• Legal database
Legal database

FC of T v BAROSSA VINES LTD & Ors

Judges:
Besanko J

Court:
Federal Court, Adelaide

MEDIA NEUTRAL CITATION: [2014] FCA 20

Judgment date: 3 February 2014

ATC 15820

Besanko J:

INTRODUCTION

1. This is an application by the Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner") for civil penalty orders against five respondents for contraventions of s 290-50(2) in Schedule 1 of the Taxation Administration Act 1953 (Cth) ("TAA"). The five respondents are Barossa Vines Ltd ("Barossa Vines"), Antonio De Francesca, Mario De Francesco, Luciano Signore and Frank Signore ("the respondents"). When the proceeding was commenced, Agribusiness Services Pty Ltd ("Agribusiness") was also a respondent. On 26 May 2013, a liquidator was appointed to Agribusiness by a resolution of its members, and on 9 September 2013, the Commissioner discontinued his proceeding against Agribusiness.

2. Section 290-50(2) in Schedule 1 of the TAA is in the following terms:

An entity must not engage in conduct that results in a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different from that described in the product ruling.

Note: A scheme will not have been implemented in a way that is materially different from that described in a product ruling if the tax outcome for participants in the scheme is the same as that described in the ruling.

3. The Commissioner alleges that each of the respondents is an entity within s 290-50(2). A product ruling is a public ruling under the TAA that states that it is a product ruling (s 995-1 of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997")).

4. Barossa Vines was the responsible entity of a number of managed investment schemes, which involved the conduct of a viticultural business and the two schemes which are relevant for the purposes of this proceeding are schemes for the 2007 financial year and the 2008 financial year respectively.

5. The Commissioner issued one product ruling in relation to the 2007 financial year. It was known as "Product Ruling Income tax: Barossa Vines Project 2007 - Applicant Group 1".

6. The Commissioner issued two product rulings for the 2008 financial year. The first was known as "Product Ruling Income tax: Barossa Vines Project 2007 - Applicant Group 2" and the second was known as "Product Ruling Income tax: Barossa Vines Project 2007 - Applicant Group 2 (using finance from Barossa Vines Limited)".

7. The 2007 Project was made available to investors through a prospectus and product disclosure statement ("PDS") entitled "Barossa Vines Project 2007" dated 24 January 2007.

8. The 2008 Project was made available to investors through the prospectus and PDS entitled "Barossa Vines Project 2007 for 2008 Growers" dated 11 March 2008.

9. Pursuant to each project, participants entered into, among other things, a management agreement by which they engaged Barossa Vines to establish and manage a vineyard lot on their behalf and incurred an upfront management fee of $4,400 on application and, in subsequent income years, smaller ongoing fees.

10. The management fees and ongoing fees were deductible under s 8-1 of the ITAA 1997 as losses or outgoings incurred in carrying on a business for the purpose of gaining or producing assessable income. However, s 35-10(2) of the ITAA 1997 effectively deferred the deductions until they could be applied against assessable income derived by participants from the 2007 Project or the 2008 Project, as the case may be.

11. The Commissioner had a discretion to decide that the rule in subsection 35-10(2) did not apply. The Commissioner's discretion is set out in s 35-55(1) and is in the following terms, relevantly:

(1) The Commissioner may decide that the rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

  • (a) …

    ATC 15821

  • (b) the business activity has started to be carried on and, for that or those income years:
    • (i) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and
    • (ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)).

Note: This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

12. On 11 April 2007, the Commissioner exercised his discretion under s 35-55(1)(b) of the ITAA 1997 by publishing the 2007 Product Ruling. Clause 29 of the product ruling provided as follows:

A Grower who is an individual accepted into the Project in the year ended 30 June 2007 may have losses arising from their participation in the Project that would be deferred to a later income year under section 35-10. Subject to the Project being carried out in the manner described above, the Commissioner will exercise the discretion in paragraph 35-55(1)(b) for Growers for the income years ended 30 June 2007 to 30 June 2010 . This conditional exercise of the discretion will allow those losses to be offset against the Grower's other assessable income in the income year in which the losses arise.

13. The 2008 Product Rulings were in identical terms, save and except that they related to an individual who was accepted into the project in the financial year ended 30 June 2008, and the Commissioner's discretion was to be exercised for the income years ended 30 June 2008 to 30 June 2012.

