CALDER v FC of T

Judges:
French J
Stone J
Siopis J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [2005] FCAFC 254

Judgment date: 7 December 2005

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French, Stone and Siopis JJ:

Introduction

1. In June 1994 Michael and Rosemary Calder invested in a Tea Tree oil plantation project at Rappville, near Casino in New South Wales. Their investment involved the acquisition of seeds for 10,000 trees to be grown and managed in common with trees acquired by other investors for the purpose of producing and selling Tea Tree oil. They entered into a Farm Agreement with the Land Owner for the use of the land on which their trees would be planted, a Management Agreement with another entity to manage their interest in the Farm business for a period of 15 years and a Loan Agreement with a Lender to finance the payment of management fees and other outgoings associated with the investment. The loans were, in part, limited recourse loans.

2. Mr Calder claimed deductions on account of his outgoings for the years ended 30 June 1994 and 30 June 1995. The deductions claimed totalled $16,025 for the two years.

3. In August 2000 the Commissioner of Taxation (the Commissioner) issued amended assessments disallowing the deductions for the two years on the basis that they were tax benefits obtained under a scheme to which the tax avoidance provisions of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the ITAA) applied.

4. Objections taken to the amended assessments were disallowed and appeals to the original jurisdiction of this Court were dismissed. Nicholson J, who dismissed those appeals, found it would be concluded that Mr Calder's dominant purpose in entering into the investment was to obtain a tax benefit. That conclusion was an objective one which did not depend upon the taxpayer's actual subjective purpose. It was reached by reference to the eight factors set out in s 177D(b) of the ITAA which are required to be considered in determining the purpose of a taxpayer entering into a scheme which gives rise to a tax benefit. Mr Calder now appeals to the Full Court against the decisions of the judge at first instance.

5. The appeal to this Court is largely by way of a challenge to evaluative findings made by the learned primary judge on undisputed primary facts. In such a case the Court will give weight to the primary judge's evaluation of the facts and will not interfere with such assessment unless the primary judge is shown to be wrong. For the reasons that follow, the primary judge's evaluation of the factors relevant to whether the Tea Tree oil project was a scheme to which Pt IVA applied was open on the facts before him and does not disclose error. The appeal should be dismissed with costs.

Factual background

6. Michael Calder served in the Royal Australian Navy from 31 January 1945 until 1 February 1982 when he retired. He served mainly as a hydrographer. Following his retirement he and his wife set up a business together teaching offshore sailing and navigation. He also acted as a consultant on hydrographic matters.

7. In March 1994 Mr Calder and his wife sold a yacht which they owned. They decided to invest the proceeds to provide additional income in their retirement. They were already what Mr Calder described as "long term investors in Australian shares". While considering a range of possible investments Mr Calder saw a newspaper advertisement for a Tea Tree oil investment project. He obtained a copy of a prospectus for what was described as the "Main Camp Tea Tree Oil Project No 3". It was dated 20 April 1994.

8. Main Camp was described in the prospectus as "a large rural holding at Rappville near Casino, in Northern New South Wales". The prospectus proposed the establishment of a commercial Tea Tree plantation on the property. The object of the project would be "to capitalise on the demand for Tea Tree oil both domestically and internationally".

9. The prospectus offered investors what it described as "a prescribed interest in Main Camp Tea Tree Oil Project No 3". In a Basic Information page it explained that the investors would "… engage in the business of growing Tea Trees on land at Rappville near Casino, NSW for a period of 15 years unless the relevant agreements are terminated earlier." The "relevant agreements" were identified. Each investor would enter into a Farm Agreement with the Land Owner and would engage a manager, under the terms of a Management Agreement, to manage the

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investor's interest in the farm business for 15 years. Management fees would be payable in the amount of $27,000 for year one, reducing to $23,450 if a prepayment were made. Year 1 fees could be borrowed under a Loan Agreement from an entity designated the "Lender". Management fees for year two would be $3,133, discounted to $2,725 if prepaid, plus a production fee of $12.50 per kilogram of oil produced. The fixed fee component could be borrowed under the Loan Agreement. Management fees for years 3 to 15 would be paid out of the proceeds of Tea Tree oil. If the proceeds were insufficient the unpaid fees would accrue, but the manager would have no recourse against the investors personally for those fees.

10. Mr Calder discussed the project with his accountant, ISIS Financial Services Pty Ltd. He was told that there had been two prior prospectuses for Main Camp Tea Tree Oil Project Nos 1 and 2 and that they were real farms with an ongoing harvesting and production process. He and his accountant also discussed the taxation implications of the investment which were covered in the prospectus. Ultimately he and his wife, Rosemary, decided to invest in the project. At the same time they purchased shares in eight listed companies and three companies in which they had existing shareholdings. He did not seek any further expert advice before entering into the project.

11. In June 1994 Mr Calder and his wife completed an Application Form and the Principal Agreement in the prospectus. The Principal Agreement annexed Farm, Management and Loan Agreements which they executed. In so doing they elected:

(i) to prepay Management Fees;
(ii) to apply for a loan under the Loan Management Agreement for an initial principal of $23,500;
(iii) to repay $8,500 of principal on or before 1 October 1994;
(iv) to adopt Loan Option 2 on the method of principal repayment. The Option provided for the loan to be repaid at $250 per year plus 50 per cent of the net earnings of the investor's interest in the Project after deducting the $250.

12. Mr Calder said that he entered the Project because he saw an investment in Tea Tree oil farming as an investment in a niche market in an expanding alternative medicine industry. He and his family had used the product for a long time and believed in it. Given the long term nature of the Project he felt the opportunity it presented was likely to yield good returns in later years. This was, he said, the basis upon which he made his decision to invest. He and his wife took up one farm in the Project comprising 10,000 trees. It was held in their joint names.

13. In the year ended 30 June 1994 Mr Calder paid and/or incurred a liability to pay for the purposes of the project and pursuant to the agreements relating to it:

(a) management fees of $11,725 under the Management Agreement;
(b) farm fees of $25 under the Farm Agreement;
(c) interest of $1,762.50 under the Loan Agreement; and
(d) seed fees of $100 under the Farm Agreement.
These amounts represent his half of the total payments made by him and his wife jointly. In accordance with the agreements in the year ended 30 June 1994 the Lender paid $11,750 to the manager on behalf of Mr Calder. Mr Calder claimed as a deduction in his income tax return for the year ended 30 June 1994 the amounts of the management fees, the farm fees and interest referred to above.

14. In the year ended 30 June 1995 Mr Calder paid and/or incurred a liability to pay:

(a) management fees of $1,362.50 under the Management Agreement;
(b) farm fees of $25 under the Farm Agreement;
(c) interest of $1,135 under the Loan Agreement; and
(d) principal of $4,200 under the Loan Agreement.
In that year the Lender paid the sum of $1,362.50 to the manager on behalf of Mr Calder. In his income tax return for that year Mr Calder claimed, as a deduction against

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taxable income, the management fees, farm fees and interest expenses referred to above.

15. For the years of income ended 30 June 1997 up to and including 30 June 2001 Mr Calder derived income of $965.82, $407.29, $1,540.77, $496.07 and $796.84 from the sale of Tea tree oil from his farm. This represented total income of $4,296.69.

16. On 18 August 2000 the Commissioner of Taxation, relying upon the tax avoidance provisions of Pt IVA of the ITAA, issued amended assessments of Mr Calder's taxable income for the years ended 30 June 1994 and 30 June 1995. The amended assessment for the year ended 30 June 1994 disallowed $13,512 as deductible expenses. The amended assessment for the year ended 30 June 1995 disallowed $2,513. The claimed outgoings disallowed were the amounts which were claimed as deductions and which are set out earlier in these reasons.

17. Objections were taken to the amended assessments and were disallowed on 23 December 2002. Mr Calder appealed in the original jurisdiction of this Court against those objection decisions. The appeals were brought under s 14ZZ(a) of the Taxation Administration Act 1953 (Cth). They were heard by Nicholson J who held that Pt IVA applied to the claimed deductions. This finding was based on his conclusion that the dominant purpose of the investments, assessed objectively, was to obtain a tax benefit. His Honour dismissed the appeals with costs -
Calder v Commissioner of Taxation [2005] FCA 911.

18. Mr Calder now appeals to the Full Court against his Honour's decision.

The nature of the investment transaction

19. It is convenient, before turning to the evidence before the learned primary judge, to have regard to the agreements which Mr Calder and his wife entered into in making their investment in the project. Those agreements were conveniently summarised in his Honour's judgment and it is sufficient to adopt and reproduce that summary here.

20. The Principal Agreement was between Summerland Lands Pty Ltd (the Land Owner), Main Camp Tea Tree Oil (No 3) Limited (the Manager), Australian Rural Group Limited (the Trustee), Project and General Finance Pty Ltd (the Lender), where applicable and each individual participant who was named in its schedules as "Farmer" and "Borrower".

21. The Principal Agreement provided that, by executing it, the Farmer/Borrower automatically, upon acceptance of the Application Form by the Land Owner, the Manager and, where applicable, the Lender, became a party to and bound by the Farm Agreement, Management Agreement and, where applicable, the Loan Agreement which were annexed to the Principal Agreement as Annexures "A", "B" and "C" respectively.

22. The Farm Agreement was between the Land Owner, the Trustee and the Farmer named in the Principal Agreement and recited that:

(a) under a lease dated 20 April 1994, the Land Owner would lease certain specified parts of the property known as "Main Camp" to the Trustee to be held on trust for the Farmers (the Project Land);
(b) under a sub-lease dated 20 April 1994 the Trustee would sub-lease the Project Land to the Land Owner.

