NARBEY v FC of T

Judges:
McKerracher J

Court:
Federal Court, Perth

MEDIA NEUTRAL CITATION: [2008] FCA 1699

Judgment date: 14 November 2008

McKerracher J

Introduction

1. Each applicant "appeals" under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) from decisions of a Senior Member of the Administrative Appeals Tribunal (the Tribunal) given on 30 April 2007. The Tribunal affirmed the decisions of the Commissioner of Taxation (the Commissioner) to disallow the applicants" objections to the amended assessments of income tax that were issued to them. These reasons deal with the "appeals" on a joint basis. Relevantly, each applicant is in the same position.

2. Each of the applicants was an investor in the Base Metals Exploration and Prospecting Project (the Project). The applicants claimed an entitlement to an allowable deduction in relation to management fees and interest on a loan entered into for the purpose of financing the applicants' payment of the management fees. The applicants made this claim on the basis that the outgoings for management fees and interest were:

• deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) as they were incurred in gaining or producing their assessable income or were necessarily incurred in carrying on a business for the purpose of gaining or producing their assessable income;
• deductible under s 330-15 of the ITAA 1997 as they were incurred on exploration or prospecting for minerals or quarry materials, obtainable by eligible mining or quarrying operations.

3. Before the Tribunal, the applicants submitted that their positions were distinguishable from that examined in
Sleight v Commissioner of Taxation 2004 ATC 4477; (2004) 136 FCR 211,
Commissioner of Taxation v Cooke 2004 ATC 4268; (2004) 55 ATR 183 and
Puzey v Commissioner of Taxation 2002 ATC 4853; (2002) 50 ATR 595. The applicants claimed that the management fees were incurred to retain a manager to actively conduct the day to day operations of the applicants' business to explore, prospect, find and sell minerals extracted from the tenements in which the applicants had an interest.

4. The applicants argued that they were "actively" involved in carrying on a business and this was evidenced by the applicants' power to give instructions to the manager and to dismiss the manager. In contrast with the facts in Puzey 50 ATR 595 they argued that each applicant was an active participant in the Project rather than a unit holder in a unit trust entitled to a share of the profits of the trust.

5. The Commissioner rejected the applicants' claims that the outgoings were deductible. The Commissioner also contended that:

• to the extent that a deduction was otherwise allowable to any applicant in respect of the claimed outgoings, it was reduced to nil, or a sum less than that claimed, pursuant to s 79D of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936);
• further and alternatively, Pt IVA of the ITAA 1936 operated to disallow deductions to any applicant for the management fees and interest for the 1998 year of income.

6. The applicants by their amended application and on oral argument have sought review on the primary basis that the Tribunal failed to give adequate reasons to explain its decisions. The paperwork, detail, argument and documentary evidence in each of the four applications was substantial. Reasons of considerable length were produced by the Tribunal in each instance but the applicants assert that the Tribunal has not, despite recording much of the agreed facts and the arguments of both parties, explained why it preferred the Commissioner's arguments and what conclusions it reached on certain key issues going to penalty such as the subjective intent of the applicants.

Jurisdiction and approach to the "appeal"

7. The applicants have substantially amended their notice and grounds of appeal to raise questions of law rather than to attempt to rely on a merits review. An appeal to this Court from the Tribunal is confined to a question of law pursuant to s 44 of the AAT Act and O 53 r 3 of the Federal Court Rules.

8. The right of appeal is provided for by s 44(1) of the AAT Act which provides:

(1) A party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding.

9. An appeal on a question of law is the sole basis under which the appeal from the Tribunal proceeds under s 44(1) of the AAT Act.

10. When the Court hears an "appeal" under s 44 it is in fact exercising its original jurisdiction. The proceedings are commenced by an applicant rather than an appellant and O 53 of the Federal Court Rules sets out the procedure which is applicable.

11. Brennan J in
Waterford v Commonwealth of Australia (1987) 163 CLR 54 at 77 observed:

"The error of law which an appellant must rely on to succeed must arise on the facts as the AAT has found them to be or it must vitiate the findings made or it must have led the AAT to omit to make a finding it was legally required to make. There is no error of law simply in making a wrong finding of fact."

12. It has been repeatedly observed and was reinforced by
Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 that it is necessary to state with precision questions which are pure questions of law. In that decision of the Full Court, Branson J observed that the argument of the appeal was conducted by reference to the grounds rather than by reference to the questions of law stated in the notice of appeal but it was the questions of law that are the subject matter of the appeal. The notice of appeal is not to be drawn "in disregard of the distinction between the questions of law to be raised on the appeal and the grounds relied on in support" of the orders sought.

13. The authorities also emphasise that as the Tribunal is an administrative body, its decisions should not be too closely scrutinised for the purpose of searching for errors of law in what may simply be imprecise language. The decision-maker's reasons are entitled to a beneficial construction rather than to be scrutinised upon overzealous judicial review by seeking to discern whether some inadequacy may be gleaned from the way in which the reasons are expressed. Additionally, it is well settled that the Court will be slow to find error in matters where the decision is made by a body with special experience or knowledge and the opinion considered in the light of other evidence is not manifestly unreasonable:
Telstra Corporation Ltd v Warren, Graham [1997] FCA 102 per Tamberlin J.

14. The reasons which must be read as a whole need to be approached in a balanced way and not with an eye keenly attuned to the perception of error. With that approach, even in circumstances where a tribunal has not expressly dealt with a particular contention, it may be possible to infer from the examination of the reasons where the Tribunal has in fact addressed the issue:
HJ Heinz Company Ltd v Chief Executive Officer of Customs (2006) 61 ATR 711 at [26]. Failure to refer to a particular matter in a decision does not necessarily mean that the matter was not considered:
Tobacco Institute of Australia v National Health & Medical Research Council (1996) 71 FCR 265 at 279.

15. While some mystique appears to surround the process, the exercise of framing a question of law, is comparable to the exercise of framing a special leave point for an application to the High Court for special leave. While quite different considerations apply to the consequences of that exercise, the discipline in distilling the question of law, is comparable.

16. If there is a question of law in these "appeals", it appears to me that, properly framed, it is:

"Does a Tribunal discharge its duty to provide reasons by simply adopting all the submissions of one party?"

Legislative provisions

17. Section 8-1 of the ITAA 1997 provides for general deductions from assessable income as follows:

" 8-1 General deductions

(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

For a summary list of provisions about deductions, see section 12-5.

