Case U117

Members:
Davies J
DP Breen DP
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 May 1987.

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J.D. Davies J. (President), D.P. Breen (Deputy President) and K.L. Beddoe (Senior Member)

This review concerns principally the calculation of the net income for the year ended 30 June 1979 of an alleged partnership, DH. 5. The Commissioner of Taxation refused a deduction to the partnership of an amount claimed to be an allowable deduction under sec. 54, 59 and 59AA of the Income Tax Assessment Act 1936 (Cth) ("the Act") and also disallowed to the individual partners, including the applicant, a medical practitioner, a deduction of his interest in the partnership loss that would have resulted had that deduction been allowed to the partnership.

The applicant claimed that the deduction allowable to DH.5 pursuant to sec. 54, 59 and 59AA of the Act was $825,780 and that the individual interest in the partnership loss which ought to have been allowed as a deduction against his individual income was $70,026.

Relevant provisions of the Act read, at the time:

"54(1) Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that

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ATC 702

year held in reserve by him shall, subject to this Act, be an allowable deduction."

"59(1) Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction."

"59AA(1) Subject to this section, where, for any reason, including -

• (a) the formation or dissolution of a partnership; or
• (b) a variation in the constitution of a partnership, or in the interests of the partners,

a change has occurred in the ownership of, or in the interests of persons in, property in respect of which depreciation has been allowed or is allowable under this Act or the previous Act, and the person, or one or more of the persons, who owned the property before the change has or have an interest in the property after the change, the provisions of this Act relating to depreciation apply as if the person or persons who owned the property before the change had, on the day on which the change occurred, disposed of the whole of the property to the person, or all the persons, by whom the property is owned after the change for a consideration equal to the amount specified in the agreement in consequence of which the change occurred as the value of the property for the purposes of that agreement, or, if there is no such agreement or no amount is so specified, an amount determined by the Commissioner."

(The emphasis is ours.)

These sections provided for the deduction of depreciation in respect of any plant which, during the year of income, was owned by a taxpayer (the partnership) and used by the taxpayer (the partnership) for the purpose of producing assessable income (see sec. 54). In a case where property of a taxpayer (the partnership), in respect of which depreciation had been allowed or was allowable, was disposed of at any time during the year of income, the depreciated value of the property less the amount of any consideration receivable in respect of the disposal was an allowable deduction (see sec. 59). In a case where, during the year of income, there was the formation or dissolution of a partnership or a variation in the constitution of a partnership (DH.5) and a change thereby occurred in the ownership of or in the interests of persons in plant in respect of which depreciation had been allowed or was allowable, then the plant was deemed to have been disposed of for, inter alia, a consideration equal to the amount specified in the agreement in consequence of which the change occurred as the value of the property for the purposes of that agreement (see sec. 59AA).

The partnership, DH.5, was allegedly formed on 27 April 1979. The partnership agreement expressed the objects of the partnership as follows:

"1(a) The objects of the Partnership are to purchase the Aircraft described in the Schedule (hereinafter called the `Aircraft') and to lease the Aircraft for income-producing purposes.

..."

On 9 May 1979, DH.5 allegedly acquired five aircraft from Z Pty. Ltd. for the sum of $905,000. An amount of income of $30,000 was alleged to have been received by DH.5 in respect of a lease of the aircraft to Z Pty. Ltd. On 11 May 1979, the DH.5 partnership was allegedly dissolved or reconstituted and a new partnership DH.5A created. By that step, a change was said to have occurred in the ownership of the aircraft. The partnership DH.5A immediately disposed of the five aircraft to Z Pty. Ltd. The minutes of the meeting of the partners of DH.5 concerning the dissolution of DH.5 and of the creation of DH.5A specified an amount of $50,000 as the value of the five aircraft for the purposes of sec. 59AA. The deduction claimed for DH.5 under sec. 59 was the cost price of the aircraft, $905,000, less depreciation for two days' ownership and use, $620, less the amount $50,000 specified in the agreement for the reorganisation of the partnership, a loss of $854,380. That loss was reduced by $28,600, being the $30,000 income less expenses so that the net loss was $825,780.

