WCVB v FC of T

Members:
BJ McCabe DP

Tribunal:

MEDIA NEUTRAL CITATION: [2024] AATA 1259

Decision date: 28 May 2024

BJ McCabe (Deputy President)

REASONS FOR DECISION

1. This case is principally concerned with the question of whether the proceeds of a sale transaction negotiated between one company (company A) and another (company B) should be counted as assessable income of a third company, the taxpayer in these proceedings. The Commissioner of Taxation says at least a portion of the sale proceeds from the company A to company B transaction should be attributed to the taxpayer even though it was not a party to the deal because of the context in which the company A-company B transaction occurred. The Commissioner says that when one has regard to the context, it becomes apparent the

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company A-company B transaction is really an adjunct to another deal in which the taxpayer, a member of the same corporate group as company A, sold different assets to company B. The Commissioner says the net result of these linked transactions was to disguise part of the true and total value extracted for the assets sold by the taxpayer and divert those gains away from the taxpayer's creditors and the Commissioner.

2. I agree it is necessary to have regard to the wider context given the evidence suggests all contracts were part of the resolution of a proposed joint venture between the corporate group and the individuals who controlled the counterparties to the various contracts. I am not satisfied the taxpayer discharged its onus in the face of those questions. The taxpayer had more success in relation to one of two claims for deductions that were also made.

An outline of what happened, and what falls to be determined

3. The applicant in these proceedings, WCVB, is a member of a corporate group. At all material times, the group was controlled by an individual whom I will refer to as Mr Smith. The group was involved in the business of buying, developing and selling real estate. Different companies within the group played different roles: some acquired and held land, and others supplied various corporate services to the landowning companies and each other in connection with various development projects.

4. WCVB was one of the landowning companies within the group. It owned three adjoining blocks of land in a suburb that I will refer to as Astoria. WCVB planned to develop the parcels of land but, after getting approval for the development, it decided to sell the land before the development commenced in earnest. (There is a live question over the extent of any preparatory work that was undertaken before the sale.) WCVB sold each of the blocks under separate contracts signed on different dates in May and June 2010. The three properties were all sold to the company, which I will refer to as ABC. ABC was controlled by individuals I will refer to as Mr Black and Mr Blue. The total sale price under the three contracts was $5 million plus GST. WCVB insists that amount was the total derived from the sales. The company included that figure in its returns as assessable income for the year in question.

5. The Commissioner says a further amount should have been included in WCVB's assessable income for the year in question in connection with the sale of the Astoria properties. That additional amount is referable to a fourth contract between another group company (as vendor) and ABC. The fourth contract was signed on 7 June 2010. The fourth contract purported to sell documents that related to the development of properties held by group companies - including the Astoria properties that were sold by WCVB. The fourth contract identified a sale price of $3.85 million net of GST for all these documents. The contract did not expressly assign value to the documents relating to the Astoria properties as opposed to the other documents.

6. There is no evidence that WCVB received any of the sale proceeds from the fourth contract. The Commissioner says that does not matter. He argues one must have regard to all four contracts to determine the amount that was actually derived from the sale of the Astoria properties. He says that when one has regard to all four contracts, WCVB or entities associated with WCVB derived more from the sale of the Astoria properties than WCVB reported in its tax return.

7. On that assumption, the Commissioner issued an amended assessment for the year ended 30 June 2011 which increased the sale proceeds on the Astoria properties from $5 million to $5,946,000. The additional monies represented a portion of the proceeds of sale under the fourth contract that the Commissioner attributed to the documents relating to the Astoria properties. To put it another way, the Commissioner says it is appropriate to treat a portion of the proceeds of sale under the fourth contract as if those monies were the balance of the purchase price for the Astoria properties. The Commissioner argued the additional amount counted as ordinary income derived by WCVB within the meaning of s 6-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) even though WCVB did not actually receive the money because it was "taken to have received the amount as soon as it is applied or dealt with in any way on [WCVB's]

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behalf or as [WCVB] direct[ed]": s 6-5(4) ITAA97. The net effect of the adjustment was to increase the assessable income of WCVB in that year by $946,000.

8. The Commissioner also disallowed claims for deductions in respect of interest expenses and the costs of construction. The Commissioner said those deductions had not been properly substantiated under s 8-1 of ITAA97.

9. The effect of all these adjustments was to increase WCVB's taxable income in the relevant year by over $2.2 million, leading to a tax shortfall of $662,587.50. The Commissioner subsequently issued a notice of penalty assessment which imposed:

10. WCVB has asked the Tribunal to revisit the objection decision in relation to substantive tax and penalties. It says there are good reasons for the Tribunal to accept the total amount derived in connection with the sale of the Astoria properties was $5 million net of GST. On WCVB's case, the fourth contract is a red herring, and no part of the sale proceeds from that transaction could be attributed to the sale of the property by WCVB.

11. WCVB also insists it is entitled to the deductions, and it offered evidence at the hearing to substantiate those claims. It says the penalties question falls away because there is no shortfall.

The applicant's onus, and some general observations about the evidence

12. In order to succeed in this case, WCVB must discharge its burden under s 14ZZK(b) of the Taxation Administration Act 1953 (Cth) (the Administration Act). That provision requires a taxpayer to establish on the balance of probabilities that the assessment was excessive, and - if so - by how much. To put it differently, the taxpayer is responsible for establishing the correct (or more nearly correct) amount of its taxable income. To succeed in that task, the taxpayer is ordinarily expected to produce witnesses, documents or other material that establish both the correct amount of assessable income and any allowable deductions.

13. In some cases, it is possible to narrow the scope of the dispute and (for example) focus on a few core expenditures or transactions that are genuinely in dispute. As a model litigant, the Commissioner should make concessions on questions of fact where he can so the taxpayer is not required to expend time and resources establishing matters that are not really in dispute. But there are many cases where the Commissioner says, in effect, anomalous expenditures or transactions which he highlights in the objection decision and the proceedings are potentially just the tip of the iceberg.

14. In such a case, the taxpayer will not inevitably succeed by leading evidence on those matters. A more comprehensive explanation of the taxpayer's affairs will be required.

15. The evidence in these proceedings focused on a limited number of transactions. The dispute over the correct amount of assessable income turns on the treatment of the proceeds of sale under the fourth contract. It is unnecessary to enquire more generally into WCVB's other sources of assessable income because it was a special purpose vehicle established to buy, develop and sell the land. It did not appear to have any other sources of income apart from the land transactions and negligible amounts derived from providing carparking services. The focus at the hearing and in the documents was on the cumulative effect (if any) of the four contracts of sale. The dispute over the deductions is also confined. WCVB has offered evidence directed to both integers of taxable income that it says should be sufficient to persuade me to accept its position and set aside the objection decision. If I am persuaded by WCVB as to the primary tax, I accept the question of penalties falls away. If there is a shortfall, it will be necessary to (a) deal with the rate of administrative penalty (if any) that should be imposed, and (b) consider whether any part of such a penalty should be remitted.

16. WCVB's case relies heavily on the testimony of its founder and controller, Mr Smith. It did not lead evidence from Mr

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Black or Mr Blue who might have explained their perspective on what they thought their companies were buying in each of the transactions. WCVB says there was no need to call that third party evidence in circumstances where WCVB was able to provide an uncontested valuation that estimated the market value of the Astoria properties was around $5 million - the very price which it obtained for the real estate it was selling under the three contracts. I was told there is no need to enquire into the fourth contract because whatever the parties were seeking to accomplish in that transaction, there were no implications for the taxpayer's affairs. The taxpayer in this case sold what it sold for a good price, and it reported that price. That was it, at least as far as the taxpayer was concerned. The fourth contract was an unfortunate distraction. WCVB also said there was ample evidence to justify its claims for deductions.

17. The Commissioner did not really engage with the valuation. He certainly did not introduce evidence which called that expert opinion into question. Even so, he says I should not be persuaded by WCVB's case in relation to the fourth contract issue (which ultimately goes to the correct amount of assessable income) or the deductions issue.

18. The Commissioner's position on the fourth contract issue was nuanced. While at a high level his case proceeded on the premise that all was not as it seemed, he did not expressly articulate a case of sham in his statement of facts, issues and contentions. At the hearing, counsel for WCVB objected when Mr Smith was asked questions by the Commissioner's counsel that implied (it was argued) the contractual arrangements, or some of them, were a sham. In my ruling on that objection, I said (transcript at p 209):

…an allegation of sham is a specific and well-understood allegation of such seriousness that one would ordinarily expect it to be made in the open as far in advance of the hearing as possible. … for reasons of procedural fairness, it would not be appropriate to allow the Commissioner to specifically ask about sham, but… the Commissioner should otherwise be able to ask questions surrounding all the circumstances of the contract and what it means.

19. The Commissioner nonetheless argued Mr Smith and WCVB had an incentive to try and understate or disguise the amount derived from the sales of the Astoria properties. The incentive was said to arise out of the fact the properties were mortgaged to a financier who had provided a large facility to the wider group. There is no doubt the group was under financial pressure at the relevant time. Mr Smith was scrambling to arrange for the sale of assets owned by group companies to reduce debt in the wake of the so-called 'Global Financial Crisis'. When the financier consented to the sales of the mortgaged Astoria properties in March 2010, it did so on the express basis that the cumulative proceeds of those sales would be applied to reduce the group's outstanding debt. The financier had expressed its satisfaction with a total sale price of $5 million plus GST for the three mortgaged properties. The evidence suggests it followed the progress of the sales carefully to ensure they were successfully completed and the bulk of the $5 million in proceeds was applied to reduce the debt.

20. It is possible Mr Smith was able to extract a higher price for the three properties from entities associated with Mr Black and Mr Blue. It is also possible he contrived to divert the additional value through the medium of the fourth contract so those monies could be retained by the group rather than being repaid to the financier which was already concerned about the group's capacity to repay its debts. (Mr Smith acknowledged the fourth contract was never disclosed to the financier; the financier was nervous enough about effecting the sale of the Astoria properties through three separate contracts of sale, let alone a fourth.) But a positive finding to that effect would amount to a finding of fraud - specifically, that Mr Smith was attempting to defraud the financier, and that WCVB (albeit perhaps incidentally) misled the Commissioner in the course of perpetrating that fraud. That is a very serious allegation to make, and a finding to that effect cannot lightly be made for the reasons discussed by the Full Court in
Sullivan v Civil Aviation Safety Authority (2014) 226 FCR 555; [2014] FCAFC 93 per Logan J at [15]-[17] and Flick and Perry JJ at [111], [117].

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21. The applicant in a case like this generally bears the onus of establishing its taxable income, as I have explained. The Commissioner is not obliged to lead evidence that contradicts the applicant, nor is the Commissioner required to defend the reasoning that he offered in support of his objection decision. At the hearing, the Commissioner might legitimately confine himself to testing the evidence offered by the applicant. In submissions thereafter, the Commissioner is free to point to any inconsistencies or credibility issues that might cause the Tribunal to find it is not satisfied on the balance of probabilities that the applicant has discharged the onus. The Commissioner can urge the Tribunal to reject evidence which is inherently unlikely, or which is otherwise inconsistent with known facts. He can point to gaps in the evidence which suggest the applicant's case is not sufficiently complete and satisfying. The Tribunal is not constrained to accept an explanation from the applicant that is fanciful, unlikely or unconvincing on its face merely because the Commissioner has failed to disprove the proffered story: to do so would effectively reverse the onus.

