The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Bogiatto (NSD 1839 of 2018).

FC of T v Bogiatto & Ors

Judges:
Thawley J

Court:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2020] FCA 1139

Judgment date: 7 August 2020

Thawley J

A OVERVIEW

1. The Commissioner of Taxation alleges that Mr Paul Enzo Bogiatto, Ryusei Pty Ltd, Lambdachase Advisors Pty Ltd and Lambdachase Services Pty Ltd contravened s 290-50(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) ( TAA 1953 ) by engaging in conduct that resulted in them or another entity being a promoter of tax exploitation schemes.

2. The alleged tax exploitation schemes each involved claims under Div 355 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) in respect of purported research and development ( R&D ) activities ( R&D claims ). The Commissioner alleges that it was not reasonably arguable that the scheme benefits resulting from the R&D claims were available at law. The allegations relate to over twenty schemes involving fourteen taxpayers in the 2012, 2013 and 2014 financial years.

3. On 8 November 2018, orders were made under rr 10.43 and 10.44 of the Federal Court Rules 2011 (Cth) granting the applicant leave to serve various documents, including the originating application and statement of claim in proceeding numbered NSD 1839 of 2018 (then relating only to Mediaconnect Australia Pty Ltd) on Mr Bogiatto in a foreign country. The Court was satisfied it had jurisdiction in the proceeding, including under s 290-50(3) of Sch 1 to the TAA 1953 and s 39B(1A)(c) of the Judiciary Act 1903 (Cth). The proceeding was of a kind mentioned in Item 12 of the Table in r 10.42 of the Rules and the Commissioner had established a sufficient prima facie case of contravention of s 290-50(1) of Sch 1 to satisfy the requirement of r 10.43(4)(c):
Australian Competition and Consumer Commission v Yellow Page Marketing BV [2010] FCA 1218 at [25] (Gordon J);
Australian Securities and Investment Commission v Axis International Management Pty Ltd [2008] FCA 1605 at [14] (Gilmour J).

4. Orders were also made on 8 November 2018 for substituted service and under r 1.34 of the Rules dispensing with certain requirements, including the implicit requirement under r 10.49 that an attempt first be made for service on Mr Bogiatto in a foreign country. The reason for dispensing with these requirements was that the evidence established that Mr Bogiatto was outside of Australia but that he had travelled to and could have been in any one of a number of countries. No sensible attempt at service could have been made and it would have bordered on the absurd in the circumstances to require an attempt first to be made.

5. Substantively identical orders were made on the same date in proceeding NSD 1959 of 2018, relating to Harris Movement Engineering ( HME ) Pty Ltd.

6. After that time, further proceedings were commenced by the applicant against the respondents: NSD 2153 of 2018 (relating to Moorilla Estate Pty Ltd); NSD 2258 of 2018 (relating to BBS Flooring Products Pty Ltd); and NSD 129 of 2019 (relating to Derisole Pty Limited, Indux Air Systems Pty Ltd, Light This Light That Pty Ltd ( LTLT ), Tempcon Pty Ltd, Woods Furniture Pty Ltd, Australian Steel Pty Ltd, Cargroomers Queensland Pty Ltd, Design Landscapes Pty Ltd, Sky High Hoists Rigging and Electrical Pty Ltd and Visionpak Pty Ltd).

7. On 27 September 2019, orders were made which included granting leave to amend the originating application and statement of claim in proceeding numbered NSD 1839 of 2018. As a matter of substance, these orders effected a consolidation of all of the proceedings into one. Although arguably unnecessary, orders were also made on 27 September 2019 for substituted service of the amended pleadings on Mr Bogiatto. The evidence at the time revealed that Mr Bogiatto had returned to Australia on 2 September 2019, using a New Zealand passport

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in another person's name. He attempted to leave Australia on 20 September 2019 but was prevented from doing so upon activation of a departure prohibition order. His whereabouts in Australia were unknown, but the evidence revealed a number of methods of service likely to bring the amended pleadings to Mr Bogiatto's attention.

8. None of the respondents appeared in the proceedings.

9. For the reasons set out below, the Court is satisfied that the Commissioner has established various contraventions on the part of Mr Bogiatto, Ryusei, Lambdachase Advisors and Lambdachase Services with respect to tax exploitation schemes concerning thirteen of the fourteen taxpayers. Applications concerning some of the contraventions are statute barred.

B FACTUAL BACKGROUND

10. Mr Bogiatto was a director and shareholder of Ryusei and Lambdachase Advisors. Ryusei was incorporated in New South Wales on 19 October 2004. Lambdachase Advisors was incorporated in New South Wales on 17 January 2014. Ryusei traded as Lambda Chase Chartered Accountants and, on occasion, as "Hill & Bogiatto" or "Hill + Bogiatto". Lambdachase Advisors also used the name "Lambda Chase Chartered Accountants" in some of its communications.

11. Mr Bogiatto was also the sole director, secretary and shareholder of Lambdachase Services which was incorporated in New South Wales on 18 April 2013.

12. Mr Bogiatto was the officer or employee with final responsibility for, and control over the work undertaken by, Ryusei, Lambdachase Advisors and Lambdachase Services.

13. The conduct in relation to each of the alleged tax exploitation schemes is addressed in detail in Section F below. However, it is convenient to summarise now that it generally involved Mr Bogiatto or entities he controlled engaging in the following conduct:

(1) The taxpayer would be contacted by telephone, either by Mr Bogiatto directly or by another person, for the purpose of arranging a meeting with Mr Bogiatto.
(2) Mr Bogiatto would attend the prospective client's premises, promoting himself as an R&D specialist, with considerable experience and expertise in assisting taxpayers with making R&D claims. Mr Bogiatto would discuss the possibility of the prospective client benefiting from R&D incentives, ask some questions about the operations of the business, advise that the taxpayer had a strong case for obtaining R&D incentives, and represent that he could assist.
(3) Mr Bogiatto would send a letter of engagement, headed "Terms of Engagement", to the prospective client. The "Terms of Engagement" provided for a fee calculated as a percentage of any R&D tax offset that the client might obtain, typically 30%.
(4) Mr Bogiatto would then ask the client to send information about the operations and finances of the business, which he would use to prepare an "R&D Tax Incentive Application" for submitting to AusIndustry for registration of the entity's R&D activities.
(5) Once registration with AusIndustry was confirmed, Mr Bogiatto would inform the client of this outcome, and prepare an "R&D Tax Incentive Schedule" containing figures that Mr Bogiatto instructed or advised the client to incorporate in its tax return or, if the client had already lodged a tax return for a given year, an amended tax return.
(6) By one of his companies, Mr Bogiatto would then send an invoice to the client, and pursue payment.

14. During this process, if a client questioned Mr Bogiatto's calculations or asked for an explanation as to how the figures produced by Mr Bogiatto were derived, Mr Bogiatto would typically respond by asserting that he would not disclose his methodology because it was his intellectual property, asserting that he was the expert, and stating that the client should not question him. On occasion, he would provide some reason to reassure the client that the figures had a sound basis.

15. The Commissioner has not established that the scheme relating to LTLT was a tax exploitation scheme. Where the tax exploitation schemes were implemented, the claims were

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grossly exaggerated or wholly unavailable. As explained in Section G below, each of the relevant implemented tax exploitation schemes involved tax evasion. The tax exploitation schemes with respect to two taxpayers (Cargroomers and Sky High) were not fully implemented and the relevant scheme benefits were not obtained because the R&D claims were not ultimately made. As explained at [81] and Section H below, these schemes did not involve "tax evasion" because no tax was evaded and no scheme benefit was obtained. Some of the contraventions relevant to these taxpayers are statute barred.

16. Before turning to the various tax exploitation schemes in more detail, it is necessary to understand the relevant statutory framework.

C STATUTORY FRAMEWORK - PROMOTER PENALTY PROVISIONS

C.1 The prohibition

17. Section 290-50 of Sch 1 to the TAA 1953 includes:

290-50 Civil penalties

Promoter of tax exploitation scheme

(1) An entity must not engage in conduct that results in that or another entity being a *promoter of a *tax exploitation scheme.
…

Civil penalty

(3) If the Federal Court of Australia is satisfied, on application by the Commissioner, that an entity has contravened subsection (1) or (2), the Court may order the entity to pay a civil penalty to the Commonwealth.

18. The meaning of "entity" is to be found in s 960-100 of the ITAA 1997 - see: s 3AA(2) of the TAA 1953. Each respondent is an entity.

19. Subsections 290-50(4) and (5) address the "amount of penalty" and the "principles relating to penalties". Penalties are to be the subject of a further hearing.

20. In order to determine whether the Commissioner has proved that an entity against whom the penalty is sought "engage[d] in conduct that results in that or another entity being a promoter of a tax exploitation scheme" in breach of s 290-50(1), it is necessary to direct attention to at least three critical matters.

21. First, there must be an entity which satisfies the definition of "promoter" in s 290-60(1). This in turn requires three matters to be satisfied.

(1) the entity must have:
- (a) marketed the scheme; or
- (b) encouraged the growth of the scheme; or
- (c) encouraged interest in the scheme: s 290-60(1)(a).
(2) consideration must be received (directly or indirectly) by the entity referred to in s 290-60(1) or an associate of that entity: s 290-60(1)(b). The consideration must be "in respect of [the] marketing or encouragement": s 290-60(1)(b).
(3) it must be reasonable to conclude that the entity referred to in s 290-60(1) has had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c).

22. Secondly, there must be a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

23. The meaning of "tax exploitation scheme" varies depending on whether or not the scheme has been implemented. In each case, there are two conditions which must be satisfied.

(1) The first condition is about the dominant purpose of an entity entering into the scheme:
- (a) if the scheme has been implemented: it must be reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme did so with the sole or dominant purpose of that entity or another entity getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i);
- (b) if the scheme has not been implemented: it must be reasonable to conclude that, if an entity (alone or with others) had entered into or carried out the scheme, it would have done so with the sole or dominant purpose of that entity or another entity getting a "scheme
  
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  benefit" from the scheme: s 290-65(1)(a)(ii).
(2) The second condition is that:
- (a) if the scheme has been implemented: it is not reasonably arguable that the "scheme benefit" is available at law: s 290-65(1)(b)(i);
- (b) if the scheme has not been implemented: it is not reasonably arguable that the "scheme benefit" would be available at law if the scheme were implemented: s 290-65(1)(b)(ii).

24. Thirdly, it is necessary to identify the "scheme benefit" which the taxpayer got if the scheme was implemented or, if the scheme was not implemented, which the taxpayer would have got. An entity gets a "scheme benefit" if:

(1) a tax-related liability of the entity is, or could reasonably be expected to be, less than it would be apart from the scheme or a part of it: s 284-150(1)(a); or
(2) an amount that the Commissioner must pay or credit to the entity under a taxation law is, or could be expected to be, greater than it would be apart from the scheme or a part of it: s 284-150(1)(b).

25. Each of these matters is examined in more detail below.

C.2 Promoter

26. The conduct proscribed by s 290-50(1) is conduct that results in that entity, or another entity, being a "promoter of a tax exploitation scheme". Section 290-60 must be read as a whole. It contains, in subs (1), three positive requirements which must be satisfied for an entity to be a "promoter". Subsection (2) contains a statutory qualification relevant to the three positive requirements in subs (1). Subsection (3) provides a statutory qualification to the third positive requirement in subs (1), namely the requirement in s 290-60(1)(c):

290-60 Meaning of promoter

(1) An entity is a promoter of a *tax exploitation scheme if:

(a) the entity markets the scheme or otherwise encourages the growth of the scheme or interest in it; and

(b) the entity or an *associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and

(c) having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement.

(2) However, an entity is not a promoter of a *tax exploitation scheme merely because the entity provides advice about the *scheme.

(3) An employee is not to be taken to have had a substantial role in respect of that marketing or encouragement merely because the employee distributes information or material prepared by another entity.

C.2.1 Section 290-60(1)(a)

27. The Full Court in
Commissioner of Taxation v Ludekens (2013) 214 FCR 149 at [248]-[258] considered the phrase "markets the scheme or otherwise encourages the growth of the scheme or interest in it", emphasising the width of the words at [250] and [257]. The Full Court recognised that the statutory language was directed to marketing and encouragement and that development of a scheme and its implementation are different. Nevertheless, after reviewing the legislative history, the Full Court noted at [256] to [257] that development and implementation might be sufficiently connected with other activity such that it answered the description of marketing or encouraging the growth in the scheme:

[256] … To a point, it can be accepted that activity or conduct that might be described as implementation of the scheme that was of a day-to-day administrative kind that may not have any element of, or connection with, communication with prospective entrants or with the publicising of the advantages of the scheme might have fallen into the wording of the 2005 Exposure Draft, but would not fall within the words of s 290-60(1). That is not to say, however, that activity or conduct that in one sense might be seen as implementation might not have a sufficiently close connection with other activity that clearly answers the description of marketing, and encouraging the growth of, or interest in, the scheme as to be part of that conduct.

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[257] Whilst care needs to be taken with the use of dictionaries (see
Sea Shepherd Australia Ltd v Federal Commissioner of Taxation (2013) 212 FCR 252 at [34]-[36]), "market" as a verb is not easily limited to making offers to participate. The Shorter Oxford English Dictionary (5th ed, Oxford University Press, 2002) includes in the definition of "market" (as a verb) the promotion or distributing for sale. The verb "to promote" is defined as including the furtherance of the growth, development, progress or establishment of (a thing); to encourage, help forward or support actively (a course or process); and to publicise (a product) or advertise so as to increase sales or public awareness. Once the potential width of such words is recognised, it is a mistake necessarily to exclude from them all conduct, which, looked at individually, answers the description of development or implementation. Such conduct may, in its proper context, form part of a body of conduct, which, examined as a whole, amounts to marketing, or encouraging the growth of or interest in, a scheme.

28. The statutory question is whether the entity "markets the scheme or otherwise encourages the growth of the scheme or interest in it". It does not matter that the activity relied upon as falling within the proscription, whether viewed in isolation or as part of a body of conduct, might also be described in some other way. The fact that conduct might be more precisely described as "development" or "implementation" does not immunise that conduct from falling within the statutory proscription.

29. The applicant provided the following examples of conduct that has been held to assist in supporting a conclusion that an entity has marketed or encouraged the growth of a scheme or interest in it:

(1) presenting seminars promoting the scheme:
Commissioner of Taxation v Arnold (No 2) (2015) 100 ATR 529 at [79(1)-(3)];
(2) distributing information or marketing brochures or lending one's name and logo to such brochures which promote or encourage interest in the scheme: Arnold at [79(5)], [81(1) and (2)], [83(3)];
(3) maintaining a website that includes statements marketing or encouraging interest in the scheme: Arnold at [81(3)], [83(4)];
(4) initiating contact with the participant, such as by telephone, to arrange a meeting: Ludekens at [86], [262];
(5) following up people to encourage them to participate in the scheme, such as by sending an email providing information about the scheme: Arnold at [79(4)]; Ludekens at [89], [262];
(6) meeting with the prospective participant, offering them to participate in the scheme, explaining to them how the scheme works, explaining the benefit of the scheme, providing them with information about the scheme, and providing assurances as to how the scheme works: Ludekens at [88], [91], [95]-[99], [262], [268], [269];
(7) preparing a "template" (such as an email) to be sent to participants or prospective participants explaining the scheme: Ludekens at [80], [262], [273];
(8) taking any steps (such as the preparation of documentation) that are necessary for the implementation of the scheme: Ludekens at [268], [269], [274]-[276];
(9) forwarding to the participant documentation regarding the scheme and asking the participant to sign and return documentation: Ludekens at [92], [93], [268];
(10) forwarding to the participant documentation regarding the scheme and asking the participant to forward it on to the participant's accountant to be used in the preparation of a tax return: Ludekens at [93], [101], [102], [177], [268], [269];
(11) encouraging and procuring participants to sign documents in order to increase the financial dimensions of the scheme: Ludekens at [284];
(12) explaining to the participant that even if they had already lodged their income tax return they are able to lodge an amendment in order to obtain the benefit of the scheme: Ludekens at [130], [145], [275], [276]; and
(13) supplying an element of the structure of the scheme: Arnold at [141].

30.

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The Commissioner pointed out that each of these examples concerned conduct that had occurred before the scheme benefit had been obtained. The Commissioner submitted that this does not necessarily mean that conduct which occurs after the scheme benefit has been obtained cannot constitute marketing or encouragement. In support of that submission, the Commissioner referred to Ludekens at [268].

31. In principle, steps taken after a scheme benefit has been obtained might fall within the statutory proscription. It all depends on the facts. For example, steps taken to assist taxpayers after a scheme benefit has been obtained from a mass marketed scheme, might encourage the growth of the scheme. That is because it might be shown, for example, that other taxpayers were encouraged to participate in the scheme, given - for example - the apparently successful outcome for those who had already participated and the later assistance provided by the promoters to those earlier participants.

32. The position is not so clear with respect to a one-off tax exploitation scheme directed to one taxpayer. In the case of one-off schemes, it might be more difficult to conclude that conduct after the tax benefit has been obtained "markets the scheme or otherwise encourages the growth of the scheme or interest in it".

C.2.2 Section 290-60(1)(b)

C.2.2.1 Consideration in respect of marketing or encouragement of growth

33. To be a "promoter" within the prohibition in s 290-50(1), the entity or an "associate" must receive (directly or indirectly) consideration in respect of the marketing or encouragement: s 290-60(1)(b). The Exposure Draft of the Tax Laws Amendment (2005 Measure No. 6) Bill 2005 (Cth) ( 2005 Exposure Draft ) used the phrase "consideration in respect of the scheme", but this was ultimately changed to "consideration in respect of that marketing or encouragement". After noting this change, the Full Court stated in Ludekens at [286]:

…That change, however, does not warrant the restriction of the necessary relationship between the consideration and the marketing or encouragement to be effectively "for" and not "in respect of". A narrowing of language did occur. The relationship was no longer between the scheme and the consideration, but the marketing or encouragement that did take place and the consideration. The latter had to be in respect of the former.

34. The Full Court concluded, contrary to the conclusion of the trial judge, that the receipt by the alleged promoter of commissions, referable to the number of woodlots purchased by the taxpayer who had been procured by the promoter to participate in the scheme, was consideration "in respect of" marketing and encouragement: Ludekens at [288].

35. The phrase "in respect of" is broad. How broad depends on the particular statutory context:
Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 per Hill J at [68]. Division 290 of Sch 1 of the TAA 1953 was enacted to deter the promotion of tax avoidance and evasion schemes: s 290-5. This context supports a broad understanding of the phrase.

C.2.2.2 The meaning of "associate"

36. Section 290-60(1)(b) provides that, for an entity to be a "promoter" of a tax exploitation scheme, the "entity or an associate" must receive consideration in respect of the marketing or encouragement.

37. The definition of "associate" is contained in s 318 of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ): s 995-1(1) of the ITAA 1997; s 3AA(2) of the TAA 1953. Subsection 318(1) defines who is an "associate" of a natural person. Subsection 318(2) defines who is an "associate" of a company.

38. The respondents were each "associates" of the other within the meaning of s 318(1) and (2) of the ITAA 1936.

C.2.2.3 Consideration

39. As noted in further detail below, there were instances where one or other of the respondents received a promise to pay through acceptance by a taxpayer of "Terms of Engagement" put forward by one of the respondents and instances where one or other of the respondents also received a payment pursuant to the "Terms of Engagement".

40.

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The receipt of a payment is clearly the receipt of consideration within the meaning of s 290-60(1)(b):
Commissioner of Taxation v Ludekens (2013) 92 ATR 301 ( Ludekens No 1 ). In Ludekens No 1 at [221], Middleton J concluded that a promise to pay is also capable of constituting consideration within the meaning of s 290-60(1)(b) depending on the particular circumstances. His Honour stated:

… it should be recalled that I have already accepted that "consideration" in this sense is not confined merely to monetary benefits. Accordingly, I am prepared to accept that a promise to pay may, in the right circumstances, constitute "consideration" for the purpose of s 290-60.

41. This conclusion was obiter dictum because the point had first been raised by the Commissioner in closing submissions and his Honour did not grant the Commissioner leave to rely on it. His Honour's reasoning for concluding that a promise to pay might constitute consideration for the purpose of s 290-60 was set out at [39]-[46]:

[39] In his final submissions, the Commissioner alleged that 3 types of consideration have been received by the respondents that satisfy s 290-60(1)(b). These are:

(a) the payment of commission by Gunns Ltd (the parent company of the Gunns group of companies, hereafter referred to as "Gunns" unless the context otherwise requires);

(b) the GST refunds received; and

(c) the promises by investors to pay their tax refunds to the respondents.

[40] In respect of this third category, the Commissioner submitted that "consideration" as it appears in s 290-60(1)(b) may encompass the receipt of non-monetary benefits (such as a promise to perform acts or pay an amount).

[41] The principal point advanced by counsel for Dr Ludekens in response was that, in this case, the Commissioner has not demonstrated the appropriate connection between the consideration allegedly received by the respondents on the one hand, and the marketing or encouragement "in respect of" which that consideration must have been received, on the other. The ability of the Commissioner to rely upon the third category of consideration was also challenged, on the basis of the Commissioner's failure to raise this category of consideration prior to including it in his final submissions at the conclusion of the hearing. That issue is determined later in these reasons for judgment. At this point, it is appropriate to make some general comments about the proper interpretation of the term "consideration" as it is used in s 290-60.

[42] In
Brooks v FCT (2000) 100 FCR 117; 44 ATR 352; 2000 ATC 4362; 173 ALR 235, the full court of the Federal Court of Australia noted - in the context of considering s 160ZZC(12) of the ITAA 1936 - that (at FCR 128-129 [36]; ATR 362 [36]; ATC 4371 [36]; ALR 246 [36]):

The word "consideration" is a technical term in the law of contract. However, like many technical words in a statute, it may be used in either a technical or non-technical sense. The meaning will depend upon the context: compare
FCT v Scully (2000) 201 CLR 148 at 164-165 [22]; 43 ATR 718 at 725 [22]; 74 ALJR 504 at 509-510 [22];
2000 ATC 4111 at 4118 [22]; 169 ALR 459 at 466-467 [22]. In Scully it was held that the expression "consideration … for or in respect of" indicated that the use of the word "consideration" was not used in a technical sense. Rather than the technical meaning of a promise given or an act done in exchange for an act or promise by another party, it had, in the context there under consideration (the context was the taxation of eligible termination payments), the meaning of "recompense." In the context of stamp duty the word has been held to mean that which moves the conveyance which is liable to duty:
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 152 per Dixon CJ.

[43] For the purpose of Div 290 of the TAA, it is clear that profits received in respect of the marketing or encouragement of a scheme

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carried out by an alleged promoter constitute "consideration" for the purpose of s 290-60(1)(b). Relevantly, the explanatory memorandum states (at paras 3.44-3.45):

Scheme promoters generally undertake promotional activities to earn higher financial rewards than would be available for providing independent and objective tax advice. Those scheme profits constitute consideration received from the marketing or encouragement of a tax exploitation scheme and help to establish that an entity is a promoter.

Salary, wages and other professional fees that reflect the time and expertise spent advising clients about a scheme are unlikely to constitute consideration in the context of the promoter definition because the consideration must be linked to the promotional activity. However, to avoid creating an incentive for promoters to attempt to characterise scheme profits as something else (such as professional fees for advice), no specific types of remuneration are excluded. (Emphasis added.)

[44] The explanatory memorandum states at paras 3.27-3.28 that the concept of "consideration" as it is used in s 290-60(1)(b) is "narrower" than when used in s 290-50(4) and (5) (which relate to the penalties to be imposed on entities found guilty of contravening s 290-50(1) or s 290-50(2)). The explanatory memorandum states:

Consideration in this context [subss 290-50(4) and (5)] refers to the total payment or financial reward derived from a scheme. Direct consideration encompasses, amongst other things, any fee, payment for services rendered, money, property, benefit, reward, compensation or recompense received or receivable that is directly related to the scheme. Indirect consideration includes in-kind payments, payments to third party associates and other payments that are indirectly related to the scheme promotion, even if they are described as something else.

It is important to note that the type of consideration to be taken into account for calculation of the maximum penalty is not constrained by the narrower consideration (related to marketing or encouragement) that is used to determine whether an entity is a promoter (see paragraph 290-60(1)(b) of this Bill). (Emphasis added.)

[45] However, I understand this commentary to relate to the difference between consideration that is received "in respect of" a scheme in general, and consideration that is specifically received in respect of marketing or encouragement of a scheme. I do not understand it to be suggesting that the essential nature of the consideration that is the subject of s 290-60 is in some way different to that invoked by s 290-50(4) and (5).

[46] Further, there is nothing in the context of s 290-60 or in its legislative history which suggests that "consideration" should be given an unduly strict interpretation, such that non-monetary benefits are automatically excluded. This is not a case like
FCT v Scully (2000) 201 CLR 148; 43 ATR 718; 74 ALJR 504; 2000 ATC 4111; 169 ALR 459, where the High Court held that there was no need for a particular reference to "consideration" in the ITAA 1936 to be read as capturing non-monetary benefits, as this was expressly provided for by neighbouring provisions of that Act (at CLR 166; ATR 726; ALJR 510-511; ATC 4118; ALR 243-244). I accept the submissions of the Commissioner that had the legislature intended to strictly confine the application of s 290-60 to monetary benefits, it could have employed a more definite term to achieve such an end (such as "payment" or "amount"). To this end, it is relevant (although by no means conclusive) that other sections of the TAA feature specific language designed to refer specifically to pecuniary amounts (see, for example, the definition of "tax-related liability" in s 255-1 as "a pecuniary liability to the Commonwealth"; and the reference in s 260-5 to a third party owing "money"). Finally, I consider that a broad reading of

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"consideration" in this context best achieves the object of the Division, namely, to deter the promotion of tax exploitation schemes.

42. On appeal, the Full Court did not consider the issue of whether a promise to pay would constitute consideration within the meaning of s 290-60(1)(b), concluding that Middleton J had not been shown to have erred in refusing to permit the Commissioner to rely upon the argument: Ludekens at [291].

43. In the present proceedings, the Commissioner submitted that two matters additional to those referred to by Middleton J in Ludekens No 1 at [46] supported a broad construction of "consideration" when used in s 290-60(1)(b):

(1) First, it was submitted that the proscription against the promotion of tax exploitation schemes extended to schemes which have not been, and may never be, implemented. If consideration were narrowly construed as requiring receipt of a monetary benefit, unimplemented schemes where no payments had been made to those marketing or encouraging growth or interest in the scheme would be excluded from the reach of the provisions.
(2) Secondly, it was submitted that, if consideration were narrowly construed as requiring the receipt of a monetary benefit, it would be open for the promoter of a scheme to structure the arrangements with the participants so as to frustrate the operation of the provisions, for example, by procuring a promise for payment, with such payment only to occur after the expiry of the four year limitation period.

44. I accept the first submission as a reason, additional to those given by Middleton J in Ludekens No 1, why "consideration" should be broadly understood.

45. I do not accept the second submission, at least as it relates to consideration shown to be "in respect of [the relevant] marketing or encouragement". Assuming the receipt of payment over four years after marketing conduct had last occurred was "in respect of [the relevant] marketing or encouragement", the receipt of payment can be conduct that results in the entity or another entity being a promoter such that the limitation period would not have expired. The reasons for this are explained in Section C.4 and Section C.5.1 below.

46. The word "consideration" in s 290-60(1)(b) is not to be understood in the technical sense as meaning consideration for the purposes of the law of contract - see: Ludekens No 1 at [42]. However, that which would constitute consideration for the purposes of the law of contract would generally, if not always, constitute "consideration" within the meaning of s 290-60(1)(b). Some of the Commissioner's submissions in these proceedings involved an implicit assumption that a promise to pay is not contractual consideration. But a promise to pay often is consideration under the law of contract. If A promises to pay B an amount of money on delivery of goods in 30 days time, the promise to pay is the consideration which gives rise to a binding contract. The later payment, upon delivery, is the purchaser's performance of the contractually binding promise to pay. If, after the contract has been performed, one was asked what the consideration was, the amount paid might commonly be stated to have been the consideration. But that statement should not mask the reality that the consideration received, which gave rise to a binding contract, was the promise to pay.

47. The present statutory context is such that the word "consideration" in s 290-60(1)(b) is apt to cover a contractually binding promise to pay fees in relation to services to be provided and a later payment of those fees. The relevant entities in the present proceedings which received a promise to pay fees "receive[d] (directly or indirectly) consideration" within the meaning of s 290-60(1)(b) as did the entities which received payments.

48. Non-monetary benefits which are not consideration for the purposes of the law of contract might also fall within the meaning of "consideration" in s 290-60(1)(b) and the receipt of such non-monetary benefits might be the direct or indirect receipt of consideration, depending on the precise facts. That is not an issue which arises in this case.

C.2.3 Section 290-60(1)(c)

49. Section 290-60(1)(c) requires that, for an entity to be a promoter, it must be "reasonable

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to conclude that the entity has had a substantial role in respect of" the relevant marketing or encouragement; it is not sufficient to demonstrate that an entity had a substantial role in respect of the scheme in general.

50. The explanatory memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) stated at [3.46] to [3.48] (emphasis in original):

What is a substantial role?

3.46 Numerous entities may participate in the promotion of a tax exploitation scheme. However, not all of these will be liable to a penalty, because only promoters who receive financial rewards from promotional activity and who also have a substantial role will satisfy the criteria for being a promoter under the civil penalty provisions.

3.47 Whether a particular promoter has a substantial (considerable or large) role will turn on the facts of the case, having regard to all matters the Federal Court thinks relevant. [Schedule 3, item 1, paragraph 290-60(1)(c)]

3.48 The matters that are relevant in this context are determined by the subject matter, scope and purpose of the provisions. They would include, for example, the degree of involvement of the relevant entity in the activities whereby the scheme was marketed or encouraged, the significance of that entity's role compared to the role played by others in those activities (ie, someone who plays a key role in devising the scheme and giving instructions to others in the course of its establishment and implementation will have a more significant role than someone who merely acts in accordance with those instructions), the nature and level of the consideration received by the entity in respect of the scheme, and the degree of the entity's participation in the management of the marketing or encouraging of the scheme.

51. This may be compared to the explanatory material which accompanied the earlier 2005 Exposure Draft of Div 290 which stated at [23] and [24]:

23. For any tax exploitation scheme there may be numerous individuals who market the scheme, however, there would only be one or a few individuals who would be considered promoters for the purposes of the civil penalty provisions. The promoters who are at risk under the civil penalty regime are those who undertake, for consideration, a substantial promotional role in the overall marketing and advancement of a tax exploitation scheme. This would be a question of fact and would be determined having regard to all relevant facts including (but not limited to) the:

• degree of the promoter's involvement in implementing, advancing, actively marketing or encouraging the growth of or interest in the scheme

• level of consideration received by the individual, directly or indirectly, from the scheme and

• individual's participation in the scheme management (including factors such as identification of the individual in the scheme's marketing material).

24. A promoter must have a substantial role in promoting the scheme to be at risk of civil penalty. That is, the promoter's role would need to be integral to the operation and growth of the scheme, such that without them, the scheme would not have been established and widely promoted. [schedule #, item #, paragraph 290-60(1)(c)]

52. It is the words of the section to which attention must be directed, not the terms of the explanatory memorandum, less still the explanatory material accompanying an earlier exposure draft:
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at [39]. To return to the terms of s 290-60(1)(c), it must be reasonable to conclude that the entity had a substantial role in respect of the marketing or encouragement relied upon in respect of the contended breach of s 290-50(1). A role can be substantial even if the entity's role was not "integral to the operation and growth of the scheme, such that without them, the scheme would not have been established and widely promoted" - cf: [24] of the quote set out immediately above. On

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the other hand, a conclusion that the entity's role was integral in the manner just described would necessarily establish that the role was substantial.

C.3 Tax exploitation scheme

53. As mentioned at [23] above, there are two conditions which must be satisfied for a scheme to be a "tax exploitation scheme". The first is para (a) of s 290-65(1) and the second is in para (b):

290-65 Meaning of tax exploitation scheme

(1) A *scheme is a tax exploitation scheme if, at the time of the conduct mentioned in subsection 290-50(1):

(a) one of these conditions is satisfied:

(i) if the scheme has been implemented-it is reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme did so with the sole or dominant purpose of that entity or another entity getting a *scheme benefit from the scheme;

(ii) if the scheme has not been implemented-it is reasonable to conclude that, if an entity (alone or with others) had entered into or carried out the scheme, it would have done so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; and

(b) one of these conditions is satisfied:

(i) if the scheme has been implemented-it is not *reasonably arguable that the scheme benefit is available at law;

(ii) if the scheme has not been implemented-it is not reasonably arguable that the scheme benefit would be available at law if the scheme were implemented.

Note: The condition in paragraph (b) would not be satisfied if the implementation of the scheme for all participants were in accordance with binding advice given by or on behalf of the Commissioner of Taxation (for example, if that implementation were in accordance with a public ruling under this Act, or all participants had private rulings under this Act and that implementation were in accordance with those rulings).

54. "Scheme" is defined in s 995(1) of the ITAA 1997 to mean:

(a) any *arrangement; or

(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

55. There is no requirement under s 290-50(1) that the applicant prove that the entity knew that the scheme, the promotion of which resulted from the respondent's conduct, had the characteristics of a tax exploitation scheme: Arnold at [23].

C.3.1 First condition: dominant purpose

56. The Full Court in Ludekens at [227]-[228] held that the "correct framework of analysis" is to ask, with reference to the time of the conduct said to contravene s 290-50(1), being any time at which there was marketing or encouragement (emphasis in original):

…whether it is reasonable to conclude that the entity entered into or carried out the scheme (or would have) with the sole or dominant purpose of it, or another entity:

(a) getting a lesser tax-related liability or a tax-related liability that could reasonably be expected to be less; or

(b) getting a greater amount than the Commissioner must pay or credit to the entity under a taxation law, or an amount that the Commissioner must pay or credit to the entity under a taxation law that could be reasonably expected to be more, than would be apart from the scheme or a part of the scheme.

57. The focus is upon what the entity was proposing to do and why, not upon any hypothesised events, circumstances or decision. Section 284-150(1) of Sch 1 does not require the Commissioner to plead or prove any alternative postulate: Ludekens at [229].

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C.3.2 Second condition: whether scheme benefit is reasonably arguable

58. The term "reasonably arguable", which appears in s 290-65(1)(b) and (2) of Sch 1, is defined in s 284-15 of Sch 1 (see s 995-1 of the ITAA 1997) as follows:

(1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.
Note: For the effect of transfer pricing documentation on when a matter is reasonably arguable, see Subdivision 284-E.

(2) To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with law.

59. It is necessary also to apply s 290-65(2) which provides:

(2) In deciding whether it is *reasonably arguable that a *scheme benefit would be available at law, take into account any thing that the Commissioner can do under a *taxation law.

Example: The Commissioner may cancel a tax benefit obtained by a taxpayer in connection with a scheme under section 177F of the Income Tax Assessment Act 1936.

60. "Scheme benefit" is defined in s 995-1(1) of the ITAA 1997 by reference to s 284-150(1) of Sch 1 to the TAA 1953 which provides:

(1) An entity gets a scheme benefit from a *scheme if:

(a) a *tax-related liability of the entity for an accounting period is, or could reasonably be expected to be, less than it would be apart from the scheme or a part of the scheme; or

(b) an amount that the Commissioner must pay or credit to the entity under a *taxation law for an accounting period is, or could reasonably be expected to be, more than it would be apart from the scheme or a part of the scheme.

61. "Tax-related liability" is defined in s 255-1 in Sch 1 of the TAA 1953 to mean:

255-1 Meaning of tax-related liability

(1) A tax-related liability is a pecuniary liability to the Commonwealth arising directly under a *taxation law (including a liability the amount of which is not yet due and payable).
Note 1: See section 250-10 for an index of tax-related liabilities.

Note 2: A taxation law, or a provision of it, may be excluded from being applied to this Part. See section 265-65.

(2) A civil penalty under Division 290 of this Schedule or Part 5 of the Tax Agent Services Act 2009 is not a tax-related liability.

62. Whether it is reasonably arguable that a scheme benefit was available at law is to be determined at the time of the relevant conduct: s 290-65(1).

63. It is perhaps unnecessary to go beyond the words of the definition of "reasonably arguable" to understand what the concept means. Nevertheless, two observations may be useful.

64. First, the word "about" was inserted in s 284-15(1) and 284-15(2) by Act No 75 of 2005, the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 1) 2005 (Cth), effective 29 June 2005. Accordingly, the matter must be "about as likely" to be correct as incorrect, not "as likely" to be correct as incorrect. The reasons for this change are explained in the Explanatory Memorandum, Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005 (Cth) at paras 3.12 and 3.13.

65. Secondly, in
Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468 at [70], Stone and Allsop JJ concluded that a payment was clearly of a capital nature but that the "question [was] open to debate in the sense of being arguable". The definition of the term "reasonably arguable" applicable in Cameron Brae was s 222C of the ITAA 1936. Section 222C turned on whether "it would be concluded that what is argued for is about as likely as not correct".

66.

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In
Allen v Federal Commissioner of Taxation (2011) 195 FCR 416, the Full Court of this Court said at [75]:

… The approach taken by Stone and [Allsop] JJ in Cameron Brae, with which we respectfully agree, is somewhat less strict than that suggested by Hill J in Walstern. On the approach in Cameron Brae, while a Court may come to a clear view on a question of statutory construction adverse to a taxpayer, that view is not decisive against the conclusion that the taxpayer's position was reasonably arguable.

67. The definition of the term "reasonably arguable" applicable in Allen was s 284-15(1) of Sch 1 to the TAA 1953. The terms of the section at the time relevant to those proceedings included whether "what is argued for is as likely to be correct as incorrect, or is more likely to be correct as incorrect", not "about as likely".