We add by way of background information that DH.5 was only one of a number of such partnership and that during May-June 1979

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ATC 703

ownership of the five aircraft allegedly moved every few days from Z Pty. Ltd. to a partnership and from that partnership to a reorganised partnership, from the reorganised partnership back to Z Pty. Ltd., from Z Pty. Ltd. to a new partnership and so on. At all times, the aircraft continued to be in the possession of or controlled by X Pty. Ltd., a company which operated a business chartering aircraft.

The applicant gave evidence that, when he entered into the partnership, he did so as a long-term investment. What precise significance that evidence was intended to have on the above issue is difficult to understand. It is well established that a taxpayer's motives are not determinative facts for the operation of provisions such as sec. 54, 59, 59AA or even 260 of the Act. As Lord Buckmaster said in
J. & R. O'Kane & Co. v. I.R. Commrs (1919-1922) 12 T.C. 303 at p. 347, "... the intention of a man cannot be considered as determining what it is that his acts amount to;...". As to sec. 260, Gibbs C.J. said in
F.C. of T. v. Gulland, Watson v. F.C. of T., Pincus v. F.C. of T. 85 ATC 4765 at p. 4771:

"Section 260 creates many difficulties of interpretation, but some matters may now be taken as settled. The section does not refer to the motives of the taxpayer or other person who entered into the arrangement which it is sought to impugn; the purpose or effect of the arrangement must be ascertained from the terms of the arrangement itself and from the overt acts by which it was carried into effect."

The evidence only tends to suggest that what happened after the formation of partnership DH.5 and the acquisition of the five aircraft was totally unauthorised, that no person had authority to dissolve that partnership or to form partnership DH.5A or to sell the aircraft back to Z Pty. Ltd., all steps that were necessary if the deduction now sought is to be allowed.

However, we do not add the applicant's evidence to the weight of the material against his claim. In our opinion, his evidence was untruthful. He entered into an arrangement with a view to obtaining the taxation deduction which he claimed in his income tax return and claims in these proceedings. The partners met only once and that was a meeting called by the promoter and the applicant's tax agent to form the partnership. A number of the tax agent's clients attended that meeting and eight of the tax agent's clients were among the 14 partners in DH.5. Apart from that meeting and their signing of the partnership agreement, the partners took no step in relation to the partnership. The applicant paid a sum of $18,200 in respect of his wife and himself. Of each $9,100, $700 was put into the partnership as capital and $8,400 went to the promoters. The partners took no action in relation to the partnership, save perhaps that they were all recorded as attending the first meeting of partners, though the applicant himself was not in fact present. The applicant made no enquiry as to why the partnership did not proceed nor any request for partnership accounts. So far as he was concerned, all that next occurred was that he made the claim in his personal taxation return for a deduction of his interest in the partnership loss and, at some stage, he received a request from the promoters to pay the sum agreed to be paid by the applicant to the promoters if the deduction was allowed. Having regard to these facts, we do not believe the substance of the evidence given by the applicant.

The Tribunal received in evidence a statement from the applicant's wife, also a medical practitioner and also a partner in DH.5. That statement was to the same effect as the applicant's evidence. For like reasons, we do not believe her statement.

The applicant's tax agent gave like evidence which, again, we do not believe. We need not deal with it at any length. In April 1979, the tax agent received from the promoters a letter setting out an arrangement appointing him as agent to promote taxation schemes, including sec. 59AA partnerships, for the promoters. The tax agent denied in evidence that he had made any such arrangement. But, in fact, he was active in promoting, in collaboration with the promoters, arrangements having taxation effects and did so in both Queensland and Tasmania. He called the meeting at which the partnership, DH.5, was agreed to be formed and eight of the partners were his clients. He conceded in evidence that he understood that sec. 59AA would be taken advantage of. Whether or not he knew all the details of what subsequently was to occur, he must have understood that there was to be a reorganisation of the partnership DH.5. Indeed, he would

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ATC 704

have been negligent in looking after his clients' interests if he had not had a general idea as to what was to occur.