22. The Tribunal must be satisfied the taxpayer has demonstrated the correct (or more nearly correct) assessment. Deliberating on the civil standard of 'balance of probabilities', the Tribunal looks to whether the taxpayer has done enough to "weigh[…] down [the] scales ever so slightly in his favour":
Allied Pastoral Holdings Pty Limited v Commissioner of Taxation [1983] 1 NSWLR 1 at 8 per Hunt J; cited with approval in
Commissioner of Taxation v Cassaniti (2018) 266 FCR 385; [2018] FCAFC 212 at [88] per Steward J. In other words, the taxpayer is not required to supply every piece of the jigsaw puzzle that is otherwise being assembled without reference to the picture on the box if it is to succeed in its case. (If the taxpayer had all the pieces available, there would be no room for doubt and the case would never have made it to a hearing!), The Tribunal must decide whether the scene emerging from the pieces assembled in the hearing has become sufficiently clear to confirm the taxpayer's version of what is depicted.

23. There is no doubt that uncorroborated evidence from a witness of fact might be accepted and relied on for the purposes of making a finding: see, for example,
Ma v Commissioner of Taxation (1992) 37 FCR 225; [1992] FCA 359. Of course, self-serving evidence from a witness must be scrutinised carefully: see, for example,
Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149; [2011] FCAFC 74 at [81]-[82] per Ryan, Jessup and Perram JJ. Much depends on common sense. When a witness gives evidence that is plausible on its face and there is no good reason to doubt the witness's credit, their evidence might be accepted without corroboration. The Tribunal might take a different, more critical approach where the witness tells a story that is less likely, or where there is some reason to question their credit. When a party fails to produce evidence (most obviously evidence from another witness) without explanation in circumstances where one would expect that evidence was relevant and available, the failure to call that evidence may invite the inference that the evidence does not exist, or that it does not support the party's case: see, generally
Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, and
Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361 at [63]; [2011] HCA 11 per Heydon, Crennan and Bell JJ.

24. If the Commissioner does rely on specific allegations as a basis for criticising the applicant's story, those allegations must be clearly articulated and supported by evidence. The Commissioner should not speculate about the possibility of sham or fraud. If the Tribunal is invited to reject a taxpayer's case on either basis, the Commissioner should point to evidence capable of sustaining such a finding. It is not enough for the Commissioner to raise the possibility of fraud (for example) and then invite the Tribunal to reject the taxpayer's case on the basis of dark suppositions about what the taxpayer or any of its witnesses might have done in the shadows. It is one thing to expect the taxpayer to establish a positive case or disprove an articulated negative, but it is quite unfair to expect them to disprove speculation.

25. While the taxpayer bears the onus, the contest must still be procedurally fair. As Aickin J explained in
Bailey v Commissioner of Taxation (1977) 136 CLR 214 at 227-228; [1977] HCA 11 at [13]:

It is not in the interests of the proper administration of justice that, when the matter comes before the court, the appellant should have to speculate about, and adduce evidence to negate, every possible kind of agreement or arrangement and avoidance which the imagination of his advisers can conjure up. Such a process is not merely time-wasting but is likely to obscure the real issues.

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26. Having said all that, the Commissioner is entitled to refer to disparate facts, raise his eyebrows and ask, in effect: "When one has regard to the whole picture, who knows what is going on here?" as he argues the taxpayer has fallen short of discharging its onus. Subject to concerns about procedural fairness, the Commissioner will typically be permitted to ask questions about what transpired and submit thereafter that the taxpayer's case cherry-picks evidence in service of an explanation of its affairs that is ultimately unpersuasive. There is a fine line to be drawn between the Commissioner running a positive case which should be expressly articulated, and presenting a purely negative case premised on permissible scepticism which calls attention to deficiencies of proof.

THE FOURTH CONTRACT ISSUE

27. I will begin by dealing with the so-called 'fourth contract' issue which relates to the taxpayer's assessable income - specifically, whether the amount of the taxpayer's assessable income is determined with reference to the proceeds of three contracts, or all four. I will thereafter deal with the deductions claims, which relates to the other component of the taxpayer's taxable income.

WCVB acquired the properties

28. The history of the dealings in the Astoria properties that follows is drawn principally from the affidavits of Mr Smith (exhibit 1 signed on 21 May 2023 and exhibit 2 dated 21 May 2023).[1] An earlier version of the affidavit dated 5 August 2021 had been filed but was replaced by the exhibited version which was amended in minor respects and sworn on 21 May 2023 (‘exhibit 1’). A second affidavit was also filed and is ‘exhibit 2’ in the proceedings. Mr Smith oversaw a property development business that was conducted through a maze of companies and trusts. The group's holding company was established in 1988. Mr Smith was the group company's only director. In his affidavit (exhibit 1 at [3]), Mr Smith explained he would decide to embark on a particular development project and the group would then establish a separate company (like WCVB) to acquire and hold the property being developed. The development process typically involved dealing with planning authorities to obtain approvals, dealing with banks and other financiers to obtain funding, and dealing with builders, tradespeople and materials suppliers who were involved in construction. Different companies within the group might attend to those functions in respect of the property which was owned by the land-owning entity, which was effectively a special purpose vehicle.

29. WCVB was established in late 2001 for the specific purpose of acquiring and developing the three contiguous Astoria properties. Mr Smith was the company's only director. In his affidavit, he explained the properties were acquired jointly by the holding company and WCVB as tenants in common in February 2002, albeit that the holding company only held a 1/20th share. The purchase price for the three properties was a total of $3.125 million. There were two dilapidated buildings on the blocks but they were otherwise vacant and part of it came to be used as a carpark: exhibit 1 at [4]-[6], [21].

30. While the acquisition of the Astoria properties was financed through borrowings from St George, the group subsequently established a new facility (or facilities) through Suncorp. As part of that refinancing arrangement, Suncorp required various companies in the group to give security over their assets. The Astoria properties were mortgaged as part of this process, and Suncorp's consent was required before they could eventually be sold. I will have more to say about the details of those arrangements and how they came about when I turn to the second aspect of the dispute between the taxpayer and the Commissioner. For now, it is enough to note the uncontroversial evidence that Suncorp:

Development approvals obtained in respect of the Astoria properties

31. The process of obtaining development approvals in relation to the Astoria properties had commenced in December 2002. A development application lodged with the local government authority sought approval to build a mixed-use multi-story building which included retail tenancies and apartments with parking. The approval was granted in January 2006. The approval anticipated construction would commence within 5 years or else it would lapse. There followed a series of interactions between Mr Smith on behalf of WCVB and the holding company (although another group company that provided construction services to the group was also involved) on the one hand and the planning authority on the other as the development approvals were obtained and amended. Nothing turns on the detail of those interactions for present purposes: it is enough to note the planning authority issued a fresh approval for a large development in May 2009 that would lapse if work did not begin by May 2012.

The sale of the Astoria properties to a former group company

32. In the meantime, another group company, ABC, acquired an option to purchase property located in a suburb I will refer to as Banksia. ABC had been incorporated for this purpose on 26 March 2009. Prior to 1 March 2010, the sole director was an employee of one of the other group companies.

33. Mr Smith was cross-examined in some detail about his relationship with that sole director. After some equivocation, he conceded the director made all her decisions in accordance with his recommendations: transcript at p 53. On that basis, I accept Mr Smith was a shadow director of ABC, at least while the employee remained the sole director.

34. In early 2010, Mr Smith recalled an approach from Mr Black and Mr Blue who ran their own property development business. (There was a third associate, Mr Brown, who was also involved in their business and he appears to have been involved in the negotiations at various points, but Messrs Black and Blue were the principal actors.) Messrs Black and Blue were interested in acquiring the Astoria properties and taking over the contract for the purchase of the Banksia property held by ABC. Mr Smith said the individuals discussed entering a joint venture with Mr Smith's group to develop the Astoria and Banksia properties and yet another property located in a suburb I will refer to as Corinthia. In cross-examination, Mr Smith said it soon became clear the group could not participate in a joint venture: transcript at pp 217-218. I will have more to say about the proposed joint venture below, but for now it is enough to note the venture between those parties did not proceed. Mr Smith said it was agreed instead that Messrs Black and Blue would take control of ABC and then ABC would purchase the Astoria properties from WCVB for a price of $5 million net of GST whilst retaining the contract to purchase the Banksia property.

35. To this end, I was told, Messrs Black and Blue were appointed directors of ABC on 12 March 2010. They acquired two thirds of the issued shares in the company on the same day. The balance of the shares were held by the group employee who was already a director. She resigned her directorship and transferred the balance of the shares in ABC to Messrs Black and Blue on 28 July 2010.

36. The acquisition of the property over which ABC had contractual obligations was successfully completed on 1 April 2010. Mr Smith said in cross-examination that Messrs Black and Blue were in control of ABC by that point and facilitated the settlement of the Banksia property acquisition: transcript at pp 90-91.

37. While all this was going on in 2010, Mr Smith approached Suncorp to obtain its consent for the sale of the three Astoria properties. Suncorp's consent was required because it held mortgages over the three properties. It was therefore able to dictate what occurred with the proceeds of the sales. Copies of email exchanges between Mr Smith and the responsible officer at Suncorp were annexed to one of Mr Smith's affidavits. Mr Smith reported on 21 April 2010 that he was negotiating with a potential purchaser. On 22 April, Mr Smith confirmed in an email to the responsible officer that a prospective purchaser had

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paid a deposit on one of the Astoria blocks and valuations were being discussed in relation to another of the blocks (hearing book at p 612). Later that afternoon, the responsible officer enquired as to the identity of the prospective purchaser and asked whether the offer was for $5m net of GST for one or more of the blocks because "[t]hat is what is the expected net amount to come to Suncorp at settlement": hearing book at p 616.

38. Mr Smith explained in his evidence that he had supplied older valuations to Suncorp suggesting the market value of the property might be in the order of $4 million: transcript at p 42. In the weeks following 22 April, Suncorp arranged for its own valuations with respect to the properties. Mr Smith was required to provide information about the development approvals and other documents to the valuers so they could prepare their opinion. Mr Smith chafed at what he took to be the slow pace of that process. He wrote to the responsible officer at Suncorp on 12 May 2010 (hearing book at p 623) to ask about what was occurring because:

I am getting a bit of pressure from the proposed purchaser of [one of the blocks]. He informed me that he is submitting attender on another site shortly and note be able to proceed if he is tender is accepted [sic]. He is ready to exchange. Your comments will be appreciated.

