DRUMMOND v FC of T

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 1342

Decision date: 16 December 2004

J Block (Deputy President)

PART A: Introduction; Preliminary and General

1. The objection decision, which is under review in this matter, is the disallowance (dated 5 December 2003) by the Respondent of the Applicant's objection (dated 11 October 2003) against an amended assessment (dated 17 September 2003) in respect of the year ending 30 June 1999 (``the relevant year'').

2. Mr. C G Catt of Counsel, instructed by Bonnell Rowntree, Solicitors, appeared for the Applicant, while Mr. M Richmond of Counsel, instructed by Mr. D. Stokes of the Australian Government Solicitor, appeared for the Respondent.

3. The Tribunal had before it the T- documents (and also some supplementary T- documents, Tp118 and Tp119) lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975; the Tribunal furthermore admitted into evidence exhibits as follows:-

Exhibit A1 - Undated statement by Joshua Michael Mackenzie received by the Tribunal on 25 August 2004.
Exhibit A2 - Undated statement of the Applicant received by the Tribunal on 25 August 2004.

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Exhibit A3 - Undated statement by the Applicant received by the Tribunal on 19 November 2004.
Exhibit A4 - Undated statement by the Applicant received in the Tribunal on the day of the hearing and being 6 December 2004.
Exhibit R1 - Loan Facility Agreement, dated 24 March 1999, between Drummond Investment Unit Trust (referred to in these reasons as the ``Unit Trust'') as lender and Karen Drummond (referred to in these reasons as ``Mrs Drummond'') as borrower.
Exhibit R2 - Summons to produce documents against the Applicant dated 28 October 2004.
Exhibit R3 - Response to the summons being Exhibit R2, contained in a letter by the Applicant's solicitors to the Respondents solicitor dated 19 November 2004.
Exhibit R4 - Summons to produce documents against Bentleys MRI (``Bentleys'') dated 26 November 2004.
Exhibit R5 - Response by Bentleys to the summons (Exhibit R4) contained in a letter by Bentleys to the Tribunal dated 1 December 2004.

4. Mr Mackenzie was not required for cross- examination and his evidence, as contained in Exhibit A1, can thus be accepted. It may be noted that it sets out merely that a standard charge for a superannuation fund is $450. That evidence is, as will be seen, of limited assistance.

5. Mr Richmond objected to a number of statements contained in Exhibits A2 and A3. In respect of paragraph 6 of Exhibit A2, Mr Catt agreed to the deletion from that paragraph of the words from and including, ``as a fee for providing tax advice...'' to the end of that paragraph. Although the other objections raised by Mr Richmond were by no means without merit, I decided to admit Exhibits A2 and A3 (amended as set out in the preceding sentence) without further amendments or deletions but subject naturally to weight.

6. I have been furnished with detailed submissions by the parties, parts of which will be included in these reasons. Mr Catt asked for permission at a very late stage of the hearing to file further submissions dealing specifically with clauses 26, 27 and 28 of the Respondent's written submissions (referred to in these reasons as ``RS''). Although the contentions contained in them were by no means new to the Applicant, and having regard in this context to the Respondent's Statement of Facts and Contentions (filed well before this hearing took place), I allowed a brief period for further submissions by the Applicant, but in respect of clauses 26, 27 and 28 of RS only, and also allowed a further brief period for a reply by the Respondent. Further submissions by the parties were duly received in accordance with the periods allowed.

7. Oral evidence was given only by the Applicant. His examination-in-chief consisted almost entirely of his confirmation that the contents of Exhibits A2, A3 and A4 are correct. It is for this reason that I include the content of Exhibit A2 (but with an amendment to paragraph 6 in the light of the conceded objection referred to previously) as follows:

``1. I am the Applicant in these proceedings.

2. In December 1998 I had a meeting with Michele Dodd, then of Bentleys MRI Chartered Accountants. During that meeting, Mrs Dodd told me that if I was both an employee of a company and its controlling shareholder I could make a contribution to a superannuation fund and claim a tax deduction for that contribution.

3. Ms Dodd told me that if the contribution was made to a superannuation fund that was not a complying fund then the amount of the contribution was unlimited. The contribution would not be taxable income of the superannuation fund.

4. During the meeting Ms Dodd said that she could not provide advice to me on the taxation consequences of making such a contribution to a non-complying superannuation fund, however, she know of a solicitor, Mr David Bonnell, who could provide this tax advice. Ms Dodd told me that she was aware that Mr Bonnell had obtained a ruling from the Australian Taxation Office that confirmed that the contribution to a non-complying super- annuation fund was deductible. Ms Dodd also told me that she was aware that Mr Bonnell had also obtained an opinion from Queens Counsel that confirmed that the contribution to such a superannuation fund was deductible.

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5. Ms Dodd told me that she was aware of another practitioner in Melbourne who could provide advice on the deductibility of contributions to a non-complying superannuation fund, however, as that practitioner had not obtained a ruling from the Australian Taxation Office she recommended that I obtain tax advice from Mr Bonnell.

6. Ms Dodd told that that Mr Bonnell would charge me 10% of the contribution to the superannuation fund...

7. In February 1999, I had a further meeting with Ms Dodd. During that meeting we discussed the practicalities of setting up companies and a superannuation fund, so that I could make a contribution to a non- complying superannuation fund. I instructed Ms Dodd to set up a company for me, to act as my employer and trustee of my superannuation fund. I also instructed Ms Dodd to set up a unit trust that would be the investment vehicle for my superannuation fund. I paid Bentleys approximately $2,500.00 for the costs of setting up his company and unit trust.

8. During this second meeting, Ms Dodd also said to me that Mr Bonnell would set up the superannuation fund and that he would charge me $450.00 to set up the superannuation fund. The balance of the 10% fee would be paid by me for the tax advice given by Mr Bonnell.

9. At the meeting Ms Dodd showed me a copy of the ruling Mr Bonnell had received from the Australian Taxation Office, and I read that ruling.

10. At the meeting Ms Dodd gave me an instruction sheet that I completed to instruct David Bonnell & Associates, Solicitors to proceed with setting up a non-complying superannuation fund and to provide advice to me on the taxation consequences of making a contribution to a non-complying superannuation fund.

11. On 22 March 1999, I received from David Bonnell & Associates, Solicitors a folder containing the trust deed and rules establishing the `P. Drummond Superannuation Fund' with Minutes and a Deed of Contribution (copies of these deeds have been provided to the Australian Taxation Office) and a letter of tax advice (annexed to this statement and marked `A' is a copy of the letter of advice and attachments).

12. The folder from David Bonnell & Associates, Solicitors also contained a costs letter (I have misplaced my copy of the original costs letter, however, annexed to this statement and marked `B' is a copy of the costs letter that has recently been provided to me by Mr Bonnell).

13. The folder from David Bonnell & Associates, Solicitors also contained two invoices, the first for $450.00 for establishing the P. Drummond Superannuation Fund and the second for $49,550.00 for tax advice (annexed to this statement and marked `C' and `D' are copies of the two invoices).

14. On 24 March 1999, I arranged for a contribution of $500,000 to be made to the P. Drummond Superannuation Fund.

15. I signed the costs letter and returned the folder to David Bonnell & Associates, Solicitors with my cheque for $50,000.

16. During the year ended 30 June 1999 I did not instruct from David Bonnell & Associates, Solicitors to undertake any other work for me.''

8. It will be noted that Exhibit A2 refers to a number of annexure and in particular annexure A, B, C and D. Annexure A is the advice letter, more fully referred to later in these reasons. Although paragraph 11 of Exhibit A2 sets out that Annexure A as referred to in Exhibit A2 includes its attachments, the attachments to Annexure A did not in fact form part of Exhibit A2 (see paragraph 11 of Exhibit A2). However, Exhibit A3 contains relevant attachments to Annexure A to Exhibit A2.

9. Annexure B to Exhibit A2 was referred to during the course of the hearing as the ``costs letter'' or the ``engagement letter''; it is referred to in these reasons as the ``costs letter''. That letter, dated 22 March 1999, from the Applicant's solicitors (then called David Bonnell and Associates) to the Applicant reads as follows:

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``Dear Phil

RETIREMENT SAVINGS PLAN - TAX ADVICE

I refer to our recent telephone conversation/ meeting regarding your personal tax affairs.

