-
The impact of this case on ATO policy is discussed in Decision Impact Statement: Brown v Commissioner of Taxation (QT 2003/413 QT 2005/318).
BROWN v FC of T
Members:PE Hack DP
Tribunal:
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
[2006] AATA 1107
PE Hack SC (Deputy President)
Introduction
1. Mr Rodney Edwin Brown, the applicant in these proceedings, says that in the income year ended 30 June 2002 he was a member of a partnership, the Yamba Partnership, which incurred a trading loss of $105,000.00. The applicant says that the respondent, the Commissioner of Taxation, was wrong to deny deductibility to his share of the partnership loss, an amount of $90,000.00. And, says the applicant, the respondent was wrong to impose, or not remit further, an administrative penalty equivalent to 10% of the tax shortfall. Finally, the applicant, in an alternative case articulated for the first time in his closing submissions, says that if, as the respondent contends, he was not a member of the Yamba partnership, then he ought be permitted to argue that he incurred the loss in his own right.
2. The respondent's objection decision in relation to the deductibility of the $90,000.00 share of the claimed partnership loss is the subject matter of the application in proceedings QT2003/413. The objection decision in relation to the penalty is the subject matter of the application in the other proceeding before me, QT2005/318[1]
Earlier litigation
3. The matters that fall to be determined in the present proceedings have already been considered by the Federal Court, as least in passing. In
Corporate Business Centres International Pty Ltd v Commissioner of Taxation[2]
4. Then in
Lamont v Commissioner of Taxation[3]
5. It may be necessary to examine his Honour's conclusions in more detail shortly however for present purposes his Honour's description of the arrangements contemplated provide a factual background for the present arrangements.
6. The arrangements were described in this way:[4]
- "27 Briefly, therefore, it can be said that it is contemplated that there is a partnership of which the applicant is a member which carries on a business. The activities which the partnership proposed to engage in and says that it did engage in, in years already passed, involves the following steps. First, an agreement is entered into between a barrister, solicitor or accountant ("the advisor") and an entity called Pre-Paid Professionals ("the promoter") whereby, in consideration of the payment of a sum of money or the agreement to pay that sum, the advisor agrees to provide professional services up to a stipulated number of hours or days to the promoter or such person as the promoter or person nominated by the promoter should direct. The services normally have to be performed within the space of 13 months. Longer periods may be
ATC 2575
nominated. The document recording this agreement is referred to as a warrant. A nomination is to be made upon "endorsement" of the warrant. The partnership then enters into an agreement with the promoter to purchase from the promoter the right to direct the advisor to perform services. The partnership is committed to purchasing a given number of warrants from the promoter in each year. Purchase of these warrants does not entail payment upon acquisition. It seems that the promoter is prepared to accept part payment of the purchase price (called a "deposit") with the balance payable thereafter. The part payment is 17.5 per cent for the years covered now by the ruling, ie the years 2003 to 2005 inclusive. The balance is payable (or so the Commissioner said in the ruling), when the service is in fact redeemed by performance or earlier if the warrant is not endorsed by the expiration of the time within which the services have to be performed. I say "so the Commissioner said" as there was a suggestion by Queen's Counsel for the applicant that what is said by the Commissioner is incorrect. Originally, the promoter agreed to purchase back the "warrants" at a discount but that agreement was subsequently withdrawn, with the consequence that all warrants to which the ruling related, not endorsed by the end of the 13 month period (assuming the warrants related to that period), would expire and have no value to the partnership. The partnership then seeks purchasers for the warrants, that is to say, persons with a need for the legal or accounting services in question. That purchaser might pay cash, or assign or mortgage the whole or part of the proceeds of litigation the purchaser is engaged in or transfer other property such as units in a unit trust to the partnership. The warrants are then endorsed in favour of the end purchaser. In other words, the end purchaser becomes the person entitled, by direction of the promoter and the partnership, to the services of the advisor. The purchaser would have no claim against the promoter that the promoter actually perform the contracted services.- 28 The partnership was to be administered by CBCI. It was required to pay to CBCI an administration fee of 17.5 per cent of the value of all of the service warrants which the partnership is committed to purchasing from the promoter for the following year and other amounts. The basis of remuneration of the promoter is set out in the Commissioner's summary given earlier and need not be here repeated.
- 29 The partnership administration was to be conducted in common with other similar partnerships although it was possible for the partnerships to terminate the arrangements with CBCI and administer their own affairs separately. Initially at least, there were no separate bank accounts maintained by each partnership but separate journal entries and other accounting records were to be kept by CBCI. It is said that all warrants acquired by the partnership (and presumably other similar partnerships) in the first year of income had been endorsed to a "fighting fund client" who is said to have required the legal services acquired for a legal campaign. This endorsement occurred in the first year of income in respect of which the present proceedings relate."
7. It is important, in the present context, to note that his Honour's determination proceeded upon the basis that the facts stated in the ruling request were correct. That included the fact that the partnership of which Mr Lamont was a partner in fact carried on a particular business for, as his Honour said[5]
"Of course, should it turn out that the facts were incorrect, the applicant for the ruling will get no protection from the ruling."
That is important here because the Commissioner puts in issue whether there was a partnership and whether the applicant was a member of it. It is also in issue whether the partnership was carrying on business.
8. Another qualification that should be noted was that his Honour's decision proceeded without regard to the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 ( ITAA 1936 ) because no determination had been made in reliance upon those provisions at the time that his Honour considered the matter. The respondent made a determination pursuant to s 177 F(1)(b) of ITAA 1936 in respect of the applicant on 2 October 2003.
9.
ATC 2576
One final qualification that need be noted is in relation to the question of trading stock. In his reasons[6]The issues
10. It seems convenient to commence by stating the issues. And it is convenient to do so by reference to the formulation of them in the parties' statements of Facts, Issues and Contentions lodged in the Tribunal in accordance with the General Practice Direction. That of the applicant was Exhibit 1 in the proceedings; the respondent's was Exhibit 2.
11. By reference to these documents I would formulate the issues in this way:
- (1) was there a partnership of which the applicant was a member,
- (2) did the applicant pay the funds which he says were his contribution to the partnership,
- (3) did that partnership (or the applicant) carry on business,
- (4) did the warrants amount to trading stock,
- (5) it the warrants did not constitute trading stock did the partnership incur a loss or outgoing i.e. was the expense incurred in acquiring non-wasting revenue assets,
- (6) do ss 82 KZME and 82 KZMF operate to deny deductibility,
- (7) does Div. 35 of the Income Tax Assessment Act 1997 operate to deny deductibility,
- (8) does Part IVA operate to deny deductibility,
- (9) should an administrative penalty have been imposed at all, or at the level imposed.
The applicant's case
The key participants
12. It may assist if I start by introducing the entities and people connected to the case.
13. The applicant's case is that he was a member of a partnership, the Yamba partnership. Mr Lipman is said to have been a partner in the Yamba partnership. Mr Ray Lamari is also said to have been a partner in the Yamba partnership as some stages.
14. Pre-Paid Professionals LLC is a company which is said to be incorporated in the United States. It is "the promoter" - the term used by Hill J in describing the arrangements in Lamont. On the material before me it is open to doubt whether it had been incorporated at the time of any of the events in question here. Some of the material described PPP as a division of The Corporate Group ( TCG ) and, in final submissions, counsel for the applicant made reference to TCG as the "legal entity operating the PPP business". I propose to use the description PPP to describe the entity involved in the matter.