(3) A loss or outgoing that you can deduct under this section is called a general deduction .
For the effect of the GST in working out deductions, see Division 27.

Note If you receive an amount as insurance, indemnity or other recoupment of a loss or outgoing that you can deduct under this section, the amount may be included in your assessable income: see Subdivision 20-A."

18. For an item of expenditure to be deductible under s 8-1 it must fall within one of the two positive limbs in s 8-1(1) and must not be disallowed under s 8-1(2) of the ITAA 1997. Section 8-1(2) provides that losses or outgoings of capital or of a capital, private or domestic nature are expressly excluded as being allowable deductions.

19. At the relevant date, s 330-15 and s 330-20 of the ITAA 1997 provided:

"SECT 330-15 Deduction for exploration or prospecting expenditure

(1) Expenditure (whether of a capital nature or not) you incur in the 1997-98 income year or a later income year on *exploration or prospecting for *minerals, or *quarry materials, obtainable by *eligible mining or quarrying operations is deductible for that income year.

Note 1: The amount you can deduct for an income year is subject to the excess deduction rules: see Subdivision 330-F.

Note 2: Your deductions under this Subdivision may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E of Schedule 2C to the Income Tax Assessment Act 1936.

Note 3: If an amount of the expenditure is recouped, the amount may be included in your assessable income: see Subdivision 20-A.

(2) However, you can deduct it only if during that income year you satisfy one or more of the tests set out in the following table:

Item For this type of expenditure: the deductibility tests are:

1. *Exploration or prospecting for *minerals (other than *petroleum) 1. You carried on *eligible mining operations (other than *petroleum mining).

2. It would be reasonable to conclude you proposed to carry on such operations.

3. You carried on a *business of, or a *business that included, *exploration or prospecting for *minerals (other than *petroleum) obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

2. *Exploration or prospecting for *quarry materials 1. You carried on *eligible quarrying operations.

2. It would be reasonable to conclude you proposed to carry on such operations.

3. You carried on a *business of, or a *business that included, *exploration or prospecting for *quarry materials obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

3. *Exploration or prospecting for *petroleum 1. You carried on *eligible mining operations in the course of *petroleum mining.

2. It would be reasonable to conclude you proposed to carry on such operations.

3. You carried on a *business of, or a *business that included, *exploration or prospecting for *petroleum obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

SECT 330-20 Meaning of exploration or prospecting

(1) Exploration or prospecting includes:

(a) in the case of mining in general and quarrying:

(i) geological mapping, geophysical surveys, systematic search for areas containing *minerals (other than *petroleum) or *quarry materials, and search by drilling or other means for such minerals or materials within those areas; and

(ii) search for ore within, or in the vicinity of, an ore-body or search for *quarry materials by drives, shafts, cross cuts, winzes, rises and drilling; and

(b) in the case of *petroleum mining:

(i) geological, geophysical and geochemical surveys; and

(ii) exploration drilling and appraisal drilling; and

(c) feasibility studies to evaluate the economic feasibility of mining *minerals or *quarry materials once they have been discovered.

(2) The following are not exploration or prospecting :

(a) development drilling for *petroleum;

(b) operations in the course of working a mining property, quarrying property or *petroleum field."

20. Part IVA of the ITAA 1936 operates in effect by voiding transactions where they are found to give rise to a tax benefit in connection with a scheme. Under s 177F(1) of the ITAA 1936 the Commissioner has the discretion to apply Pt IVA to a transaction.

21. Section 177D is the key provision which identifies the criteria for Pt IVA to apply. There must be:

• a scheme (s 177A);
• a tax benefit (or the taxpayer would but for s 177F obtain a tax benefit) (s 177C); and
• having regard to eight matters stated in s 177D(b), it is to be concluded that a person associated with the scheme entered into the scheme for the purpose of enabling the taxpayer or other taxpayers to obtain a tax benefit in connection with the scheme.

22. Section 79D of the ITAA 1936 (now superseded) also arises for consideration in these appeals. Relevantly, that section provides as follows:

" Limitation on deductions for foreign income

(1) Where:

(a) apart from this section, there are one or more foreign income deductions of a taxpayer in relation to a class of assessable foreign income in relation to a year of income; and

(b) either:

(i) the taxpayer did not derive any assessable foreign income of that class in the year of income; or

(ii) the taxpayer derived assessable foreign income of that class in the year of income and its amount is exceeded by the sum of the foreign income deductions;
then, for the purposes of this Act, those deductions are reduced respectively:

(c) where subparagraph (b)(i) applies-to nil; or

(d) where subparagraph (b)(ii) applies-by amounts proportionate to those deductions and equal in total to the amount of the excess referred to in that subparagraph."

23. Section 6AB(1) of the ITAA 1936 provides:

"(1) A reference in this Act to foreign income is a reference to income (including eligible termination payments as defined in subsection 27A(1)) derived from sources in a foreign country or foreign countries, and includes a reference to an amount included in assessable income under section 26D, 27CAA, 102AAZD, 456, 457, 458, 459, 459A or 529."

24. Additionally, s 224(2) and s 226L of the ITAA 1936 respectively, provide:

"224(2) In subsection (1), 'tax avoidance scheme' means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax.

226L Subject to this Part, if:

(a) a taxpayer has a tax shortfall for a year; and

(b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and

(c) the scheme was a tax avoidance scheme within the meaning of subsection 224 (1); and

(d) none of the scheme sections applies in relation to the scheme;
the taxpayer is liable to pay, by way of penalty, additional tax equal to:

(e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct - 25% of the amount of the shortfall or part; or

(f) in any other case - 50% of the amount of the shortfall or part."

Applicants' primary complaints

Grounds 4.1 to 4.6

25. The applicants say that the Tribunal erred in law in failing to consider the applicants' evidence and contentions and the legal principles relevant to the decisions under review. The applicants advance this argument in their written and oral submissions alleging that the Tribunal failed to provide sufficient reasons for its decision. The applicants state that it is "not clear what evidence the Tribunal accepted or rejected when it concluded that the claimed outgoings were not deductible under either limb of section 8-1 or section 330-15 of the 1997 Act or section 79D of the 1936 Act".