The Farm Agreement provided as follows:

(a) the Land Owner granted to the Farmer a right to farm 10,000 Tea Trees on the site or sites forming part of the Project Land on which the said Tea Trees were established (Farm);
(b) the term of the right was deemed to commence on 30 June 1994 and end on 30 June 2009;
(c) the fee payable to the Land Owner for the grant of the right (farm fee) was:
- (i) for each of years 1 and 2 a prepaid fee per Farm of $50;
- (ii) for each of years 3 to 15 a fee calculated monthly in advance on the basis of $50 plus an annual increment equal to the Consumer Price Index of Sydney to be paid from the income arising from the sale of Tea Tree oil from the Project;
(d) after the first 2 years the farm fee was to be paid out of the gross income of the Project prior to the payment of management fees pursuant to the Management Agreement. If in any year the gross income was not sufficient to pay the farm fee it

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could be paid out of the gross income in any subsequent year;
(e) the Land Owner was to supply to the Farmer at the Farmer's expense germinated seeds in a healthy condition in numbers equal to 10,000 trees per Farm;
(f) the Land Owner would procure the design and survey of the Farm and would record and, if requested, notify the Farmer the position of such Farm;
(g) the Farmer would:
- (i) purchase germinated Tea Tree seeds from the Land Owner and grow them out into harvestable trees;
- (ii) maintain the trees and tree placements according to principles of good husbandry and thereafter harvest the trees and process the leaf into oil;
- (iii) generally maintain the Farm and conduct the business of farming Tea Trees in an efficient manner according to good farming practice.

23. The Management Agreement was between the Manager and the Farmer named in the Principal Agreement and provided as follows:

(a) the Farmer became a party to and bound by a Deed made between the Land Owner, the Manager and the Trustee (the Investment Deed, sometimes described in submissions as the Project Deed);
(b) the Farmer engaged the Manager to manage the business of farming the Farmer's Farm and the harvesting and processing of the Tea Trees thereon to produce and market Tea Tree oil;
(c) the agreement was to commence on 30 June 1994 and continue for 15 years thereafter;
(d) the Manager agreed to perform at its expense all the obligations of the Farmer to the Land Owner under the Farm Agreement except for the Farmer's obligation to pay farm fees to the Land Owner and within the initial 13 month period of the Management Agreement to:
- (i) receive from the Land Owner germinated Tea Tree seeds selected to the best of the knowledge and belief of the Manager and the Land Owner from known high yielding stock and in healthy condition;
- (ii) do all things necessary to ensure that the germinated Tea Tree seeds were tended according to principles of good husbandry; grown into seedlings and then planted at the rate of 10,000 per Farm;
- (iii) conduct the Farm in a commercial manner in keeping with accepted Tea Tree oil industry standards;
- (iv) create and maintain shelter belts and fencing for the protection of the plant placements;
- (v) prepare the land with adequate drainage and ensure proper drainage was supplied by the Land Owner;
- (vi) provide suitable fertilisation to the Tea Trees;
- (vii) eradicate pests, keep the Farm free of competitive weeds and keep down and exterminate vermin, noxious animals, insects, plants and weeds
(the Initial Obligations);
(e) subsequent to the Initial Obligations, the Manager agreed to perform at its expense all the obligations of the Farmer to the Land Owner under the Farm Agreement except for the Farmer's obligation to pay farm fees to the Land Owner and to:
- (i) continue to perform the obligations set out at subpars (iii) to (vii) above;
- (ii) use its best endeavours to harvest the Tea Trees at or about the time estimated by it to produce the best results for the Farmer;
- (iii) use processing facilities supplied by the Land Owner to process the harvested Tea Tree leaf into oil;
- (iv) sell and distribute such Tea Tree oil using its best endeavours to obtain the maximum price available and account to the Farmer and the Trustee for the proceeds of such sale;
- (v) where the Manager believed it was in the best interests of the Farmer to do so, to pool the oil produced from the Farmer's trees with oil produced from other Farmers' trees and other projects, in which event the proceeds of sale of oil
  
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  pro rata would be divided between the Farmers;
(f) the Farmer agreed to pay the Manager as follows:
- (i) if the Farmer prepaid the fee in respect of the Initial Obligations, $23,450 per Farm (reduced from $27,000);
- (ii) for the period of 13 months commencing at and including 30 June 1995, $2,725 plus $12.50 per kilo of oil produced (reduced from $3,133 if paid in advance on 30 June 1995);
- (iii) for each year thereafter commencing 30 June 1996 the management fee was the sum of $2,725 per Farm plus $12.50 per kilo of oil produced, and thereafter such costs would increase at an increment equal to the Consumer Price Index of Sydney;
- (iv) the management fees for the year commencing on 30 June 1996 and thereafter were to be paid out of the gross income of the Project and in the event that the gross income in any year was not sufficient to pay the management fees for that year the fees could be paid out of the gross income of the Project in any subsequent year;
- (v) subject to the gross income of the Farmer being made available in its entirety by the Farmer to the Manager for the purpose of paying the management fees the Manager would have no recourse to the Farmer for such management fees;
(g) the Farmer authorised and directed the Manager to pay to the Land Owner out of the Farmer's Project any farm fees due and payable by the Farmer to the Land Owner pursuant to the Farm Agreement prior to payment of the Manager's remuneration.

24. The Loan Agreement was between the Lender and the Borrower named in the Principal Agreement and provided as follows:

(a) the Lender advanced to the Borrower the Principal Sum referred to in the Principal Agreement and being:
- (i) $23,500 per Farm in Year 1;
- (ii) $2,775 per Farm in Year 2.
(b) the term of the loan was eight years from the date of the Loan Agreement and deemed to commence on 30 June 1994 for the purpose of calculating principal and interest;
(c) as consideration for the Lender discounting the interest rate by 2 per cent per annum, the Borrower agreed to pay upon execution of the Loan Agreement the first year's interest at the rate of 15 per cent per annum;
(d) as consideration for the Lender reducing the rate of interest during the second year of the Loan Agreement to 12.66 per cent, the Borrower agreed to pay the Lender on 30 June 1995 interest for 12 months in advance on the principal then outstanding;
(e) as consideration for the Lender reducing the rate from and including year 3 onwards to 6.5 per cent per annum, the Borrower agreed to pay the Lender interest monthly in advance on the principal sum outstanding subject to such payment being due from the sale of oil and payable from the income there from after payment of all farm fees and all management fees and charges;
(f) the Borrower was to make one principal repayment to the Lender on 1 October 1994 of $8,500 per Farm;
(g) the balance of the principal sum and interest was to be repaid to the Lender by direct deduction from the income from the business (as defined) and by executing the Loan Agreement the Borrower authorised the Manager to pay the Lender all such monies;
(h) the Borrower could elect to have the income of the Farmer available for repayment of principal calculated as either:
- (A) the balance of the gross income of the farm (a term not defined in the Loan Agreement) after payment in order of priority of all farm fees, all management fees and interest due and payable; or
- (B) $250 plus 50 per cent of the balance of the gross income of the farm (a term not defined in the Loan Agreement), after payment in order of priority of all farm fees, all management fees and interest due and payable.
(i) subject to the Borrower making the specified principal and interest payments by

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the due dates and performing his obligations under the Farm Agreement, the Borrower would have no other liability for payment of the balance of the principal sum or interest thereon other than out of the income from the Project, provided that should the Borrower's income from the Project be insufficient to pay the principal sum and interest by the expiration of eight years from the date of the Loan Agreement then the term of the loan was to be extended for no more than 15 years from the date of the Loan Agreement until the principal and interest is paid from such income;
(j) at the expiry of 15 years from the date of the Loan Agreement, the Loan Agreement and the Borrower's obligations to repay any outstanding principal and interest were to cease;
(k) the Borrower authorised the Lender to remit the Principal Sum to the Trustee to be applied by the Trustee towards the obligation of the Borrower to pay management fees and farm fees, and the Lender irrevocably agreed to remit such funds in satisfaction of the Borrower's obligations under the Farm Agreement and the Management Agreement.

The evidence before the trial judge

25. The evidence before the primary judge included that of Mr Calder and his wife and Mr Calder's witnesses who were Mr McClymont, the Managing Director of an agricultural consultancy and Mr Hayer, a former employee of the Project. The Commissioner relied upon the evidence of a chartered accountant, Mr Langridge. Evidence-in-chief was given on affidavit.

26. Undisputed elements of Mr Calder's affidavit evidence have already been referred to describing his personal history, the way in which he and his wife came to invest in the Project, the general nature of the prospectus, the agreements they entered into, the payments he made, the deductions he claimed and the assessment history that followed.

27. In his affidavit evidence Mr Calder said that he understood, when he went into the Project, that he would be carrying on a business of growing Tea Trees with others where he shared in the benefits and risks of the Project such as planting failure, price fluctuations, management failure and marketing failure. Being in business with others offered economies of scale, enabled the tree farming activities to be more modernised and allowed the Farmers to benefit from the Manager's continuous market research and development. He and his wife had elected to have the farm managed because of the previous experience that the managers had gained in connection with Projects Nos 1 and 2. He regarded the farm and management fees that they paid as reasonable because they provided for the management, harvesting, promotion and marketing of the Tea Tree oil by experts. He understood that he would have no direct role in the day to day management of the Project and would need no special expertise in that business.

28. Mr Calder read all the information in the prospectus including the terms of the various agreements. He understood that there would be few returns in the early years with the opportunity for greater returns in five to seven years. This appeared normal for an agricultural venture. His investment was intended to be long term so he was not concerned by the delay in returns. He read an expert's report in the prospectus which commented favourably on the projected oil yields and oil prices used as the basis for the financial projections in the prospectus. Overall he believed that the opinions and forecasts in the prospectus were corroborated by the actual progress being made on Project Nos 1 and 2 which, according to the prospectus, appeared to be proceeding satisfactorily. He did not make any inquiries about the Project Manager nor did he speak with any representative before he entered into the Project. He regarded the prospectus information as thorough and sufficient for him to make a decision and act on it.

