBB was a mere conduit. This is nothing more than a rehearsal of a submission rejected more than once in relation to separate legal entities within a group, one of which undertakes the business of in-house financier:
Federal Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562, at 569;
Federal Commissioner of Taxation v Tasman Group Services Pty Ltd (2009) 180 FCR 128, at [56]; BHP Billiton Finance, at [18] to [21]; and Ashwick, at [40] to [43]. This particular business of HWBB was neither an appendage to a business carried on by a group of companies controlled by Mr Gould nor was it a mere conduit of the business of the AA Trust. As mentioned, HWBB, too, was not operated for altruistic

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reasons. The evidence demonstrates that it was generally profitable. To operate, it had expenses such as those of its service provider, Asiaciti, to meet. It is not reasonable to expect that it would have advanced funds to the AA Trust interest free.

447. An analysis of funds available to the AA Trust at the time when advances occurred means that not borrowing was not an option that "might reasonably be expected to have been obtained" for the AA Trust; not if it were to continue to carry on its business. Commercial suicide is not a reasonable alternative postulate. From 1999 at least, the assessment, necessarily one made by Mr Gould, was that it needed more than the existing facility limit of $1 million in order to carry on its business. Subsequent events show that, objectively, there was such a need. Mr Good's evidence confirms that it was unlikely that, at the time, the AA Trust could have obtained from an Australian bank a facility with the limit for which the 1999 agreement provided and in any event not at a rate which HWBB offered. That rate was competitive but it was not fixed at such a level that one might reasonably conclude that it was so fixed solely for the purpose of the obtaining by the AA Trust of the tax benefit of a deduction in respect of that interest. Objectively, and on the whole of the evidence, if it were to continue to carry on business, the AA Trust was always going to do what it did, obtain from HWBB an increase in a facility limit and take advances from HWBB within that limit at a competitive interest rate and on terms that additionally provided for a facility fee, as, when and to the extent required.

448. For these reasons, Pt IVA has no application in the circumstances of the present case to the particular interest and facility fee deduction claims upon which the AA Trust has succeeded in discharging its onus of proof. It follows that, to the extent that the Commissioner's assessments deny such deductions, they have been proved to be excessive.

AMENDMENT - S 171A - 2001, 2002 AND 2004 INCOME YEARS

449. The AA Trust contends that it satisfies either or each of items 3 and 4 in the table under s 171A(1) of the ITAA 1936 such that the time within which the Commissioner was empowered to assess it has expired.

450. The controversial issue in relation to this contention is whether it had a "tax loss", as defined.

451. The tax return of the AA Trust in respect of each of 2001, 2002 and 2004 income years disclosed an excess of allowable deductions over assessable income, and also recorded a carry forward tax loss from the previous year. The AA Trust contends that, on either view of what it is to have a tax loss, it had a tax loss.

452. Not so, submits the Commissioner. The Commissioner submits that "tax loss" is defined in s 6(1) of the ITAA 1936 to have the same meaning as in the ITAA 1997. In the ITAA 1997, "tax loss" is defined in s 995-1. In turn and materially (via paragraph (a) of the definition), that definition directs attention to "a tax loss worked out under s 36-10 of the ITAA 1997". The Commissioner submits that, just as Anglo American as trustee of the AA Trust has "net income" under Div 6 as defined in s 95 of the ITAA 1936, rather than taxable income, it also does not have a "tax loss". That submission proceeds from the references in items 1 and 2 in the table under s 171A(1) of the ITAA 1936 to "taxable income" to s 95 of that Act, which refers to "net income" of a trust estate, rather than to "taxable income".

453. The riposte of the AA Trust to this submission of the Commissioner is that, "Whatever infelicities of language there may be in Div 36, they count for little given the number of statutory provisions that provide for the treatment of trust tax losses." Particular reference is then made to s 36-25 of the ITAA 1997 and to sch 2F of the ITAA 1936, each of which makes particular provision in respect of certain trusts and their tax losses.

454. The use by the AA Trust of the description "infelicities of language" is certainly apt, even something of an understatement. A clue to the resolution of what is truly a difficult issue of statutory construction may be offered by s 265-5 within sch 2F of the ITAA 1936 in its reference, in the overview to that schedule to the prospect that, in certain circumstances, a trust "may have to work out in a special way its net income and tax loss for the

ATC 25785

income year". Looking overall at the tax treatment of trusts, including to the provisions identified by the AA Trust, "net income" looks to be a quite discrete concept to "tax loss" in relation to a trust. Both s 36-25 of the ITAA 1997 and sch 2F of the ITAA 1936 would indeed be rendered meaningless if a trust could not have a "tax loss". Further, the specification in s 36-10 of the ITAA 1997 of how to calculate a "tax loss" owes nothing either to "taxable income" or to "net income" but instead looks to assessable income, allowable deductions, any tax losses from previous years and any net exempt income.