In dealing with these facts, Mr R.I. Hanger Q.C., senior counsel for the Commissioner of Taxation, relied upon sec. 260 of the Act. We need not detail the provisions of that well-known section. We may say at once that, in our view, so far as the Administrative Appeals Tribunal is concerned, it has no application to this type of case. As Gibbs C.J., with whom Wilson J. agreed, said in F.C. of T. v. Gulland, Watson v. F.C. of T., Pincus v. F.C. of T., cited above at p. 4771:

"... A line of decisions illustrates that if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that sec. 260 is attracted. Stephen J. in
Mullens & Ors v. F.C. of T. 76 ATC 4288 at p. 4303; (1976) 135 C.L.R. 290 at p. 318, summed up in that way the effect of the earlier authorities which included
W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66;
F.C. of T. v. Sidney Williams (Holdings) Ltd. (1957) 100 C.L.R. 95; and
F.C. of T. v. Casuarina Pty. Ltd. 71 ATC 4068; (1971) 127 C.L.R. 62. The subsequent authorities -
F.C. of T. v. Patcorp Investments Ltd. 76 ATC 4225; (1976) 140 C.L.R. 247, especially at ATC pp. 4236-4237; C.L.R. pp. 298-299;
Slutzkin & Ors v. F.C. of T. 77 ATC 4076; (1977) 140 C.L.R. 314; and
Cridland v. F.C. of T. 77 ATC 4538; (1977) 140 C.L.R. 330 - are all consistent with this formulation. As Stephen J. further said in Mullens & Ors v. F.C. of T. at ATC pp. 4303-4304; C.L.R. p. 319:

• `Section 260 of the Act, in performing its task of `protecting the general provisions of the Act', cannot be allowed to negative the Act's specific and particular provisions...'

These cases apply the principle of construction expressed in the maxim generalia specialibus non derogant. They show that Lord Denning's statement in Newton v. F.C. of T. needs to be understood subject to the qualification which I have indicated, but do not otherwise detract from the authority of that statement."

See also Brennan J. at pp. 4777-4778. Dawson J. likewise did not challenge the authority of cases such as Mullens & Ors v. F.C. of T. 76 ATC 4288; (1976) 135 C.L.R. 290; Slutzkin & Ors v. F.C. of T. 77 ATC 4076; (1977) 140 C.L.R. 314; and Cridland v. F.C. of T. 77 ATC 4538; (1977) 140 C.L.R. 330. At p. 4796, his Honour said:

"It should also be pointed out that the authorities draw a distinction between an arrangement which modifies an antecedent transaction or situation and one which merely orders a taxpayer's affairs in relation to income from a new source or in relation to a deduction from which the previous transaction or situation did not preclude him. In the former case, but not the latter, sec. 260 may have an application for there may be an alteration of the incidence of income tax, etc. See Mullens' case at ATC p. 4294; C.L.R. p. 302 per Barwick C.J. and Cridland's case at ATC pp. 4541-4542; C.L.R. pp. 338-339 per Mason J...."

We are therefore of the view that sec. 260 of the Act has no application to the present case. If the provisions of sec. 54, 59 and 59AA of the Act are satisfied, then those sections provide a deduction in the circumstances which have eventuated. Section 260 does not override such express and detailed provisions of the Act and no antecedent transaction or situation was altered. That the applicant may deliberately have taken advantage of the provisions of the Act is of no consequence.

Mr Hanger also relied upon the issue of fiscal nullity enunciated in the United Kingdom in
W.T. Ramsay Ltd. v. I.R. Commrs (1982) A.C. 300. However, that particular principle of nullity was held in
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718 to have no application in Australia. This Tribunal is bound by that judgment.