39. Mr Smith said he received what I infer was a verbal 'go ahead' from the responsible officer at Suncorp shortly thereafter: transcript at p 42 (see applicant's closing submissions at [51]). The first of the three contracts for sale was signed on 18 May 2010. The second was signed on 2 June and the third on 7 June. Copies of all three contracts were forwarded to the responsible officer at Suncorp under cover of an email dated 10 June 2010. Copies of all three contracts are also reproduced in the 'T' documents provided pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act). Those contracts all identify the vendors as WCVB and the holding company, the owners of the land.

40. The responsible officer at Suncorp wrote back to Mr Smith on 15 June. The correspondence reflects a measure of irritation on the officer's part. He noted the buyer identified in the contracts was not the entity that had been referred to in earlier correspondence, but he assumed the purchaser was related to that entity. (It was.) The officer went on to express his surprise that there were three contracts, rather than a single consolidated contract (document ST75 at p 2226 of consolidated 'T' documents). He said:

…the Bank has serious concerns with the fact there are now 3 separate contracts for each lot and that each has a different date for settlement. (ie: - what if only some of them (and not all of them) proceed to completion).

Consequently, the Bank's position with the above sales is set out hereunder.

  • (a) The Bank does not consent to the 3 separate contracts;
  • (b) The Bank will release its mortgage over the 3 lots on conditions that:
    • (i) All of the sale proceeds are paid to the Bank… and
    • (ii) The lots settle concurrently n later than 26 July 2010 (being 42 days from the last dated contract); and
  • (c) The Bank continues to reserve its rights….

41. This response did not derail the deal. The contracts all settled on 12 August 2010 after the purchaser paid over $5 million (being the total purchase price inclusive of GST). The settlement statements prepared by the lawyers who handled the transaction were in evidence before me (pp 631ff of the hearing book). They each record instructions to draw cheques in favour of Suncorp (amongst others) at the time of settlement under each contract. The cheques to Suncorp added up to $4,870,223.34 which reflected the whole of the proceeds of the sale less GST and adjustments in respect of lawyer fees and the like which were recorded in the settlement statements. On 13 August 2010, those cheques were apparently deposited into the Suncorp loan account that was conducted by the group's lead borrower under the facilities. Suncorp had consented to the sales. And that was that, according to WCVB.

42. The history I have recorded thus far is largely uncontroversial. There is no reason to doubt the properties were sold to the purchaser or that Suncorp ultimately consented to the

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sales after being assured (a) as to the total purchase price and (b) virtually all the net proceeds would be applied to pay down the group's debt to Suncorp.

43. Suncorp had reason to scrutinise the sales closely given the parlous financial state of the group. The responsible officer from Suncorp was not called to give evidence so I should be cautious about forming a view about Suncorp's attitude to the sale price. WCVB, at least by implication, argued that Suncorp was plainly satisfied with the purchase price because it consented to the sale after considering the valuation opinions - including valuation opinions Suncorp obtained in advance of the sales being completed. Suncorp certainly had an incentive to push for the best price because it was owed a significant amount of money under the facilities. But it was presumably disposed towards making a pragmatic commercial decision in circumstances where the seller was obviously under financial pressure. The pressure would be relieved by the sales, but group companies would still owe money under the facilities even after the sales were concluded.

44. The surprise registered by the responsible officer at Suncorp when informed that the sales would proceed in three separate contracts is understandable. The decision to negotiate three contracts rather than a single contract was never adequately explained. Of more concern was the extent of the relationship between Mr Smith and Messrs Black and Blue. He was asked about that relationship in cross-examination. The Commissioner invited me to infer the relationship between those individuals was such that WCVB and ABC should not be regarded as dealing at arms' length.

45. I have already noted ABC was formerly part of the same group as WCVB. Prior to 12 March 2010, ABC's single director was an employee of the group. Mr Smith was already involved in negotiations with Messrs Black and Blue (and perhaps Mr Brown) in relation to the Astoria properties, amongst others, at that point. There was talk of a joint venture before Mr Smith said the decision was made to deliver up control of ABC to Messrs Black and Blue. Those individuals were appointed directors on 12 March 2010. They were also allocated two thirds of the shares in ABC. But the group employee who was hitherto the sole director remained on the board until July - that is, until after the contracts of sale for the Astoria properties were signed but before they settled. Given Mr Smith's concession that the employee-director acted at his direction, there is at least a question over whether the company was dealing with WCVB at arms' length when the contracts were signed, even if the two companies were no longer formally part of the same larger group.

46. WCVB says, in effect, that I need not be troubled by these questions. It says the valuation evidence should reassure me that the sales of the Astoria properties were made at the prices recorded in the three contracts. The prices obtained were equal to market value, I was told.

47. The valuation report of Mr Grahame Hollinshead is dated 5 August 2021. It was prepared for the purpose of these proceedings at the request of WCVB. A copy of the report is reproduced at pp 788ff of the hearing book. Mr Hollinshead appears to be appropriately experienced and credentialed. He explained the basis on which he formed his opinion in the executive summary as follows (at pp 791-792 hearing book):

As at the Date of Valuation the Subject Properties enjoyed development consent for a part 12 and part 6 storey mixed use building including 100 residential units and two ground floor commercial suites pursuant to [the development application then in force].

The approved development had a Gross Floor Area ( GFA ) of 9,560.11m2which, as set out in this report, represented the highest and best use of the Subject Properties.

In determining the Market Value of the Subject Properties, I have utilised the Market Approach to valuation, and more specifically, the Comparable Transactions Method.

The Comparable Transactions Method is utilised to determine the Market Value by comparing the Subject Properties with comparable market sales evidence.

Under this approach, I have ascribed separate market derived values on a $/m2

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GFA basis to each of the Subject Properties. In my experience the market value of mixed use development sites is typically determined using the Comparable Transactions Method on a $rate/m2of potential GFA. This method of valuation recognises that the value of a mixed use development site is generally regarded as being a function of the floor space which could be yielded from a development of that site.

48. It is important to underline the valuer's assumption that the development approvals were in place and contributed to the value of the property. The evidence confirms the development approvals had been obtained and were current at the time the sales occurred. That is significant because, as a matter of law and commercial reality, "a development consent is not personal to the applicant but endures for the benefit of subsequent owners during the currency of the development consent": see
Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 229 CLR 577; [2006] HCA 55 at [67] per Kirby and Crennan JJ. In other words, the development consent flows with the land once it is obtained.

49. After summarising his assumptions and methodology, the valuer concluded the market value of each of the properties on the date that the individual contracts were signed was:

50. The cumulative market value of the three blocks with the benefit of the development approval then in force was $4,875,000. WCVB points out that estimate closely approximates the final sale price exceeding $5 million inclusive of GST.

51. The Commissioner did not object to the valuer's report nor did he ask to cross-examine Mr Hollinshead or offer any contrary evidence. I have no reason not to accept Mr Hollinshead's opinion in the circumstances.

52. If that was the extent of the evidence, this would be an easy case. While there were some curious aspects to the sale transactions when examined on their own terms, they appear to have been concluded at a reasonable price, and that price net of GST was reported in the tax returns. There would simply be no reason to suppose that any further value was obtained in respect of the properties when they were sold.

Contracts: and then there were four…

53. Mr Smith said in exhibit 2 at [23]ff that the genesis of the fourth contract lay in the proposal to enter into a joint venture with Messrs Black and Blue (and perhaps Mr Brown) to develop the Astoria, Banksia and Corinthia properties, and potentially a fourth property. Mr Smith said he was prepared to consider the arrangement because his group was experiencing difficulties in the wake of the global financial crisis: at [26]. Mr Smith said it was anticipated the group would retain a one third interest in the various properties: at [28]. The terms of the proposed joint venture were never reduced to writing: transcript at p 62. That joint venture arrangement was abandoned in May 2010. Mr Smith said the decision to abandon the joint venture is recorded in an exchange of emails annexed to exhibit 2 at [36].

54. Mr Smith made clear in exhibit 2 at [37]-[38] that it was anticipated the joint venture would be replaced by what I infer was an integrated plan with respect to the properties. The sale of the Astoria properties to ABC was one component of that revised plan. The so-called 'fourth contract' was another. The corporate control transactions and payments that I will describe below were also part of the plan. His oral evidence at the hearing was more equivocal: his answers in cross-examination initially seemed to suggest the transactions unfolded at the behest of Messrs Black and Blue after the decision was made to end the joint venture: transcript at p 62. He subsequently appeared to concede the connection between the various transactions when he referred to the agreements in relation to the various properties and said (transcript at p 64):

And obviously the agreement that all agreements had to be performed by the final date of the settlement for [Corinthia] before we hand over the certificate of sale from everything else that went with it.

55. I will return to the question of the proposed joint venture and its resolution below. Before I do that, it would be helpful to explore

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the other aspects of the plan, which the Commissioner says includes the fourth contract.

56. The fourth contract was an agreement in the form of a deed between a company I will call Zenith (the seller) and ABC. The deed is dated 7 June 2010. Mr Smith signed the deed on behalf of Zenith. Zenith was a foundational member of the same group of companies as WCVB. ABC was the purchaser under the deed in addition to being the purchaser of the Astoria properties under the three contracts with WCVB. A copy of the deed is reproduced in the 'T' documents at pp 523ff as referred to in Mr Smith's second affidavit at [44].

57. Zenith apparently provided intra-group services to other entities, including WCVB. In his affidavit, Mr Smith explained (exhibit 2 at [33]) Zenith:

…carried out the planning processes from conception to approval stages of the Development Applications. This encompassed the commissioning and management of numerous expert reports in accordance with the relevant Local Environmental Plans in support of the applications for development of those properties and ongoing correspondence and resubmitting of assessments leading up to an approval.

58. Mr Smith explained (at [35]) it was more efficient to give Zenith carriage of the development application process on behalf of landowning companies rather than burdening the landowner with the expense. He said Zenith would recoup its costs from each landowning company once the asset in question was sold. Having said that, it is apparent from Mr Smith's affidavit that the company's involvement was a formality. He was the one undertaking the work: [19].

59. Mr Smith said Zenith's work had resulted in an increase in value to both the Banksia property owned by ABC and the Corinthia property owned by another company that I shall refer to as Delta. He explained (at [34]):

In [Delta]'s case a Development Consent was achieved for the [Corinthia] Property which increased the value of the property based on the density and floor space ratio achieved, and for [ABC], the [Banksia] Property planning had progressed to pre-DA status in consultation with the appropriate council staff where concurrence of experts reports and assessments for two high rise buildings were agreed and hence, [ABC] was ready to proceed to formal Development application in the approval process.

60. Given that improvement in value, Mr Smith went on to explain in his second affidavit (at [40]) that Zenith:

…had to be paid for the benefits derived from the lengthy planning processes in achieving the DA for [Corinthia] and the green light at pre-DA meeting to proceed with a DA for [Banksia]. The … Group was entitled to value of the benefits earned from the planning works which was based on a time factor to commence construction and the value of each property (based on a value per unit) approved or entitled to be approved).

61. WCVB's case at hearing was that Mr Smith arranged for a transaction between Zenith and the other entities to recover Zenith's costs and participate in some of the gains accruing to the landowners as a result of the development approval processes that Zenith had overseen. Mr Smith said it was agreed the group would access that increased value by selling the documents connected with the developments. The agreement recording the sale from Zenith to ABC was contained in the deed which is now known as the fourth contract dated 7 June 2010.