29. Mr Calder referred in his evidence to regular correspondence received from the Manager and the Australian Rural Group Ltd. He exhibited a number of letters and reports in that regard. Until 2000 he had no reason to make inquiries with the Manager as everything appeared to be operating well. He thought the Project was being run very professionally. However in late 2000 Main Camp Tea Tree Oil Limited, which had become the Manager of all

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four Main Camp Tea Tree Oil Projects with effect from 30 June 1999, recommended to the investors that the Project be terminated. The Trustee opposed the winding up of the Project and arranged for the 2001 harvest to go ahead. However the Manager organised a meeting of Farmers on 21 December 2000 at the Wentworth Hotel which Mr Calder attended. The purpose of the meeting was to wind up the Project, but because of lack of support for winding up from the investors, the meeting was terminated.

30. The Manager continued with the 2001 harvest and, jointly with the Trustee, invited the investors who wanted the Project to continue to contribute $500 as a voluntary levy to fund the harvest. Mr Calder paid that amount. However, the Trustee went into liquidation on 12 December 2002. Its liquidators then acceded to a formal request by the Manager to retire as Trustee which they did on 29 January 2003. The Project was then terminated by the Manager on 2 May 2003.

31. Mr Calder said that his dominant purpose for participating in the Project was to produce good financial returns during his retirement. The Project also appealed to him as it was an Australian project and was based on the farming of Tea Tree oil which he personally believed was an outstanding pharmaceutical product with great commercial potential. He did not consider the tax deductions involved as anything but the normal consequence of running a business where the expenses are set off against the income.

32. The prospectus which was exhibited to Mr Calder's affidavit identified, inter alia, rural risk factors, structural risk factors and marketing risk factors. It set out what it called Plantation and Income Illustrations. Under this heading it stated that planting would commence as soon as possible after commitments to 50 farms were received (ie 50,000 trees). For the purpose of forecasting total oil production the Manager had assumed that the first harvest scheduled for the third year would yield 260 kilograms of oil per hectare and that subsequent harvests would yield up to 300 kilograms per hectare. The income would be totally related to yield and the price received on the sale of oil. The prospectus said:

"While in a free market prices will vary there has been a steady rise in prices during the last few years as the amount of oil available for sale has increased. The Manager believes that in the next few years at least, this general trend could continue as reliable, volume producers of quality oil provide an environment suitable for large manufacturers to confidently include tea tree oil in their existing or new product lines. For the purposes of illustration, the Manager has assumed an annual inflationary increase of 5% in the figures below although future prices cannot be guaranteed."

33. It was anticipated, according to the prospectus, that selling prices for oil might be a little erratic as the impacts of increased production and developing demand were likely to move at differing rates at different times over the term of the project. Illustrative cash flow projections were based upon three alternative scenarios. The first was a return on investment calculation assuming that a Farmer prepaid his first year farm fee and first year management fee and paid for the seeds for a total initial outlay of $23,700. This was the "No Loan Option". Alternative projections were based upon Loan Repayment Option 1 which provided for all net farm earnings to be used to repay the loan as quickly as possible. The third projection was based on Loan Repayment Option 2 which, as noted earlier, provided for the loan to be repaid at the rate of $250 per year plus 50 per cent of the net earnings of the project after deducting the $250.

34. The cash flow projections for a single farm (10,000 trees) where no loan was taken were set out in a table covering the year ended 30 June 1995 to the year ended 30 June 2009 inclusive. Projected income for the first two years was zero and in the fifteenth year was $13,471. The total gross income over the period was projected at $131,864. Total expenses were projected at $72,698, leaving a net projected income of $59,166. This was said to represent a return on investment averaging 19.2 per cent. The actual annual returns on investment rose from zero in 1995 and 1996 through 10.8 per cent in 1997 to 25.6 per cent in 2009.

35. The cash flow projections for a single farm under Loan Repayment Option 2 again showed a net projected income of $59,166

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representing the return on investment of 19.2 per cent on average. However after taking out loan repayments the cash distribution over the whole period was $34,289.

36. The prospectus included an agricultural consultant's report prepared by The Centre for Agricultural Risk Management Pty Ltd. The consultant's report stated that the Main Camp management team had exhibited "applaudable" (sic) attention to detail. The progress thus far on Main Camp Projects No 1 and No 2 was described as "sound, professional and on schedule". They were said to be based on proven successful agricultural management practices. The major strength of the Main Camp Projects was said to be the design and layout of the plantation incorporating laser levelled fields and a sound irrigation and drainage system. The major unknown factor was said to be yield. Recent leaf material tests indicated that the trees were on target to achieve projected yields. The Tea Tree industry was described in the report as one with "significant potential and commercial merit".

37. A marketing consultant's report prepared by Southpac Laboratories Pty Ltd was also included in the prospectus. Under the heading "Recent Trends" it stated:

"Over the last seven years, production of Tea Tree Oil has increased nearly 6 fold, from about 18 tonnes in 1986 to about 100 tonnes in 1993. During that time, selling prices have doubled reflecting the strong demand for the oil."

In relation to prices the report stated:

"The strong demand and limited supply has maintained prices over the year with oil generally being traded around A$65-A$75 per Kg in Australia, and US$50 - US$55 for export, with smaller quantities selling for up to A$90 per Kg. The $US export price has been maintained despite a considerable drop in the $A (5%-10%) during 1993, and this has benefited exporters and kept the export price above that obtainable in Australia.

The current gap in demand over supply should ensure that prices remain firm or increase in the foreseeable future."

The report was dated 21 February 1994.

38. The prospectus contained a page headed "Taxation and Cash flow Aspects of Years 1 and 2". It referred to a scenario called "Option A" in which for each farm the Farmer prepaid interest of $3,525 in the first year, made a principal repayment of $8,500 on or before 1 October 1994 and prepaid the second year's interest of $2,250 on or before 30 June 1994. This was said in the section dealing with taxation and cash flow aspects to yield an immediate day one tax deduction of $27,025 and a further tax deduction at 30 June 1995 of $2,250. This was said to be subject to the investors taking their own advice. Figures were set out under this heading based on a single farm with the deduction offset against the highest personal tax rate income.

39. The taxation implications were discussed in a report dated 11 February 1994 from Court & Co, Chartered Accountants. The report contained their opinion that:

"Provided that an Investor is carrying on a business by his involvement in the project, and provided Investors entering into the Loan Agreement intend their investment to run the full 15 year course, an investor should, prima facie, be entitled to deductions pursuant to sub-sec 51(1) of the ITAA for the following expenses in the year they are incurred:

i. Farm fees paid, in accordance with the Farm Agreement to the Land Owner in respect of the use of the land upon which the venture is to be undertaken;

ii. Management fees paid to the Manager in respect of the provision of initial and subsequent management services; and

iii. Interest, if any, paid to the Lender pursuant to the signing of the Loan Agreement."

The report considered the possible application of Pt IVA of the ITAA. This was by way of a general description of the application of the provision and recent litigation in relation to it.

40. Court & Co also produced an "Investigating Accountant's" report dated 11 February 1994 in relation to the No 3 Project. In that report they expressed the following opinion:

"We have also examined the arithmetical accuracy of forecasts made in this Prospectus and find them accurate. However we express no opinion on the assumptions

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underlying the forecasts detailed in the Prospectus.

Any evaluation of the assumptions underlying the forecasts must take into account the risks inherent in agricultural enterprises. Attention is directed to the Agricultural Consultant's Report which discusses aspects of these risks including water availability. As a result of these risks, the actual yields and costs may not necessarily be the same as the forecasts, and therefore I am unable to express an opinion on both the returns and the costs of the Project."

41. Mr Calder swore a supplementary affidavit in which he said that there would obviously have been a greater tax benefit had the investment in the Tea Tree oil project been in his wife's name only. In 1994 she had a large taxable capital gain of $36,113 plus other income of over $22,000 which could have been offset against the losses in the project for that year. In later years they expected her income to be about a quarter of his. When Mr Calder and his wife entered into the Project he was aware that the maximum taxation advantage for them as a couple was for her to enter into it solely in her own name. This, he said, was not done because taxation benefit was not the primary objective. They both wished to be involved in what they regarded as an industry with great promise.

42. Mrs Calder swore an affidavit to like effect. She was not cross-examined on her affidavit.

43. Graham Hayer had been employed by Main Camp Tea Tree Oil Ltd in or about 1992, working fulltime at their Rappville plantation. He began as a farm hand and in June 1992 was appointed as Civil Works Manager where he oversaw clearing, burning, laser levelling, drainage, water storage, pumping, the workshop and the building of a distillation plant and office. He stayed with the No 3 plantation until the end of 1997. He gave evidence of his training and industry background and the services which he had provided under the Management Agreement during the financial years ended 30 June 1994 and 30 June 1995. He was, during that time, Civil Works Manager for the entire Main Camp plantation, including the No 3 plantation. He confirmed that the services referred to in cls 5 and 6 of the Management Agreement were performed during that time in accordance with that agreement.

44. Graham McClymont is a consultant to various clients involved in primary production, processing and pooling businesses and has carried on business as such since 1989. He was instructed by the solicitors for Mr Calder to provide his opinion on:

1. the potential yield of Tea Tree oil at the time of the original offer to Farmers in 1994 and any supporting research;
2. the state of the Tea Tree market at the time of the original offer to Farmers in 1994 and any supporting sales contracts or materials demonstrating prices achieved at the time;
3. the manner in which the plantation relating to Main Camp Tea Tree Oil Project No 3 had been established and operated.

He was provided with a copy of the prospectus and inspected the Project on 16 December 2003. He had discussions with the plantation manager and was given access to archive records of the Project to which he referred throughout his report.