14. The Commissioner's product rulings each contained a clause as follows:

If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:

  • • this Product Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and
  • • this Product Ruling may be withdrawn or modified.

15. The 2007 Project was promoted on the basis of conformity with the 2007 Product Ruling and the 2008 Project was promoted on the basis of conformity with the 2008 Product Rulings. Each project was implemented in a way that was materially different from that described in the relevant product ruling. Those matters gave rise to a contravention of s 290-50(2) of the TAA, and had the effect that each product ruling had no binding effect on the Commissioner and was liable to be withdrawn or modified.

16. The board of Barossa Vines consisted of Antonio De Francesca, Mario De Francesco, Luciano Signore and four non-executive directors. Antonio De Francesca, Mario De Francesco and Luciano Signore received directors' fees and superannuation from Barossa Vines.

17. Under a Vineyard Management Agreement, Barossa Vines appointed Agribusiness as manager and Agribusiness was required to perform initial services including establishing each grower's vineyard lot and replacing rootlings which failed, and ongoing services which included maintaining each grower's vineyard lot in accordance with good viticultural practices. Each of the individual respondents were directors of Agribusiness (Frank Signore was also the general manager of Agribusiness) and each received fees from Agribusiness as consultants.

18. In relation to the 2007 Project, there were 330 participants, licences over 2,889 vineyard lots and revenue raised of $11,613,780. In relation to the 2008 Project,

ATC 15822

there were 259 participants, licences in relation to 2,139 vineyard lots and revenue raised of $8,534,460. Most of the participants in the schemes were individuals. In relation to the 2007 Project, there were 86 participants who acquired one or two lots, and in relation to the 2008 Project, there were 69 participants who acquired one or two lots.

19. Section 290-50(4) in Schedule 1 of the TAA provides for the maximum amount of the civil penalty for a contravention of s 290-50(2). The principles which are relevant to the determination of the appropriate penalty are stated in a non-exhaustive way in s 290-50(5) which is in the following terms:

In deciding what penalty is appropriate for a contravention of subsection (1) or (2) by an entity, the Federal Court of Australia may have regard to all matters it considers relevant, including:

  • (a) the amount of the consideration received or receivable (directly or indirectly) by the entity and associates of the entity in respect of the scheme; and
  • (b) the deterrent effect that any penalty may have; and
  • (c) the amount of loss or damage incurred by scheme participants; and
  • (d) the nature and extent of the contravention; and
  • (e) the circumstances in which the contravention took place, including the deliberateness of the entity's conduct and whether there was an honest and reasonable mistake of law; and
  • (f) the period over which the conduct extended; and
  • (g) whether the entity took any steps to avoid the contravention; and
  • (h) whether the entity has previously been found by the Court to have engaged in the same or similar conduct; and
  • (i) the degree of the entity's cooperation with the Commissioner.

20. The proceeding was listed for trial commencing on 30 September 2013 and it was estimated to continue for a period of five weeks. A considerable volume of evidence was filed. A large number of affidavits were filed and the Book of Common Documents comprised 26 volumes of documents. On 24 June 2013, the Commissioner and the respondents attended a mediation. The proceeding was resolved as between the parties at the mediation and they put forward a statement of agreed facts and joint submissions on penalty. In the joint submissions on penalty, the parties put forward penalties which they contended should be imposed. I recently considered the proper approach where the parties put forward proposed pecuniary penalties in
Australian Competition and Consumer Commission v P & N Pty Ltd [2014] FCA 6. I said (at [3]):

In relation to the proposed pecuniary penalties, I was asked by the parties to follow the approach in
NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 ("NW Frozen Foods") at 290-291 per Burchett and Kiefel JJ and
Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd (2004) ATPR 41-993. In other words, if I am satisfied that the proposed pecuniary penalties are within an appropriate range, then they are the penalties I should impose. At the same time, my attention was quite properly drawn to the decision of the Court of Appeal of the Supreme Court of Victoria in
Australian Securities and Investments Commission v Ingleby [2012] VSCA 49 where those decisions were said to be bad law. I respectfully acknowledge the force of the points made by the Victorian judges. Clearly there are points to be made on both sides as to the appropriate approach, but sitting as a single judge I think I should follow the approach of the Full Court of this Court unless that Court or the High Court suggests that a different approach should be taken. The approach of the Full Court in NW Frozen Foods is well-established and, so far as I know, still being applied by single judges of this Court. …

21. I will follow that approach in this case.

BACKGROUND MATTERS RELEVANT TO THE CONTRAVENTIONS

22. Barossa Vines was the responsible entity for nine schemes before the 2007 Project and

ATC 15823

the 2008 Project. The scheme areas before the 2007 Project comprised 769.5 ha and, as a result of the 2007 and the 2008 Projects, the scheme areas comprised 1020.9 ha. In other words, the vineyards increased by approximately one-third as a result of the 2007 and 2008 Projects.