It is this firm's policy to write to clients setting out the terms of our engagement.

I also draw your attention to certain rights that you have under the Legal Profession Act 1994.

Work to be carried out

The work that you have instructed us to carry out on your behalf involves establishing an investment and contribution plan including preparation of a superannuation trust deed and associated minutes and other additional services required to implement the contribution plan.

Our Personnel

David Bonnell and Kerrie-Anne Lewis will be responsible for the work to be undertaken for you by the firm. Please feel free to contact them at any time on any aspect of your matter on 9233 0755.

Our Charges

As agreed, our cost in this matter is 10 percent (10%) of the amount of your contribution.

All and any future contributions undertaken directly or indirectly in accordance with our advice, procedures and documentation at any future time will be required to be implemented through David Bonnell & Associates on the same terms and conditions including a fee structure of 10 percent (10%) of the contribution.

I will provide two invoices. The first invoice will be for $450.00, our usual costs for providing basic superannuation plan documentation and this will not be deductible. The balance of our fee will be charged for tax advice and will be wholly deductible.

Disbursements

All disbursements will be inclusive in our cists and you will be charged no additional fees for any disbursements incurred by our firm.

Accounts and payment details

The agreed fee payable to David Bonnell & Associates shall be paid on the day of your contribution fund .

David Bonnell & Associates will arrange for the preparation of accounts for the savings plan by a firm of chartered accountants for a reasonable fee.

Retention of Documents

I will retain all documentation, including letters of advice, trust deeds and other documents evidencing the transactions for a period of two years after which I will provide them to you. Should you require any of these documents prior to the expiration of two years for the purposes of complying with any enquiries from the Australian Taxation Office or for any other purpose required by the law I will provide them to you.

I will retain all papers associated with your matter for seven years after the date of our final account, after which I may destroy the file without prior reference to you. This, offcourse, does not apply to document deposited with us to be held in safe custody.

Solicitors' lien

I am entitled to exercise a solicitors' lien over any of your documents held by us. This means that I am entitled to retain possession of your papers and documents while any account of ours remains unpaid.

Fees

David Bonnell & Associates works closely with advisers to our mutual clients and routinely pays them fees for assistance in obtaining information and background material. I also may pay introductory fees.

Legal Profession Act 1994 (the `Act')

Under the Act you are entitled:

(a) to receive a memorandum of our fees in the prescribed form; and

(b) to have our bill of costs assessed for fairness and reasonableness.

The right to have our bill assessed may not be available where there is a costs agreement in force which complies with the Act (which I believe this letter does) and the bill is rendered in accordance with that

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agreement unless the agreement is determined by a Costs Assessor to be unjust.

If you need any further advice on your rights or the procedures to be followed under the Act please contact us or, if you prefer, you should feel free to obtain independent advice.

Acceptance of Costs Agreement

I thank you again for your instructions and look forward to working with you. Would you please signify your acceptance of the terms of this agreement by signing and returning the attached copy. Alternatively, your acceptance may be signified by you continuing to instruct me in the matter, or by any other conduct of your that indicates you accept these terms.

If you have any questions, please do not hesitate to contact us on (02)92330755...''

It may be noted that the costs letter refers under ``our reference'' to ``David Bonnell and Kerrie-Anne Lewis''. It should be noted also that the costs letter commences with a reference to a ``recent telephone conversation/meeting''.

10. Annexure A to Exhibit A2 is the letter of advice by the Applicant's solicitors to the Applicant; it too is dated 22 March 1999 and it also sets out that our reference is ``David Bonnell/Kerry-Anne Lewis''. It commences with a reference to ``our recent conference''. It also is reproduced (and is referred to in these reasons as the ``advice letter'') as follows:

``Dear Mr Drummond,

TAX ADVICE

I refer to our recent conference and confirm that I was to provide you with a letter of advice as to the taxation consequences of making a contribution to a non-complying superannuation fund.

This letter will first outline the factual basis on which transactions were undertaken and then look at the legal consequences. The discussion of the legal consequences will consist of three parts, the first deals with questions of law on which the Commissioner has given a ruling, the second deals with Part IV A and the third deals with the question of what a superannuation fund is.

THE FACTS

The factual basis of these transactions was as follows:

• You are a controlling shareholder of a private company. This means, that you own at least 51 % of shares in a private company.

• You are an employee of that private company. To be an employee in these circumstances it is sufficient that you are a director of the company, it is not necessary for you to receive a salary from the company.

• The company, of which you are the controlling shareholder, will derive some assessable income this year.

• You made a contribution to a non-complying superannuation fund (the `Fund') for your own benefit pursuant to a Deed of Contribution.

• The Fund then invested the money on an arms-Iength basis. It did not lend the money to either you or the company of which you are the controlling shareholder.

THE COMMISSIONER'S RULING

On the basis of the facts set out above I then posed the following questions to the Commissioner of Taxation. The Commissioner's answers are reproduced in italics beneath each question:

1. Will the contribution to the Fund be deductible to the taxpayer under s 82AAE of the Income Tax Assessment Act 1936?

Yes, a contribution to a non-complying superannuation fund made by the taxpayer having a controlling interest in a private company will be deductible to that taxpayer under s. 82AAE of the Income Tax Assessment Act, 1936.

2. Will the contribution be assessable to tax in the hands of the Fund?

No, a contribution made within the circumstances outlined in question 1 will not be assessable to tax in the hands of the non-complying super- annuation fund as a taxable contribution under paragraph 274(1)(a) of the Income Tax Assessment Act, 1936 or any other provision of the Income Tax Assessment Act 1936 or the Income Tax

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Assessment Act, 1997. Note that the potential application of Part IVA has not been considered.

3. Will the contribution be a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 and if so would it be subject to tax under that Act?

No, a contribution made within the circumstances outlined in question 1 will not be a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997.

4. Will a contribution made within the circumstances outlined in Question 1 be a fringe benefit under the Fringe Benefits Tax Assessment Act, 1986?

Yes, a contribution made within the circumstances outlined in question 1 will give rise to a fringe benefit under the Fringe Benefits Tax Assessment Act, 1986.

5. Will a contribution outlined in Question 1, assuming that it is an external period residual fringe benefit under s 51 of the Fringe Benefits Tax Assessment Act 1986, have a taxable value of nil since the value of the recipients contribution will offset the value of the recipients CUITent benefit?

Yes, the fringe benefits arising from a contribution made within the circumstances outlined in question 1 will have a taxable value of nil.

The reasons for these answers are set out below:

QUESTION 1:

Section 82AAE of the Income Tax Assessment Act 1936 provides:

` 82AAE A deduction is allowable under this Subdivision in respect of an amount paid by a taxpayer as a contribution to a non-complying superannuation fund (as defined by subsection 267(1)) for the purpose of making provision for superannuation benefits for an eligible employee other than such an employee who is an exempt visitor to Australia for the purposes of section 517 in relation to the year of income in which the amount is paid.'

The taxpayer will be regarded as a `taxpayer', because he/she will be deriving income or deriving profits or gains of a capital nature in the relevant years (subsection 6(1))

`Eligible employee' is defined in subsection 82AAA(1). Subparagraph (a)(ii) of the definition provides that an eligible employee in relation to a taxpayer includes `an employee of a company in which the taxpayer has a controlling interest'. An `employee' is defined in the same subsection as a person who is employed by a taxpayer and is (a) engaged in producing assessable income of the taxpayer; or (b) is a resident of Australia and is engaged in the business of the taxpayer.

By virtue of subsection 82AAA(2), the taxpayer - who is a director of a private company, shall be regarded as employed by that company.

It has been indicated that in the current year and in the year ending 30th June 2000, a private company will derive assessable income from discretionary trust distributions. Although the taxpayer is not a PAYE employee of the company, he is the sole employee, and will be the sole shareholder and director. Therefore, it can be accepted that the taxpayer will be engaged in producing assessable income of the private company.