62. The recitals to the deed confirmed Zenith was the "beneficial owner of development documents in relation to a number of properties…" including "[a]ll Plans, reports, council approvals, submissions for [the Astoria, Corinthia and Banksia properties]". The documents in question are referred to in the deed thereafter as 'the D.A. Documents'. ABC is identified as the purchaser of all the D.A. Documents under the terms and conditions set out in the deed. Clause [1] then provides:

Upon receipt of payment in the amount of $3,850,000 + GST [Zenith] has agreed to transfer to [Delta] all its right, title and interest in relation to the D.A. Documents and hand over all original D.A. Documents to [ABC].

63.

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To be clear: the D.A Documents in question were identified in the deed as those documents which related to the Banksia and Corinthia development approvals as well as the documents relating to the development approval obtained in respect of the Astoria properties that were being sold by WCVB to ABC in the other three contracts we have already discussed. Zenith was in possession of the Astoria documents because it had overseen the (successful) approval process.

Zenith, ABC - and Delta

64. Zenith was incorporated in August 1992. Mr Smith was a director of the company from that date. He became the sole director after his wife retired from the board in 2002 (although I note she remained the company secretary until 5 December 2011). I have already explained Mr Smith signed the fourth contract on behalf of Zenith on 7 June 2010. But the ASIC Current and Historical Organisation Extract attached to his affidavit (hearing book at pp 890) suggests Mr Smith ceased being a director of Zenith on 1 June 2010. The records also disclose Mr Smith's son had been appointed to the board on the same day Mr Smith resigned. The son remained a director until 5 December 2011, the same day on which his mother retired as company secretary.

65. It is unclear what authority Mr Smith had to sign the fourth contract deed on 7 June 2010 on behalf of Zenith in circumstances where he had resigned as director the previous week. He was asked about this in cross-examination but he did not clearly explain what was going on. It is difficult to know what significance should be attached to this evidence. I note Ms Kovacs asked Mr Smith whether he actually signed the document in his capacity as a director of the taxpayer: transcript at p 128. The question was apparently premised on the assumption the taxpayer was involved in the transaction because its property was being sold for value - value that should have been reported as assessable income. Mr Smith denied he was signing otherwise than on behalf of Zenith and insisted "[t]his deed of agreement is totally independent of anything to do with [the taxpayer]": transcript at p 128.

66. It is difficult to know what to make of this evidence. On the one hand, Mr Smith did not clearly explain why he had resigned in circumstances where he clearly continued to play a role in the affairs of Zenith and other group companies. (The fact his son appears to have replaced him on the board of Zenith invites an inference that Mr Smith thereafter retained influence if not control over the company.) When pressed on this issue, Mr Smith insisted he was in fact still a director at the relevant time notwithstanding what the ASIC documents record. It is not clear why he would have thought it necessary to resign from the board of Zenith to accomplish whatever it was he had in mind: resigning from the board at that juncture would likely invite more questions if he had a nefarious purpose. On balance, I do not think the evidence justifies a positive finding that Mr Smith resigned from Zenith to disguise his real purpose, but it does reflect the irregular and uncommercial flavour of these dealings.

67. Delta was not a party to the deed between Zenith and ABC. Mr Smith said Delta had been established as a landowning entity on 2 August 2007. He recalled in his affidavit that he was the sole director and shareholder of the company at the time: exhibit 2 at [16]. Delta acquired the Corinthia property in December 2007: exhibit 2 at [18]. (I will have more to say about the financing arrangements in relation to the acquisition below.) Zenith proceeded to undertake work to secure development approvals in respect of the Corinthia.

68. The ASIC Current and Historical Extract annexed to Mr Smith's affidavit (at pp 898ff hearing book) records him ceasing to be a director of Delta on 12 March 2010 at which point the group employee who was hitherto the sole director and member of ABC also became a director of Delta. Mr Smith said shares were issued to Messrs Black and Blue who also became directors of Delta on 12 March 2010. In exhibit 2, Mr Smith explained (at [29]) these developments came about pursuant to the (soon-to-be abandoned) proposal to establish a joint venture to develop the properties. The group employee did not resign from Delta until 15 November 2010: a copy of her resignation letter is reproduced in Mr Smith's affidavit (hearing book at p 926). The share transfer forms recording the employee's subsequent transfer of her shares in Delta to

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Messrs Black and Blue are also dated 15 November 2010 (hearing book at pp 927-928). The share transfer forms suggest the shares transferred by the group employee were sold at a nominal price. Mr Smith said in his affidavit that he also sold his shares for nominal value around this time.

69. The evidence of Messrs Black and Blue being appointed to the board of Delta and becoming shareholders in March 2010 is broadly consistent with WCVB's case that:

70. I should pause to note there are some inconsistencies in the evidence that all this was planned as part of the resolution of the joint venture. While I have already noted Mr Smith's acknowledgment of a plan to execute a series of transactions effecting a transfer of control over ABC and Delta and the sale of the Astoria properties, Mr Smith also expressly denied there was a connection between the sale of the Astoria properties and the dealings that were the subject of (or ancillary to) the fourth agreement. When questioned about the links (if any) between the contracts during cross-examination, the following exchange occurred (transcript at p 108):

Ms Kovacs: So you suggest to the tribunal that the contracts - the three contracts entered into for the sale of [the Astoria properties], had nothing to do with the deed of agreement entered into on 7 June 2010 between [Zenith] and [ABC]?

Mr Smith: Absolutely not.

71. I am unable to reconcile that answer with the other evidence, including paragraphs [37]-[38] of Mr Smith's own affidavit (exhibit 2). The integrated nature of the plan to resolve the joint venture was confirmed in a number of ways. For example, Mr Smith was asked in cross-examination (transcript at p 103ff) about communications from the lawyers for ABC at the time of the settlement of the contracts over the Astoria properties. Mr Smith was shown a letter from the lawyers dated 30 June 2010 that refers to the purchase of the Astoria properties in its heading. The letter is reproduced as document ST157 at p 2602. Intriguingly, the short letter says:

Please find enclosed s47 certificate showing a charge over property situated at [Corinthia]. Your client will also be required to provide me with a clearance certificate prior to or at settlement.

72. The Commissioner says the reference to the Corinthia property was clearly suggestive of a link between the two transactions. I note the request in that letter was effectively reiterated to Mr Smith in an email from the group's own lawyer on 15 July 2010, the heading of which also referred to the sale of the Astoria properties. After confirming the purchaser's lawyers were ready to settle the Astoria contracts on 20 July, the email (reproduced as document ST155 at p 2600) notes:

She [the purchaser's solicitor] mentioned that there should also be a title for a [Corinthia] property provided to her on settlement.

73. Mr Smith pointed out in cross-examination that the same solicitor was acting for the purchaser on the Astoria sale and the fourth contract. He was not otherwise able to provide a satisfactory alternative explanation for the correspondence which, on its face, suggested there was a link between the various transactions.

74. Given all the evidence that the parties to the various dealings appear to link the transactions, it is no surprise the Commissioner insists the sales of the Astoria properties must be seen in a wider context which includes the fourth contract and the related corporate control transactions and payments. The evidence that members of Mr Smith's group and Messrs Black and Blue struck the agreements in question as they transitioned from the joint venture also raises questions over whether the parties were dealing with each other at

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arms' length. But there are also questions about the details of the arrangement, including the precise character of some of the payments between the various companies.

The monies passing between the various parties

75. The share transfer forms in evidence suggest the transfer of the shares in each of ABC and Delta occurred at a nominal value. That was certainly Mr Smith's evidence: exhibit 2 at [50], [51]. I note copies of the share transfers dated 15 November 2010 to Messrs Black and Blue are reproduced in the hearing book as part of Mr Smith's affidavit at pp 927-928.

76. Mr Smith explained the unwinding of the joint venture was premised on two things occurring which involved substantial payments being made. The first was the payment of the purchase price of $3.85 million ($4.235 million including GST). The obligation on ABC to pay the purchase price was set out in the deed, and that amount is referred to in the tax invoice dated 7 June 2010 issued by Zenith to ABC. The second was a payment of $1.9 million by Messrs Black and Blue into Delta that covered a debt which Delta owed Zenith. The second payment is not mentioned in the deed. Delta was not a party to that agreement, after all. The payment is supposedly referable to the resolution of the joint venture agreement.

77. The evidence around the circumstances of the payments - particularly the payment of the $1.9 million into Delta - requires careful scrutiny. WCVB says Delta bought the Corinthia property for $1.5 million in 2007. The property was mortgaged to a financier who advanced funds in connection with the purchase. WCVB says it is apparent from Delta's accounts that Delta had come to owe around $1.9 million at the time of the fourth contract: see notes to Delta's financial statement annexed to exhibit 2 (hearing book p 936) and applicant's closing submissions at [68]. Mr Smith explained the $1.9 million debt was incurred in respect of what he called 'the hard costs' of acquiring and holding the Corinthia property: transcript at p 82. That explanation is not inherently unlikely as far as it goes: as Mr Smith explained in cross-examination (transcript at p 73), Delta was a landowning company that had been established to buy and develop the property, and it was only able to fund all that by accessing the resources of other group companies or external financiers. There does not seem to be any doubt that the company purchased the land or that costs would have accrued to maintain the property - although not the costs associated with the development application process, which were apparently being borne by Zenith under the group's usual arrangements. It is plausible Delta would have a debt in that amount in 2010. It is the identity of the ultimate creditor which has aroused the Commissioner's scepticism.

78. The notes to the financial statements for 2010 show that $999,000 of the $1.9 million that had accrued was owed to the secured creditor and the balance of the debt was owed to Zenith. Mr Smith explained in his affidavit (exhibit 2 at [51]ff) that it was agreed following the decision not to proceed with the proposed joint venture:

79. That agreement is not recorded in writing.

80. The Commissioner says the evidence of a debt to Zenith does not make sense, and that the $1.9 million payment was made by Messrs Black and Blue in return for the shares. In cross-examination, Ms Kovacs zeroed in on what Mr Smith had said in [54] of his affidavit about the source of the $1.9 million obligation. In that paragraph, he had asserted:

The Loans (unsecured) of $1,900,000 was advanced by [Zenith] to acquire the property , obtain DA cost, commence preliminary building works and pay out the mortgage to [the financier]. [Emphasis added]

81. Ms Kovacs asked Mr Smith about the assertion in his affidavit that Zenith loaned the money to acquire the property. Mr Smith explained (transcript at p 74):

I mean, the wording may not have been in best format, but the clause clearly states that the 1.9 million was made of the discharge of the mortgage to [the financier] and other

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costs, hard costs, associated with the making of the property after that.

82. There was other confusing evidence given on this point. An email exchange between Mr Smith and the lawyers attending to the settlement of the arrangements dated 23 November 2010 (reproduced in the annexure to exhibit 2 at p 941-942 of the hearing book) recorded the machinations in relation to Delta and observed "[t]he sale price is $1,900,000 [less an amount paid as a deposit]" [emphasis added]. After some deductions, the lawyer advised Mr Smith on 24 November 2010 (annexure to exhibit 2 at p 943 of the hearing book) to collect a bank cheque at the settlement conference that day in the amount of $1,552,586.60 in favour of Zenith.