455. It follows that s 171A was not a source of statutory authority for the making of assessments for the 2001, 2002 and 2004 income years.

AMENDMENT - S 166A - 2005, 2007, 2008 AND 2009 INCOME YEARS

456. The AA Trust submits that s 166A(3) of the ITAA 1936 is applicable such that each tax return it lodged for the 2005, 2007, 2008 and 2009 income years is deemed to be a notice of assessment. On this basis, it submits that s 170(1) of the ITAA 1936 is applicable such that the Commissioner was unable to amend those deemed assessments unless the Commissioner was of the opinion there has been fraud or evasion for the purposes of s 170(5) of that Act. In amplification, it submits that the definition of full self-assessment taxpayer, found in s 6(1) of the ITAA 1936, viewed as a whole, "suggests the class of entities intended to have full self-assessment status are entities engaged in commerce" and that the intent would be thwarted were a trustee company to be excluded. In any event, it submits that it is a company and hence within the definition of "full self-assessment taxpayer".

457. It is not, with respect, at all apparent to me that any theme of engagement in commerce permeates the definition of "full self-assessment taxpayer" in s 6(1) of the ITAA 1936. If there is any theme, textually, in that definition, it is that trusts are to be differentiated from companies with only certain types of trust being a "full self-assessment taxpayer".

458. Further, as the Commissioner pointed out in submissions, in the ITAA 1936, "company", by s 6(1), has the meaning given by s 995-1(1) of the ITAA 1997. In that section, "company" means, materially, a "body corporate". In turn, a "body corporate" is, by s 960-100(1)(b) of the ITAA 1997 defined as an "entity". By s 960-100(4) it is provided that, "If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity." An example given under that subsection, which differentiates acting in a personal capacity from acting in the capacity of trustee, is apt. One provision which refers to an entity of a particular kind is the definition in s 995-1(1) of "company", which refers to a body corporate. That reference, in light of s 960-100(4) is not to a company acting as trustee.

459. On either approach, the AA Trust was not, in the income years suggested, a "full self-assessment taxpayer".

"FRAUD OR EVASION"?

460. The Commissioner also formed an opinion, for the purposes of s 170 of the ITAA 1936, that there had been an avoidance of tax due to fraud or evasion.

461. For the purposes of this provision, an avoidance of tax occurs where less tax has been paid than ought to have been paid but for the fraud or evasion:
Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23, at 34.

462. The relevant principles and practice in relation to a challenge in a court to such an opinion were long ago stated by Dixon J (with whom McTiernan and Webb JJ agreed) and also by Williams J in
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 ( Denver Chemical Manufacturing ). Sir Owen Dixon had then but recently elaborated on the grounds on which a decision based on a subjective state of mind of the Commissioner might be reviewed in a court in
Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353. For present purposes, it is necessary only to refer to Denver Chemical Manufacturing.

463. The following emerges from Denver Chemical Manufacturing:

464. To this it might be added that "fraud" carries its ordinary, common law meaning. It occurs where a false statement has been made to the Commissioner either knowingly or with reckless indifference to its truth:
Kajewski v Federal Commissioner of Taxation (2003) 52 ATR 455, 2003 ATC 4375, at [111].

465. The AA Trust advanced elaborate arguments as to why the Commissioner's opinion had not been formed according to law. A fundamental difficulty with these arguments was, as the Commissioner highlighted in submissions, that, contrary to Denver Chemical Manufacturing, the arguments of the AA Trust proceeded from a foundation which was not proved. Though a very great deal indeed of evidence was tendered in this proceeding, that evidence did not include a discrete identification of exactly what was before the Commissioner at the time when he formed his opinion as to fraud or evasion. Necessarily, that was immediately prior to the making of the assessments concerned, not at the objection stage. Further, the reasons given at the objection stage, which are in evidence, are not the reasons of the Commissioner for the original forming of the opinion on the basis of which the assessments were made. Those reasons, if given, are also not in evidence. It would be possible to review the opinion absent those reasons but not in the absence of the evidence before the Commissioner.

466. Herein may lie one difficulty in the change which has been made in relation to an exercise of judicial power in a taxation appeal. The present appeal is expressed to be against the objection decision: s 14ZZ(1)(a)(ii), TAA. However, the burden which falls on the AA Trust is not to prove that the objection decision was wrong but rather that the assessment is excessive: s 14ZZO, TAA. One way of doing that is to show that there was no power to make the assessment because, materially, an opinion as to fraud or evasion was not formed according to law.