68. The reference to Walstern (said in Allen to be more strict than the test in Cameron Brae) is a reference to what Hill J had said in
Walstern Pty Ltd v Commissioner of Taxation (2003) 138 FCR 1 at [108] in relation to former s 226K of the ITAA 1936:

1. The test to be applied is objective, not subjective. This is clear from the use of the words "it would be concluded" in para (1)(b) of the section;

2. The decision-maker considering the penalty must first determine what the argument is which supports the taxpayer's claim;

3. That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision-maker at this point will need to compare the taxpayer's argument with the argument which is considered to be the correct argument;

4. The decision maker must then determine whether the taxpayer's argument, although considered wrong, is about as likely as not correct, when regard is had to "the authorities";

5. It is not necessary that the decision-maker form the view that the taxpayer's argument in an objective sense is more likely to be right than wrong. That this is so follows from the fact that tax has already been short paid, that is to say the premise against which the question is raised for decision is that the taxpayer's argument has already been found to be wrong. Nor can it be necessary that the decision-maker form the view that it is just as likely that the taxpayer's argument is correct as the argument which the decision-maker considers to be the correct argument for the decision-maker has already formed the view that the taxpayer's argument is wrong. The standard is not as high as that. The word "about" indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer's argument can objectively be said to be one that while wrong could be argued on rational grounds to be right;

6. An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be "about as likely as not correct" when regard is to be had to the material constituting "the authorities"; and

7. Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of "authority" a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen

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to be wrong it is nevertheless "about" as likely to be correct as the correct view. A question of judgment is involved.

C.4 Can receipt of consideration be conduct within s 290-50(1)?

69. The prohibition in s 290-50(1) is that "[a]n entity must not engage in conduct that results in that or another entity being a promoter of a tax exploitation scheme". The better interpretation of s 290-50(1) is that the receipt of consideration within the meaning of s 290-60(1)(b), may be "conduct that results in that or another entity being a promoter of a tax exploitation scheme". That interpretation promotes the statutory objects and the contrary interpretation is antithetical to them. If the receipt of consideration is not within the meaning of engaging in conduct in s 290-50(1), a number of odd results would follow. It is sufficient to mention two:

(1) First, if entity A engaged in substantial marketing and encouragement up until 30 June 2000 and not thereafter, but did not receive any consideration until 29 June 2004 (assume it received no promise to pay), the Commissioner would (absent evasion) only have one day in which to commence proceedings. That is because entity A would not be a promoter within the meaning of s 290-60(1) until it received consideration on 29 June 2004, but it last engaged in conduct that resulted in it being a promoter on 30 June 2000 (unless receipt of consideration is engaging in conduct). If entity A received consideration more than four years after 30 June 2004, the Commissioner could not commence proceedings.
(2) Secondly, if entity A engaged in substantial marketing and encouragement but ensured that all consideration was received by its associate, entity B (which engaged in no marketing or encouragement), and the receipt of consideration by B was not engaging in "conduct that results in that or another entity being a promoter of a tax exploitation scheme", then the Commissioner would be confined to pursuing penalties from an entity which did not receive any consideration (and might be impecunious) and would not be able to recover under the promoter penalty regime from the associate which benefitted from the marketing or encouragement.

70. The second example is of practical significance in the present case. As discussed below, Lambdachase Services was not shown to have engaged in any marketing or encouragement, substantial or otherwise. Accordingly, s 290-60(1)(a) and (c) was not satisfied in relation to Lambdachase Services. However, in respect of some of the schemes, Lambdachase Services received payments in relation to the marketing and encouragement of the other respondents, each of which was an associate of Lambdachase Services. If the receipt of consideration by Lambdachase Services was not engaging in "conduct that results in that or another entity [the other respondents] being a promoter of a tax exploitation scheme", then Lambdachase Services would not have breached the prohibition in s 290-50(1).

71. The Commissioner submitted that Lambdachase Services' receipt of consideration constituted a substantial role in promoting the relevant schemes within the meaning of s 290-60(1)(a) and (c). It was on that basis that the Commissioner submitted Lambdachase Services contravened s 290-50(1). I reject that submission. The receipt of consideration was in no way marketing or encouragement. Nevertheless, I conclude that Lambdachase Services contravened s 290-50(1), notwithstanding it had no role in marketing or encouraging, because its receipt of consideration resulted in other entities being promoters of tax exploitation schemes.

72. The better interpretation of s 290-50(1) is that an associate, whose only involvement is to receive consideration, can be a "[a]n entity [which has engaged] in conduct that results in … another entity being a promoter of a tax exploitation scheme". The associate's receipt of consideration is necessary, in the second example in [69] above, for the marketing entity to be a promoter within the meaning of s 290-60.

C.5 Limitation period of 4 years

73. Section 290-55(4) of Sch 1 provides a time limit for bringing an application under s 290-50 in relation to an entity's

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involvement in a tax exploitation scheme. Section 290-55(4) and (6) provide:

290-55 Exceptions

…

Time limitation

(4) The Commissioner must not make an application under section 290-50 in relation to an entity's involvement in a *tax exploitation scheme more than 4 years after the entity last engaged in conduct that resulted in the entity or another entity being a *promoter of the tax exploitation scheme.

…

(6) However, the limitation in subsection (4) or (5) does not apply to a *scheme involving tax evasion.

74. There are two matters which it is relevant to address about this provision in relation to the present proceedings. First, the question arises whether the receipt of consideration can be engaging in conduct that resulted in the entity or another entity being a promoter under s 290-55(4). Secondly, it is necessary to make some observations about the meaning of "tax evasion".

C.5.1 Receipt of consideration

75. The time at which the four-year period commences is when the entity "last engaged in conduct that resulted in the entity or another entity being a promoter of the tax exploitation scheme": s 290-55(4).

76. The relevant conduct is that which is identified by s 290-60(1). There are two matters which s 290-60(1) requires, relevant for present purposes, in order for an entity to be a "promoter":

(1) First, s 290-60(1)(a), read with (1)(c), requires a substantial role in marketing or encouraging the tax exploitation scheme.
(2) Secondly, s 290-60(1)(b) requires consideration being received by the entity or an associate of the entity.
Absent both of these requirements being satisfied, an entity cannot be a promoter and the prohibition in s 290-50(1) cannot have been contravened.

77. As discussed in Section C.4 above, the receipt of consideration within the meaning of s 290-60(1)(b), may be "conduct that results in that or another entity being a promoter of a tax exploitation scheme". Section 290-55(4) adopts the same language as the prohibition in s 290-50(1) and must mean the same thing.

78. Accordingly, and recognising that the analysis depends on the application of the provisions to the precise factual circumstances of each case, the receipt of consideration can, if it is the last piece of conduct in point of time resulting in an entity being a promoter, signify the commencement of the limitation period for one or other of the relevant entity or the associate (and their respective positions with respect to the commencement of the limitation period might be different).

C.5.2 Meaning of tax evasion

79. The phrase "tax evasion", used in s 290-55(6), is not defined. The phrase has long been used in tax legislation and its meaning is clear enough. In
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 at 313, Dixon J stated:

I think it is unwise to attempt to define the word "evasion". The context of s 210(2) [now s 170(1) of the ITAA 1936] shows that it means more than avoid and also more than a mere withholding of information or the furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.

In the present case the Board concluded that the appellant intentionally omitted the income from the return and that there was no credible explanation before them why he did so. They thought that the conduct of the taxpayer answered the description of an avoidance of tax by evasion.

80. In
R v Meares (1997) 37 ATR 321 at 323, Gleeson CJ (with whom Sully and Bruce JJ agreed) stated:

Although on occasion, it suits people for argumentative purposes, to blur the

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difference, or pretend that there is no difference, between tax avoidance and tax evasion, the difference between the two is simple and clear. Tax avoidance involves using, or attempting to use, lawful means to reduce tax obligations. Tax evasion involves using unlawful means to escape payment of tax. Tax avoidance is lawful and tax evasion is unlawful. Although some people may feel entitled to disregard that difference, no lawyer can treat it as unimportant or irrelevant. It is sometimes said that the difference is difficult to recognise in practice. I would suggest that in most cases there is a simple test that can be applied. If the parties to a scheme believe that its possibility of success is entirely dependent upon the authorities never finding out the true facts, it is likely to be a scheme of tax evasion, not tax avoidance.

81. It is also necessary to observe, because of the present context, that "tax evasion" as used in the relevant tax legislation has been understood as involving some tax in fact having been evaded or at least some beneficial tax outcome being obtained. It has not been understood as referring to blameworthy acts or omissions which have not been pursued to the point of tax being avoided or a beneficial tax outcome being obtained. An entity can contravene the prohibition in s 290-50(1) even where the relevant tax exploitation scheme was not fully implemented such that no scheme benefit was obtained. In the present case, two tax exploitation schemes were not fully implemented, such that the relevant taxpayers did not obtain any tax offset. The relevant schemes concerning those two taxpayers are not schemes "involving tax evasion" because no tax was in fact evaded and no scheme benefit was ultimately sought or obtained. It is difficult to see any meaningful operation of s 290-55(6) in relation to schemes which are not implemented to a point that the scheme benefit is in fact obtained. If the legislature had intended "tax evasion" to mean something different to what it means elsewhere in the relevant tax legislation, it would have adopted different terminology. For example, the legislature could have switched off the time limitation in s 290-55(4) by stating in s 290-55(6) that s 290-55(4) did not apply to "schemes involving evasion" or to schemes involving certain specified conduct.

82. As mentioned earlier, s 290-5(a) states that one object of Div 290 is "to deter the promotion of tax avoidance schemes and tax evasion schemes". It is only with respect to those schemes which involve tax evasion that the limitation period does not apply.

C.6 Onus and standard of proof

83. Section 290-50(1) is a civil penalty provision. The Commissioner bears the onus of proof. In a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities: s 140(1) of the Evidence Act 1995 (Cth). Section 140(2) of the Evidence Act then provides:

Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account:

(a) the nature of the cause of action or defence; and

(b) the nature of the subject-matter of the proceeding; and

(c) the gravity of the matters alleged.

84. Section 140(2) applies according to its terms. Nevertheless, it is appropriate to observe that s 140(2)(c) reflects the common law position that the more serious the allegation, the less likely it might be expected, all other things being equal, that a respondent would have committed the relevant act:
Briginshaw v Briginshaw (1938) 60 CLR 336.

D STATUTORY FRAMEWORK - RESEARCH AND DEVELOPMENT

85. Division 355 of the ITAA 1997 entitles an eligible entity to a tax offset for eligible R&D expenditure. The object of Div 355 is set out in s 355-5:

355-5 Object

(1) The object of this Division is to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.

(2) This object is to be achieved by providing a tax incentive for industry to

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conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form (including new knowledge in the form of new or improved materials, products, devices, processes or services).

86. To be entitled to the tax offset, the entity needs to be eligible for one or more "notional" deductions identified in Div 355: s 355-100. The entity must be an R&D entity: s 355-100. Relevantly for present purposes, the definition of an R&D entity includes body corporates incorporated under an Australian law: s 355-35. The entity must be registered for R&D activities under Part III of the Industry Research and Development Act 1986 (Cth) ( IRD Act ). Only R&D entities can register for R&D activities and claim the R&D tax offset.

87. R&D activities include both "core R&D activities" and "supporting R&D activities". Section 355-25 of the ITAA 1997 defines "core R&D activities":

355-25 Core R&D activities

(1) Core R&D activities are experimental activities:

(a) whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:

(i) is based on principles of established science; and

(ii) proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

(b) that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

(2) However, none of the following activities are core R&D activities:

(a) market research, market testing or market development, or sales promotion (including consumer surveys);

(b) prospecting, exploring or drilling for minerals or *petroleum for the purposes of one or more of the following:

(i) discovering deposits;

(ii) determining more precisely the location of deposits;

(iii) determining the size or quality of deposits;

(c) management studies or efficiency surveys;

(d) research in social sciences, arts or humanities;

(e) commercial, legal and administrative aspects of patenting, licensing or other activities;

(f) activities associated with complying with statutory requirements or standards, including one or more of the following:

(i) maintaining national standards;

(ii) calibrating secondary standards;

(iii) routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things;

(g) any activity related to the reproduction of a commercial product or process:

(i) by a physical examination of an existing system; or

(ii) from plans, blueprints, detailed specifications or publically available information;

(h) developing, modifying or customising computer software for the dominant purpose of use by any of the following entities for their internal administration (including the internal administration of their business functions):

(i) the entity (the developer ) for which the software is developed, modified or customised;

(ii) an entity *connected with the developer;

(iii) an *affiliate of the developer, or an entity of which the developer is an affiliate.

88. In
Moreton Resources Ltd v Innovation and Science Australia (2019) 271 FCR 211 at [148], the Full Court (Davies, Moshinsky and Steward JJ) said:

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In our respectful opinion, the words "experimental activities" in the opening line of s 355-25(1) have very little, if any, work to do beyond reflecting the type of activities described in paras (a) and (b) of the subsection. Paragraphs (a) and (b) contain a detailed description of activities. Activities must meet the descriptions in both paragraphs to satisfy the defined expression "core R&D activities". The word "experiment" is used in para (a): this paragraph refers to an outcome that can only be determined by applying a systematic progression of work that, among other things, "proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions". Given the detail and content of the description in paras (a) and (b), it is difficult to envisage activities that would meet the description in paras (a) and (b) but would not be considered "experimental activities". This is not to say that the word "experimental" in the opening line of the subsection is wholly superfluous. It is, at least, descriptive of the types of activities that are described in paras (a) and (b).

89. Section 355-30 defines "supporting R&D activities":

355-30 Supporting R&D activities

(1) Supporting R&D activities are activities directly related to *core R&D activities.

(2) However, if an activity:

(a) is an activity referred to in subsection 355-25(2); or

(b) produces goods or services; or

(c) is directly related to producing goods or services;

the activity is a supporting R&D activity only if it is undertaken for the dominant purpose of supporting *core R&D activities.

90. The tax offset is a 43.5% refundable tax offset if the R&D entity's aggregated turnover is less than $20 million: s 355-100(1). A non-refundable 38.5% tax offset applies for all other R&D entities. Unused non-refundable offset amounts may be carried forward to future income years. Originally, the rates were 45% and 40% respectively, however this changed for income years starting on or after 1 July 2016.

91. There are two principal kinds of notional deductions. An R&D entity can notionally deduct:

(1) its expenditure on registered R&D activities where certain conditions are met: s 355-100(1)(a) and Subdiv 355-D; and
(2) the decline in value of a tangible depreciating asset used for R&D activities: s 355-100(1)(b) and Subdiv 355-E.

92. R&D entities claim the offset by a two-stage process that broadly involves:

(1) Registering - R&D entities register R&D activities with AusIndustry. An R&D entity is not eligible to claim the R&D offset unless its R&D activities are registered for the relevant income year. It must lodge its application for registration with AusIndustry within 10 months of the end of its income year: s 27D(c)(i) of the IRD Act; and
(2) Claiming - R&D entities claim the tax offset in their income tax returns. The tax return must be accompanied by the Australian Taxation Office's "R&D Tax Incentive Schedule" detailing the R&D expenditure incurred.

93. The R&D program is based on self-assessment. Registration of an entity's R&D activities does not, by itself, determine that the activities described in the registration are eligible "core R&D activities" or "supporting R&D activities". Rather, each entity is required to self-assess against the legislated eligibility requirements and is responsible for making sure it meets those requirements.

94. The Board may make "findings" when considering an entity's application for the purposes of s 27A(1): s 27B. The Board may also make findings about an entity's registration under s 27A: s 27J. Whether the findings are made when considering an entity's application or after registration, the findings can include "that all or part of a registered activity was a core R&D activity conducted during the registration year" and "that all or part of a registered activity was a supporting R&D activity conducted during the registration year": s 27J(1)(a) and (c).

95. A certificate given to the Commissioner under the IRD Act that sets out the Board's "findings" is binding on the

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Commissioner for the purposes of assessments of the R&D entity for the relevant income year: s 355-705(1) of the ITAA 1997. The present proceeding was conducted on the implicit basis that no relevant certificate existed in relation to any of the alleged tax exploitation schemes the subject of the proceedings.

96. The processing of tax returns, and of the claims for the tax offset incorporated within those returns, also occurs within a self-assessment system.

E THE OBLIGATION TO KEEP RECORDS

97. The Commissioner observed that a person making a claim for a tax offset is required to keep adequate records in accordance with s 262A(1) of the ITAA 1936. That section provides:

262A Keeping of records

(1) Subject to this section, a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of this Act.

98. The Commissioner then referred to
Re Ozone Manufacturing Pty Ltd and Federal Commissioner of Taxation (2013) 97 ATR 50 at [135], in which Dunne SM stated:

It is clear that eligible companies intending to claim the R&D tax offset must maintain adequate contemporaneous records which substantiate the carrying on of claimed R&D activities and the incurring of expenditure in relation to those activities. Moreover, as the R&D tax offset claim involves an election or choice, the records must include sufficient particulars which show the basis on which the election or choice has been made. As substantiation of expenditure is involved, the records should show what time has been spent on the R&D activities in respect of which the tax offset is claimed. It follows that the applicant's ordinary business records should be sufficient for a relevant independent third party (such as the tribunal) to be able to readily verify the amount of the expenditure on R&D activities and the relationship of the expenditure to those activities. The applicant should also maintain records or documentation to support the apportionment of expenditure between R&D activities and other business activities, such as time sheets or time cards, which are capable of reasonably straight-forward analysis.

99. The Commissioner submitted:

The records that must be kept to record and explain claims for R&D tax offsets should reflect the nature of R&D activities. As a generalisation, it is reasonable to expect that substantial records will be generated by any genuine experimental activity, whose outcome cannot be known or determined in advance on the basis of current knowledge, but can only be determined by applying a systematic progression of work that is (i) based on principles of established science; and (ii) proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and which is conducted for the purpose of generating new knowledge. If there are not records showing how the new knowledge was generated, it is unlikely that there was a systematic progression of work involving experiment, observation and evaluation.

100. It may be accepted that adequate records must be kept in accordance with s 262A of the ITAA 1936. It may also be accepted that a failure to have such records might be a matter from which inferences might be drawn including that certain activities did not take place or certain expenditure was not incurred. However, entitlement to the tax offset is not dependent on keeping records to "substantiate that the claimed R&D expenditure was incurred on R&D activities that have been registered with AusIndustry". Entitlement to the tax offset is dependent on whether the taxable facts are such that the R&D claims were available. Whether those taxable facts can be proved or established is a different issue. A taxpayer who kept inadequate records but who, nonetheless, was able to substantiate the various matters required by the statutory scheme, would still be entitled to the tax offset.

101. It is a misconception implicit in some of the Commissioner's submissions that documentary evidence is the only kind of evidence which can substantiate the relevant taxable facts. A taxpayer might have

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inadequate records yet establish to the satisfaction of the ATO or the Tribunal on review, or a Court for some other purpose, that R&D activities were carried out and that relevant expenditure was incurred. This might be done through witness statements, statutory declarations or the giving of oral testimony. Such material might or might not be supported by documentary evidence. It is not difficult to envisage a situation in which, for example, a taxpayer was able to prove through documentary evidence the total salary paid to particular employees and also establish, through oral testimony, that those employees were engaged in R&D activities and what proportion of the employees' time was devoted to those R&D activities. The existence of supporting documentary evidence as to what proportion of time was spent on R&D activities might make the testimony more persuasive and the absence of such documentary evidence might lead a tribunal of fact not to accept the testimony or to give it less weight. However, the absence of documentary evidence does not mean the testimony would have to be rejected or was incapable of proving or establishing the relevant asserted facts.

102. Against this background the Commissioner submitted, in relation to most of the schemes, that the R&D claims were not reasonably arguable at law because the "taxpayer did not have adequate or contemporaneous records to substantiate that the claimed R&D expenditure was incurred on R&D activities that had been registered with AusIndustry". I reject this submission. Even where the Commissioner does establish an absence of adequate or contemporaneous records to substantiate the claimed R&D expenditure, it does not follow that the R&D claims are, for that reason, not reasonably arguable at law. The onus on the Commissioner in the present case was, amongst other things, to establish that it was not reasonably arguable that the scheme benefits were available at law. Contrary to the Commissioner's submissions, this onus is not discharged simply by establishing that inadequate records were kept. It is discharged by establishing that the taxable facts were such that it was not reasonably arguable that the scheme benefits were available. This is explained further below when dealing with the schemes.

F THE SCHEMES

F.1 Mediaconnect Australia Pty Ltd

103. Mediaconnect provides a software platform to connect journalists with public relations professionals and organise events connecting journalists with technology companies. Mediaconnect was alleged to have been involved in a tax exploitation scheme in the 2013 financial year.

104. The findings set out below are based on the affidavit evidence of Mr Philip Sim, the Chief Executive Officer of Mediaconnect, and documentary evidence which was tendered.

F.1.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

105. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.

F.1.2 Promoter

F.1.2.1 Section 290-60(1)(a): marketing and encouragement

106. As discussed further below, Mediaconnect had received advice on R&D incentive claims from entities unrelated to the respondents before the Mediaconnect Scheme, but had never lodged an R&D incentive claim with the Australian Taxation Office ( ATO ).

107. Mr Sim received a call in March 2014 from a person who identified himself as Michael from "Lambda Chase Chartered Accountants". The call was made on behalf of Mr Bogiatto. Michael and Mr Sim arranged a meeting between Mr Sim and Mr Bogiatto for 19 March 2014.

108.

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The meeting for 19 March 2014 was confirmed by an email sent on 11 March 2014. That confirmation email included:

Dear Philip,

Thank you for speaking with my colleague Michael last week, regarding the Federal Government R&D tax concessions.

I would like to confirm that I will be coming to meet with you to discuss further - details as per above meeting invitation. The appointment time has been set for 2:00pm for half an hour or so.

The link to our website is www.lambdachase.com.au

Regards

Paul Bogiatto

Managing Partner

B.Bus.(Mkt), B.Bus.(Acc), Dip F S, C.A., J.P.

Registered Company Auditor, Tax Agent, Licenced Financial Planner

Ryusei Pty Ltd

ABN: 13 111 442 847

Trading as

Lambda Chase Chartered Accountants

www.lambdachase.com.au

…

109. At the 19 March 2014 meeting, Mr Bogiatto represented, among other things, that he had expertise and "a high success rate with R&D claims". Mr Sim said that he had the following conversation with Mr Bogiatto:

Mr Bogiatto: Companies of Mediaconnect's ilk are qualified for the R&D tax incentive. Are you doing work that would constitute research?

Me: Yes, we have shifted our business strategy to focus on creating a public and media relations system which operates in real time allowing us to put all of our development resources into a whole new area.

Mr Bogiatto: There are a number of requirements that need to be met to claim the R&D tax incentive but we can assist you to claim the R&D tax incentive as we are experts and have a high success rate with R&D claims.

Me: Ok.

110. Mr Sim decided to engage Mr Bogiatto's services after the 19 March 2014 meeting.

111. On 20 March 2014, Mr Bogiatto sent Mr Sim a letter of engagement and a flyer, outlining the R&D expertise of "Lambda Chase". The flyer included the following:

Lambda Chase specialises in assisting companies - small and large and across every industry, to access Government funding and tax concessions.

…

Our firm is highly experienced in the preparation and lodgement of EMDG's [Export Market Development Grants] and R&D grants.

…

Lambda Chase are the experts in Government grants. Let us help you maximise your claims with a minimum of fuss and drama.

112. The letter of engagement was headed "Terms of Engagement". It was printed on a letterhead with a composite comprised of a device (or logo) and stylised words "LambdaChase" underneath which appeared the words "chartered accountants":

113. The letterhead also included Ryusei's ABN underneath the composite. The name of Ryusei did not appear in the "Terms of Engagement". Underneath Ryusei's ABN was Mr Bogiatto's name together with various claimed qualifications: "Paul Bogiatto B Bus (Mkt), B Bus (Acc), DIP FS, CA, JP".

114. The parties to a contract are ascertained in accordance with the objective theory of contract:
Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at [262]-[266]. A reasonable observer of the contract, and the communications that led to the entering of the contract, together with the background facts known to the parties, would have concluded that the parties to the contract were

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Mediaconnect and the entity to which the ABN belonged, namely Ryusei - see:
Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 at [54]. If it is permissible to look at subsequent conduct to determine the parties to a contract (as to which see
El-Kazzi v Kassoum [2009] NSWSC 99 at [24] and [25]):

(1) The invoice ultimately issued was issued by Lambdachase Services on 27 June 2014. Objectively, this merely evidences that Ryusei required the payment under its contract with Mediaconnect to be made to Lambdachase Services (Ryusei's associate).
(2) The subsequent conduct otherwise confirms that the "Terms of Engagement" was a contract between Mediaconnect and Ryusei.

115. After the 20 March 2014 email, Lambda Chase sent emails on 7, 15 and 23 April 2014 requesting that Mr Sim send through Mediaconnect's financial information. Each of these emails included a signature block identifying the email as having been sent by or on behalf of Mr Bogiatto who was identified as the "Managing Partner" of Ryusei trading as Lambda Chase Chartered Accountants and providing Ryusei's ABN.

116. In the 7 April 2014 email, Mr Bogiatto indicated that the information was required urgently due to a "deadline" said to be fast approaching. Mr Bogiatto requested details of the R&D project. After the 23 April 2014 email, Mr Sim sent an email to Mr Bogiatto attaching financial material related to Mediaconnect prepared by Mr Kwok, Mediaconnect's accounts manager, and a document Mr Sim prepared describing the project for Mediaconnect's proposed real-time public and media relations system. Mr Sim was not able to locate the email attaching this information, but I accept that it was sent.

117. The financial information which had been gathered by Mr Kwok included details of wages which had been paid to various employees, a depreciation schedule and a "trial balance". It is clear that this was based on documentary material and electronically stored data.

118. The document which Mr Sim had prepared for Mr Bogiatto, describing the project for Mediaconnect's proposed real-time public and media relations system, indicated why the project was new, what had been achieved in relation to the project to date and what the company's objectives were concerning the project. The document stated:

MediaConnect Projects

Objective

The objective was to design a real-time public & media relations system.

New knowledge

The system interface needed to be created to engage users in order to be adopted accepted and used.

Ease of use of core functions resulted in end users interacting with the software.

Fuzzy logic helped the creation of numerous engines and functions which created database and engine.

Outcome

While the speed that media works has increased exponentially, public relations have not kept up with this velocity, nor has the communication systems used by journalists and public relations professionals to communicate. Therefore we have had to conduct our own experiments to develop the system.

Core Activity

The hypothesis of our R&D project has been to take our existing model, which has been to help these two communities to:

1) Work more effectively

2) Connect with each other

And transition our product and our users into today's "real-time" world. This required that the whole initial project be scrapped and we have to redesign in a whole different angle to engage in the new system.

This process has involved:

1. Identifying the areas where the real-time model provides business benefits for our users

2. Developing mechanisms to facilitate real-time working where those business benefits are identified

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3. Identifying ways to facilitate take-up of the mechanisms we develop or are developing

1. There is significant inertia in the public relations industry, in terms of legacy ways of working that are tied to desktop productivity tools like spreadsheets and desktop email. We have significant faced challenges in terms of getting users to change the software they have been using, even though it is largely inefficient. In many respects we found that we were working too far ahead of our client base and had to re-visit our more basic tools and services to increase engagement with our tool, before we could move the user into "real-time". This has required us to improve the usability with simpler, more intuitive basic functionality.

2. As well as the inertia of legacy processes and systems, our research has shown that our userbase is less technically adept than we have previously assumed. We have found experienced limited take-up of our early real-time services, which we have identified as being largely due to our users not having the technical prowess to make use of traditional enterprise software-style interfaces and as such we face the ongoing issue of trying to develop interfaces for very sophisticated computing but which are ridiculously simple and intuitive for non-technical users to discover, run and report on.

3. In particular, we require PR professionals to standardise their "list management" outside of their e-mail and spreadsheets. We discovered that current list management techniques used by ourselves and other were seldom used in practice because they either required the user to 1) totally manage a list or 2) accept a list that they had little control over refining. The recommendation engine that we discuss below to overcome this, has been limited by the reliability and accuracy of our manual categorisation techniques.

4. We have examined why real-time communications models have not been adopted between our communities - and discovered that media are reluctant to give up their instant messaging credentials to PR professionals for fear of being "nagged" and conversely when PR professionals had access to these credentials they tended not to use them for fear of being considered invasive. The lack of a standard mechanism also was a blocker. All journalists and PR professionals tended to use different messaging/conferencing systems and many of these hurdles to take-up including users needing to download applications to use them. We need to achieve a level a critical-mass that creates a network effect and propagates the use of the platform throughout the community.

5. Real-time methods require significant computing resources to process and we have struggled to update our server infrastructures and databases to transition into this real-time processing. This has resulted in us experiencing various outages and unreliable performance. This is an ongoing issue and we face the challenge of finding ways and methods to deliver a performance computing architecture within our limited budget constraints.

6. With experiments we have experienced far greater engagement of our product by improving core functions such as our list management and distribution tools, following our program to improve the ease-of-use, and simplification of our core features.

7. Experiments that have introduced real-time functionality, such as real-time reporting on distribution success it has proved popular and successful with the user-base. This has confirmed our presumption that in order for our program to be successful, it will require ongoing focus on the simplification and intuitive nature of the interface. We recognise that across our vertical sector of public relations software there are no clear examples of interfaces that are succeeding on this front and as such we are forced to engage in constant iterative development and user-testing.

8. Through experimentation we have developed a list management "recommendation engine" that gives our users the flexibility to both automate list

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management but retain the flexibility of deciding which media to include in their lists.
This involves developing algorithms of pattern matching of journalists based on their interests, social media signals, the titles they write for and previously published work, with list criteria and company topics. Recommendations that our system identifies for the user's lists are then presented to the user via a familiar "inbox" system.

9. We have experimented with improving our mechanisms for matching media profiles with client profiles. This resulted in the development through experimentation by continually refining a unique taxonomy that is suited to the our particular use-case, but also using automated categorisation techniques and artificial intelligence to extend this taxonomy and ensure that content is accurately categorised so that our recommendation engine offers accurate.

10. Our experiments indicated that media reluctance to share their instant-messaging credentials were the primary barrier to the take-up of instant communication between the media and PR communities. As such, we have been developed through experimentation a permissions system that aim to echo the real-world permissions, which operates on a trustbasis.

11. Using those permissions and the chat infrastructure, we've developed we've been experimenting with different ways to apply real-time communication to the media/PR engagement model. We have developed unique concepts like thins virtual chat-based media conferences, journalist sourcing, media enquiries systems and team collaboration.

12. Experimentation has resulted in developing viral mechanisms to help us achieve criticialmass without having to employ marketing and advertising, which is beyond the resources of our organisation. These have included the ability with the creation of our system for our users to create their own personal pages enabling real-time connections, which they can promote within their email signatures, social profiles and so on.

13. We have re-architected much of our technical infrastructure to cope with the real-time activities taking place. This has included a shift from a core SQL database, to a distributed MongoDB which allows more scalability and better performance of various databases. We have moved our infrastructure to a more flexible distributed, cloud model and segmented the various elements of our platform into distinct instances so as that each component of the platform does not impact the reliability of the greater system.

Supporting Activity

This activity comprised of literature and technology review searches over the internet and technical magazines worldwide. This included a search and review of existing products, journal literature which resulted in no solution that existed.

119. On 26 April 2014, Mr Bogiatto emailed to Mr Sim a draft AusIndustry R&D Tax Incentive Application which recorded that Mediaconnect's total R&D expenditure was $488,686 for the 2013 financial year. Mr Bogiatto used the information which had been provided by Mr Sim to prepare the application, including the financial information which had been gathered by Mr Kwok. Mr Bogiatto attached to the application the document set out immediately above, headed "MediaConnect Projects".

120. The R&D Tax Incentive Application identified Mr Bogiatto as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application stated that Mediaconnect had relied on advice from a tax agent or R&D consultant and identified the person from whom Mediaconnect had received such advice as Mr Bogiatto. He was said to be from "Lambdachase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

121. On 28 April 2014, Mr Sim received an email from Mr Bogiatto (with Ryusei signature block) in which it was noted that Mr Sim had been sent a draft R&D Tax Incentive

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Application and that he needed to provide his approval for its submission to AusIndustry, the due date being 30 April 2014.

122. In late April 2014, Mr Sim contacted Mr Bogiatto and expressed concern in regard to the claim for foreign labour costs in the application. Mr Sim gave evidence of the following conversation:

Me: Paul, you have included claims for the cost of the offshore labour in the supporting R&D activities?

Mr Bogiatto: Who is doing the brain power?

Me: It's my idea, I'm spec-ing it out and they're actually doing the work.

Mr Bogiatto: The source of the R&D is residing with you in Australia then, which is fine.

Me: Ok.

123. Mr Sim had raised this concern because he had previously been advised by Price Waterhouse Coopers ( PwC ) that Mediaconnect could not use offshore labour expenses in connection with an R&D tax incentive claim. Mediaconnect used a number of contract labour sources offshore for programming and research activities. Mr Sim gave evidence of the following conversation after 26 April 2014:

Me: I was informed by PwC that I could not claim for any development staff because they are offshore in Russia and the Philippines.

Mr Bogiatto: If the IP and the core activities are being conducted in Australia whether you were hiring in Australia or outside really doesn't matter. You could be spending money on whatever way to execute a job but because Sydney was the location where the idea, design and specifications were made the location of the labour is not relevant.

Me: Ok.

124. After these conversations, Mr Sim consented to the submission of the R&D Tax Incentive Application to AusIndustry. It was submitted on about 30 April 2014. The final application was in the same form as the draft application, including that the description of the "core activity" was made by reference to the "attached documents", namely the "MediaConnect Projects" document which Mr Sim had prepared for Mr Bogiatto. Mr Bogiatto may have made minor changes to the attachment.

125. On 3 June 2014, Mr Bogiatto sent Mr Sim a copy of AusIndustry's Notice of Registration dated 27 May 2014 and an R&D Tax Incentive Schedule for the 2013 financial year. Mr Bogiatto's email (with Ryusei signature block) stated that the R&D Tax Incentive Schedule would need to be lodged with the company tax return or with an amended return if it had already been lodged. The R&D Tax Incentive Schedule included the following data:

• Label E, "R&D expenditure - Salary expenditure" - $244,715;
• Label G, "R&D expenditure - Other" - $243,971;
• Label M, "R&D assets - Decline in value" - $0; and
• Labels X and Z, "Total notional R&D deduction" - $488,686.

126. On 12 June 2014, Mediaconnect posted the R&D Tax Incentive Schedule to the ATO. At this time, Mediaconnect did not understand that they were required to submit an amended income tax return. Ultimately, after communication between Mr Bogiatto and Mr Sim and the identification of Mediaconnect's mistake, it was decided that Mr Bogiatto would lodge an amended income tax return.

127. On 1 October 2014, Mr Bogiatto sent Mediaconnect a draft amended income tax return for the 2013 tax year, which included the R&D Tax Incentive Schedule.

128. On 2 October 2014, Mr Kwok indicated by email that he had "looked through the numbers and [it] looks ok". In a later email on the same day, Mr Kwok sent the income tax return, signed by Mr Sim, to Mr Bogiatto.

129. On or shortly after 2 October 2014, Mr Bogiatto lodged Mediaconnect's amended income tax return. The Commissioner subsequently granted Mediaconnect an R&D tax offset of $219,908.70, offset the R&D tax offset of $219,908.70 against its gross tax of $128,308.80 and credited to it $95,243.90.

130. Mr Bogiatto was the contact person for Mediaconnect at Lambda Chase. He was

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involved in soliciting Mediaconnect to engage the services of Lambda Chase, he collated information and sought feedback from Mediaconnect, and he was responsible for submission of the Mediaconnect R&D Tax Incentive Application and the 2013 amended tax return.

131. Mr Bogiatto was, at all relevant times, the directing mind and will of Ryusei and Lambdachase Advisors. The engagement letter referred to above displayed Ryusei's ABN. All email correspondence from Mr Bogiatto displayed an email signature which included Ryusei's ABN.

132. Mediaconnect's AusIndustry R&D Tax Incentive Application used Lambdachase Advisors' name and that entity's ABN. Lambdachase Advisors was not shown to have done more than lend its name and ABN to Mediaconnect's AusIndustry R&D Tax Incentive Application. As explained further below, the lodging of the AusIndustry R&D Tax Incentive Application was a critical component of the "scheme" which constituted the "tax exploitation scheme". In lending its name to the R&D Tax Incentive Application, Lambdachase Advisors encouraged interest in the scheme. As noted at [27] above, it does not matter that this conduct viewed in isolation can be described as a step in implementing the scheme.

133. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the scheme (identified in Section F.1.3 below) within the meaning of s 290-60(1)(a).

F.1.2.2 Section 290-60(1)(b): consideration

134. As noted above, on 20 March 2014, Mr Bogiatto sent an email to Mr Sim, attaching the "Terms of Engagement". The engagement letter was signed by Mr Bogiatto, on a "LambdaChase chartered accountants" letterhead, showing the ABN of Ryusei. The fee was "30% of the net Research & Development tax offset granted from the Australian Taxation Office in the first instance". The terms of engagement set out in the letter included:

You may accept these terms … by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter …

135. The "Terms of Engagement" were accepted by Mediaconnect by conduct. Mediaconnect's promise to pay constituted consideration received by Ryusei for the purposes of s 290-60(1)(b) - see: Section C.2.2.3 above.

136. On 27 June 2014, an invoice was issued to Mediaconnect for work done in the preparation and submission of the 2013 R&D Tax Incentive Application and the R&D claim which had been made. That invoice was in the amount of $24,189.99, and indicated that payment was to be made to Lambdachase Services. This was issued before Mediaconnect had lodged an amended 2013 income tax return and before it had received any refund. Mr Sim considered the invoice to be substantial and held off paying it for as long as he could. He also took the view that Mr Bogiatto had not performed any significant work and had simply provided to AusIndustry Mediaconnect's payroll information and the document which he had prepared. Mediaconnect did not ultimately pay the invoice.