45. In his affidavit Mr McClymont referred first to the yield projections and the statement in the Project prospectus that the Project Manager believed that an average yield of 260-300 kg per hectare was achievable from healthy trees on a well managed plantation under reasonable conditions. He noted that the report from the Centre for Agricultural Risk Management stated that the assumptions used in the Project prospectus for a yield of 260 kg per hectare for the first harvest and 300 kg per hectare in subsequent years were "achievable but at the high end of expectations". He reviewed relevant literature from the early 1990s researching Tea Tree oil yields and on the basis of that literature expressed his opinion that the yield projections in the Project prospectus were at the high end of industry expectations in 1994 but achievable with competent management and adequate water supply.

46. Mr McClymont then considered the projections about Tea Tree oil prices. He noted that the Project prospectus stated that the estimated selling price in 1994 was $60.50 per kilogram and assumed that it would escalate at

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an inflation rate of 5 per cent per annum thereafter. During the year ended 30 June 1994 3,546 kilograms of oil was sold out of the Main Camp Tea Tree Oil Project No 1 at $65 per kilogram. A research paper which he cited showed that the industry price for Tea Tree oil during 1993/1994 was $56 per kilogram. In August 1995 a conference held by Australian Tea Tree Export and Marketing Ltd discussed an industry strategy to maintain the price around $60 per kilogram with premiums for differentiated oil types. Mr McClymont expressed the opinion that the stated price in the prospectus of $60.50 in 1994 was a realistic and achievable estimate especially as Main Camp was achieving the forecast price at the time. The industry was buoyant in 1994 and it was anticipated that with further breakthroughs in research and development it was likely to prosper.

47. Mr McClymont also considered the state of the Tea Tree market and expressed the view that while the current price was frustrated by oil stocks held by importers on farm and unharvested leaf, the industry was capable of growing rapidly and prospering if research and development increased and greater cooperation could be obtained from key industry participants.

48. Mr McClymont also gave evidence of his many inspections of the Main Camp plantations between August 1992 and December 2003. He said he had inspected them about 26 times over that period and last inspected the part of the plantation that related to the No 3 Project in December 2003.

49. Although all four Projects were terminated in 2003 the Main Camp property continued to be managed professionally as the largest Tea Tree oil plantation in Australia. When the Projects were in operation they covered 1,524 hectares with 505.54 hectares allocated to the No 3 Project. Each Farmer was able to identify his or her own Farm or half Farm within that area. In support of this statement Mr McClymont exhibited a copy of the Farmer's Register kept by Main Camp.

50. Mr McClymont described Main Camp's harvesting and distillation process as modern and efficient. There was a modern distillery on the property. The No 3 Project's first harvest occurred in 1997 although only 339 hectares had been harvested at that time.

51. Mr McClymont said that, based on his inspections, it was his opinion that the management of the plantations and the No 3 Project had been competent, professional and business like. Although the property was capable of producing more than it did, management had continued to recognise that it must be commercial and market driven and so had chosen to produce under capacity while the low price of Tea Tree oil was affecting profits and demand. Mr McClymont noted that approximately 85% of seedling plantings were carried out during the initial 13 months as provided for in the Management Agreement with the balance planted as weather permitted. He exhibited to his affidavit a report with various detailed annexures.

52. In a supplementary affidavit he stated that it was usually the case in similar projects that Management Fees were prepaid and a discount given for payment in advance. A substantial proportion of plantation establishment costs is usually incurred in the first year following the commencement of seedling planting. The first commercially significant harvest is usually produced in the third year and the majority of costs occurred thereafter is usually associated with the maintenance of the plantation, the harvesting of trees and the production of oil.

53. The Commissioner relied upon the evidence of Martin Paul Langridge, a partner in the firm of Deloitte Touche Tohmatsu, Chartered Accountants. He leads the Deloitte's forensic practice in Perth. In the introduction to a report exhibited to his affidavit Mr Langridge said he had been requested to analyse the income and expenditure projections in the No 3 Project prospectus and a supplementary prospectus with particular regard to the after-tax cash flow implications for Mr and Mrs Calder including:

1. Mr Calder's stated intention of obtaining an additional income stream in retirement.
2. Mr Calder's assertion that he decided the financing option represented the best use of capital.
3. Mr Calder's stated belief that the opinions and forecasts in the prospectus were

ATC 5062
corroborated by the actual progress made on the No 1 and 2 Projects.
4. The effect, if any, of Mr and Mrs Calder's decision to make a joint investment in the Project.

54. Mr Langridge criticised the calculation of Return on Investment (ROI) in the prospectus. A figure of 19.2 per cent had been calculated as the average ROI percentage for 13 years from 1997 to 2009 inclusive. However the first two years in which net projected income was negative $2,775 and zero respectively were ignored in the calculation of that average. Had those two years been taken into account the average ROI would have been 15.9 per cent. The calculation of ROI itself was conceptually flawed. The actual calculation made for each year was the net income divided by the initial cash outlay of $23,700. That initial outlay did not represent the initial cost of an investment but rather prepaid fees. This was evident from the nature of the payment and further supported by the various arguments put forward in the prospectus that the payment gave rise to a loss in the year in which it was made. The only part of the outlay that appeared to be in the nature of an investment, that is to say capital, was the amount of $200 paid for seeds. Even they had no apparent ongoing terminal value to the Investor as an asset.

55. Mr Langridge said that the presentation of a simple average of returns which included an inflationary element was completely invalid because those returns were not expressed in constant dollars. The inclusion of inflationary increases at 5 per cent per annum had the effect of increasing "the average return" from 9.7 per cent to 19.2 per cent excluding the error resulting from the omission to take into account the 1995 and 1996 figures in the calculation. If that error were also taken into account the average return would be calculated as 7.6 per cent. He said:

"In a circumstance where there is an initial cash outlay followed by a cash flow stream over a defined period, the appropriate investment appraisal methodology is the calculation of an internal rate of return (IRR). This method takes account of the fact that a portion of the cash receipts over the life of the Project simply represent a recoupment of the initial cash outlay. IRR also takes account of the time value of money where a dollar today has a greater value than a dollar in the future as a result of general price inflation."

56. Mr Langridge did his own calculation of the IRR, amending the financial projections as follows:

1. by inclusion of cash outflow for 1994;

2. by inclusion of cash outflow for 2010 (income tax on 2009 income);

3. by removal of the 5 per cent inflationary increases incorporated in the prospectus models for product prices and therefore revenue and also project expenses.

The IRR results for each of the options canvassed in the prospectus were as follows:

Option	IRR Before Tax	IRR After Tax at 48.4%
No loan option	1.39%	1.32%
Option 1	NA	NA
Option 2	NA	NA

He observed that in relation to Option 1 projections showed the net cash flow after interest but before tax on the Investor was negative $10,356. That is, on a before tax basis, the Investor would not even recoup in full from the Project the initial 1994 and 1995 payments. For that reason there was no applicable IRR under Option 1 for the Project. The after tax cash flow was negative $5,440. Again, the Investor could not recoup in full the initial investment. In similar vein for Option 2, the projections showed that the net cash flow after interest but before tax to the Investor was negative $14,475. That was equal to the Investor's initial 1994 and 1995 payments as under that option the Project never generated sufficient cash flow to provide any distribution to the Investor. There was therefore no applicable IRR under Option 2 for the Project. The after tax cash flow was negative $6,483. Again the Investor would not recoup in full the initial investment.

57. Mr Langridge then calculated an IRR making allowance for an inflationary factor of 5

ATC 5063

per cent. The result for each option on that calculation was as follows:

Option	IRR Before Tax	IRR After Tax at 48.4%
No loan option	9.27%	9.19%
Option 1	8.59%	19.48%
Option 2	8.91%	33.36%

He observed that on a before tax basis the IRR of the Project ranged from 8.59 per cent to 9.27 per cent depending upon whether the loan option was taken. Ten year Treasury Bonds during the month of July 1994 were paying an interest rate before tax (risk free) of between 8.56 per cent and 9.97 per cent. Mr Langridge pointed out that Mr and Mrs Calder could have invested in Ten Year Treasury Bonds to obtain a similar return with significantly less risk than that of the Project. The Project only showed a return significantly in excess of the risk free rate where the loan options were taken and the investment measured on an after tax basis. He said:

"This highlights that the Project relies upon the tax deductibility and effect of the initial payments and the gearing provided by the loan, to show any acceptable rate of return."

58. Mr Langridge accepted "as intuitively correct" Mr Calder's assertion that the financing options set out in the Loan Agreement in the prospectus represented the best use of his capital. Mr Langridge said that the Tables contained in the prospectus indicated the same rate of return of investment of 19.2 per cent in all cases. However Option 1 required a much lower cash commitment from the Investor before tax.

59. In relation to Mr Calder's reliance upon the expert report in the prospectus Mr Langridge observed that the price used in the financial projections started at $60.50 per kg for 1994 and rose by 5 per cent per annum as a result of assumed annual inflation. Although the initial price was supported by data presented in the Southpac report, the report did not set out future price expectations in any detail. There was only a general statement to the effect that there was excess demand and that this would support the current price. Mr Langridge described this as basic economic theory. He went on to say:

"However when taken with the details of the existing size of the market, the only reasonable conclusion that could, in my view, be drawn would be that prices were more likely than not to come under downward pressure in the future as supply increased significantly and exceeded identified demand."

60. In relation to Mr Calder's joint investment in the Project, Mr Langridge accepted that overall tax liability would have been minimised by Mrs Calder investing in the Project in her own name. From an initial tax liability perspective only, the joint investment was preferable to an investment by Mr Calder but not as tax effect as an investment by Mrs Calder only. He pointed out, however, that there were other considerations in addition to the tax effect in the initial year. A joint investment would have the result that taxable income generated by the Project in later years would be split between Mr and Mrs Calder. Whether such a split would result in more or less tax in the future was dependent upon the Calders' other income in each year and therefore their individual effective tax rates.