23. During the relevant period, Agribusiness' staff consisted of the following:

  • (1) a vineyard manager, Mr John Niutta, whose experience was as a tractor operator and vineyard hand. Mr Niutta stepped down in late 2008 because he was uncomfortable with how big the project was getting and the stress of managing the vineyards;
  • (2) an assistant vineyard manager, Mr Ashley Ware, who had a Level 2 Certificate in Food Processing (Wine);
  • (3) Mr Chris Galler, who was the former vineyard manager. He had a Certificate IV in Viticulture. By 2007, he was employed by a related winemaking entity, Rosedale Wines, and he maintained some ongoing involvement in the vineyards. However, he had no formal role with Barossa Vines or Agribusiness; and
  • (4) there were three site supervisors, one irrigation operator, and up to seven vineyard hands during the relevant period. None of the vineyard hands had formal qualifications.

24. Agribusiness routinely engaged independent contractors to perform various tasks on the vineyards. Those independent contractors included A & MJ Musolino (earthmoving), Linke Vineyard Services (for post knocking and trellising), Virginia Irrigation (irrigation design and installation) and labourers from Sem & Sem Pty Ltd.

25. During the relevant period, Mr Paul Miller, a viticultural consultant, was engaged to provide external viticultural reports. Mr Miller provided reports for the board of Barossa Vines and for publication to investors, as well as providing reports in relation to suitability of blocks for use in commercial viticulture.

26. Before March 2009, there is no documentary evidence of management attention to the complex issues involved in managing vineyards. There are no soil moisture monitoring records, no worksheets or records, no irrigation records, no manuals or policies and procedures. In March 2009, Agribusiness appointed Mr Syd Kyloh as vineyard manager. He was appropriately qualified for that position.

27. In 2005 and in August 2006, Mr Miller warned Barossa Vines about staffing and he made specific mention of issues with expansion. In 2007, Barossa Vines engaged Mr Leigh Waechter as irrigation operator. Between 2006 and 2008, Barossa Vines made several attempts to recruit an experienced vineyard manager who was working with Southcorp and was known to Mr Luciano Signore. These attempts comprised discussions between the candidate and Mr Luciano Signore, but ultimately, the attempts were unsuccessful. Mr Antonio De Francesca recalls that there was "no sense of urgency" about the appointment at that stage. The discussions delayed Barossa Vines employing somebody else.

28. Mr Miller raised staffing issues throughout 2008. On 12 March 2008, he sent a board report to Barossa Vines and commented as follows to Mr Linden Huxtable (corporate compliance manager) in his covering e-mail:

I am concerned about BVL. I think it can be resolved but the now massive size of the operation requires a bit more planning, direction and timely execution than has happened over the last year especially if further expansion is intended. The failures at Eckermann and Sturt Highway are symptoms of quick fixes/last-minute decisions/late decisions or of even more concern saying something has been done when it hasn't.

29. In the accompanying report Mr Miller said:

The problems that have occurred this year are partly to do with season but mostly to do with rapid expansion and resourcing issues that have been raised before.

30. In Mr Miller's board report for August 2008, he made the comment that:

… there are still areas of concern that show lack of resources and capability. These include … weeds still out of control in some areas, … and a lack of vines for new

ATC 15824

plantings because of a need for re-planting previous blocks.

… In comparison with the other vineyards … that I am involved with the BVL operation is still short of management and technical resources as previously reported.

31. In an update to board report dated 9 November 2008, Mr Miller said the following:

The major concerns are with the young vineyards but most tasks on the established vineyards are behind schedule and weed control and canopy management are not up to standard.

32. On 11 March 2009, Mr Miller visited Barossa Vines vineyards and he met Mr Kyloh. They discussed the need for improvement in three areas: "water, weeds and workforce".