137. Consideration in the form of Mediaconnect's promise to pay was received by Ryusei "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Ryusei marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.1.2.3 Section 290-60(1)(c): substantial role

138. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c).

139. The roles have been described at F.1.2.1 above. None of these roles could be said to be roles which were not of substance.

F.1.3 Tax exploitation scheme

140. I am satisfied on the basis of the matters set out above and below, that there was a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

141.

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The "scheme" at least included advising Mediaconnect that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in Mediaconnect's tax return, lodging the R&D Tax Incentive Application, advising the taxpayer to lodge an amended income tax return and lodging the amended income tax return.

142. The "tax exploitation scheme" was one which was implemented. As discussed at [23] and Section C above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude on the basis of the facts set out above that Mr Bogiatto, Ryusei, Lambdachase Advisors and Mediaconnect (alone or together) entered into or carried out the scheme with the sole or dominant purpose of Mediaconnect getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

143. As for the second condition, for the reasons given below, it is not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that Mediaconnect was entitled to any of the scheme benefit.

144. The Commissioner's primary argument as to why it was not reasonably arguable that any of the scheme benefit was available was that the "taxpayer did not have adequate or contemporaneous records to substantiate that the claimed R&D expenditure was incurred on R&D activities that had been registered with AusIndustry for the 2013 financial year". This was said to be established because:

(1) Mediaconnect had never previously reviewed each person's role in the company, nor determined the potential R&D component of the work done by each staff member;
(2) There was no discussion or enquiry made by Mr Bogiatto about the percentage of time that staff spent on the R&D project or whether each staff member's time would be apportioned to relevant R&D activities. Had this matter been raised, Mr Sim would have indicated that the company had no records which would have enabled such apportionment to occur;
(3) Mediaconnect did not maintain any records which specifically allowed anyone to identify or quantify:
- (a) any experimental activity it conducted as part of its R&D projects;
- (b) any process of systematic progression, through the application of scientific principles, from hypothesis to logical conclusion;
- (c) any work undertaken by any member of staff within the company for the purpose of generating new knowledge;
- (d) the amount that Mediaconnect spent on R&D projects;
- (e) the amount of time each employee who performed R&D work spent on that work;
- (f) the amount of expenditure on the company's R&D projects which was by Mediaconnect overseas.

145. I accept that the evidence either directly or by inference established that there were inadequate records kept which directly proved some of the matters referred to immediately above.

146. I accept that it is possible that the failure to keep such records might constitute a breach s 262A(1) of the ITAA 1936. For the reasons given in Section E above, I do not accept that any breach of s 262A(1) would, of itself, have the consequence that the claim was not reasonably arguable at law. For example, the fact that Mediaconnect did not keep records would not have prevented it from establishing, in proceedings under Part IVC of the TAA 1953 or otherwise, the underlying facts through other available material or evidence, such as through statements from or testimony of relevant employees conducting R&D activities, together with such documentary records as did exist. It would be open for a tribunal of fact to accept oral evidence of an employee as to what the employee did and how much of his or her time was devoted to such tasks. Likewise, it would be open to the ATO to accept statements made

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by a taxpayer as to the underlying facts despite a lack of documentary evidence.

147. It would also have been open to the respondents to have sought to prove in these proceedings that Mediaconnect was conducting R&D activities and what amount of the scheme benefit was reasonably arguable. The respondents have not adduced any evidence so have not adduced evidence of the amount which they contend was reasonably arguable.

148. The Commissioner bears the onus of establishing that the R&D claims were not reasonably arguable. The Commissioner has adduced evidence from which I conclude that some amount of the scheme benefit was reasonably arguable at law.

149. Mr Sim stated in his affidavit:

40. I know from my interactions with, oversight and tasking of the staff members listed at paragraph 38 whose work involved some R&D, that they at most spent approximately 20% working on the R&D activities claimed. These staff members spent the majority of their time assisting the company with its ordinary business activities such as organising and hosting functions as well as attending to office duties. Given Mediaconnect's total employee expenses less my personal remuneration was $404,230, the most that could have been attributable to the project for which R&D was claimed was $80,846.

41. The total of my remuneration in the amount of $75,000 plus 20% of the balance of Mediaconnect's employment being $80,846 is $155,846. Accordingly, there was no reasonable basis for the suggestion that the company's R&D salary expenditure was $244,715.

42. In addition to there being no reasonable basis for the R&D salary expenditure claimed, the suggestion that the company had incurred $488,686 in Total R&D expenses was substantially greater than what could be reasonably justified for other reasons.

…

70. Mediaconnect was required to pay back the entire R&D tax incentive refund it had received, except for the amount claimed for work I had personally done. As I understand it, this exception was made on the basis that I was able to provide evidence of the work I had performed personally but could not produce equivalent information for the other staff members that were involved in the project for which Mediaconnect's R&D claim was made …

150. This demonstrates the likely availability of evidence that R&D activities were arguably carried out and that relevant expenditure was arguably incurred. The Commissioner has not established that Mr Sim and employees of Mediaconnect could not have established the relevant facts by way of testimony, even in the absence of documentary evidence corroborating that testimony. Mr Sim was the Commissioner's witness. If Mr Sim could have given evidence that no R&D activities were carried out he would have done so - cf:
Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389. He did not. Mr Sim considered that $155,846 claimed on wages was related to R&D activities. The Commissioner has not established that it was not reasonably arguable at law that this amount could be claimed as R&D expenditure.

151. Mr Sim also gave evidence that the amount claimed for "R&D expenditure - Other" was excessive by a considerable amount, but did not express a view about what was reasonable. I conclude that some amount of the claim was reasonably arguable at law.

152. The Commissioner's second argument was that some or all of the work the subject of the expenditure claimed at label G, "R&D expenditure - Other - $243,971" of the R&D Tax Incentive Schedule, was conducted solely or primarily outside Australia, in circumstances where it was not covered by a finding under s 28C(1)(a) of the IRD Act. This was said to be apparent from the following:

(1) Mediaconnect used a number of contract labour sources from offshore for programming and research activities, including one person based in Russia and three persons based in the Philippines.
(2) Mr Sim acknowledged that while "essentially all of the company's employees, except the accounting

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staff and general manager, did some work on the relevant project, there was no way of identifying or quantifying what this work comprised".
(3) No finding was sought (or made) under the IRD Act in respect of this offshore expenditure.

153. I accept the Commissioner's second argument. An R&D tax offset will only be available for expenditure incurred on an activity conducted outside Australia if a finding that the activity cannot be conducted in Australia has come into force. There was no such finding. The consequence of accepting the Commissioner's second argument is that the Commissioner has established that it was not reasonably arguable that the whole of the claimed R&D expenditure was available at law, but not what amount was not reasonably arguable.

154. The Commissioner's third argument was that the amount of R&D expenditure claimed by the taxpayer exceeded any reasonably arguable view of the expenditure it incurred on R&D activities. The Commissioner relied on the following:

(1) Mr Bogiatto assessed Mediaconnect's total R&D expenditure in the sum of $488,686. This figure represented 53.29% of the company's total business expenditure for the 2013 year. In respect of this percentage, Mr Sim said that "Mediaconnect did not spend anything close to 53.29% of its total business expenditure on R&D activities for the 2013 year"; and
(2) Mr Sim regarded the claim for R&D salary expenditure in the sum of $244,715 as without a reasonable basis. He calculated the true sum of Mediaconnect's R&D salary expenditure to be in the amount of $155,846.

155. I accept this argument. I infer from the absence of complete records and the facts identified above, that it was not reasonably arguable that the whole of the claim for R&D expenditure (and ultimately the credit which was the scheme benefit) was reasonably arguable at law.

156. Accordingly, whilst I accept that it was not reasonably arguable that the whole of the scheme benefit was available at law, I do not accept that none of it was. The precise amount which was not reasonably arguable was not established.

F.1.4 Scheme benefit

157. There was a scheme benefit because an amount that the Commissioner had to pay or credit to Mediaconnect under a taxation law was, or could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b). The "scheme benefit" has not been shown to be the whole of the amount contended by the Commissioner.

F.2 Harris Movement Engineering (HME) Pty Ltd

158. HME was engaged in the business of designing and installing stage constructions for theatres, stadiums and other performance spaces, private and public auditoriums, pubs, clubs, places of worship and other venues. The findings of fact made below have been reached on the basis of oral evidence given by Mr Harris and a draft affidavit of Mr Harris, which Mr Harris adopted in his oral evidence, and documentary evidence. Mr Harris was at all relevant times the sole director and secretary of HME. The Commissioner contended that HME engaged in "tax exploitation schemes" in the 2012, 2013 and 2014 financial years.

F.2.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

159. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) in relation to the 2012 tax exploitation scheme:
- (a) Mr Bogiatto engaged in conduct which resulted in him and Ryusei being promoters of a tax exploitation scheme within the meaning of s 290-60; and
- (b) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.
(2) in relation to the 2013 and 2014 tax exploitation schemes:
- (a) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of tax exploitation schemes within the meaning of s 290-60; and
  
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- (b) Ryusei engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60; and
- (c) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60.
(3) in relation to the 2013 tax exploitation scheme Lambdachase Services engaged in conduct which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors each being a promoter under s 290-60(1) of a tax exploitation scheme, notwithstanding that Lambdachase Services was not itself a promoter because it had no role in marketing or encouraging interest in the 2013 tax exploitation scheme. That is because Lambdachase Services received consideration which resulted in those entities being promoters. The reasons for this conclusion are further explained in Section C.4 above.

F.2.2 Promoter

F.2.2.1 Section 290-60(1)(a): marketing or encouragement

160. On the basis of the facts outlined above and below, I am satisfied:

(1) in relation to the 2012 tax exploitation scheme that Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 and 2014 tax exploitation schemes that Mr Bogiatto, Ryusei and Lambdachase Advisors,

marketed, and encouraged interest in, the relevant schemes (identified in Section F.2.3 below) within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

161. In late 2011, Mr Harris received an unsolicited phone call from either Mr Bogiatto or another person from Lambda Chase. During that telephone call, the caller:

(1) stated that he was from Lambda Chase Charted Accountants, an entity which specialised in research and development applications;
(2) stated that Mr Harris's business, HME, could apply for a grant if it engaged in R&D;
(3) offered to meet with Mr Harris to "look into" whether HME could apply for such a grant.

162. Mr Harris agreed to the proposed meeting. Before this telephone call, Mr Harris had heard of the R&D regime but had no experience of it or the processes involved in making a claim.

163. In an email dated 10 April 2012, Mr Seeto of Lambda Chase wrote to Mr Harris, copying Mr Bogiatto, and stated: "Paul Bogiatto and myself are looking forward to meeting … I believe we can help you maximise your claim for 2011". The email contained a signature block indicating it was from Ryusei trading as Lambda Chase Chartered Accountants.

164. Mr Bogiatto, Mr Seeto and Mr Harris met on 16 April 2012 at the office of HME. During the meeting, Mr Bogiatto and Mr Seeto briefly explained to Mr Harris what the R&D tax concession was and how it could be applied to a business like HME. Mr Bogiatto led the discussion, with Mr Seeto also speaking. During the meeting, Mr Bogiatto stated:

A tax deduction is available for a business that does R&D. The business registers its R&D project with AusIndustry and gets a certificate of registration. The business then claims the tax deduction for its expenses on the R&D project in its tax return. Can we have a look around your factory and see what you are doing that could be eligible R&D?

165. Mr Harris showed Mr Bogiatto and Mr Seeto around the factory. During that tour, Mr Harris pointed to various hoists, rigging and other equipment deployed by HME and made some observations about how that equipment was designed and built, saying:

These are examples of theatrical equipment we design and build ourselves. They are a direct outcome of our engineering design and development work that is HME's intellectual property.

166. After that meeting, on the same day (ie 16 April 2012), Mr Seeto sent an email to Mr

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Harris (copying Mr Bogiatto) thanking Mr Harris for "engaging Lambda Chase to prepare and submit HME's claim for 2011" and attaching a Lambda Chase "Terms of Engagement" letter. The letterhead was that of "LambdaChase chartered Accountants", as described at [112] above, and included the ABN of Ryusei. The letterhead also referred to "Paul Bogiatto B Bus (Mkt), B Bus (Acc), DIP FS, CA, JP". The letter was signed by Mr Seeto on behalf of Mr Bogiatto. It stated, inter alia, that Lambda Chase would provide services which included preparing and registering R&D activities with Innovations Australia for Mr Harris's business entities and preparing and lodging the R&D concession submission for those business entities. The letter included:

We [Lambda Chase] consider that we have the necessary expertise to perform the services covered by our engagement …

167. After receipt of this letter, and negotiations by telephone between Mr Harris and Mr Bogiatto, a fee arrangement was agreed for Lambda Chase's engagement. According to Mr Harris, the fee structure agreed was:

… 30% of the net R&D tax offset from the ATO payable on three conditions: that 'the ATO processes the lodged company tax return for HME with the R&D schedule for the credit due'; that Lambda Chase would 'lodge the amended tax return on HME's behalf'; and that HME would appoint 'Lambda Chase as its R&D tax consultant for a period of not less than 3 years following the 2011 R&D Tax Concession Claim submissions'.

168. Mr Harris signed the Terms of Engagement letter, which had been altered to include the new fee structure, and sent it to Mr Bogiatto.

169. The 2011 financial year : Mr Bogiatto assisted HME to submit an R&D Tax Incentive Application to AusIndustry for the 2011 financial year, and in turn assisted the company to lodge an income tax return with the Commissioner in that financial year. No contraventions were alleged in respect of that conduct.

170. The 2012 financial year : On 3 April 2013, Mr Harris received a further engagement letter from Mr Bogiatto for the preparation of HME's 2012 R&D claim. The letterhead was that of "LambdaChase chartered accountants", as described at [112] above, and included the ABN of Ryusei. The letterhead referred to "Paul Bogiatto B Bus (Mkt), B Bus (Acc), DIP FS, CA, JP". The letter was signed by Mr Bogiatto. The fee structure was "25% of the net Research & Development tax offset granted from the Australian Taxation Office in the first instance" and did not contain the conditions included in the 2011 Terms of Engagement.

171. A second letter, dated 3 April 2013, was sent by Lambda Chase to Mr Harris, signed by Mr Bogiatto, and containing Ryusei's ABN, which included:

The firm would like to thank you for meeting with us to discuss your company's Research & Development activities. … Given your description of your company's product development and processes we believe it would be in your company's financial interest to strongly consider taking advantage of the R&D Incentives available to you.

As you know the R&D Incentives is complex and meeting requirements to maximise claims can be involved, time consuming and costly. Lambda Chase professionals are experts with experience and capability in executing your R&D Incentives claim which will provide maximum financial benefits for the relevant financial year and beyond. We believe in making the R&D Claim as smooth as possible and taking as little as possible of you or your staff's time whilst ensuring your submission is well structured and robust.

172. HME provided information to Mr Bogiatto who then prepared HME's financial statement for the 2012 financial year.

173. On 28 April 2013, Mr Bogiatto sent an email to Mr Harris attaching a draft AusIndustry R&D Tax Incentive Application for the 2012 financial year. In the email, Mr Bogiatto asked Mr Harris to complete certain missing information and requested that a signed copy of the application be returned to Mr Bogiatto for lodgement. The draft application recorded that, for the 2012 financial year, HME's Total R&D Expenditure was $3,948,730.

174.

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On 30 April 2013, Mr Bogiatto submitted HME's AusIndustry R&D Tax Incentive Application for the 2012 financial year to AusIndustry, recording total R&D expenditure in the amount of $3,948,730. In the application, Mr Bogiatto of "Lambda Chase Chartered Accountants" was identified as the nominated contact person and Ryusei's ABN was supplied. Unlike the 2013 and 2014 applications referred to below, the 2012 application did not contain a section to indicate whether or not HME had received advice in relation to the application from a tax agent or R&D consultant.

175. On around 10 May 2013, AusIndustry sent to Mr Bogiatto a Notice of Registration for HME for the 2012 financial year.

176. On 13 May 2013, Mr Bogiatto emailed Mr Harris a copy of the Notice of Registration. The notice was forwarded to Mr Harris together with an R&D Tax Incentive Schedule. The schedule confirmed a total notional R&D deduction of $3,948,730.

177. On 23 May 2013, Mr Bogiatto lodged HME's 2012 income tax return with the ATO, which included the expenditure schedule which claimed a refundable R&D tax offset in the amount of $1,776,928.95.

178. As a result of the lodgement of the income tax return for 2012, HME received a tax refund in the amount of $603,408.45.

179. The 2013 and 2014 financial years : On 1 April 2014, Lambda Chase sent to Mr Harris a further letter of engagement, signed by Mr Bogiatto and directed towards the preparation of HME's R&D claims for the 2013 financial year and onwards. That letter was in relevantly identical form to the 2012 letter of engagement referred to earlier.

180. The same methodology that applied in relation to the preparation of the 2012 R&D claim also applied to the preparation of R&D claims for the 2013 and 2014 financial years, except that HME used additional software called Ostendo in addition to MYOB. The information HME provided, or made available to Lambda Chase and Mr Bogiatto for that purpose, was of a like kind to that provided for the 2012 financial year.

181. Mr Bogiatto prepared HME's financial statements for the 2013 and 2014 financial years. Those financial statements falsely represented that management fees had been incurred when they had not.

182. The preparation of the 2013 and 2014 AusIndustry R&D Tax Incentive Applications proceeded in a similar way to the 2012 application. However:

• In the 2013 application, Mr Bogiatto of "Lambdachase Advisors" was identified as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that HME had relied on advice from a tax agent or R&D consultant and identified the person from whom HME had received such advice as Mr Bogiatto of "Lambdachase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".
• In the 2014 application, under the heading "Tax Agent or R&D Consultant Services", Mr Bogiatto was nominated as the person from whom HME had received advice. He was said to be from "Lambdachase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the entity which had given advice. Mr Harris was the "nominated contact person".

183. On 15 April 2014, Mr Bogiatto lodged for HME its 2013 AusIndustry R&D Tax Incentive Application, which recorded total R&D expenditure for the 2013 financial year of $4,846,465. HME was registered for R&D with AusIndustry for the 2013 financial year.

184. On 24 June 2014, Mr Bogiatto lodged with the ATO on behalf of HME an income tax return for the 2013 income year, recording total R&D expenditure in the amount of $4,846,465. As a result of the lodgement of this income tax return, HME received a tax refund in the amount of $2,180,909.25

185. On 18 September 2014, Mr Bogiatto lodged for HME its 2014 AusIndustry R&D Tax Incentive Application, which recorded total R&D expenditure for the 2014 financial year of $8,912,608. HME subsequently became registered for R&D with AusIndustry for the 2014 financial year.

186. On 23 October 2014, Mr Bogiatto lodged with the ATO on behalf of HME an

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income tax return for the 2014 income year, recording total R&D expenditure in the amount of $8,912,608. As a result of the lodgement of this income tax return, HME received a tax refund in the amount of $4,010,673.60.

F.2.2.2 Section 290-60(1)(b): consideration

187. Ryusei had a contractual entitlement to payment of a fee under the "Terms of Engagement" letters for the relevant financial years. Although Ryusei was not specifically mentioned in the letter, the objective construction of the agreement is that the entity entitled to the fees was the legal entity to which the identified ABN belonged - see [114] above. The fee payable was "25% of the net Research and Development tax offset granted from the Australian Taxation Office". The letters provided that "[y]ou may accept these terms … in writing by signing a copy of this letter and returning the signed copy to us" or "by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter …".

188. HME accepted the terms set out in these engagement letters by continuing to provide instructions in relation to its R&D claims.

189. Mr Harris gave the following evidence by way of a draft affidavit which he adopted in his oral evidence:

(1) HME received an invoice from Lambda Chase dated 31 May 2013 for the preparation of the 2012 R&D claim and lodgement of the 2012 income tax return in the amount of $165,937.31. This required payment to Ryusei and supplied Ryusei's ABN;
(2) HME received an invoice from Lambda Chase dated 27 June 2014 for R&D work done for the 2013 financial year in the amount of $756,538.69. This required payment to Lambdachase Services and provided that entity's ABN. The invoice was paid by HME via two instalments in July and August 2014 respectively;
(3) HME received a number of other invoices, not shown to be directly connected to any tax exploitation scheme. One invoice, in an amount of $48,234, related to the R&D claim for the 2011 year about which no complaint was made. HME made various payments to Ryusei following receipt of these invoices;
(4) HME paid $1,500,000 to Ryusei on 7 January 2015 for work done in relation to the 2014 R&D claim. No entity had provided an invoice in this respect - rather, Mr Harris said that the "payment was based on the agreed 30% fee structure";
(5) Mr Harris was shown an invoice from Ryusei, on a Lambda Chase letterhead, addressed to HME dated 22 June 2013 in the amount of $3,850,594. He had never seen this invoice before. He gave the following evidence in this respect:

Is that an invoice provided to you by Mr Bogiatto's firm, Lambda Chase Chartered Accountants, dated 22 June 2013?---It is.

Did you ever receive that invoice from Mr Bogiatto?---I don't recall, but I don't think we did.

Well, did you receive it from Mr Bogiatto or his firm around the time that it is dated?---I don't believe we did.

Did you ever pay or did you ever cause Harris Movement Engineering to pay Lambda Chase Chartered Accountants in respect of an invoice for $3.85 million?---No, I did not.

190. In relation to each of the years, consideration was received by Ryusei in the form of a promise to pay. It is unclear whether Ryusei received payments in relation to the 2012 financial year in performance of HME's promise to pay. In relation to the 2013 financial year, Lambdachase Services received payments from HME. Lambdachase Services was an associate of Mr Bogiatto, Ryusei and Lambdachase Advisors. In relation to the 2014 financial year, Ryusei received payments in performance of HME's promise to pay. Ryusei marketed and encouraged interest in the schemes and was an associate of Mr Bogiatto and Lambdachase Advisors.

191. It follows from the foregoing that consideration was received "in respect of [the] marketing or encouragement" of:

(1) Mr Bogiatto and Ryusei in relation to the 2012 tax exploitation scheme; and

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(2) Mr Bogiatto, Ryusei and Lambdachase Advisors in relation to the 2013 and 2014 tax exploitation schemes: s 290-60(1)(b).

192. I am satisfied that s 290-60(1)(b) is satisfied in relation to each of the 2012, 2013 and 2014 financial years.

F.2.2.3 Section 290-60(1)(c): substantial role

193. I am satisfied that:

(1) in relation to the 2012 tax exploitation scheme, Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, Mr Bogiatto, Ryusei and Lambdachase Advisors,

had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. None of the roles could be said to be a role which was not of substance. Lambdachase Advisors was identified in the 2013 and 2014 AusIndustry R&D Tax Incentive Applications as the entity through whom Mr Bogiatto had given advice. Ryusei was the entity with which HME contracted and which, through Mr Bogiatto and others, communicated with HME.

F.2.3 Tax exploitation scheme

194. I am satisfied on the basis of the matters set out above and below, that there were "schemes" in each of the 2012, 2013 and 2014 financial years which were "tax exploitation schemes" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

195. The "schemes" at least included advising HME that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in HME's tax return, lodging the R&D Tax Incentive applications and lodging income tax returns on behalf of HME.

196. The "tax exploitation schemes" were ones which were implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude:

(1) in relation to the 2012 tax exploitation scheme, that Mr Bogiatto, Ryusei and HME; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, that Mr Bogiatto, Ryusei, Lambdachase Advisors and HME,

alone or together entered into or carried out the schemes with the sole or dominant purpose of HME getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

197. As for the second condition, for the reasons given below, it was not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that HME was entitled to any of the scheme benefit.

198. The Commissioner's primary argument as to why it was not reasonably arguable that any of the scheme benefit was available was, again, that the "taxpayer did not have adequate records to substantiate that the claimed R&D expenditure was incurred on R&D activities that had been registered with AusIndustry". This was said to be established because Mr Harris made it clear in his evidence that, even if it were the case that HME engaged in R&D activities, "HME never maintained records of such activity so as to properly substantiate or justify any R&D claim based on such work". The Commissioner also referred to Mr Harris's evidence that HME "did not maintain (or otherwise have) contemporaneous records supporting the suggestion that the company itself had incurred any expenditure in relation to the R&D activities registered with AusIndustry".

199. As noted earlier, the Commissioner relied upon a draft affidavit of Mr Harris which Mr Harris adopted when giving his evidence orally. That affidavit included the following account of certain events. On 27 May 2015, Mr Harris was informed that the ATO had commenced an audit into HME's R&D claims. He was informed that a letter had been sent to Lambda Chase but that there had not been a satisfactory response. Mr Harris then rang Mr Bogiatto and had the following discussion:

Me: I have just had a call from a tax officer telling me the ATO has commenced an audit

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of our R&D claims and has sent a letter notifying you of the audit with a questionnaire. Why is it that I got that call? What is this all about?

Mr Bogiatto: It's true. There is an ATO audit. I am your accountant and am managing the ATO. I am handling it. Don't you deal with them, don't talk to them, and don't have any discussion or interactions with the ATO. That's what you pay me for, I'll manage everything. I will need you to give me HME's book-keeping records and invoices.

200. Mr Bogiatto continued to act for HME until July 2015 when he eventually said to Mr Harris that the R&D claims were "not going to stand up under this level of review". Mr Harris's draft affidavit included:

68. In July 2015, at times, dates and locations I cannot recall, I had a series of telephone and face to face conversations with Mr Bogiatto. Each time I spoke with him he was increasingly gruff, forceful and unprofessional. In one such call he admitted that the claims were "not going to stand up under this level of review". I took that to mean that HME's R&D claims had been incorrectly made and that the position set out in those claims had no reasonable basis. I was horrified by that prospect. I could feel my life's work and reputation collapsing in front of me. I was deeply concerned about whether I would be in a position to continue to feed and support my children, and that the business I had worked so hard on for so long would disappear. The memory of that moment still distresses me.

69. In those conversations Mr Bogiatto made all manner of suggestions for frustrating the ATO audit. I recall him suggesting bankruptcy in one conversation. In a conversation with him in a coffee shop - I do not otherwise remember when and where - Mr Bogiatto made such proposals and I responded using words to the following effect:

Mr Bogiatto: We need to push HME into liquidation. If HME goes into liquidation the ATO will conclude there is nothing to recover and will let it go. I will create a contract between HME and an overseas party. That overseas party can then obtain a winding up order against HME for unpaid fees for services rendered. That will be the mechanism to push HME into liquidation before the ATO review finishes.

Mr Bogiatto: Or I could give HME an invoice for $10 million. HME would pay the invoice in gold bullion. I will then disappear and recycle the money to you.

Me: Paul, this is ridiculous. It is not going to end well. I don't want to be a party to it.

70. Late one night at around 11.30pm at HME's factory, Mr Bogiatto presented me with a document to sign which I believe to be the falsified contract with an overseas party he had proposed in our earlier discussion. He said words to the effect of:

Mr Bogiatto: This is the contract we spoke about. I need you to sign it.

71. My wife was with me. Mr Bogiatto was in a terrible state. He seemed not quite right in his demeanour. He did not threaten us directly but I felt extremely uneasy and vulnerable. His increasing state of agitation made me want to get myself and my wife away from him. Therefore I signed the document, gave it to Mr Bogiatto, closed up the factory and we got out and away from Mr Bogiatto. I do not have a copy of the document.

72. Within a day or two I regretted the course I had taken (referred to in the paragraph immediately above) and was concerned about having signed the document. I fundamentally did not agree with the strategy Mr Bogiatto had proposed to frustrate the ATO audit and I decided to act. I sought legal advice from Andrew Grima from Coleman Greig Lawyers. Mr Grima recommended that I seek independent advice from KPMG.

73. I engaged Mr Jeremy Geale, who at that time was a partner in KPMG's Legal and Tax Services team.

201. By a letter dated 22 September 2015, Mr Geale of KPMG made a voluntary disclosure to the ATO on behalf of HME. Also provided to the ATO was a report which Mr van Bergen of KPMG had prepared ( KPMG report ). Mr Geale's letter stated:

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As you are aware we act for Harris Movement Engineering Pty Ltd (HME).

For the purposes of assisting our client with the ATO's risk review, our client has engaged us to review their tax affairs and on their behalf make a voluntary disclosure of any amendments required. As you are aware, responsibility for preparation and lodgement of our client's tax returns (in respect of income tax, FBT, GST and R&D) resided with their former adviser Lambda Chase. Our client has since terminated its agreement with Lambda Chase.

Following our retainer, with the assistance of KPMG, we have commenced a review of our client's taxation affairs. We have initially focussed that review on R&D as this was identified by us as the area most at risk and was also the subject of your questions. That review has now been completed, and as a consequence our client is now in a position to make a voluntary disclosure of the amendments required to its income tax returns for the 2012 to 2014 income years. We note that these amendments will result in a tax shortfall. We attach a copy of KMPG's report, including its recommended amendments.

202. The KPMG report included:

1. Background and scope of KPMG review

We understand that HME registered R&D activities with AusIndustry under the Industry Research and Development Act 1986 (Cth) for the years ended 30 June 2012, 2013, and 2014 on the advice of and with the assistance of an external consultant, Lambda Chase Chartered Accountants. Similarly, the calculation of eligible notional deductions included in HME's income tax returns for the abovementioned income years were also prepared by Lambda Chase.

The key focus of our review has been the extent to which the amounts claimed in HME's income tax returns for the relevant income years are able to be substantiated, based on the contemporaneous business and specific R&D records kept by company.

Specifically, we have considered the following information sources as part of our review:

• HME's R&D Applications as lodged with AusIndustry for each of the years under review;

• Technical R&D documentation maintained by HME in the ordinary course of its business activities; and

• HME's financial records and systems (MYOB and Ostendo).

On the basis of the information we have reviewed, below are suggested amendments for HME's R&D tax schedules for the years ended 2012, 2013 and 2014, as well as a summary of the methodology that has been applied to reach these figures.

…

2. Calculation methodology and key review points

…

Summary of HME's financial and technical documentation systems

We understand based on our discussions with HME that each of the R&D activities registered in the 2012, 2013 and 2014 income years corresponds to one or more HME "projects". Within HME's financial systems, as well as its systems to maintain contemporaneous technical documentation, each project is assigned a project number.

The same project numbering system is used in both HME's technical documentation systems, as well as "Ostendo", an application that works in conjunction with MYOB (HME's accounting platform) to enable tracking of expenditure against projects. As such, we consider that HME has adequate systems in place to identify and track the experimental activities undertaken by its drafters and engineers to complete each "project" (including IP created through new technical drawings), as well as any material costs associated with a project (e.g. the creation or installation of the new device or apparatus for trials).

203. Attached to the KPMG report were various work sheets which were prepared from the contemporaneous records which KPMG had

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obtained from HME. The KPMG report suggested amendments to the tax returns for the 2012 to 2014 years. These suggested amendments reduced the R&D tax offset which had been claimed. However, substantial R&D claims were made.

204. On 22 October 2015, the ATO issued amended assessments in accordance with KPMG's suggestions. The consequence of the issue of the amended assessments was that HME became insolvent and went into liquidation.

205. The draft affidavit which Mr Harris adopted, included:

83. Since the events that I have deposed to above, I have gained some understanding of the R&D regime and its requirements and say the following about the years ending 30 June 2012, 30 June 2013 and 30 June 2014:

a. HME did not engage in activities, the outcome of which could only be ascertained by applying a systematic progression of work that was based on scientific principles and which progressed from hypothesis to experiment and then observation and evaluation, before culminating in conclusions;

b. HME did not engage in any activities that supported, or directly related to the kind of activities referred to at (a) immediately above;

c. even if it were the case that the company had engaged in scientific experimentation or supporting activities of the kind referred to at (a) and (b) above, HME never maintained records of such activity so as to properly substantiate or justify any R&D claim based on such work; and

d. further to (c) above, HME did not maintain (or otherwise have) contemporaneous records supporting the suggestion that the company itself had incurred any expenditure in relation to the R&D activities registered with AusIndustry.

206. If the evidence at [83(a)] were accepted it would follow that the activities in fact conducted were not "core R&D activities" within the meaning of s 355-25(1), set out at [87] above. If there were no "core R&D activities", there could be no "supporting R&D activities". It would follow that there would be no basis for any R&D claim.

207. Mr Harris also gave oral evidence. In response to a question posed by the Court, Mr Harris stated in relation to the 2013 year:

Post the KPMG audit we took at the end of this, it - on average, we were between 15 and 20 per cent of our turnover was valid R&D.

208. In response to further questions, Mr Harris indicated that this assessment applied equally to the 2012 and 2014 years. It was clear that Mr Harris considered HME had engaged in valid R&D activities, notwithstanding what was contained in [83] of his draft affidavit.

209. The Commissioner submitted that it was unnecessary to resolve the inconsistency between this oral evidence and the evidence at [83(a)] of Mr Harris's draft affidavit. It was submitted:

Even if HME incurred R&D expenditure up to 20% of its total expenditure, the amounts claimed in the tax returns were grossly inflated. In any event, it is submitted that the evidence at paragraph 83(a) of Mr Harris' draft affidavit should be preferred. His oral evidence concerning the 20% figure should be understood as no more than an assertion by Mr Harris that at some point HME might have argued that it was engaged in some R&D activity; however, that argument is not reasonably open in view of what is said at paragraph 83(a) and the absence of contemporaneous records of the experimental activities.

210. I reject the submission that [83(a)] of Mr Harris's draft affidavit should be preferred to his oral evidence. Mr Harris's oral evidence is supported by the content of the KPMG report. Mr Harris did not suggest that he considered KPMG's report to be incorrect. The Commissioner, who was conducting a risk review or audit at the time the KPMG report was submitted, issued amended assessments reflecting the amounts KPMG had calculated as being legitimate claims. The express task which KPMG had embarked upon was to determine how much of the R&D claim could be "substantiated, based on the contemporaneous business and specific R&D records kept by [the] company". No evidence was

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given about how [83(a)] of the draft affidavit came to be drafted in the terms in which it was. The language of the paragraph closely reflects the terms and concepts which appear in the definition of "core R&D activities" in s 355-25(1). Although [83] states that Mr Harris had "gained some understanding of the R&D regime and its requirements", Mr Harris did not give evidence that he had read the legislative provisions. In any event, [83(a)] does not reveal Mr Harris's understanding of the meaning of the language of s 355-25(1) or how that understanding applied to the activities of HME. Paragraph 83(a) is in the form of a submission; it does not furnish evidence which substantiates that which the submission implies should be concluded. The paragraph is inconsistent with Mr Harris's oral evidence and the KPMG report. If the Court were to conclude that [83(a)] of Mr Harris's affidavit was correct, as the Commissioner submitted, it would necessarily follow that the KPMG report submitted by Mr Geale to the ATO was materially false and misleading.

211. Paragraph 83(c) of Mr Harris's draft affidavit is also relevant. As noted, it states:

… even if it were the case that the company had engaged in scientific experimentation or supporting activities of the kind referred to at [83](a) and (b) above, HME never maintained records of such activity so as to properly substantiate or justify any R&D claim based on such work.

212. If this paragraph is to be understood as meaning that HME has no records substantiating R&D activity, it would mean that the KPMG report falsely represented that contemporaneous records supporting such activities and expenditure did exist. The KPMG report stated that the key focus of KPMG's review was "the extent to which the amounts claimed in HME's income tax returns for the relevant income years are able to be substantiated, based on the contemporaneous business and specific R&D records kept by company".

213. It is difficult in the circumstances just described to accept the Commissioner's submission that [83(a)] of Mr Harris's draft affidavit should be preferred to his oral evidence. I do not accept that [83(a)] of Mr Harris's draft affidavit establishes that HME had not engaged in any R&D activities. Indeed, I do not accept that [83(a)] accurately reflects Mr Harris's views. I also do not accept that [83(c)] of Mr Harris's draft affidavit establishes that there were no records kept which substantiated or justified any R&D claim based on such work. I conclude that records were kept and that they were sufficient to permit KPMG to submit the report which it did.

214. In any event, I would have rejected the proposition that it would necessarily follow from an absence of "proper records" that it was not reasonably arguable that any of the scheme benefit was available at law. The reasons for that have been stated earlier.

215. The Commissioner's second argument was that the amount of R&D expenditure claimed by the taxpayer exceeded any reasonably arguable view of the expenditure it incurred on R&D activities. The following submissions were relied upon in this regard (footnotes omitted):

(a) HME did not engage in experimental activities, the outcome of which could only be ascertained by applying a systematic progression of work that was based on scientific principles and which progressed from hypothesis to experiment and then observation, before culminating in conclusions;

(b) Concerning the 2012 financial year:

i. the amount of the R&D deduction claimed "represents a far greater proportion of HME's expenditure than the actual R&D activities comprised". At most, HME spent about 20% of its total expenditure on activities Mr Harris considered to be R&D.

ii. some of the expenditure which was the subject of HME's R&D claim was referable to projects that HME undertook for clients, and was included in invoices to (and recovered from) the relevant clients;

(c) Concerning the 2013 income year:

i. Mr Harris (who knew HME's annual turnover for that year to be around $5m) deposes to HME not incurring R&D expenditure in the amount of

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$4,846,465 and not incurring certain of the expenses included in the claim - for example, the $3,500,540 management fee claimed to have been incurred in the 2013 income year;

ii. the same position applied as that outlined at (b)ii. immediately above;

(d) Concerning the 2014 income year:

i. HME "did not incur expenditure of $8,912,608 and certainly did not incur R&D expenditure in that amount";

ii. the same position applied as that outlined at (b)ii. above;

iii. the aggregated turnover of HME ($10,182,115) and the R&D expenditure ($8,912,608) included by Mr Bogiatto in HME's R&D schedule were "gross exaggerations";

iv. HME's R&D claim relied on, in part, the supposed payment by the company of a $9,782,852 management fee, in circumstances where "HME did not pay any management fee".