Mr Hanger further relied upon the doctrine of sham as enunciated in
Boydell v. James (1936) 36 S.R. (N.S.W.) 620 at p. 627;
Perpetual Trustee Company v. Bligh (1941) 41 S.R. (N.S.W.) 33 at p. 39 and
Snook v. London & West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802. As Dawson J. said in F.C. of T. v. Gulland, Watson v. F.C. of T., Pincus v. F.C. of T., cited above, at p. 4793, "An arrangement

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ATC 705

which comprises measures not intended to operate as they purport to, will be a sham and will be deprived of legal effect because it has no reality in law". However, as we shall later demonstrate, this is not a case in which overall the arrangements made and steps taken would otherwise be effective to obtain a taxation benefit but should be struck down or held to be of no account because they were not intended to operate as they purported to.

We turn now to the principal issues for determination.

The first issue is whether the five aircraft were owned by the partnership, DH.5. Mr A. Morris, of counsel, who appeared for the applicant, seemed surprised when it was pointed out to him during the course of the hearing that, in a matter where the arrangements were not of an ordinary family or commercial nature, the Tribunal would not infer ownership from the mere existence of a chain of title commencing with the transfer from Z Pty. Ltd. to partnership DH.5. Had the arrangements been ordinary commercial arrangements and had the first acquisition been a transaction which occurred in the ordinary course of business between a vendor and a purchaser, the Tribunal no doubt would have been content to infer that the vendor had had title and validly transferred ownership. In the present case, however, the transfer that occurred was not an ordinary commercial transaction and we would not be prepared to infer that property in the aircraft passed between Z Pty. Ltd. and DH.5 just because of the execution of a document of transfer.

For these reasons, Mr Morris was given liberty to submit, after the close of the hearing, further evidence of the title of X Pty. Ltd., from whom allegedly title first passed to the first partnership, DH.1. That evidence was difficult to obtain, as the business of X Pty. Ltd. has ceased and the company has been struck off the register. However, there were produced certificates of insurance which suggested as to four of the aircraft, at the relevant time that:

• VH-SAM - was owned by Alliance Acceptance Co. Ltd.
• VH-MAX - was owned by Cessna International Finance Corporation
• VH-RLX - ownership unstated
• VH-UFQ - ownership unstated.

That information, with the exception of the details in relation to VH-MAX, generally accorded with details from the Register of Australian Aircraft, which were tendered in evidence by the respondent, which show X Pty. Ltd. to have been the owner of only two of the aircraft, VH-RLX and VH-MAX, at the relevant time.

We therefore conclude that the most DH.5 obtained was ownership of two or three of the aircraft. It was not suggested that, with respect to the other aircraft, which were owned by finance companies, any step was ever taken or intended to be taken to acquire the aircraft from the true owners.

It may be that, because the transaction with respect to the aircraft had as its central element the transfer of ownership in five aircraft and the vendor was not the owner of two or three of those aircraft, the whole transaction was void. The transaction could not achieve what the partners, who were not at arm's length, mutually intended it to achieve. But we need not consider this further. There is an additional reason why it should be held that property in the aircraft did not pass. Each agreement for the sale of aircraft provided specifically that:

"2. Property in the Aircraft shall pass when:

• (a) a notice of attornment is delivered to the Lessee and
• (b) the Certificate of Airworthiness in respect of the Aircraft is delivered."

In no case was a certificate of airworthiness delivered in respect of the aircraft and in no case was a notice of attornment delivered to the lessee X Pty. Ltd.

The next issue is whether, assuming that DH.5 did obtain ownership of the aircraft, the aircraft were used by the partnership during the year of income for the purpose of producing assessable income. As we have mentioned, possession of the aircraft did not alter by reason of any of the transactions with which we are concerned and whatever activity they had been involved in, apart from the subject transaction, that activity continued. We are not concerned to examine whether they continued to be operated by X Pty. Ltd. or were hired out by X Pty. Ltd. to others. The evidence is merely that these aircraft did exist and were in use in

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ATC 706

Victoria, in the possession or control of X Pty. Ltd.