Grounds 4.7 to 4.11

26. The applicants also say that the Tribunal erred in law in failing to make the material finding as to the applicants' subjective or actual purposes. They claim that the Tribunal also failed to refer to the evidence relied upon in deciding that the Commissioner was entitled to impose additional tax by way of penalty. The applicants further submit that the Tribunal erred in law in not reaching a conclusion regarding whether the Project was a tax avoidance scheme for the purposes of s 224(2) of the ITAA 1936 nor did it consider whether the applicants fell within s 226L of the ITAA 1936.

Adoption of Commissioner's submissions

27. The Tribunal after recording essentially agreed facts, then quoted substantial parts of the lengthy submissions first for the applicant and then for the Commissioner in each of the appeals. The applicants contend that the extensive background facts recorded by the Tribunal do not constitute findings, however in my view, it is reasonably clear from the reasons that the background facts were in effect, agreed facts. The argument which was run in the Tribunal turned on whether the facts as agreed or as evidenced in the substantial documentation before the Tribunal enabled the claims of the applicants to be substantiated.

28. The Tribunal then concluded with a paragraph simply adopting the Commissioner's submissions. The conclusion of the Tribunal is contained in [262] and [263] which together provides as follows:

"262. The Tribunal has carefully considered all the evidence and the submissions made on behalf of the applicant and the respondent as set out above. The Tribunal makes the following findings:

1. FINDINGS OF FACT:

The Tribunal is of the view that the evidence strongly supports the respondent's contentions as to the relevant facts and the conclusions of fact to be drawn therefrom as set out in the respondent's submissions on all the matters in issue between the parties. The Tribunal accordingly rejects the applicant's assertions to the contrary.

2. ISSUES OF LAW

Section 8 -1 Income Assessment Act 1936

2.1 In the Tribunal's opinion for the reasons set out in the respondent's contentions, the claimed outgoings are not deductible under either the first or the second limb of s 8-1 as they were not necessarily incurred in gaining or producing assessable income or in the course of a business carried on for the purpose of gaining or producing assessable income, alternatively they were of capital or of a capital nature.

Section 330-15 Income Tax Assessment Act 1997 and s 79D Income Tax Assessment Act 1936

2.2 For the reasons set out in the respondent's contentions the Tribunal also finds that the claimed outgoings are not deductible under s 330-15 of the Income Tax Assessment Act 1997, alternatively any amount that may otherwise be allowable is reduced to nil pursuant to s 79D of the Income Tax Assessment Act 1936.

3. PART IVA

263. The Tribunal having found that the deductions claimed by the applicant should not be allowed for the reasons stated above there is strictly speaking no need for the Tribunal to consider the provisions of Part IVA of the Income Tax Assessment Act 1936."

29. Paragraph [265] dealt with a separate argument concerning s 177F of the ITAA 1936.

30. In recording what appears at 1. and 2. above, the content of the submissions was not compared and evaluated topic by topic. This does not necessarily mean that the approach taken by the Tribunal was not self-evident. Whether or not it was self-evident depends largely on the content of the respective submissions.

31. The applicants complain that the Tribunal has not indicated why it accepted the Commissioner's submissions nor has it addressed some of the key issues necessary in order to determine various aspects of the submissions. One example given and perhaps the most significant example relates to the second limb of the appeal. The applicants complain that there is no finding in relation to the challenged subjective intention of the respective applicants.

Lack of particularity in the primary ground

32. Apart from the second limb of the application, the applicants have not pointed to any particular findings or reasoning of the Tribunal that have not been addressed in the Tribunal's reasons.

33. The Tribunal's general adoption of the submissions of the Commissioner without further analysis has not, with respect, been particularly helpful, but equally a general complaint about lack of reasoning without pointing to what has necessarily been omitted from the expressed reasoning process, suffers from a similar flaw.

34. It is not optimal on an application under s 44 of the AAT Act for the Court to be required to rummage around unassisted through the evidence and lengthy reasons to try to identify what, if anything, may have been omitted in the reasoning process. I am not persuaded that to do so is the role of the Court on an application of this nature. The grounds should point to any specific deficiency. I would also acknowledge that in some instances a deficiency may be obvious. That is not so in this case.

35. Nevertheless, notwithstanding that I do not consider it to be the role of the Court to do so, I have attempted to evaluate the strength of the complaints by the applicants by examining and comparing the detail in both the applicants' and the Commissioner's submissions. This is not directed to reviewing factual findings but to assessing whether the Tribunal's adoption simpliciter of the Commissioner's submissions, was an adequate explanation for arriving at the conclusion reached.

36. In the absence of specific deficiencies being identified by the applicants, it has been necessary to consider all of the arguments raised by the applicants in the Tribunal in order to ascertain whether any of them were not either specifically or generally traversed and addressed by the Commissioner and are therefore left unanswered. As is a common experience in litigation, the arguments do not necessarily coincide or respond one to the other. Some of the Commissioner's arguments (as they were all accepted), eliminate the need to consider every one of the applicants' arguments to determine whether or not the argument was addressed. On completion of that exercise, in my view there are only two of the applicants' arguments which might not (in the precise way in which they were put) have been specifically considered. I have identified them below.

Relevant principles as to adequacy of reasons

37. Before considering the bare assertion as to failure to express reasons, it is necessary to examine the nature of the duty on that topic. The applicants relied upon s 43(2B) of the AAT Act. It was submitted that the Tribunal is under an obligation to express the reasons with sufficient particularity such that the applicants can determine from the reasons why the Tribunal reached its conclusions:
De Domenico v Marshall (1999) 94 FCR 97 at [17], [30], [31], [33], [60] and [61], Waterford 163 CLR 54 at [77],
Rana v Military Rehabilitation and Compensation Commission [2005] FCA 6, and
Federal Commissioner of Taxation v McCabe 90 ATC 4968; (1990) 26 FCR 431.

38. A tribunal's failure to carefully consider the evidence and relevant legal principles, failure to make findings on material questions of fact and failure to refer to the evidence in support of its findings (where it was legally required to make the findings) is a failure to meet its obligations under the AAT Act. As explained by Hill J in
Copperart Pty Ltd v Federal Commissioner of Taxation (1993) 93 ATC 4779 at 4781 - cited in
TelePacific Pty Limited v Commissioner of Taxation 2005 ATC 4107; [2005] FCA 158 per Sackville J at [56]:

"… the obligation under s 43(2B) is not satisfied by a statement of the Tribunal's conclusion of fact. The parties are entitled to know what evidence the Tribunal accepted and what evidence it took into account. Likewise the parties are entitled to know what evidence the Tribunal rejected. Without this knowledge the parties have but an incomplete idea of the Tribunal's process of reasoning and a lessened respect for the Tribunal's decision making process."