216. I accept the Commissioner's second argument. It is clear that the claimed expenditure was grossly exaggerated. No reasonable accountant could have considered it to be truthful. I am satisfied that it was not reasonably arguable that R&D expenditure could be claimed in any amount greater than that identified in the KPMG report.

217. The result is that the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that none of the scheme benefit was available at law. I am satisfied that the amounts identified by KPMG as substantiated in its report were reasonably arguable and that the balance was not reasonably arguable.

F.2.4 Scheme benefit

218. There was a scheme benefit because an amount that the Commissioner had to pay or credit to HME under a taxation law was, or could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

F.3 Moorilla Estate Pty Ltd

219. Moorilla trades as the Museum of Old and New Art ( MONA ). It was the taxpayer participant in a scheme in the 2013 financial year.

220. Although the evidence also addressed a scheme in the 2014 financial year, the Commissioner did not plead any case in relation to that year or make any submission in that respect.

221. Mr John Kelly was the Chief Financial Officer ( CFO ) of Moorilla, and shares the role of Chief Executive Officer ( CEO ) with Mr Mark Wilsdon. Mr Kelly has occupied the CFO and joint CEO role since 2014. The facts set out below have been drawn from the affidavit of Mr Kelly and the documentary evidence.

F.3.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

222. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60;
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
(4) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors each being a promoter of a tax exploitation scheme, notwithstanding that Lambdachase Services was not itself a promoter because it had no role in marketing or encouraging interest in the tax exploitation scheme. Lambdachase Services received consideration which resulted in those entities being promoters. The reasons for this conclusion are further explained in Section C.4 above.

F.3.2 Promoter

F.3.2.1 Section 290-60(1)(a): marketing or encouragement

223. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto,

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Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the scheme (identified in Section F.3.3 below) within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

224. On or shortly before 2 April 2014, Mr Kelly received an unsolicited approach from Lambda Chase by telephone in which an enquiry was made as to whether Moorilla conducted R&D activities and whether Mr Kelly was interested in speaking with an expert in R&D tax incentive claims. Mr Kelly agreed to discuss any such entitlement. He then received an email from the email address "pa@lambdachase.com.au" foreshadowing a further call to set up a time to meet with Lambda Chase R&D experts. That email was signed off by Stephen Fox of "Ryusei Pty Ltd trading as Lambda Chase Chartered Accountants". It represented that Lambda Chase:

• could assist Moorilla to determine its eligibility for the R&D tax incentive;
• could assist Moorilla to register for the R&D tax incentive;
• could assist Moorilla to claim the R&D tax incentive; and
• had experts with the "know-how and experience to maximise your claim".

225. On 23 April 2014, Mr Kelly received a telephone call from Mr Bogiatto. During that telephone call, Mr Bogiatto represented that:

• he had "10 plus years' experience in R&D";
• his firm "has a range of expertise in assisting clients to claim the R&D tax incentive";
• the deadline to register Moorilla's R&D activities with AusIndustry was 30 April 2014 such that Mr Kelly "will need to get the information to [him] quickly"; and
• three projects outlined by Mr Kelly during the conversation "would have a good chance of qualifying as activities under the R&D incentive".

226. The projects Mr Kelly mentioned were known as "Virtual MONA", "Mobile Robotic Display Cases" and "Experimental Beer production" related to a microbrewery. Two of these projects were then being coded internally as research expenses, suggesting the existence of electronic or documentary records.

227. In his evidence, Mr Kelly described "Virtual MONA" in the following way:

'Virtual MONA' was a real-time 3D museum model that was about allowing virtual access to MONA on Tuesdays, being the day on which MONA is closed to the public. MONA was not the first museum to offer virtual reality access online. In this virtual experience, patrons would be able to look through the gallery via the internet and there would be virtual games and activities for the patrons to explore. This project began in its development in 2011, approximately around the time the museum opened.

228. Mr Kelly described "Mobile Robotic Display Cases" in the following way:

The Mobile Robotic Display Cases project involved a new approach to displaying art and it was a project that we had been working on for a number of years. The Mobile Robotic Display Cases were designed to move in response to the proximity of visitors in the actual museum gallery setting. The minimal function or response behaviour required of the robot is that it be capable of sensing the proximity of a visitor and be able to move either toward or away from him/her. Effectively, the display case employs a motion sensor and movement mechanism to achieve an artistic effect that is designed to dramatize the display case and subvert the expectations of the gallery visitor.

229. Mr Kelly described the "Experimental Beer production", and Mr Bogiatto's comment about it, in the following way:

The experimental beer project involved working up different beer varieties under the brand 'Moo Brew' as part of the microbrewery operated by MONA. During the 23 April phone discussion, Mr Bogiatto said words to the following effect:

Mr Bogiatto: Moorilla could also make an R&D claim in respect of the experimental beer.

230.

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Mr Kelly continued:

However, this project was one that I felt would not qualify for the R&D tax incentive as most breweries are always experimenting with beer, in order to enhance flavour and the consumer's experience, and if they do not work you can just tip them down the sink[.] While there was an element of experimentation in the beer production process, I did not consider that there was any systematic research or development activity such that I would be comfortable making a claim for the cost of that activity.

231. During the call, Mr Bogiatto represented to Mr Kelly that time was of the essence in that, in order to qualify for the tax incentive for the 2013 year, the claim had to be lodged by 30 April 2014. He stated that he would ask for information and that, once it was provided, he would fill out an R&D application form and send it back to Mr Kelly for approval and signature. Mr Bogiatto would then lodge the application with AusIndustry.

232. On 23 April 2014, Mr Bogiatto sent an email to Mr Kelly requesting information that had been briefly discussed during the telephone conversation. This email, as with later emails from Mr Bogiatto, included a signature block identifying the email as being sent by Mr Bogiatto who was identified as the "Managing Partner" of Ryusei trading as Lambda Chase Chartered Accountants and providing Ryusei's ABN. The email requested details of the R&D projects and certain identified financial information.

233. Mr Kelly contacted MONA's department head and exhibition designer, Mr Spinks, for further information. Mr Spinks replied the same day, providing information outlining the Virtual MONA and Mobile Robotic Display Cases projects' successes, failures and issues, together with a description of the projects. An attachment to Mr Spinks's email described the projects in the following way:

Mobile robotic display case

In developing MONA's approach to exhibiting its collection various methods and devices were researched and explored. One of the outcomes of this was the development of a mobile robotic display case. The robotic case was designed to move in response to the proximity of humans in a museum gallery setting.

The minimum function or response behavior required of the robot is that it be capable of sensing the proximity of a visitor and be able to move either toward or away from the person - operating always at a safe distance from the target visitor and others within the gallery. This is designed to dramatise the display case and subvert the expectations of the gallery visitor.

The case has operated successfully within the gallery for extended periods of time. It is currently being assessed for additional, more complex functions and behaviors.

Virtual MONA - (Virtual real time 3D model of MONA)

During the development stage of MONA's exhibition design it became necessary to visualise how the galleries would look with the exhibition designs being developed.

MONA's Exhibition Development team investigated the idea that volumetric data from the architect's CAD files could be imported into gaming software allowing virtual real time access to the entire building. A gaming developer was commissioned and successfully imported the entire data set of the museum into the software.

The developer's brief was to develop not only the virtual museum but to design tools within the virtual model that gave the user the capability to place and manipulate 2D and 3D art; display cases; wall panels and video art, projected on a wall or on an LCD screen or cube monitor. The model includes the capability to change wall and panel colours; it has a measuring tool and a placement grid; users can place notes and teleport themselves to different locations within or outside the museum. A comprehensive catalogue of MONA's collection was imported into the model and made available via a searchable menu for placement on the walls.

The other unique feature was that design sets could be saved to a server for access by

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other remote users who could make their own changes to existing designs. This was particularly useful given staff working on MONA were located in Hobart, Melbourne and abroad.

This design tool is unique and has required a considerable amount of research and experimentation, which remains ongoing in its further development and refinement.

234. This information was sent by Mr Kelly to Mr Bogiatto. It was used by Mr Bogiatto to draft the AusIndustry R&D Tax Incentive Application.

235. Mr Bogiatto emailed to Mr Kelly Lambda Chase's engagement letter, headed "Terms of Engagement", dated 23 April 2014 and signed by Mr Bogiatto. It included Lambdachase Advisors' ABN. The letter stated that the provision of R&D services "will be conducted in accordance with the relevant professional and ethical standards issued by the Accounting Professional & Ethical Standards Board Limited (APESB)".

236. Mr Kelly stated:

25. After receiving this engagement letter, I performed my own due diligence on Mr Bogiatto by searching the Lambda Chase website. Upon perusal of the Lambda Chase website, I noted that Lambda Chase represented it had ten years' experience in R&D, employed highly qualified personnel who understood the relevant legislation and regulations governing the R&D tax incentive, and that the R&D tax incentive was one of Lambda Chase's core services. I made a print-out of the Lambda Chase website at the time. Annexed to this affidavit and marked 'JPK7' is a copy of that print-out.

26. Further, Mr Bogiatto's email signature on the email referred to paragraph 17 above (see 'JPK2') indicated that he held a Bachelor of Business and a Diploma of Financial Services, that he was a Chartered Accountant, registered company auditor, tax agent, financial planner and Justice of the Peace. I also checked the New South Wales Justices of the Peace (JP) Register which confirmed that he was, as at that time, currently registered as a JP. This, and the representations made on the Lambda Chase website, led me to believe that I could rely on Mr Bogiatto's R&D expertise. Annexed to this affidavit and marked 'JPK8' is a copy of the JP Register searched on 13 February 2015.

237. On 26 April 2014, Mr Kelly contacted Mr Bogiatto by telephone and advised him:

I will be relying on you as the R&D expert to analyse the information we have provided to you and to advise me whether these projects qualify for the R&D tax incentive.

238. Also on 26 April 2014, Mr Kelly received an email from Mr Bogiatto attaching a draft AusIndustry R&D Tax Incentive Application for the 2013 financial year. The email to which the draft application was attached contained a request for further financial information in order to finalise the application. Mr Kelly responded to that request for further information on 28 April 2014, indicating, amongst other matters, that "most of our R&D is outsourced as it is extremely specialised and technologically complex".

239. On 29 April 2014, emails were exchanged between Mr Bogiatto and Mr Kelly, in which, among other things:

(1) Mr Kelly questioned the figures that Mr Bogiatto had used in respect of the expenditure for the two projects given his expectation that the R&D expenditure would be in the sum of approximately $100,000 as opposed to $2,051,594;
(2) Mr Bogiatto indicated that "we estimated the overall expenditure for each project based on the portion of the direct cost from the R&D expenditure you provided". Mr Bogiatto then queried, "[p]lease advise us with the percentage of expenditure you would like to apply for each project";
(3) Being concerned that the R&D expenditure as calculated by Mr Bogiatto exceeded that which had in fact been incurred, Mr Kelly responded to Mr Bogiatto's email, stating:
I dont want to potentially reduce our R&D rebate but the total project spends are:
- ATC 23321
  • Virtual Mona - $256,707 represented by $156,707 paid direct to specialist (Spark GFX) plus approximately $100,000 on direct wages associated with this project.
- • Mobile Robotic Display Cases - $130,120 represented by payments to consultants (Dr Peter Morse 10K; Aegres 70K) plus approx. 50,000 on direct wages associated with this project
Hope this helps.
(4) Mr Bogiatto attached an updated draft of the AusIndustry R&D Tax Incentive Application for Moorilla in respect of the 2013 financial year and sought instructions as to whether the application could be submitted to AusIndustry;
(5) Mr Kelly advised Mr Bogiatto that he, Mr Kelly, still was unable to reconcile the figures used by Mr Bogiatto, but that Mr Kelly trusted the figures were "representative of the information I have sent through".

240. On 30 April 2014:

(1) Mr Bogiatto again sought instructions to submit to AusIndustry the AusIndustry R&D Tax Incentive Application, requesting that Mr Kelly "[p]lease get back to us before 1pm for us to submit";
(2) Mr Kelly reiterated his concern that R&D expenditure was much higher than he expected. He repeated his calculations contained in his email of 29 April 2014, extracted above;
(3) Mr Bogiatto asked Mr Kelly to contact him by telephone. During that call, Mr Kelly expressed his "shock" at the "level of expenditure and the size of the claim in the 2013 AusIndustry tax incentive application". Mr Bogiatto responded by stating:

I'm the expert, leave that to me. I have 10 years' experience, this is all part of the way the grant works. You are entitled to apportion a percentage of indirect costs and overheads to the projects to include it as part of the claim in addition to the direct costs.

241. Mr Kelly decided to defer to Mr Bogiatto's experience, and signed and returned the 2013 AusIndustry R&D Tax Incentive Application. The application was submitted to AusIndustry by Mr Bogiatto on that day.

242. The application nominated Mr Bogiatto of "Lambdachase" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Moorilla had relied on advice from a tax agent or R&D consultant and identified the person from whom Moorilla had received such advice as Mr Bogiatto of "Lambdachase". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

243. On 16 May 2014, Mr Bogiatto sent an email to Mr Kelly attaching AusIndustry's Notice of Registration and the R&D Tax Incentive Schedule. The email stated that the figures in the R&D Tax Incentive Schedule should be incorporated into Moorilla's 2013 income tax return. The R&D expenditure figures in the Schedule were as follows:

• Label E, "R&D expenditure - Salary expenditure" - $1,179,324;
• Label G, "R&D expenditure - Other" - $835,572; and
• Labels X and Z, "Total notional R&D deductions" - $2,051,594.

244. On 7 July 2014, Mr Bogiatto sent an email to Moorilla confirming that the 2013 R&D Tax Incentive Schedule should have been forwarded to Moorilla's accountant to lodge with the company tax return. He also provided a copy of an invoice dated 27 June 2014, requiring payment of fees totalling $101,553.87, payable into an account held by Lambdachase Services.

245. On 10 November 2014 Mr Kelly sent an email to Mr Bogiatto advising Mr Bogiatto that he was deferring to his expertise and inviting him to reconsider the correctness of the R&D expenditure figures. Mr Bogiatto replied on that day stating:

The return you sent can be lodged.

The information contained in relation to the R&D matter has no issues.

I am comfortable with the number and will handle all enquiries from AusIndustry.

246.

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After Mr Bogiatto confirmed the correctness of the R&D figures, Moorilla's tax agent and accountant, BDO, lodged Moorilla's income tax return in respect of the 2013 financial year. As a result of the lodgement of the 2013 income tax return, the Commissioner allowed and credited to Moorilla an R&D tax offset of $923,217.75.

F.3.2.2 Section 290-60(1)(b): consideration

247. Lambda Chase's engagement letter was signed by Mr Bogiatto and contained Lambdachase Advisors' ABN. As amended by handwritten notation, the fee was "10% capped at $100,000 of the net Research & Development tax offset granted from the [ATO] in the first instance". The terms of engagement set out in the letter included that "[y]ou may accept these terms … by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter".

248. As noted earlier, on 7 July 2014, an invoice was issued to Moorilla for preparation and submission of its 2013 R&D tax incentive application in the amount of $101,553.87, requiring payment to be made to Lambdachase Services. The invoice was on a "LambdaChase" letterhead, which also contained Mr Bogiatto's name and qualifications. It bore Lambdachase Services' ABN. The invoice was paid by Moorilla on 13 February 2015.

249. Consideration in the form of a promise to pay was received by Lambdachase Advisors "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Consideration in the form of payment was received by Lambdachase Services. I am satisfied that this was also "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Lambdachase Advisors marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Ryusei. Lambdachase Services was an associate of Mr Bogiatto, Ryusei and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.3.2.3 Section 290-60(1)(c): substantial role

250. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out in Section F.3.2.1 above. None of the roles could be said to be ones which were not of substance.

251. The Commissioner submitted that Lambdachase Services played a substantial role in promoting the scheme. I do not accept that submission. I accept that certain conduct which occurs after a scheme has been implemented might in particular circumstances be capable of being marketing or promoting - see: [30] above. However, all the Commissioner has established in the present case is that Lambdachase Services received consideration. It was not shown to have been otherwise involved in the relevant events. In those circumstances, the Commissioner has not established that Lambdachase Services engaged in any marketing or promotion such that it was a promoter - cf: s 290-60(1)(a). That conclusion does not immunise Lambdachase Services from a conclusion that it breached the prohibition in s 290-50(1).

F.3.3 Tax exploitation scheme

252. I am satisfied on the basis of the matters set out above and below, that there was a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

253. The "scheme" at least included advising Moorilla that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in Moorilla's tax return, lodging the R&D Tax Incentive Application and advising Moorilla to lodge the 2013 income tax return.

254. The "tax exploitation scheme" was one which was implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that Mr Bogiatto, Ryusei, Lambdachase Advisors and Moorilla (alone or together) entered into or carried out the scheme with the sole or dominant purpose

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of Moorilla getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

255. As for the second condition, for the reasons given below, it was not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that Moorilla was entitled to any of the scheme benefit.

256. The Commissioner's primary argument as to why it was not reasonably arguable that any of the scheme benefit was available was, again, that the "company did not and does not have adequate or contemporaneous records to substantiate that the claimed R&D expenditure was incurred on R&D activities that had been registered with AusIndustry". This submission was said to have the consequence that none of the claim was reasonably arguable at law. I have earlier rejected the proposition that a proved inadequacy of records necessarily means that the claim was not reasonably arguable at law. In any event, the basis for the submission that the taxpayer did not have adequate or contemporaneous records was not identified and is contrary to the Commissioner's evidence. The evidence demonstrated that contemporaneous accounting records were available and I infer from the evidence referred to above that documentary evidence was available in relation to the activities which were being conducted. The Commissioner's evidence did not establish that none of the activities were properly to be regarded as R&D activities.

257. The Commissioner's second argument was that the amount of the R&D expenditure claimed by Moorilla exceeded any reasonably arguable view of the expenditure it incurred on R&D activities. The Commissioner's submissions included (emphasis in original):

(i) In the 2013 financial year, Mr Bogiatto calculated R&D salary expenditure in the sum of $1,179,324. At [47(b)], Mr Kelly states "I knew that only five of Moorilla's staff had worked on the projects for which the R&D claim had been made… Collectively, Moorilla incurred at most $500,000 on their salaries. No more than 40% of any of their time was attributable to the Virtual Mona and Robotic Displace Case projects, and accordingly the total salary and wage expense attributable to these projects was at most $200,000 "; [emphasis added]

(ii) In the 2013 financial year, Mr Bogiatto calculated 'R&D Expenditure - Other' in the sum of $835,572. At [47(a)] and [47(c)], Mr Kelly notes that "I had provided Mr Bogiatto a list of the $51,306.73 in direct costs incurred by Moorilla" and "I could not identify indirect costs or overheads to justify the rest of the costs claimed to be R&D. There were, to my knowledge, no such indirect costs or overheads";

(iii) Mr Kelly observes (at [95]), in relation to the R&D expenditure figures calculated by Mr Bogiatto, "these amounts were completely disconnected from the true position";

(iv) Mr Kelly deposes (at [97]) that he now believes "the amount Moorilla claimed [for R&D salary expenditure] on the advice of Mr Bogiatto to be grossly inflated".

258. I accept that the amount of R&D expenditure exceeded any reasonably arguable view of the expenditure incurred on R&D activities.

259. The Commissioner also submitted that there was a "very high risk" (being a reference to a risk rating attributed by KPMG when conducting a review of Moorilla's R&D claim) that Moorilla's aggregated turnover exceeded $20 million in the 2013 financial year.

260. The aggregated turnover of the relevant group exceeded $25 million and Moorilla's aggregated turnover was considered by KPMG to be approximately $21.7 million. That being so, Moorilla was entitled to a 40% non-refundable R&D tax offset, not the 45% refundable R&D tax offset that was claimed.

261. The Commissioner has discharged the onus of establishing that it was not reasonably arguable that the whole of the scheme benefit was available at law, but not that none of it was available at law. I conclude that it was not reasonably arguable that most of the scheme benefit was available at law.

F.3.4 Scheme benefit

262. There was a scheme benefit because an amount that the Commissioner had to pay or

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credit to Moorilla under a taxation law was, or could reasonably be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

263. As noted earlier, the precise amount of the scheme benefit has not been established.

F.4 BBS Flooring Products Pty Ltd

264. BBS imports and manufactures installation accessories for the installation of floor coverings, including the trade items that tradespeople use when installing floor coverings. Mr William Bateman was at all relevant times the director and secretary of BBS. He provided evidence in the proceedings by way of affidavit.

265. In 2012, BBS engaged a person to assist it to submit an application to AusIndustry for registration of R&D activities. The total sum of BBS's R&D expenditure was self-assessed at $80,000 but despite submission of the application form to AusIndustry, BBS did not include any amount for R&D in its 2012 income tax return. The Commissioner contended that BBS was a taxpayer participant in an asserted tax exploitation scheme for the 2013 financial year.

F.4.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

266. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60;
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
(4) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors each being a promoter of a tax exploitation scheme, notwithstanding that Lambdachase Services was not itself a promoter because it had no role in marketing or encouraging interest in the tax exploitation scheme. Lambdachase Services received consideration which resulted in those entities being promoters. The reasons for this conclusion are further explained in Section C.4 above.

F.4.2 Promoter

F.4.2.1 Section 290-60(1)(a): marketing or encouragement

267. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, a scheme (identified in Section 4.3 below) within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

268. On 17 October 2014 Mr Bogiatto met with Mr Bateman at BBS's premises and told him that he was a chartered accountant specialising in assisting clients with R&D and was an expert in R&D claims. During this meeting Mr Bateman indicated that BBS did not have documentation in place and had looked at making R&D claims previously but had found it onerous from an administrative point of view. Mr Bateman gave the following account of what was said:

Me: BBS Flooring is poorly prepared to make R&D claims. We don't have documentation in place and don't really understand the R&D claims process. We have looked into it previously and found it rather onerous from an administrative point of view to make a claim.

Mr Bogiatto: Well I am the expert that can help you. I have done this before and you will not have to be burdened unnecessarily by the administrative aspects of the R&D process. I will interview you, gather the necessary information, and make the submission. You will not have to worry about having to do too much at your end with the R&D application process.

Me: How can you do all that without BBS Flooring having to put in a lot of work?

Mr Bogiatto: What I can do is take notes from the records you have and what you

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have done that could have been claimable R&D. I would select from that the activities that we would register. I can prepare the documentary evidence that would be needed to support the R&D Application to AusIndustry. Tell me about the work that BBS Flooring does that you think might be R&D.

Me: Our competitors are particularly price focused in our industry and most of our competition comes from China and constantly sets new low benchmarks for price, so we have to look at ways we can add value without reducing the price. It's very hard to come up with something truly innovative but we are constantly looking at how to improve the features of our product. So if we can, we look at it more along the lines of value for parts. And most of that is incremental improvements rather than something dramatic. For example, we have developed a process to improve carpet grippers to secure carpet to the floor. We have also been looking at how we can use tapes to improve performance and reduce odours. Is that the sort of project that you would look at as R&D?

Mr Bogiatto: Yes, I've got a system to do this. I have been studying the R&D processes, am familiar with it and had done it for many people. Leave it to me, you just provide the information I ask for, outline these projects, and we'll go through your accounts.

Me: There are no R&D allocations or buckets in our accounts.

Mr Bogiatto: We know what's claimable and what's not. We know how to assemble it in a format which passes muster with the ATO. Why don't we go for a walk around the premises and you can show it to me?

269. Mr Bateman received an engagement letter from Mr Bogiatto, headed "Terms of Engagement", dated 17 October 2014. This was on "LambdaChase" letterhead, as described at [112] above. The letterhead also included Lambdachase Advisors' ABN underneath the composite. The name Lambdachase Advisors did not appear in the letter. Underneath Lambdachase Advisors' ABN was Mr Bogiatto's name together with various qualifications: "Paul Bogiatto B Bus (Mkt), B Bus (Acc), DIP FS, CA, JP".

270. The "Terms of Engagement" identified the fee payable as 30% of the net R&D tax offset sought. Mr Bateman was concerned about the level of the fee and he contacted Mr Bogiatto by telephone resulting in an exchange which included:

Me: I have received the engagement letter but am uncomfortable with this 30% fee arrangement.

Mr Bogiatto: I am the guy that would make this happen and you are not paying for my time but for my acquired knowledge of the R&D system. I am able to achieve a result. The risk of success is with me. Trust me. BBS Flooring was not able to get anywhere previously with R&D but I will get you there.

Me: Well I haven't been able to get up the hill previously in my own endeavours so if you are able to get me up the hill, then we can talk about a more reasonable fee rate for subsequent years.

271. Mr Bateman subsequently authorised Mr Bogiatto to undertake the R&D work and accepted the terms of engagement by providing instructions to Mr Bogiatto.

272. Later in October 2014, Mr Bogiatto attended BBS's premises and questioned Mr Bateman about the nature of BBS's projects. Mr Bateman identified three projects he wanted Mr Bogiatto to consider in making an R&D claim: "carpet grip", "development of improved tape products" and "coupling parts". Mr Bateman later provided financial information to Mr Bogiatto and a "script" which included an outline of the three projects. The "script" referred to numerous "experiments" which had been conducted and identified a number of "tests and failures". The script also set out the "objectives" of the projects.

273. The "script" was used by Mr Bogiatto in drafting the AusIndustry R&D Tax Incentive Application, which he sent to Mr Bateman for approval. It is apparent from the terms of the application for registration that the material contained in the "script" was used. It was not suggested that the underlying facts referred to in the "script" were invented or that the

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"script" did not reveal activities which arguably constituted R&D activities.

274. The application nominated Mr Bogiatto of "Lambda Chase Advisors" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that BBS had relied on advice from a tax agent or R&D consultant and identified the person from whom BBS had received such advice as Mr Bogiatto of "Lambda Chase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

275. In the AusIndustry R&D Tax Incentive Application, Mr Bogiatto had calculated total R&D expenditure in the amount of $1,317,857. On seeing this, Mr Bateman formed the view that the amount claimed "simply did not make sense". He telephoned Mr Bogiatto. Mr Bateman gave the following account of their conversation:

Me: The numbers in the application are quite large. Are you sure this is right?

Mr Bogiatto: I am experienced in this. I know how to put these claims together. I know what is claimable and what is not. And you don't have to burden yourself with that.

276. Mr Bateman decided to defer to Mr Bogiatto and approved the lodgement of the application with AusIndustry.

277. On 1 December 2014, Mr Bateman received an email from AusIndustry attaching a letter dated 13 November 2014 approving the registration of BBS's R&D activities. Mr Bateman regarded registration of BBS's R&D activities as "validation that BBS Flooring had had its application reviewed and approved by AusIndustry".

278. Also on 1 December 2014, Mr Bateman received an email attaching a 2013 R&D Tax Incentive Schedule. The email contained a signature block identifying the email as being sent by Mr Bogiatto who was identified as the "Managing Partner" of Ryusei trading as Lambda Chase Chartered Accountants and providing Ryusei's ABN.

279. Mr Bogiatto told Mr Bateman that he should be appointed as BBS's tax agent in order to amend its 2013 income tax return, the tax return having earlier been submitted without a claim for an R&D Tax Incentive. Mr Bateman declined to appoint Mr Bogiatto as BBS's tax agent. However, he permitted Mr Bogiatto to correspond with BBS's existing tax agent to provide the required information so that the existing tax agent could amend the 2013 income tax return.

280. The amended 2013 income tax return was lodged on 4 December 2014. As a result of the lodgement of that amended return, BBS was allowed an R&D tax offset of $593,035.65 and received a credit from the ATO in that amount.

281. Mr Bateman was concerned about the quantum of the refund provided by the ATO, considering it to be "much higher than I had expected". He asked Mr Bogiatto to provide his workings. Mr Bateman gave the following account of a conversation, which I accept occurred:

Me: Paul, we lodged the amended tax return and BBS Flooring has received a refund in the amount of $593,035.65 from the ATO. It's much higher than I had expected. Would you please provide the workings of how this was calculated?

Mr Bogiatto: This is my intellectual property and I am not going to disclose my algorithm for those calculations.

Me: Isn't the R&D claim part of the tax return and something that BBS Flooring should understand?

Mr Bogiatto: The calculations are my intellectual property of my business and that is why I am worth the premium fees.

282. On 24 February 2015, Mr Bateman wrote an email to Mr Bogiatto which included:

I am still struggling with the implications of the large R&D credit you arranged for BBS. My expectation had been in the order of $40,000 - $50,000. The sudden change in magnitude came among the end-of-year rush when I did not have time to scrutinise the detail.

My chief concern is that the claims is 'self-assessed' - that is that the person making the claim (BBS) must be sure of its validity - and that I have no experience to make this judgement. I rely almost solely on

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your experience and assurance that the information we provided was correctly calculated.

…

It would help greatly if I could understand the what expenses were classified into core R&D expenditure of each of the projects. Can you please provide a break-up of the below figures…

283. Mr Bateman gave evidence that, on 24 February he received a telephone call from Mr Bogiatto in response to his email during which Mr Bogiatto said:

If there was something incorrect about the calculations in the 2013 R&D schedule, BBS Flooring would not have been paid and why would you doubt me now when I have done this for you and delivered … I'm worth every cent.

284. Mr Bogiatto also stated "we should get started on the next year's claim".

F.4.2.2 Section 290-60(1)(b): consideration

285. As noted earlier, the "Terms of Engagement" dated 17 October 2014 sent on the letterhead of "LambdaChase chartered accountants" was signed by Mr Bogiatto and bore Lambdachase Advisors' ABN. The fee was "30% of the net Research & Development tax offset sought". Lambdachase Advisors received consideration in the form of a promise to pay.

286. On 27 February 2015, an invoice was issued to BBS in the amount of $203,491.20, requiring payment to be made to Lambdachase Services. Between 5 March 2015 and 24 July 2015, Mr Bateman caused seven payments to be made in satisfaction of the invoice. These payments (which also constitute consideration within the meaning of s 290-60(1)(b)) were made in performance of the promise to pay made to Lambdachase Advisors.

287. The consideration in the form of the promise to pay and in the form of payment was received "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Lambdachase Advisors marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Ryusei. As to the consideration in the form of payment, Lambdachase Services was an associate of Mr Bogiatto, Ryusei and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.4.2.3 Section 290-60(1)(c): substantial role

288. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. None of the roles could be said to be a role which was not of substance.

F.4.3 Tax exploitation scheme

289. I am satisfied on the basis of the matters set out above and below, that there was a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

290. The "scheme" at least included advising BBS that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in BBS's tax return, lodging the R&D Tax Incentive Application, advising the taxpayer to lodge an amended income tax return and assisting with the lodgement of the amended income tax return.

291. The "tax exploitation scheme" was one which was implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that Mr Bogiatto, Ryusei, Lambdachase Advisors and BBS (alone or together) entered into or carried out the scheme with the sole or dominant purpose of BBS getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

292. As for the second condition, for the reasons given below, it was not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that BBS was entitled to any of the scheme benefit.

293.

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The Commissioner's primary argument as to why it was not reasonably arguable that any of the scheme benefit was available was, again, that "BBS did not have adequate or contemporaneous records to substantiate the claimed R&D expenditure". In support of this submission, the Commissioner relied upon the evidence of Mr Bateman to the effect that he was not able to reconcile the amounts which Mr Bogiatto had used in the application and in the 2013 R&D Tax Incentive Schedule. However, the evidence adduced by the Commissioner establishes that it was arguable that R&D activities were carried out. I infer that there were witnesses available, including Mr Bateman, who could have given evidence about the activities. The evidence also reveals that financial records existed and that Mr Bateman considered a small claim was available. Mr Bateman's evidence was that he could not "reconcile" Mr Bogiatto's calculations. Although Mr Bateman's affidavit stated that there were "no records kept by BBS Flooring in relation to any R&D activity it undertook" and that "there were no materials available to substantiate that the claimed R&D expenditure amounts arrived at by Mr Bogiatto were incurred on R&D activities", these statements - in the nature of submissions - are inconsistent with other parts of his affidavit. Mr Bateman's affidavit makes it tolerably clear that there were records available which could have been relied upon to support an R&D claim. For example, there were records proving employment expenses and other expenditure. These records could have been supplemented by oral evidence. The Commissioner has not established that it was not reasonably arguable that some R&D tax offset was available. It would have been open to the ATO or a merits review Tribunal to accept the evidence of witnesses as supplemented by such documentary records as did exist.

294. The Commissioner's second argument was that the amount of R&D expenditure claimed by the taxpayer exceeded any reasonably arguable view of the amount it expended on R&D activities in circumstances where:

(1) the total R&D expenditure claimed exceeded BBS's total expenditure, excluding cost of goods sold (where those costs formed no part of the R&D activities);
(2) the total amount claimed for R&D salary expenditure comprised approximately 51% of BBS's entire salary expenditure for the year despite Mr Bateman's acknowledgement that BBS employed 14 staff at the relevant time, only four of whom were involved in R&D activities and, on average, only 40% of those four employees' time was directed to R&D activities.

295. I accept that it was not reasonably arguable that most of the scheme benefit was available at law.

F.4.4 Scheme benefit

296. There was a scheme benefit because an amount that the Commissioner had to pay or credit to BBS under a taxation law was, or could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

297. The precise amount of the scheme benefit has not been established.

F.5 Derisole Pty Limited

298. Derisole was the taxpayer participant in an alleged tax exploitation scheme for the 2013 financial year. Mr Crocker became a director of Derisole on 17 July 2002 and managed the business from then until May 2016. Derisole was a retailer of seafood, operating under the brand name "Joto Fresh Fish". The business was sold to Poulos Brothers Seafood in May 2016. Mr Crocker continued to work as the sales manager for the new owners.

299. Before Mr Bogiatto made contact with Mr Crocker, Derisole had begun fitting out new business premises using refrigeration equipment developed by Anycool Pty Ltd. That refrigeration equipment used technology developed by Anycool called "Liquid Refrigerant Optimiser" ( LRO ). Mr Crocker understood that the LRO would allow Derisole to reduce considerably the amount of refrigerant the company had previously used with a resulting cost saving.

300. In his affidavit, Mr Crocker stated:

Anycool supplied the LRO technology in conjunction with the fitout … but it did not develop such technology for Derisole to own. So the LRO technology did not in any

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way belong to Derisole. Rather, Derisole had spent close to $800,000 fitting out the warehouse of which approximately $300,000 was attributable to the LRO technology we installed as part of this process. I considered Derisole had invested in the LRO technology only in the sense that we had installed it for use in Derisole's business.

F.5.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

301. For the reasons given below, for the purposes of s 290-50(1), I conclude that:

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.

F.5.2 Promoter

F.5.2.1 Section 290-60(1)(a): marketing or encouragement

302. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the scheme within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

303. In July 2013, Mr Crocker received a telephone call from a man he thought identified himself as Mr Bogiatto. Mr Crocker did not recall the detail of that telephone call, but did recall Mr Bogiatto indicating that "Anycool has referred me to you". A meeting was scheduled for 23 August 2013 at Derisole's business premises. This meeting was arranged by Mr Bogiatto through emails with Mr Crocker. Mr Bogiatto's emails included a signature block identifying Mr Bogiatto as the "Managing Partner" of Ryusei trading as Lambda Chase Chartered Accountants and providing Ryusei's ABN.

304. Mr Crocker gave the following account of the conversation which occurred on 23 August 2013:

Mr Bogiatto: As you know, Trevor from Anycool gave me your details because you have invested in the LRO technology for your warehouse fitout. You are eligible to receive an R&D grant for the money you have invested in the new technology.

Me: I'm no engineer but it makes a lot of sense to me to install the newest technology in the warehouse because it uses a fraction of the refrigerant that we would be using otherwise. It should deliver significant and immediate cost savings due to the carbon tax that would be payable to operate traditional refrigeration equipment because the refrigerant gas attracts the carbon tax. With the LRO technology we will literally use 20% of the refrigerant gas which is very harmful for the environment.

Mr Bogiatto: You're entitled to an R&D grant under the R&D scheme. You've paid for this technology, you should get a grant for it. I can get all the technical information from Anycool so all I will need from you is the financial information.

Me: I can arrange for my accountant to provide you with that information directly.

305. After the meeting, Mr Bogiatto obtained information from Anycool and financial information from Derisole's accountant.

306. On 28 April 2014, Mr Bogiatto lodged with AusIndustry an R&D Tax Incentive Application for the 2013 year. That application recorded that three of Derisole's employees were engaged in R&D activities and that Derisole's total R&D expenditure was $1,008,090.

307. The application nominated Mr Bogiatto of "Lambdachase Advisors Pty Ltd" as the "nominated contact person". The application also stated that Derisole had relied on advice from a tax agent or R&D consultant and identified the person from whom Derisole had received such advice as Mr Bogiatto of "Lambdachase Advisors Pty Ltd". The ABN

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of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

308. On 16 May 2014, Mr Bogiatto emailed Mr Crocker a copy of AusIndustry's "Notice of Registration" dated 14 May 2014. Mr Bogiatto's email signature referred to Ryusei trading as Lambda Chase Chartered Accountants. Mr Bogiatto also provided an R&D Tax Incentive Schedule for inclusion in Derisole's proposed amended 2013 tax return. Derisole had already submitted its 2013 tax return.

309. On 21 May 2014, Mr Crocker directed his tax agent to lodge the amended income tax return for the 2013 financial year. Shortly thereafter, Derisole received a tax refund in the amount of $151,213.35.

F.5.2.2 Section 290-60(1)(b): consideration

310. On 21 August 2014, Mr Bogiatto emailed an invoice in the amount of $49,900 from Lambdachase Services. Derisole did not pay the invoice at that time because it did not have the available cash at the time to pay it.