A first step in the series of transactions which took place was that, when X Pty. Ltd. first sold the aircraft to the first of the partnerships, DH.1, the aircraft were thereafter leased back to X Pty. Ltd. for the term of five years. Ownership in the aircraft allegedly passed thereafter from the first partnership to a reconstituted partnership and from that partnership to Z Pty. Ltd., from that company to a second partnership and so on. Accordingly, there was, during the subsistence of all the relevant partnerships, a lease of the aircraft to X Pty. Ltd. for the period of five years from 23 March 1979 at a rent of $10,000 per month. The rent was to be paid by three consecutive monthly payments in advance, the first of such payments to be made on the execution of the lease.

When DH.5 in its turn came to purchase the aircraft from Z Pty. Ltd., it did so subject to the existing lease. The existence of this lease was said by Mr Morris to be a use of the aircraft for the purpose of producing assessable income. There are two reasons why we think that this submission was ill-founded. The first is that no payment was due by X Pty. Ltd. at a time when DH.5 purportedly owned the aircraft. Therefore, no money was paid to DH.5 under the lease and DH.5 was not entitled to receive any. The second is perhaps more fundamental. In our opinion, a mere documentary transaction as occurred in the present case whereby aircraft were purchased subject to a lease by a partnership which remains in existence thereafter for only two days does not amount, in our opinion, to the use by the partnership of plant or articles.

We do not suggest that, in an appropriate case, plant may not be used for the purpose of producing assessable income if it is used by being hired out or leased out. Subsection 54(1) does not require personal use. But the mere purchase of aircraft subject to a lease in a situation where the possession of the aircraft does not change and no step exercising ownership and control is taken so far as the lessor is concerned does not in our opinion amount to use of plant or articles. Use is a question of fact. The mere acquisition of aircraft which are subject to a lease does not involve use. Use involves either actual use or the exercise of rights for the benefit of the owner of those rights. DH.5 did nothing in that regard.

DH.5 was alleged to have acquired the aircraft on 9 May 1979 from Z Pty. Ltd. Mr Morris relied also upon the purchase agreement of that date, in which Z Pty. Ltd. was described as the vendor and DH.5 was described as the purchaser. The agreement included the following recitals:

"RECITALS

...

D. The Aircraft is the subject of a lease (herein called `the Lease') to [X] Pty. Ltd, a company duly incorporated in the State of Victoria and having its registered office at... Victoria (hereinafter called `the Lessee') a copy of which has been produced to the Purchaser.

...

F. The Vendor has guaranteed to the Purchaser subject to the terms of this agreement a minimum net income from the Aircraft of no less than three (3) months rent payable under the Lease and has agreed that it will itself take a lease of the Aircraft and pay rent in respect thereof as hereinafter provided."

The provisions of the agreement included:

"...

6(a) The Purchaser hereby agrees to grant and the Vendor hereby agrees to take a lease of the Aircraft on the same terms and conditions as the Lease with the variations referred to below (hereinafter called `the Second Lease'):

• (i) The lessee under the Second Lease shall be the Vendor.
• (ii) The words `the first of such payments to be made on the execution hereof' in clause 3 of the Lease shall be replaced in the Second Lease by the words `receipt of the first of such payments being hereby acknowledged'.
• (iii) The period of the Second Lease shall be such period as the parties may agree but in default of agreement shall be three (3) months.
• (iv) The Second Lease shall commence on the expiration or prior determination of the Lease.

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6(b) The Vendor shall pay to the Purchaser at the time when the Purchase Price is payable under this agreement the first three (3) months rent payable under the Second Lease being the amount shown in the Schedule as `First Rent Instalment Under Second Lease'."

The effect of these provisions was that the partnership agreed to grant to Z Pty. Ltd. a lease of the aircraft for the period of three months commencing on the expiration or prior determination of the lease to X Pty. Ltd. (that is to say, on 23 March 1984), the three months' rent, $30,000, being payable on the execution of the agreement for the sale and purchase of the aircraft. The $30,000 was received by DH.5 and the receipt was alleged to demonstrate that plant or articles owned by DH.5 were used by it during the year for the purpose of producing assessable income. Again, we do not consider this arrangement to be a use of plant or articles. There was no factual use or factual exercise of control over these aircraft. There was no more than a paper arrangement which the persons who effected it knew would be brought to an end within two days, save for the payment of the $30,000, by a reorganisation of partnership DH.5 and a transfer of ownership of the aircraft back to Z Pty. Ltd.