15. A Mr John McCarthy appears to have been the controlling mind of PPP. Mr McCarthy was not called despite the applicant's solicitors having earlier indicated an intention to do so. Among other roles that he may have played in the events in issue here Mr McCarthy set up, at least in cyberspace, Jacques Nobel, a "virtual" accountancy firm and Bernstein Wise, a "virtual" law firm. Mr Kenneth West was employed by PPP "in order to assist them in the establishment of their business in the Asia-Pacific region.
16. Mr Ian Daley was a director of Smaji Management Pty Ltd. At all relevant times that company held a major franchise for the Income Tax Professionals, a tax agent business catering, according to Mr Daley, "for lower socio-economic taxpayers." Mr Daley was involved in the affairs of PPP, in part as a speaker at seminars for members of the public promoting PPP's "business model" and, as well, as a potential provider of accountancy services by means of warrants. In the former role Mr Daley was in reality a salesman of the arrangements promoted by PPP.
17. Mr Tony Anamourlis is a solicitor. At the time of these events he was a member of the firm Parkland Rhodes. That firm, according to Mr Anamourlis had agreements with PPP to be a service provider although no services were apparently ever provided under the warrant scheme. Mr Brian McGrath, a consultant at the time with Hardings Solicitors, had a similar role as did his firm. Hardings was never called upon to provide services under any warrants.
18. The evidence of Mr Anamourlis and Mr McGrath was that in about July 2002 Mr West told them that "a state of force majeure
ATC 2577
applied" to the arrangements between PPP and the firms.19. Ms Denise Clark was the controlling mind of Corporate Business Centres International Pty Ltd ( CBCI ). Its role was as the administrator of the Yamba partnership and the other similar partnerships said to have been formed. Ms Suzanne Manning also worked at CBCI.
20. Mr John Lamont (who was the brother of the applicant in Lamont) describes himself as:
"a regional coordinator for the Asia-Pacific region of Canlon International Ltd which is a (wholesale)litigation funder."
21. Mr Nick Petroulias has legal qualifications. He was, at one time, a high-ranking employee in the respondent's office. The simplest description of his involvement in the events subject of these proceedings is that he was the legal advisor to PPP and to CBCI. He appears to have played a key role in setting up the arrangements, including the drafting of documents. It was proposed that he become a service provider.
22. There are other persons who either gave evidence or who played some role in the underlying transactions but the foregoing provides a sufficient description of the key participants. With that introduction I turn to the applicant's case.
The applicant's case
23. It must be said that the applicant's case on the partnership was somewhat fluid. In his notice of objection dated 22 July 2003 the applicant referred[8]
24. This detail is reflected and amplified by the applicant's Amended Statement of Facts, Issues and Contentions filed in the Tribunal on 28 June 2006. Paragraphs 5 and 6 of that document were in these terms:
"Mr Brown joined a partnership named as the Yamba Partnership with a fellow participant, Mr Anthony Lipman who he met at a workshop on assessing business opportunities that were conducted by Williams and Partners in Brisbane and in particular lead by Mr Bracegirdle. There were other partners that were introduced who as a result of certain adverse publication from the Respondent, withdrew their involvement in May 2002.
The partnership in fact commenced in February 2002 although the final version of the Partnership Deed was not executed until 29th June 2002 and incorrectly refers to the starting date as the date of execution. The Deed took some time to prepare as it was important to Mr Brown that the Deed adequately provided for a differential return as between the partners so as to encourage more active participation by the partners in the business. The partnership entered a business agent agreement on the 3rd of March 2002."
25. The respondent sought further and better particulars of the partnership which elicited these details, extracted from the applicant's solicitors letter dated 11 September 2006:[9]
"Mr Brown commenced as an initial partner of the Yamba partnership in November 2001.
The number and identity of the other taxpayers committed to the Yamba partnership at 31 December 2001 is set out in the second affidavit of Ms Clark.
As a result of the respondent's detrimental activity, all these taxpayers except for Mr Brown and Mr Lipman withdrew their commitment to the Yamba partnership before 30 June 2002."
26. The reference to the affidavit of Ms Clark is, presumably, intended to be a reference to a memorandum from Ms Clark of CBCI to a Louise Le Reux dated 18 December 2001.[10]
27.
ATC 2578
The applicant, in his affidavit sworn on 13 March 2006,[11]"To the best of my recollection I would pinpoint the starting point of the Yamba partnership as late November 2001 when it commenced doing business."
It is notable that the applicant gives, and gave, no detail of the things said to constitute the doing of business. This extract highlights one of many flaws in the evidence of the applicant, his tendency to swear to conclusions. I will return below to that tendency and its effect upon my views on the reliability of his evidence.
28. But what is odd about this affidavit is that it is entirely devoid of any reference to Mr Lipman, the man said, on the applicant's case, to have been his partner from November 2001 onwards.
29. The applicant was asked about Mr Lipman in cross-examination. This extract is illuminating:
"There's a document that suggests that Mr Lipman was a partner of yours? - - Yes, I remember the name, Lipman, yes.
But he wasn't partner at the end, as at 30 June 2002. Is that right? - - I don't believe so, sir."
30. Later in cross-examination the applicant did recall that Mr Lipman was his partner and it may be that, when originally pressed, he had simply forgotten. But it seems to me to be odd that when originally asked the applicant could not recall that Mr Lipman was said to have been his partner.
31. There are some documents that touch upon this question. There is a document described as "Heads of Agreement" bearing a "Date of Effect" of 21 November 2001.[12]
32. So far as I can ascertain Mr Lipman's name appears first in the documents before me in a document described as "The Deed for Yamba Partnership".[13]
"In my capacity as attorney and agent from [sic] the Yamba Partners, I signed the final version of the Partnership Deed on the 29th of June 2002. To the extent necessary, Mr Brown has seen the Partnership Deed and has ratified it."
I propose to ignore the last sentence which is, in part, unintelligible and, as to the balance, asserts a conclusion of law from facts not stated.
33. The next thing that calls for remark is that the Deed records that is was made on 29 June 2002. Recital A to the Deed is in these terms:
"The parties to this Deed ("Partners") mutually agree to become active partners in the conduct of the business of acquiring and marketing wealth creation and financial and taxation services, systems, concepts and strategies to the public, and the business of designing wealth enhancing business models for the public using technological systems."
Clause 1.1 provided:
"The Partnership shall be deemed to commence on the date specified in Item 1 of Schedule 1 and shall continue until determined in the manner hereinafter provided."
The date specified in Item 1 of Schedule 1 was 29 June 2002.
34. Ms Clark valiantly attempted to overcome this obvious difficulty by describing the drafting of the Deed as "somewhat clumsy". She continued:
"Whilst the drafting may be unclear, what is meant to be said is that the 29th of June is the "date the deed" was entered into (or more precisely the date from which the new provisions found in the Deed were to govern the relationship between the partners). There was no reference to the date of commencement in the schedule and it is not
ATC 2579
supposed to be saying anything about the date of the commencement at al [sic].As a matter of fact, a partnership heads of agreement was signed in early November 2001 and was originally formalized by the Heads of Agreement signed by Mr Brown on the 21st of November 2001."
35. It may first be observed that the statement in the last paragraph of the extract is at odds with the account of the applicant both as to the existence of an earlier version of the heads of agreement and the date of signing of the document in evidence described as Heads of Agreement.