83. Ms Kovacs suggested to Mr Smith that there was no loan from Zenith, and that Messrs Black and Blue had agreed to accept direct responsibility for paying out the financier. He insisted there was, and confirmed the monies received by Zenith at the time of settlement should be understood as a repayment of that debt: transcript at pp 74, 76. Mr Smith insisted (transcript at p 79) the $1.9 million amount referred to the hard costs of acquiring and holding the property which had to be repaid to Zenith. He said the payment in respect of the debt was separate from the uplift in the value of the Corinthia property which Zenith had brought about; that uplift was instead incorporated in the $3.85 million amount payable under the fourth contract.

84. In the absence of a written record of the terms of the joint venture and its resolution, the easiest way to resolve the confusion about the purpose of the individual payments would be to call evidence from Messrs Black and Blue. But the taxpayer did not call Mr Black or Mr Blue. When Mr Smith asked why the applicant had not done so, he replied: "Why would I? Sorry, the answer is no" (transcript at p 220).

85. Even if I assumed in the taxpayer's favour that the shares were sold at a nominal value because Messrs Black and Blue were separately contributing $1.9 million to repay Delta's debt, a mystery remains: precisely what was ABC buying in return for $3.85 million?

86. Mr Smith said in exhibit 2 at [43] that the documents in relation to the development approvals of the Astoria properties were publicly available. The value generated by the approvals was incorporated into the value of the land subject to the approvals, as the expert valuation report contends. The documents in relation to the Astoria development approvals therefore had no intrinsic value, it was argued. In contrast, the documents relating to the Banksia property were potentially valuable and needed to be assigned because the approvals had not been finalised. Mr Smith said the assignment of those documents would allow Messrs Black and Blue to finalise the existing development application rather than start that process over again: exhibit 2 at [45].

87. What of the value of the development documents in relation to the Corinthia property? Those approvals had also been finalised which means - like the Astoria documents - they had no intrinsic value. As I understand WCVB's case, those documents nonetheless served as a proxy for the value generated by the development process overseen by Zenith. That value was not otherwise reflected in the sale of the Corinthia land - remembering that the sale was being effected through a transfer of control over the landowning company rather than a sale of the land itself at market value. In those circumstances, Mr Smith explained, the $3.85 million payment (plus GST) was a "fee" to be paid that reflected the accretion in value to the Banksia and Corinthia properties as a result of Zenith's work: exhibit 2 at [44]. He said (at [48]):

It was proper for [Zenith] to be entitled to the amount under the Deed of Agreement as it had funded the costs associated with the drawings and professional reports and preparatory works for both the [Banksia] Property by way of assignment of works under progress and the [Corinthia] Property by handing over all company books, files and planning approvals. The fee was derived from the raw value of both [Banksia] and the [Corinthia] properties, by way of an agreed uplift on these properties.

88. Mr Smith suggested in cross-examination that the D.A. Documents in Zenith's possession included a certificate of title document for the Corinthia property: transcript at p 93. That document

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was not produced at the hearing, although in fairness the Commissioner's counsel did not press for the call of the document after Mr Smith mentioned it. If the document existed, it may have been valuable in the sense that it gave Zenith leverage in the negotiations with Messrs Black and Blue. But once again, Messrs Black and Blue were not called to confirm that account in circumstances where one would expect they could readily do so.

89. The question remains: why bother mentioning the Astoria documents in the Fourth Contract if they had no value to the transaction? Mr Smith's affidavits do not squarely address this question, but he was cross-examined about it at the hearing.

90. In the course of a lengthy exchange with Ms Kovacs, Mr Smith acknowledged that once the planning authority gave consent to development, the consent ran with the land and was available on its terms to any subsequent purchaser: transcript at p 113. As a practical matter, that meant the increase in value wrought by the development approval would ordinarily be included in any valuation of the property. When Ms Kovacs suggested (transcript at p 113-114) "there was no plausible explanation for a deed being entered into for the sale of only development documents or development approval and associated documents", Mr Smith initially blustered. He thereafter appeared to suggest the documentation in relation to the Astoria properties was dealt with in the contracts of sale in relation to those properties - which begs the question of why they would be mentioned again in the fourth contract. In the following exchange, Ms Kovacs pressed Mr Smith on what she suggested was his shifting explanation for referring to those documents in the deed (at transcript pp114-115):

Ms Kovacs: …I suggest that you've made it up because you are struggling now to explain the inconsistency that development documents in connection with the [Banksia] and [Corinthia] properties had to be sold and yet development documents in connection with [Astoria] did not need to be sold?

Mr Smith: I think I've been consistent. And the evidence is consistent. And I'll restate again, that in a contract for sale a contract - straight-out contract for sale - supersedes all previous negotiations prior to the exchange date. And the vendor is under legal obligation to attach all of the items that belong with the property regardless of their nature.

Ms Kovacs: You can't explain why the [Astoria] properties are referenced in the deed of agreement?

Mr Smith: They're referenced in the recital just for completeness.

Ms Kovacs: I suggest to you that that is nonsense?

Mr Smith: Really? It's the document. It's a commercial document. You can refer to it.

Ms Kovacs: You can refer to anything and - just for completeness, can you? Is that your suggestion to the tribunal?

Mr Smith: No. No. I just said - I pretty much said, look it's in the document. It's a commercial document, had been executed and transacted. There's really not much I can add to it. It is what it is.

Ms Kovacs: Mr [Smith], I put it to you that you can't explain why the [Astoria] properties are referenced in the deed but now you say, in your evidence, that the DA approval for [those properties] was automatically captured in the $5 million price approved by the bank?

Ms Smith: I think you've asked me numerous questions on that very topic over the last two days and my answer has been pretty much the same.

91. Mr Smith's shoulder-shrugging resort to the expression "It is what it is" drew attention to the inadequacy of his explanation for what transpired. When Ms Kovacs went on to ask about answers given by the group's former accountants in response to questions from the Commissioner about the reasoning behind including the Astoria documents in the fourth contract, Mr Smith struggled. Ms Kovacs then asked (transcript at p 121):

You can't explain, can you, why you give evidence that the sale of one property, being the property at [Astoria], would automatically capture the value of any DA, and yet you say that the sale of the

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[Corinthia] property would not capture the value of any DA [given the Corinthia property had also received development approval]?

92. Mr Smith offered a discursive reply to this question. He suggested an explanation for why the development documents in relation to the Banksia and Corinthia properties were mentioned in the deed: those properties were not subject to a standard contract of sale which would have dealt with the development documents issue (he said) but they were effectively being acquired by transferring the shares in the holding company. Whatever the merits of that explanation, it does not deal with the decision to include the Astoria documents in the fourth contract when according to Mr Smith's own explanation the disposition of those documents was dealt with in the contacts of sale that related to those properties.

93. Ms Kovacs also took Mr Smith to the assertion in his affidavit (at [35] of exhibit 2) that Zenith ordinarily recouped its costs associated with securing development approvals from the sale proceeds when the property was sold. Ms Kovacs pointed out Zenith had worked on securing the approvals for the Astoria properties. She asked Mr Smith to explain why he said a different practice was followed in this case. His answer (transcript at p 123) was relatively straightforward: "As transacted, there was no surplus funds to be paid to [Zenith] for the services provided." He then elaborated:

I agree paragraph 35 said that [Zenith] usually gets paid from the proceeds of sale of an asset, which is usually intended to be a development site to be developed. But in this instance the property was sold under severe circumstances and there was no surplus funds beyond repaying Suncorp.

94. The Commissioner was effectively inviting me to infer the fourth contract provided for a fee to be recovered by Zenith in respect of its work on all three projects, rather than two, because that was Zenith's usual practice. The Commissioner says WCVB, through Mr Smith, does not provide a coherent explanation for why the deed referred to the Astoria documents if the usual practice was not being followed in this case.

Findings in relation to the fourth contract and its relationship with the other three contracts

95. Mr Smith was cross-examined at length. He was recalling events and plans that occurred over a decade ago. The documentary record is fragmented - because of the passage of time, and because of Mr Smith's management style which did not exhibit a firm commitment to record-keeping or an assiduous regard for the niceties of decision-making in a corporate group. His evidence was central to the taxpayer's case because he was at the centre of whatever occurred. He had lapses of memory and he was argumentative, but he was also trying to recall complex events and interactions that occurred some time ago. While he was important to WCVB's case because he was in a position to know what the various group companies were thinking when they entered into the transactions under consideration here, the true character and effect of the four contracts is not determined solely by reference to his intentions. It is also necessary to have regard to the objective features of the arrangements and how they interacted which might be different to what Mr Smith thought they intended. One must take in the whole picture (insofar as it is relevant) before expounding confidently on what it depicts.

96. Mr Smith was asked towards the end of his cross-examination (transcript at p 220) why Messrs Black, Blue and Brown had not been called to give evidence. As I have already noted, his answer was unequivocal: "Why would I? Sorry, the answer is no". There was no suggestion those witnesses were unavailable. The failure to call them was unfortunate when they likely had a perspective on the fourth contract and its potential linkage with the contracts in relation to the Astoria property.

97. I have already acknowledged the Tribunal may accept the uncorroborated evidence of a witness. The cases establish there is no rule to the effect that a witness's evidence must be corroborated by documents or other testimony - even as other cases warn of the need to carefully scrutinise the evidence of a witness who has an interest in the outcome of the case. I have also explained the Tribunal would not lightly make a positive finding that conduct amounts to fraud, and that

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positive submissions to the effect the contracts were a sham could not fairly be entertained.

98. I acknowledge the force in WCVB's argument that, as a matter of fact, there is a valuation which demonstrates the Astoria properties had a market value that approximated the sale price of the properties under the three contracts of sale that settled in 2010. But I am also satisfied Mr Smith's own evidence suggests there was some sort of commercial linkage in the minds of the various parties between the three sale contracts and the fourth contract. While I acknowledge Mr Smith's evidence is inconsistent on this point, it is sufficient to raise a real question over what was sought to be achieved by the parties to the fourth contract, at least. That contract expressly refers to the documentation in relation to the Astoria properties, which invites the inference that at least part of the purchase price of the contract was referable to that documentation in circumstances where that documentation had no intrinsic value. Mr Smith's own evidence suggests Zenith would ordinarily attempt to recoup its costs after the sale of an asset was complete, and that it effectively followed that practice in relation to the other two properties mentioned in the fourth contract. That was strange given the documents in relation to the Corinthia property also had no intrinsic value.

99. The Commissioner argues WCVB's explanation does not make sense on its own terms. The evidence surrounding the fourth contract raises important questions over what was going on between WCVB, other group companies, and Messrs Black, Blue and Brown. One could not confidently accept WCVB's explanation of the transaction in relation to the Astoria properties until those other questions were answered - most obviously by calling at least one of Messrs Black or Blue, or providing a good explanation as to why their evidence was unavailable or why it would not assist me.