39. The High Court has also spelt out in
Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323 at 346 per McHugh, Gummow and Hayne JJ with Gleeson CJ agreeing:

"It ensures that a person who is dissatisfied with the result at which the Tribunal has arrived can identify with certainty what reasons the Tribunal had for reaching its conclusion and what facts it considered material to that conclusion. Similarly, a court which is asked to review the decision is able to identify the Tribunal's reasons and the findings it made in reaching that conclusion. The provision entitles a court to infer that any matter not mentioned in the s 430 statement was not considered by the Tribunal to be material. This may reveal some basis for judicial review … for example, it may reveal that the Tribunal made some error of law …"

40. The case of TelePacific [2005] FCA 158 bore some resemblance to the present appeal. In that case at [56], Sackville J commented on the "dangers in a Tribunal setting out extensive submissions made by a party and reasoning by reference to them, unless it is made clear precisely which submissions the AAT accepts and why". However in that case, his Honour was of the view that it was reasonably clear why the Tribunal reached the decision it did, in adopting the Commissioner's submissions. The opposite conclusion was reached by Hill J in Copperart 93 ATC 4779 at 4789 where it was held that the Tribunal failed in its obligations by recording submissions without clearly setting out which submissions were accepted and which were not.

41. If the Tribunal did not record the findings of fact it actually made and this failing makes it impossible to ascertain the Tribunal's reasoning processes, its decision would be materially affected by the error of law (TelePacific [2005] FCA 158 at [54]). However, s 43(2B) of the AAT Act only obliges the Tribunal to set out its findings on those questions of fact which the Tribunal considers to be material to the decision that is made and the reasons it has for reaching that decision. It does not require the Tribunal to record findings on all questions of fact which might objectively be regarded as material: Yusuf 206 CLR 323 at [68].

42. The question in each case is whether sufficient appears from the judgment of the Tribunal to enable the parties and the Court to understand and deal with the reasoning and decision of the Tribunal:
Roncevich v Repatriation Commission (2005) 222 CLR 115 at [19].

Issues

43. The Commissioner contends that the Tribunal in the present circumstances has correctly identified the issues for decision, set out extensive findings of fact and then has, after setting out the submissions of the applicants, expressly adopted both findings of fact and "reasoning" of the Commissioner.

44. The Commissioner argues that the ultimate number of issues is relatively straightforward and can be identified by the summary of the submissions made by the Commissioner and adopted by the Tribunal. They are the following (by reference to paragraph numbers in the Tribunal's decision):

(a) the claimed outgoings did not have a sufficient connection with the gaining or producing of assessable income to be deductible under the first limb of s 8-1, and why that conclusion follows from the evidence (to be taken from the Commissioner's submissions at [188]-[193]);
(b) that the claimed outgoings were not necessarily incurred in carrying on business for the purpose of producing assessable income so as to be deductible under the second limb of s 8-1, and why (at [194]-[201]):
(c) that the claimed outgoings were in the nature of capital, and why (at [206]);
(d) that none of the outgoings claimed by the applicants was expenditure on exploration or prospecting; and why (at [208]); and
(e) that there was a lack of evidence (at [210]) and each applicant had failed to demonstrate that he satisfied one or more of the tests set out in s 330-15.

45. The Commissioner contends that the suggestion that the Tribunal failed to include in its reasons, findings on material questions of fact is simply swept aside by a reading of the reasons at [8]-[75] which expressly set out not only detailed findings but also explain that those findings are based primarily on the documents before the Tribunal.

46. The Commissioner contends the Tribunal has not simply set out the respective submissions of the parties but has also expressly found that the evidence supports the Commissioner's contentions. Similarly, it is argued that there is no uncertainty about the reasoning process in relation to the findings on the two limbs of s 8-1 and s 330-15 of the ITAA 1997. For the most part I agree with this submission.

47. The applicants, however, strongly argue that contrary to the submission of the Commissioner, par [262] of the Tribunal's reasons (at 1.) does not state that the Tribunal is of the view that the evidence strongly supports the Commissioner's contentions as to the relevant facts "based on the reasons of the respondent". In other words, the applicants contend that the actual reasoning process was not explained. Counsel for the applicants argued that one is left with doubt as to what are findings of fact, what are statements of fact, what is the outline of facts, and what are the submissions, such that the applicants do not understand why the Tribunal reached the conclusion that the amounts are not deductible.

48. In my view this aspect of the applicants' argument would fall into the category of taking an over zealous approach to the reasons. It is clear, in my view, that the Tribunal accepted the reasoning advanced for the Commissioner in the Commissioner's submissions. The real question is whether those submissions failed to address key arguments raised for the applicants.

The reasons

49. Most of the factual material was uncontested. It is to be noted and does not appear to have been challenged on the appeal in any way that identifies specific error, that the Tribunal expressly said the facts emerged from the documents and the evidence before the Tribunal "(and) are not in dispute".

50. The Tribunal recorded in detail the undisputed facts which emerged primarily from the documents before it in relation to the Project. It recorded the following features of the Project.

51. The Project was marketed over the years 1998 and 1999. In February 1998, Base Metals Exploration NL (Base Metals) and Explorers and Prospectors Finance Ltd (EPF) issued a prospectus inviting participation in the Project. The core relevant documents examined by the Tribunal were:

• the prospectus;
• the agreement between Base Metals and Caledonian Pacific Minerals (CPM);
• the management agreement between participants in Base Metals;
• the loan agreement between Inteq and Core Mining NL;
• the investment deed; and
• the joint venture agreement between Base Metals and Basin Minerals NL (Basin Minerals).

52. Each participant was required to enter into a management agreement with Base Metals and to make an initial payment of $12,000 for participation in the Project. The prospectus offered a finance package with EPF under which participants could, upon subscribing for 25 ordinary shares of $1.00 in EPF, obtain a loan (for a term of 10 years) in the sum of up to $12,800 per participation (Finance Package). The prospectus set out the commercial risks of the Project and the possible tax implications, stating that the risks may be offset in part by taxation benefits. The particulars of the Finance Package were set out in detail, stating that for a single participation using the Finance Package, the participant would:

(a) borrow $12,800 ($12,000 management fee + $800 interest);
(b) have a cash outlay of $4,050 ($25 for EPF shares + $4,025 as a single repayment due on 30 September 1998);
(c) receive tax savings of $6,208, based on the participant paying income tax at the rate of 48.5%; and
(d) have a consequential net benefit of $2,158.