36. But beyond that it is not open to Ms Clark to seek to controvert the terms of what she says was the document executed by the parties. It remains the law that the parties to an agreement are bound by its terms unless able to rely on a defence of non est factum or able to have it rectified.[15]
37. Perhaps recognizing this difficulty Mr Sofronoff QC, who led Mr Robertson for the applicant, put the applicant's case in his closing submissions as one where the partnership commenced on 29 June 2002.
38. But, ultimately, I am unable to accept that there was a partnership. The applicant's evidence, and the evidence of the witnesses relied upon by him, leaves me unpersuaded.
39. I should start by observing that the applicant struck me as an intelligent person. He was, according to his affidavit, an engineer although he appears to pursue other occupations at present. Despite this apparent intelligence the applicant demonstrated time and time again an unwillingness to answer directly, perfectly straightforward questions put to him in cross-examination. He seemed, if I may say so, to prefer to articulate what he perceived to be the strong points of his case.
40. At a quite early stage of cross-examination Mr McGovern SC, who led Mr Connor for the respondent, asked questions of the applicant regarding the seminar where he was first introduced to the transactions that became the subject matter of these proceedings. He was then asked:
"Did you see any ads for the seminar or the workshop before attending."
The question was simple and I did not consider at the time that it was asked in a way that might have confused the applicant. His answer[16]
"I was in conversation with, I think, a number of people before actually attending, but during the process of the actual presentation itself, and that was one of the reasons why fundamentally I thought the business was quite strong, in the fact that they demonstrated web-sites …"
He was cut-off at that juncture by an objection.
41. No part of the applicant's answer was responsive to the question and, in the second part of the answer, the applicant appeared to be anxious to convey a message he thought important to his case.
42. This instance was early on in the applicant's evidence and I accept that frequently witnesses may be nervous when initially giving evidence. But the pattern of avoiding answering the question and, in many instances, articulating his case, continued. Another example will suffice. In the course of the second day of cross-examination the applicant was taken by Mr McGovern to a document that spoke of "forecasts" in the context of the sale of warrants. He was then asked:[17]
"Now, were you given a document of forecasts in relation to any prospective demands for warrants?"
He answered:
"Absolutely. Not so much a document, sir, but I was completely confident, through CBCI's efforts of marketing, my ability, and Ian Daley's pre-order, I think, from memory, it was 30,000 …"
43. There were innumerable similar instances throughout the lengthy cross-examination of the applicant.
44. But there are a number of other reasons to be sceptical about the reliability and truthfulness of the applicant's evidence. Before examining them I should record, in a general way, the account of events given by the applicant in his affidavit.[18]
45. In October 2001 he attended a weekend workshop conducted by a Mr Bracegridle. On the afternoon of the second day the workshop
ATC 2580
was addressed by Mr Ian Daley. Mr Daley was promoting the merits of:"… various opportunities that arise in the legal services industry and in particular, what he regarded as the revolutionary aspect of the prepaid services model.[19]
Exhibit 4, par 6. "
The "model" was, according to the applicant, the PPP model and he read the PPP business plan that Mr Daley made available. PPP was Pre-Paid Professionals, described in the business plan[20]
46. Subsequent documents that are in evidence, including the Heads of Agreement signed by the applicant on 21 November 2001 and a Service Provider Engagement Agreement said to have been executed by PPP,[21]
47. In any event the applicant was apparently impressed with Mr Daley's presentation of the PPP model on the occasion of the workshop. He even purports to have a precise recollection of Mr Daley saying:[22]
- • "Pre-Paid Legal's Inc which has reported huge success amongst ordinary individuals such as truck drivers and administrative workers who have developed substantial business by running this business model"
- • "The key is volume and volume is best achieved from ordinary people understanding a well priced service."
According to the applicant:[23]
"At the end of the workshop I informed Mr Daley that "I considered the business model reasonably attractive and subject to a due diligence and further consideration, I have committed myself to $50,000 to be used as working capital for the new business."
There is some incongruity with the notion of the applicant committing himself, but subject to further consideration.
48. During the workshop, mention was made by Mr Daley that CBCI could be appointed the administrator for the business. The applicant says that he found this most attractive. He said:[24]
"I understood and it was explained to me that, to put in Mr Daley's words, 'the administrator will bear all the salaries of staff, of consultants, of travel and promotion and will only get paid if they make you the money.' I accepted that this was appropriate but I replied 'so long as that does not compromise my responsibility for strategy and risk to all other equity participants.'"
49. Seemingly to give effect to this appointment Article 6 of the Heads of Agreement signed by the applicant[25]
"The partners agree to appoint Corporate Business Centres International Pty Ltd to be their agent and attorney to undertake all secretarial, administrative and co-ordination activity for the partnership at the direction and control of the partners who are at all times expected to declare their instructions to the administrator."
There is, as well, a document[26]
- "(1) review potential partnership opportunities and admit me to a partnership that may be suitable to me;
- (2) Pay the capital establishment costs of $500;
- (3) Acquire the $50,000 of service warrants;
- (4) execute the standard administration agreement; business agent agreement; terms and conditions of engagement with clients and such other documents necessary and convenient."
Various declarations were made by the client over the signature panel at the foot of the page including a somewhat self-serving one that recorded that:
"The sole purpose of my application herein is in order to become part of a business for commercial profit."
50. The first reference I can locate that deals with the precise terms of the relationship between CBCI and the Yamba Partnership is a document described as Administration
ATC 2581
Agreement.[27]51. The applicant, who says that by 2002 he regarded himself as being in a partnership, described that in this way:[28]
"In my case at least, during 2002, the wishes of the partners were expressed at partnership meetings and by regular communications with Mr Nick Petroulias in relations to legal matters and Ms Suzanne Manning in relation to all administrative issues. Denise Clark was also available in relation to less routine administrative issues that needed following up. My personal position was that I considered myself as partner and not merely a titular one. I was there to protect not only my interests but those of all the partners and to ensure that correct strategic decisions were made on behalf of all partners at all times."
52. Following the "very productive workshop presentations", the applicant says:[29]
"…a number of people who became the Yamba partnership had by Christmas 2001, committed themselves to what Mr Daley described as the "critical mass of $15 million worth of orders". That he said meant that our risk was limited to only 15% of the face value of the warrants. I myself had committed a $50,000 cash contribution. Mr Daley offered that ITP would also guarantee the acquisition of a significant number of warrants."
53. In the early part of 2002 the applicant raised with Mr Daley the notion of obtaining a product ruling from the respondent. Mr Daley, according to the applicant, was dismissive but, says the applicant, he can recall justifying it by saying to Mr Daley something like:[30]
"because I don't want any trouble with the ATO and like to have peace of mind to properly get the return on my commitment to the business".
54. In early February 2002 the applicant says that he became aware of the potential for the Yamba partnership being able to deliver legal services at more affordable prices to assist in promoting litigation on behalf of a Mr Daniel Culhaci.
55. It is next relevant to note that on 10 April 2002 the respondent issued a Taxpayer Alert cautioning against involvement in "end of financial year 'service warrant' schemes which promise large tax deductions for small investors."[31]
"Subsequent to that press release, only myself and Mr Lamari continued to meet regularly in relation to the business."
56. It is now necessary to move to early May 2002 when, according to the applicant, he attended a meeting at the offices of CBCI to hear a presentation in relation to potential litigation on behalf of Mr Steve Hart. Mr Petroulias outlined the case and recommended the involvement of Canlon International Limited, a company described as a "wholesale litigation funder". The applicant says that he was aware of that company having previously met Mr John Lamont from Canlon.