It follows that the taxpayer will be regarded as an employee as defined in subsection 82AAA(1).

The legislation does not define what is a `controlling interest'. However, in
Kolotex Hosiery (Australia) Pty Ltd v FC of T (1972) 130 CLR 64, Mason J declared at 77:

`Central to the concept of control of a company is the capacity to control a general meeting. That capacity rests on majority voting power and it matters not whether the majority voting power is, or is not attached to shares.'

The taxpayer will have majority voting power at the private company's general meeting. Thus, he/she can be properly regarded as having a controlling interest in the company.

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It follows that the taxpayer will be an eligible employee in relation to himself because he will be an employee of the private company, in which he will have a controlling interest.

An exempt visitor is a person who is lawfully in Australia under a temporary entry permit of four years or less, and who is not awaiting the determination of a personal application for Australian permanent residency (subsection 517(2)). The taxpayer is not an exempt visitor.

Thus, a literal interpretation of the law provides that a contribution to the non- complying superannuation fund made by the taxpayer for the purpose of making provision for superannuation benefits for himself will be deductible to him under section 82AAE of the Income Tax Assessment Act 1936.

QUESTION 2:

Subsection 274(1) of the Income Tax Assessment Act 1936 provides:

` 274(1) [Amounts paid to an eligible entity] Subject to this Division, the following amounts paid to an eligible entity (other than a PST) in a year of income ( `the contribution year' ) are taxable contributions in relation to the contribution year:

(a) if the eligible entity is a resident superannuation fund in relation to the year of income in which the contributions are made:

(i) contributions made for the purpose of making provision for superannuation benefits for another person...'

`Eligible entity' is defined in section 267 to include an eligible superannuation fund. An `eligible superannuation fund' is defined in the same provision to mean a fund that is a complying or a non-complying super- annuation fund. Thus, the superannuation fund to which the taxpayer intends to contribute will be an eligible entity.

A literal interpretation of the law provides that a contribution made by a person for him/herself will not be a taxable contribution as defined in paragraph 274(1)(a). This is because subparagraph 274(1)(a)(I) requires of the contribution that it be made for the purpose of making provision for superannuation benefits for another person . The contribution to be made by the taxpayer will be for the purpose of making provision for superannuation benefits for himself/herself .

QUESTION 3:

The superannuation contribution surcharge is imposed by the Superannuation Contributions Tax (Assessment and Imposition) Act 1997. `Surchargeable contributions' is defined in section 8 of that Act in terms of amounts paid for, or by, a member to a `superannuation (accumulated benefits) provider', or to a `superannuation (defined benefits) provider'.

A superannuation (defined benefits) provider is defined in section 43 of the same Act in terms of a `defined benefits superannuation scheme', which is defined in the same provision to be either a public sector superannuation scheme or a regulated superannuation fund.

The superannuation fund, the taxpayer intends to join will not be part of a public sector superannuation scheme, because it will not be established by a Commonwealth, State or Territory law, or under the authority of the Commonwealth, State or Territory governments or a municipal corporation, local government or public authority.

Further, the superannuation fund will not be a regulated superannuation fund. By virtue of section 19 of the Superannuation Industry (Supervision) Act 1993, a regulated superannuation fund requires notice in writing by the trustee of the superannuation fund electing that the provisions of that Act will apply to the fund. The trustee of the superannuation fund the taxpayer intends to join will not be making such an election.

A superannuation (accumulated benefits) provider is defined in section 43 of the Superannuation Contributions Tax (Assessment and Imposition) Act 1997 to mean a superannuation provider that is not a superannuation (defined benefits) provider. It follows that the trustee of the superannuation fund which the taxpayer intends to join will be a superannuation (accumulated benefits) provider.

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In order for amounts paid by a member to a superannuation (accumulated benefits) provider to constitute surchargeable contributions, the superannuation fund must be a `complying superannuation fund' or a complying `approved deposit fund' (see paragraph 8(2)(b)).

It has been advised in the private binding ruling application that the superannuation fund the taxpayer intends to join will be a non-complying superannuation fund.

Further, the superannuation fund will not be an `approved deposit fund' within the meaning of subsection 10(1) of the Superannuation Industry (Supervision) Act 1993, to which section 43 of the Superannuation Contributions Tax (Assessment and Imposition) Act 1997 defers.

It follows that, regardless of whether or not the contribution made within the outlined circumstances is assessable to tax in the hands of a non-complying superannuation fund as a `taxable contribution' under paragraph 274(1)(a) of the Income Tax Assessment Act 1936, a payment to the superannuation fund the taxpayer intends to join will not constitute a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Imposition) Act 1997.

QUESTION 4:

In order for a `fringe benefit' to arise from a contribution made by the taxpayer to the superannuation fund, subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 essentially requires four criteria to be fulfilled:

There must be a benefit;

The benefit must be provided by the employer, an associated of the employer, or an arranger;

The benefit must be provided to the employee or to an associate of the employee; and

The benefit must be provided in respect of the employment of the employee.

Thus, a fringe benefit will arise where it is found that a benefit will be provided to the employee (the taxpayer), or to an associate of the employee (the Trustee of the superannuation fund), by an associate of the employer (the taxpayer) in respect of the employment of the employee.

There must be a benefit

`Benefit' is defined in subsection 136(1) to include `any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility...'.

This is an extremely wide definition, and it is the Commissioner's view that the mere expectancy of a trust distribution will constitute a right and, as such, a benefit.

It is also the Commissioner's view that a legal interest in the money will constitute an interest in personal property and, as such, a benefit.

The benefit must be provided by the employer, an associate of the employer, or an arranger

The expression `associate' is defined in subsection 136(1) as having the meaning in section 26AAB of the Income Tax Assessment Act 1936. However, this section has been replaced by Sub Division 20-B of Part 2-1 of the Income Tax Assessment Act 1997. Paragraph 20-125(1)(c) of that Act indicates that the term `associate' is defined in section 995-1(1). That subsection adopts the meaning in section 318 of the Income Tax Assessment Act 1936.

Sub subparagraph 318(2)(d)(ii)(A) declares an associate of a company to include a person where a controlling interest is held in the company by that person. The taxpayer will be an associate of the employer because he will hold a majority voting interest in the company.

Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (`FBTA') defines the then `provide', in relation to a benefit, to include allow, confer, give, grant or perform. This definition is also very broad and it is the Commissioner's view that the benefit will be provided by the taxpayer by means of the contribution and its accompanying deed.

The benefit in respect of the trustee will be a property benefit.

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By virtue of subsection 136(1) FBTA, a `property benefit' is a benefit referred to in section 40 FBTA. That section provides for a property benefit where one person provides property to another person. `Property' is defined in subsection 136(1) to mean intangible property and tangible property. According to the same provision, `tangible property' means goods and `intangible property' and includes any kind of property other than tangible property (as defined), rights arising under contracts of insurance and leases or licences in respect of real property or tangible property (as defined). The general meaning of the word `property' is given in Macquarie Dictionary of Law as `a thing or asset that can be owned, including money...'.

This definition is supported by Stroud's Judicial Dictionary, in which reference is made to the decisions in Attorney General v. Penrhyn 83 LT 103 and Attorney General v. Murray (1904) 1 KB 165.

In relation to property, `provide' is defined in subsection 136(1) FTBA to mean:

`dispose of (whether by sale, gift, declaration of trust, or otherwise)

(f) if the property is a beneficial interest in property but does not include legal ownership - the beneficial interest; or

(if) in any other case - the legal ownership of the property'.

The taxpayer will dispose of the legal ownership of the money to the trustee of the superannuation fund. Therefore, there will be the provision of a property benefit to the trustee.

The benefit must be provided to the employee or to an associate of the employee

The taxpayer will be an employee of the private company.

The trustee will be an associate of the employee (the taxpayer) by operation of either paragraph 318(1)(d) or sub sub paragraph 318(1)(e)(ii)(A) FBTA.

Paragraph 318(1)(d) FTBA provides that an associate of a natural person includes a trustee of a trust where the natural person benefits, or is capable of benefiting under that trust. The taxpayer, as a member of the superannuation fund, will be capable of benefiting under that trust.