33. In 2008, Mr Bruce Henderson, who was technical manager for Grant Burge, was contracted to provide technical expertise. He inspected the vineyards every four weeks and provided what Mr Antonio De Francesca described as "mini reports". Five such reports were prepared and in the last of these reports which was sent to Barossa Vines on 14 November 2008, Mr Henderson said:

Comment with regard to weed control appears as a constant thread through most blocks in these reports … The need to have in place strategies for weed control was stressed in my first major report … However it is implemented weed control involves a significant commitment of resources implemented in a timely fashion.

Often the need for work is noted … Generally my report is noting that completion of these tasks is overdue (in an ideal world) … there is however, an implication of provision of additional resources to allow for the timely completion of operations.

Bearing in mind the above some significant progress has been observed over the last few months … within current constraints every effort has been made to address issues.

34. Mr Henderson also observed that he had not had access to information on soil moisture readings or quality, quantity or flow rates of water or current practices.

THE 2007 PROJECT

35. As stated above, the 2007 Project comprised 2,889 vineyard lots. A total of 1,277 vineyard lots on the Both block were allocated to participants in the 2007 Project. These lots were not planted prior to 30 June 2007, or at all in the 2007 planting season, although works to prepare for planting were commenced on these lots by at least August 2007. Furthermore, the vineyard lots had not been planted as at January 2008.

36. In January 2008, a valuer, Mr Colin Pickett, acting at the request of Barossa Vines' lender, inspected the Both block and observed no planting material. He was informed that the planting had been deferred.

37. The balance of the Both block was allocated to participants in the 2008 Project and the whole block was planted with plantings that failed totally.

38. The failure to plant the Both block meant that the 2007 Project was implemented in a way that was materially different from the scheme described in the 2007 Product Ruling and that was in breach of s 290-50(2), because the Commissioner ceased to be bound to exercise the discretion in s 35-55 of the ITAA 1997. Furthermore, by reason of the failure, it was not otherwise open to the Commissioner, for each of the years ended 30 June 2007, 2008, 2009 and 2010 to exercise that discretion in relation to participants allocated lots on the Both block.

39. None of the respondents advised participants that the Both block had not been planted by 30 June 2007. Furthermore, on 27 September 2007 Mr Antonio De Francesca advised the Australian Taxation Office ("ATO") as follows:

1. The Project did proceed in the manner described in the Product Ruling application and the product Ruling 2007/32 that issued.

40. That advice was provided in a response to a request from the ATO for information about the 2007 Project. The ATO made a further request for information on 14 December 2007, and in particular, they asked for "details of the additional land secured to supply … extra vineyard lots" for the 2007 Project. On 22 December 2007, Barossa Vines responded by providing details of land acquired in May 2007 -

ATC 15825

three titles forming the Both block - the lease entered into for one of the titles and the contracts to purchase the other two.

41. On 13 February 2008, Barossa Vines wrote to the ATO providing further details of its interests in the titles forming the Both block, and said:

As the landholder and BVL intended to use the land in the Project, the Landholder entered into a lease Agreement with the then owner, Colin Donald Both, to lease the land until settlement was completed. That Lease Agreement specifically permitted the Landholder to sublease the land to BVL, so that BVL could carry out its operations on the land for the purposes of the Project.

42. Mr Luciano Signore altered reports to the board of Barossa Vines to positively report completion of preparation and planting of the Both block by 30 June 2007. On 13 September 2007, Mr Ware sent a vineyard report by e-mail to Mr Luciano Signore. That report included the following:

Ripping the Both block was completed on the 27th August. Fertilizer & gypsum has been applied & finished. Rotary hoeing was started on the 29th August & completed on the 11th September awaiting Linke contractors to start marking down the block ready for two post knockers to come and start knocking post's (sic) on the 19th September.

43. Mr Luciano Signore presented a vineyard report to the Barossa Vines Board on 13 September 2007. He amended Mr Ware's report but based on discussions he had with Mr Chris Galler, and it provided as follows:

Ripping the new property Both block was complete on the 27th May. Fertilizer and gypsum applied & finished. Rotary hoeing was started on the 29th May & completed on the 11th June.

Approx 60 Hectare vineyard completed 30th June.

44. On 29 November 2007, Mr Ware sent a further report by e-mail to Mr Luciano Signore. In the report presented to the board of Barossa Vines, Mr Luciano Signore added the following based on discussions with Mr Galler:

ECKERMANS, BOTH

This years June 2007 plantings.

Progressing nicely even after an extremely dry winter.

Minimal weed control required.