311. By late October 2014, Mr Bogiatto contacted Mr Crocker and indicated that AusIndustry had selected Derisole's 2013 R&D Tax Incentive Application for review. It gradually became apparent to Mr Crocker that Derisole had not been engaged in any R&D activities and had not been entitled to make the claim which it did. Rather, Derisole had paid Anycool for refrigeration equipment in the context of fitting out its new premises. This would have been obvious to any competent accountant.

312. By 5 March 2015, Mr Crocker had decided to withdraw the 2013 R&D registration and communicated that fact to AusIndustry. After doing this, he telephoned Mr Bogiatto and they had the following conversation:

Me: Paul, I have obtained a second opinion regarding Derisole's R&D claim and have decided to withdraw it. I also have spoken to Dr Gillam from AusIndustry and she has told me that Derisole is not entitled to the R&D Grant.

Mr Bogiatto: Don't talk to AusIndustry or do anything. I'll handle it, I'll be the judge of whether you're entitled to it.

Me: No, Paul. I've done it.

313. After this conversation, Mr Bogiatto did not follow up in relation to fees.

314. On 19 October 2016, a letter of demand was received by Derisole from Alexander Maroulis Lawyers, which attached a letter dated 18 March 2014 entitled "Terms of Engagement" on a "LambdaChase" letterhead, as described at [112] above, and bearing Ryusei's ABN. Mr Crocker did not recall having previously received the engagement letter. Nevertheless, the probabilities favour that he received the letter, did not execute it and accepted it for Derisole by continuing to instruct Mr Bogiatto after it was received. Also attached to the letter of demand was the invoice in the amount of $49,900.29. A demand was made for payment of $27,741.45 by way compromise. Mr Crocker caused solicitors retained on his behalf to respond, denying that any sum was owed by Derisole. Derisole has not paid any amount.

315. As discussed above, the probabilities favour that Derisole accepted the "Terms of Engagement". Consideration in the form of a promise to pay was received by Ryusei "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Ryusei marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Lambdachase Advisors. It may well have been that Derisole had a good defence to any demand for payment in the circumstances, but Ryusei still obtained consideration when Derisole accepted the Terms of Engagement in the form of a promise to pay.

316. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.5.2.3 Section 290-60(1)(c): substantial role

317. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. None of them could be said to be a role which was not of substance.

F.5.3 Tax exploitation scheme

318. I am satisfied on the basis of the matters set out above and below, that there was

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a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

319. The "scheme" at least included advising Derisole that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing a R&D Tax Incentive Schedule for inclusion in Derisole's tax return, lodging the R&D Tax Incentive Application for registration and advising the taxpayer to lodge an amended income tax return.

320. The "tax exploitation scheme" was one which was implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that Mr Bogiatto, Ryusei, Lambdachase Advisors and Derisole (alone or together) entered into or carried out the scheme with the sole or dominant purpose of Derisole getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

321. As for the second condition, for the reasons given below, it was not reasonably arguable that any of the scheme benefit was available at law: s 290-65(1)(b).

322. The Commissioner's primary argument as to why it was not reasonably arguable that any of the scheme benefit was available was, again, that "Derisole did not have adequate or contemporaneous records to substantiate that the R&D expenditure claimed … was incurred on R&D activities". I accept that Derisole did not have such records, but that fact is not a bar to it establishing that it had a reasonably arguable claim by other means.

323. The Commissioner's second argument was that the amount claimed as R&D expenditure was not incurred on R&D activities, because as Mr Crocker stated:

(1) Derisole "never conducted any experimental activities based on scientific principles - in fact, it had never undertaken any experiments at all";
(2) Derisole did not engage in work for the purpose of acquiring new knowledge;
(3) Derisole's daily monitoring of the temperature of the refrigeration was aimed solely at ensuring the refrigeration equipment was functioning correctly. There was no part of this process that involved, for example, testing a hypothesis to arrive at conclusions - rather, it simply involved a staff member spending a small part of his day "checking the temperature in the cool room and freezer facilities".

324. I accept this argument. I am satisfied that the Commissioner has established that it was not reasonably arguable that R&D expenditure was incurred.

325. The Commissioner also submitted, by way of his third argument, that the amount of R&D expenditure claimed by Derisole exceeded any reasonably arguable view of the amount it expended on R&D activities. It follows from accepting the second argument that I also accept this argument.

326. I accept the Commissioner has established that it was not reasonably arguable that any of the scheme benefit was available at law.

F.5.4 Scheme benefit

327. There was a scheme benefit because an amount that the Commissioner had to pay or credit to Derisole under a taxation law was, or could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

F.6 Indux Air Systems Pty Ltd

328. Indux was the taxpayer participant in alleged schemes in the 2013 and 2014 financial years. Mr Stephen Phillip Vidler was the director of Indux. He provided evidence by way of affidavit. He had been the director since 1 December 1994. Indux went into liquidation on 19 July 2017.

329. Before liquidation, Indux was the corporate trustee of the Indux Trading Trust. Mr Vidler described the Indux Trading Trust as the primary operating entity. The Indux Trading Trust was involved in the design, manufacture and installation of air filtration equipment. It employed the relevant staff and incurred the relevant business expenditure.

330. Mr Vidler gave evidence to the effect that Indux was involved in activities which he

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considered constituted R&D activities, including problem solving, analysing, design and conducting trials.

F.6.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

331. For the reasons given below, in relation to the 2013 and 2014 years, I accept that, for the purposes of s 290-50(1):

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of tax exploitation schemes within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60; and
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60.

F.6.2 Promoter

F.6.2.1 Section 290-60(1)(a): marketing or encouragement

332. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the schemes identified in Section 6.3 below within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

333. In February 2014, Mr Vidler received an unsolicited telephone call on behalf of Lambda Chase. Mr Vidler was informed by the caller that Lambda Chase was "looking for companies interested in applying for the R&D tax incentive". Mr Vidler responded that he had been trying unsuccessfully for ten years to obtain advice about making an R&D tax incentive application. A meeting was then organised.

334. On 27 February 2014 Mr Vidler received an email from Mr Bogiatto thanking him for speaking with his colleague, Stephen, the week before. Mr Bogiatto confirmed the meeting at Indux's office for 10 March 2014. Mr Bogiatto's email signature block referred to Ryusei trading as "Lambda Chase Chartered Accountants" and contained Ryusei's ABN.

335. At the meeting on 10 March 2014, Mr Vidler told Mr Bogiatto that Indux engaged in R&D activities but had never made a claim. He gave the following account of a conversation:

Mr Bogiatto explained the R&D tax incentive and the process of applying for it in such technical terms that, while his explanation gave me the sense he was knowledgeable about the incentive and the process, I did not retain the specific details of what he said. Our discussion then continued and we exchanged words to the following effect:

Me: The Indux business is carried on through a trust and so I have been told that it cannot be eligible to make an R&D claim.

Mr Bogiatto: I can put in place a company structure that would overcome that difficulty. I have very high confidence that Indux would be eligible for the R&D tax incentive. The next step is for you and the company to put forward your R&D projects, detailing expenses, descriptions, failures and objectives, number of hours and materials used in the R&D programs.

Me: What will be your fee?

Mr Bogiatto: My fee will be 30% of the R&D tax benefit refunded to Indux. I will include the fee in the R&D claim as R&D expenditure so it will not be an additional expense that Indux will incur.

336. Mr Vidler showed Mr Bogiatto through the Indux factory and showed him the project that Indux was working on at the time.

337. Mr Vidler and others, including Alan Calvert (the Production Manager), Michael Phillips (the Project Manager), Brian Rosner (the Sales Engineer) and Sophie Vidler (Mr Vidler's daughter and Indux's accounts manager) gathered information over the next several months to provide Mr Bogiatto details of Indux's R&D projects.

338. The 2013 financial year : On 23 April 2014, Mr Bogiatto emailed Ms Vidler, requesting "your 2013 financial accounts". Mr Vidler was copied to the email. Although Mr Vidler could not locate a response, he believed

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that either he or Ms Vidler provided the information on about 23 April 2014.

339. On 25 April 2014, Mr Bogiatto sent to Mr Vidler two emails. By these emails, he provided to Mr Vidler a draft AusIndustry R&D Tax Incentive Application. That application recorded that, in the 2013 financial year, Indux's overall R&D expenditure was $621,935. Mr Bogiatto sought additional information including tax file numbers for Indux and further information in relation to Indux for the 2013 financial year.

340. On 28 April 2014, Mr Vidler sent an email to Mr Bogiatto stating:

The total R&D expenditure seems high is this correct?

341. Mr Bogiatto responded on 29 April 2014, stating that he believed it was correct because Indux had "a lot of overheads to allocate since so many job [sic] have a R&D aspect". He also stated:

I am more interested in knowing of more technical issues of your R&D projects and would like to include these in your submission.

342. After receiving this email, Mr Vidler telephoned Mr Bogiatto and asked what additional technical information was required. Mr Bogiatto indicated that he required information "about the research, what is the design and the process of improving the design through experiments and trials".

343. After this discussion, Mr Vidler provided additional information in respect of a series of projects by email sent to Mr Bogiatto on 29 April 2014. This information identified various "challenges", the work carried out and specified the amount expended on each project.

344. On 6 May 2014, Mr Bogiatto emailed Mr Vidler informing him that he had lodged with AusIndustry the AusIndustry R&D Tax Incentive Application for the 2013 financial year and attached an engagement letter headed "Terms of Engagement". The engagement letter was dated 15 April 2014 and was on a "LambdaChase" letterhead, as described at [112] above, and bore Lambdachase Advisors' ABN. Mr Vidler executed the "Terms of Engagement" on 7 May 2014.

345. The AusIndustry R&D Tax Incentive Application recorded that, in the 2013 financial year, Indux's overall R&D expenditure was $621,935. The application identified Mr Bogiatto of "Lambdachase Advisors Pty Ltd" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Indux had relied on advice from a tax agent or R&D consultant and identified the person from whom Indux had received such advice as Mr Bogiatto of "Lambdachase". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

346. On 21 May 2014, Mr Bogiatto emailed to Mr Vidler a copy of AusIndustry's Notice of Registration for the 2013 income year dated 9 May 2014. Attached to that email was an R&D Tax Incentive Schedule for 2013 containing the following amounts which Mr Bogiatto advised should be included in Indux's 2013 income tax return:

• Label E, "R&D expenditure - Salary expenditure" - $317,533;
• Label G, "R&D expenditure - Other" - $290,359;
• Label M, "R&D assets - Decline in value" - $14,042; and
• Label Z, "Total notional R&D deduction" - $621,935.

347. In around June 2014, Mr Vidler decided to appoint Mr Bogiatto as Indux's accountant. On 26 June 2014, Ms Vidler provided to Mr Bogiatto a copy of Indux's MYOB file in respect of the 2013 financial year. On the same day, Mr Vidler provided Business Activity Statement ( BAS ) data for May 2014 to Mr Bogiatto by email and enquired whether Indux could lodge the BAS itself. Mr Bogiatto responded by email on 26 June 2014, querying "can I lodge this for you" and indicating that another company should be set up.

348. On 1 July 2014 Mr Bogiatto sent a further email, replying to Mr Vidler's email of 26 June, stating:

Phil

I will set this up for you.

Indux Design and Engineering Pty Ltd

349.

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On 1 August 2014, Mr Vidler sent an email to Mr Bogiatto asking Mr Bogiatto whether "now [is] the time to rearrange corporate set up to make R&D claim easier?". On 5 August 2014, Mr Bogiatto replied stating, among other things: "we are restructuring".

350. On 12 August 2014, Mr Vidler responded, asking about the progress of the R&D refund and when it would be ready to be lodged. About the restructuring, he asked: "Tell me what is the restructuring? Don't keep it a secret. What do I need to do?". On 13 August 2014 Mr Bogiatto responded as follows:

Phil

Have set up your company

In the middle of your work.

I will need the 2012 financial accounts.

Please SMSF that have been done also.

351. On 14 August 2014, Mr Bogiatto emailed Mr Vidler asking for information and documents in order to complete Indux's income tax return for the 2013 financial year. Ms Vidler responded on 18 August 2014 by email, copied to Mr Vidler, attaching copies of the documents requested.

352. On 1 September 2014, Mr Vidler sent an email to Mr Bogiatto enquiring "[s]hould we now be trading as Indux Enviro Filtration P/L?". He sought details of the ABN and ACN of that new company. By email on that same day, Mr Bogiatto replied, stating:

Trade has [sic - as] the trust still.

We will use the other company Indux Enviro Filtration P/L as the R&D entity. …

353. On 12 September 2014, Mr Vidler enquired of Mr Bogiatto by email when Indux's tax return for the 2013 financial year would be lodged. Mr Bogiatto replied that "[a]ll is drafted up", but that there were matters which he would query with Mr Vidler.

354. Mr Bogiatto sent a further email to Mr Vidler on 12 September 2014 seeking further information and the provision of additional documents in order to progress work on the income tax return for Indux. Ms Vidler responded on 23 September 2014 and provided additional material. Mr Bogiatto, Mr Vidler and Ms Vidler communicated further between 25 September 2014 and 4 March 2015 in respect of the provision of additional material.

355. On 13 October 2015, Mr Bogiatto sent an email to Mr Vidler which attached a draft copy of Indux's 2013 income tax return (together with various other income tax returns for other entities) and sought instructions as to lodgement with the ATO.

356. On 16 October 2015 Mr Vidler responded by querying the quantum of the tax which was payable by him for the 2012 financial year. He stated that paying the amount of $18,900 to the ATO was "causing [him] to baulk" in circumstances where he was "paid in hand just $31,200 during that period". He queried: "[c]an this be seen [as] a manipulation?". He otherwise approved the lodgement of the remainder of the income tax returns, including the 2013 income tax return for Indux. Mr Bogiatto responded by indicating that "it is not manipulation because you work in the business" and "it is valid tax planning".

357. On or about 25 November 2015, Mr Bogiatto informed Mr Vidler that he had lodged with the Commissioner Indux's income tax return for the 2013 financial year. As a result of the lodgement of the amended income tax return for 2013, the Commissioner allowed Indux an R&D tax offset of $279,870.75.

358. The 2014 financial year : On 9 March 2015, Mr Bogiatto sent an email to Mr Vidler advising that, in order to claim the R&D tax incentive for the 2014 financial year, Mr Bogiatto needed Mr Vidler to provide details of the R&D projects and financial information for the 2014 financial year.

359. Mr Vidler responded by email dated 12 March 2015, providing a significant amount of information concerning potential R&D projects. In a second email of 12 March 2015, Mr Vidler provided financial information.

360. On 24 March 2015, Mr Bogiatto sent an email to Mr Vidler advising that, in order to claim the R&D tax incentive for the 2014 financial year, Mr Bogiatto needed Mr Vidler to provide details of the R&D projects and other financial information. This email was identical to the email sent by Mr Bogiatto on 9 March 2015. On 10 April 2015, Mr Bogiatto sent an email to Mr Vidler requesting updated information required to complete the 2014

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R&D submission. In a series of emails between 11 April 2015 and 23 April 2015, Mr Vidler forwarded to Mr Bogiatto updated information and attached various documents, much of which had earlier been provided to Mr Bogiatto, in answer to his renewed request.

361. On 28 April 2015, Mr Bogiatto provided to Mr Vidler a draft AusIndustry R&D Tax Incentive Application. It recorded that for the 2014 financial year, Indux's overall R&D expenditure was $708,218. The application identified Mr Bogiatto of "Lambda Chase Advisors" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Indux had relied on advice from a tax agent or R&D consultant and identified the person from whom Indux had received such advice as Mr Bogiatto of "Lambda Chase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

362. On 29 April 2015, Mr Vidler sent an email to Mr Bogiatto in which he indicated that he did not understand the R&D expenditure, queried whether it was correct, and stated that it "seems like [a] lot more than the R&D costs". Mr Bogiatto did not respond to Mr Vidler's email and Mr Vidler was unable to speak to Mr Bogiatto by telephone.

363. On 30 April 2015 at 10.45 am, Mr Bogiatto sent an email to Mr Vidler, advising that 30 April 2015 was the last day to submit the application and indicating that the application would be submitted unless Mr Vidler contacted Mr Bogiatto before 1 pm on 30 April 2015 and raised any issues. Mr Vidler, concerned not to miss the indicated deadline for the submission of the application, and having determined to defer to Mr Bogiatto's expertise in the area, authorised Mr Bogiatto to submit the application.

364. On 6 May 2015, AusIndustry issued a Notice of Registration for the 2014 financial year.

365. On 28 August 2015, Mr Bogiatto emailed to Mr Vidler an R&D Tax Incentive Schedule for the 2014 financial year, containing the following items:

• Label E, "R&D expenditure - Salary expenditure" - $329,311;
• Label G, "R&D expenditure - Other" - $378,909; and
• Labels X and Z, "Total notional R&D deduction" - $708,219.

366. Additional material was provided to Mr Bogiatto by Ms Vidler between 13 October 2015 and 20 October 2015.

367. On 9 November 2015, Mr Bogiatto sent an email to Mr Vidler which attached a draft copy of Indux's 2014 income tax return and sought instructions to lodge the income tax return.

368. Mr Vidler considered that the Indux income tax return for the 2014 financial year "falsely stated the business expenditure amounts". He made a number of attempts to telephone Mr Bogiatto to raise his concerns, but was unable to speak to Mr Bogiatto.

369. On or about 25 November 2015, Mr Bogiatto informed Mr Vidler that he had lodged Indux's income tax return for the 2014 financial year. As a result of the lodgement of the amended income tax return for 2014, the Commissioner allowed Indux an R&D tax offset of $318,698.55.

F.6.2.2 Section 290-60(1)(b): consideration

370. As noted earlier, Indux accepted the "Terms of Engagement" dated 15 April 2014 which had been sent by Mr Bogiatto. This letter bore Lambdachase Advisors' ABN.

371. Indux did not receive an invoice from any of the respondents. Nor were any fees paid by Indux to the respondents. Although no fees were in fact paid, on the basis that Indux accepted the "Terms of Engagement", it became liable to pay Lambdachase Advisors the relevant amount.

372. Consideration in the form of Indux's promise to pay was received by Lambdachase Advisors "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Lambdachase Advisors marketed and encouraged interest in the schemes and was an associate of Mr Bogiatto and Ryusei. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.6.2.3 Section 290-60(1)(c): substantial role

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373. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. None of their roles could be said to be a role which was not of substance.

F.6.3 Tax exploitation scheme

374. I am satisfied on the basis of the matters set out above and below, that there were two "schemes" which were "tax exploitation schemes" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

375. The "schemes" at least included advising Indux that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing applications for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing R&D Tax Incentive Schedules for inclusion in Indux's tax returns, lodging the R&D Tax Incentive Applications, advising the taxpayer to lodge income tax returns claiming the R&D tax incentive and lodging the income tax returns.

376. The "tax exploitation schemes" were ones which were implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that Mr Bogiatto, Ryusei, Lambdachase Advisors and Indux (alone or together) entered into or carried out the schemes with the sole or dominant purpose of Indux getting a "scheme benefit" from the schemes: s 290-65(1)(a)(i).

377. As for the second condition, for the reasons given below, it was not reasonably arguable that the scheme benefits were available at law: s 290-65(1)(b).

378. The Commissioner's primary argument in relation as to why it was not reasonably arguable that any of the scheme benefit was available was that the amounts claimed as R&D expenditure were not incurred by Indux, but rather were incurred by the Indux Trading Trust, which was not an "R&D entity" within the meaning of s 355-35 of the ITAA 1997. The Indux Trading Trust was not eligible to receive R&D incentives under Div 355 of the ITAA 1997. I accept this argument.

379. The Commissioner also argued:

(1) Indux's total expenditure was inflated, first, by the inclusion of management fees which were not incurred and, secondly, by R&D fees which were incurred by the Indux Trading Trust and incorrectly attributed to Indux. This wrongly suggested a loss for Indux for tax purposes. This resulted in the R&D benefit paid to Indux being substantially increased. In this regard, Mr Vidler stated:

Annexed to this affidavit and marked SPV42 is the Indux 2014 income tax return Mr Bogiatto prepared which was received on 9 November 2015. It also wrongly states Indux made a loss of $663,996.34 when in fact it traded profitably. I formed the view that Mr Bogiatto falsely stated the business expenditure amounts in the Indux 2014 income tax return to produce a loss the company did not in fact incur in order to maximise the R&D tax incentive refund, and in turn, to maximise Mr Bogiatto's fee (which was calculated as 30% of the refund). I telephoned Mr Bogiatto several times to discuss my concerns with him but as with my earlier attempts, he did not answer my calls. The result was that I was not able to discuss with Mr Bogiatto my concerns about the exaggerated expenditure amounts and the false trading losses.
(2) The amount of R&D expenditure claimed by Indux exceeded any reasonably arguable view of the amount it expended on R&D activities. For example, R&D salary expenditure in the 2014 financial year was claimed at $329,311. Mr Vidler observed that the true R&D salary expenditure was approximately $73,700. He further observed, in deposing to the excessive nature of the amount claimed, that the total claimed for R&D salary expenditure was approximately 89% of Indux's entire salary expenditure for the 2014 financial year.

380. I accept these alternative arguments. It follows from accepting the Commissioner's primary argument, that I accept that it

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was not reasonably arguable that any of the scheme benefits were available at law.

F.6.4 Scheme benefit

381. There was a scheme benefit because an amount that the Commissioner had to pay or credit to Indux under a taxation law was, or could be expected to be, greater than it would have been apart from the schemes or parts of them: s 284-150(1)(b).

F.7 Light This Light That Pty Ltd

382. LTLT was the taxpayer participant in an asserted tax exploitation scheme in the 2013 financial year. Ms Lisa Shanahan provided affidavit evidence relevant to that scheme. Ms Shanahan was the director of LTLT, having occupied that role since February 2015. LTLT was incorporated in 2006. Ms Shanahan was its secretary at the time of incorporation. The company directors were Harry Iliopoulos and Leo Muraschuk. Mr Iliopoulos left LTLT in 2015, hence Ms Shanahan's appointment as director.

383. LTLT manufactures LED garden lights and sells them through a distribution network in NSW, Victoria, Adelaide and Canberra.

F.7.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

384. I am not satisfied that Mr Bogiatto, Ryusei, Lambdachase Advisors or Lambdachase Services engaged in conduct which resulted in any of the respondents being a promoter of a tax exploitation scheme within the meaning of s 290-60. As discussed further below, the reason for that is that I am not satisfied that there was a tax exploitation scheme. The Commissioner has established that it was reasonably arguable that all but $2,556 of the R&D expenditure giving rise to the scheme benefit was lawfully available. Indeed, the Commissioner allowed the claim apart from this amount. I am not satisfied that it was not reasonably arguable that the remaining $2,556 was also claimable.

F.7.2 Promoter

F.7.2.1 Section 290-60(1)(a): marketing or encouragement

385. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, a scheme but I am not satisfied that the scheme was a "tax exploitation scheme". It follows that I am not satisfied about the matter in s 290-60(1)(a) or (c). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

386. On 10 March 2014, a letter of engagement, headed "Terms of Engagement", was sent to Mr Iliopoulos by Mr Bogiatto on a "LambdaChase" letterhead, as described at [112] above, with Ryusei's ABN. Also attached was a Lambda Chase promotional pamphlet. That promotional pamphlet included:

Lambda Chase specialises in assisting companies - small and large and across every industry, to access Government funding and tax concessions. Our experienced staff are experts in analysing business operations and developing comprehensive and prudent strategies to maximize claims.

Our firm is highly experienced in the preparation and lodgement of EMDG's and R&D grants. We follow up and ensure your claim is processed correctly and quickly to access the fixed pool of funds.

…

Lambda Chase are the experts in Government grants. Let us help you maximise your claims with a minimum of fuss and drama.

387. On 1 April 2014, Mr Iliopoulos wrote an email to Mr Bogiatto which included:

Hi Paul

It was a pleasure to meet you in my office a couple of Fridays ago.

Thanks for enlightening me.

Since that meeting, I have collated the documents you requested in order to enable my Company to make a claim for govt grants, in the form of money.

I have in point form:

History of R & D

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Successes and failures

Issues & Challenges to overcome

The Saudi Projects

Financing & cost of R&D

Payroll breakdown

Financial report (Tax Return)

I haven't got a copy of Financial P&L, just the Company Tax return. Plus have an Executive Summary to add.

As I mentioned at the meeting to recap:

We (LTLT PL) have invested in R & D to build a range of Australian made LED lights for the outdoors to withstand the harsh environments of Middle East (Saudi projects, North Africa and Australia since 2004. We incorporated in 2006. We have been injecting money to fund the revenue required for R&D, and also conducted "paid" field trials since 2006 to measure performance of lights in a variety of situations.

We have finally achieved success to design and manufacture a range of LED lights here in Bondi Australia which can withstand the elements for the Saudi projects and beyond. It is no surprise that we have been running at a loss since 2006. Hence why we are not looking to offset any tax payments we have due, because we don't.

I want to make sure that you are still confident we can be paid money in our grant. You rubbed your fingers together and mentioned "cheque", which I was sure we were in the right hands with you. The point is, that we don't need to offset any tax payable, because of the losses, but we are keen to recoup some of the money we spent on R&D over the last 8 years, in particular 2012-2013. If you are still confident we will be paid a "govt grant" for the R&D and focus on export projects we have been chartered to install, I will hand deliver all documents you require today to help us make our claim.

I look forward to hearing from you soon.

Cheers

Harry Iliopoulos

Managing Director

Light This Light That

388. Mr Bogiatto responded by email saying:

I am confident that you will get the R&D and a cheque will come to you.

389. Mr Bogiatto's email contained a signature block which stated that he was the "Managing Partner" and identified the relevant company as Ryusei trading as Lambda Chase Chartered Accountants. It included Ryusei's ABN.

390. On 26 April 2014, Mr Bogiatto provided to Mr Iliopoulos a draft 2013 R&D Tax Incentive Application for submission to AusIndustry. The total R&D expenditure recorded in the 2013 R&D Tax Incentive Application was $174,782. The application nominated Mr Bogiatto of "LambdaChase Advisors Pty Ltd" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that LTLT had relied on advice from a tax agent or R&D consultant and identified the person from whom LTLT had received such advice as Mr Bogiatto of "LambdaChase Advisors Pty Ltd". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

391. On 9 May 2014, an email was sent by AusIndustry to Mr Bogiatto, copied to Mr Iliopoulos, attaching AusIndustry's Notice of Registration.

392. On 16 May 2014, Mr Bogiatto provided to Mr Iliopoulos an R&D Tax Incentive Schedule, as an attachment to an email which stated:

Dear Harry

Please find attached your R & D number and R & D schedule.

With this information you will need to lodge your company tax return or amend it if you have already lodged it before.

The lodgement of this company tax return with the R & D schedule will result in the refund been allocated to you.

Please ensure that the ATO has your details to process the refund into your bank account. In order for this to occur you will

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need to contact the ATO and inform them of these bank details.

Please contact us when the above has been actioned.

393. At the time, LTLT's tax agents were Charltons Chartered Accountants. Emails between Mr Bogiatto, Mr Iliopoulos and Ms Shanahan were exchanged between 9 September 2014 and 3 November 2014. Those emails relate to Charltons having incorrectly lodged the 2013 R&D schedule with the 2014 income tax return.

394. Due to the lodgement of the 2013 R&D schedule with the 2014 income tax return, Mr Bogiatto was instructed to lodge the amended return without the assistance of Charltons.

395. On 18 November 2014, Mr Bogiatto emailed Mr Iliopoulos. He stated that LTLT:

• had an R&D tax offset of $78,651.90 for the 2013 financial year;
• had tax payable of $40,670.40 for the 2013 financial year; and
• would receive a net refund of $37,981.50 for the 2013 financial year.

396. Mr Bogiatto sought instructions to lodge the amended 2013 income tax return. Instructions to lodge the amended 2013 income tax return were provided on 19 November 2014 and it was lodged on that day. As a result, the Commissioner allowed LTLT an R&D tax offset of $78,651.90, offset the LTLT R&D tax offset of $78,651.90 against its gross tax of $40,670.40, and credited $37,981.50 to LTLT.

F.7.2.2 Section 290-60(1)(b): consideration

397. LTLT accepted the "Terms of Engagement" by instructing Mr Bogiatto.

398. On 27 June 2014, an invoice was issued to LTLT in the amount of $12,533.90, requiring payment to be made to Lambdachase Services. The invoice was paid by LTLT on 17 December 2014.

399. Consideration in the form of a promise to pay was received by Ryusei "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Consideration in the form of payment was received by Lambdachase Services. I am satisfied that this was also "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Ryusei marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Lambdachase Advisors. Lambdachase Services was an associate of Mr Bogiatto, Ryusei and Lambdachase Advisors. However, the marketing or encouragement was not shown to be in respect of a "tax exploitation scheme" for the reasons given in Section 7.3 below. Accordingly, s 290-60(1)(b) is not satisfied.

F.7.2.3 Section 290-60(1)(c): substantial role

400. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. None of their roles could be said to be a role which was not of substance. However, as mentioned, the marketing or encouragement was not shown to be in respect of a "tax exploitation scheme" for the reasons given in Section 7.3 below. It follows that s 290-60(1)(c) is not satisfied.

F.7.3 Tax exploitation scheme

401. I am satisfied on the basis of the matters set out above and below, that there was a "scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

402. The "scheme" at least included advising LTLT that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in LTLT's tax return, lodging the R&D Tax Incentive Application for registration, advising the taxpayer to lodge an amended income tax return and assisting with the lodgement of the amended income tax return.

403. The "scheme" was one which was implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that Mr Bogiatto, Ryusei, Lambdachase Advisors and LTLT (alone or together) entered into or carried out the scheme with the sole or dominant purpose of LTLT

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getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

404. As is discussed below, LTLT appears to have been entitled to the scheme benefit or most of it and it appears that the claim was entirely genuine. However, the question whether there was a dominant purpose of obtaining the scheme benefit does not turn on lawful entitlement to the scheme benefit.

405. As for the second condition, the Commissioner argued that it was not reasonably arguable that a part of the scheme benefit was available at law because the taxpayer had also claimed a part of the expenditure as a deduction under Div 40 of the ITAA 1997.

406. After the tax return was lodged, the ATO commenced a review of LTLT's R&D tax incentive claims. Ultimately, this lead LTLT to appoint a solicitor, Ms Waterhouse of Waterhouse Lawyers, to represent the company. According to Ms Shanahan, the Commissioner accepted all of the R&D expenditure except for an amount of $2,556 which had also been claimed for depreciation. In her affidavit, Ms Shanahan stated:

At the conclusion of the review, the ATO accepted all of Ms Waterhouse's submissions but disallowed an amount $2,556 for depreciation included by Mr Bogiatto as part of the claimed R&D expenditure. Mr Bogiatto had included the depreciation amount without explanation for how he had calculated it. LTLT was not able to substantiate it after the fact. In any event, as I understand it, the company had already claimed such expenditure as a deduction under Division 40 of the Income Tax Assessment Act 1997 (Cth), meaning it could not validly form part of an R&D claim as well. The other expenditure LTLT had claimed as R&D expenditure was accepted by the ATO.

407. Ms Shanahan's understanding, expressed in her affidavit, that the amount of $2,556 had been claimed as a deduction under Div 40 and so could not also be claimed as R&D expenditure is not a sufficient basis to conclude that it was not reasonably arguable that the amount was R&D expenditure. The Commissioner had the capacity to establish by proper evidence that it was not reasonably arguable that the amount of $2,556 was R&D expenditure. For example, it may well have been that the amount was claimable as R&D expenditure, and perhaps more appropriately so claimed, if it had not been claimed as a deduction under Div 40. The Commissioner did not venture into these matters either by way of evidence or submissions.

408. The circumstances suggest that the scheme involved the making of a genuine R&D claim. The promoter penalty regime was not introduced for the purpose of punishing minor errors made in the context of otherwise genuine claims.

F.7.4 Scheme benefit

409. There was a scheme benefit because an amount that the Commissioner had to pay or credit to LTLT under a taxation law was, or could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

410. However, as indicated earlier, the Commissioner has established that it was reasonably arguable that all but $2,556 of the R&D expenditure giving rise to the scheme benefit was lawfully available. Indeed, the Commissioner allowed the claim. The Commissioner has failed to establish that it was not reasonably arguable that the remaining $2,556 was also claimable.

F.8 Tempcon Pty Ltd

411. Tempcon was the taxpayer participant in two alleged tax exploitation schemes, one in the 2012 financial year and one in the 2013 financial year. Mr William Lonsdale gave evidence by affidavit in relation to the schemes.

412. Tempcon was described by Mr Lonsdale as follows:

[Tempcon] was a holding company that held a real property asset in Victoria. Tempcon did not have any employees or bank accounts. Its only activity was the receipt of rental payments in respect of the property it held.

413. Mr Lonsdale was the sole director of Temperature Controls Pty Ltd, having occupied that role since 2015. Mr Lonsdale had

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been a director of Temperature Controls since 1988. Temperature Controls designs and manufactures temperature and level sensors for various applications, described as predominantly industrial in nature, and generally for use in hazardous areas such as gas and mining industries in Western Australia and Queensland.

414. Until October 2013, Mr Lonsdale was jointly responsible for the operation and management of Temperature Controls with his business partner, Mr Victor Donnelly. Mr Donnelly died in October 2013. Before Mr Donnelly's death, he was responsible for taking telephone calls and sales and Mr Lonsdale was responsible for the management and running of factory operations.

415. Mr Lonsdale referred to a number of corporate entities and a unit trust in the group of corporate entities controlled and beneficially owned by Mr Lonsdale and his wife. Temperature Controls Unit Trust ( TCUT ) was described as the "primary trading entity within the group, employing Temperature Control's staff and developing and manufacturing the products we sell to customers".

416. Temperature Controls was the trustee of TCUT and its activities were limited to that role. Temperature Controls has not traded and was not involved in any other activities or enterprise in its own right.

417. Mr Lonsdale also gave evidence to the effect that Tempcon and TCUT had never been in a consolidated group for taxation purposes. He stated that TCUT undertook R&D activities in its own right. TCUT did not undertake R&D activities for or on behalf of Tempcon. Tempcon did not undertake R&D activities in its own right. There was no agreement between TCUT and Tempcon by which TCUT would carry on R&D activities on behalf of Tempcon. Tempcon did not pay any fees to TCUT, nor has there been any other transfer of monies between these entities in respect of R&D activities TCUT has carried on.

F.8.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

418. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) in relation to the 2012 tax exploitation scheme:
- (a) Mr Bogiatto engaged in conduct which resulted in him and Ryusei being promoters of a tax exploitation scheme within the meaning of s 290-60;
- (b) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
- (c) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto and Ryusei both being promoters of a tax exploitation scheme, notwithstanding that Lambdachase Services was not itself a promoter. Lambdachase Services received consideration which resulted in Mr Bogiatto and Ryusei being promoters. The reasons for this conclusion are further explained in Section C.4 above.
(2) in relation to the 2013 tax exploitation scheme:
- (a) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
- (b) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
- (c) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.

F.8.2 Promoter

F.8.2.1 Section 290-60(1)(a): marketing or encouragement

419. On the basis of the facts outlined above and below, I am satisfied that:

(1) Mr Bogiatto and Ryusei marketed, and encouraged interest in, the 2012 financial year scheme within the meaning of s 290-60(1)(a); and
(2) Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the 2013 financial year scheme within the meaning of s 290-60(1)(a).

420.

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Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

421. In late 2011 or early 2012, Mr Donnelly received a telephone call from a person from Lambda Chase. Mr Donnelly advised Mr Lonsdale of the call and they agreed to meet with someone from Lambda Chase to discuss Temperature Controls' eligibility to make an R&D claim.

422. In about September 2011, Mr Bogiatto and his associate, Mr Ray Seeto, attended the premises of Temperature Controls. Mr Lonsdale gave the following account of the conversation:

Mr Bogiatto: Tell me about the products and services Temperature Controls provides. Have you developed any products of your own?

Me: We develop products for hazardous areas for LPG refineries and flameproof applications. This activity has been ongoing since 2006 and we have been involved with other companies developing products. We have obtained a number of certificates of conformance for our products from TestSafe Australia which is the NSW government organisation responsible for product testing and certifying electrical products for use in explosive atmospheres.

Mr Bogiatto: It sounds like Temperature Controls is carrying out activities that are eligible for the R&D tax incentive. Anything you need to newly create, change or work on could be treated as R&D. There are a number of categories of Temperature Controls' expenses that could be claimed such as the cost of labour, cost of the certification of testing, pressure testing and developing drawings.

Me: Ok, these are things that Temperature Controls does. What about the materials we use in these activities?

Mr Bogiatto: You can't make a claim for the cost of physical items, but there would be testing and things like that that could be paid for and claimed. By way of example, the time involved in building test jigs could be claimed but not necessarily the parts you used.

Me: What information is required to make an R&D claim?

Mr Bogiatto: You should start photographing your products and recording information to keep track of the time for people and the company's costs involved with R&D activities. You will need to come up with a description of the purpose of the project, what happens during the projects, the process you go through and the conclusion of the projects.

Me: Ok, we can prepare that information for the Temperature Controls Unit Trust which is our trading entity.

Mr Bogiatto: A trust can't claim R&D.

Me: Well, all our operating expenditure was incurred by TCUT.

Mr Bogiatto: Do you have a company?

Me: We have holding companies which hold real property assets. Tempcon holds a real property asset in Victoria. We had intended Tempcon to be nominated as the entity used for certification purposes with TestSafe Australia. There is a regulatory requirement that the manufacturer's name appears on certain products. We wanted to sell products to our competitors and did not wish to advertise the name Temperature Controls on the products if that could discourage our competitors from purchasing the products from us. It turned out that this structure did not work well for us because the entity that holds the certification for TestSafe Australia needs to be ISO 9001 quality assured. Tempcon was not quality assured. TCUT, which had been previously used, was ISO 9001 quality assured, and so we had to go back and change all our TestSafe applications to be in Temperature Controls' name. That is why all Tempcon does now is hold real property.