Sub sub paragraph 318(1)(e)(ii)(A) FTBA declares an associate of a natural person to include a company where a majority voting interest is held by the natural person. The taxpayer has expressed an intention to have a company in which he will have a majority voting interest installed as trustee of the superannuation fund.

In respect of the employment of the employee

The superannuation contribution, and concomitant benefits the taxpayer intends to make/provide will be at least partly in respect of his employment. It does not matter that the contribution also may be made partly because of his directorship/ shareholding because paragraph 148(1)(a) FTBA renders irrelevant whether or not the benefit is also to be provided in respect of any other matter or thing.

Thus, the contribution will give rise to two fringe benefits under the Fringe Benefits Tax Assessment Act 1986 - one in respect of the taxpayer, and the other in respect of the trustee of the superannuation fund.

QUESTION 5:

Section 5 of the FBTA imposes a tax in respect of the fringe benefits taxable amount of an employer of a year of tax. `Fringe benefits taxable amount' is defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986, which, by section 3 of the FBTA is incorporated with, and to be read as one with, the FBTA. By subsection 136(1):

``fringe benefits taxable amount' , in relation to an employer in relation to a year of tax, means the sum of the taxable values, in relation to the year of tax, of all the fringe benefits in relation to the employer in relation to the year of tax.'

The taxpayer's fringe benefit

The fringe benefit provided to the taxpayer will be, for the purpose of determining its taxable value, an `external period residual fringe benefit'.

The benefit will be a residual benefit because it will not be a benefit by virtue of a

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provision of Subdivision A of Divisions 2 to 11 of the FBTA (section 45).

It will be a period residual benefit because it will be provided during a period. That is, it will subsist for more than one day, and will not be deemed by any provision of the Act to be provided at a particular time or on a particular day (subsection 149(1)).

The taxpayer will not be, at or about the time at which the benefit will be provided, carrying on a business consisting of, or including, the provision of identical or similar benefits principally to outsiders. Therefore, the benefit will not be regarded as an in-house residual benefit (subsection 136(1)). It follows that the benefit will be an external period residual benefit, which is defined as a period as a period residual fringe benefit, other than an in-house residual fringe benefit (subsection 136(1)).

Section 51 applies to determine the taxable value of an external period residual fringe benefit. Paragraph 51 (c) is the relevant provision, because the benefit will not be purchased by the taxpayer under an arm's length transaction. Paragraph 51 (c) declares the taxable value to be the notional value of the recipient's current benefit, reduced by the recipient's contribution in respect of that benefit. `Notional value' is defined in subsection 136(1) to be the amount that a person could reasonably be expected to pay to obtain the benefit under an arms length transaction. `Recipient's contribution' [sic] means, in relation to a residual fringe benefit, the amount of any consideration paid to the provider by the employee in respect of the provision of the recipient's benefit.

Subsection 136(1) of the FBTA defines `in respect of', in relation to the employment of an employee, to include by reason of, by virtue of, or for or in relation directly or indirectly to, that employment.

In the case of the taxpayer (the recipient), the contribution made by himself will at least equal the arm's length value of the fringe benefit.

It follows that the taxable value of the external period residual fringe benefit provided to the taxpayer will be zero.

Alternative arguments may be raised that the benefit to be provided to the taxpayer can be properly regarded as a property benefit. However, regardless of its characterisation, the taxable value of the fringe benefit will remain zero because a property fringe benefit's taxable value is also calculated with reference to the recipient's contribution (see sections 42 and 43).

The trustee's fringe benefit

The fringe benefit provided to the trustee will be, for the purpose of determining its taxable value, an external property benefit.

The taxpayer will not be, at or about the time of provision, carrying on a business consisting of, or including the provision of identical or similar property principally to outsiders. Therefore, the benefit will not be regarded as an in-house property benefit (subsection 136(1)). It follows that the benefit will be an external property fringe benefit, which is defined as a property fringe benefit other than an in-house property fringe benefit (subsection 136(1)).

Section 43 applies to determine the taxable value of an external property fringe benefit. Paragraph 43(c) is the relevant provision, because the benefit will not be purchased by the taxpayer under an arm's length transaction. Like paragraph 51(c), paragraph 43(c) declares the taxable value to be the notional value of the recipient's current benefit, reduced by the recipient's contribution in respect of that benefit.

The contribution will be made under a Deed of Contribution entered into by the taxpayer and the trustee, subjecting the contribution to the terms and conditions of the Deed of Trust of the superannuation fund.

It is difficult to conclude that a `willing but not anxious' buyer will pay anything for a sum of money subject to strict conditions of the kind imposed by the Deed of Contribution. In fact, a person could reasonably be expected to receive money to accept such an encumbered fringe benefit.

Consequently, it is concluded that the notional value of that fringe benefit will be zero. It follows that the taxable value of the trustee's fringe benefit will be zero.

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Therefore, the fringe benefits arising from the contribution made by the taxpayer will each have a taxable.

PART IVA

The Commissioner's ruling did not address the question of whether Part IVA can apply to the contribution to the Fund. I have therefore obtained the opinion of F.L. Harrison QC and M.L. Robertson of Counsel. Their joint opinion is enclosed with this letter.

In short Part IVA of the Income Tax Assessment Act 1936 allows the Commissioner to reconstruct transactions and cancel tax benefits if the Commissioner can form an opinion that an arrangement was entered into solely or for the dominant purpose of obtaining a tax benefit, such as a deduction. The Commissioner has not ruled on whether Part IVA could apply because a recent decision has made it apparent that he cannot provide such a ruling in advance of a transaction.

A summary of the opinion obtained is that based on the same facts provided to the Commissioner in the Application for Private Ruling it would not be reasonable for the Commissioner to form an opinion that the sole or dominant purpose of entering into the scheme was the obtaining of a `tax benefit'. Accordingly we consider that Part IVA of the Act cannot be applied by the Commissioner so as to allow him to cancel any tax benefits or otherwise reconstruct the transactions.

A SUPERANNUATION FUND

The overriding consideration in undertaking this transaction is that it involves a superannuation fund. If the non-complying fund is not managed in such a way as to provide for the retirement of the member then a deduction may be denied or the Commissioner may be able to reasonably come to the opinion that the dominant purpose of the transaction was tax avoidance.

At common law a superannuation fund is an indefinitely continuing fund carried on for the purpose of providing benefits to members or their relatives on retirement or death. This means that the fund should not apply its funds in a way that would make it unlikely that the member would receive any benefit on retirement. The use of funds to provide for leisure activities for members should therefore be avoided.

The overriding theme is that the fund should invest on an arms-Iength basis. The fund is however a non-complying fund. This means that restrictions on providing financial assistance to members or their relatives do not apply. The fund may, therefore, make loans to associates of members, such as family trusts and spouses. Also rules relating to in-house assets and so on do not apply, and the fund may invest in shares or loans to employers of the member.

It also means that the fund should be administered with a long term view in mind. It should remain in place until the member's retirement. Naturally changes in the member's circumstances may provide catalysts for winding up the fund earlier than might be expected.

If you have any questions, please do not hesitate to contact either Kerrie-Anne or myself on (02) 9233 0755.''

11. I do not think it necessary to include in these reasons any of the other annexure and in particular the ruling referred to by Mr Bonnell in the advice letter or the opinion given by Mr Harrison Q.C and Mr Robertson (also referred to in the advice letter) or another opinion obtained by Mr Bonnell from Mr AH Slater Q.C and Mr Hamilton. However, it is relevant to note that the ruling in question obtained on 29 September 1998 was a private ruling given to Mr David N Bonnell in respect of his own affairs (and not those of anyone else) in respect of the relevant year and also the year ending June 2000. Both of the two opinions by counsel were issued in November 1998 and refer in their terms to a ruling, and being presumably the ruling in favour of Mr Bonnell. Both opinions focused in the main on Part IVA of the Income Tax Assessment Act 1936 (``the 1936 Act''); Part IVA was not raised by the Respondent as an issue. Mr Richmond advised the Tribunal also that the Respondent did not raise any contentions as to sham.