Vine losses < 2% will require a replanting before Christmas

45. On 5 December 2007, Mr Miller sent to Mr Huxtable a report in which he noted:

Given the dry conditions and in anticipation of restrictive water supply the manager postponed some of the 2007 plantings.

46. On 6 December 2007, Mr Huxtable wrote to Mr Miller as follows:

Just the BVL report page 3 under point 2 - Lucio has suggested delete 2nd sentence i.e. "Given the dry . of the 2007 plantings." Not good if ATO picked up as they may withdraw ATO Product Ruling

47. The relevant sentence does not appear in the final report.

48. Each of Mr Antonio De Francesca, Mr Luciano Signore and Mr Frank Signore has sworn an affidavit in this proceeding and each advanced a positive case that the Both block was planted by 30 June 2007.

49. In relation to the 2007 Project, 1,432 vineyard lots on a block known as the "Eckermann block" were allocated to participants. That involved 174 participants and a total area of 71.6 ha (1,432 × 0.05 ha).

50. After the failure of initial plantings in 2007, parts of the Eckermann block were abandoned. As at April 2011, approximately 27.03 ha of the total area of 71.75 ha on the Eckermann block remained unplanted. This equates to approximately 540 vineyard lots. The respondents are responsible for the abandonment. Soil problems led to the areas being abandoned and these problems were identified from the outset in Mr Miller's viticultural report in the 2007 prospectus and PDS. Mr Miller made specific recommendations for the Eckermann block including avoiding rocky outcrops, careful ripping and increasing soil depth by mounding soil to the vines.

51. Those potential problems were not avoided either by excluding bad areas or by

ATC 15826

taking the recommended steps to ameliorate the soil issues. Mr Miller noted these failures in his report to the board of Barossa Vines of 31 August 2009, when he said:

The … Eckermanns 2007 blocks … are due for re-planting.

In both blocks recent detailed soil analyses have identified that in some areas it may not be feasible to replant. The total area of this could be of the order of 50 ha.

The initial tests done here were reconnaissance surveys and more detailed analysis before planting may have avoided some of these issues. In addition it (sic) seems that some areas were planted that had been suggested to be avoided in the initial soil reports - e.g. rocky outcrops at Eckermanns and Blanchetown clay at Sturt Highway.

52. Participants in vineyard lots which were abandoned could never expect to produce assessable income. The constitution for the 2007 Project provided for pooling of participants' produce and distribution from the sale of the produce. However, only participants who contributed product from a harvest to a pool were entitled to distributions from the proceeds of sale.

53. The abandonment of areas of the Eckermann block meant that the 2007 Project was implemented in a way that was materially different from the project described in the 2007 Product Ruling and that was in breach of s 290-50(2), because the Commissioner ceased to be bound to exercise s 35-55 of the ITAA 1997. Furthermore, by reason of the failure it was not otherwise open to the Commissioner for each of the years ended 30 June 2009 or 2010, to exercise that discretion in relation to participants whose lots were abandoned.

THE 2008 PROJECT

54. The vineyard lots in the case of the 2008 Project were allocated to the following blocks: the Both block, 1,167 vineyard lots with an area of 58.35 ha (130 participants); the Zerk 1 block, 772 vineyard lots with an area of 38.6 ha (112 participants); and the Zerk 2 block, 200 vineyard lots with an area of 10 ha (17 participants).

55. Under the 2008 Product Rulings, the responsible entity was required to plant rootlings. It was necessary for the respondents to order rootlings from a nursery a year in advance. In June 2007, the respondents ordered 350,000 rootlings from Ausvine for planting in June 2008. In or about late May 2008, Ausvine advised Barossa Vines that it was unable to deliver the rootlings ordered. The failure of the rootlings in the nursery was evident to Ausvine in about November 2007 but was not disclosed to Barossa Vines. Rootlings were unavailable on the open market in sufficient numbers to plant a large vineyard. As a result, cuttings were planted on the Both block, the Zerk 1 block and the Zerk 2 block. In relation to the 2007 Project, cuttings were planted in relation to 1,277 vineyard lots on the Both block. In relation to the 2008 Project, cuttings were planted on each of the three blocks and all of the vineyard lots comprising that scheme were affected.