61. In cross-examination Mr Langridge said he did not review "in enormous detail" the material annexed to Mr McClymont's affidavit dealing with expert views as to future markets for Tea Tree oil. Nor did he consider the other material annexed to that affidavit. He said he was not required to give an expert opinion in terms of overall price and yield. That was outside his expertise. As to projected price increases for Tea Tree oil from 1994 onwards, he agreed that his evidence on that point was that, based simply on the material in the prospectus, it was possible that at some time in the future supply might equal demand or exceed it. Equally it was possible, based on material in the prospectus, that in the 15 year life of the Project the supply might fall uncomfortably short of demand. He agreed that his experience as an accountant did not extend to forecasting commodity prices but said it did extend to an understanding of the economics of supply, demand and pricing in a general sense.

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The reasons for judgment of the learned primary judge

62. After reviewing the factual background, the relevant agreements and identifying the statutory framework, the learned primary judge observed that Pt IVA of the ITAA can only apply to disallow deductions otherwise allowable. However the Commissioner did not concede that the deductions claimed by Mr Calder were allowable. The essence of the Commissioner's submission to his Honour was that the expenses were not incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. He submitted this was the case because the purpose of the expenditure was to obtain a tax advantage. The Commissioner contended that although the amounts incurred as expenses were, on their face, applied in payment of Project expenses they were, in reality, directed to obtaining a tax benefit and not for the purpose of actually funding the Project.

63. Mr Calder came to the hearing on the assumption that the Commissioner was not challenging the proposition that the amounts in question were all allowable deductions. This was founded on the fact that the Commissioner was out of time for amending the assessments so as to disallow the claimed expenses under s 51(1) and had not previously done so. Mr Calder pointed out that if the Commissioner were correct in his preliminary submission and the expenses were not allowable deductions, there was no scope for the application of Pt IVA on which the bulk of the Commissioner's case was based.

64. The learned primary judge found that from the nature of each of the payments the prima facie position arose that they were allowable deductions. He was not satisfied that position had been rebutted by the Commissioner's submissions. He therefore proceeded on the basis that the amounts paid were allowable.

65. His Honour then considered the application of Pt IVA of the ITAA to the claimed deductions. He discussed the proper approach to the application of s 177D. It was common ground that the making and implementation of the prospectus, the Principal Agreement, the Farm Agreement, the Management Agreement, the Loan Agreement and the Investment Deed constituted a scheme within the meaning of s 177A(1) of the ITAA. The Commissioner had formulated alternative schemes in terms set out by his Honour. Mr Calder conceded that it was possible to frame those alternative schemes but denied that he could be said to have obtained tax benefits in connection with either of them in the relevant years. His Honour said that he would consider the alternative schemes should it prove necessary to do so.

66. It was agreed that in the years ended 30 June 1994 and 30 June 1995 Mr Calder obtained, in connection with the scheme, tax benefits within the meaning of s 177C(1) and s 177D(a) the amounts of $13,512 and $2,513 respectively. The Commissioner posited an alternative tax benefit under each of the alternative schemes. That was the difference between the respective amounts claimed by him as deductions for the years ended 30 June 1994 and 30 June 1995 and his share of the amount of the payments the Calders were required to make to the Project. For 1994 this would have been $11,750 and for 1995 negative $2,862, leaving a net benefit of $8,888. Mr Calder contended that this alternative had not been supported by the Commissioner. His submissions being unanswered in terms, his Honour held that the submissions on the alternative tax benefit should only be considered should the Commissioner's contentions on the scheme not succeed.

67. His Honour then reviewed the eight factors to which he was required to have regard by s 177D(b) in determining whether Mr Calder had entered into the scheme for the purpose of obtaining a tax benefit in connection with it. His Honour's findings in respect of each of those enumerated factors are as follows:

(i) The manner in which the scheme was entered into or carried out

68. Under this heading his Honour had regard to Mr Calder's personal circumstances, the joint character of the investment, the payments he made, the contents of the prospectus, the pooling of the trees in the Project, the structure of the investment, the passivity of the investment and the use of round robin arrangements. In respect of these

ATC 5065

arrangements his Honour made the following findings:

(a) Mr Calder's personal circumstances
Mr Calder was a retiree who had recently acquired funds from the sale of an asset and sought to increase and diversify his portfolio to provide an additional retirement income stream. He had some knowledge and interest in Tea Tree oil and carefully considered the commercial merit of the project and the actual progress on the Main Camp Projects Nos 1 and 2. These circumstances were held to "… favour a commercial purpose in the investment".
(b) The joint character of the investment
His Honour agreed with the submission of the Commissioner that it was not material that Mr Calder and his wife made their investment jointly when a greater tax benefit would have been available to his wife alone. His Honour regarded this matter as neutral.
(c) Payments by Mr Calder
Mr Calder made payments to the Project totalling about $1,862 in June 1994 well before the lodgement of his return. His voluntary levy payments of $250 in January 2001 and $250 in April 2001 were said to evidence an intention to obtain an additional retirement income stream. His Honour said (at [57]):

"These factors favour a finding, not relevant here, that the applicant had a subjective purpose of seeking commercial returns. They do not objectively support that the applicant did not enter the scheme for the purpose of obtaining a tax benefit in connection with it as his dominant purpose. These factors are therefore neutral."
(d) Contents of the prospectus
Mr Calder submitted that the prospectus did not over emphasise the tax effectiveness of the Project. It emphasised the commercial aspects of the Project above any other aspects. His Honour took the view that the prospectus could not be said to have been giving any over-emphasis to tax and that its contents were a neutral factor.
(e) Pooling
Mr Calder submitted that pooling his oil with that of other Investors was a sensible business arrangement and referred to Commissioner of Taxation v Cooke (2004) 55 ATR 183 His Honour noted that on a reading of the Agreements contained in the prospectus the scheme did not offer Mr Calder the option to farm alone. His Honour held that given the reasoning in Cooke and Commissioner of Taxation v Sleight (2004) 136 FCR 211, he did not consider that the fact of pooling alone could support an objective finding of a tax benefit purpose. It was equally explicable as a business arrangement. The factor of pooling was therefore neutral.
(f) Structure of the investment
The Commissioner submitted that the Project might have had an overall commercial outcome but the features by which the Project was structured to secure tax benefits were crucial to the application of Pt IVA. Those features were the obligation under the Farm Agreement to prepay farm fees for each of the years 1 and 2 of the Project, the provision for an election to prepay management fees and the terms of the Loan Agreement which provided for the borrowing of the whole of the farm fees and management fees in respect of the years 1 and 2. The Commissioner also referred to the prepaid interest in each year and the obligation to make a principal repayment of $8,500 on 1 October 1994. The Commissioner submitted that the prepayment of the farm fees and management fees had no purpose except to enable Project participants to obtain tax deductions.

His Honour found that the scheme was so structured as to significantly self-fund the financial obligation of Mr Calder to the Project. He regarded it as of significance that the scheme provided an immediate tax deduction and later deductions sufficient to generate tax savings which would cover the cash required from Mr Calder without risk to his own funds. His Honour accepted the Commissioner's submission that the manner in which the scheme was structured favoured an objective conclusion that Mr Calder as a taxpayer had entered into it for

ATC 5066
the purpose of enabling him to obtain a tax benefit. The structure therefore supported a finding of a tax benefit purpose.
(g) Passivity of investment
The Commissioner submitted that the entry into and carrying out of the scheme required limited activity by its participants over the first 13 months of the Project. And after the first 13 months the Project was to be carried out without further disturbance to the participants. It was submitted by the Commissioner that Mr Calder did nothing more than was required of him.

His Honour found (at [86]):

"The fact that the scheme only required limited activity from the applicant over the first 13 months is in my view a neutral factor, as is the absence of the maintenance of records by him. These matters are as consistent with the applicant having a commercial purpose to be effected by the Manager as having a purpose of acquiring tax benefits."

It may be noted that this finding is said on behalf of Mr Calder, to be inconsistent with a finding recorded in [96] of the judgment. Reference to that finding will be made later in these reasons.
(h) Round robin arrangements
The Commissioner contended that the project was carried out without the benefit of funds in the amount of the deductible farm fees and management fees. Advances to be made in respect of those amounts were never made with actual cash, but by "round robin type transactions effected by accounting entries in the books and bank statements of the promoter companies". His Honour found that it was clear that Mr Calder was unaware of the round robin transactions. He noted however that, as was said by Hill J in Sleight at [77], round robins can be a feature of many tax avoidance schemes and point to a purpose of that character. Hill J had also accepted that it could not be said that round robins strongly point to such a purpose. The learned primary judge found (at [91]):

"Here the presence of the round robin arrangement does not decisively point to a tax benefit purpose but does not support a conclusion of a commercial purpose. It supports only a conclusion that it mildly supports a tax benefit purpose."

(ii) The Form and Substance of the Scheme

69. .Under this heading his Honour found an indication of a tax benefit purpose. It is convenient to set out his conclusion (at [96]):

"Unlike the position in Sleight, the applicant did not have the option to farm alone. The Loan Agreement was optional. Nevertheless, it can be said of the present scheme (as it was said by the Full Court in Sleight of the scheme there in issue) that the form was one designed to increase the taxation deductions available to an investor. On the other hand, the substance was one in which the applicant as the investor was a passive investor. It can be said here as it was said in Sleight at [82] that the particular shape the investment took was fashioned in a way that would maximise the tax deductions. They were geared up by the Loan Agreement with up-front payments and the loan allowing the prepayment of the management fee and the deduction which emanated from that. The loan was to be repaid out of the investor's profit share on the limited recourse basis of 50 per cent so that the substance was that the investor was to receive only a lesser share of profit over the term of the Loan Agreement. "But for" the tax deductions, the form the investment might be expected to take would relate more to the substance of what happened. This points to a tax benefit purpose."