57. According to the applicant Mr Petroulias said:
They are prepared to acquire six warrants for six days of my time in scoping the project. You happy about that?
The applicant says that he responded:
"It's a good strategic sale that will give us a good background as to how to proceed with this case."
Nothing ultimately came of this transaction and the applicant was advised by Mr Petroulias to "suspend the sale" because of difficulties that it was said would be caused by the respondent to any persons assisting Mr Steve Hart. The applicant does not give a date when this suspension occurred however Mr Petroulias says that it was on 30 May 2002 that he telephoned Mr Lamont to encourage him to cancel the warrants. But it is of some interest to examine the documents said to have been
ATC 2582
created to reflect the proposed transaction involving six days of Mr Petroulias' time.58. There is before me a letter[33]
"Thank you for your order of 6 warrants numbered AUDXB50001-AUDXB50006 which are attached.
Please present these warrants to Pre-Paid Professionals LLC as outlined on their website www.pre-paid.pro.com
…
These warrants are provided subject to the Client Service Agreement below. Please sign and return this agreement to confirm that you have understood the terms.
CLIENT SERVICE AGREEMENT
In consideration of the payment of the sum specified in the Schedule as the Advance Fee paid to us on the date set out in the Schedule, we undertake to provide you with the services set out in the Schedule if required by you at any time up to and including the termination date specified in the Schedule."
The document before me bears what appears to be the signature of Ms Clark on behalf of the Yamba Partnership and of Mr Lamont on behalf of Canlon. The document was put in evidence through the affidavit of Mr Lamont who described it in this way:[34]
"… a true copy of warrants issued to Canlon and the standard terms and conditions under which these warrants were endorsed to us, which I had received by email."
The Schedule to the document refers to a date of agreement of 12 May 2002, an advance fee of $5,000.00 and services to be provided of 6 days opinion as to prospects of a tax related case.
59. I appreciate that the applicant's case is that nothing came of this transaction however if the document is to be believed there ought to have been a payment of $5,000.00 made by Canlon to the Yamba Partnership. The document purports to record that a fee of $5,000.00 was paid on 12 May 2002 and, presumably, paid by Canlon to the Yamba Partnership. Yet nothing was in fact paid. Mr Lamont said:[35]
"The advice was never given so there was no payment of any money."
Moreover, it would seem, this transaction appears never to have been recorded in the accounts of the Yamba Partnership. There is no equivalent to the "PPP Irrevocable Order Form"[36]
60. To this point in the chronology, the documents[37]
"… was telephoned by Mr Daley as to whether I was prepared to put up the difference resulting from the number of partners of the Yamba Partnership that had pulled out. Mr Daley told me that he had renegotiated the arrangement with PPP that allowed me to outlay less cash so as to permit more time for the business to recover. He said:
'PPP would accept payment as follows:
- a) 12.5% deposit by 30 June 2002
- b) 50% ie a further 38.5% by 31 December 2002
- c) Balance before 30 June 2003'"
It was, according to the applicant, at this time that he decided to "commit $90,000.00" on the basis of a deposit of 12.5%.
61. Thus, according to the applicant, on 28 June 2002, the Yamba Partnership, at his direction, ordered $105,000.00 worth of warrants. It is not clear what role, if any, Mr Lipman, as the other member of the claimed Yamba Partnership, played in this decision.
62. In support of his assertion that the Yamba Partnership acquired $105,000.00 worth of warrants the applicant relies upon a document described as an Irrevocable Order Form.[40]
ATC 2583
June 2002 to Pre-Paid Professionals LLC for 120 General Commercial and/or Taxation Administration warrants in the amount of $105,000.00. At the foot of the document appears the signature of Mr McCarthy accepting the order on behalf on PPP. Of course, on the case that the applicant now advances, the Yamba Partnership was not in existence on the date this order was placed, and it appeared to be accepted[41]63. I should also add that, on the applicant's case, he was, all the while, involving himself in the business of the Yamba Partnership. This appeared to involve attending meetings. The applicant spoke, in his affidavit,[42]
- "43 The format of the meetings was generally to have a teleconference where all common details were presented. That format allowed all partners from different partnerships to ask questions that were common to all of us. We usually broke for a period in order for individual partnerships to have their own little meetings before recombining again and expressing our instructions.
- 44 I found this format a little difficult because I wasn't keen on other people knowing our business. Nevertheless, as I could and often did, attend the offices of CBCI personally, I could let my views be known with Ms Manning, Ms Clark and Mr Petroulias personally."
64. I should, in this context, make mention of the running minute book. The genesis of the document was explained in this way by Ms Clark:[43]
- "21 It was Mr Petroulias that had insisted in early March 2002 on a scheduled meeting format where all the partners from different partnerships established for similar purposes to the Yamba partnership could attend to deal with common problems. I recall that Mr Petroulias said:
'I am being asked the same questions time and time again it is driving me mad. There are certain common issues that are similar to all the partnerships. No partnership has yet the financial capability to have truly mutually exclusive issues. They will all benefit from what we have to say and they can have their own separate meetings outside the scheduled program.'
I said: 'Yes, Suzanne and Michael are finding the same difficulties. Our telemarkers [sic] are also spending time fielding the same questions for the partners about what they have been up to. I am getting complaints about reporting many times over and not getting any work done. … I agree we have to limit the time spent on answering the same questions'.
- 22 Accordingly from the meeting of the 3rd of March 2002, we had what Mr Petroulias called 'the consortium approach' to partnership meetings. That is, these meetings were to discuss common issues that affected all the partnerships. Thereafter the partners were free to discuss the issues themselves. Mr Brown attended all the partnership meetings. As he was frequently in the city in Brisbane, he found it more convenient he said to me on the 3rd of March, 'to drop in for a coffee and participate in the meetings.'
- 23 The running minute book and the subsequent meetings reflect an accurate (although rather skeletal) record of the discussion and events that occurred through the period. I understand that these minutes are part of the documents compiled by the respondent for this Honourable Tribunal and I refer to those documents."
65. The air of unreality that permeated much of the evidence on the applicant's side extended to the running minute book. It is arranged in what appears to be chronological order, that is, the first entry is dated 3 March 2002[44]
66. But it is plain that it cannot have been kept on a chronological basis and entries cannot have been made contemporaneously. The point may be illustrated by reference to the second entry, that said to record the details of a
ATC 2584
partnership meeting on 4 March 2002. That entry records, inter alia:"It was pointed out that the partnerships are particularly sensitive about the Class Ruling owing to the damage caused to the cash flow by TA 2002/5."
TA 2002/5 is a reference to the respondent's Taxpayer's Alert which was not published until 8 April 2002, more than a month after the meeting where it was supposedly discussed. There are other similar examples.
67. Mr Petroulias was the author of most of the entries in this document. His explanation for these discrepancies was entirely unconvincing. Moreover the entries made, even if genuine, could hardly be considered to be a description of the business and affairs of a partnership. Many entries seem to be related to matter that could have no connection with any "partnership" business. Many seemed to be devoted to expressing the author's unfavourable views of the respondent and his actions in this and other contexts. But, in addition, the entries are too vague and devoid of detail to be of any assistance. By way of example, the entry for 10 March 2002 appears to be in relation to a meeting attended, it is recorded, by sales agents, Mr McCarthy (from PPP) Mr Daley, Mr Petroulias and Ms Clark. It notes:
"Looked at available people
Dee to interview sales agents to be employed/engaged by P/Ships. At least one in each state suggested.