56. The use of cuttings on these blocks resulted in a 100% failure of the plantings and the respondents are responsible for the failed planting. The respondents estimated the likely success rate for cuttings to be between 50 and 85%. The corresponding estimated likely failure rate of 15 to 50% is unacceptably high for a commercial vineyard. Furthermore, as a matter of viticultural practice, the respondents ought to have made regular inquiries of the nursery about the progress of the rootlings. Barossa Vines was advised of Ausvine's default in late May 2008. Despite that advice, in June 2008, Barossa Vines accepted a further 125 participants in the 2008 Project, allocating to them 772 lots on the Zerk 1 block, and 200 lots on the Zerk 2 block.

57. The planting of cuttings rather than rootlings resulted in the 2008 Project being implemented in a way that was materially different from the project described in the 2008 Product Rulings in breach of s 290-50(2), because the Commissioner ceased to be bound to exercise the discretion in s 35-55 of the ITAA 1997. Furthermore, by reason of the planting of the cuttings, it was not otherwise open to the Commissioner for each of the years ended 30 June 2008, 2009, 2010 or 2011 to exercise that discretion in relation to participants in the 2008 Project.

58.

ATC 15827

As I have said, initial plantings on the Zerk 1 block failed and were not replaced. As at April 2011, only 13.67 ha of a total area of 38.4 ha was planted and, of that, 2.7 ha needed replacement vines. Accordingly, at least 22 ha or 440 vineyard lots had been abandoned. The respondents were responsible for the abandonment.

59. Soil problems led to areas of the Zerk 1 block being abandoned. Those problems were identified in the soil report prepared by Ms Wendy Meech, who is the principal soils agronomist of WJB Consulting. The report identified the fact that the majority of the property had very shallow top-soil depths over sheet rock or clay layers. Furthermore, the report contained specific recommendations including careful ripping of rock and poorly structured clay layers, moulding of lime-free top-soil and careful irrigation management and monitoring. The report recommended considering areas of very shallow rock for exclusion from the development. Later detailed soil analysis showed that some areas of vineyards, including the Zerk 1 block, were not worth replanting because of areas of very shallow soils often underlying rock which was not feasible to remediate.

60. Participants whose vineyard lots were abandoned could never expect to produce assessable income. The constitution for the 2008 Project provided for pooling of participants' produce and distribution from the sale of the produce. However, only participants who contributed product from a harvest to a pool were entitled to a distribution from the proceeds of sale.

61. The abandonment of areas of the Zerk 1 block resulted in the 2008 Project being implemented in a way that was materially different from the project described in the 2008 Product Rulings in breach of s 290-50(2), because the Commissioner ceased to be bound to exercise the discretion in s 35-55 of the ITAA 1997. Furthermore, by reason of the failure it was not otherwise open to the Commissioner for each of the years ended 30 June 2010 or 2011 to exercise that discretion in relation to participants whose lots were abandoned.

THE CONTRAVENTIONS ARE PROVED

62. On the basis of the facts set out above, I find that the respondents and each of them have engaged in conduct in contravention of s 290-50(2) of the TAA in relation to the 2007 Project and in relation to the 2008 Project.

63. In this case, there are two projects covered by separate product rulings and the conduct in respect of each attracts a penalty. The parties submitted that the related principle of totality applied to moderate the aggregate penalty to be imposed in respect of the respondents' conduct (
Australian Ophthalmic Supplies Pty Ltd v McAlary-Smith (2008) 165 FCR 560 at 567, [25] per Gray J; at 575 - 576, [66] - [73] per Graham J; at 583, [102] per Buchanan J). The parties asked the Court to accept that, in considering whether the proposed penalty is within an appropriate range on a proper application of the totality principle, a substantial reduction in aggregate penalties imposed in respect of the contraventions relating to the 2007 Project and the 2008 Project would be expected.

64. To the extent that two offences contain common elements, it would be wrong to punish the offender twice for the commission of the elements that are common:
Pearce v The Queen (1998) 194 CLR 610 at 623, [40] per McHugh, Hayne and Callinan JJ.

THE PENALTIES TO BE IMPOSED

65. Section 290-50(4) of the TAA provides that the maximum amount of the penalty is the greater of 5,000 penalty units ($550,000) for an individual, or 25,000 penalty units ($2,750,000) for a body corporate on the one hand, and twice the consideration received or receivable (directly or indirectly) by the entity and associates of the entity in respect of the scheme. In this case, the provision with respect to penalty units applies to determine the maximum penalty in respect of the individual respondents, and the provision with respect to the consideration received applies to determine the maximum penalty in respect of Barossa Vines. In the case of Barossa Vines, the maximum penalty in relation to the 2007 Project is $23,227,560 and the maximum penalty in relation to the 2008 Project is $17,197,560. In the case of the individuals, the maximum

ATC 15828

penalty is $550,000 in the case of each contravention.