12. The Loan Facility Agreement which is Exhibit R1 (and which is referred to in these reasons as the ``loan agreement'') was drawn by David Bonnell and Associates. It was executed on 24 March 1999; Mrs Drummond's

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signature was witnessed by Kenneth Arthur Drummond while the signature of the Applicant, as trustee of the Drummond Investment Unit Trust (``the Unit Trust''), was witnessed by Michael Dodd. The loan agreement is a comprehensive and detailed document; it appears to be designed to cater for any and all loans which may be made by the Unit Trust to Mrs Drummond in respect of loans requested by Mrs Drummond, but where the Unit Trust is not obliged to provide any such loans. The loan agreement contains no reference whatever to any amount, and so that there is apparently no limit to the amount which might be lent thereunder. In my experience, a loan agreement which makes no reference whatever to an amount is unusual.

13. T6 (Tp37 and Tp38) is a promissory note (referred to as the ``promissory note'') together with endorsements all of which are set out in these reasons as follows:

``$500,000

Date: 24 March 1999

On demand, Phil Drummond promises to pay to P. Drummond Pty Limited as Trustee for the P. Drummond Superannuation Fund or order the sum of $500,000 (with interest thereon at the rate determined in accordance with the definition of `benchmark interest rate' in section 136 of the Fringe Benefits Tax Assessment Act, 1986 (Cth)).

[Signed]

Phil Drummond''

``$500,000

Date: 24 March 1999

On demand, P. Drummond Pty Limited as Trustee for the P. Drummond Super- annuation Fund promises to pay to The Drummond Investment Unit Trust to order the sum of $500,000 (with interest thereon at the rate determined in accordance with the definition of `benchmark interest rate' in section 136 of the Fringe Benefits Tax Assessment, 1986 (Cth)).

[Signed]

Director - P. Drummond Pty Limited

...

$500,000

Date: 24 March 1999

On demand, The Drummond Investment Unit Trust promises to pay to Karen Drummond or order the sum of $500,000 (with interest thereon at the rate determined in accordance with the definition of `benchmark interest rate' in section 136 at the Fringe Benefits Tax Assessment Act, 1986 (Cth)).

Signed by Trustee of The Drummond Investment Unit Trust''

14. It will be noted then that on 24 March 1999, the Applicant promised on demand to pay P Drummond Pty Ltd (``referred to in these reasons as the Drummond Company'') as trustee of the P Drummond Superannuation Fund (``referred to in these reasons as the Superannuation Fund'') $500,000 plus interest in accordance with the benchmark rate provided in section 136 of the Fringe Benefits Tax Assessment Act 1936. The payee of the promissory note (``the Superannuation Fund'') then endorsed that promissory note in favour of the Unit Trust, which in turn endorsed that promissory note in favour of Mrs Drummond. It will be noted also that each of the two endorsements contains the same reference to interest on the amount of $500,000 dollars. The fact that the promissory note was made and endorsed on the same date as the loan agreement indicates that the loan agreement and the promissory note are connected.

PART B: The Cross-Examination of the Applicant

15. The Applicant confirmed that the ruling which is Annexure E to Exhibit A3 is the ruling referred to in paragraph 9 of Exhibit A2. It will be recalled that that ruling was issued in 1998 to Mr Bonnell in connection with his own affairs.

16. The Applicant was next referred to the folder which is referred to in turn in paragraph 11 of Exhibit A2. He was asked whether the loan agreement was included in the folder; he answered that ``it is possible''. He was asked also whether it was possible that there were other documents and he answered that ``I don't believe so''.

17. T9 is the Trust Deed and rules in respect of the Superannuation Fund. The Applicant was asked whether, when he received T9, it had

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been signed by Mr Bonnell; he answered that he did not remember. When asked whether it was posted to him he said that he ``collected'' it himself.

18. The Applicant was then referred to the advice letter and in particular to the commencing words ``I refer to our recent conference''. It was put to him that there was no conference with Mr Bonnell prior to the advice letter. He answered that he consulted Michele Dodd of Bentleys and that she arranged a meeting with Mr Bonnell. It was then put to him that there is no reference in any of his three statements to such a meeting and he answered ``I believe it was missed out''. The Applicant was asked, with reference to paragraph 10 of Exhibit A2, whether he had a record of any conference with Mr Bonnell and he answered ``no''. The Applicant was not cross-examined as to whether there was a telephone conversation with Mr Bonnell prior to the advice letter; it may be noted though that similarly none of Exhibits A2, A3 or A4 refer to any such telephone conversation.

PART C: The Summonses to Produce

19. In answer to the summons to produce (Exhibit R4) addressed to them, Bentleys replied (Exhibit R5) as follows:

``SUMMONS TO PRODUCE DOCUMENTS HAND DELIVERY

NO N NT9 OR 2000

PHILLIP DRUMMOND

With reference to the summons dated 26th November 2004 to produce documents for the abovementioned matter I confirm that as far as I am aware we do not hold:

1. Any file relating to work undertaken in respect of the Phillip Drummond Superannuation Fund, any documents and written communication evidencing receipt of advice in respect of the Phillip Drummond Superannuation Fund; copies of advices or opinions provided by David Bonnell & Associates in respect of the Phillip Drummond Superannuation Fund; copies of any communication either to or from Phillip Kendall Drummond in respect of the Phillip Drummond Superannuation Fund.

2. Copies of any documents including file notes, memoranda, letters and computer records received from David Bonnell & Associates in respect of the Philip Drummond Superannuation Fund.

...''

20. In answer to the summons to produce addressed to the Applicant (Exhibit R2) Mr Bonnell replied (Exhibit R3) as follows:

``Dear Ms Wild

PHILLIP DRUMMOND v COMMISSIONER OF TAXATION MATTER: NT 2004/9

We refer to our recent telephone conversation.

We enclose a supplementary statement by the Applicant in this matter.

As discussed Mr Drummond has also obtained his documents. The only document that he has obtained that matches any of the material sought by your summons is a Loan Agreement. This Loan Agreement falls within the category of documents in his `blue file' that were not included in the `T' documents.''

PART D: Analysis of the evidence

21. Tp36 - Tp83 inclusive (T6 - T10 inclusive) are all referable to the Superannuation Fund and consisting of the promissory note (and endorsements) minutes of various meetings, the Trust Deed and rules in respect of the Superannuation Fund, and also a Deed of Contribution dated 24 March 1999 (Tp64 and Tp65). All of those documents were either expressly (ex facie the documents or inferentially) prepared by Mr Bonnell. It is in this context that Mr Mackenzie's evidence (Exhibit A1) is of limited relevance. Mr Mackenzie's evidence is that $450 is a standard charge for provision for a Superannuation Fund deed. The evidence before me is that Mr Bonnell prepared much more than the Superannuation Fund deed.

22. The Superannuation Fund must of course be distinguished from the Unit Trust. The trustee of the Superannuation Fund is the Drummond Company whereas the Applicant is the trustee of the Unit Trust. Tp17 (which forms part of the accounts of the Unit Trust at 30 June 1999) indicates that the trust capital in respect of the Unit Trust was and presumably still is $500,013 made up as follows:

            


   ``6. TRUST CAPITAL
   Settlement sum                             10.00
   I Ordinary Class Units of $1 each           1.00
   1 `B' Class Units of $1 each                1.00
   500,001 `C' Class Units of $1 each   $500,001.00
                                        -----------
                                        $500,013.00''
                                        -----------

Tp17 indicates that the Unit Trust was established on 3 March 1999, and thus prior to the receipt of the folder and its contents. Tp16 reflects, as an asset, a receivable (non-current) and being an unsecured loan of $500,000. The Trust Deed in respect of the Unit Trust did not form part of the T documents. It would appear though that the ``contribution'' by the Applicant of $500,000 was made to the Superannuation Fund which in turn invested that amount in a ``subscription'' for ``C'' class units in the Unit Trust and that the Unit Trust in term ``lent'' the amount so ``subscribed'' to Mr Drummond. The words ``contribution'', ``subscription'', ``subscribes'', and ``lent'' appear in inverted commas in this clause simply because there was in fact no payment of $500,000 (with or without interest as specified in the promissory note) to anyone. The only ``payment'' was the promissory note to which I have referred previously. Mr Bonnell, as I have said, was responsible for the preparation of the documentation (and excluding only in respect of the Unit Trust and the Drummond Company) to which I have referred; there was no evidence or contention that demand was ever made under the promissory note. Bentleys referred the Applicant to Mr. Bonnell. Paragraph 4 of Exhibit A2 is strongly suggestive of the fact that Bentleys knew what advice would be obtained and possibly or even probably because this was not their only referral. Bentleys drew the accounts which form part of the T documents; paragraph 7 of Exhibit A2 indicated that Bentleys were paid $2500 for the setting up of ``this company and unit trust''. It is likely that the ``C'' class units in the Unit Trust were issued in consideration of the ``contribution''; as I have indicated there was in fact no contribution in the sense that money changed hands; on the contrary there was merely a promissory note payable on demand together with interest endorsed as set out previously, and in respect of which there has never been a demand. To issue units as paid up in respect of consideration of this type appears to me, as a matter of accountancy, to be distinctly unusual. This comment, in my view applies also to the ``loan receivable'' reflected as an asset of the Unit Trust.