100. The Commissioner says I can readily infer there was at least an implied direction from WCVB to ABC to pay to Zenith that portion of the proceeds of sale under the fourth contract which related to the Astoria properties: Commissioner's closing submissions at [52]ff. I accept that inference is open given:

101. WCVB did not establish the inference should not be drawn. It follows that it is irrelevant WCVB did not receive the funds itself.

102. I am not satisfied WCVB has discharged its onus in relation to the fourth contract issue. It follows a portion of the sale proceeds under that contract is attributable to WCVB and should have been included in its assessable income in the year in question even if it never actually received those monies into its accounts.

THE DEDUCTIONS

103. That brings me to the second aspect of the dispute between the parties: the claims for deductions in respect of interest and construction costs. The claims for deductions are made under s 8-1 of ITAA97. Section 8-1(1) provides:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

  • (a) it is incurred in gaining or producing your assessable income; or
  • (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

104. At least two issues fall for determination in the reasons which follow. The first is whether (and if so, when) a loss or outgoing was incurred. Cases like
Emu Bay Railway Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 596; [1944] HCA 28 establish (in the words of Latham CJ at p 606) that "[t]he words 'outgoings incurred' should not be limited to expenditure actually made. They include a liability presently incurred and due though not yet discharged". The focus on when and if the payment is due - rather than whether and when a payment occurred - is potentially important in this case because WCVB argues it did not incur interest prior to

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the 2011 year of income (when the payment was finally made) even though interest was said to be accruing on the loans in the meantime. As we shall see, WCVB argues it was a condition of the intragroup loan that the interest accruing between the 2004 and 2010 financial years was not due and payable unless and until the Astoria properties were sold and a surplus was available to make the payment. WCVB relies on the reasoning in Emu Bay and other cases to argue that a contingent liability which is conditioned upon another event occurring before payment is required will not be incurred in the relevant sense until the event occurs and the obligation falls due.

105. The second issue involves consideration of whether a nexus is established between the loss or outgoing and the earning of assessable income. As Latham CJ, Rich, Dixon, McTiernan and Webb JJ explained in
Ronpibon Tin NL v Commissioner of Taxation (1949) 78 CLR 47 at 56-57; [1949] HCA 15:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income. …

… it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. …

106. It is important to emphasise a nexus must exist between the outgoings and the taxpayer's assessable income. A taxpayer does not become entitled to a deduction in respect of an outgoing that is intended to generate assessable income for someone else rather than the taxpayer. That might be a particular risk in corporate groups - and the Commissioner says it is an issue here.

The claim in respect of interest

107. To understand the claim for deductions in respect of interest, it is necessary to delve into the financing arrangements surrounding the purchase of the Astoria properties and the group's subsequent refinancing through Suncorp.

108. It appears to be uncontroversial that the initial purchase of the properties by the taxpayer (and the group company which owned a 1/20th share of those assets) was funded under a loan facility with St George. St George had advanced $3 million in connection with the purchase. The purchase occurred in 2002. The debt was not substantially reduced following the acquisition. That is not surprising in circumstances where the taxpayer had limited income of its own: it was established as a special purpose vehicle to acquire the property and carry out the development. It did not expect to derive significant income until the properties were sold. (Mr Smith said in his affidavit (exhibit 1 at [21]) that part of the properties was leased for car parking, but there is no suggestion that activity generated much revenue.)

109. After the taxpayer acquired the Astoria properties, the group's principal banker started to apply pressure to the group over a number of different loan facilities that were coming due or which had expired. One of the facilities that was causing concern was the facility which related to (and was secured by) the Astoria properties. St George wrote to the taxpayer on 23 June 2003 to warn that the facility was due to expire at the end of that month: exhibit 1 at [10] and p 82 of the hearing book.

110. Mr Smith said the group decided to approach a new banker and seek a more global solution to its financing needs. The group had several developments underway or in prospect through different group companies in addition to the development of the Astoria properties, so it needed capital. The group approached Suncorp to establish a new facility under which a group company would obtain a loan of $27 million to consolidate and pay out existing facilities (including the St George facility secured by the Astoria properties) and fund new developments: exhibit 1 at [11]. A copy of the letter offer from Suncorp to the group company and the credit facility documents were before me at the hearing. The facility was established in December 2003. (There were technically several different facilities involving different properties and different parties, but that

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distinction is not important for present purposes.)

111. Mr Smith explained (in exhibit 1 at [15]) he agreed as a director of the various entities (including the taxpayer):

112. The group borrowing company paid out the St George facility on 24 December 2003: exhibit 1 at [19]. A copy of the facility deed is reproduced as document T10 (from p 130 of the 'T' documents). That deed includes a requirement that security be provided by various group companies including the taxpayer. On the same day, Mr Smith signed a guarantee and indemnity document in favour of Suncorp on behalf of a number of group companies including the taxpayer. A copy of that document is reproduced as document T8 (from p 79). Suncorp thereafter took a mortgage over the Astoria properties as contemplated under the terms of the facility.

113. Mr Smith said interest accrued on the amount advanced under the intragroup arrangement but WCVB was not liable to pay the interest as it accrued. It would instead pay the capitalised interest when it sold the Astoria property (he said) "and then only to the extent there was sufficient sale proceeds from the sale of the [Astoria] properties to pay the interest": exhibit 1 at [15]. (As we shall see, that qualification was included in the amended version of Mr Smith's affidavit which was tendered in these proceedings; an earlier version of the same affidavit did not include the qualification. I will have more to say about that anomaly below.) During cross-examination, Mr Smith explained the commercial rationale behind the limited nature of WCVB's liability to pay interest (transcript at p 164):

…those properties were designed to be developed, not to be sold as land. So it's usually a longer period of time, a much longer period of time, because … a DA takes quite a bit of time and you've got to market, you've got build, you've got to sell. And the first mortgagees are priority 1, any other direct expense to the sales become priority 2, and then eventually, the intercompany get paid.

114. That is Mr Smith's current recollection of the intragroup loan agreement, at any rate. He was unable to produce the loan agreements which recorded the terms, and his recollection of the precise terms of the intragroup deal has shifted over time. At the hearing, he said he trusted the group's accountants at the time to document the terms of the intragroup loans but whatever documents there were had been lost: exhibit 1 at [18]. He pointed out the accounts of the borrowing company for the year ending 30 June 2004 record it borrowing $27 million under the facility and paying an amount to the former banker which (he says) reflects the payout of the facility with the former banker in respect of the Astoria properties. He adds the accounts of WCVB for the same period record it borrowing around $3.5 million from the group treasury company: exhibit 1 at [19]-[21].

115. The absence of the intragroup loan agreement documentation is a concern, but Mr Smith's explanation for the loss of those documents is not incredible on its face. I formed a clear impression from Mr Smith's evidence that he managed the affairs of the group companies in an idiosyncratic way. There is ample evidence suggesting he was not assiduous in documenting and recording arrangements between the group companies and Messrs Black and Blue, for example. It is believable he would strike an intragroup deal in relation to finance arrangements since he seemed to make decisions on behalf of all the companies and then quickly move on, leaving it to the accountants to attend to (and record) the details. I also accept his recent recollection of the events would be fractured given he was obviously operating by the seat of his pants at the time.

116. The loan from the group treasury company to WCVB was assigned to another company in the year ending 30 June 2005. I will refer to that other company as Assignee. Mr

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Smith said he was able to sign off on the assignment in his separate capacities as director of the group treasury company and WCVB. Thereafter, he explained, WCVB was formally indebted to Assignee: exhibit 1 at [22]-[24]. The properties continued to be mortgaged to Suncorp, which explains why Suncorp's consent was required for the eventual sales to ABC.

117. Suncorp was apparently becoming nervous over its exposure to the group around the time of the global financial crisis. The group's lead borrowing company was in default under the terms of the facility. Suncorp was considering withdrawing the facility or taking enforcement action. To forestall that prospect, Mr Smith said he signed a 'deed of forbearance' dated 9 June 2009 in his capacity as director of WCVB, and in his personal capacity. He also signed as director of other group companies that became obligors under the deed. A copy of the deed is reproduced as document T4 in the 'T' documents from p 6. The deed included what amounted to an action plan that required additional security, guarantees and asset sales from companies in the group. Clause [9] provided:

Notwithstanding any other terms of this Deed, the Obligors acknowledge and agree that all amounts due and owing to Suncorp by the Obligors pursuant to the Facilities and the Securities shall be repaid to Suncorp in full no later than 30 April 2010.

118. The intent of the deed was clear: whereas WCVB's Astoria properties were originally mortgaged to secure the debt owing under the facility established in December 2003, WCVB was acknowledging that it and the other obligors would be responsible for all the debts under all the facilities.

119. When the Astoria properties were sold, the entirety of the proceeds of the sale under the three contracts were ultimately paid to Suncorp via Assignee and the group borrowing company. $3 million of the amount paid to Suncorp was a repayment of principal (ie the amount advanced to WCVB to pay out the St George facility in 2003). The balance - an amount of $1,870,223.34 - was presumably referable to interest on the Suncorp facility.

Was interest deductible in the 2011 financial year or at some other time?

120. As I understand WCVB's argument, the interest it owed on the intragroup loan had been accruing and capitalising as a contingent liability since the date of the original advance. (Recall that Mr Smith said the intragroup loan provided for interest to be calculated on the same rate as Suncorp was charging the group borrowing company under the terms of the loan facility.) The contingency which conditioned the liability was in two parts:

121. That being so, WCVB says it only became liable to pay $1,870,223.34 in interest following the sales of the Astoria properties because that was all that was left over. I was told it follows a deduction in that amount was available to WCVB under s 8-1 of ITAA97 in the 2011 year of income when the sales and interest payments were made, even though the interest had been accruing (but was not payable) in the 2004-2010 financial years. WCVB points out that payment did not cover the amount of interest that had actually accrued: Ms Seiden SC, who appeared for WCVB, provided a summary of the calculation of interest over the years that suggests the total interest capitalised on a debt of $3 million from the date of the initial advance in 2003 to the settlement of the sales of the Astoria properties in August 2010, was around $3.4 million. Yet WCVB was only able - and therefore liable - to pay just over $1.8 million under the terms of the intragroup loan.

122. The Commissioner says WCVB has not discharged its onus of establishing there was an intragroup loan on the terms alleged. He points to the absence of any documentation of the intragroup loans and other inconsistencies in the evidence which ought (at a minimum) give me pause before accepting WCVB's explanation.

123. One of the inconsistencies highlighted by the Commissioner is the treatment of interest in WCVB's financial records in the

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earlier financial years. WCVB acknowledges an amount was recorded in respect of interest being paid in the 2004 financial year but says that amount was obviously referable to the St George loan that was paid out. WCVB says the accountants who prepared those statements did not record any amount of interest referable to the Suncorp facility in the 2004 and 2005 years of income. New accountants appointed in 2006 did not record interest being payable in the 2006-2008 years of income either. That evidence is consistent with WCVB's case that it did not incur a liability to pay at the time. But the approach taken to interest in the financial statements for the 2009-2010 years of income is different. Those statements were prepared in 2013 after a yet another firm of accountants was engaged to prepare the statements for the 2009-2012 years of income. They do show an interest liability accruing. That inconsistency was put to Mr Smith in cross-examination.