467. As enacted and for many years thereafter, there was no asymmetry in the ITAA 1936 between the right of appeal to a court exercising original jurisdiction, Commonwealth judicial power and the onus of proof. By the former s 187(b) of the ITAA 1936, a taxpayer dissatisfied with the Commissioner's decision on an objection was entitled to require the Commissioner to treat his objection as an appeal and to forward it to the court then exercising the relevant original jurisdiction. In that appeal, the taxpayer had the onus of proving the assessment to be excessive: see the former s 190(b) of the ITAA 1936. The ITAA 1936 as enacted replicated the earlier method by which Commonwealth judicial power could be invoked to challenge an assessed liability to income tax. In that method, the objection supplied the grounds upon which the court determined whether the

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assessment was excessive with the Commissioner's objection decision supplying nothing more than the pre-condition to an ability to refer the objection against the assessment to the court.

468. Part of the problem which bedevils the AA Trust in its attempted challenge may therefore be the confusion in thinking that presently attends the formulation in the TAA for the invocation of judicial power. Although the appeal is said to be against an objection decision, that decision, the reasons for it and the evidence before the Commissioner at the time it was made are truly a distraction, because the onus on the taxpayer is to prove the assessment to be excessive:
Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168, at 198 per Brennan J, at 221, per Dawson J and, at 227, per Toohey J.

469. For these reasons, the ground challenging the Commissioner's opinion with respect to fraud or evasion fails.

PENALTIES

470. The Commissioner's assessing position, maintained on the appeal, was that the shortfall amount resulted from intentional disregard of a taxation law by the AA Trust or its agent, resulting in a penalty of 75% of the shortfall amount pursuant to item 1 in the table in s 284-90(1) of sch 1 to the TAA. In the alternative, the Commissioner submitted that the AA Trust or its agent had at least been reckless and so penalties should have been imposed at a rate of 50% pursuant to item 2 in the table in s 284-90(1) of sch 1 to the TAA.

471. While the primary position of the AA Trust was that there was no shortfall, it submitted in the alternative that, as to penalty, there was no "culpable conduct" and so no exposure to penalty or, at most, there was a failure to take reasonable care. The AA Trust also made the point, which is true in the abstract, that it did not follow that all tax shortfalls were the result of conduct of the same character. As to the latter point, so pervasive was Mr Gould's control and so consistent were his behaviours, I am not persuaded that there is any relevant distinction to draw as between shortfalls for penalty purposes.

472. The conclusion which I have reached concerning an absence of active dishonesty by Mr Gould precludes, in my view, a finding of intentional disregard for penalty purposes. In some circumstances in relation to criminal liability, wilful blindness can supply the requisite element of knowledge. However, the text of item 1 in the table in s 284-90(1) of sch 1 to the TAA is against a like conclusion in relation to penalty and suggests that there must be an actual intention, not an equivalent of one.

473. A taxpayer or agent who was wilfully blind would at least be reckless.

474. In
Hart v Federal Commissioner of Taxation (2003) 131 FCR 203, at [33] and [43], the members of the Full Court approved this statement by Cooper J in
BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111; (2001) 46 ATR 347; [2001] FCA 164, at [77], as to the meaning of recklessness:

Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and a reasonable person in the position of the statement maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.

[emphasis added]

475. In my view, Mr Gould was at least grossly indifferent as to whether expenditures claimed by the AA Trust as deductions were truly incurred or incurred in the amounts claimed. A reasonable person in his position would have seen there was a real risk that the deductions claimed were not allowable to the AA Trust under a taxation law. Fiscally, his conduct was, objectively, outrageous, much more than just a failure to take reasonable care. In these circumstances, the appropriate characterisation is that it was reckless, so attracting penalty at a rate of 50%, pursuant to item 2 in the table in s 284-90(1) of sch 1 to the TAA.

476. It follows that the penalty assessments are, to this extent, proved to be excessive. That

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are also excessive in that, to the very limited extent indicated above, the tax shortfalls are not as assessed by the Commissioner.

477. There does not appear to be any dispute that any penalty would be increased by 20% in all of the years after the 2001 year, pursuant to s 284-220 of sch 1 to the TAA.

478. The question of remission is one for the exercise of an administrative discretion on the merits, which is not a power consigned to the Court.

RESULTANT ORDERS

479. It will be necessary to hear from the parties both as to the appropriate form of orders to give effect to these reasons for judgment as well as in respect of costs.

THE COURT ORDERS THAT:

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

 

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