Those with 10 or more participations would receive a slightly higher benefit per participation.

53. The sources of income for participants were identified as being the sale of the rights to mine, the sale of interests in tenements and the sale of royalties to tenements. I will return to the question of the proper characterisation of the proceeds of these sales.

54. The applicants accepted the Finance Package offered in the prospectus. Mr David Narbey, Mr Philip Wade and Mr Robert Whooley invested in the Project in the year ended 30 June 1998. Mr Adam Williams invested in the year ended 30 June 1999.

55. The applicants each claimed allowable deductions for expenditure incurred in the Project in the following amounts:

	1998	1999
Philip Wade	$25,600
David Narbey	$12,800
Robert Whooley	$38,400
Adam Williams		$76, 800

56. It was concluded that none of the applicants derived income from their participation in the Project in 1998 and 1999 or any time thereafter.

57. Having examined the documents, the Tribunal made the point that of the 10,000 participations offered in the Project and their effect, participants including the applicants took up 6939 participations in the period February 1998 to June 1998 with further participations being granted in the 1999 financial year so that a total 9989 participations were granted over a two year period. As such, the participants including the applicants allegedly incurred obligations for management fees and prepaid interest in the following amounts:

Year	Management Fees	Prepaid interest	Total
1998	$83,268,000	$5,551,200	$88,819,200
1999	$36,600,000	$2,440,000	$39,040,000
	$119,868,000	$7,991,2000	$127,859,200.00

58. The Tribunal noted that because of the way the Project was financed, those amounts were not available for the conduct of the Project. Real cash actually paid by participants was limited to $4,025 per participation.

59. The Tribunal also noted that the financier to the participants, EPF was wholly owned by the participants. It lent the participants $12,800 per participation to pay management fees to Base Metals and to pay interest. The Tribunal noted that EPF purportedly obtained the funds to pay the management fee to Base Metals on behalf of the participants from Laton Corporate Pty Ltd (Laton Corporate). In each of the 1998 and 1999 years there was a bill facility under which EPF drew bills of exchange to pay Base Metals. The amount of the bills in each year corresponds to the management fees set out in the table above, that is $83,268,000 in 1998 and $36,600,000 in 1999.

60. The Tribunal noted that on 17 June 1998 EPF as borrower and Laton Corporate as lender, with Base Metals as indemnifier, made a deed of loan (the Laton Loan) by which:

(a) Laton Corporate agreed to advance between 17 June and 30 June 1998 or such later date as agreed as many instalments as required by EPF up to $120 million;
(b) the advance was to be made by way of a bill facility; and
(c) interest was to be paid on the advance at 8% per annum to be calculated in the first year on the amount of the advance at 1 July 1998 and was to be paid in advance to the lender by 31 October 1998.

61. Laton Corporate, however, agreed to accept a lesser amount if Base Metals paid an indemnity amount in accordance with the provisions of the Laton Loan. The Tribunal continued:

"56. By clause 5.1 of the Laton loan, the advance was repayable on 31 December 2008 subject to the obligation of EPF to pay to Laton Corporate immediately in reduction of the advance any repayments of principal received under the Retail Loan Contracts (defined as the loan contracts between EPF and the participants by which EPF provided finance to invest in the project) (clauses 1.1(11)(definition) and 5.2).

57. Also on 17 June 1998, Base (as Depositor) and Laton Corporate made a Deposit Deed, the terms of which included:

(a) the parties stated that Laton Corporate had agreed to enter into the Laton loan (defined as the Wholesale Loan Deed) at the request of Base (clause 2.1);

(b) Base was required to deposit with Laton Corporate an amount equal to the advance under the Laton loan immediately following each instance of provision of financial accommodation under that deed (clause 2.2);

(c) Base had only limited rights of withdrawal (Recital E and clause 5).

58. Clause 5.3 of the Deposit Deed set out a formula by reference to which Laton Corporate must pay a withdrawal. This was done by requiring the balance after the withdrawal to be at least the difference between the initial deposit made by Base (i.e. the amount of the advance to EPF) and the aggregate of all amounts (other than interest) received by Laton Corporate under the Loan Deed.

59. Under those agreements:

(a) EPF gave notice to Laton Corporate by 9 Acceptance Notices that it intended to operate the bill facility under the Deed of Loan by drawing 86 bills of exchange, with Base as payee in each case, as follows:

No of bills Face value of each Aggregate face value Acceptance date

32 $996,000 $31,872,000 17 June 1998

7 6 × $996,000
1 × $984,000 $6,960,000 25 June 1998

2 $996,000 $1,992,000 26 June 1998

5 4 × $996,000
1 × $984,000 $4,968,000 30 June 1998

2 1 × $996,000
1 × $972,000 $1,968,000 30 June 1998

3 $996,000 $2,988,000 30 June 1998

30 28 × $996,000
1 × $684,000
1 × $336,000 $28,908,000 30 June 1998

4 2 × $996,000
1 × $780,000
1 × $468,000 $3,240,000 30 June 1998

1 $372,000 $372,000 6 July 1998

86 $83,268,000.00"

62. Significantly, the Tribunal then observed that while the applicants claimed that Laton Corporate was an external independent financier:

(a) there was no evidence that it had the financial resources to lend $83,268,000 and potentially up to $120 million;
(b) the effect of the Deed of Loan and the Deposit Deed was that Base Metals must deposit with Laton Corporate the whole of the amount lent by Laton Corporate to EPF;
(c) the deposit had limited rights of withdrawal. In effect, Base Metals could only withdraw to the extent of actual cash paid by the participants or paid on their behalf out of any income earned from the Project.

63. The result of this was that the only money available to Base Metals to carry on any activity of exploration or prospecting was the actual cash payments made by the participants. The position was the same in 1999.

Deductions and income - competing submissions

64. The complex agreements gave rise to the following effects according to the applicants. The management fees paid by the applicants were incurred in each instance in the gaining or production of assessable income, or necessarily incurred in carrying on a business for the purpose of gaining income. The applicants asserted that the income in this case was to be derived from either or all of the following:

1. sale of rights to the mine;
2. sale of interests in tenements; and
3. sale of royalties from tenements.