23. Mr Bonnell is the instructing solicitor for the Applicant and he was present throughout the hearing. He did not give evidence before the Tribunal. The fact that he did not do so when his evidence would so clearly have been relevant must give rise to a strong inference that his evidence would not have been of assistance to the Applicant (see
Jones v Dunkel (1959) 101 CLR 298).

24. Nor did Bentleys, and in particular Ms Dodd, give evidence; the same (Jones and Dunkel) inference must be drawn. I note in this context that, having regard to the time period involved, the contents of Exhibit R5 are surprising.

25. The evidence indicates that the Applicant consulted Ms Dodd in December 1998. She in turn referred him to Mr Bonnell as a practitioner who could assist him. (The reference in paragraph 5 of Exhibit A2 to ``another practitioner in Melbourne'' must be erroneous). Ms Dodd arranged (at a subsequent meeting in February 1999) for the completion of an instruction sheet (presumably designed to furnish Mr Bonnell with the information needed by him). That information sheet was passed on to Mr Bonnell. Mr Bonnell then, on 22 March 1999, furnished the Applicant with the folder referred to in paragraphs 11, 12, 13 of Exhibit A2. The evidence by the Applicant that there had been a prior meeting with Mr. Bonnell, mention of which was omitted from all three of his witness statements, cannot be accepted in the light of the fact that there was no evidence of any kind as to what took place at such a meeting. The costs letter (unlike the advice letter) referred to ``a recent telephone conversation/meeting'' but there was no mention by the Applicant of any such telephone conversation. Put in other words, the Applicant received at one and the same time, all of the relevant documentation and including but not limited to the costs letter, the advice letter and the loan agreement. The Applicant did not, in other words, first receive for consideration the costs letter which on confirmation, (and thereafter) resulted in the production of the advice letter and the other documents.

26. The amended assessment in respect of the relevant year and which is the subject of this

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hearing indicates that in the relevant year, the Applicant's income was $168,520 (Tp188). A deduction of $500,000 would, had it been allowed, have resulted in a substantial carry- forward loss. There was no evidence before me as to the ability as to the Applicant to fund a contribution in cash of this magnitude. The fact that the contribution took the form of a promissory note payable on demand suggests that it might have been difficult for the Applicant to fund such a contribution, or in the alternative that it was never contemplated, that the contribution would in fact be funded in cash.

PART E - The Costs Letter

27. I have previously quoted the costs letter in its terms; I now refer to its content under the head of ``Work to be carried out'' and note that the work specified did not contain any reference whatever to tax advice. I next refer to its content under the head of ``Our Charges''; it indicates in the clearest possible terms that Mr Bonnell's fee was a straight 10% of the amount of the contribution and being in this instance of course 10% of $500,000 or $50,000. Put in other words, there was no fee calculated on a time basis; Mr Catt said at the hearing that if the contribution had been $200,000 then the cost at 10% would naturally have been considerably less and on this basis $20,000. In this case, and as I have said, the cost was $50,000. Mr Bonnell then went on, in the costs letter, to specify that there would be two invoices; one of $450 for the Superannuation Fund; in respect of the balance of $499,950 he said ``the balance of our fee will be charged for tax advice and will be wholly deductible''.

PART F - The Advice Letter

28. A consideration of the advice letter indicates that in fact it does not contain tax advice for the Applicant. Nearly all of it consists of a recital of the ruling (and including the explanatory part) and being a ruling referable to Mr Bonnell and to no one else. The advice letter and the ruling, including the explanatory part, are in this context quite remarkably similar. The advice letter does also refer to FBT; FBT would of course have been relevant in respect of the Applicant's employer rather than the Applicant. (It contains moreover a brief reference to superannuation funds). The advice letter in addition contains a brief mention of Part IVA, but through a reference to the opinion by Mr Harrison Q.C and Mr Robertson. It is again relevant to note that the ruling (referable to Mr Bonnell only) and the opinions by counsel were all obtained in 1998, and before the Applicant consulted Ms Dodd.

PART G - The Law

29. Section 25-5 of the Income Tax Assessment Act 1997 (``the 1997 Act'') provides relevantly as follows:

``(1) You can deduct expenditure you incur to the extent that it is for:

(a) managing your tax affairs; or

(b) complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity; or

...

(2) You cannot deduct under subsection (1):

...

(e) a fee or commission for advice about the operation of a Commonwealth law relating to taxation, unless that advice is provided by a recognised tax adviser.

(3) You cannot deduct expenditure under subsection (1) to the extent that a provision of this Act (except section 8-1) expressly prevents or limits your deducting it under section 8-1 (about general deductions). It does not matter whether the provision specifically refers to section 8-1.

(4) You cannot deduct capital expenditure under subsection (1). However, for this purpose, expenditure is not capital expenditure merely because the tax affairs concerned relate to matters of a capital nature.

Example

Under this section, you can deduct expenditure you incur in applying for a private ruling on whether you can depreciate an item of property.''

30. There is no dispute as to the fact that Mr Bonnell qualifies as a ``recognised tax adviser'' as defined in section 995-1 of the 1997 Act.

31. The Respondent has identified the relevant issues in clause 19 of RS which reads as follows:

``19. The issues which arise are:

(a) whether the amount of $49,550 is, in whole or part, expenditure `for managing

ATC 2397
your tax affairs' within the meaning of s. 25-5(1)(a) of the ITAA 1997;

(b) if so, whether the amount of $49,550 is, in whole or part, expenditure of a capital nature which is excluded by s. 25-5(4) of the ITAA 1997.''

It may be noted that the Respondent did not consider that section 25-5(1)(b) of the 1997 Act is relevant. The Applicant contended that it is; I will deal with the Applicant's contentions in this regard later in these reasons.

32. It is necessary in the first instance to determine what the amount of $49,550 was paid for. In the case of a contractual payment this will usually be determined by reference to the contract itself; see
Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 at 4559;
NMRSB Limited & Ors v FC of T 98 ATC 4188 at 4205-4206;
Vincent v FC of T 2002 ATC 4742 at 4756 [67]). As I have indicated, the costs letter under the head of ``work to be carried out'' does not refer to tax advice. The costs letter then went on to stipulate for 10% of the contribution and to be charged through two invoices, one allegedly for tax advice. That the allocation was made purely in order to achieve the maximum tax advantage for the Applicant is abundantly clear; however, it cannot affect the characterisation of the work which was performed.

33. The advice letter did not, as I have indicated, contain any tax advice referable to the Applicant. Clauses 26, 27 and 28 of RS (and with which, and notwithstanding additional submissions by the Applicant, I agree) reads as follows:

``26. It is clear that the only communication from Mr Bonnell to the applicant which is put forward as the provision of `tax advice' to the applicant is the Advice letter. Although that letter has the heading `tax advice' on the first page, on a close reading it will be seen that all that it contains is:

(a) a report on the `questions of law on which the Commissioner has given a ruling' to Mr Bonnell in his personal capacity as a taxpayer (at pages 1-9);

(b) a `summary of the opinion' provided by FL Harrison QC and ML Robertson of counsel in relation to the application of Part IVA to the arrangement the subject of the ruling (paragraph 10);

(c) some observations regarding the nature of a superannuation fund (page 10).