Reviewed business parks for business styled warrants and geographic spread.
Looked at concentration of industrial zones on Melbourne, Sydney and Brisbane."
68. In the result I place no reliance upon the document.
69. To return then to the applicant's account of events it is next relevant to note that following the "order" for warrants it is said that the partnership deed for the Yamba partnership was executed on 29 June 2002 by Ms Clark on behalf of the applicant and Mr Lipman.
70. A further curiosity of the case is that no executed copy of this document has been produced. But I should note that the unexecuted document that has been produced has appended to it a single sheet, signed by Ms Clark "By and for the Partnership" and described as "Minute of Amendment of Deed".
"It was agreed at the time of the signing of this Deed by and for the Partners that all provisions relating to the Decision Committee has to this date been considered to have been varied and by this minute record that it remains varied.
All references to the Decision Committee has been and should be instead read as references to the partners or, as the case may be, CBCI acting under the authority and instruction of the partnership.
Any references to the Decision committee that is not effectively varied by the amendments above has been and should be considered deleted or otherwise be considered inoperative for a period of 12 months upon which time a review of the management structure will be undertaken."
71. This document was drafted by Mr Petroulias and according to Ms Clark was signed by her at the same time as the partnership deed. The drafting is obscure but, so far as I can tell, its import seems to be that any reference in the partnership deed to the Decision Committee is to be read as a reference to the partners active either personally or through CBCI.
72. But despite this the array of documents[45]
73. In October 2002 the applicant applied for a private binding ruling. There were, he said, considerable delays in the respondent dealing with the application. He says that he took this up with Mr Petroulias saying:
"I don't understand this if they know the arrangement well enough to issue press releases and alerts, and have been considering the class ruling applications for a year, why are they delaying in responding."
Mr Petroulias' response, according to the applicant, was:
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"It's obviously deliberate. We should wait the statutory period and go to court."
But Mr Petroulias did, apparently, advise the applicant to amend his 2002 income tax return. That had originally been lodged on 13 September 2002 and in it the applicant had claimed the sum of $90,000.00 as a deduction from assessable income. An amended return, excluding the $90,000.00 deduction, was eventually lodged on 12 February 2003.
74. In the meantime, according to the applicant,[46]
"It was not possible to obtain the bulk buying discount to provide the standardized warrant packages offered by PPP. Instead 'the only means of survival' Mr Petroulias told us at the meetings of the 5th of October 2002 onwards was to give a greater relative focus on 'litigation funding cases' and try make [sic] more 'strategies alliances with other funders such as IMF.'"
75. According to the applicant he became interested, around that time, in participating in funding of litigation involving an entity that I shall describe as Telco. A Mr Culhaci (or entities associated with him) held shares in a company described as Telco. Mr Culhaci had the view that some of the directors and officers of Telco had breached their duties in a way the "resulted in the dissipation of the share value of these companies resulting in a loss of $6,000,000."[47]
76. By a series of documents bearing the date 12 December 2002:
- • Mr Culhaci and a company associated with him assigned to Canlon as trustee their causes of action in consideration of the issue to then of six million units in the Corporate Fraud Recovery Trust;[49]
Exhibit 6, #72. - • the Yamba partnership endorsed to Canlon as trustee the 120 warrants numbered AUDXB603412 to AUDXB603532 in consideration "of the issue of $105,000 ordinary units … by [Canlon to the Yamba partnership]";[50]
Exhibit 6, #73. - • the Yamba partnership applied to Canlon for 105,000 units in the Corporate Fraud Recovery Trust;[51]
Exhibit 6, #74.
77. Next there is a document described as "Unit Transfer" dated 13 December 2002 whereby the Yamba partnership transferred to Pre-Paid Professionals LLC, "in consideration of satisfying the liability outstanding to the sum of $91,875."[52]
- "1. In satisfaction of the outstanding liability of $91,875 owing by it to PPP, the partnership as beneficial owner assigns to the assignee absolutely all of its right, title and interest in 91,875 units in the fighting fund.
- 2. A condition precedent to this arrangement is that the Partnership will be successful in achieving the taxation position advocated by it either by having it accepted by the Australian Taxation Office or otherwise achieving a court judgement to the effect."
78. The reference in clause 1 to the assignee is presumably intended to be a reference to PPP. The relevance of clause 2 is not clear to me. Nor is it clear to me how the absolute assignment in clause 1 apparently given effect to by a transfer two days earlier, can be reconciled with the apparently unsatisfied condition precedent in clause 2. It does not, in the end result, matter however it highlights once again the unreality of much of the applicant's case and an apparent belief on the part of those responsible for drafting the documents that appearance is more important than substance.
The applicant's reliability
79. Having set out, albeit briefly, the essence of the applicant's evidence I turn to the question of whether that evidence ought be accepted.
80. I have already remarked upon the applicant's frequent habit of avoiding answering questions and, instead, volunteering information that he perceived to be helpful to his cause. But, in addition, and as appears from the extracts above the applicant swore to the precise words (not words to the effect of) of
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conversations. It defies belief that he could possibly remember the conversations recounted in the detail that he pretends to have. During the course of cross-examination he was taken to the entries in the running minute book for 7 April 2002. He believed that he had been personally present at that meeting but when pressed for details of his recollection of what had been discussed at the meeting he said:[54]"Just general consensus about what we were talking about. It's very hard to remember detail. I find it difficult that you expect me to remember such explicit detail after four - such a long period of time."
And later:
"I have recollection of considerable meetings and considerable discussions, but when you ask me for specific words or comment about a word, I cannot give you an answer to that, sir."
81. It was understandable that the applicant could not recall explicit detail or specific words and it would be wrong to criticise him for that. But, in his affidavit he purports to do precisely that, that is, to recall explicit detail of events and specific words of lengthy conversations. Indeed his entire affidavit is remarkable for the detail of the applicant's recollections of conversations in stark contrast to his oral evidence.
82. The applicant's credibility was also affected by his evidence regarding the payment of $13,150.00.
83. It will be recalled that particulars were sought of the applicant's case prior to the hearing. As part of those particulars[55]
84. He was asked about this payment in cross-examination and confirmed on oath that payment of an initial deposit of "13 odd thousand dollars" had been made in cash to Mr Bracegirdle in November 2001. That sum, he agreed, represented 12.5% of the amount that he was going to be paying and that the sum had been withdrawn, in cash, from one of his bank accounts. And he had every confidence that he had, and would be able to produce, bank records that would confirm payment of $13,150.00 in November 2001.
85. No bank records were ever produced. What was produced, when the applicant was recalled on the seventh day of the hearing, was a photocopy of a receipt[56]
"Sir, it's some stage between the November time frame sir and June 30 that next year."
86. I have very great difficulty with this evidence. At best for the applicant it would show that he is prepared to swear to matters of which he has neither record nor recall. At worst he is fabricating his evidence. Mr Sofronoff QC accepts that this evidence is relevant to the applicant's credit and that is undoubtedly so. But he says, in effect, it ought not be concluded that the applicant lied on oath because the fact of this payment had not been put in issue at trial. The submission continued:
"There is a world of difference between asking a taxpayer to prove an allegation of fact and asserting positively that the taxpayer's proffered proof should not be accepted even though there is no contrary evidence adduced. The Respondent made this grave accusation first at trial, so that the Applicant did not have a chance to address it fully before hand. Seeking particulars of the date of payment cannot be dressed up as a proper notice of an allegation that the taxpayer is not to be believed on his oath. If anything, it suggests the contrary."