65. The applicants contended that the "income" to be derived was consistent with the manner in which many exploration and prospecting ventures derive their income. However, the Commissioner made the point that the funds received from those sales were capital not income. The Commissioner submitted that the participants, (including each of the applicants) could not derive income unless the tenements were mined. The applicants submitted that was a misconceived view in relation to an exploration and prospecting venture.

66. The applicants' argument was that the management fee was incurred to retain a manager to conduct the day to day operations so as to essentially explore, prospect and find and sell the minerals extracted from the tenements in which the applicants had a proportionate interest. To support this construction, the applicants relied upon the clauses of the management agreement between Base Metals as manager and the applicants, particularly the obligation held by Base Metals to perform its duties on behalf of the applicants in a professional way.

67. There was debate between the applicants and the Commissioner on the question of whether the applicants were in fact "actively" involved in the business and therefore themselves carrying on a business. This was significant in the debate as to whether the expense was incurred in relation to carrying on of a business.

68. The applicants relied heavily on the appointing of a manager and sought to distinguish their positions from the cases of
Commissioner of Taxation v Lau 84 ATC 4929; (1984) 6 FCR 202,
Commissioner of Taxation v Brand 95 ATC 4633; (1995) 31 ATR 326, Sleight 136 FCR 211,
Commissioner of Taxation v Emmakell Pty Ltd 90 ATC 4319; (1990) 22 FCR 157,
Commissioner of Taxation v Walker 84 ATC 4553; (1984) 2 FCR 283, Puzey 50 ATR 595 and Cooke 55 ATR 183 in which it was held that the taxpayers involved were passive and did not actively make decisions or hold the business records.

69. In that regard the applicants submitted that the critical point was that the applicants "had the power" to dismiss the manager and the power to give instructions to the manager. There seems to have been no express evaluation of this submission in the Tribunal's reasons. This power was not a topic specifically canvassed in the Commissioner's submission before the Tribunal. It may follow accordingly, at least on the face of the matter, that the applicants do not know whether or not the Tribunal considered this argument. I will return to this issue.

70. The applicants' submission was also that it was not a case in which it could objectively be said that at the time of the investment there was no prospect of obtaining assessable income. It relied upon the forecast projections in the prospectus. The applicants' contention was that the evidence demonstrated to the contrary and it was reasonable for the applicants in each instance to expect that assessable income exceeding the expenses would be acquired "for the duration" of the Project. Equally, there seems to have been no specific evaluation of the long term financial benefits submission in the Tribunal's reasons. It was not a topic directly canvassed in the Commissioner's submissions before the Tribunal. It may follow accordingly, at least on the face of the matter, that the applicants do not know whether or not the Tribunal considered this argument. Again, I will consider this further below.

71. The Commissioner however submitted the applicants did not incur the claimed outgoings either in gaining or producing assessable income or necessarily in carrying on a business for the purpose of gaining or producing an assessable income. Additionally, it was contended by the Commissioner that the outgoings were of capital or of a capital nature.

72. The Commissioner argued that the claimed outgoings did not have a sufficient connection with gaining or producing assessable income so as to be deductible for two reasons. First, the activities undertaken by or on behalf of Base Metals were not committed to the derivation of return as income. The effect of the agreements was that, on the assumption that a commercial quantity of minerals was discovered, it was open to various parties to effect a return in a variety of what were then undetermined ways. These did not necessarily involve the derivation of assessable income.

73. Secondly, the management fees and interest supposedly incurred by the applicants according to the Commissioner lacked sufficient connection with the gaining or producing of assessable income to be deductible under the first limb of s 8-1. The reason for this was because they were incurred and expended at a time when Base Metals and therefore the participants held no interest in the tenements that were capable of producing assessable income. The relevant tenements were at that time owned by CPM and Basin Minerals. Under the agreements Base Metals could acquire an interest in the tenements when the committed amounts were actually expended. Until that occurred, Base Metals had no interest in any commercial quantity of minerals that was discovered in the tenements. The required committed amounts were not expended and Base Metals never received an interest in the tenements under the agreements. For that additional reason the participants' outgoings lacked a sufficient connection with the derivation of assessable income to be deductible under the first limb of s 8-1.

74. The Commissioner argued that the agreements in the Project were complex and obscure in their meaning. It was argued that when one has regard to the language of the management agreement and the investment deed, what was sought to be achieved by entering into the agreements was not the commercial benefits which might arise under the agreements but rather the pursuit of taxation deductions.

75. The applicants were simply not carrying on a business as explorers, prospectors or otherwise. In this regard the Commissioner contended that in s 8-1 the expression "business" has its ordinary meaning (see the definition in s 995-1 of the ITAA 1997). In reality, it was contended, the applicants were simply passive investors in a project being undertaken by others and it fell into the same category as those investors in Puzey 50 ATR 595 and
Clowes v Commissioner of Taxation (1954) 91 CLR 209.

76. The Commissioner's contention was that the prospectus, the management agreement and the agreement between Base Metals and CPM all envisaged that on discovery of a commercial quantity of minerals, one mechanism for realising their value was to sell the tenements. "Profit" from the sale of the tenements would not have been assessable income but would have been capital.

77. It was also open to Base Metals and the participants to realise the commercial value of a successful discovery by causing Core Mining to purchase Inteq's interest in the tenements. If that happened, subsequent assessable income from mining or other working of the tenements would be generated and in the hands of Core Mining but not in the hands of the participants. Accordingly, the exploration and the prospecting work which was undertaken was preparatory and preliminary to the work and transactions that would later occur by which a return could be realised on a successful discovery of minerals.

78. The Commissioner relied on the fact that the only activities actually carried out by the participants themselves were signing a participation application, a loan application, a share application and paying for the shares and making one repayment of principal. Unlike those who would ordinarily conduct a business, the participants kept no books of accounts in relation to the Project, were not involved in any day to day operations, were not involved in any of the decision making in relation to exploration and prospecting and indeed, maintained no records and undertook no activities which one would expect from the carrying on of a business. The participation was organised as an investment, each participant had for each participation approximately a one ten thousandth entitlement to rights. Those interests were governed by the trust deed between Base Metals and Inteq.

79. Because they were, in effect, investors and were not carrying on a business, that was a further reason for disallowing the claimed deductions.