27. Nowhere to be found in the advice letter is any advice by Mr Bonnell to the applicant as to the tax consequences of the arrangement which the applicant was to enter into.

28. Even if, contrary to the above submission, the Tribunal finds that the advice letter contained advice regarding the tax consequences of the arrangement which the applicant was to enter into, that advice was negligible. In reality, what the fee was paid for was the establishment of a superannuation fund as indicated by the description of the `work to be carried out' in the Engagement Letter.''

34. The Respondent in RS went on to consider that some part of the advice letter might have contained tax advice but described by the Respondent as ``negligible''. I propose, if only for the sake of completeness to assume, notwithstanding my finding in clause 33, that some tax advice was (somehow) provided. Section 25-5(1) of the 1997 Act in its use of the words ``to the extent that'' makes it clear that there may be a relevant question of apportionment. However, the onus is then on the Applicant to establish the extent to which he made a payment for managing his tax affairs within section 25-5(1)(a) of the 1997 Act. See
Bartlett & Anor v FC of T 2003 ATC 4962 at 4974-4975 paragraphs 70 and 71.

35. The evidence indicates in clear terms that Mr Bonnell did not only prepare the deed for the Superannuation Fund; in addition and inter alia, he prepared the Deed of Contribution, the promissory note and the loan agreement, apart from all of the various minutes. Some part of the relevant amount must have been paid for those services. As the Respondent contends, there is no evidence of any kind before the Tribunal which would permit the Tribunal to apportion the fee as between those services and other services which might conceivably fall within section 25-5 of the 1997 Act. The evidence of Mr Mackenzie does not assist in relation to this issue.

36. Mr. Catt contended (correctly) that in general terms and where parties contract at arms length it is not open to the Respondent to contest the quantum of the consideration paid

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(
Ronpibon Tin NL & Tongkah Compound NL v FC of T (1949) 8 ATD 431 at 437-438; (1949) 78 CLR 47 at 60;
FC of T v Cliffs International Inc 77 ATC 4564). But although it is clear enough that the Applicant and Mr Bonnell were at arms length in respect of certain aspects of their relationship, this was not so in all respects.

37. The label utilised by Mr Bonnell is clearly is not determinative. (Vincent v FC of T at 4756 [68];
FC of T v Broken Hill Pty Co Ltd 2000 ATC 4659 at 4668 [36];
Collis v FC of T 96 ATC 4831 at 4837).

Clause 68 of the judgment of the Full Court in Vincent reads as follows [ATC at 4756]:

``Before considering the Management Agreement, however, it is useful to comment on a matter which has some relevance here. There is no suggestion, at least before us, that either the Management Agreement or the Lease Agreement was a sham in the legal sense of that word, cf
Snook v London & West Riding Investments [1967] 1 All ER 518 and
Sharrment Pty Ltd v Official Receiver in Bankruptcy (1988) 18 FCR 449. But there will be cases, of which the present appeal is an example, where one may be distracted from the process of characterisation by the labels which the parties employ.''

And clause 36 of the judgment in Broken Hill reads [ATC at 4668]:

``The next matter which requires some comment is the use of `labels' in the process of characterisation. Again, there is no dispute as to principle between the parties. The true position is that the label that a party uses to characterise a payment, in the present case the word `interest', will not be determinative, although it may have some relevance: cf
NM Superannuation Pty Ltd v Young & Anor (1993) ANZ Insurance Cases ¶61-163 at 77,884; (1993) 41 FCR 182 at 198-199, referred to by the learned trial judge in this context. What that relevance may be will depend on the particular circumstances of the case. A licence does not become a lease because the parties chose to call it one, if it is in truth a licence:
Radaich v Smith (1959) 101 CLR 209. A person does not cease to be an employee and become an independent contractor because the parties use the latter description: Hannan & Allen v Australian Mutual Provident Society (unreported, Supreme Court of Victoria, 15 November 1996). So, it may be said that an amount payable does not become interest, if the parties chose to adopt that word, if in law it is not. What then is interest?''

38. It is clear enough on the evidence before me that the Applicant and Mr. Bonnell were anything but arms length as to the apportionment. The costs letter indicates in the clearest possible terms that although Mr Bonnell required to be paid $50,000 (10% of the contribution) he was ready to apportion his fee to suit the tax position of the Applicant. From his point of view, the apportionment was irrelevant since the whole amount of $50,000 would be taxable in the hands of his firm. Exhibit A2 indicates that the Applicant was told by Ms Dodd what the cost would be; at the second of his meetings with her he was told of the manner in which the cost would be apportioned. It is likely that this was a selling point in respect of the scheme as a whole. My finding then is that if there was any amount which could constitute a charge for managing the Applicant's tax affairs within section 25-5(1)(a) of the 1997 Act, the onus was on the Applicant to establish the amount in question. The Applicant has not discharged that onus, and indeed it cannot be said that he made any attempt to do so.

39. In case I have erred in respect of the preceding findings, (and again for the sake of completeness) it is desirable that I consider the provisions of section 25-5(4) of the 1997 Act, the effect of which is that a deduction will be denied if it is on capital account, but provided that a deduction will nevertheless be allowed in accordance with the second sentence of section 25-5(4) of the 1997 Act which provides that ``expenditure is not capital expenditure merely because the tax affairs concerned relate to matters of a capital nature.''

40. The leading case as to the distinction between expenditure on capital account and expenditure on revenue account is
Sun Newspapers Limited and Associated Newspapers Ltd v FC of T (1938) 61 CLR 337, Dixon J said at p. 363:

``There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) manner in which it is to be used, relied upon or enjoyed, and in this and under the former

ATC 2399
head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment, or by making a final provision or payment as to secure future use or enjoyment.''

41. At 359-360 J Dixon drew comparisons between expenditure relating to ``profit yielding subject'' and expenditure incurred as part of the process of operating the business:

``The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organized method of serving their needs. At the other extreme it may consist in a great aggregate of buildings, machinery and plant all assembled and systematized as the material and immaterial, in which it may be expressed such sources of income contain or consist in what has been called a `profit- yielding subject', the phrase of Lord Blackburn in United Collieries Ltd. v Inland Revenue Commissioners (1929) 12 Tax Cas. 1248, at p. 1254. As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose. But the practical application of such general notions is another matter.''

...
And at 362: ``... the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.''

42. In
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 194; (1946) 72 CLR 634 at 647, Dixon J said:

``... the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.''

43. Expenditure by a taxpayer who is an individual and not conducting business, in the establishment of a superannuation fund is of a capital nature, being expenditure to acquire an enduring advantage by a once and for all payment: see
Fanmac Ltd v FC of T 91 ATC 4703 at 4709; see also
Vincent v FC of T 2002 ATC 4742 at 4757 [75] as follows:

``Where a taxpayer carries on a business of breeding cattle and selling the progeny, it is obvious that the progeny would be trading stock and on revenue account. The commercial expression that an item of trading stock represents part of the circulating capital of a trader does not mean that trading stock is to be regarded as on capital account. There has never been a case in this country, or in the United Kingdom where trading stock has been suggested to be on capital account, even where the stock is the initial stock of the business. There is a suggestion in the judgment of Dixon CJ in

ATC 2400
John Fairfax & Sons Pty Ltd v FC of T (1959) 11 ATD 510 at 511; (1958-1959) 101 CLR 30 at 35 that s 51(2) was enacted because it was thought necessary because trading stock represented or might represent the circulating capital of the business. However, his Honour makes it clear that this would not mean that that trading stock was on capital account and his Honour offers another explanation not relevant here. Indeed, the legislative history of s 51(2) suggests another explanation for the introduction of that subsection, namely that livestock, included by the 1936 legislation (which for the first time also introduced a section equivalent to s 51(2)) within the definition of `trading stock' would, where the livestock was, for example, a dairy cow be on capital account. Thus, absent s 51(2), the cost of acquisition of livestock such as dairy cows, or perhaps sheep acquired for producing wool, would be on capital account. Section 51(2) was enacted to ensure that the acquisition of such livestock would entitle the farmer to a deduction: see
Walker v FC of T 83 ATC 4168; (1983) 70 FLR 354. For present purposes, however, this question need not detain us. It is clear that where a person not carrying on a business acquires an asset for the purpose of sale other than sale in the course of a business, that asset could not be trading stock, although the sale of the asset might give rise to a profit being assessable income. Further the acquisition of that asset would be an acquisition on capital account.''