(iii) The Time and Length of the Scheme

70. His Honour found under this heading that Mr Calder had sold his interest in his yacht in March 1994. He had received money from the sale probably in April 1994. He had looked for investments in May and June 1994 and in June 1994 had purchased shares in six public companies. He invested in the Project because he wanted a higher risk venture. He received a receipt on 18 June 1994 evidencing the payment of money to enter the scheme. The round robins occurred on 30 June 1994. His Honour considered that the time of entry into the scheme in these circumstances marginally favoured a tax benefit purpose.

71.

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As to the length of the scheme it was not one which started and finished in the year of income once a deduction had been availed of. It contemplated activity over 15 years before the Management Agreements terminated and the farms reverted to the Land Owner. His Honour considered that this feature marginally supported a commercial purpose in entering into the scheme.

(iv) The result in relation to the Act that, apart from Part IVA would be achieved by the scheme

72. The parties were in agreement that, but for Pt IVA, the result of the scheme was that the applicant obtained a deduction of $13,512 in the 1994 year and a deduction of $2,513 in the 1995 year. These deductions related to the farm fees, management fees and interest paid in connection with the Project. His Honour found (at [104]):

"The applicant's claimed deductions of $16 025 exceeded the requirements of his personal cash, namely $7238. This points to taxation as a dominant purpose."

(v) Change in the financial position of the taxpayer from the scheme

73. The submissions put to his Honour under this heading focussed upon the evidence of Mr Langridge and Mr McClymont no doubt having regard to the objective character of the imputed purpose to be ascertained under s 177D. His Honour held it was apparent that Mr Calder was subjectively influenced by the forecasts of return on investment in the prospectus. The Commissioner on the other hand, contended that he should have seen the lack of commerciality in the investment through analysis of the scheme. He should have seen that the commercial opportunities did not exist or were vastly overstated because of errors in calculation, the role of tax savings in the projections and wrong assumptions concerning future price and inflation. His Honour observed, however, that even if Mr Calder had appreciated the errors in calculation that did not have the result that he could be said only to have reasonably expected tax benefits from the scheme. Mr Langridge's evidence had supported the view that there would still have been a return of between 7.6 per cent and 8.91 per cent. His Honour also agreed with Mr Calder's submission that at the time he made his investment it could not reasonably have been expected that he would have discounted entirely the possibility of any price increase and that the rate of 5 per cent was a reasonable expectation in the circumstances. His Honour said (at [122]):

"Were it relevant, these factors would support a finding that the subjective purpose of the applicant lay in the pursuit of commercial gain in the course of carrying on a business."

74. As to the other factor relied upon by the Commissioner which was the role of tax savings in the projections, his Honour said (at [123]):

"… Mr Langridge's evidence was that the Project relied upon the tax deductibility and effect of the initial payments and the gearing up provided by the loan to show any rate of return. In those circumstances it cannot be objectively found that the dominant purpose of the applicant's entry into the scheme was to enable the applicant to make a commercial investment: the tax benefit was the key to the commerciality of the investment."

75. His Honour considered that at the time of Mr Calder's entry into the scheme the objective fact was that the dominant purpose of such entry was to obtain the tax benefit. Without that benefit the commerciality of the scheme would have been very substantially endangered.

(vi) Change in the financial position of any person with any connection to the taxpayer from the scheme

76. His Honour considered this factor to be neutral.

(vii) and (viii) Any other consequence for the taxpayer or person referred to in subparagraph (vi) and the nature of any connection between the taxpayer and any person referred to in subparagraph (vi)

77. His Honour again found these factors to be neutral.

78. In the last paragraph of his Honour's judgment under the heading "CONCLUSION ON THE APPLICATION OF PART IVA" he said (at [132])

"I have weighed each of the above factors individually and cumulatively. In my view the manner in which the scheme was entered into and structured, the presence of round

ATC 5068
robin arrangements, the nature of its form in contrast with its substance, the timing of the entry into the scheme, the result in relation to the Act apart from Pt IVA, the change in the financial position of the applicant and the character of what he may reasonably now have been expected to have in mind at the time of entry, are all consistent with the applicant objectively being seen to have a dominant purpose of obtaining a tax benefit. Accordingly I consider the application by way of 'appeal' should be dismissed."

Grounds of appeal

79. The grounds of appeal challenged his Honour's conclusions about dominant purpose largely by reference to his evaluative judgments. It is not necessary to set the grounds out here at length as they are particularised in some detail. It will suffice to deal with them seriatim in the reasons that follow. It is important, however, to bear in mind that the ultimate judgment as to purpose under s 177D is holistic, albeit it requires that regard be paid to each of the eight factors listed in s 177D(b). Indeed it can be expressed as a global or overall judgment provided that it is apparent that those factors have been considered.

80. Challenges to such global conclusions by reference to the failure to give adequate weight to one factor or another or by reference to allegedly excessive weight attributed to one factor or another are unlikely to succeed. A judgment will generally reflect an awareness of and immersion in the detail of the case that it is difficult to replicate in an appeal court. Without detracting from the function and responsibilities of the appeal court, that necessarily introduces a practical restraint into its judgment on such matters.

Statutory framework

81. The relevant provisions of the Income Tax Assessment Act 1936 (Cth) applicable in this case are those comprised in Pt IVA. They are as follows:

" 177A(1) In this Part, unless the contrary intention appears:

…

'scheme' means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, cause of action or course of conduct;

…"

The meaning of "purpose", which appears in s 177D(b) below, is elaborated in s 177A(5) thus:

"A reference in this Part to a scheme or part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose."

82. The idea of a "tax benefit" is elaborated in s 177C:

" 177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

…

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;

…

and for the purposes of this Part, the amount of the tax benefit shall be taken to be:

…

(d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph;

…"

83. The purpose to be identified and the factors to be taken into account in that identification in order to attract the application of Pt IVA are set out in s 177D:

"This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after

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that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -

(a) a taxpayer (in this section referred to as the ' relevant taxpayer ') has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b) having regard to:

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)."

84. The power of the Commissioner to cancel a tax benefit obtained in connection with a scheme to which Pt IVA applies is set out in s 177F:

"(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may:

…

(b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income;"

The role of the appellate court

85. The appellate function of the Court has been considered in a number of cases and recently by the Full Court in
Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd (2005) 220 ALR 211. The Full Court there reviewed a number of cases relating to its appellate function and referred to
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 in which there was also a substantial review of authorities. It is not necessary here to revisit those reviews. Poulet Frais and the cases it cited are clear authority for the proposition that where primary facts have been found and are not in dispute and where the judgment under challenge involves matters of evaluation or characterisation, a degree of appellate caution is required before reversing the trial judge's findings. This is so even though those findings are not dependent upon credibility - Poulet Frais at [37]. An appeal by way of rehearing is not

ATC 5070

simply a rehearing of or a second go at trial. It does not answer Ambrose Bierce's definition of an appeal in his Devil's Dictionary as "a second throw of the dice".

86. In Poulet Frais the Court was concerned with an appeal against a finding of misleading or deceptive conduct. In that context it said (at [46]):

"Where the determination of whether particular conduct was misleading or deceptive is not straight forward but rather involves elements of degree, opinion or judgment, a simple preference in the appellate court for a view different from that taken by the trial judge may not carry with it the conclusion of error. The appeal court might conclude either that there could not be said to be only one possible correct determination or that the trial judge had a particular advantage, not share by the appellate court, in assessing critical matters of nuance and judgment. In such a case, in determining whether or not the trial judge fell into appealable error, the appeal court should not proceed as though on a hearing de novo in which the views of the trial judge carry no weight. Rather the appeal court must give appropriate weight to the views of the trial judge and set aside his or her finding only if persuaded that the finding is wrong. However, if an appellate court is persuaded that particular conduct, found by the trial judge to be misleading or deceptive, was not in fact misleading or deceptive, it thereby identifies error in the decision of the primary judge. Similarly where an appellate court is persuaded that conduct which the trial judge did not consider misleading or deceptive is in fact misleading or deceptive."

87. The preceding statement can be generalised to any judgment which involves elements of evaluation or characterisation on undisputed primary facts. In such a case the Court must give appropriate weight to the views of the trial judge and set aside his or her finding only if persuaded that the finding is wrong.

Principles governing the application of Part IVA

88. Part IVA of the ITA confers upon the Commissioner, by operation of s 177F, a discretion to cancel a tax benefit obtained by a taxpayer in connection with a scheme to which Pt IVA applies.

89. The exercise of that discretion does not depend upon whether the scheme, which the Commissioner identifies, is the correct scheme. It is possible for the Commissioner to rely, in appeal proceedings, upon one scheme and, in the alternative, another which is a subset of the transactions or arrangements covered by the first -
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382. In the present case the Commissioner has identified a scheme and it is not in dispute that the scheme so identified is one capable of attracting the application of Pt IVA if the requirements of s 177D are satisfied with respect to it. As noted earlier, the Commissioner did formulate, before the learned primary judge, some alternative or fall back schemes which were propounded on the basis of the transactions and arrangements comprising the Project. Given his Honour's conclusions it was not necessary to address those alternative schemes and they did not figure in the arguments put to this Court.

90. It was not in issue on this appeal that the deductions claimed by Mr Calder constituted a tax benefit which he obtained in connection with the scheme propounded by the Commissioner. The necessary condition for the application of Pt IVA, which is set out in s 177D(a), was satisfied. The appeal therefore turned entirely upon the finding of the learned primary judge that, having regard to the eight factors listed in s 177D(b), it would be concluded that Mr Calder entered into the scheme for the purpose of obtaining a tax benefit. This requires consideration of the principles governing the application of s 177D(b) of the ITAA.

91. The question posed by s 177D(b) was formulated in
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 422 thus:

"…whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme."