80. The second reason said by the Commissioner to be fundamental as to why the outgoings did not fall within the second limb of s 8-1 was because the activities of the participants, whether or not they were carrying on a business, were not directed to gaining or producing assessable income but were activities that were preliminary or preparatory to the pursuit of assessable income.

81. On the topic of the capital nature of the outgoings, the Commissioner argued that the amounts payable by the applicants in the two financial years were outgoings of capital or of a capital nature and therefore were not deductible. In
Hallstroms Pty Ltd v Commissioner of Taxation (Cth) (1946) 72 CLR 634 at 648 the High Court said that the characterisation of an outgoing as capital or an account of revenue "depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process": see also
Cliffs International Inc v Federal Commissioner of Taxation 79 ATC 4059; (1979) 142 CLR 140.

82. The fact that the outgoings were called a management fee and called interest did not affect their real characterisation according to the Commissioner's submissions. (What the parties call a payment may have some relevance depending on the circumstances of the case but will not be determinative). Neither label was accurate in the circumstances of the present case on the Commissioner's submissions. The management fee was not a fee for the management of either an asset or an undertaking. Also, the sum lent to each participant and designated "interest" did not have the character of interest. It formed part of the principal sum lent. Regardless of the accuracy or otherwise of the labels, the question is whether on proper characterisation the amounts were said to be capital or revenue account. The Commissioner submitted that both sums were the cost of the participants of obtaining an interest in the nature of an investment and accordingly were both capital.

Mining deduction

83. The applicants submitted that subdivision 330A of the ITAA 1997 provided a deduction for expenditure incurred on exploration and prospecting even if an item of expenditure was capital or of a capital nature. In order to be eligible for the deductions the taxpayer had to be carrying on "eligible mining" or it had to be reasonable to conclude that a taxpayer proposed to carry on such operations. The deduction for such expenditure was said to be allowable whatever the character of the expenditure, provided that it was directed to the purpose of producing assessable income. On that basis it was claimed that the expenditure incurred on the tenements by Base Metals on behalf of the applicants and other participants qualified as exploration and prospecting expenditure pursuant to the definition in s 330-20 of the ITAA 1997. Reliance was also placed on s 330-595 which allowed the applicants to claim deductions for the expenditure under s 330-15 notwithstanding that it was carried out by a contractor on behalf of the applicants.

84. The Commissioner submitted that the applicants were not entitled to the claimed deductions in the years ended 30 June 1998 and 30 June 1999 under s 330-15 of the ITAA 1997. That section provides as follows in relation to deductions for exploration or prospecting expenditure:

"(1) Expenditure (whether of a capital nature or not) you incur in the 1997-98 income year or a later income year on *exploration or prospecting for *minerals, or *quarry materials, obtainable by *eligible mining or quarrying operations is deductible for that income year.

(2) However, you can deduct it only if during that income year you satisfy one or more of the tests set out in the following table:

Item For this type of expenditure: the deductibility tests are:

1. *Exploration or prospecting for *minerals (other than *petroleum) 1. You carried on *eligible mining operations (other than *petroleum mining).

2. It would be reasonable to conclude you proposed to carry on such operations.

3. You carried on a *business of, or a *business that included, *exploration or prospecting for *minerals (other than *petroleum) obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

2. *Exploration or prospecting for *quarry materials 1. You carried on *eligible quarrying operations.

2. It would be reasonable to conclude you proposed to carry on such operations.

3. You carried on a *business of, or a *business that included, *exploration or prospecting for *quarry materials obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

3. *Exploration or prospecting for *petroleum 1. You carried on *eligible mining operations in the course of *petroleum mining.

2. It would be reasonable to conclude you proposed to carry on such operations.

3. You carried on a *business of, or a *business that included, *exploration or prospecting for *petroleum obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business."

85. In order to be deductible under s 330-15, the claimed outgoings must constitute "expenditure … on exploration or prospecting for minerals …" in the relevant year. In the relevant year under consideration in each instance, none of the outgoings claimed by the applicants was expenditure on exploration or prospecting because of the financial arrangements put in place by Base Metals' interests.

86. The whole of the management fees received by Base Metals was committed to the round robin of funds that occurred on or about 30 June 1998. The amounts nominally incurred as "interest" were not expenditure incurred on exploration or prospecting.

87. In the following year for the same reason, the amounts paid did not constitute expenditure on exploration or prospecting but were rather outgoings committed to and employed as part of the round robin of funds that occurred at the end of the financial year.

88. The Commissioner also commented on the paucity of evidence as to the amounts actually expended by Base Metals on real exploring and prospecting and the dates on which those amounts were expended.

89. The expenditure appears to have been after the financial years in question in the sense that as at 30 June 2000, $7,631,163 was outlayed in relation to the CPM tenements as disclosed in the Base Metals' Liquidator Report of 26 November 2001 and at most $720,000 had been expended in relation to the Basin Minerals tenements.

90. None of those items of expenditure occurred in the 1998 year of income.

91. Further, in order to be deductible, according to the Commissioner (pursuant to s 330-15), the relevant expenditure must be that of the applicants not of Base Metals. Moreover, the applicants failed to demonstrate, according to the Commissioner, that they satisfied one or more of the tests set out in s 330-15(2) of the ITAA 1997. Eligible mining which is defined in s 330-30 is specific in its definition and according to the Commissioner no mining operations and therefore no eligible mining operations were carried on by the applicants either through Base Metals, CPM or Basin Minerals on any tenements. There was no evidence on which it would be reasonable to conclude, according to the Commissioner, that the applicants intended to carry on eligible mining operations. In that regard, the Commissioner asserted that the investments were structured so that they did not provide for ongoing contributions from participants so as to fund any such operations; the financial projections were based on Project income from sale of rights to the mine, sale of interests in tenements and sale of royalties to tenements not on the carrying out of mining operations and, finally, the applicants did not carry on a business of or that included exploration or prospecting for minerals.