We should also say that we do not regard the $30,000 as assessable income of DH.5. If it had been assessable income of a company genuinely carrying on the business of hiring out aircraft, it would have been brought to account as assessable income not when received but in the year in which the period of the lease to which it related fell - see
Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 114 C.L.R. 314. But DH.5 carried on no activity. The $30,000 was simply one of the sums which passed in the course of this arrangement. It was not part of the proceeds of a business and, in our opinion, had no fiscal consequences.

We turn now to the question of the partnership and its reorganisation. The deed of partnership on its face appears to be a straightforward partnership agreement. Objects cl. 1(a) describes the objects of the partnership as being, "... to purchase the Aircraft described in the Schedule (hereinafter called the `Aircraft') and to lease the Aircraft for income-producing purposes". The five aircraft were listed in the schedule, the date of commencement of the partnership was stated to be 27 April 1979 and the amount of the capital contribution of each of the 14 partners was set out in the schedule, $8,250 being the total, of which the applicant and his wife contributed $700 each. The proportionate interest of each of the partners was likewise set out in the schedule. The deed of partnership contained the usual provisions. The following clauses should be specifically noted. Clause 12 provided:

"12. The Partners shall by unanimous decision only have the right at any time and from time to time to admit other persons into the Partnership upon such terms and conditions as shall be unanimously agreed upon."

Clauses 16(a) and (d) provided:

"16(a) Subject as otherwise provided herein all matters of or relating to the Partnership and the Partnership business shall be determined by a simple majority of votes of the Partners.

• (d) The Partners may appoint a manager to conduct all or any of the affairs or business of the Partnership with such powers, including (without in any way limiting the generality of the foregoing) powers to execute deeds and other agreements or instruments of the Partnership, and on such terms and conditions as the Partners may determine."

Clause 18 provided:

"18. Each Partner may at any time and from time to time by notice in writing to the other Partners, appoint a proxy to act for him in passing or signing resolutions of the Partners in accordance with the provisions of Clause 16 hereof either for a fixed time or for a particular meeting or resolution or generally until removed by a like notice in writing so given and a resolution passed by being signed by such proxy or by such proxy casting a vote in respect of such resolution shall be as valid and effectual as one signed by or voted upon by the Partner appointing such proxy himself and such proxy shall be deemed to have the authority of the Partner appointing him to vote on or sign resolutions in accordance with the terms of the notice of his appointment until the expiry of his appointment in the terms of

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ATC 708

such notice or until notice in writing of his removal as a proxy has been actually received by the other Partners."

On 26 April 1979, the day before the partnership commenced, each of the partners executed a document which stated that, pursuant to cl. 18 of the deed of partnership, the partner appointed Mr A to be his or her proxy to act for him or her in passing or signing resolutions.

There is in evidence a minute of a meeting of partners held on 27 April 1979 at 2.15 p.m. The minute records all the partners as being present, though the applicant was not and his wife recalls only one meeting and that being before the partnership agreement was signed. The minute records that the meeting resolved that a Mr K, who was not a partner, be chairman of the meeting. The meeting then resolved on the purchase of aircraft and on the entering into of many other arrangements, including the lease of the aircraft. It was resolved, "... that Mr [W] be appointed as Manager of the Partnership's affairs with authority to delegate to [H]". Mr H was given authority to execute on behalf of the partnership certain documents and also to execute a power of attorney appointing a person resident in the Australian Capital Territory as attorney to execute certain documents in that Territory. Subsequently, the agreement for the purchase of the aircraft was, as we have mentioned, executed on 9 May 1979 by Mr H on behalf of DH.5, the price being $905,000.