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Hill J said in
Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 at 543 (Ryan and Cooper JJ agreeing) that it is necessary to have regard to each of the matters referred to in s 177D(b). This does not mean that each must point to the necessary purpose. Some may point one way, others another way:

"It is the evaluation of these matters alone, or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers."

All eight must be considered -
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 per Gummow and Hayne JJ at 244 [70]. But as Callinan J said of the eight factors, in the same case (at 261 [92]):

"It is not necessary of course that every one of them be relevant to every scheme. Indeed the presence or overwhelming weight of one factor alone may of itself in an appropriate case be of such significance as to expose a relevant dominant purpose."

The reference in s 177A(5) to a "dominant purpose" in its ordinary meaning is a reference to that which was the ruling or most influential purpose - Spotless at 416. The list of factors in s 177D are exhaustive of the considerations relevant to the question of dominant purpose - Peabody at 542, applied by Sackville J in
CC (NSW) Pty Ltd (In Liq) v Commissioner of Taxation (Cth) (1997) ATC 4123 at 4147 and adopted with apparent approval by Carr J in
Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at 45 (Sundberg J agreeing).

92. There is no necessary opposition between a commercial purpose and the purpose of obtaining a tax benefit. As was said in Spotless (at 415):

"A person may enter into or carry out a scheme, within the meaning of Part IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business."

Putting it another way, a particular course of action undertaken by a taxpayer may be tax driven and also reflect a rational commercial decision. The presence of the latter does not determine whether the person has the dominant purpose of obtaining a tax benefit - Spotless at 416.

93. In Hart Gleeson CJ and McHugh J said (at 227 [15]):

"… the fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D. Taxation is part of the cost of doing business and business transactions are normally influenced by cost considerations. Furthermore, even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction."

Their Honours also pointed out (at 227 [16]):

"… a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective."

The mere fact that a taxpayer pays less tax by entering into one form of transaction rather than another does not show that Pt IVA applies. Nor does the fact that a taxpayer has obtained a tax benefit (at 240 per Gummow and Hayne JJ).

94. Section 177C(1)(b) defines a tax benefit by reference, inter alia, to a deduction being allowable to the taxpayer where the whole or a part of it would not have been allowable if the scheme had not been carried out. In Hart, Gummow and Hayne JJ said, at 243, that when s 177C(1)(b) is read with s 177D(b):

"… it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed."

95. Section 177D mandates consideration of an objective purpose. That is to say the purpose which could be inferred by "a reasonable person". One of the reasons for requiring consideration of objective criteria under s 177D in ascertaining purpose:

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"… was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer."

This does not prevent attribution to the taxpayer of the purpose of a professional adviser -
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at 264.

96. The subjective state of mind of a taxpayer or, in the case of a company, the company's directors is irrelevant - Eastern Nitrogen at 45. In Hart, Gummow and Hayne JJ said of s 177D(b) (at 243 [65]):

"That provision requires the drawing of a conclusion about purpose from the eight identified objective matters; it does not require, even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it."

It does not follow from the irrelevance of the subjective state of mind of the taxpayer that objective factors, tending to indicate that a particular purpose was subjectively held by a person, may not also be relevant to the determination of the objective purpose which could be inferred by a reasonable person.

Ground 1.1 - Relevance of joint taxpayer and spouse investment in assessing dominant purpose

97. It appeared from the evidence given by the Commissioner's expert, Mr Langridge, that had Mr and Mrs Calder wanted to maximise the tax benefit from their investment in the Project then all funds should have been invested in the name of Mrs Calder. Counsel for Mr Calder argued that the trial judge erred in failing to treat that matter as an objective factor strongly negating the dominant purpose of obtaining a tax benefit.

98. The joint character of the investment was examined by his Honour in connection with his consideration of the manner in which the scheme was entered into or carried out. He accepted the Commissioner's argument that just because Mr and Mrs Calder did not structure their investment to maximise their tax benefits did not mean that Mr Calder lacked a dominant purpose, viewed objectively of obtaining a tax benefit.

99. The real question was whether the joint character of the investment could be weighed in the balance as a matter tending against a dominant tax benefit purpose. It is no doubt possible in any given case to imagine schemes or structures or ways of doing things which might have given rise to greater tax benefits than those actually secured. Such imaginings have little bearing on the question whether in the case at hand it could have been concluded that the dominant purpose of entering into a scheme was to secure a tax benefit. His Honour's treatment of the question was correct as a matter of principle. His judgment on the facts of the particular case does not disclose error.

Ground 1.2 - Taxpayer's personal circumstances and attitudes to the investment

100. It was submitted for Mr Calder that the learned primary judge had failed to give proper weight to the undisputed fact that he and his wife and family had used Tea Tree oil medicinally since the 1970s, that they had displayed considerable interest in a knowledge of its medicinal qualities and had used it medicinally and had recommended it to others. These facts, viewed objectively, did not merely "favour a commercial purpose". It was said that these facts, viewed objectively, strongly supported the conclusion that the primary purpose of the investment was not to achieve a tax benefit but to have a stake in an industry and a product which had long been of particular personal interest to the Calders and in which Mr Calder believed on reasonable grounds had the potential to produce substantial returns.

101. His Honour, in dealing with Mr Calder's personal circumstances, did so as part of his consideration of the manner in which the scheme was entered into or carried out.

102. Counsel for Mr Calder submitted that his Honour should have held that these circumstances did not merely "favour a commercial purpose" but strongly supported a conclusion that the dominant purpose of the appellant was not to achieve a tax benefit.

103. His Honour's finding on this matter was in favour of Mr Calder. The weight to be attributed to these circumstances was a matter for his Honour. No error adverse to Mr Calder was disclosed. If anything there is room for

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argument in relation to his Honour's consideration of these matters that they would seem primarily to bear upon Mr Calder's subjective purpose in entering into the transaction. However that matter was not debated.

Ground 1.3 - Factors relevant to subjective purpose not irrelevant to objective purpose

104. It was submitted for Mr Calder that the evidence showed that he had paid $1,887.50 to the Project in June 1994, lodged his tax return after 30 June 1994 and by a notice of assessment issued on 2 September 1994 received a refund of $3,873.17. He then paid a further $4,250 on 27 September 1994 as a principal repayment under the Loan Agreement and $1,125 on 8 June 1995 for prepaid interest. Mr Calder and his wife also paid a further $500 as a voluntary levy to fund harvests on the property although those payments were not required under the Project Agreements.

105. The learned primary judge is said to have erred in treating as irrelevant to a determination of Mr Calder's purpose his lack of reliance on a tax refund to invest in the Project. The tax refund of $3,873.17 from his 1994 deductions was less than his initial cash payments of $1,887.50 in June 1994 and $4,250 in September 1994 and voluntary harvest payments made. His Honour found that these considerations favoured a finding that Mr Calder had a subjective purpose of seeking commercial returns. He rightly treated that subjective purpose as irrelevant. However he went on to say of those underlying considerations (at [57]):

"They do not objectively support that the applicant did not enter the scheme for the purpose of obtaining a tax benefit in connection with it as his dominant purpose. These factors are therefore neutral."

The mere fact that evidence might support a finding of a subjective purpose of seeking commercial returns does not mean that such evidence may not also be relied upon in ascertaining what a reasonable person might have concluded about Mr Calder's purpose in investing in the Project.

106. The timing and quantity of payments made by an Investor and the relationship between those payments and tax refunds may be matters of objective fact which could be taken into account in assessing dominant purpose. They are made relevant to that consideration by the broad terms of the criterion in s 177D(b)(i).

107. It should be noted however that his Honour did not find these matters incapable of supporting an objective inference. He found that they did not objectively support such an inference. The fact that they might support an inference that Mr Calder was seeking commercial returns does not, on the authorities previously discussed, exclude the possibility that they would be neutral in relation to the question whether there was a dominant purpose of seeking a tax benefit.

Ground 1.4 - the effect of the prospectus

108. In ground 1.4 it was alleged that his Honour erred in holding that the contents of the prospectus were a "neutral factor" in ascertaining purpose under s 177D(b). It was submitted in support of the challenge to his Honour's finding that the prospectus placed significant emphasis on the commercial aspects of the Project. It gave substantial agricultural and commercial information which included income projections, an agricultural consultant's report and a marketing consultant's report. The promoters of the scheme were required by law to include information as to the tax benefits available by way of allowable deductions under the ITAA. A report detailing the tax implications of the Project and an Investigating Accountant's report meeting those reporting requirements were therefore included in the prospectus.

109. In coming to the conclusion that he did about the prospectus, it is said that the learned primary judge relied on the approach of Hill J in Sleight. It was pointed out that in Cooke where the prospectus had addressed and highlighted the taxation advantages of participation in the project the Court made a finding of a dominant commercial purpose and rejected the contention that references in the prospectus to the tax deductibility of the investment meant that the dominant purpose was a tax benefit.

110. In answer, the Commissioner submitted that the argument advanced on behalf of Mr Calder amounted to the following:

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(a) the Project prospectus did not over emphasise tax;
(b) the Project prospectus in Cooke did over emphasise tax;
(c) Part IVA was held not to apply in Cooke;
(d) accordingly, the primary judge ought to have followed Cooke to find the contents of the prospectus to be a neutral factor.

It was submitted that had his Honour applied such reasoning he would have failed in the task of determining the question of purpose on the particular facts of the case before him.

111. There is no doubt that the emphasis in the prospectus on the commercial aspects of the Project would support an inference that, viewed objectively, a person investing in the Project in response to the prospectus would be doing so for a commercial purpose. But as has already been noted, a commercial purpose may be entirely consistent with the existence of a dominant purpose of securing a tax benefit. The latter not being indicated from the prospectus, it would seem that it was, in that sense, that his Honour regarded the prospectus as neutral. He cannot be said to have erred in that conclusion.