Mr Bogiatto: We can use Tempcon to claim the R&D expenditure.

Me: To be clear, all business expenses including wages, rent and utilities are incurred by TCUT.

Mr Bogiatto: That's not an issue. We can make the R&D claim through Tempcon. We will submit the R&D

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application to AusIndustry through Tempcon and then you will receive a return back through that entity.

Me: Ok, let's give it a go. What are your fees?

Mr Bogiatto: The fee for our services is 30% of the amount returned on the R&D claim. I will send through an engagement letter with all the details for you to sign and then we can get started. The first step is to lodge an R&D application with AusIndustry on behalf of Tempcon. In order to complete the AusIndustry application, I will need you to provide detail of the projects that you have undertaken.

Me: Ok, that all makes sense. If you tell me what you need I will pull it together.

Mr Bogiatto: I will need descriptions of what projects had been undertaken, an explanation of what Temperature Controls was trying to achieve with these projects and their approximate costs. Give me the management financial reports for TCUT, a copy of wages paid and a breakdown of the people involved in the R&D projects. Once you have provided this information, I will come back to you regarding what Tempcon is eligible to claim.

Me: Ok, sounds good.

423. After this meeting, Mr Lonsdale received an engagement letter which he signed and returned. Mr Lonsdale did not retain a copy and no copy was in evidence.

424. The 2011 financial year : Mr Bogiatto assisted Tempcon to obtain R&D registration in the 2011 income year and claim an R&D tax incentive. The Commissioner sought no relief in respect of that income year. The R&D tax incentive claimed in that year resulted in a tax refund to Tempcon of $24,545.94.

425. The 2012 financial year : Mr Bogiatto was engaged by Tempcon to assist Temperature Controls as trustee for the TCUT with an R&D Tax Incentive Application for the 2012 income year. Mr Bogiatto sought and obtained information in respect of four projects regarded by Mr Lonsdale to be R&D projects. The information provided by Mr Lonsdale related to four projects being carried out by TCUT.

426. Mr Bogiatto prepared a draft R&D Tax Incentive Application for the 2012 year, which identified Tempcon as the R&D entity. The draft application identified Mr Bogiatto of "Lambda Chase Chartered Accountant" as the "nominated contact person" and Ryusei's ABN was supplied.

427. Tempcon's R&D application, dated 29 April 2013, was subsequently registered with AusIndustry. Thereafter, Mr Bogiatto provided the R&D figures to Mr Lonsdale to be included in Tempcon's income tax return. It was lodged on or about 1 July 2013. A refund was subsequently received in the sum of $21,184.89.

428. The 2013 financial year : By email on 17 February 2014 and 15 April 2014, Mr Bogiatto requested information relating to TCUT's R&D projects for the 2013 income year. Mr Lonsdale provided information in relation to four projects.

429. On 26 April 2014, Mr Bogiatto sent an email to Mr Lonsdale attaching a draft R&D Tax Incentive Application for the 2013 income year. Mr Bogiatto subsequently lodged an R&D Tax Incentive Application with AusIndustry without further reference to Mr Lonsdale. A copy of the R&D Tax Incentive Application was provided to Mr Lonsdale by email on 28 April 2014. The application nominated Mr Bogiatto of "Lambdachase Advisors" as the "nominated contact person". The application also stated that Tempcon had relied on advice from a tax agent or R&D consultant and identified the person from whom Tempcon received advice as Mr Bogiatto of "Lambdachase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

430. AusIndustry's Notice of Registration dated 30 April 2014 was provided to Mr Lonsdale by Mr Bogiatto on 9 May 2014. Mr Bogiatto also provided to Mr Lonsdale a copy of the R&D Tax Incentive Schedule with amounts for inclusion in Tempcon's 2013 income tax return.

431. Mr Lonsdale provided a copy of the R&D Tax Incentive Schedule to his tax agent for inclusion in Tempcon's 2013

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income tax return. As a result, Tempcon received a tax refund of $96,645.60.

432. The 2014 financial year : Mr Bogiatto prepared and lodged in April 2015 an R&D Tax Incentive Application with AusIndustry in respect of the 2014 financial year.

433. Mr Bogiatto sent Mr Lonsdale a copy of the AusIndustry registration letter for the 2014 year and the R&D Schedule for inclusion in Tempcon's 2014 income tax return. Mr Lonsdale looked at the figures in the R&D Schedule and was surprised at the high amount of the R&D claim proposed to be made. He did not make a claim. The Commissioner did not seek any relief in submissions in connection with the 2014 financial year.

434. By May 2015, the ATO had commenced a risk review in relation to the R&D claim for the 2013 year.

F.8.2.2 Section 290-60(1)(b): consideration

435. I accept that Mr Lonsdale received an engagement letter after the meeting with Mr Bogiatto in September 2011 and that he signed and returned it. After the 2012 income tax return was lodged, Mr Bogiatto issued an invoice dated 4 July 2013 to Tempcon bearing Lambdachase Services' ABN. The invoice was in the sum of $7,224.80. It was paid in full by cheque on 18 July 2013 by Temperature Controls.

436. In relation to the 2012 year, I am satisfied that the consideration was received "in respect of [the] marketing or encouragement" of Mr Bogiatto and Ryusei: s 290-60(1)(b). Lambdachase Services was an associate of Mr Bogiatto and Ryusei. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

437. On 28 April 2014, Mr Bogiatto provided to Mr Lonsdale an engagement letter addressed to Tempcon. The engagement letter was signed by Mr Bogiatto, and on a "LambdaChase" letterhead, as described at [112] above, showing Ryusei's ABN. The fee was 30% of the net R&D tax offset granted from the ATO in the first instance.

438. No invoice was issued in respect of the 2013 income tax return. Nevertheless, I conclude that consideration was received by Ryusei in the form of a promise to pay. I am satisfied that, in relation to the 2013 year, the consideration was received "in respect of [the] marketing or encouragement" of Mr Bogiatto, Lambdachase Advisors and Ryusei: s 290-60(1)(b). Ryusei marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.8.2.3 Section 290-60(1)(c): substantial role

439. In relation to the 2012 financial year, I am satisfied that Mr Bogiatto and Ryusei had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. Neither of their roles could be said to be a role which was not of substance.

440. In relation to the 2013 financial year, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above.

F.8.3 Tax exploitation scheme

441. In relation to each of the 2012 and 2013 years, I am satisfied on the basis of the matters set out above and below, that there was a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

442. The "schemes" at least included advising Tempcon that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in Tempcon's tax returns, lodging the R&D Tax Incentive Application and advising the taxpayer to include details of the R&D claim in its tax returns.

443. The "tax exploitation schemes" were ones which were implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition it is reasonable to conclude:

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(1) in relation to the 2012 financial year, that Mr Bogiatto, Ryusei and Tempcon (alone or together) entered into or carried out the scheme with the sole or dominant purpose of Tempcon getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i); and
(2) in relation to the 2013 financial year, that Mr Bogiatto, Ryusei, Lambdachase Advisors and Tempcon (alone or together) entered into or carried out the scheme with the sole or dominant purpose of Tempcon getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i);

444. As for the second condition, it was not reasonably arguable that any of the scheme benefit was available at law: s 290-65(1)(b). The amounts claimed as R&D expenditure were not incurred by Tempcon, but rather were incurred by TCUT. TCUT was not an "R&D entity" within the meaning of s 355-35 of the ITAA 1997 and was not eligible to receive R&D incentives under Div 355.

F.8.4 Scheme benefit

445. There was a scheme benefit because an amount that the Commissioner had to pay or credit to Tempcon under a taxation law was, or could reasonably be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

F.9 Woods Furniture Pty Ltd

446. Woods was the taxpayer participant in an alleged tax exploitation scheme in the 2014 financial year. Mr Massey and Mr Firman gave evidence by way of affidavit. Mr Massey was the managing director of Woods, a role he held since 1988. Mr Firman was the financial controller of Woods and had been in that position since approximately August 2015. He was also the company secretary and had been in that role since July 2015.

447. Woods manufactures furniture used in educational institutions such as tables and desks, seating, soft furnishing and storage, including lockers and bookshelves.

F.9.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

448. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60;
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
(4) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors each being a promoter of a tax exploitation scheme, notwithstanding that Lambdachase Services was not itself a promoter. Lambdachase Services received consideration which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors being promoters. The reasons for this conclusion are further explained in Section C.4 above.

F.9.2 Promoter

F.9.2.1 Section 290-60(1)(a): marketing or encouragement

449. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the tax exploitation scheme within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

450. In November 2014, Mr Massey received two or three telephone calls from a woman who identified herself as the personal assistant to Mr Bogiatto. During one or more of those calls, Mr Massey was informed that "Lambda Chase provides services to small businesses that do not have the time or expertise to lodge R&D tax incentive applications". Ultimately, a meeting was arranged for Mr Massey to meet with Mr Bogiatto.

451. On 21 November 2014, Mr Bogiatto met with Mr Massey at Woods' office. Mr Massey gave the following account of their conversation:

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Mr Bogiatto: Tell me about Woods' background and any research & development work you do.

Me: Woods makes furniture for schools, things like desks, chairs and lockers. We don't make R&D claims, however, as this is only a small part of our business.

Mr Bogiatto: Why not?

Me: Because the amount of work involved and the time it would take collating records for a small tax advantage are not worthwhile for Woods given its size.

Mr Bogiatto: Most people believe the same thing, that you have to keep contemporaneous records for R&D tax claims. This is a common misconception. But a reasonable estimation can be arrived at later. It's a simple process of applying to AusIndustry and getting the activities approved as R&D. I am expert in the area and I know how to do it. There is no risk to you and my fee will be a share of the incentive. What activities is Woods engaged in right now?

Me: One activity is a welding jig. Most of what we manufacture is made in jigs that we create by hand. The components of the jig we are designing will be cut by laser according to a computer programme. Its components will lock together so that the jig itself will not require welding that can otherwise cause distortion in the jig and inaccuracies and inconsistencies in the finished product. The programme means that the jig can be replicated if the original is ever damaged or destroyed.

Me: In another activity we are developing our own enterprise resource planning [ ERP ] software to manage the accounting connected with our manufacturing operation and its unique systems and processes. We need to upgrade from our old software. We have not found suitable new software off-the-shelf and so we are creating our own by modifying open source ERP software called Open ERP.

Me: In a third activity we are developing a one piece moulded chair that can be rendered in six seat heights from 3 dies or moulds. We call it the RM Chair.

Mr Bogiatto: With regards to the RM Chair project, if Woods is simply producing a new chair, there is a commercial outcome and Woods is not taking any risks, that is not R&D. However, if Woods is stumbling, finding, having to go back, redo, and rework, that does come under R&D. In my view all three projects would qualify as R&D.

Mr Bogiatto: For the R&D claim I will need Woods' labour costs and other amounts spent on the projects.

Me: I can only provide estimates because we have not kept records.

Mr Bogiatto: I will also need Woods' asset register.

Me: What do you hope to glean from that?

Mr Bogiatto: Leave it to me, I have been doing this for many years. I have methodologies to extract the necessary information about R&D activities.

Me: What will it cost us?

Mr Bogiatto: We charge a standard fee of 30% of the tax benefits received by our client and this will be set out in a Letter of Engagement which I will provide to you.

452. After the meeting, an engagement letter dated 21 November 2014 and signed by Mr Bogiatto was sent to Mr Massey on a "LambdaChase" letterhead, as described at [112] above. The letter bore the ABN of Lambdachase Advisors. Mr Massey did not sign and return the letter immediately. This resulted in "a number of follow-up phone calls from Mr Bogiatto" during which Mr Bogiatto said "a number of Woods' projects [were] eligible for the R&D tax incentive".

453. Mr Massey was satisfied that "the company has finally found an expert who knew his way around tax and could give Woods the tax advice that it had not received from other accountants". He decided to retain Mr Bogiatto.

454. By email dated 8 April 2015, Mr Bogiatto sought details of Woods' R&D projects, "payroll breakdown" and various forms of financial information. This email contained a signature block which identified Mr Bogiatto as the managing partner of

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"Ryusei Pty Ltd", included Ryusei's ABN and the logo of "LambdaChase Chartered Accountants".

455. A number of emails were exchanged on 9 April 2015 in which Mr Massey provided much of the material sought by Mr Bogiatto. In one email he sought a definition of "payroll breakdown". Mr Massey was informed that he should provide:

1- Number of employees work for R & D and their wages for the 2014 financial year

2- Total number of employees and total wages paid in 2014 financial year.

456. By email on 9 April 2015, Mr Massey responded, stating:

Each project has involved different people and for various hours. We have one full time person employed in product development only some of his work involves R&D.

Likewise we have one person working full time in IT, but again part of his time is involved in general IT support and routine activities. However the majority of his time is spen[t] programming and working with a third party in developing our in house ERP and manufacturing system with is our major R&D effort.

Even the welding rig R&D work is done by a person who's [sic] main role is department supervision.

The RM chair project has been predominantly handled by me.

So as you can see the labour component of a claim is the hardest part to quantify.

457. Over a series of days, Mr Massey provided details of the three projects he wanted Mr Bogiatto to consider in any R&D application which was to be made. Those projects were:

• "The RM Chair";
• "Production of reproducible and accurate welding jigs"; and
• "Fully customized ERP system with thin client access throughout the company".

458. By an email on 14 April 2015, Mr Massey stated, in respect of his estimate of time spent on R&D activities, "[a]s I stated earlier no actual records have been kept for internal hours devoted to the various projects, so are purely conservative estimates".

459. On 24 April 2015 Mr Massey received three emails from Mr Bogiatto. In the second and third emails, Mr Bogiatto sought information about "failures", "performance issues" and an indication about whether "all your expectations fulfilled when compared to what you designed and development [sic]" in relation to the "ERP system". In the first email, a request was made for "payroll break down amounts … of each employee who worked on R & D projects".

460. By email on 27 April 2015, Mr Massey provided the following explanation of, and detail concerning, the ERP software project:

The Open ERP project was littered with failures/set-backs as every piece of code was written bugs would be found and require rectification.

The involvement of so many members of our staff in the design and specification stage resulted in a product that suited our needs but also resulted in costly "blind allies" being pursued such as the delivery departments insistence that we had to have code written to allow the use of dot matrix printers to produce traditional multi part delivery dockets, only for the scrapping of this approach six weeks after implementation.

The complexity of the programming also resulted in us not achieving our planned changeover date which would have seen us start using the new system at the start of the 2012/13 FY

[I]nstead we went live a month later on the 1st August 2012.

The highly customised design of our system also resulted in 853 hours of reprogramming and checking to allow an update of the graphic user interface brought about by changes to the base open source code used by the program.

As a result a number of important modules including the Bill of Materials and warehousing have not been implemented as yet and are still being handled by an earlier in house designed system based on MS Access and Excel.

The many benefits' of a non proprietary system are however clearly observable

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- we have rolled out a unique system of thin client computers on the factory floor that allow every department to see what work is required to be done down to a hourly basis as well as allowing them to look ahead at every order in the system and allow instant update via bar code scanning to allow the exact status of every job in the system to be reviewed remotely.

461. On 29 April 2015, Mr Bogiatto sent an email to Mr Massey, attaching a draft AusIndustry R&D Tax Incentive Application. The total R&D expenditure was estimated to be $4,443,921. Aggregated turnover was recorded as $45,932,305. Mr Massey made notes on the draft application when it was received. Next to the figure for aggregated turnover he wrote: "? $18,719,240". His handwritten notes also indicated that 2.5 employees were engaged in R&D of a total of 72 employees.

462. On 29 April 2015, Mr Massey sent Mr Bogiatto an email indicating that he wanted his "accountant to cast his eye over [the application] before commenting". His email included:

We only have one full time employee, employed on product development and one full time employee for the IT project but given they were/are involved in other projects as well as the fact that others including myself have been involved with the three "R&D" projects I tried to calculate the man hours involved.

The other major point is that not all the work involved in the projects occurred in the one financial year.

463. During a telephone call on either 29 or 30 April 2015, Mr Massey asked Mr Bogiatto about the quantum of the R&D expenditure. He gave the following account of the conversation:

Me: How did you come up with your figures? The estimated expenditure of $4,443,921 seems too high to me.

Mr Bogiatto: Overheads can be attributed and the amounts in the application are what resulted from that estimation. That is why I wanted a copy of Woods' asset register and general ledger.

464. A further draft AusIndustry R&D Tax Incentive Application was received on 30 April 2015 in which the aggregated turnover figure was adjusted in accordance with Mr Massey's handwritten notation. Shortly thereafter Mr Massey and Mr Bogiatto spoke and Mr Bogiatto stated that the deadline for lodging the R&D application was 30 April 2015.

465. Having regard to the deadline, Mr Massey determined to approve the submission of the R&D Tax Incentive Application despite his reservations. He stated in his email to Mr Bogiatto,

I rely on your expertise and experience as to the calculation of the costs extracted from the information I have provided, so please proceed with the application.

466. The application nominated Mr Bogiatto of "Lambda Chase Advisors" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Woods had relied on advice from a tax agent or R&D consultant and identified the person from whom Woods had received such advice as Mr Bogiatto of "Lambda Chase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

467. On 8 May 2015, AusIndustry provided to Mr Bogiatto, and copied to Mr Massey, a Notice of Registration.

468. On 28 August 2015, Mr Bogiatto provided to Mr Massey a draft R&D Tax Incentive Schedule with figures to be included in Woods' 2014 income tax return. R&D expenditure was calculated in the sum of $4,443,920. On the same day, an invoice was issued to Woods on letterhead of "LambdaChase chartered accountants", requiring payment to Lambdachase Services' and including that entity's ABN. The invoice was in the sum of $659,922.12.

469. The email attaching the invoice encouraged Mr Massey to commence preparations for the R&D claim for the 2015 financial year. It included:

I note the economy and stock market is changing drastically going forward and I strongly advise for your best interest that you get the 2015 R & D refund in your hands to handle future changes.

470.

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On 31 August 2015, Mr Massey emailed to Mr Firman a copy of Mr Bogiatto's invoice and the R&D schedule. Mr Massey separately spoke to Mr Firman and asked him to speak with Mr Bogiatto to query the quantum of the tax invoice and the inability to reconcile the figures in the R&D Tax Incentive Schedule.

471. In his affidavit, Mr Firman deposed to having been "immediately concerned" about two aspects of the R&D claim. First, he considered it unusual to charge a fee based on the percentage of the tax benefit rather than a fixed fee. Secondly, the quantum of the R&D expenditure was, in his view, without "reasonable justification". As a result of his concerns, Mr Firman deposed to having tried telephoning Mr Bogiatto a number of times without success over the two weeks or so following 31 August 2015.

472. On 16 September 2015, Mr Firman spoke with Mr Bogiatto by telephone, during which he asked for "more information" about the 2014 R&D claim. Mr Firman gave the following account of the conversation:

Me: "Paul, it's Steve Firman from Woods, I am now the financial controller of Woods and am responsible for the R&D claim. Can you provide me with more information about the 2014 R&D claim? We need to understand how you calculate the amounts in the 2014 R&D schedule from the financial information that was provided to you?"

Mr Bogiatto: "My workings are my proprietary information and I am not going divulge them to you."

Me: "That's unusual as we are responsible for lodging the income tax return and we should not lodge anything we are not comfortable with."

473. After the telephone conversation, Mr Firman requested by email "details of how the information we provided eventually produces the final number". Mr Bogiatto responded the next day and stated, inter alia:

My workings are my property and can not be forwarded to any party since it is my work.

Clients who have their internal/external accounts requesting such information do not have intentions to pay for my services from past experience.

Is it your intention to not pay me?

474. On 28 September 2015, Mr Firman sent an email to Mr Bogiatto requesting that he provide a response to the following questions:

(1) Was the tax deduction process as you outlined in your email advised to Woods Furniture in writing and can you provide evidence.

(2) This new tax information has a significant impact upon the 2014 tax amount Woods Furniture can claim and we believe significantly impacts your claim upon Woods Furniture.

(3) We will now calculate the tax amounts to be deducted from our standard tax return and it is essential for you to confirm the amounts in writing you have included prior to your uplift factor.
As you are aware Woods Furniture has legal responsibility for all information contained in its tax returns and we must ensure compliance.

475. No response was received. Despite Mr Bogiatto's failure to provide details of the manner in which he calculated Woods' R&D expenditure, it was determined at a meeting on 1 October 2015 that Woods would proceed to amend its 2014 income tax return to include Mr Bogiatto's calculations of its R&D expenditure. Mr Firman gave the following account of what was said at the meeting:

Me: I am uncomfortable making the claim Paul has recommended. I do not understand the calculations, the size of the claim is concerning and Paul will not provide any documentation to support the claim which we take responsibility for.

Mr Rogers: I don't know the specifics, but something does not feel right here.

Mr Massey: I don't understand it all either but Paul is an expert in his field and he's accredited so we're covered. We can rely on his qualifications and expertise as a chartered accountant to amend the tax return.

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Me: What about Paul's bill? It is astronomical and I don't understand how it is calculated either.

Mr Massey: We won't pay the invoice as currently prepared but we agreed to 30% of the benefit. We should ask for an amended invoice based on the actual benefit to Woods.

Me: Ok.

476. An email was sent to Mr Bogiatto on 1 October 2015 by Mr Firman. That email stated that Woods had determined to proceed as follows:

(1) Submit our 2014 R&D tax incentive claim and use the figures provided by you (attachment 1). Which you have calculated based on factual and true data provided by us at your request.

(2) Calculate the expenditure to be deducted from our standard 2014 tax return to ensure we do not receive both a standard deduction and the R&D tax offset for the same expenditure.

(3) We will not accept and pay your invoice LC1610 for $659,922.12.

(4) Upon receipt of our 2014 tax deduction from the ATO we will contact you and request a replacement invoice based on the net R&D tax offset obtained as per our agreement with you.

477. After the email was sent, Mr Massey received a telephone call from Mr Bogiatto during which Mr Bogiatto said that Mr Massey had "incorrect information". Mr Bogiatto offered to "prepare [the 2014 income tax return] at no extra cost". He also indicated that he would "explain the process for claiming the R&D tax benefit". Mr Bogiatto then sent an email confirming the matters discussed on the telephone. His email included:

Thank you for taking the call this morning.

Per our discussions I note that information you have received is not correct.

We have agreed per our phone call just this morning that you will supply the company 2014 tax return and correspondence you have mentioned.

My firm with no extra charge will prepare the the [sic] amended tax return for your agent.

In addition I will also step through the tax return and mechanics so you clearly understand what is occurring and seeing the net tax benefit to your company.

…

Please email the company tax return and correspondence and I will clarify all this matters for you by Monday.

478. Between 6 and 22 October 2015 a series of emails were exchanged between Mr Bogiatto and Mr Massey, culminating in Mr Massey's email of 22 October 2015 in which he stated:

The person that lodges our tax returns was concerned about lodging a return without knowing the background to the figures. However I have sent him a letter instructing him to lodge an amended return using your data and informed him of your qualifications and expertise in R&D returns …

479. The letter instructing Woods' tax agent to lodge the amended tax return was sent on 19 October 2015. The amended tax return was lodged on 21 October 2015. As a result of the lodgement of the amended income tax return for 2014, the Commissioner allowed Woods an R&D tax offset of $1,999,764 and credited to it $642,870.30 plus interest.

F.9.2.2 Section 290-60(1)(b): consideration

480. The engagement letter of 21 November 2014 has been referred to above. On 14 October 2015, Woods received an invoice from "Lambda Chase Chartered Accountants", requiring payment to Lambdachase Services and including that entity's ABN. The invoice was in the sum of $219,974.04 inclusive of GST. On 16 December 2015, Woods paid $219,974.04 to Lambdachase Services.

481. Consideration in the form of a promise to pay was received by Lambdachase Advisors "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Consideration in the form of payment was received by Lambdachase Services. I am satisfied that this was also "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and

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Lambdachase Advisors: s 290-60(1)(b). Lambdachase Advisors marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Ryusei. Lambdachase Services was an associate of Mr Bogiatto, Ryusei and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.9.2.3 Section 290-60(1)(c): substantial role

482. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. None of their roles could be said to be a role which was not of substance.

F.9.3 Tax exploitation scheme

483. I am satisfied on the basis of the matters set out above and below, that there was a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

484. The "scheme" at least included advising Woods that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in Woods' tax return, lodging the R&D Tax Incentive Application for registration and advising the taxpayer to include information relevant to the R&D claim in its amended income tax return.

485. The "tax exploitation scheme" was one which was implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that Mr Bogiatto, Ryusei, Lambdachase Advisors and Woods (alone or together) entered into or carried out the scheme with the sole or dominant purpose of Woods getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

486. As to the second condition, for the reasons given below, it was not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that Woods was entitled to any of the scheme benefit.

487. The Commissioner's primary argument as to why it was not reasonably arguable that any of the scheme benefit was available was, again, that "Woods did not have adequate or contemporaneous records to establish that the total claimed R&D expenditure was incurred on R&D activities that had been registered with AusIndustry for the financial year". In support of this submission, the Commissioner relied upon the evidence given by Mr Massey and Mr Firman, in particular the following comments by Mr Massey:

Except for the very limited information I refer to later … Woods has never kept contemporaneous records of any experimental activity it undertook to develop new products, including records indicating the time spent or expenditure incurred on such work. Beyond that limited information which I address below, the company did not log or catalogue in any way its R&D activities during the 2014 and earlier financial years.

488. As indicated above, an absence of contemporaneous documents does not necessarily establish that it was not reasonably arguable that the tax benefit was available at law. I am not satisfied that the Commissioner has established that Woods was not entitled to any part of its R&D claim on this basis.

489. The Commissioner's second argument was that the amount of R&D expenditure claimed by Woods exceeded any reasonably arguable view of the amount it expended on R&D activities. That contention was said to be borne out by the following matters:

(1) Notwithstanding Mr Massey's indication that "2.5" Woods employees were involved in R&D activities, of a total of 72 employees across the organisation, R&D salary expenditure ($1,369,118), as calculated, accounted for 23.66% of total wages ($3,584,327.45). On subsequent review by Mr Firman, he considered that "staff costs incurred by Woods in respect of its three R&D projects totalled $306,015".

(2) Total R&D expenditure ($4,443,920) represented 54.89% of the 2014 business

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expenditure (excluding cost of goods sold). In the view of Mr Firman, the company's financial controller, "there was simply no basis for claiming that the company had spent over $2.9m [excluding R&D salary expenditure] on "other" R&D expenditure". He proceeded to express the view that "total other costs on the part of Woods [was] $279,808".

(3) On 23 November 2016, Woods amended its 2014 income tax return, reducing the 2014 R&D expenditure from $4,443,920 to $585,826. That revised R&D expenditure was accepted by the ATO.

490. I accept these arguments. In my view, it was reasonably arguable that Woods had R&D expenditure in the amount of $585,826 in the 2014 year. I accept that it was not reasonably arguable that the balance of the R&D expenditure was available to be claimed at law.

F.9.4 Scheme benefit

491. There was a scheme benefit because an amount that the Commissioner had to pay or credit to Woods under a taxation law was, or could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

F.10 Australian Steel Pty Ltd

492. Australian Steel was the taxpayer participant in an asserted tax exploitation scheme in the 2014 financial year. Mr Capocasale provided evidence in relation to the scheme.

493. Mr Capocasale was the managing director of Australian Steel. He has held that position since Australian Steel's incorporation on 25 October 1993. Mr Capocasale describes Australian Steel as a "third-tier steel supplier to the steel industry around Australia, providing flame cutting and wash grinding services to various sectors of the steel industry".

F.10.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

494. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60;
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
(4) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors each being a promoter of a tax exploitation scheme. Lambdachase Services received consideration which resulted in those entities being promoters. The reasons for this conclusion are further explained in Section C.4 above.

F.10.2 Promoter

F.10.2.1 Section 290-60(1)(a): marketing or encouragement

495. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the scheme within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

496. In November 2014, Mr Capocasale received an unsolicited telephone call from a person whose name Mr Capocasale does not recall. The caller stated:

Mr Paul Bogiatto of Lambda Chase Chartered Accountants is going to be in Melbourne seeing other clients in the steel industry and we would like to make an appointment for Mr Bogiatto to come and meet with you to discuss AusSteel's eligibility to make R&D claims.

497. Mr Capocasale agreed to meet with Mr Bogiatto and, on 3 December 2014, Mr Bogiatto met with Mr Capocasale at Australian Steel's premises. Mr Capocasale gave the following account of their conversation:

Mr Bogiatto: Thank you for taking the time to meet with me while I'm here in Melbourne.

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Me: What brings to you to Melbourne?

Mr Bogiatto: Helping clients with R&D is what I do. I've got a few clients which I look after including in your space. You know, engineering and steel.

Me: Who are the clients that you look after?

Mr Bogiatto: I can't tell you my clients' names but I have an office in Sydney. My firm is called Lambda Chase and we specialise in R&D. So what do you do with your R&D? How do you track your R&D processes?

Me: I am not sure what you are talking about. We have got physical things out there, three dimensional physical objects that we retain.

Mr Bogiatto: Do you try and do something that doesn't quite work and then you experiment further?

Me: We do some of that, yes. We have specific clients that we do particular things for and we often have repeat orders so we always see if there is a new way of doing something to speed up the process.

Mr Bogiatto: Let's go for a walk through the factory and you can show me what you are talking about.

498. Mr Capocasale took Mr Bogiatto through AusSteel's factory and Mr Bogiatto asked him to show him something that he thought was R&D. Mr Capocasale showed Mr Bogiatto "a physical aspect of heavy steel which, when you hold it in a particular way, can be manufactured to create a specific design". He also showed Mr Bogiatto two to three jigs that Australian Steel had been working on for a number of years. He gave the following account of a further conversation:

Me: We have been working on this jig for a few years. We have tweaked the process three to four times to get to this point.

Mr Bogiatto: How much does it costs to produce and to make the jig.

Me: I don't know how much the jig has cost. We haven't kept any records regarding the costs of the process.

Mr Bogiatto: You should be documenting all of your R&D work on paper and taking photo evidence. How much time and involvement in the process to develop the jigs did you have and who else was involved? I'll need you to provide some numbers for me. Would it be $5000, $10,000 or $20,000 every time you did this process?

Me: I don't know how much it would cost and we would need to sit down and do the number crunching.

Mr Bogiatto: That's ok, leave it to me. You are eligible for the R&D tax incentive. I will need a copy of the company's financials for the 2014 year and a copy of the 2014 income tax return. Once I have a copy of the 2014 financial information I will be able to complete the R&D application for that year.

Me: Ok, I'll see what I can pull together

Mr Bogiatto: There is a deadline for AusSteel to apply to register its R&D activities with AusIndustry for the 2014 year. If you can't make that deadline the company will have to wait another twelve months to lodge another R&D claim.

499. Mr Capocasale understood that the application needed to be lodged with AusIndustry on an urgent basis. Mr Capocasale formed the view that Mr Bogiatto was knowledgeable and experienced in R&D claims. Having regard to the limited time Mr Capocasale considered was available in order for Australian Steel to register its R&D work, he provided some financial material relating to Australian Steel to Mr Bogiatto during the meeting including its 2014 income tax return. He could not recall the nature of the other material that he provided.

500. On 5 December 2014, Mr Bogiatto sent to Mr Capocasale a letter titled "Terms of Engagement - R&D". The letter was signed by Mr Bogiatto, on a "LambdaChase" letterhead, as described at [112] above, and included Lambdachase Advisors' ABN. The fee was "30% of the net Research & Development tax offset sought". The Terms of Engagement letter also provided that it could be accepted "by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter".

501.

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Mr Capocasale contacted Mr Bogiatto to discuss the letter on the day of its receipt. Mr Capocasale said that they had the following discussion:

Me: My accountants, Hayes Knight, will have to review the R&D information for it to be included in our tax return.

Mr Bogiatto: If your accountants want to be involved, I am not interested because this is my intellectual property and this is between you and me and I am not talking to your accountants. This is my business, this is my IP so I am not going to divulge anything about my processes to your accountant.

Me: It's ok, you can deal with me.

Mr Bogiatto: AusSteel is entitled to an $800,000 R&D tax refund for the 2014 year. Do you want to proceed with the R&D application?

Me: Yes, we'll go ahead with it but can you tell me how you have calculations of how he arrived at the refund amount of $800,000?

Mr Bogiatto: The refund amount is based on the information that you have provided, the human resources and machine times involved in each exercise and the amount of times the processes had been undertaken during the year.

502. Mr Capocasale decided to retain Mr Bogiatto. The Terms of Engagement letter was signed by Mr Capocasale on 5 December 2014 and provided to Mr Bogiatto.

503. Shortly after Mr Bogiatto was retained by Mr Capocasale, Mr Bogiatto emailed a draft AusIndustry R&D Tax Incentive Application for Australian Steel to Mr Capocasale. The application assessed total R&D expenditure to be $1,418,253.

504. The application nominated Mr Bogiatto of "Lambda Chase Advisors" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Australian Steel had relied on advice from a tax agent or R&D consultant and identified the person from whom Australian Steel had received such advice as Mr Bogiatto of "Lambda Chase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

505. Mr Capocasale approved the lodging of the application with AusIndustry.

506. On 13 May 2015, Mr Capocasale was copied into an email sent from AusIndustry to Mr Bogiatto advising that AusIndustry would review Australian Steel's application before the completion of the registration process. AusIndustry requested further documents and additional information. Australian Steel provided further information to Mr Bogiatto and the review was subsequently resolved.

507. On 20 July 2015, Mr Bogiatto emailed Mr Capocasale attaching:

(1) a copy of AusIndustry's Notice of Registration dated 13 July 2015; and
(2) an R&D Tax Incentive Schedule for 2014, containing the following data which Mr Bogiatto advised should be included in Australian Steel's 2014 amended tax return:
- • Label E, "R&D expenditure - Salary expenditure" - $325,146;
- • Label G, "R&D expenditure - Other" - $1,084,212;
- • Label M, "R&D assets - Decline in value" - $8,894; and
- • Labels X and Z, "Total notional R&D deduction" - $1,418,252.

508. Mr Bogiatto's email contained a signature block which stated that he was the managing partner and identified the relevant company as Ryusei trading as Lambda Chase Chartered Accountants.

509. On 21 July 2015, Mr Capocasale forwarded Mr Bogiatto's email of 20 July 2015, together with the attachments, to his tax agents, Tino Di Battista and Dominic Papalia, at Hayes Knight.

510. On 22 July 2015, Mr Capocasale received an email from Mr Battista in which he observed that the R&D figures "seem quite high … on face value". Mr Battista made the following request:

Please provide the complete copy of the R&D form which outlines each of the projects and related activity and costs as this will be required if the ATO seeks

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clarification of how the $1.4m was arrived at and in respect of which R&D activities.

511. By email on 30 July 2015, Mr Papalia wrote to Mr Bogiatto requesting a breakdown of the R&D items set out in the R&D Tax Incentive Schedule, including any supporting documents to verify the figures. The amended 2014 income tax return was lodged by Hayes Knight that day.

512. As a result of the lodgement of the amended income tax return for 2014, the Commissioner appears to have allowed Australian Steel an R&D tax offset of $638,213. The Commissioner submitted that this amount was allowed, although the amended tax return was not tendered.

513. On 4 August 2015, Mr Capocasale forwarded to Mr Bogiatto the email from Mr Papalia of 30 July 2015. On 5 August 2015, Mr Bogiatto responded to Mr Capocasale's email stating, amongst other things:

We have an agreement concerning the work I have done for you.

I have processed the application and passed a initial review with Ausindustry. …

My workings are my property and can not be forwarded to any party since it is my work.

Clients who have their accountant requesting such information do not have intentions to pay for my services from past experience.

Is it your intention to not pay me?

I will send you the invoice shortly.

514. Mr Capocasale responded, indicating that he understood Mr Bogiatto's concerns and would instruct his tax agents to "proceed with your initial instruction".

515. On 28 August 2015, Mr Bogiatto sent to Mr Capocasale an email:

(1) attaching an invoice to Australian Steel for preparation and submission of the 2014 R&D tax offset in the amount of $210,610.42, requiring payment to Lambdachase Services. The invoice was amended on 5 November 2015;
(2) recommending that Australian Steel make an R&D claim in respect of the 2015 financial year and requesting that Mr Capocasale provide to Mr Bogiatto information in relation to this. Mr Bogiatto further observed:

I note the economy and stock market is changing drastically going forward and I strongly advise for your best interest that you get the 2015 R&D refund in your hands to handle future changes.

F.10.2.2 Section 290-60(1)(b): consideration

516. The "Terms of Engagement" have been referred to earlier.

517. On 5 November 2015, Australian Steel received an amended invoice from "LambdaChase Chartered Accountants", requiring payment to and including the ABN of Lambdachase Services. The invoice was for $70,203.47. It was paid by Australian Steel on 4 December 2015.

518. Consideration in the form of a promise to pay was received by Lambdachase Advisors "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Consideration in the form of payment was received by Lambdachase Services. I am satisfied that this was also "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Lambdachase Advisors marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Ryusei. Lambdachase Services was an associate of Mr Bogiatto, Ryusei and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.10.2.3 Section 290-60(1)(c): substantial role

519. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. None of their roles could be said to be a role which was not of substance.

F.10.3 Tax exploitation scheme

520. I am satisfied on the basis of the matters set out above and below, that there was a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

521.

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The "scheme" at least included advising Australian Steel that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing an R&D Tax Incentive Schedule for inclusion in Australian Steel's 2014 amended tax return, lodging the R&D Tax Incentive Application for registration and advising the taxpayer to lodge an amended income tax return.