A second meeting of the partners was purportedly held on 11 May at 9 a.m. The meeting was in Sydney and there were present Mr W, Mr A and a Mr R representing S Pty. Ltd. The minutes record that the manager, Mr W, reported that, subject to the approval of the partnership, an agreement had been negotiated with S Pty. Ltd. under which the existing partnership DH.5 would be terminated and a new partnership including S Pty. Ltd. would be established on substantially the same terms and conditions as the existing partnership save that the shares of the partners would be as to the existing partners 10% and as to S Pty. Ltd. 90%. A term of the agreement would specify $50,000 as the value of the partnership's aircraft for the purposes of sec. 59AA of the Act. It would be agreed that S Pty. Ltd. would be managing partner of the partnership. It would be further agreed that, in consideration of the foregoing, S Pty. Ltd. would not be liable to make any initial capital contribution to the partnership. It was resolved that a partnership agreement on these terms would be entered into and that Mr H be authorised to act for and represent the existing partners in all respects in the new partnership.

The new partnership deed was executed on the same day, 11 May 1979, Mr H executing the deed on behalf of the former partners. The deed provided that S Pty. Ltd. should be interested as to 90% in the assets, liabilities, profits and losses of the partnership, though S Pty. Ltd. brought in no capital.

At a meeting of the new partnership DH.5A, held at 11 a.m. on the same day, in Sydney, attended by the same three persons, it was reported that an opportunity had arisen for the sale of the aircraft and it was resolved to sell the same. A Mr J was authorised to execute the sale agreement on behalf of the partnership.

Under the signature of Mr J, the aircraft were resold on that day, 11 May 1979, by partnership DH.5A to Z Pty. Ltd. for $875,000, with the benefit of the current lease of the aircraft. There are no minutes of any further meeting of partnership DH.5A and no further activity occurred, other perhaps than some tidying up of the accounts and finances.

In our opinion, there was nothing in the partnership agreement of 27 April 1979, whether it be cl. 16 or 18, or in the authorities executed by the partners to Mr A establishing him as proxy, which would have entitled him without notice to the partners, which they did not have, either to bring the partnership DH.5 to an end or to constitute the former partners into a new partnership with S Pty. Ltd. in partnership DH.5A. Any authority given pursuant to cl. 16 and 18 of the deed of partnership of 27 April must be read subject to the object of that deed which was to constitute the partners in partnership carrying on business together for the purpose of acquiring and leasing out the five aircraft specified. There is nothing in cl. 16 or 18 which would have authorised Mr A without communication to the partners to bring in another partner, who would make no capital contribution whatever but would be entitled thereafter to 90% of the capital and profits of the partnership. There was no authority for any person to place the existing partners into partnership with S Pty. Ltd. and

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ATC 709

certainly no authority, having done so, to sell the aircraft the purchase and leasing of which had been the purpose for which the partners had joined together in partnership on 27 April 1979.

Thus, the precondition upon which sec. 59AA of the Act operates, namely, the reorganisation of a partnership is, in our opinion, not satisfied in this case. The purported transaction was unauthorised and void.

In one sense there was authority for this reorganisation for, as the partners entered into the arrangement intending to obtain a taxation deduction, it may be inferred that the persons who attended to the meetings, the minutes, the agreements, etc., were authorised to do whatever was necessary to obtain that deduction. But, sec. 54, 59 and 59AA do not operate in this context. For their operation they require a real use of plant and articles, a real partnership and a real reorganisation of the partnership. What occurred in the present case did not have reality in that sense. Mr A had no authority to reorganise a real partnership in the manner which purportedly occurred.

It is unnecessary that we should deal with the question of bank accounts, cheques and the like. The evidence discloses that each of the partners put in a certain amount of money, of which some went to the promoters of this arrangement along with an undertaking that a further amount would be paid if the arrangement was successful in producing a taxation deduction and some was paid to the partnership. Other moneys moved between X Pty. Ltd., Z Pty. Ltd. and S Pty. Ltd. In substance, there was a round robin of cheques, though to state the matter in that way is too simplistic. We have not seen anything in the financial transactions themselves, other than the payment to the promoters, which would lead us to draw a conclusion adverse to any part of the applicant's case.