Ground 1.4A - significance of round robin transactions

112. The grounds of appeal were amended by leave at the hearing to allow the inclusion of a new ground 1.4A, reflected in the written submissions which had been filed before the hearing. Under this ground it was submitted that his Honour erred in holding that the round robin transaction, of which Mr Calder was unaware, supported a conclusion that it "mildly supports a tax benefit purpose". It was said his Honour should have held this to be a neutral factor simply because the taxpayer was unaware of and not a party to that part of the transaction. It was argued that in Cooke's case the taxpayer was also unaware of alleged round robin transactions and that it was rightly accepted by the learned primary judge that such transactions could not be part of any "scheme" to which the taxpayer was a party.

113. It is important to bear in mind that in considering the round robin transaction his Honour was considering, having regard to the manner in which the scheme was entered into or carried out (alone or in combination with other factors mentioned in s 177D) it would be concluded that the taxpayer entered the scheme for the purpose of obtaining a tax benefit in connection with it. The subjective purpose of the taxpayer and, indeed, the taxpayer's awareness of the relevant provisions of the law, his fiscal awareness, are not material to determining the question of purpose. The issue that arises is whether the way in which the entities associated with the promoters of the scheme deal with their funds may be relevant to determining the taxpayer's purpose.

114. The broad formulation of the factors in s 177D(b) particularly (i) and (ii) clearly encompasses matters of which a taxpayer may be quite unaware. So a taxpayer may execute the relevant application form and agreements without reading them. That does not mean that the taxpayer is taken to be unaware of them and that the contents of the agreements are to be disregarded in assessing purpose under s 177D. It would be open to a taxpayer to make inquiry as to how the funds which the taxpayer is contributing will be dealt with as between, for example, lender and manager. That is an inquiry which the taxpayer would be entitled to make having regard to the liability that he or she has assumed to pay the manager's fees. The absence of such inquiry and lack of awareness of the way in which the funds were actually processed does not mean that those factors are to be disregarded in the objective assessment of purpose under s 177D any more than the unread details of the contracts which constitute the framework of the scheme.

115. The ground of appeal in this case turned entirely upon Mr Calder's ignorance of the round robin arrangement that was said to exist between Lender and Manager. That lack of awareness being irrelevant to his Honour's proper consideration of this aspect of the execution of the scheme, this ground must fail.

Ground 1.4B - the form of the investment as indicative of a tax benefit purpose

116. It was submitted in support of this ground that Mr Calder had appointed a Manager to manage his Project Farm by signing a Management Agreement. He understood that such appointment would offer benefits such as economies of scale, modernised farming activities and continuous market research and development. The Project was actually established, operated and managed in a

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professional, commercial and businesslike manner and in accordance with the Agreements. So much was indicated by the evidence of Mr McClymont and Mr Hayer. There was no contention by the Commissioner that the arrangements were a sham or that the fees incurred under the Project Agreements were excessive or inflated or that the required work was not fully carried out. In the submissions on behalf of Mr Calder comparisons were drawn with Cooke's case where, like Mr Calder, the taxpayer's only involvement in the project was to contribute the required funds. The Court in Cooke concluded that the taxpayer's dominant purpose was to obtain a commercial return and not to obtain a tax benefit. The learned primary judge found the form of the investment was designed to increase the taxation deductions available to an Investor, that Mr Calder was a passive Investor and that this pointed to a tax benefit purpose. Counsel for Mr Calder made the point that the learned primary judge had earlier found in [86] that the passivity aspect was a neutral factor. He submitted that the learned primary judge should have found (as the Court had done in Cooke) that the fact that Mr Calder prepaid his fees using predominantly borrowed funds, sought to maximise his commercial return through the appointment of a manager and was a passive investor who did not physically take part in the project, did not point to him as having a dominant tax purpose.

117. The finding of the learned primary judge which is impugned under this ground was related to a consideration of the form and substance of the scheme, the factor mentioned in s 177D(b)(ii). His Honour found that the form of the scheme was one designed to increase taxation deductions available to an investor. It could be said, as was said in Sleight, that the particular shape the investment took was fashioned in a way that would maximise tax deductions. His Honour referred to the gearing up by the Loan Agreement with upfront payments and prepayment of the management fee giving rise to a deduction. He referred to the limited recourse basis upon which the loan was to be repaid. It is true that his Honour described a substance of the scheme as "… one in which the applicant as the Investor was a passive investor". But the factors to which he referred as pointing to a tax benefit purpose were directed to the form of the scheme and the features of it recited by his Honour in [96]. It was plainly open to his Honour to come to the conclusion that those features pointed to a tax benefit purpose. There is no error in coming to the conclusion with which this Court would interfere.

118. It is true that in [86] his Honour said that the fact that the scheme only required limited activity from the applicant over the first 13 months was a neutral factor. This was in the context of his Honour's consideration of the manner in which the scheme was entered into or carried out. In [96] his Honour was looking to the form and substance of the scheme. The passivity of the investment does not appear to have played any significant role in the logic, related to the "particular shape the investment took" which led him to the conclusion of an indication of a tax benefit purpose. Ground 1.4B fails.

Ground 1.5 - the timing of the investment

119. His Honour had regard to the time and length of the scheme as required by s 177B(b)(iii). In that process he said at [101]:

"The applicant sold his interest in his yacht in March 1994. His evidence was at trial was that he received the money from the sale probably in April 1994. (sic) In May and June 1994 he looked for investments. In June 1994 he purchased shares in six public companies. He invested in Main Camp because he wanted a high risk venture. On 18 June 1994 he received a receipt evidencing that he had paid money to enter the scheme. The round robins occurred on 30 June 1994. I consider that the time of entry into the scheme in these circumstances marginally favours a tax benefit purpose."

120. It was submitted for Mr Calder that the learned primary judge should have found, based on the facts which were undisputed, that there was clearly no flurry of activity on the last day of June 1994, that the appellant had entered into the project well before the end of June 1994 at the same time as he made other (non tax effective) investments. These facts, it was said, would support a finding that the time of the investment in the Project was a neutral factor and did not support a conclusion that the purpose was to achieve a tax benefit even "marginally". There is no doubt that the

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investment was proximate to the end of the financial year. The fact that the appellant may have purchased shares in other companies in the same month does not exclude the possibility that the timing of investment in this scheme was related to a tax benefit purpose. It was open to his Honour to draw the conclusion that he did. No error is shown under ground 1.5.

Ground 1.6 - the relationship between the claimed deductions and "the requirements of his personal cash".

121. As was said in Hart, simply borrowing to invest does not of itself point to a tax purpose and simply to show that a taxpayer has obtained a tax benefit does not show that Pt IVA applies. It was submitted that the learned primary judge should have found that the fact that Mr Calder's claimed deductions exceeded the requirement of his personal cash, due to the use of borrowings, was not a factor pointing to a dominant tax purpose as in Cooke, where the taxpayers borrowed a far higher percentage of their total invested funds. The Commissioner submitted in answer however, that this is not a case in which Mr Calder simply borrowed to invest and that so much appeared from his Honour's reasoning. In considering the relationship between the deduction claimed and the cash outlaid his Honour had regard to s 177D(b)(iv) namely the result in relation to the operation of the ITAA that, but for Pt IVA would be achieved by the scheme. He noted under that heading that both Mr Calder and the Commissioner were in agreement that but for Pt IVA, the result of the scheme was that he obtained deductions totalling $16,025 in the 1994 and 1995 years. His finding that that exceeded the requirements of the cash outlaid over that period was indisputable. His Honour was entitled to draw the conclusion that the multiplier effect of the scheme as between cash outlay and claimed deduction was indicative of a tax benefit purpose. His reasoning simply states his conclusion, but his conclusion was plainly open and no error is shown.

Grounds 1.7, 2 and 3

122. These three grounds collapse into the one complaint about his Honour's treatment of the evidence of the Commissioner's expert witness Mr Langridge. In the relevant part of his reasons for judgment the learned primary judge discussed the change in the financial position of the taxpayer from the scheme, the factor set out in s 177D(b)(v). His Honour had noted the contentions advanced against Mr Calder that he should have seen the commercial opportunities of the scheme did not exist or were vastly over-stated because of errors in calculation, the role of tax savings in the projections and wrong assumptions concerning future prices and inflation. As to the role of tax savings in the projections, his Honour said (at [123]):

"However … Mr Langridge's evidence was that the Project relied upon the tax deductibility and effect of the initial payments and the gearing up provided by the loan to show any rate of return. In those circumstances it cannot be objectively found that the dominant purpose of the applicant's entry into the scheme was to enable the applicant to make a commercial investment: the tax benefit was the key to the commerciality of the investment."

On the strength of that finding his Honour went on to say, at [124], that it was an objective fact that the dominant purpose of entry into the scheme was to obtain a tax benefit for without that benefit the commerciality would have been "very substantially endangered".

123. In his expert report, Mr Langridge had in fact said:

"The Project only shows a return significantly in excess of this risk free rate where the loan options are taken and the investment is measured on an after tax basis. This highlights that the Project relies upon the tax deductibility and effect of the initial payments and the gearing provided by the loan, to show any acceptable rate of return."

124. In [123] the words used by his Honour indicated that he was picking up the actual words used by Mr Langridge in his report. The omission of the word "acceptable" is most likely to have been simply a slip. But even if it were not, the difference between a finding that, absent tax deductibility and other features, the project would not show any acceptable rate of return and a finding that absent those matters the project would fail to show any rate of return is not a difference that would have been material to his Honour's conclusion. The short answer to this cluster of grounds of appeal is that

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his Honour has made a finding which he was plainly entitled to make on the strength of Mr Langridge's evidence and that to the extent there was a misquotation, it was not a material misquotation. The grounds of appeal 1.7, 2 and 3 must therefore fail.

Conclusion

125. For the preceding reasons, the appeal will be dismissed with costs.

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