66. I turn now to consider each of the matters identified in s 290-50(5) in Schedule 1 of the TAA and other relevant matters.

67. I have already set out the consideration received by Barossa Vines in relation to the 2007 Project and in relation to the 2008 Project. A significant part of the sums received were applied towards implementation of the schemes.

68. In each of the 2007 and 2008 years, Antonio De Francesca, Mario De Francesco and Luciano Signore received significant amounts by way of directors' fees and superannuation from Barossa Vines ($65,400 per annum) and a consulting fee of $300,000 per annum from Agribusiness. Frank Signore received a consulting fee of $300,000 per annum from Agribusiness in each of the 2007 and 2008 years. Because there are other schemes, those amounts have to be apportioned and that has been done in the manner indicated in the Notes to Schedule 1 of the joint submissions on penalty.

69. General deterrence is an important purpose for the imposition of a pecuniary penalty (see the statement of the objects of Division 290 in s 290-5).

70. In relation to the amount of loss or damage incurred by scheme participants, it is likely that participants in each scheme have suffered loss and damage by reason of the material differences in the implementation of the scheme described in the PDS. As a consequence of those differences, the income of participants was likely to have been adversely affected by delayed development or abandonment of vineyard lots. Participants allocated vineyard lots on the Eckermann block and the Zerk 1 block which were abandoned would never enjoy the benefit of the deductible expenses they incurred.

71. On 15 February 2012, the Commissioner partially withdrew the 2007 Product Ruling with effect from the 2008 income year and wholly withdrew the 2008 Product Rulings. A total of 509 taxpayers were referred for amendment action. The group referred consisted of taxpayers who:

  • (1) according to the prospectus registers, were participants in the 2007 Project or the 2008 Project;
  • (2) had claimed identifiable income tax deductions in accordance with either the 2007 Product Ruling or the 2008 Product Rulings:
    • (i) for the 2008 to 2010 income years (for investors in the 2007 Project); and/or
    • (ii) for the 2008 to 2012 income years (for investors in the 2008 Project);
  • (3) whose investments the Commissioner was not out of time to amend; and
  • (4) were not in a group reasonably suspected of having been accepted into the 2007 scheme on or after 1 July 2007.

72. The Commissioner sent a letter to each of the identified taxpayers inviting them to lodge self-initiated amended assessments removing their claims to income tax deductions relating to the 2007 Project and/or the 2008 Project. Subsequently, 215 taxpayers requested amendments to their tax return for relevant years and the ATO processed 278 amendments resulting in shortfall liabilities of $286,800 and interest of $37,825. Compliance action continues in relation to taxpayers who did not request an amendment.

73. In terms of the nature and extent of the contraventions, the 2007 Project and the 2008 Project were large scale mass marketed managed investment schemes in which 589 participants invested over $20,000,000. The respondents' failures demonstrate a lack of care in the management of the schemes on behalf of participants. The respondents' attempts to conceal the failure of the plantings of the Both block demonstrate a lack of candour. The selling of the vineyard lots knowing that they would not be planted with rootlings in the case of 2008 Both block, Zerk 1 block and the Zerk 2 block, can only indicate that attention to good viticultural practice was subordinated to commercial considerations.

74. In terms of the circumstances in which the contraventions took place, including the deliberateness of the entity's conduct and whether there was an honest and reasonable mistake at law, it is the case that the material differences in the implementation of the 2007

ATC 15829

Project and the 2008 Project were the result of the respondents' failure to prepare adequately or plan the development of vineyards, or to put in place appropriate structures and resources for their establishment and ongoing management. These omissions, although not deliberate, left scheme participants vulnerable to external factors such as a shortage of planting material and the soil difficulties, which led to the abandonment of vineyard lots on the Eckermann block and the Zerk 1 block. The decision to continue selling vineyard lots in the 2008 Project after it was known that no rootlings would be available for planting on those blocks was deliberate.

75. In terms of the period over which the conduct extended, the relevant conduct covered the period from the respondents' acceptance of participants in the 2007 Project in around May 2007 to the end of the 2009 planting season in September or October 2009, by which time a decision had been made not to replant certain vineyard lots on the Ecerkmans block and the Zerk 1 block.