Nor is it necessary to describe the many other arrangements, such as a loan agreement, a charge agreement and an option agreement which were effected. They were merely ancillary and incidental.

In brief, for the reasons we have given, we are of the view that the applicant's claim fails at every major step, namely, ownership of plant or articles, use of plant or articles for the purpose of producing assessable income and reorganisation of a partnership.

We would add one further ground upon which we would find against the applicant. In our opinion, the 14 partners did not enter into a partnership in the ordinary sense, that is to say, join together for the purpose of carrying on business in common with a view to profit. In our opinion, it is clear that they simply signed the partnership agreement and the proxies and intended to have no further dealings with the matter save ultimately to be informed of their interests in the net loss which they could include in their separate income tax returns as an allowable deduction. Nor, in our opinion, was their organisation a partnership in the extended sense defined in sec. 6(1) of the Act. In our opinion, the partners did not jointly derive assessable income. As stated earlier, the $30,000 receipt for rental in advance was not income. For these reasons, therefore, DH.5 was not a partnership.

The applicant claimed a deduction of $70,026 being his interest in the net loss made by partnership DH.5 as well as $205 being his interest in the net loss made by partnership DH.5A. The reasons we have given are sufficient to deal with both those matters and we need not deal in any more detail with the basis upon which the net losses of each of the partnerships were calculated.

The applicant further claimed a deduction of the amount of $8,400 being the amount paid by him to O Pty. Limited, the promoter. The claim was made "for consulting services in relation to the purchase of income producing assets". For the reasons we have given, this claim must also fail. The expenditure was not incurred in gaining or producing assessable income. It was a cost of entering into an arrangement which was designed to achieve a taxation deduction for the applicant.

In this context, it may be useful to refer specifically to some evidence additional to that mentioned above. As we have said, the applicant entered into an arrangement to obtain a taxation deduction. In addition to the $8,400 paid, he agreed to pay an additional $5,600 if the deductions were obtained. On 25 May 1979, he signed an Acknowledgement of Debt which included the following:

"1. I am indebted to [O] Pty Limited its successors or assigns (hereinafter referred to

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ATC 710

as [`O']) in respect of the sum of $5,600.00 being the balance of monies due for the services performed by [O] in arranging for expenses which are allowable deductions for taxation purposes and the said sum shall be immediately payable to [O] on receiving an assessment or other notification from the Commissioner of Taxation in which the deductions are allowed."

The overall nature of the arrangement was described in this evidence by Mr H:

"You can answer, can you not? It was all part of a preconceived plan? - It was not written down as a plan. It was -

It was intended? - I think you are right, yes.

...

And in putting them into effect, you intended that no member of the partnership would be wealthier at the end of the day, other than - I will stop it there, that you intended no member of the partnership would be wealthier at the end of the day? - Again, I did not intend that at all; that is how it worked out.

But you knew before you started, that that is how it would work out? - That is correct."

Compare this evidence, which has the ring of truth, with the following evidence of the applicant:

"And you have also become aware that ultimately the partnership business was terminated and the aircraft resold? - Yes, I understand it was terminated.

Were you consulted in relation to that? - I do not recall being consulted in that sense. I may have heard about it later on, and at subsequent discussions with Mr [I], but I assumed some bad luck or bad management was responsible for it."

and the following statement of the applicant's wife:

"I have no recollection that I was specially aware of any reconstitution of the partnership or sale of aircraft by the partnership in May or June of 1979 and believe I became aware of those events in the following financial year. When informed of the termination of activities by the partnership I assumed that its activities had not proven as successful as we had hoped."

That evidence as to bad luck and lack of success was untruthful and we reject it accordingly. The $8,400 was not paid in the purchase of income-producing assets. It was paid for a taxation deduction.

For these reasons, we would affirm the Commissioner's decision on the objection.