124. In the course of a lengthy exchange with Ms Kovacs, Mr Smith conceded there were errors in the financial statements (and the tax returns based on those financials) that he had not previously identified. That was problematic in circumstances where he had earlier endorsed the accuracy of the various records. When challenged over some of these discrepancies, Mr Smith protested (transcript at p 157):

These financials are over 12 years old. I have written my affidavits over the last two years or so, and I have become aware that there were multiple discrepancies in 2007, 2008, 2009 and 2010.

125. After dealing with some of those discrepancies in the earlier years which are not relevant for present purposes, Mr Smith went on to explain (at p 157) he engaged new accountants to deal with the later years in 2013. His evidence suggests further mistakes were made - including mistakes in accounting for the interest liability in the 2009-2010 years of income. He said:

The figures speak for themselves right up until 2008. In 2009, which is when [the new accountant] was commissioned, you know, in a desperation move by myself as a medium-sized accountancy firm, to review the 2009-10 financials that were completed by the previous accountant but I had no confidence in, and he was instructed to bring the standard of the financials to an acceptable standard and to get them submitted ASAP.

126. Mr Smith then reflected on the interactions with the new accountants during this period. He described a frantic process in which the new accountants waded through the material and met with him periodically for instructions. He acknowledged errors occurred during that process but did not resile from his evidence about the terms of the intragroup loans.

127. I am satisfied the evidence of these inconsistencies establishes Mr Smith was not as careful as he should have been when attending to his obligations with respect to the financial records. His earlier assertions that he was confident about the accuracy of the various records appear to have been infected by bravado. The fact he should appear confused when confronted by the evidence during cross-examination is not altogether surprising given he was asked to explain the details of records prepared some time ago that he may not have scrutinised carefully at the time. The Commissioner submitted it was particularly troubling that Mr Smith's explanations of what occurred appeared to shift over time: he effectively abandoned an earlier affidavit he had made dated 5 August 2021, preferring to rely on a revised version of the same affidavit dated 21 May 2023. The revised affidavit relevantly amended the text of clauses of [15](c) and (d) of the affidavit so they read as follows, with the bolded words added:

  • c) [WCVB] pay to [the group treasury company] interest on the loan of $3 million at the same rate charged by Suncorp from time to time to [the group borrowing company] on the loan facility taken out by [the group borrowing company]. [WCVB] was liable to repay the loan amount of $3million and pay the interest which had been capitalised only once there was a sale of [the Astoria properties]. [sic] and then only to the extent there was sufficient sale proceeds from the sale of the [the Astoria] properties to pay the interest.
  • d) [the group treasury company] pay to [the group borrowing company] interest on the loan of $3 million at the same rate charged by Suncorp from time to time to [the group borrowing company] on the loan facility taken out by [the group borrowing company]. [The group treasury company] was liable to repay the loan amount of $3million and pay the capitalised interest only once [WCVB sold the Astoria properties]. [sic] and then only to the extent there was sufficinet slae [sic] proceeds from the sale of the [Astoria] properties to pay the interest.

128. The Commissioner says the additional words are crucial to WCVB's case on the deductions as it emerged at the hearing. The Commissioner points out WCVB's case was articulated in its first statement of facts, issues and contentions that was also filed on 5 August 2021 - that is, at the same time as the earlier statement which did not include the highlighted qualification. The Commissioner points out WCVB originally sought a deduction for a larger amount but adjusted its claim to seek a deduction in respect of a $1.8 million payment only after the Commissioner identified that amount in his statement of facts, issues and contentions dated 10 June 2022. Mr Smith was asked about the circumstances in which he came to make this change in his affidavit during cross-examination. Mr Smith said (transcript at p 251) he decided to make the change on 21 May 2023 - the date of the amended statement - because he thought he needed to clarify the relevant passage by adding the text. He went on to insist that he decided to do so after re-reading the affidavit. He denied the change was prompted by the Commissioner's statement of facts, issues and contentions: transcript at p 252. He said he had not been provided with a copy of that document until a few days before the hearing, and even then he only scanned the document. When Ms Kovacs began to ask questions that might reveal conversations between Mr Smith and WCVB's lawyers, WCVB sought to invoke legal professional privilege.

129. The Commissioner points out WCVB chose not to call evidence from witnesses including the solicitor who had carriage of the matter or another accountant who might be expected to shed light on the change in the claim. The Commissioner says the decision not to call those witnesses was not adequately explained, so the Tribunal could safely infer their evidence would not have assisted WCVB. I am not persuaded it is appropriate to draw an adverse inference from the failure to call the solicitor to give evidence given legal professional privilege, although I accept the evidence from the accountant might have been of assistance.

130. The amendment of the statement was not adequately explained. I have some doubt about Mr Smith's evidence that he decided more-or-less spontaneously to amend the statement in the interests of clarity without reference to the Commissioner's material. I was also left bemused, if not confused, by Mr Smith's attempts to explain entries into the accounts of Assignee during cross-examination. But while all that might raise questions over the credit of Mr Smith, the underlying story that he tells makes commercial sense.

131. There is no doubt $3 million was advanced to WCVB in late 2003 by the group borrowing company via the group treasury company to pay out the St George loan. There is no dispute that WCVB was a special purpose vehicle established to acquire and develop the properties; it was not a trading company and did not generate any income to speak of which would enable it to pay the interest on the loan as it accrued. It made sense for the various other group entities that were upstream from WCVB in relation to the loan to attribute the interest to WCVB but to make clear the interest would not be recovered unless and until the Astoria properties were sold. It also makes sense that the interest would accrue at the rate of interest Suncorp was charging the group borrower from time to time. The fact the loan was, in effect, a limited recourse loan so that WCVB would only be liable to the group companies for whatever amount it could pay was not of itself unusual.

132. In the circumstances, I am satisfied Mr Smith's account of the terms of the intragroup loan should be accepted notwithstanding the question marks over some aspects of his evidence. While I accept there might be some uncertainty at the margins as to how

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much interest had accrued, there seems to be no doubt that at least $1.8 million was paid in respect of interest.

133. Subject to what follows, that means the deduction was properly sought in relation to the 2011 year of income because the liability to pay the capitalised amount did not arise until that point. I should add that WCVB could not claim a larger deduction in respect of all the interest that accrued: given I accept the terms of the intragroup loan said WCVB was only liable to pay as much as it could, that is the maximum amount that could be deducted.

Has WCVB established the nexus?

134. The Commissioner says there is a further problem with the claim for a $1.8 million deduction in the 2011 year of income. He argues WCVB has not discharged its onus of establishing a nexus between the $1.8 million expenditure and the gaining or earning of WCVB's assessable income - as opposed to the assessable income of other entities in the group. The Commissioner points out s 8-1(1) refers to the taxpayer claiming deductions in respect of losses or outgoings incurred in "gaining or producing your assessable income" (emphasis added). The Commissioner says WCVB has not established the nexus between the interest payment in the year ending 2011 (or any other year of income) and the earning of assessable income of WCVB (as opposed to earning income for other group companies).

135. I have already concluded WCVB did not discharge its onus in relation to the monies paid under the fourth contract. Those monies were never received by WCVB although they should be included in its assessable income pursuant to s 6-5(4) of ITAA97 because those monies are taken to be applied or dealt with on WCVB's behalf or as it directed. But there seems to be no doubt WCVB succeeded in selling the Astoria properties for a total exceeding $5 million, and the amounts it actually received were included in its assessable income in the ordinary course.

136. The complication in this case arises out of the fact the group borrowed a total of $27 million through one or more group borrowing companies. Monies from that facility were advanced to various group companies to fund the projects they were undertaking.

137. There does not appear to be any dispute that WCVB was advanced $3 million to pay out the St George facility which had been used to fund the purchase of the Astoria properties. There is no reason to doubt money ultimately came from the Suncorp facility, albeit that it was formally advanced by the group treasury company. WCVB subsequently provided a mortgage over its properties in favour of Suncorp and (in due course) became an obligor pursuant to the deed with Suncorp that increased its exposure to the debts of the wider group. Other group companies also provided security and became obligors under the terms of the deed.

138. I have already found WCVB obtained Suncorp's consent to the sale of the Astoria properties. The net proceeds of the sale were ultimately lodged into the Suncorp loan account in August 2010. On 1 August 2010, a total of $14.1 million remained owing under that facility; after the Astoria sale proceeds were deposited on 13 August 2010, that amount was reduced. The Commissioner says that payment indirectly benefitted other companies in the group. In written submissions, the Commissioner noted Mr Smith had acknowledged in cross-examination at least five entities had received advances out of the facility and all those entities likely shared in the $14.1 million debt: transcript at p 224. Ms Kovacs went on to ask:

Ms Kovacs: …I suggest to you that you have no way of knowing what amount within the $14.1 million balance as at 1 August 2010 was referable to interest in relation to the [Astoria] properties?

Mr Smith: As I said, it was based on a pro rata of the initial lent money to each one of those five properties and it would have continued on that basis. The $27 million, as I recall, was reduced initially by the refinance to [another financier] for part of the $27 million, as well as the development of the property at […]. And I think the balance of that carried forward on from that date onward. The - I was the decision maker and the negotiator with all of the stakeholders through that process, and on or in that period the money discharged by [WCVB] was accepted by Sun Corp - was

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approved by Sun Corp. And from that date onward, [WCVB] had no dealings with Sun Corp.

139. I acknowledge there is some uncertainty over whether other entities may have benefitted from WCVB's payment. However it is also clear from the interactions with Suncorp I have already described that Suncorp required WCVB to pay the entirety of the net proceeds of the sales of the Astoria properties to Suncorp as a condition of Suncorp giving its consent as mortgagee to the sales. To put it differently, WCVB would not have derived any of the assessable income it subsequently returned without agreeing to pay the net proceeds of the sale to Suncorp in reduction of the debt due under the facility. The net proceeds that WCVB ultimately remitted included $3 million in principal and the balance in respect of interest. It seems obvious to me the outgoing was incurred "in gaining or producing [WCVB's] assessable income".

140. In those circumstances, I am satisfied the claim for a deduction in the 2011 year of income with respect to interest is made out.

The claim in respect of construction costs

141. WCVB says it was required to undertake some work on the Astoria properties after the development application was approved in 2006. The development consent in question was approved on 17 January 2006. Mr Smith explained in his affidavit (exhibit 1) at [28] that it was necessary to "establish substantial commencement of the DA to underpin the development consent from ever lapsing…" and to expand the carparking facility on the site. He added WCVB agreed with the group construction company that the construction company would:

…carry out site early works and civil works on [the Astoria properties] to underpin surrounding commercial and residential properties so that there was substantial commencement for the Development Consent and to expand the car park station to the rest of the properties.