522. The "tax exploitation scheme" was one which was implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that Mr Bogiatto, Ryusei, Lambdachase Advisors and Australian Steel (alone or together) entered into or carried out the scheme with the sole or dominant purpose of Australian Steel getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

523. As for the second condition, for the reasons given below, it was not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that Australian Steel was entitled to any of the scheme benefit.

524. The Commissioner's primary argument as to why it was not reasonably arguable that any of the scheme benefit was unavailable was, again, that the "taxpayer did not have adequate or contemporaneous records to substantiate that the claimed R&D expenditure was incurred on R&D activities that had been registered with AusIndustry for the 2014 financial year". In support of this submission, the Commissioner relied upon Mr Capocasale's acknowledgement that:

(1) "[t]here were no records maintained by the company in relation to the limited R&D activity … which could be relied upon to justify the R&D expenditure";
(2) "the company kept no records at all which would enable its R&D activity to be identified or quantified".

525. The evidence adduced by the Commissioner does not establish that it was not reasonably arguable that R&D activities were carried out. The ATO commenced a review of Australian Steel's 2014 R&D claim. In the context of that review, an amended return for the 2014 year was lodged, after Australian Steel had received assistance from Mr Battista who was provided with relevant documents. This resulted in a lower R&D amount being claimed. The Commissioner did not establish what that lower amount was. Australian Steel continues to make R&D claims, but at lower levels. I am satisfied that there were witnesses available who could have given evidence about the activities and about the expenditure on those activities, albeit that full and proper contemporaneous records of R&D expenditure were not kept. I do not accept that it was not reasonably arguable that some R&D tax expenditure was available to be claimed. By way of example, it would have been open to the ATO or a merits review Tribunal to accept the evidence of witnesses as supplemented by such documentary records as did exist. Indeed, it appears that the ATO did accept that R&D expenditure was incurred in 2014 given the evidence just described.

526. The Commissioner's second argument was that the amount of R&D expenditure claimed by the taxpayer exceeded any reasonably arguable view of the amount it expended on R&D activities. Australian Steel's claimed R&D salary expenditure was $325,146. Mr Capocasale acknowledged that, of Australian Steel's 19 employees, only 3 or 4 undertook R&D activities and they would have dedicated only 20% of their time to R&D activities. The highest paid employee undertaking R&D work received a salary of $120,000. Mr Capocasale accordingly calculated total R&D salary expenditure to be in the range of $72,000 to $96,000.

527. I accept that it was not reasonably arguable that most of the scheme benefit was available at law. I do not accept that it was not reasonably arguable that some R&D tax offset was available. The Commissioner did not establish the precise amount which was not reasonably arguable.

F.10.4 Scheme benefit

528. There was a scheme benefit because an amount that the Commissioner had to pay or

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credit to Australian Steel under a taxation law was, or could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

529. The precise amount of the scheme benefit has not been established.

F.11 Cargroomers Queensland Pty Ltd

530. Cargroomers was the taxpayer participant in an alleged tax exploitation scheme in the 2013 financial year. Evidence was given by way of affidavit by Mr Errol Woolcott. Mr Woolcott was the sole director of Cargroomers. He had been a director since 10 November 1988 and the sole director since his wife ceased to be a director on 20 June 1996.

531. Cargroomers provides mobile car detailing and cleaning services. It is a franchise operation with 80 franchisees Australia wide. It also has a manufacturing division which manufactures and sells car detailing and cleaning products.

F.11.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

532. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
(2) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
(3) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.

F.11.2 Promoter

F.11.2.1 Section 290-60(1)(a): marketing or encouragement

533. On the basis of the facts outlined above and below, I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors marketed, and encouraged interest in, the scheme within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

534. Mr Woolcott received a number of telephone calls from Mr Bogiatto in October 2013. During one of those calls, Mr Bogiatto said "I want to meet with you to discuss the R&D tax incentive". Mr Woolcott did not arrange to meet with Mr Bogiatto but, nevertheless, Mr Bogiatto appeared unannounced in October 2013 at the Cargroomers' office. Mr Woolcott agreed to speak with Mr Bogiatto. During the meeting, Mr Bogiatto stated that:

Cargroomers could be eligible for a considerable payment for its paint protection R&D.

535. Mr Bogiatto stated that he and Lambda Chase specialised in R&D applications. Mr Bogiatto indicated a dollar amount that Cargroomers could expect to receive through an R&D tax offset, however Mr Woolcott could not recall the amount. He did recall that it was "significant and that was a matter which certainly got my attention".

536. The meeting concluded with a request from Mr Bogiatto to Mr Woolcott for the provision of "tax file numbers … as well as some information about the Cargroomers business". Mr Bogiatto also indicated that he would "get [Mr Woolcott] information about the application process".

537. In about November 2013, Mr Bogiatto again appeared unannounced at the Cargroomers' office. This resulted in a meeting which included Mr Bogiatto, Mr Woolcott, Ms Sharon Duncan (the financial controller of Cargroomers) and Mr Woolcott's son, Blair. During the meeting, Mr Bogiatto stated:

I am a Sydney-based accountant who has gone into the R&D area and I now do this for a living. I look after a lot of companies. I get a lot of returns for those companies and am doing this around Australia.

…

I can make the necessary adjustments to Cargroomers' tax returns.

538. During the meeting, Mr Bogiatto indicated a dollar amount, "in the order of $100,000" to the best of Mr Woolcott's recollection, that Cargroomers could expect to receive through an R&D tax offset.

539.

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On 17 February 2014, Mr Bogiatto sent an email to Mr Woolcott in which Mr Bogiatto referred to previous conversations with and emails to Mr Woolcott. He requested that Mr Woolcott start giving this matter his attention and asked that Mr Woolcott email to him details of Cargroomers' projects. He advised that he was "keen to finalise this in order to maximise the tax incentive and cash refund coming your way".

540. Mr Bogiatto's email contained a signature block which stated that he was the managing partner and identified the relevant company as Ryusei trading as Lambda Chase Chartered Accountants.

541. On 6 March 2014, Mr Bogiatto sent an email to Mr Woolcott following up on the provision of information he had previously requested. This contained the same signature block as his earlier email.

542. On 26 April 2014, Mr Bogiatto sent an email to Mr Woolcott and Ms Duncan attaching the "draft 2013 R&D submission for your review". I infer that the "submission" was a draft R&D Tax Incentive Application. In her response to his email, Ms Duncan requested, referable to a request that she provide details in respect of "2013 taxable income/loss", that Mr Bogiatto "please call so I can ascertain what you are looking for". She also requested that Mr Bogiatto call her "re the company name you have used for the submission". Approval was not given to file the draft R&D Tax Incentive Application.

543. On 30 April 2014, Mr Bogiatto submitted to AusIndustry an R&D Tax Incentive Application. It recorded that for the 2013 financial year, Cargroomers' overall R&D project expenditure was $1,002,421.

544. The application nominated Mr Bogiatto of "LambdaChase Advisors Pty Ltd" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Cargroomers had relied on advice from a tax agent or R&D consultant and identified the person from whom Cargroomers had received such advice as Mr Bogiatto of "LambdaChase Advisors Pty Ltd". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

545. Mr Bogiatto sent an email on 30 April 2014 to Mr Woolcott attaching the R&D Tax Incentive Application and a letter dated 30 September 2013 titled "Terms of Engagement". The letter was signed by Mr Bogiatto, on letterhead of "LambdaChase chartered accountants", with Ryusei's ABN. The letter indicated that the fee associated with Mr Bogiatto's work was "30% of the net research and development tax offset granted from the Australian Taxation Office in the first instance". The Terms of Engagement also provided: "[y]ou may accept these terms … by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter …". Cargroomers continued to provide instructions to Mr Bogiatto.

546. On 1 May 2014, Ms Duncan sent an email to Mr Bogiatto which included:

Please find attached the financials for Cargroomers Qld Pty Ltd as discussed. Please note there were no sales and there are no employees under this company - these are under Cargroomers Qld Trust.

547. On or about 2 May 2014, Mr Woolcott spoke with Mr Bogiatto by telephone. During this conversation, Mr Bogiatto stated: "I do not want to talk with your accountant".

548. On 9 May 2014, Mr Woolcott was copied into an email sent from AusIndustry to Mr Bogiatto attaching a copy of AusIndustry's Notice of Registration, dated 8 May 2014.

549. On 21 May 2014, Mr Bogiatto sent an email to Mr Woolcott which included:

We will help you lodge 2013 amended tax return with the R&D schedule.

The lodgement of this company tax return with the R&D schedule will result in the refund been allocated to you.

550. On 24 June 2014, Mr Bogiatto requested the 2013 income tax returns for Cargroomers and the Cargroomers Qld Trust. Ms Duncan provided the relevant income tax returns on 27 June 2014.

551. On 19 September 2014, Blair Woolcott received an email from Mr Bogiatto requesting income tax returns for J4US Family Trust, The Woolcott Trust, Errol Woolcott and Pamela

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Woolcott. Mr Bogiatto sent an email requesting the same information again from Blair Woolcott on 24 September 2014. On 8 October 2014, Mr Bogiatto sent a further email to Mr Errol Woolcott, requesting the same material sought earlier, "in order to finalise the income tax returns". On 9 October 2014, Mr Bogiatto made a request in the same terms to Ms Duncan.

552. On 10 October 2014, Mr Bogiatto sent a further email to Mr Woolcott requesting the 2013 income tax returns for The Woolcott Trust, Errol Woolcott and Pamela Woolcott. Blair Woolcott responded to that email and asked "… before we get to this how are we going for our manufacturing/export grants?"

553. On 16 October 2014, Mr Bogiatto telephoned Mr Woolcott. He asked that Mr Woolcott to provide "the financials I have been requesting".

554. On 23 October 2014 Mr Bogiatto emailed Mr Woolcott and requested copies of all trust deeds together with information about the identity of the trustee for Cargroomers Queensland Trust and The Woolcott Trust.

555. By email on 30 October 2014, Ms Duncan advised Mr Bogiatto that Cargroomers did not wish to proceed to make a claim for an R&D tax offset. In that email Ms Duncan indicated, inter alia:

After talking with the ATO it has become clear that journaling income and expenses retrospectively between entities to obtain the grant money is not acceptable practice. As we have no wish to provide incorrect information to the ATO, and R&D grants can't be issued to Trusts, we will not be proceeding with the R&D Grant application.

556. At about the same time that Ms Duncan sent her email of 30 October 2014 to Mr Bogiatto, Mr Woolcott telephoned Mr Bogiatto and indicated that Cargroomers would not be proceeding with its application. Mr Bogiatto said to him: "You've just been wasting my time, energy and efforts. You have cost me a lot of money".

F.11.2.2 Section 290-60(1)(b): consideration

557. The Terms of Engagement have been referred to earlier. Those Terms of Engagement were accepted by Cargroomers continuing to instruct Mr Bogiatto.

558. No invoice was ever issued by any of the respondents to Cargroomers. Nor were any fees paid by Cargroomers to any of the respondents. Nevertheless, I am satisfied that at the time of the marketing and promotion consideration had been received in the form of the promise to pay. That consideration was received by Ryusei, the entity with which Cargroomers contracted.

559. That consideration was received "in respect of [the] marketing or encouragement" of Mr Bogiatto, Ryusei and Lambdachase Advisors: s 290-60(1)(b). Ryusei marketed and encouraged interest in the scheme and was an associate of Mr Bogiatto and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied in relation to each of Mr Bogiatto, Ryusei and Lambdachase Advisors.

F.11.2.3 Section 290-60(1)(c): substantial role

560. I am satisfied that Mr Bogiatto, Ryusei and Lambdachase Advisors had a "substantial role" in respect of the marketing or encouragement relied upon as satisfying s 290-60(1)(a): s 290-60(1)(c). The roles each had are set out above. They are each of substance.

F.11.3 Tax exploitation scheme

561. I am satisfied on the basis of the matters set out above and below, that there was a "scheme" which was a "tax exploitation scheme" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

562. The "scheme" at least included advising Cargroomers that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry, lodging the R&D Tax Incentive Application for registration and planning to claim in respect of R&D through lodgement of income tax returns.

563. The "tax exploitation scheme" was one which was not implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition,

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it is reasonable to conclude that, if Mr Bogiatto, Ryusei, Lambdachase Advisors and Cargroomers (alone or with others) had entered into or carried out the scheme, they would have done so with the sole or dominant purpose of Cargroomers getting a scheme benefit from the scheme: s 290-65(1)(a)(ii).

564. As for the second condition, it was not reasonably arguable that any of the scheme benefit would have been available at law if the scheme had been implemented: s 290-65(1)(b)(ii). The company did not incur the amounts recorded as R&D expenditure. Rather, these amounts were incurred by the Cargroomers Queensland Trust, which was not an "R&D entity" within the meaning of s 355-35 of the ITAA 1997 and which was, accordingly, not eligible to receive R&D incentives under Div 355 of the ITAA 1997.

F.11.4 Scheme benefit

565. If the scheme had been implemented, an amount that the Commissioner would have had to pay or credit to Cargroomers under a taxation law would have been greater than it would have been apart from the scheme or a part of it and Cargroomers would have got a scheme benefit: s 284-150(1)(b).

F.12 Design Landscapes Pty Ltd

566. Design Landscapes was the taxpayer alleged to have participated in three tax exploitation schemes in the 2012, 2013 and 2014 financial years. Evidence in relation to those schemes was provided by an affidavit from Mr Platt sworn 5 September 2019.

567. Mr Platt was the director and secretary of Design Landscapes, having held that position since 28 November 1988. Design Landscapes constructs "public domain and landscape infrastructure projects" both in the role as principal contractor and subcontractor.

F.12.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

568. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) in relation to the 2012 tax exploitation scheme:
- (a) Mr Bogiatto engaged in conduct which resulted in him and Ryusei being promoters of a tax exploitation scheme within the meaning of s 290-60
- (b) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
- (c) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto and Ryusei and Lambdachase Advisors each being a promoter of a tax exploitation scheme, by receiving consideration which resulted in those entities being promoters.
(2) in relation to the 2013 and 2014 tax exploitation schemes:
- (a) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of tax exploitation schemes within the meaning of s 290-60;
- (b) Ryusei engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60;
- (c) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60; and
- (d) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors each being a promoter of tax exploitation schemes, by receiving consideration which resulted in those entities being promoters.

F.12.2 Promoter

F.12.2.1 Section 290-60(1)(a): marketing or encouragement

569. On the basis of the facts outlined above and below, I am satisfied:

(1) in relation to the 2012 tax exploitation scheme, that Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, that Mr Bogiatto, Ryusei and Lambdachase Advisors,
marketed, and encouraged interest in, the relevant schemes within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond

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marketing and encouragement but are set out here for convenience.

570. In 2011, Design Landscapes' account manager, Melinda Watson, received an unsolicited telephone call from Ray Seeto of Hill & Bogiatto Chartered Accountants. Ms Watson was instructed by Mr Platt to meet with Hill & Bogiatto and report back to him in respect of the services they were able to provide. She did so.

571. A meeting with Mr Bogiatto, Mr Seeto, Mr Platt and Ms Watson took place on or around 20 December 2011. Mr Platt gave the following account of what was said:

Mr Bogiatto: Thank you for meeting with us today. Ray has told me a little bit about your business but would you tell me about a typical project that you would do?

Me: We do landscape construction projects that involve taking a set of plans or drawings and implementing that on site for the client. But when you're doing construction, you never build anything exactly as per the drawings.

Mr Bogiatto: So you never build to the plans. There always have to be changes in order to bring about what another has represented in a drawing?

Me: Yes, for example, we'll find that someone's set out the building in the wrong place and so, we have to change the design to fit into the space that's available. Or more, there's often a lot of buildability issues on jobs where the architect or the landscape architect is great at drawing a picture and says, I want you to build this. But how do they actually expect us to build that? It's not buildable in that way. We then have to re-work the actual buildability aspects of that to come up with something that looks reasonably close to what they're after as a finished product.

Mr Bogiatto: Well, if you're not building it as per someone else's drawing and you're having to make adjustments to make it work, that's all R&D. The cost of that work is potentially available to you as R&D. R&D claims are my specialisation and everything you have described could be R&D because we were not building as per someone else's drawing but having to make the drawing work by bringing what is drawn into being. I am a specialist in R&D and I can help you to take advantage of the R&D Concessions available to you.

Me: If we were to move ahead and we engaged you, what does it look like in terms of your fees and your structure and how you operate?

Mr Bogiatto: We will get back to you with a proposal.

Me: Ok, I am interested in retaining your services. We'll think about it and wait for you to send through a proposal.

572. On 21 December 2011, Mr Platt received an email from Mr Seeto, attaching a letter in Mr Seeto's name, thanking Mr Platt, "on behalf of Paul and [Mr Seeto]", for meeting with them. The email contained a signature block which described Mr Seeto as the "Business Director" and referred to Ryusei trading as Hill & Bogiatto. It contained Ryusei's ABN.

573. The letter, on a Hill + Bogiatto letterhead, included:

Given your description of your company's product development and processes we believe it would be in your company's financial interest to strongly consider taking advantage of the R&D Concessions available to you.

As you know the R&D Concession is complex and meeting requirements to maximise claims can be involved, time consuming and costly. Hill+Bogiatto professionals are experts with experience and capability in executing your R&D Concession claim which will provide maximum financial benefits for the 2011 financial year and beyond. We believe in making the R&D Claim as smooth as possible and taking as little as possible of staff's time whilst ensuring your submission is well structured and robust.

574. After negotiations in 2012 with respect to the fees proposed to be charged for the R&D services, it was agreed that a fee of 15% of the net R&D tax concessions would apply. A letter of engagement was ultimately sent on 20 March 2012 confirming that fee. That letter of

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engagement was superseded by the provision of a further letter of engagement on 24 June 2013. The fee remained at 15% of the net R&D tax concession.

575. Mr Bogiatto assisted Design Landscapes to submit an R&D Tax Incentive Application to AusIndustry for the 2011 financial year, and in turn assisted the company to lodge an amended income tax return with the Commissioner in that financial year. No contraventions are alleged in respect of that conduct.

576. Similarly, Mr Bogiatto assisted a related company, Design Landscapes (ACT) Pty Ltd, to submit an R&D Tax Incentive Application and amended income tax return for the 2012 year. No contraventions are alleged in respect of that taxpayer.

577. The 2012 financial year : On 27 March 2013, Ms Watson sent an email to Design Landscapes employees, copied to Mr Platt and Mr Bogiatto, requesting that employees select an appointment time to meet with Mr Bogiatto to provide information to him in order that he might assess Design Landscapes' projects for R&D eligibility and, if eligible, quantify the resulting R&D expenditure.

578. On 12 April 2013, Ms Watson received an email from Mr Bogiatto advising that he was "in the middle of [Design Landscapes'] R&D application". He attached "draft R&D project description[s]" and sought additional information. Further correspondence providing additional financial material and project information was exchanged between Mr Bogiatto and employees of Design Landscapes, including Mr Platt and Ms Watson.

579. On 27 April 2013, Mr Bogiatto provided by email a draft AusIndustry R&D Tax Incentive Application and requested various additional pieces of information. Additional information was provided between 27 April 2013 and 29 April 2013.

580. On 29 April 2013, Mr Bogiatto sent an email to Ms Watson attaching a further draft AusIndustry R&D Tax Incentive Application, asking Ms Watson to complete missing information in the application and requesting that a signed copy of the application be returned to Mr Bogiatto for lodgement. Mr Platt believed that the form was returned by Ms Watson to Mr Bogiatto by email for submission to AusIndustry.

581. The draft application recorded that, for the 2012 financial year, Design Landscapes' overall R&D project expenditure was $2,996,355. The draft application nominated Mr Bogiatto of "Lambda Chase Chartered Accountants" as the "nominated contact person" and provided Ryusei's ABN.

582. On 30 April 2012, Mr Bogiatto emailed Ms Watson with the word "Done", apparently confirming that the 2012 AusIndustry R&D Tax Incentive Application had been submitted.

583. On or around 10 May 2013, AusIndustry sent to Mr Bogiatto a Notice of Registration for the 2012 financial year. That Notice was forwarded to Design Landscapes together with an R&D Tax Incentive Schedule. The Schedule included a total notional R&D deduction of $2,751,355.

584. On 21 May 2013, Design Landscapes' tax agent, Jon McArthur of Stature ARW Accounting Pty Ltd, lodged with the Commissioner on behalf of Design Landscapes an amended income tax return for the 2012 financial year, incorporating the R&D expenditure calculated by Mr Bogiatto.

585. As a result of the lodgement of the amended income tax return for the 2012 year, the Commissioner allowed Design Landscapes an R&D tax offset of $1,100,542, including allowing non-refundable tax offsets of $174,946.90 to be carried forward to be applied against taxable income in later years.

586. The 2013 and 2014 financial years : The 2013 and 2014 schemes are discussed together for comprehensibility. The process by which Mr Bogiatto obtained information, including the meetings he attended and the emails he sent requesting information, were common between both schemes. The Commissioner contended that each were separate schemes, not a single scheme over two years.

587. The preparation of the 2013 and 2014 AusIndustry R&D Tax Incentive Applications proceeded in a similar way to the 2012 application. Mr Platt recalls that he caused his receptionist to arrange meetings between Mr Bogiatto and Design Landscapes' project managers in order to facilitate the provision of information about Design

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Landscapes' projects to allow Mr Bogiatto to make an assessment of their eligibility for R&D tax concessions.

588. By email on 11 July 2013, Mr Bogiatto confirmed that he had met with "all the project managers" and "[t]he meetings went well". He further indicated, in respect of the 2014 financial year, "I intend to see all project managers just before Christmas if this suits your schedule to ensure we capture all information for the 2014 year". This email contained a signature block which described Mr Bogiatto as the "Managing Partner" and referred to Ryusei trading as Lambda Chase Chartered Accountants and included Ryusei's ABN.

589. On 29 April 2014, Mr Bogiatto sent an email to Mr Platt that included descriptions for Design Landscapes' projects, which Lambda Chase had drafted, for inclusion in the application to AusIndustry for the 2013 financial year.

590. On 30 April 2014, Mr Bogiatto submitted to AusIndustry the AusIndustry R&D Tax Incentive Application for the 2013 financial year. Mr Platt was notified of that fact by email on 6 May 2014 which attached an engagement letter. The engagement letter is discussed later.

591. The application recorded that for the 2013 financial year, Design Landscapes' overall R&D project expenditure was $3,656,601.

592. The application nominated Mr Bogiatto of "Lambdachase Advisors Pty Ltd" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Design Landscapes had relied on advice from a tax agent or R&D consultant and identified the person from whom Design Landscapes had received such advice as Mr Bogiatto of "Lambdachase Advisors Pty Ltd". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

593. On 20 May 2014, AusIndustry sent Mr Bogiatto a Notice of Registration for the 2013 financial year.

594. On 2 October 2014, Mr Bogiatto lodged Design Landscapes' income tax return for the 2013 financial year. As a result of the lodgement, the Commissioner allowed the taxpayer a refundable R&D tax offset of $1,645,470.45 and credited to the taxpayer $1,540,788.15.

595. On 30 April 2015, Mr Bogiatto submitted to AusIndustry the AusIndustry R&D Tax Incentive Application for the 2014 financial year. The application recorded that for the 2014 financial year, Design Landscapes' overall R&D project expenditure was $4,794,074.

596. The application nominated Mr Bogiatto of "Lambda Chase Advisors" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Design Landscapes had relied on advice from a tax agent or R&D consultant and identified the person from whom Design Landscapes had received such advice as Mr Bogiatto of "Lambda Chase Advisors". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

597. On 15 July 2015, Mr Bogiatto lodged on behalf of Design Landscapes an amended income tax return for 2013. As a result of the lodgement of the amended income tax return, the Commissioner included a non-refundable carry forward R&D tax offset of $109,368.90, changed the refundable R&D tax offset previously allowed to a non-refundable R&D tax offset of $104,682.30 to be applied against Design Landscapes' gross tax of $104,682.30, allowed a non-refundable R&D tax offset of $4,686.60 to be applied against Design Landscapes' income in later years, and credited to Design Landscapes $104,682.30.

598. On 24 July 2015, Mr Bogiatto lodged with the Commissioner on behalf of Design Landscapes an income tax return for the 2014 financial year, incorporating information prepared by Mr Bogiatto in relation to R&D. As a result of the lodgement of the income tax return for 2014, the Commissioner allowed Design Landscapes a refundable R&D tax offset of $2,157,333.30, offset the Design Landscapes' 2013 carry-forward non-refundable R&D tax offset of $4,686.60 and the 2014 refundable R&D tax offset of $1,528,098.60 against Design

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Landscapes' gross tax of $1,532,785.20 and credited to it $629,234.70.

F.12.2.2 Section 290-60(1)(b): consideration

599. The "Terms of Engagement" letter dated 20 March 2012, signed by Mr Seeto on behalf of Mr Bogiatto on a "LambdaChase" letterhead, as described at [112] above, contained Ryusei's ABN. The fee was "15% of the net Research and Development tax offset from the Australian Taxation Office". The Terms of Engagement letter provided that "[y]ou may accept these terms … by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter …". Design Landscapes executed the Terms of Engagement. The resulting contract was between Ryusei and Design Landscapes.

600. A second "Terms of Engagement" letter was dated 24 June 2013. It was signed by Mr Bogiatto on a "LambdaChase" letterhead and showed Ryusei's ABN. The fee was "15% of the net Research & Development tax offset granted from the Australian Taxation Office in the first instance". The Terms of Engagement letter also provided that "[y]ou may accept these terms … by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter …". Design Landscapes executed the Terms of Engagement on 1 July 2013 and continued to provide instructions.

601. A third "Terms of Engagement" letter was dated 15 April 2014. It was signed by Mr Bogiatto on a "LambdaChase" letterhead and contained the ABN of Lambdachase Advisors. The fee was "15% of the net Research and Development tax offset granted from the Australian Taxation Office in the first instance". The Terms of Engagement letter provided "[y]ou may accept these terms … by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter …". Design Landscapes executed the Terms of Engagement on 24 May 2014 and continued to provide instructions. The resulting contract was with Lambdachase Advisors.

602. By a Statement of Claim filed on 29 December 2015 and served on Design Landscapes on 30 December 2015, Ryusei, Lambdachase Advisors and Lambdachase Services sought liquidated damages from Design Landscapes (and other associated entities) in the sum of $658,213.71 for payment of unpaid invoices including invoices relating to the 2012, 2013 and 2014 schemes. Following service of the Statement of Claim, a payment in the sum of $60,000 was made to the respondents in full and final settlement of the matter.

603. Consideration was received, in the form of a promise to pay, by Ryusei and Lambdachase Advisors. Each of those entities engaged in marketing and encouragement and was an associate of each other and of Mr Bogiatto. Consideration was also received in the form of payment of $60,000 in settlement of the proceedings which had been commenced by Ryusei, Lambdachase Advisors and Lambdachase Services.

604. I am satisfied that consideration was received "in respect of [the] marketing or encouragement" of:

(1) Mr Bogiatto and Ryusei in relation to the 2012 tax exploitation scheme; and
(2) Mr Bogiatto, Ryusei and Lambdachase Advisors in relation to the 2013 and 2014 tax exploitation schemes: s 290-60(1)(b).

605. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.12.2.3 Section 290-60(1)(c): substantial role

606. I am satisfied that:

(1) in relation to the 2012 tax exploitation scheme, Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, Mr Bogiatto, Ryusei and Lambdachase Advisors,

F.12.3 Tax exploitation scheme

607. I am satisfied on the basis of the matters set out above and below, that there were "schemes" in each of the 2012, 2013 and 2014 years which were "tax exploitation schemes" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

608. The "schemes" at least included advising Design Landscapes that it was eligible

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for an R&D tax offset under Div 355, collecting information for the purposes of preparing applications for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing R&D Tax Incentive Schedules for inclusion in Design Landscapes' tax returns, lodging the R&D Tax Incentive Applications for registration, advising the taxpayer to lodge income tax returns and assisting with the lodgement of income tax returns.

609. The "tax exploitation schemes" were ones which were implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude:

(1) in relation to the 2012 tax exploitation scheme, Mr Bogiatto, Ryusei and Design Landscapes; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, Mr Bogiatto, Ryusei, Lambdachase Advisors and Design Landscapes,

alone or together entered into or carried out the scheme with the sole or dominant purpose of Design Landscapes getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

610. As for the second condition, for the reasons given below, it was not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that Design Landscapes was entitled to any of the scheme benefit.

611. On 29 February 2016, Design Landscapes was informed that the ATO was undertaking a comprehensive risk review for the period 1 July 2011 to 30 June 2014. The ATO provided a position paper on 9 August 2016. On 12 September 2016, Design Landscapes was informed that the ATO had finalised the review and would proceed with an audit. By this time, AusIndustry had commenced a review of Design Landscapes' R&D registration. Design Landscapes engaged Mr Nethersole of Nexia Australia and New Zealand to assist in the ATO audit and AusIndustry review.

612. AusIndustry came to the view that the activities which had been submitted as R&D activities for the years 2012 to 2014 financial years were not eligible R&D activities. Mr Platt stated that this view was "in keeping with what I had come to learn about whether the company was entitled to make an R&D claim in any of the relevant years".

613. After describing various matters concerning the ATO audit and AusIndustry Review, Mr Platt stated at [96] to [98] of his affidavit:

96. Based on the events outlined above, I have developed a much deeper understanding of how the R&D regime operates. With the benefit of that understanding, and looking back at the work Design Landscapes was actually doing on the projects relied upon in its R&D claims, I now believe that those projects involved much less R&D activity than was actually claimed. This is because of the following:

(a) None of the projects for which Design Landscapes made R&D claims (and none of the work the company did generally) involved conducting experiments or any experimental activity based on accepted principles of science. There was little scientific process about the way it went about its work. The company was simply in the business of installing landscape projects for clients. Where problems emerged on a particular project (such as, the architect's design not being achievable in the actual application), we would seek to address it as efficiently and effectively as possible - but this was almost always done by adapting known methods, ideas and technologies and simply combining them in a different way;

(b) Consistent with what I have said at (a) immediately above, Design Landscapes never had any formal and documented hypothesis that was the subject of any testing or evaluations. We would simply work on coming up with landscaping solutions based on the needs and input of our customers. By way of example, on the One Central Park project … I believe that the work to mix and test soil components to formulate the most appropriate soil mix for the specific application may very well have been a valid R&D activity notwithstanding that it was ultimately rejected by

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AusIndustry. However, the R&D claim made by Design Landscapes at the recommendation of Mr Bogiatto included the cost of labourers undertaking the installation part of the project which primarily involved putting soil into planter boxes, which I know now was not eligible R&D. Accordingly, on that project, ineligible labour comprised approximately 90% of the R&D claim;

(c) The company, across all of the projects on which its R&D claims were based, did not set out with the goal of trying to generate new knowledge. We were always seeking to complete projects by finding practical solutions to any challenges that presented themselves. For example, I now believe that the Arboretum project which … comprised the manufacture of bespoke play equipment and a concrete wall did not involve any proper R&D activities because none of the methods or technologies applied by Design Landscapes were new. Such solutions were always based on knowledge, information and know-how that had been in the marketplace for a considerable time. It was just that the various solutions or technologies had not previously been combined together in the way that Design Landscapes performed the elements of the projects.

97. Even if, despite what I have explained in the paragraph immediately above, any of the work Design Landscapes undertook did involve R&D activity, the company did not specifically maintain any time records or data that would allow someone to quantify the expenditure and work involved in such activities.

98. Further, again even if there were R&D activities undertaken by the company in any of the relevant years, the amounts claimed based on the materials Mr Bogiatto prepared, significantly exceeded the expenditure that, on any reasonable view, Design Landscapes had actually incurred on those activities. I say this because there was no reasonable basis for the quantum of the R&D salary expenditure claimed in each of the relevant years where a small proportion of Design Landscapes' labour involved innovative design and a high proportion was in the nature of installation.

614. Mr Platt also provided evidence which indicated that Design Landscapes and Design Landscapes (ACT), being commonly owned associates, had an aggregated income which exceeded $20 million.

615. The Commissioner submitted that, because Design Landscapes aggregated turnover exceeded $20 million, it was not eligible for the 45% refundable tax offset by reason of ss 67-30 and 355-100 of the ITAA 1997. I accept that submission. The Commissioner did not submit or establish that Design Landscapes would not have been entitled to a non-refundable 40% tax offset (being the percentage which applied before 2016).

616. The Commissioner next submitted that the activities referred to in Design Landscapes' R&D applications were not "core R&D activities" within the meaning of s 355-25 of the ITAA 1997 or "supporting R&D activities" within the meaning of s 355-30 of the ITAA 1997. The Commissioner relied on the evidence (and submission) of Mr Platt referred to above. Mr Platt's evidence at [96(b)] of his affidavit included that he considered at least one activity may well have been valid R&D activity, notwithstanding that AusIndustry did not accept that view. In my view, the Commissioner has not established that none of the activities were not reasonably arguably R&D activities. The Commissioner has established that the overwhelming majority of Design Landscapes' activities were not R&D activities.

617. The Commissioner's third submission was that the amount of R&D expenditure claimed by the taxpayer exceeded any reasonably arguable view of the amount it expended on R&D activities. The Commissioner relied on the following statements in particular made by Mr Platt in his affidavit:

(1) "the R&D claim made by Design Landscapes at the recommendation of Mr Bogiatto included the cost of labourers undertaking the installation part of the project which primarily involved putting soil into planter boxes, which I know now was not eligible R&D. Accordingly, on that

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project, ineligible labour comprised approximately 90% of the R&D claim";
(2) "even if there were R&D activities undertaken by the company in any of the relevant years, the amounts claimed based on the materials Mr Bogiatto prepared, significantly exceeded the expenditure that, on any reasonable view, Design Landscapes had actually incurred on those activities."

618. I accept that submission.

619. The Commissioner's final submission was that Design Landscapes "did not have adequate or contemporaneous records to substantiate that the total claimed R&D expenditure was incurred on R&D activities registered with AusIndustry for those financial years". I accept that Design Landscapes did not have adequate records for the stated purpose. However, that does not mean that it was not reasonably arguable that it engaged in R&D activities which could have formed the basis for a claim which was available at law, even if difficult to prove. It is the taxable facts which are relevant to whether a claim is available and the lack of records does not alter the taxable facts.

620. I accept that it was not reasonably arguable that most of the scheme benefit was available at law.

F.12.4 Scheme benefit

621. There was a scheme benefit because an amount that the Commissioner had to pay or credit to Design Landscapes under a taxation law was, or could reasonably be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

622. The precise amount of the scheme benefit has not been established.

F.13 Sky High Hoists Rigging and Electrical Pty Ltd

623. Sky High was the taxpayer participant in two alleged tax exploitation schemes in the 2012 and 2013 financial years. Evidence in relation to those schemes was provided by way of affidavit by Mr Nathan Hunt.

624. Mr Hunt was the secretary of Sky High, having occupied that role since 24 January 2006. He was a director of Sky High from 24 January 2006 to 5 March 2010. Sky High designs, manufactures, installs and services construction hoists which are devices used on construction sites "to vertically transport personnel and materials".

F.13.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

625. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) in relation to the 2012 tax exploitation scheme:
- (a) Mr Bogiatto engaged in conduct which resulted in him and Ryusei being promoters of a tax exploitation scheme within the meaning of s 290-60; and
- (b) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.
(2) in relation to the 2013 tax exploitation scheme:
- (a) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of a tax exploitation scheme within the meaning of s 290-60;
- (b) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60; and
- (c) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.

F.13.2 Promoter

F.13.2.1 Section 290-60(1)(a): marketing or encouragement

626. On the basis of the facts outlined above and below, I am satisfied:

(1) in relation to the 2012 tax exploitation scheme, that Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 tax exploitation scheme, that Mr Bogiatto, Ryusei and Lambdachase Advisors,

marketed, and encouraged interest in, the relevant schemes within the meaning of s 290-60(1)(a). Some of the facts set out in this section are relevant to issues beyond marketing and encouragement but are set out here for convenience.

627.

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In around November 2012, Mr Hunt received a telephone call from a person at Lambda Chase as a result of which a meeting was arranged for Mr Hunt to meet with Mr Bogiatto and Mr Ray Seeto at Sky High's office on 5 November 2012. Mr Hunt gave the following account of the conversation:

Mr Bogiatto: Nathan, thank you for taking the time to meet with me. I am an accountant and I specialise in assisting clients with research and development. Can you tell me a bit about your business, how you manufacture the hoists and any research and development that you are doing?

Me: Sky High Hoists have imported most of our hoists from China but it is necessary to modify them to be compliant with Australian standards. The purchased hoist is basically the shell and we build the associated gear that goes with the hoists to make up the functioning product that we use. Our manufacturing process involves testing the products but the output is not new. Effectively it is a copy of other products that are already out there in the market for 30 years. We're not particularly new and innovative, so I am not sure that what we do is research and development is it?

Mr Bogiatto: That is research and development … If you are modifying and testing, that is research & development. What is your process?

Me: Building the machines is something that we do between jobs. Because there is only a couple of us working on it and it is something we do in our downtime, building a machine would take us about six months, maybe even a whole year. I thought Sky High was just manufacturing assets to use in our business, I did not know that this involved R&D.

Mr Bogiatto: Sky High is doing R&D because you are doing processes for the first time that had not been done before and this involved trialling out the items.

Mr Bogiatto: Let's go for a walk around the yard so you can show me some of what you are talking about.

628. Mr Hunt took Mr Bogiatto and Mr Seeto on a tour of the yard and the workshop. He stated that, as part of this, he showed them what the company was doing, including the design of a new materials hoist, new tyres and other structural components that would speed up the process of installing a hoist on a construction site as well as a communications system that was being worked on. Mr Hunt gave the following account of a conversation:

Me: This is one of the hoists and the associated gear that we have built.

Mr Bogiatto: That's research & development.

Me: Ok. Over here are the jigs and the template that we have built over time.