87. I am unable to accept the submission. The applicant, through his solicitors, had provided particulars of the month of payment. They were not put in equivocal terms nor was it suggested that they were being provided as the applicant's best recollection. It might be thought that the applicant might, at that time, have searched for the document that he later
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produced. It was open to him to say, in response to the request for particulars, that he had no recollection of when the payment was made. And it was open to him, when questioned about the matter in the witness box, to profess uncertainty. But he chose instead to give unequivocal evidence that is inconsistent with later evidence he has given.88. I am also unable to accept the notion that "no contrary evidence [was] adduced". The applicant's later evidence was contrary to his earlier evidence.
89. But even if I were to accept that the applicant was merely confused in his particulars and in his first evidence about the date of payment the notion that, in reality, he paid $13,125.00 in cash to Mr Bracegirdle in May 2002 does not sit well with the balance of his case. $13,125.00 represents 12.5% of $105,000.00. On the applicant's case the notion of a deposit of 12.5% was first raised in a telephone conversation with Mr Daley "on or about the 20th of June 2002." Similarly, a figure of $105,000.00 as the total face value of warrants was first raised in the same conversation. And $105,000.00 was, on the applicant's case, the commitment of both Mr Brown and Mr Lipman. I am unable to reconcile a payment of $13,125.00 by the applicant on 2 May 2002 with the balance of the case that he presents.
90. These matters, and my generally unfavourable impression of the applicant as a witness, lead me to conclude that he was simply reckless with the truth. He took no care to ensure that what he swore to was correct and simply swore to an account of events and conversations that he regarded as being consistent with his interests. I propose to place no reliance upon what he says on critical issues unless it is supported by independent evidence.
Was there a partnership
91. In light of the way in which the applicant now puts his case, that is, that the Yamba partnership came into existence on 29 June 2002 when, it is said, the Yamba partnership deed was signed, it is not necessary of me to consider the question of an earlier formation of a partnership. There would have been very considerable factual and legal[57]
92. The first question is whether I am satisfied that the Yamba partnership deed was executed as Ms Clark says. I am not satisfied that it was.
93. I reach that conclusion for two reasons - because no executed copy was produced and because I do not accept Ms Clark as a reliable witness.
94. The existence (or otherwise) of a signed copy of the document has been an issue in the proceedings for some time. Paragraph 11 of the respondent's Statement of Facts, Issues and Contentions, filed as long ago as 28 November 2005, read:
"A deed (the 'partnership document') evidencing the terms of the partnership is said to have been executed on 29 June 2002. Neither the executed partnership document nor a copy of the executed partnership document has been provided by the applicant to the respondent."
Despite this no executed copy was produced and no evidence given that might explain the absence of an executed copy. The only evidence that it was even executed is that of Ms Clark.
95. She too, was in my view, unreliable. She had, in common with the applicant, a tendency to be reckless in her evidence. That is demonstrated by her evidence regarding the question of the payment by the applicant of $13,125.00.
96. The first account given by Ms Clark of events surrounding payment by the applicant came in a statement dated 4 October 2006, that is, on the third day of the hearing. That statement contained the following:
Just before the 28th of June 2002, I received after several attempts to obtain, a cheque from Mr Bracegirdle [to represent the 12½% deposits for both Mr Lipman and Mr Brown that Bracegirdle had collected]. These funds were duly applied for the acquisition for the order for warrants receipted for PPP in the confirmation of order, [and further acknowledged and ratified by the subsequent deeds of acknowledgment and deeds of assignment of units in December 2002].
97. I excluded the passages marked [ ] - the first on the basis that it amounted to hearsay, that is, an implied assertion of the part of Mr
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Bracegirdle, and the other on the basis that it was an assertion of law which Mr Sofronoff QC did not, in any event, wish to support. It is, of course, true that the rules of evidence do not operate in this Tribunal. Nonetheless to admit the evidence would have meant that the respondent had no opportunity to test, by cross-examination, the implied assertion on a matter that has some significance in the proceedings. Leave was granted to Mr Sofronoff QC to elicit further evidence in chief from Ms Clark. She was asked:[58]"How much was the cheque for? Do you remember?"
and responded:
"It was somewhere around about 13 or 14 thousand dollars."
The cheque, she said, "would have been banked into CBCI's cheque account."
98. In cross-examination Ms Clark was taken to the bank statements for that account.[59]
"You don't see any amount there for 13 to 14 thousand odd that you referred to yesterday? --- From Mr Bracegirdle?
Yes? --- I think it's the one on 28 June for the $9,875. I'm pretty sure that we - that's why I was hounding[60]
The transcript records, incorrectly, “handling”. Mr Bracegirdle, because we were disputing about some money that we actually owed him for some expenses and that so - and there was a discrepancy on the amount that he was wanting to give us. He wanted to retain the money that we owed him, some of it. So if I had a look here at the deposits on 28 June, I think you will probably find that the amount of the 9875 was what he retained and then gave us the cheque for."
99. Subsequently Ms Clark was recalled, having located, in New Zealand, a document[61]
100. On the way that the applicant's case is put it is not necessary for me to determine whether the applicant, through Mr Bracegirdle, paid money to CBCI and, if he did, the amount and circumstances of the payment. And it also unnecessary for me to determine whether Ms Clark's evidence of the set-off ought be accepted. But her evidence does reveal recklessness in her approach to the task of giving evidence.
101. On the most favourable view of her evidence:
- • her first written account omits reference to the set-off,
- • when asked about the amount and, importantly, whether she remembered the amount, she did not profess any difficulties in her recollection,
- • her recall of the set-off was seemingly only prompted when it was apparent that the bank statements contradicted her first account.
102. Even on this view I am left to wonder about the reliability of Ms Clark's evidence. But Ms Clark, in common with the applicant, professed precise and accurate recollections of conversations from years ago. Her account[62]
"I met Mr Rodney Brown in early November 2001. He had decided to hold their partnerships meetings for the Yamba Partnership in the CBCI offices in the Corporate Christie Centre. I attended that meeting as did Mr Petroulias. Mr Brown told me:
'I am very excited by this business model because I see many cases in the building game where this would work well. I believe that anyone thinking of doing a renovation ought to buy a service package that provided for legal assistance and specialized professionals. People in that market are so fearful that the demand would be huge. I am hoping to get out employment and am looking to get into a business full time. If this works, I will focus more of my time on it'
I said: 'Do you want us to do anything about it, now?'
He said: 'Not yet, let me find my feet first. I want to learn all there is to know about how the US model works and then tweak it here and there.'"
103. In my view it defies belief that anyone could have a perfect recollection of conversations more than four years earlier.[63]
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Clark's evidence regarding the payment by Mr Bracegirdle demonstrates that she too has a fallible memory. I would not expect otherwise, but I have grave reservations about a witness who, in effect, swears to a perfect and infallible recall of events and conversations at this remove.104. My reservations about Ms Clark's evidence together with the applicant's inability to produce an executed copy leave me well short of being satisfied that the Yamba partnership deed was ever executed.
105. That is not, of course, the end of the matter. The absence of a signed partnership agreement does not, of itself, preclude the possibility that a partnership involving Mr Lipman may have been formed, as the applicant alleges, in November 2001.