44. That the expenditure in this matter was on capital account within Hallstroms is clear from the evidence. The Applicant first consulted Ms Dodd in December 1998. He was told that the cost of embarking upon the scheme would be 10% of the contribution. The subsequent meeting with Ms Dodd indicated that the cost would be split in the manner indicated. An instruction sheet for Mr. Bonnell was completed. On 22 March 1999, Mr. Bonnell furnished the whole package in the folder referred to in Exhibit A2. When he collected the folder the Applicant received the costs letter, the advice letter, the loan agreement, the promissory note, the Deed of Contribution and also the Superannuation Fund documents. When one considers those documents one can readily see that a charge of $50,000, related as it was to the amount of the contribution, was very high indeed. A fee on the usual time basis would have been much less. The Applicant was clearly enough prepared to pay so high an amount in order to ``buy in'' to the scheme and, in the circumstances in order to obtain the tax advantages thereby perceived to be available.

45. It is then necessary, and again for the sake of completeness, to consider in this context what is meant by the word ``merely'' in section 25-5(4). Considered on its own its intended meaning is not easy to ascertain. This qualification was first introduced into section 69(3) of the 1936 Act; the explanatory memorandum to Taxation Laws Amendment Bill (No. 5) 1989 specified as follows:

``New subsection 69(3) provides that, for the purposes of section 69, expenditure that is incurred by a taxpayer in relation to a tax- related matter will not be taken to be expenditure of a capital nature only because the income tax affairs to which the expenditure relates are of a capital nature.

Subsection 69(1) (refer to the earlier notes on that subsection) does not allow a deduction for tax-related expenditure that is of a capital nature. But for proposed subsection 69(3), a taxpayer would not be entitled to a deduction for fees for professional advice concerning the application of the capital gains tax provisions of the Principal Act in relation to an asset held by the taxpayer, or the cost of disputing whether expenditure associated with the establishment of a new business is an allowable deduction.''

46. The explanatory memorandum then indicates that a deduction will be allowed in respect of capital expenditure but only where the advice relates to the then existing affairs of a taxpayer. In this case, of course, we are concerned with something entirely new and so that the ``merely'' proviso cannot apply.

47. Mr. Catt contended at some length that there was room for an argument as to the application of section 25-5(1)(b) of the 1997 Act; he referred in particular to the fact that under this sub-paragraph a deduction is available in respect of compliance with an obligation imposed on a taxpayer in so far as that obligation relates to the tax affairs of an entity. Mr Catt argued in particular that the

ATC 2401

Applicant is the public officer of the Drummond Company and as such would be obliged to ensure that the Drummond Company complies with its taxation obligations. It must be remembered that the Superannuation Fund, the Unit Trust, and the Drummond Company came into existence in order to implement the scheme. In my view the subclause is couched in terms which clearly relate to the ongoing or current affairs of an existing entity but not to an entity which will be brought into existence thereafter. There are however more cogent reasons why the subsection does not apply in this case; they are set out in clause 48 below.

48. As noted previously in these reasons, Mr Catt asked for and obtained permission to file additional submissions in relation to clauses 26, 27 and 28 of RS. He did in fact file, as I have noted, additional submissions and the Respondent replied. Clauses 14 to 18 of the Respondent's reply (and with which I agree) dealt with the argument that some part of the fee fell within section 25-5(1)(b) of the 1997 Act as follows:

``14. The applicant contends that in so far as the Advice Letter relates to the Superannuation Contributions Tax (Assessment and Collection) Act and the Fringe Benefits Tax Assessment Act, it falls within s. 25-5(1)(b). Whilst it is true that s. 25-5(1)(b) extends to a payment made by a taxpayer in complying with an obligation imposed on the taxpayer by a Commonwealth law, and the applicant was public officer of P Drummond Pty Ltd, paragraph (b) is qualified by the words `in so far as that obligation relates to the tax affairs of an entity'.

15. When originally enacted, and during the 1999 year, s. 25-5 provided relevantly as follows:

`(1) You can deduct expenditure you incur to the extent that it is for:

(a) managing your *tax affairs; or

(b) complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the *tax affairs of an entity;

...'

16. During the 1999 year the expression `tax affairs' was not defined in the ITAA 1997, but there was a definition of `tax' in s. 995-1 of the ITAA 1997 namely:

`tax means:

income tax imposed by the Income Tax Act 1986, as assessed under this Act; or

income tax imposed as such by any other Act, as assessed under this Act.'

The expression `this Act' is defined in s. 995-1 to include the Income Tax Assessment Act 1936.

17. It will be apparent that the definition of `tax' did not extend to either the Superannuation Contributions Tax (Assessment and Collection) Act 1997 or the Fringe Benefits Tax Assessment Act 1986. Consequently, matters arising under those Commonwealth laws could not be `tax affairs' for the purposes of s. 25-5(1)(b) and in so far as the fee of $49,550 paid by the applicant related to advice given to the applicant in respect of those Commonwealth laws, the payment is not within s. 25-5(1)(b).

18. A significant part of the Advice Letter related to the application of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 and the Fringe Benefits Tax Assessment Act 1986 (approximately 5 pages out of a total of a little over 10 pages).

But and again in any event and even if any part of the amount claimed falls within section 25-5(1)(b) of the 1997 Act and even if deduction is not denied by section 25-5(4) of the 1997 Act the Applicant has failed to produce any evidence as to an apportionment and has thus not discharged the onus.''

49. I have noted that Mr Richmond did not contend that Part IVA of the 1936 Act applies or that the scheme in question is a sham. Had he done so, those contentions might arguably have been successful; in these circumstances it is neither necessary nor desirable for me to consider them further. Mr Richmond's cross- examination of the Applicant was not lengthy. Clearly Mr. Richmond considered (correctly in my view) that it was not necessary for him to raise such issues or to cross-examine at any greater length. The content of the advice letter and the manner in which the folder was provided lead me to infer that the procedure

ATC 2402

may have been used on other occasions and for other clients. On the evidence before me, Bentleys was aware of the basis on which transactions of this kind were carried out by Mr Bonnell. I have previously referred to my reservations as to the ``C'' class capital component of the capital of the Unit Trust, and the nature of the loan receivable. The conduct of Bentleys does not reflect well on them. And a fortiori his conduct does not reflect well on Mr Bonnell. Apart from any other considerations, (and in particular his failure to give evidence), I have doubts moreover as to whether in all the circumstances it was proper or desirable for him to act as solicitor to the Applicant in these proceedings. Reference was made during the hearings to the fact that opinions from eminent counsel had been obtained. The opinions in question do not contain any indication whatever that counsel were aware of the fact that a contribution might be made not in cash but through a promissory note payable on demand and where in fact there was no demand. It is difficult to believe that counsel would have regarded an aspect of this nature as not being very significant indeed.

PART H - Summary

50. In summary:

(a) The consideration was not paid for tax advice;
(b) If notwithstanding subclause (a) above, it can be said that some part of the consideration was for tax advice it was incumbent on the Applicant to establish the part attributable; he did not do so, and thus did not discharge the onus on him;
(c) In any event section 25-5(1)(b) of the 1997 Act is not relevant in respect of a structure which will come into place in consequence of the relevant services; moreover that subsection is not relevant because the definition of ``tax'' then relevant did not extend to superannuation contributions tax or to fringe benefits tax;
(d) In any event furthermore the expenditure was on capital account and the second sentence contained in section 25-5(4) of the 1997 Act does not assist the Applicant;

51. Accordingly, the objection decision under review must be affirmed.

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