Mr Bogiatto: That's research & development. All of this is research and development and you are entitled to claim a tax incentive for this and I can help you with that.

Me: What are your fee arrangements?

Mr Bogiatto: Our fee will be 30% of what you are able to claim.

Me: Ok. Let's go ahead with it.

Mr Bogiatto: I will provide you with some paperwork for you to sign to get started and I will need you to provide me with detail of employee wages and details of the people that were involved in building the gear.

629. On 5 November 2012, an email was sent by Ms Tang to Mr Hunt attaching a "Proposal" and a "Letter of Engagement". The signature block indicated that Ms Tang worked for Ryusei trading as Lambda Chase Chartered Accountants.

630. The "Proposal" was on a "LambdaChase" letterhead, as described at [112] above, which included a reference to Mr Bogiatto, and Ryusei's ABN. The "Proposal" included:

The firm would like to thank you for meeting with us to discuss your company's Research & Development activities. I hope we have given you a chance to reflect on the process of the R&D Incentive claim. Given your description of your company's product development and processes we believe it would be in your

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company's financial interest to strongly consider taking advantage of the R&D Incentives available to you.

As you know the R&D Incentives is complex and meeting requirements to maximise claims can be involved, time consuming and costly. Lambda Chase professionals are experts with experience and capability in executing your R&D Incentives claim which will provide maximum financial benefits for the relevant financial year and beyond. We believe in making the R&D Claim as smooth as possible and taking as little as possible of you or your staff's time whilst ensuring your submission is well structured and robust.

631. The "Letter of Engagement" was dated 5 November 2012 and headed "Terms of Engagement". The letter was signed by Mr Bogiatto, on a "LambdaChase" letterhead, which referred to Mr Bogiatto and contained Ryusei's ABN. The fee was "30% of the net research and development tax offset granted by the Australian taxation Office". The Terms of Engagement letter provided that "[y]ou may accept these terms … by your conduct in instructing us or continuing to instruct us after receipt of the engagement letter …".

632. The 2012 financial year : On 7 December 2012, Mr Seeto on behalf of Ryusei trading as Lambda Chase Chartered Accountants, sent an email to Mr Hunt, copied to Mr Bogiatto. Mr Seeto requested that Mr Hunt provide drawings and notes relating to "one small project" being undertaken by Sky High, after which Lambda Chase would make amendments to the description, and the same process could then be employed in relation to other Sky High projects.

633. On 15 February 2013, Mr Bogiatto sent an email to Mr Hunt requesting information. He advised that he wanted to finalise the R&D claim so that Sky High could obtain funds to continue its research. The information that Mr Bogiatto requested included Sky High's tax return for the 2011 or 2012 financial year and financial information in relation to the 2012 financial year.

634. On 12 March 2013, Mr Bogiatto sent an email to Mr Hunt attaching a document entitled "Research & Development Project Criteria". He requested that Mr Hunt populate the document with information about work undertaken by Sky High. He also requested Sky High's 2012 MYOB file or accounting records and Sky High's 2011 tax return and financial accounts.

635. On 25 March 2013, Mr Bogiatto sent an email to Mr Hunt in which he advised that the final day to submit an AusIndustry R&D Tax Incentive Application for the 2012 financial year was 30 April 2013.

636. On 27 March 2013, Mr Bogiatto sent an email to Mr Hunt in which he requested a copy of Sky High's 2011 income tax return, 2012 financial accounts and trial balance, details of staff involved in Sky High's R&D projects and a depreciation schedule for the 2012 financial year.

637. On 15 April 2013, Mr Bogiatto sent an email to Mr Hunt, requesting additional information in respect of two hoist projects. The first was a "high speed man and materials hoist" and the second was the "Sky Climber" which Mr Hunt described as a "materials-only hoist" which Mr Bogiatto had listed as the second R&D project for the proposed application.

638. On 27 April 2013, Mr Bogiatto sent an email to Mr Hunt attaching a draft AusIndustry R&D Tax Incentive Application. He requested that Mr Hunt review and return a signed copy of the form for submission. The email attaching the AusIndustry R&D Tax Incentive Application contained a breakdown of Sky High's R&D wage expenditure. The total claim for R&D wage expenditure was in the amount of $138,041.51

639. Mr Hunt regarded the wage expenditure associated with R&D to be "embellished" because the allocations "did not represent the time I or these other employees had spent on the hoist projects". He regarded the figure as "plainly incorrect and unreasonable". Mr Hunt gave the following account of what occurred:

… I had provided various staff wages amounts to Mr Bogiatto at his request. In his email Mr Bogiatto allocated percentages of total wages paid to me, Garry Moss, an employee and "other admin" (that is, administration staff), to R&D activities. Mr Bogiatto had allocated 80% or $53,200 of

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my own wages of $66,500 to R&D activities. He had allocated 80% or $46,498 of Mr Moss's wages of $50,122.95 to R&D activities. And he had allocated 25% or $38,343.15 of administrative staff wages of $153,372 to R&D activities. Mr Bogiatto's allocations did not represent the time I or these other employees had spent on the hoist projects. His allocation to the hoist projects, out of total wages of $277,995.54, a figure of $138,041 seemed plainly incorrect and unreasonable to me. I thought the amounts were embellished. I had a number of telephone discussions with Mr Bogiatto in which I told him of my concerns about the accuracy of his figures.

Me: Garry Moss and I are the only people in the workshop and we worked on the hoist manufacturing projects in our spare time between jobs, but that is not a big part of what we do. You have allocated 80% of each of Garry and my time to R&D but we didn't really spend that much time on it. It was just filling time to build something we could hire out later.

Mr Bogiatto: Sky High Hoists is eligible to make the claim.

640. On 28 April 2013, Mr Bogiatto sent an email to Mr Hunt attaching a further draft of the AusIndustry R&D Tax Incentive Application for the 2012 financial year. The figures were the same as those which appeared in the draft provided by email on 27 April 2013. Mr Bogiatto requested that Mr Hunt review and return a signed copy of the form for lodgement and requested that Mr Hunt provide a copy of Sky High's 2012 income tax return. Mr Hunt maintained the view that the figures contained within the application were "exaggerations". He gave the following account of events:

I observed that the application form related to the 2012 year and covered: the high speed hoist project, for which it claimed the project expenditure had been $252,929; and the Sky Climber project, for which it claimed the project expenditure had been $232,197. The form stated the total R&D expenditure to be $485,126. I was not comfortable with those figures because I did not know how they had been calculated - for example, what man hours, cost of parts and consumables they were based on. I was also sceptical because I had already considered the same figures as they appeared in the earlier 27 April 2013 draft R&D application [annexure NH8] and concluded they were exaggerations. I provided Mr Bogiatto's figures to our accountant Mr Peter Khoury (Peter Khoury), I think that this was by email but I no longer have the email. I recall that Peter Khoury telephoned me one evening around late April 2013 said words to the effect:

Peter Khoury: Nathan, I am concerned that this R&D application is not an accurate representation of what Sky High does. R&D is a very specific thing.

Me: I'll definitely take that on board, Peter.

On or around 30 April 2013 after consulting with Peter Khoury, I telephoned Mr Bogiatto and we had a discussion to the following effect:

Me: Paul, I've had a look at the R&D Application form you have prepared. I don't think it's right. The numbers are too high.

Mr Bogiatto: The deadline is 30 April for the 2012 registration.

641. Mr Hunt did not approve the figures contained in that application, sign the application, return the application to Mr Bogiatto or instruct Mr Bogiatto to submit the application to AusIndustry. Nevertheless, on 29 April 2013, Mr Bogiatto submitted to AusIndustry the R&D Tax Incentive Application. It recorded that, for the 2012 financial year, Sky High's overall R&D project expenditure was $485,126. The application was lodged without Mr Hunt's knowledge and included amounts with which Mr Hunt had earlier informed Mr Bogiatto he disagreed.

642. The application nominated Mr Bogiatto of "Lambda Chase Chartered Accountants" as the "nominated contact person". The ABN of Ryusei was supplied in relation to the "nominated contact person".

643. Mr Hunt received an invoice dated 4 July 2013 for $24,014.10 requiring payment to Ryusei in respect of the 2012 application. He did not pay the invoice.

644. The 2013 financial year : Mr Bogiatto maintained contact with Mr Hunt in the months

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following April 2013 during which period they discussed lodging an R&D application for the hoist projects in the 2013 financial year.

645. Mr Hunt stated that, in about April 2014, Mr Bogiatto said to him:

We are coming up to the deadline for R&D applications for the year ended 30 June 2013. We need copies of your accounts to put together the registration for this year.

646. On 29 April 2014, Mr Bogiatto submitted to AusIndustry an AusIndustry R&D Tax Incentive Application. The form recorded that for the 2013 financial year, Sky High's overall R&D project expenditure was $855,320. Mr Hunt stated that he had not "sight[ed], sign[ed] or otherwise approve[d] the lodgement of the 2013 AusIndustry Application".

647. The application nominated Mr Bogiatto of "Lambda Chase" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Sky High had relied on advice from a tax agent or R&D consultant and identified the person from whom Sky High had received such advice as Mr Bogiatto of "Lambda Chase". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

648. On 9 May 2014, Mr Bogiatto emailed to Mr Hunt a copy of AusIndustry's Notice of Registration dated 1 May 2014 and an R&D Tax Incentive Schedule including the following figures which Mr Bogiatto advised he would include when lodging Sky High's 2013 income tax return:

• Label E, , "R&D expenditure - Salary expenditure" - $139,372;
• Label G, "R&D expenditure - Other" - $686,693;
• Label M, "R&D assets - Decline in value" - $29,255; and
• Labels X and Z, "Total notional R&D deductions" - $855,320.

649. On numerous occasions between May 2014 and May 2015, Mr Hunt repeatedly asked Mr Bogiatto to explain how he derived the figures for R&D expenditure in respect of the 2013 financial year. Mr Bogiatto did not provide any meaningful or satisfactory response.

650. On about 24 April 2015, Mr Bogiatto attended a meeting with Mr Hunt and Sky High's internal accountant, Tim Holdsworth. During the meeting, Mr Holdsworth asked Mr Bogiatto to explain how he arrived at his R&D expenditure figures in respect of the 2013 financial year. Mr Hunt gave the following account of the meeting and subsequent events:

On or around Friday 24 April 2015, Mr Bogiatto attended a meeting at Sky High's office. Mr Holdsworth also attended and was the primary speaker. Mr Bogiatto was silent through much of the meeting and was not responsive to questions put to him by Mr Holdsworth. I noticed that Mr Bogiatto did not make eye contact with Mr Holdsworth or I and this resulted in what became a one sided dialogue with periods of silence after each statement or question that Mr Holdsworth addressed to Mr Bogiatto. During the discussion, words to the following effect were spoken:

Mr Bogiatto: We need all of Sky High Hoists' financial information and employee expenses to prepare the AusIndustry application for the year ended 30 June 2014 before the cut-off date of 30 April 2015 which is next Thursday.

Mr Holdsworth: Before we discuss making an R&D application for the 2014 year, we need to understand from you what has happened with the process for the 2013 year. What is the status of the 2013 R&D application? … Paul, I am new to Sky High Hoists so I don't have all the background but we need to bring everything up to date. Can you tell me what R&D work has been done and how you arrived at your figures? … Are you able to provide us with a copy of what you have worked on or presented to AusIndustry regarding R&D for 2013? … Sky High has received invoices from you for work that is said to have been completed on R&D. Sky High had not received any R&D tax offset, can you explain why you have issued the invoices? … If you don't have it now, would you please send to me all the work that you have done in respect of the 2013 R&D application by email?

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Mr Bogiatto: I'll get back to you.

Mr Bogiatto left the 24 April 2015 meeting very quickly when it ended and I did not see him again after that time.

After Mr Bogiatto had left Sky High's premises, Mr Holdsworth and I discussed the 24 April 2015 meeting and how to go forward with the matter:

Mr Holdsworth: Paul Bogiatto is a "shonkster". He wouldn't answer any of our questions during our meeting. I don't trust him.

Me: We'll need Peter Khoury's help to bring Sky High's tax obligations up to date. He is best placed to attend to Sky High's tax obligations as well as its compliance. Please follow up with Mr Bogiatto but if he doesn't provide the information, we should go back to Peter Khoury

Mr Holdsworth: What about Mr Bogiatto' invoices?

Me: If he hasn't done the work then we will not pay him.

Mr Holdsworth: Ok.

651. In or around May or June 2015, Sky High removed Mr Bogiatto's ATO Portal access for Sky High. Sky High did not claim R&D expenditure in the income tax returns for the 2012 or 2013 financial years.

F.13.2.2 Section 290-60(1)(b): consideration

652. The "Terms of Engagement" between Ryusei and Sky High have been referred to earlier. Sky High accepted those terms by continuing to instruct Mr Bogiatto.

653. On 12 July 2013, Ryusei issued an invoice to Sky High dated 4 July 2013 for preparation and submission of the 2012 application in the amount of $24,014.10. The invoice indicated that payment was to be made to Ryusei. Payment was never made. No invoice was received in respect of the 2013 application.

654. Consideration in the form of a promise to pay was received by Ryusei "in respect of [the] marketing or encouragement" of:

(1) Mr Bogiatto and Ryusei in relation to the 2012 tax exploitation scheme; and
(2) Mr Bogiatto, Ryusei and Lambdachase Advisors in relation to the 2013 tax exploitation scheme: s 290-60(1)(b).

655. Ryusei marketed and encouraged interest in the 2012 and 2013 tax exploitation schemes. Ryusei was an associate of Mr Bogiatto. Relevantly for the 2013 financial year tax exploitation scheme, Ryusei was an associate of Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied in relation to each of Mr Bogiatto, Ryusei and Lambdachase Advisors in respect of the relevant years.

F.13.2.3 Section 290-60(1)(c): substantial role

656. I am satisfied that:

(1) in relation to the 2012 tax exploitation scheme, Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 tax exploitation scheme, Mr Bogiatto, Ryusei and Lambdachase Advisors,

F.13.3 Tax exploitation scheme

657. I am satisfied on the basis of the matters set out above and below, that there were "schemes" in relation to the 2012 and 2013 financial years which were "tax exploitation schemes" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

658. The "schemes" at least included advising Sky High that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing applications for registration for the R&D tax incentive by AusIndustry, lodging the R&D Tax Incentive Applications, and encouraging the taxpayer to lodge income tax returns reflecting that R&D activities had been carried out.

659. The "tax exploitation schemes" were ones which were not implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude that, if:

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(1) in relation to the 2012 tax exploitation scheme, Mr Bogiatto, Ryusei and Sky High; and
(2) in relation to the 2013 tax exploitation scheme, Mr Bogiatto, Ryusei, Lambdachase Advisors and Sky High,

alone or together had entered into or carried out the scheme, they would have done so with the sole or dominant purpose of Sky High getting a "scheme benefit" from the scheme: s 290-65(1)(a)(ii).

660. As for the second condition, for the reasons given below, it was not reasonably arguable that any scheme benefit would have been available at law: s 290-65(1)(b).

661. The Commissioner's first argument as to why it was not reasonably arguable that any of the scheme benefit would have been available at law was that the amount which would have been claimed as R&D expenditure would not have been incurred on R&D activities because the projects in which Sky High was involved were "all about replicating products that had been in the market for decades". The Commissioner relied on Mr Hunt's evidence that:

(1) Sky High imports hoists from China and does no more than modify them to comply with Australian standards;
(2) the hoist is "effectively … a copy of other products that are already out there in the market for 30 years";
(3) "We're not particularly new and innovative"; and
(4) Sky High "was never engaging in R&D activities".

662. On the basis of Mr Hunt's evidence, I accept that it would not have been reasonably arguable that Sky High was engaged in R&D activities.

663. The Commissioner's second argument was that Sky High did not have adequate or contemporaneous records to substantiate that the total claimed R&D expenditure was incurred on R&D activities registered with AusIndustry for the relevant financial years. I accept that the evidence established that inadequate records existed to establish what expenditure was incurred on R&D, if any. For reasons expressed earlier, I do not accept that this - of itself - leads to the necessary conclusion that it was not reasonably arguable that R&D activities occurred or that expenditure was incurred.

664. The Commissioner's third argument was that the recorded claims for R&D expenditure in the draft R&D schedule exceeded any reasonably arguable view of the amount the taxpayer expended on R&D activities. It follows from accepting the first argument that I also accept this argument.

665. I accept that it was not reasonably arguable that any R&D tax offset would have been available if the scheme had been implemented.

F.13.4 Scheme benefit

666. If the scheme had been implemented, an amount that the Commissioner had to pay or credit to Sky High under a taxation law would have been, or could be expected to be, greater than it would have been apart from the scheme or a part of it and Sky High would have got a scheme benefit: s 284-150(1)(b).

F.14 Visionpak Pty Ltd

667. Visionpak was the taxpayer participant in three alleged tax exploitation schemes in the 2012, 2013 and 2014 financial years. Evidence in relation to these schemes was provided by affidavits from Mr Domenic Cicciarelli and Mr Harry Scapetis.

668. Mr Cicciarelli was the sole director of Visionpak, having occupied that position since 2001. Visionpak went into liquidation on 15 March 2017. It was involved in the manufacturing, through thermoforming technology, of plastic containers for food products.

669. Mr Cicciarelli had limited understanding of accounting and business administration matters and, accordingly, appointed, and relied upon, managers and internal advisors to assist him with such matters.

670. Mr Scapetis is a certified practising accountant. Through a company, he provided assistance to Visionpak following commencement of a review by the ATO of Visionpak's R&D tax incentive claims.

F.14.1 Section 290-50(1) conduct of an entity which resulted in that entity or another entity being a promoter

671. For the reasons given below, for the purposes of s 290-50(1), I accept that:

(1) in relation to the 2012 tax exploitation scheme:
- (a) Mr Bogiatto engaged in conduct which resulted in him and Ryusei being promoters of a tax exploitation scheme within the meaning of s 290-60; and
- (b) Ryusei engaged in conduct which resulted in it being a promoter of a tax exploitation scheme within the meaning of s 290-60.
(2) in relation to the 2013 and 2014 tax exploitation schemes:
- (a) Mr Bogiatto engaged in conduct which resulted in him, Ryusei and Lambdachase Advisors being promoters of tax exploitation schemes within the meaning of s 290-60;
- (b) Ryusei engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60; and
- (c) Lambdachase Advisors engaged in conduct which resulted in it being a promoter of tax exploitation schemes within the meaning of s 290-60;
- (d) Lambdachase Services engaged in conduct which resulted in Mr Bogiatto, Ryusei and Lambdachase Advisors each being a promoter of a tax exploitation scheme, by receiving consideration which resulted in those entities being promoters.

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F.14.2 Promoter

F.14.2.1 Section 290-60(1)(a): marketing or encouragement

672. On the basis of the facts outlined above and below, I am satisfied:

(1) in relation to the 2012 tax exploitation scheme, that Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, that Mr Bogiatto, Ryusei and Lambdachase Advisors,

673. Visionpak's general manager in March 2013 was Mr Gareth Lorigan. At or about that time, Mr Bogiatto contacted the Visionpak office and a meeting was arranged to take place that month between Mr Bogiatto, Mr Lorigan and Mr Cicciarelli. Mr Cicciarelli gave the following account of the meeting and his decision to retain Mr Bogiatto:

Mr Bogiatto: I am a registered tax agent, a qualified auditor and a member of the Institute of Chartered Accountants. My firm is called Lambda Chase Chartered Accountants … my office is in Sydney and I have about eight accountants working for me. I specialise in preparing applications for research and development tax concessions and I have a lot of companies that I look after in Melbourne. Tell me about the R&D work you do.

Mr Lorigan: There are a few activities that we do that relate to creating new packaging for our clients and also the methods to create an efficient tool. For example, we have been doing a lot of work with biscuit trays and also meat trays with a folding lid.

Me: Yes, we have two or three guys working on the folding lid for the meat trays. We are spending a lot of money on developing new methods and tooling is very expensive. I have heard of R&D but what is it all about?

Mr Bogiatto: It is about developing products and methods that are new or different, like your meat trays you are telling me about. If you buy something off the shelf, well that's not R&D because you have not spent the time and effort developing it. Why don't we go for a walk to see the work you are doing?

Gareth and I then took Mr Bogiatto on a tour of the factory I showed him Visionpak's manufacturing process and the areas in which new tooling and new meat trays were being developed. Following our walkaround, Mr Bogiatto, Mr Lorigan and I had a further discussion during which we said words to the following effect:

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Mr Bogiatto: I can help you with making an R&D claim for the work that you are doing here.

Me: What are your fees? We don't have a lot of available cash to pay advisors.

Mr Bogiatto: There is no upfront payment required. I'll do the work for you and if you get the R&D tax benefit, my fee will be 30% or [sic] that.

Me: Ok, we can explore the possibilities on the basis that there is no upfront cost to Visionpak.

Mr Bogiatto: What's your turnover?

Mr Lorigan: About six million a year.

Mr Bogiatto: I will need a copy of the financials.

Me: Gareth will get those to you.

At the time of this interaction with Mr Bogiatto, Visionpak needed funds to sustain its continuing product development as well as help with cash flow that had been affected by expenditure on past product development. I was attracted to the idea of Visionpak receiving a legitimate source of funds from the R&D incentive scheme. I decided to use Mr Bogiatto on this front because he had impressed me as a well-qualified expert in the March 2013 meeting referred to above.

674. On 19 March 2013, Mr Bogiatto provided to Mr Cicciarelli an introductory letter and an engagement letter, both addressed to "Domenic Cicciarelli and Gareth Lorigan" of Visionpak. The opening two paragraphs of the introductory letter read:

The firm would like to thank you for meeting with us to discuss your company's Research & Development activities. I hope we have given you a chance to reflect on the process of the R&D Incentive claim. Given your description of your company's product development and processes we believe it would be in your company's financial interest to strongly consider taking advantage of the R&D Incentives available to you.

As you know the R&D Incentives is complex and meeting requirements to maximise claims can be involved, time consuming and costly. Lambda Chase professionals are experts with experience and capability in executing your R&D Incentives claim which will provide maximum financial benefits for the relevant financial year and beyond. We believe in making the R&D Claim as smooth as possible and taking as little as possible of you or your staff's time whilst ensuring your submission is well structured and robust.

675. The engagement letter was headed "Terms of Engagement", was signed by Mr Bogiatto, and was on a "LambdaChase" letterhead, as described at [112] above. Mr Bogiatto's name appeared on the standard letterhead, together with Ryusei's ABN. The fee identified in the engagement letter and the introductory letter was 30% of the net R&D tax offset granted by the ATO.

676. The 2012 financial year : Mr Cicciarelli had no involvement in the provision of information to Mr Bogiatto for the purposes of the application being made to AusIndustry. He stated that he "left the task of dealing with [Mr Bogiatto] on most matters to do with his proposed R&D tax incentive work to others - principally Mr Lorigan and Ms Yvonne Bosch … who was the company's accounts manager and an accountant". Mr Cicciarelli was not requested to approve the application to AusIndustry or the submission of the amended income tax return to the ATO.

677. After his engagement, Mr Bogiatto submitted Visionpak's R&D Tax Incentive Application to AusIndustry. The application identified Mr Bogiatto as the "nominated contact person", stating he was an accountant with "Lambdachase" and providing Ryusei's ABN.

678. Mr Cicciarelli stated that the application was submitted without reference to Mr Cicciarelli and that he first learned about the contents of the application in the course of dealing with the ATO in relation to a risk review which commenced in 2015.

679. AusIndustry registered Visionpak for the 2012 year. Mr Steve Di Petta, Visionpak's accountant, had already prepared and lodged an income tax return for the 2012 year. Mr Bogiatto prepared an R&D Tax Incentive Schedule which was provided to Mr Di

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Petta who, in turn, prepared and lodged an amended 2012 income tax return including the 2012 R&D claim.

680. As a result of the lodgement of the amended income tax return for 2012, the Commissioner allowed Visionpak an R&D tax offset of $673,202.25 against the taxpayer's gross tax of $449,148.60 and credited to the taxpayer $246,642.65.

681. The 2013 financial year : As with the 2012 financial year, Mr Cicciarelli had no involvement in the provision of information to Mr Bogiatto for the purposes of the application to AusIndustry. Equally, he was not apparently involved in approving the application to AusIndustry or submitting the amended income tax return to the ATO.

682. Mr Bogiatto lodged Visionpak's 2013 R&D Tax Incentive Application with AusIndustry and AusIndustry registered Visionpak for R&D activities in the 2013 financial year.

683. The 2013 application nominated Mr Bogiatto of "Lambdachase Advisors" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Visionpak had relied on advice from a tax agent or R&D consultant and identified the person from whom Visionpak had received such advice as Mr Bogiatto of "Lambdachase Advisor". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

684. Mr Bogiatto prepared an R&D Tax Incentive Schedule which he provided to Mr Di Petta for inclusion in an amended 2013 income tax return. Mr Di Petta included the R&D figures in an amended 2013 income tax return and it was lodged.

685. As a result of the lodgement of the amended income tax return for 2013, the Commissioner allowed Visionpak an R&D tax offset of $649,024.20 against the taxpayer's gross tax of $420,006.00 and credited to the taxpayer $261,608.20.

686. The 2014 financial year : By late 2014, Mr Cicciarelli had engaged Mr Bogiatto not only to provide R&D services but also as Visionpak's tax agent and to prepare its financial statements. Mr Cicciarelli gave the following account of a discussion leading to that engagement:

Mr Bogiatto: Mr Di Petta had not made all possible claims on previous tax returns regarding depreciation charges and other costs. It's not just the R&D, I can make adjustments to previous returns for you and lodge the 2014 income tax return.

Me: Sometimes he talks at 100 miles an hour so I don't know if he has dealt with all of these matters.

Mr Bogiatto: I already know about your business and I'll do a better job than he does so why don't you appoint me to take over so you will have one accountant with the whole financial picture?

Me: Ok, that makes sense.

687. As with the 2012 and 2013 financial years, Mr Cicciarelli had no involvement in providing information to Mr Bogiatto for the purposes of the application to AusIndustry. Equally, he was not apparently involved in approving the lodging of the application with AusIndustry or submitting the income tax return to the ATO.

688. On 24 December 2014, Mr Bogiatto submitted Visionpak's 2014 R&D Tax Incentive Application to AusIndustry. Visionpak's overall R&D project expenditure was said to be $9,356,550.

689. The application nominated Mr Bogiatto of "Lambdachase Advisors Pty Ltd" as the "nominated contact person". Under the heading "Tax Agent or R&D Consultant Services", the application also stated that Visionpak had relied on advice from a tax agent or R&D consultant and identified the person from whom Visionpak had received such advice as Mr Bogiatto of "Lambdachase Advisors Pty Ltd". The ABN of Lambdachase Advisors was supplied in relation to the "nominated contact person" and the "Tax Agent or R&D Consultant Services".

690. AusIndustry registered Visionpak for the 2014 year.

691. On 3 February 2015, Mr Bogiatto lodged Visionpak's tax return for the 2014 financial year. As a result of the lodgement of the income tax return for

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2014, the Commissioner allowed the taxpayer an R&D tax offset of $4,210,447.50 and credited to the taxpayer $4,187,322.30.

692. Mr Cicciarelli gave the following account of what then occurred:

Sometime shortly afterwards Ms Bosch informed me that an amount of $4,187,322.30 had been credited by the ATO to Visionpak's trading account. Upon becoming aware of the large sum I immediately called Mr Bogiatto and we had a discussion that involved us exchanging words to the following effect:

Me: We have just received more than 4 million dollars into Visionpak's bank account from the ATO. Is this legitimate?

Mr Bogiatto: Yes, I have adjusted a number of errors on past three years' tax returns to do with depreciation of machinery and have also lodged the R&D claim.

Me: It's such a large amount of money, are you sure it's right?

Mr Bogiatto: Do you think the tax man will give you money if I wasn't right? Of course it's right and make sure you pay my invoice.

Me: Would you please send through copies of all of the financial statement that you have been preparing for Visionpak?

Mr Bogiatto: Sure, ok. I'll get it to you.

F.14.2.2 Section 290-60(1)(b): consideration

693. The engagement letter of 19 March 2013 has been referred to earlier. It was accepted resulting in a contract between Ryusei and Visionpak.

694. In July 2013, a tax invoice dated 4 July 2013 on a "LambdaChase" letterhead, requiring payment to Ryusei and showing Ryusei's ABN was sent to Visionpak. The invoice was said to be for fees in relation to the "[p]reparation and submission [of] 2012 Research & Development Tax Concession Claim to AusIndustry". The invoice was in the sum of $67,320 plus GST. The invoice was paid in full in July or August 2013.

695. After lodgement of the 2013 amended income tax return, a tax invoice dated 27 June 2014 on a "LambdaChase" letterhead, requiring payment to Lambdachase Services and showing its ABN, was sent to Visionpak. The invoice was in the sum of $64,902.30 plus GST. It was paid in full.

696. After lodgement of the 2014 income tax return, a tax invoice on a "LambdaChase" letterhead, requiring payment to Lambdachase Services and showing its ABN, was sent to Visionpak. The invoice was incorrectly addressed to "Bropak Pty Ltd" and incorrectly dated 20 June 2014. The invoice was in the sum of $1,256,190 plus GST. The invoice was paid in full on or around 27 February 2015.

697. Consideration in the form of a promise to pay was received by Ryusei "in respect of [the] marketing or encouragement" of:

(1) Mr Bogiatto and Ryusei in relation to the 2012 tax exploitation scheme; and
(2) Mr Bogiatto, Ryusei and Lambdachase Advisors in relation to the 2013 and 2014 tax exploitation schemes: s 290-60(1)(b).

698. Consideration, in the form of payment, was received:

(1) by Ryusei in relation to the 2012 tax exploitation scheme; and
(2) by Lambdachase Services in relation to the 2013 and 2014 tax exploitation schemes: s 290-60(1)(b).

699. Ryusei was an associate of Mr Bogiatto and Lambdachase Advisors. Lambdachase Services was an associate of Mr Bogiatto, Ryusei and Lambdachase Advisors. Accordingly, I am satisfied that s 290-60(1)(b) is satisfied.

F.14.2.3 Section 290-60(1)(c): substantial role

700. I am satisfied that:

(1) in relation to the 2012 tax exploitation scheme, Mr Bogiatto and Ryusei; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, Mr Bogiatto, Ryusei and Lambdachase Advisors,

F.14.3 Tax exploitation scheme

701. I am satisfied on the basis of the matters set out above and below, that there were "schemes" in each of the 2012, 2013 and 2014

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financial years which were "tax exploitation schemes" within the meaning of s 290-65(1) at the time of the conduct asserted to contravene s 290-50(1).

702. The "schemes" at least included advising Visionpak that it was eligible for an R&D tax offset under Div 355, collecting information for the purposes of preparing an application for registration for the R&D tax incentive by AusIndustry and for the purpose of preparing R&D Tax Incentive Schedules for inclusion in Visionpak's tax returns, lodging the R&D Tax Incentive Applications, advising the taxpayer to lodge amended income tax returns for the 2012 and 2013 years and lodging the 2014 income tax return.

703. The "tax exploitation schemes" were ones which were implemented. As discussed above, there are two conditions which must be satisfied for a "scheme" to be a "tax exploitation scheme". As to the first condition, it is reasonable to conclude:

(1) in relation to the 2012 tax exploitation scheme, that Mr Bogiatto, Ryusei and Visionpak; and
(2) in relation to the 2013 and 2014 tax exploitation schemes, that Mr Bogiatto, Ryusei, Lambdachase Advisors and Visionpak

alone or together entered into or carried out the schemes with the sole or dominant purpose of Visionpak getting a "scheme benefit" from the scheme: s 290-65(1)(a)(i).

704. As for the second condition, for the reasons given below, it was not reasonably arguable that the whole of the scheme benefit was available at law: s 290-65(1)(b). However, the Commissioner has not discharged his onus of establishing that it was not reasonably arguable that Visionpak was entitled to any of the scheme benefit.

705. The Commissioner's primary argument in relation to this issue was, again, that the "taxpayer did not have adequate or contemporaneous records to substantiate that the total claimed R&D expenditure was incurred on R&D activities that had been registered with AusIndustry for the financial year". The Commissioner did not establish that, as a matter of fact, inadequate records were kept. Accordingly, this argument cannot be made out. In any event, I would have rejected it for reasons identified earlier.

706. The Commissioner's second argument was that the amount of R&D expenditure claimed by the taxpayer exceeded any reasonably arguable view of the amount it expended on R&D activities. The Commissioner made the following submissions in this respect:

(1) In the 2012 AusIndustry application, Visionpak's R&D expenditure was recorded as $14,960,045. Mr Cicciarelli regarded this sum as "grossly exaggerated and incorrect" and "simply not possible" given that the company's turnover in the 2012 financial year was approximately $6,000,000. On receipt of external advice, Visionpak's R&D expenditure in the 2012 financial year was reduced to $1,099,685.
(2) In the 2013 AusIndustry application, Visionpak's R&D expenditure was recorded as $1,442,276. On receipt of external advice, Visionpak's R&D expenditure in the 2013 financial year was reduced to $952,897.
(3) In the 2014 AusIndustry application, Visionpak's aggregate turnover was said to be $14,616,172. In fact, Visionpak's aggregate turnover was $5,617,97. Secondly, the 2014 AusIndustry application records that nine Visionpak employees were engaged in R&D work. Mr Cicciarelli stated that "no more than three Visionpak employees were engaged in R&D activities that year". Thirdly, the 2014 AusIndustry application stated that R&D expenditure was $9,356,550. There was no reasonable basis for arriving at an R&D expenditure figure where such a figure considerably exceeded the entity's turnover, and where the sum was subsequently calculated on the basis of external advice to be $1,331,568.

707. I accept that it was not reasonably arguable that the whole of the scheme benefit was available at law. I conclude that it was reasonably arguable that the amounts identified immediately above on the basis of external advice were available at law.

F.14.4 Scheme benefit

708. There was a scheme benefit because an amount that the Commissioner had to pay or credit to Visionpak under a taxation law was, or

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could be expected to be, greater than it would have been apart from the scheme or a part of it: s 284-150(1)(b).

G EVASION

709. Having regard to the totality of the evidence in the proceedings, I am satisfied in relation to each of the implemented schemes (being the schemes which resulted in scheme benefits actually being received by the relevant taxpayer), apart from LTLT, that Mr Bogiatto knew that the claims were not reasonably arguable (where that conclusion applies) or that the extent of the claims being made was not reasonably arguable (where that conclusion applies). The implemented tax exploitation schemes, apart from LTLT, were each ones where the participants getting away with it depended on the ATO "never finding out the true facts":
R v Meares (1997) 37 ATR 321 at 323.

710. Except with respect to LTLT, I am comfortably satisfied that Mr Bogiatto knew that the claims arising in relation to the implemented schemes he was marketing and encouraging were unavailable or exaggerated. With the exception of LTLT, Mr Bogiatto deliberately put forward claims which he knew were wholly or partly unjustifiable and engaged in evasion.

711. Because Mr Bogiatto was the directing mind of Ryusei, Lambdachase Advisors and Lambdachase Services, I am satisfied that they too engaged in evasion in relation to each of the implemented schemes in which they were involved, apart from LTLT.

H WHETHER UNIMPLEMENTED SCHEMES STATUTE BARRED

712. As mentioned earlier, the schemes with respect to Cargroomers and Sky High were not fully implemented in that the R&D claims were never made. It follows that the relevant taxpayers obtained no scheme benefit and that the schemes were not ones "involving tax evasion" - see Section C.5.2 above. The schemes would have involved tax evasion if they had been implemented, but they were not.

713. The Commissioner submitted in relation to Cargroomers that the last relevant conduct occurred on 23 October 2014. The proceeding relevant to Cargroomers was commenced on 1 February 2019 (not 4 February 2019 as submitted), outside of the four year time limit set by s 290-55(4). The Commissioner submitted that the time limit did not apply because the scheme was one "involving tax evasion" within the meaning of s 290-55(6). The Commissioner's submissions centred on the fact that the contemplated R&D claim in the unimplemented scheme was obviously not available. I accept that any benefit which would have been obtained if the scheme had been implemented would have been obviously unavailable and that, if implemented, the scheme would have involved tax evasion. However, the scheme was not implemented, no tax was evaded and no beneficial tax outcome was secured. The scheme was not one "involving tax evasion" within the meaning of s 290-55(6).

714. In relation to Sky High, the Commissioner submitted that the last conduct engaged in by the respondents that resulted in the respondents being a promoter occurred on 2 March 2015. The relevant conduct was the sending of an email by Mr Bogiatto as managing partner of Ryusei requesting bank statements. It was submitted, and I accept, that the bank statements were requested with a view to Mr Bogiatto finalising tax returns for the 2012 and 2013 years. Whilst no returns reflecting R&D claims for the 2012 and 2013 year were ever lodged, this conduct was part of encouraging the 2012 and 2013 schemes, albeit neither was ever fully implemented.

715. The proceeding relevant to Sky High was commenced on 1 February 2019 (not 4 February 2019 as submitted), which was within the four year time limit set by s 290-55(4) so far as it concerns the involvement of Mr Bogiatto and Ryusei in relation to 2012 and 2013.

716. The Commissioner did not point to any conduct or "involvement" (see s 290-55(4)) on the part of Lambdachase Advisors, within four years of commencement of the relevant proceeding, which resulted in it or another entity being a promoter. Accordingly, in so far as the proceeding concerned Lambdachase Advisors' involvement in the 2013 tax exploitation scheme, the proceeding is statute barred. As mentioned earlier, that scheme was not one involving evasion.

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I CONCLUSION

717. The Commissioner is directed to bring in short minutes of order to give effect to these reasons.

THE COURT ORDERS THAT:

1. The applicant file within 14 days short minutes of order giving effect to these reasons for judgment.

2. The proceeding be listed for a case management hearing at 9 am on 27 August 2020.

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

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