76. In terms of whether the respondents took any steps to avoid the contraventions, it is to be said that, in general terms, the respondents did not take any steps to avoid the contraventions. The planting of cuttings in the 2008 year was, at best, a misguided attempt to avoid a contravention. The respondents did take steps to avoid future contraventions by taking the precaution of taking cuttings for growing into rootlings for subsequent plantings and by the appointment of an appropriately qualified vineyard manager, Syd Kyloh, in March 2009.

77. In terms of whether the respondents have previously been found by the Court to have engaged in the same or similar conduct, the respondents have not been found by the Court to have engaged in the same or similar conduct.

78. In terms of the degree of the respondents' cooperation with the Commissioner, the Commissioner conducted a review of the 2007 scheme between 21 August 2007 and 5 February 2009, and in May 2009 commenced an extensive investigation into whether the respondents had contravened s 290-50(2). During the review, the investigation, and in sworn material filed in this proceeding, the respondents actively concealed from the Commissioner the failure to plant the Both block. The respondents' assistance with the Commissioner's investigation was limited. A considerable amount of critical evidence gathered by the Commissioner was obtained from third parties. The respondents attended interviews voluntarily and provided information, initially voluntarily, but subsequently pursuant to statutory notice. Their responses to statutory notices did not always fully comply with the request. An access visit involving nine officers of the ATO was conducted at the office premises of Barossa Vines on 20 April 2011 and at premises in the Barossa Valley occupied by Agribusiness on 21 April 2011. The respondents' cooperation during the Commissioner's investigation is not of a degree that can properly be relied upon in mitigation of penalty. However, the respondents have cooperated with the Commissioner to resolve this matter by agreeing facts and, by doing so, have acknowledged their wrongdoing and saved the public and witnesses the cost of a trial. The parties submit that that cooperation is a matter for which a discount reflected in the agreed penalty should be allowed.

79. In terms of other matters, Barossa Vines is not trading, has no assets and has no creditors. There is the very real prospect that the Commonwealth will not recovery any civil penalty which this Court orders Barossa Vines to pay. The parties submit that it is nevertheless appropriate that the Court order Barossa Vines to pay a penalty. I accept that submission.

80. The parties propose a pecuniary penalty of $125,000 for each of the individual respondents. That is a substantial sum for an individual. The parties submit that it is appropriate to fix a penalty for Barossa Vines that is proportionate to the penalty to be imposed on the individual respondents. The proposed penalty for the individual respondents is $125,000 each. The ratio between the penalty proposed for each individual respondent and the penalty proposed for Barossa Vines is 1:5. That is the ratio of the penalty units maxima for individuals and bodies corporate in s 290-50(4)(a).

81. Each of the director respondents was also a director of Agribusiness and, in that capacity, bore responsibility for implementing

ATC 15830

the 2007 and 2008 Projects in a manner which conformed with the 2007 and 2008 Product Rulings. Frank Signore was not a director of Barossa Vines but he was a director of Agribusiness. He received less consideration than the other individual respondents. However, in addition to being a director of Agribusiness, he was the general manager and, therefore, the respondent with the most direct responsibility for the material differences in the implementation of the 2007 and 2008 Projects. In those circumstances, it is appropriate that the penalty imposed on him be the same as it is in the case of the other individual respondents.

CONCLUSION

82. In summary, these are significant contraventions, but at the same time they fall well short of the worst case. At one level, the causes of the contraventions may be characterised as incompetent management and staffing difficulties. However, that is not the full story. The failure to heed the warnings of the viticultural experts and others and to check on the progress on the rootlings mean, to my mind, that the respondents were prepared to put their own commercial interests ahead of their important obligations to investors. The element of concealment and maintenance of a false position impacts heavily on any suggestion of cooperation or immediate contrition. On the other hand, the appointment of a competent manager in March 2009 is a factor in the respondents' favour, as is the fact that the loss to investors, although no doubt important to them, is not, relatively speaking, a very substantial sum.

83. I am satisfied that the penalties proposed by the parties are appropriate and should be imposed. Barossa Vines is to pay to the Commonwealth a civil penalty of $625,000 and the four individual respondents are each to pay a civil penalty to the Commonwealth of $125,000. There is to be no order as to costs.


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.