106. But one difficulty in reaching that conclusion lies in the complete absence of any reference to Mr Lipman, whether as a member of the Yamba partnership or at all, until his name was mentioned in the Yamba partnership deed. He was not said to have been a member of the Yamba partnership in the CBCI memo relied upon in the applicant's particulars and his name was not mentioned in the applicant's evidence in chief.
107. But there are further difficulties in concluding that there was ever a partnership. Partnership is of course:
"the relationship that subsists between persons carrying on a business in common with a view of profit.[64]
" Partnership Act 1891 (Qld) s 5(1).
Where, as here, there is a complete absence of evidence of any relationship between the supposed partners I find it impossible to conclude that there was, in fact, a partnership, however constituted, between the applicant and Mr Lipman.
108. In my view the applicant's case based upon the existence of a partnership must fail because I am not satisfied that the applicant ever was a member of a partnership.
The applicant's alternative case
109. Mr Sofronoff QC sought to overcome a finding of this nature by arguing, in the alternative, that the applicant, if found not to be in partnership, could advance, in effect, a "sole trader" case. I do not consider that it is open to the applicant to advance such a case having regard to s 14ZZK of the Taxation Administration Act 1953. That section limits the applicant, in these proceedings, to the grounds stated in the taxation objection. The Tribunal has power to permit departure from those grounds but I would not regard the present case as one where such a departure was warranted.
110. I take that view for two reasons - because the alternative case sought to be advanced is factually inconsistent with that advanced in the notice of objection and throughout the hearing and because the alternative case is devoid of factual merit.
111. I should expand briefly on those reasons.
112. As to the first, I note that the alternative argument was raised first in the course of the applicant's final submissions. It was open to the applicant, when opening the case, to at least raise the possibility of a finding that, as a matter of law, there might not be a partnership and putting the Tribunal and the respondent on notice of a desire to advance the alternative case. The applicant chose not to proceed in that way.
113. The second reason needs to be expanded upon in some greater detail. The argument advanced in the alternative is articulated in the applicant's closing submissions in this way:
The Applicant's case is simple. For the 2003 year of income the Applicant derived assessable income form his business activities, income gladly accepted as such by the Respondent. The Applicant's cost of deriving that assessable income was $90,000. As that was "the cost of a step taken in the process of gaining or producing income" it "must be regarded as an outgoing … whatever purpose or motive may be attended all or any of the steps involved" under s 8-1.[65]
is cited in support of this proposition. John vFederal Commissioner of Taxation 89 ATC 4101 ;(1989) 166 CLR 417
It was said that the applicant incurred the costs (of, presumably, $90,000.00) "by reason of the irrevocable commitment made in June 2002 by the applicant, being jointly and severally liable for the commitment as a member of a Yamba partnership."
114. Thus, it was said, the applicant's case was supported fully by s 8-1(1)(a) Income Tax Assessment Act 1997 and, it was also said,
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because his assessable income was from carrying on a business, s 8-1(1)(b) was also attracted.115. I accept, of course, that it is not necessary that an outgoing be disbursed in the year of income; it will be incurred if the taxpayer is definitively committed in the year of income.[66]
116. I will deal first with the claimed payment to Mr Bracegirdle. In final submissions the matter was put in this way:[68]
"Mr Brown believed that he paid Mr Bracegirdle two amounts of money in November 2001 as part of his commitment to pay $13,150, being one amount of $650 and another amount of $12,500.
Subsequently, Mr Brown discovered a receipt from Mr Bracegirdle for $13,150[69]
In fact the receipt is for $13,125. dated May 2002. Mr Kearney also gave evidence that he saw Mr Brown pay a large amount of money in cash to Mr Bracegirdle at that later time and in return Mr Bracegirdle gave Mr Brown a receipt. Mr Brown gave evidence that the total the total payment amount of his contribution to the Yamba partnership was not worked out until around the May 2002 period, so it is open to the Tribunal to find that Mr Brown paid the smaller amount of $650 in November 2001 to Mr Bracegirdle as his commitment to the Yamba partnership (then a commitment to pay cash of $12,500 in May 2002 when a significant sum was paid by him in cash to Mr Bracegirdle then receipting both amounts."
117. The difficulty I have with this submission is that it is far removed from the evidence.
118. I have already set out the evidence of the applicant[70]
119. The applicant was not all clear about the notion of "two amounts of money" as these extracts from his cross-examination demonstrate:
"And the amount that you paid, the total that you paid, the total that you paid of $13,150 was that in two separate amounts, that is to say, one amount of $12,500 and a separate amount of $650? --- I just remember the total amount of 13 odd thousand dollars as a total figure item, sir.[71]
Transcript p. 106.2. But, anyway, doing the best you can now, and reflecting upon all of that information that has become available to you, does it accord with your recollection that the moneys you paid came in two separate amounts, if you like, $12,500 and $650? --- It may have, sir, but I do recall the $13-odd thousand dollar sum.[72]
Transcript p. 108.9. "
This evidence leaves me unpersuaded that the applicant had the belief asserted in the first paragraph from the applicant's submissions extracted above.
120. I am equally unable to accept the second paragraph. What was produced by the applicant when he returned to the witness box on the seventh day of the hearing was a photocopy document that he said had been given to him by Mr Bracegirdle (and which his wife had discovered the previous evening). He had "absolutely no idea" where the original document might be. When pressed, he could not, in fact, recall whether he had been given a photocopy document. He said that the occasion of receiving the document was at Mr Kearney's office at Queen Street in exchange for the money.
121. Mr Peter Kearney, a chartered accountant provided a statement that became Exhibit 39. Mr Bracegirdle was a "business consultant" who would refer clients to Mr Kearney's firm from time to time and who used the firm's facilities. Mr Kearney was, he said, aware from discussions with the applicant of Mr Brown's possible involvement in a partnership with PPP. His affidavit continued:
"At a meeting on the 2nd of May 2002, I was present with Mr Brown and Mr Bracegirdle when I observed that Mr Bracegirdle was handed a sum of $13,125 by Rodney Brown saying "here is my further instalment for the warrants on my commitment and I should have some more soon." I observed that Mr Bracegirdle gave him a receipt on a paper bearing the Williams and Partners letterhead used at the time …
After deducting the fees referred to above … at the instructions of Ms Clark of CBCI,
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my clear recollection is that Mr Bracegirdle paid $11,000 or $12,000 to CBCI."
122. It will be immediately noticed that Mr Kearney also professed to recall the precise words used and, moreover, that what he recalls is inconsistent with the applicant's case.
123. If, in truth, $13,125.00 was paid on this occasion it was, on the applicant's case, the only instalment; it was not a "further" instalment. And, on the applicant's case, there was no requirement of "some more soon". Of course the notion of $13,125.00 (which is 12.5% of $105,000.00) being paid in May 2002 does not sit well with the applicant's evidence earlier noticed, that the idea of a 12.5% deposit and a "commitment" of $105,000.00 was first raised in late June 2002.
124. But there were more fundamental problems for Mr Kearney. He asserted unequivocally that the meeting took place in Mr Bracegirdle's office within the offices of Williams and Partners on the first floor of 307 Queen Street. He had, he said, a clear recollection of this occasion. He described the meeting in this detail:[73]
"My office is on the Queen Street end of the first floor. On the top end, also on the Queen Street floor is an interview room where we met Rod Brown. Mr Rod Brown. We went down to Mr Bracegirdle's office, which is in an office down next to my office, also on the Queen Street floor, Queen Street view, and that's where the meeting took place."
Despite all of this detail of the meeting it transpired that Mr Kearney's firm was not located at the Queen Street address in May 2002; it had moved to new premises in Edward Street in November 2001.