142. That agreement may have been facilitated by the fact Mr Smith was a director of both entities. As with some of the intragroup arrangements I have already discussed, that agreement does not appear to be have been formally recorded in a written contract. Mr Smith said it was a term of the agreement that payment for the work would not be forthcoming unless and until the properties were sold because WCVB did not have the cashflow to pay the construction costs in the meantime: exhibit one at [28].

143. In any event, Mr Smith said the work commenced on or after 1 July 2008. He said he personally attended the Astoria properties to supervise the work being done by the group construction entity between July 2008 and December 2009: exhibit one at [30]. That work included demolition and removal of some existing structures, excavation of contaminated soil, construction of new car parking facilities, and ancillary work like the erection of fencing and gates. Mr Smith recalled the work being carried on at least in part by employees of a construction company within the group using its own equipment.

144. WCVB tendered a report provided by a quantity surveyor, Mr Madden (exhibit four). Mr Madden was asked to express an opinion on the value of the works that were said to have been undertaken on the Astoria properties between 1 July 2008 and December 2009. He opined the reasonable value of the works was calculated to be $964,751.58 (inc GST). The Commissioner pointed out the expert was not in a position to say whether the works were in fact carried out. I note the report included a number of satellite photographs that were time-stamped 14 November 2009, 1 April 2010, 22 April 2010, 14 August 2010 and 17 October 2010. It is difficult to discern from those pictures whether any work was completed prior to the picture taken in August 2010. More substantial work is apparent in the picture taken in October 2010. But the pictures do not take us very far.

145. The expert's estimate provides some support for the amount that Mr Smith says was invoiced in respect of the construction works. The invoice he referred to was issued to WCVB on 31 December 2010 for $990,000 (inc GST). But that invoice - which is reproduced at document T34 from p 573 - requires some explanation. To begin with, the invoice was not issued by the group construction company. It was actually issued by another group company I will refer to as Ace Constructions. Mr

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Smith explained a decision had been made in December 2010 to assign the group construction company's work in progress to Ace Constructions which would thereafter provide construction services: transcript at p 262. Mr Smith said Ace Constructions decided to issue the invoice for the work that had been undertaken earlier, and which was described in the schedule attached to the invoice. Mr Smith pointed out in his affidavit (exhibit one at [43]-[44]) that the financial accounts for both WCVB and Ace Constructions refer to the expense. The expense is described as 'management fees' in the accounts of WCVB and 'Management/Constr costs' in the accounts of Ace Constructions (hearing book at pp 580, 280). Mr Smith pointed out the business activity statements of Ace Constructions for that period also record the $900,000 amount.

146. Mr Smith did not clearly explain why a decision was made to make the assignment to Ace Constructions, although I note external administrators were appointed to the group construction company on 7 January 2011, a week after the invoice was issued. But that is not the only reason to question the timing of this invoice. The Astoria properties had been sold months before the invoice was issued. Having disposed of its only asset and paid out the monies owing to Suncorp after deducting expenses, WCVB had no means of paying the invoice. The Commissioner says I should infer there was never any intention to recover the amount owing under the invoice. If that was so, WCVB never actually incurred the outgoing in the sense intended in s 8-1.

147. The Commissioner referred to another potential complication in the form of a second invoice - this one from the group construction company - that was also issued to WCVB on 31 December 2010. That invoice was in the amount of $880,000 (inc GST). The invoice referred to 'final building and maintenance work' that was described in more detail in the annexure to the invoice (document T37 at p 608). The Commissioner noted both invoices prompted claims for input tax credits in WCVB's business activity statement for the October-December 2010 quarter. A copy of the BAS is annexed to the affidavit of Mr Smith.

148. Ms Kovacs pointed out in cross-examination that Mr Smith's affidavit said the work recorded in the invoice from Ace Constructions was done in connection with a development application which had been approved in 2006. She asked Mr Smith to explain why the invoice referred to a different, more recent development application that took effect from 11 May 2009 (ie, after the work had supposedly been commenced). Over the course of a lengthy and confusing exchange, Mr Smith appeared to argue that the two approvals were effectively the same: the more recent one was effectively a revised version of the first (transcript at p 262).

Findings in relation to the deduction for construction costs

149. WCVB argued in submissions that it made commercial sense for the landowner to commence some construction work to comply with and preserve the development approvals that were in place. I accept that is so, even if the development approvals were in a state of flux. (I earlier described the history of the development approvals with respect to the property and noted there appeared to be several iterations, if not different approvals, as WCVB's plans for the properties evolved.) It follows I am prepared to accept some work was done by the group construction company as alleged between 1 July 2008 and the end of December 2009. I also accept there is expert evidence confirming that $900,000 was a reasonable value of the work that was referred to in the invoice that was subsequently issued by Ace Constructions. But there is no independent verification that the work recorded in the invoice was in fact completed. Mr Smith says he was on-site and oversaw the work being done. Yet even if I accept his evidence in this regard, there was no adequate explanation of the circumstances in which the invoice from Ace Constructions came to be issued months after the sale of the Astoria properties was completed, and just ahead of the group construction company going into external administration. There is no record of the agreement to assign the work in progress from the group construction company to Ace Constructions, and no proper explanation of the second invoice that was issued by the group construction company on the same day

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as the invoice from Ace Constructions. That evidence all raises serious questions over whether the outgoing was incurred during the relevant year of income.

150. Mr Smith is interested in the outcome of the proceedings. That does not inevitably mean his evidence must be corroborated before it is accepted, but there are aspects of his story which do not appear to make commercial sense. The balance of the evidence does not clearly point to the conclusion for which WCVB contends.

151. WCVB bears the onus of satisfying me the deduction in respect of construction costs is available on all the evidence. I am not satisfied it has discharged that onus.

CONCLUSION AS TO LIABILITY

152. I have decided the Commissioner was right to include a portion of the sale proceeds under the fourth contract in WCVB's assessable income pursuant to s 6-5(4) of ITAA97 even though there is no suggestion WCVB ever received that money. I have also concluded the Commissioner was right to disallow the deduction in respect of the construction costs - principally because WCVB failed to discharge its onus of establishing the outgoing was incurred. The applicant fared better in relation to its claim that the interest was deductible.

153. I noted earlier in these reasons that the hearing focused on the fourth contract issue, the interest deduction issue, and the construction cost issue. The evidence and submissions were all directed to those matters, along with penalties. The Commissioner's written closing submissions nonetheless asserted there was no agreement to confine the review.

154. While I acknowledge there was no formal agreement to confine the review, both parties conducted the review as if a formal concession had been made that narrowed the issues in dispute. There was no evidence presented in relation to other issues, and no other submissions made. That made sense in circumstances where the evidence appears to establish WCVB was a special purpose vehicle that did not carry on other activities beyond the ones that were described. It follows the taxpayer does not appear to have other affairs which need to be addressed: it just developed and sold the properties in question. I am satisfied in those circumstances that the objection decision should be varied to allow the claim in respect of the interest deduction. That leaves only the question of administrative penalties.

PENALTIES

155. The extent of any tax shortfall will need to be reconsidered given my conclusions as to WCVB's liability to tax. If the claim for a deduction in respect of interest is taken into account, that may reduce or even eliminate the amount of any shortfall. I will deal with the penalties question even so for the sake of completeness.

156. After the Commissioner identified there would (on his calculation) be a shortfall resulting from a false statement in the 2011 year of income, he imposed a shortfall penalty under s 284-75(1) of Schedule One to the Administration Act. The penalty was comprised of:

157. There is no dispute that WCVB bears the onus of establishing the penalties decision ought to have been made differently.

158. The central difficulty for WCVB in these proceedings lies in the fact the story divined from the documentation and surrounding circumstances tended not to accord with the story elicited from Mr Smith, WCVB's directing mind. Even my finding that WCVB succeeded in relation to the claim for interest deductibility was made in the face of an uncertain documentary record.

159. In written submissions, WCVB referred to the decision of the Full Court in
Hart v Commissioner of Taxation (2003) 131 FCR 203; [2003] FCAFC 105. In that case, Spender J memorably explained (at [33]-[34]):

33 It is not reckless simply to make a claim that is erroneous. Nor, in my view, is it reckless to make a claim, "knowing there is a real risk that the claim might be wrong;" cf the observations of Cooper J in
BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) ATC 411 at 4129. If a jockey knows that in a horse race there is a real, as opposed to a fanciful, risk of serious injury or death involved in participation in the race, it would not be reckless conduct on the part of the jockey according to the proper meaning of "reckless", to take part in the horse race. So, too, a driver in a Formula 1 motor vehicle race.

34 Recklessness consists in making a claim, not caring whether the claim is true or false. …

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160. While I acknowledge that analysis, it remains incumbent on the taxpayer to demonstrate the penalty assessment was wrong and what it should have been. The taxpayer has not discharged that onus in this case. Counsel for WCVB argued there were comparatively minor failings of substantiation that suggested, at most, a mere want of care, but the shortcomings and gaps in substantiation were altogether more serious than that. Indeed, the evidence I have analysed in relation to assessable income raises a potential inference that WCVB intentionally disregarded its obligations. While I made clear I was not prepared to entertain a case of fraud or sham, I was not satisfied WCVB had discharged its onus. I think the same conclusion applies in relation to the finding of recklessness. WCVB has not satisfied me it was appropriate to impose a lower rate of penalty, or no penalty at all. Its records were a mess, and likely inadequate and contradictory at the time the return was lodged.

161. I reach the same conclusion in relation to the imposition of the uplift. The Commissioner says the uplift is appropriately imposed given there is an inference available that the fourth contract obscured the amount of assessable income WCVB derived from the sale of the Astoria properties. While I did not decide there was fraud or sham because that was not pleaded, I am not satisfied WCVB established a different conclusion on the question of whether uplift was appropriate. To put it another way, the evidence invited an inference there was something untoward about WCVB's dealings and I am not persuaded WCVB negatived that inference.

162. The oral submissions on WCVB's behalf noted there had been an error when WCVB's accountants had mistakenly included the sale proceeds from the Astoria properties in the 2010 year of income, but the Commissioner's submissions made clear that error was not being held against the applicant. I agree that was appropriate.

163. That leaves only the question of remission. The Tribunal can remit all or part of an administrative penalty that is otherwise properly imposed if it would be appropriate to do so in the circumstances: s 298-20 of Schedule One to the Administration Act. One would ordinarily expect submissions referring to evidence that explain why it would be harsh or otherwise inconsistent with the objectives of the penalty regime. I was not provided with evidence to that effect. The penalties were appropriately imposed, and I am not aware of any persuasive reason why they should be remitted.

164. It follows the objection decision with respect to penalties must be affirmed.

DECISION

165. Pursuant to s 43(1)(b) of the Administrative Appeals Tribunal Act 1975 (Cth), the objection decision is varied to allow the claim for deduction in respect of interest in the amount of $1,870,223.34 but is otherwise affirmed, including as to penalties.

Footnotes

[1] An earlier version of the affidavit dated 5 August 2021 had been filed but was replaced by the exhibited version which was amended in minor respects and sworn on 21 May 2023 (‘exhibit 1’). A second affidavit was also filed and is ‘exhibit 2’ in the proceedings.

 

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