125. When Mr Kearney was recalled, having checked the date of the move from the sublease, he professed a new belief that the meeting took place at the new premises.
126. But Mr Kearney also swore unequivocally that an amount of $13,125.00 was handed over. He did not himself count it and his assertion that the sum of $13,125.00 was handed over was based upon the fact that the receipt showed that amount and that Mr Bracegirdle counted the money. His statement that the amount of $13,125.00 was handed over is, at best, extravagant. As much as he could possibly have said, I would have thought, is that he saw a sum of money handed over, it was counted by Mr Bracegirdle who wrote out a receipt for $13,125.00 and he assumed that that was the amount handed over.
127. The other part of his affidavit set out above was also demonstrated to be unreliable. He asserted a "clear recollection" that Mr Bracegirdle paid $11,000.00 or $12,000.00 of the cash to CBCI having deducted some fees said to be owing by CBCI to Mr Bracegirdle and Mr Kearney's firm. That statement, if accepted, would provide some corroboration for the evidence of Ms Clark that there was an agreed set off between Mr Bracegirdle and that a lesser amount than $13,125.00 was paid by Mr Bracegirdle to CBCI.
128. Despite Mr Kearney's "clear recollection" it emerged that this evidence was based entirely upon what he had been told by Mr Bracegirdle and he himself had no idea what Mr Bracegirdle did with the money.
129. I am left to conclude that Mr Kearney was prepared to say whatever he thought might assist his client. I cannot place any weight on his evidence.
130. In circumstances where I regard the applicant, Ms Clark and Mr Kearney as being unreliable witnesses I am not satisfied that the applicant paid an amount of $13,125.00 (or similar) to Mr Bracegirdle (or CBCI), a fortiori where neither Mr Bracegirdle nor any objectively verifiable records e.g. bank statements, deposit slips etc, are able to be produced. In that latter regard the applicant (and those involved with him including Ms Clark and Mr Petroulias) were aware, even before this supposed payment was made, that the respondent had an adverse view of the arrangement. One would have thought that in those circumstances efforts might have been made to ensure that objective means of proof of payment would be maintained.
131. My lack of satisfaction regarding payment of the $13,125.00 extends, for similar reasons, to the claimed "irrevocable commitment" to pay $90,000.00.
132. This commitment was made, on the evidence, by a partnership which I am not satisfied existed to a company that was not then in existence. It purports to be signed by a person who is shown to have set up a "virtual"
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firm of accountants and a "virtual" law firm. Mr McCarthy was not called to give evidence and his absence was not explained. I have no confidence in the evidence of the applicant or Ms Clark regarding this document. Indeed I have no confidence at all in any of the evidence of the applicant or Ms Clark.133. I am not satisfied that the applicant ever incurred the claimed liability of $90,000.00.
134. For these reasons I would not give leave to the applicant to depart from the grounds stated in his taxation objection.
135. In these circumstances it is unnecessary for me to consider many of the issues raised by the parties. Were it necessary for me to have considered the issue of whether the applicant was carrying on business I would have been unpersuaded by his evidence that he was doing so. The submissions of the respondent made apt reference to the colourful remark of Rogers J in
Deane v Federal Commissioner of Taxation[74]
136. I want, finally, to remark upon the general quality of three affidavits relied upon by the applicant. Almost without exception they suffered from the defect already outlined - a tendency to record what was said to be a precise recollection of conversations from years earlier in circumstances where it was evident from cross-examination of the witnesses that they had no such recollection. Additionally, in many instances there were fundamental corrections that were required to be made to the affidavit when the witnesses were first called such that I was left with the clear impression that a number of the witnesses had not read their affidavit with any care at all before swearing to the truth of them. The recent remarks of Callinan J in
Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd[75]
"It is impossible to avoid the suspicion that statements on all sides are frequently the product of much refinement and polishing in the offices and chambers of the lawyers representing the parties, rather than of the unassisted recollection and expression of them and their witnesses. This goes some way to explaining the quite stilted and artificial language in which some of the evidence is expressed in writing from time to time, as it was here."
What his Honour said of the evidence in that case is entirely true of the present although some of the affidavits were not subjected to necessary polishing to ensure their accuracy.
137. In light of my conclusions I need not deal with the various other legal issues raised in relation to the objection decision denying deductibility to the $90,000.00 claimed as a partnership loss. It follows from what I have said that I would affirm the respondent's objection decision in proceedings QT2003/413.
The administrative penalty
138. There remains for consideration the issue of administrative penalty, the subject matter of proceedings in QT2005/318. The penalty was imposed by the respondent in reliance upon Subdivision 284-C of Schedule 1 to the Taxation Administration Act. That Subdivision is entitled "Penalties relating to Schemes". The term "scheme" is defined, by reference to s 995-1 of the Income Tax Assessment Act 1997 (Cth.) in a manner that is not apt to cater for the present circumstance where I have concluded that the applicant has not made out his case on deductibility.
139. But given that this Tribunal, by virtue of s 43(1) of the Administrative Appeals Tribunal Act 1975 (Cth.) may, for the purpose of reviewing a decision, exercise all the powers and discretions that are conferred on the respondent it seems to me, and neither party submitted to the contrary, that I ought consider the issue of penalties by reference to the other provision regarding administrative penalties.
140. Subdivision 284-B of the Taxation Administration Act deals with penalties relating to false or misleading statements made to the Commissioner and those relating to the taking of positions that are not reasonably arguable. Liability for the former is created by s 284-75(1) in these terms:
"You are liable to an administrative penalty if:
- (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and
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- (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
- (c) you have a shortfall amount as a result of the statement."
141. Subsection 284-75(2) is in similar terms in relation to a position that was not reasonably arguable and, importantly, contains a paragraph (c) in identical terms.
142. It is unnecessary for present purposes to finally decide whether the applicant, in his original return, made a false or misleading statement or took a position that was not reasonably arguable. The critical provision, in each case, is paragraph (c) which requires that there be a shortfall amount as a result of the statement . By virtue of s 284-80 there is a shortfall amount if a tax-related liability worked out on the basis of the statement is less than it would have been if the statement were not false or misleading or if it is less than it would have been if the statement did not treat a tax law as applying in a way that was not reasonably arguable.
143. Had the original return remained the operative document I do not doubt that the applicant would have been liable for an administrative penalty. But, having lodged that return in September 2002, the applicant lodged an amended return in February 2003, deleting the $90,000.00 deduction earlier claimed. Some three months after receiving an amended return which no longer claimed the deduction the respondent assessed on 26 May 2003 on the basis of the original return (and thereby created a tax shortfall) and then within days, on 2 June 2003, made an amended assessment giving effect to the withdrawal of the claim for a deduction of $90,000.00.
144. At the outset of the hearing I raised the matter of the respondent having assessed in this way but what I there described as a curiosity was never explained. I am left to conclude only that the respondent consciously assessed in that way in order to create a tax shortfall.
145. In those circumstances the tax shortfall did not result from a false or misleading statement by the applicant, it resulted from the respondent assessing on the basis of facts no longer put forward. Put another way, any falsity or inarguable position had been corrected before it had been acted upon.
146. In my view one of the conditions for the imposition of liability was not present and accordingly I would uphold the applicant's objection to the imposition of the administrative penalty.
147. In QT2005/318 I would set aside the respondent's objection decision and remit the matter to the respondent for re-assessment in accordance with these reasons.
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