92. The Tribunal accepted these submissions and, in my view, was entitled to do so.

Section 79D of the ITAA 1936 - competing submissions

93. The evidence and argument from the applicants was to the effect that the expenditure was incurred by the applicants by way of a management fee paid to an entity which was located in Australia and whose central control and management was in Australia. The obligation of the manager was to manage each applicant's participation interest in the tenements. The applicants contended that the income derived from the sale of the rights to mine, sale of interests in tenements and the sale of royalties from tenements was to be generated from contracts negotiated and made in Australia with payments to be made in Australia. Additionally, it was stressed that tenements that were successfully explored were to be assigned to Core Mining NL, an entity located within Australia with central control in management of its operations residing in Australia. As such, it was submitted by the applicants, the income derived by the participants (including the applicant in each instance), was sourced in Australia and would not have been foreign sourced income such that s 79D of the ITAA 1936 had no application. The applicants stressed that "source" for s 79D was not a legal concept but something which a practical person would regard as a real source of income and a "practical hard matter of fact". Section 79D has been set out above. The process of identifying the locality of a source of income may differ depending on the nature of the income in question.

94. However, the Commissioner submitted that by reason of s 79D of the ITAA 1936, the amount of any deduction otherwise allowable to the applicants would be reduced to nil. The Commissioner argued that the applicants failed to discharge their onus of proving that any amount that would otherwise be allowable would not be reduced to nil pursuant to this section. The income to which the outgoings relate was at least in part, according to the Commissioner's submission, a share of income expected to be derived from exporting minerals found in New Caledonia or the disposal of tenements in New Caledonia. Accordingly by reason of s 6AB(1) of the ITAA 1936, that income is foreign. The Commissioner submitted that the applicants had not put forward any basis on which the claimed outgoings could be apportioned between foreign source income and income derived in Australia and accordingly the Commissioner argued under s 79D the amount of the foreign income deduction, if otherwise allowable, would be reduced to nil.

95. The Tribunal accepted these submissions and was entitled to do so.

Part IVA of the ITAA 1936 - competing submissions

96. In relation to Pt IVA of the ITAA 1936, the applicants submitted that each of the eight factors set out in s 177D(b) of the ITAA 1936 had to be considered in determining the purpose of the taxpayer under Pt IVA. Reference was made to Sleight 136 FCR 211, Puzey 50 ATR 595, Cooke 55 ATR 183 and
Calder v Commissioner of Taxation 2005 ATC 5050; (2005) 61 ATR 267, cases revolving around "similarly structured investment schemes" and it was submitted that in those cases particular emphasis was placed upon:

1. the commercial returns forecast in the prospectus calculated, ie, before tax and before finance basis (s 177D(b)(v) of the ITAA 1936);
2. the commercial content and emphasis of the prospectus (s 177D(b)(i) and (ii) of the ITAA 1936);
3. the personal circumstances of the investor (s 177D(b)(i), (ii) and (v) of the ITAA 1936);
4. the time the taxpayer entered the investment (s 177D(b)(iii) of the ITAA 1936); and
5. the reasonableness/excessiveness of fees charged to the investors (s 177D(b)(i) and (ii) of the ITAA 1936.

97. Specifically, the applicants submitted that to ignore or disregard the evidence concerning those facts which the Full Federal Court has found to be highly relevant in determining the dominant purpose of a taxpayer in similarly structured investment schemes would be an error of law indicating that the conclusion as to purpose was not that of a reasonable person. Conversely (based on Cooke 55 ATR 183, Sleight 136 FCR 211, and
Calder v Commissioner of Taxation 2005 ATC 4760; (2005) 59 ATR 655) a reasonable person would regard a round robin financing of the investors' participation as, at its highest, "only mildly pointing to a tax purpose" on the part of the investor. To place considerable emphasis on the financing of the investors' participation by a loan, implemented by a series of round robin transactions, as heavily pointing to a tax purpose on the part of the investor would again, according to the applicants' submissions, be to "seriously err in law". The conclusion would not be that of a reasonable person.

98. The applicants relied upon the evidence of Mr Terence Wilsteed which was said to be unchallenged as to the purpose of s 177D(b) of the ITAA 1936. His evidence was that it was reasonable to expect the top range of the revenue forecast to be derived from the tenements, the subject of the exploration and the prospecting activities. The evidence, it was said, supported the conclusion that the investment was projected to make a substantial return on a before tax and before finance basis from year one. Furthermore, the Project was forecast to derive income for 10 years.

99. The personal circumstances of each applicant were said to be objective facts which a reasonable person must have regard to when considering whether there was a dominant tax purpose and, in particular, when considering the manner in which the scheme was entered into or carried out (s 177D(b)(i) and the form and substance of the scheme (s 177D(b)(ii)) (Stone J in
Cooke v Commissioner of Taxation 2002 ATC 4937; (2002) 51 ATR 223 at [91]-[94] at first instance (approved by the Full Court at [90])). In Sleight 136 FCR 211, the Full Federal Court had upheld the respondent's application of Pt IVA to disallow the claimed deductions. The applicant asserted that the Full Federal Court did not suggest that it disagreed with the decision in Cooke 55 ATR 183 but rather sought only to distinguish it on the facts (Sleight per Hill J at [111] and per Carr J at [244]-[245]). The specific point of distinction of Sleight from Cooke was said by Hill J at [111] to be that the figures in the prospectus in Cooke if accepted showed a very substantial return on cash invested even if the tax consequences were not taken into account. The applicants emphasised that in Sleight both Hill J at [75]-[76] and Carr J at [216] placed great weight on the poor projected financial returns. So also did Nicholson J at first instance in Calder 59 ATR 655 at [122]-[123]. Having to rely on tax benefits of the financing to obtain an acceptable rate of return in Sleight 136 FCR 211 and Calder was not an element present in these appeals according to the applicants.

100. The applicants contended that the unchallenged evidence confirmed that it was reasonable for the applicants to expect a potential rate of return forecast for the Project, albeit not evenly spread over the 10 year term. As to the commercial emphasis in the Prospectus, again the applicants submitted that as a whole the Prospectus clearly emphasised the commercial benefits of the investment rather than the tax benefits. The applicants contended that the degree of emphasis on the tax benefit in the Prospectus was minor.

101. The Tribunal apparently assessed and summarised the applicants' detailed argument on the eight s 177D(b) factors in relation to the objective purpose, seriatim, as follows:

" (I) THE MANNER IN WHICH THE SCHEME WAS ENTERED INTO AND CARRIED OUT

152. The applicant relied on the submissions set out above in support of his contention that the manner in which the scheme was entered into and carried out, does not point to a dominant purpose of the applicant obtaining a tax benefit.

153. The applicant noted that in cross-examination it was suggested to the applicant by the respondent that he could have purchased shares in CPM as opposed to becoming an explorer and prospector in the Project. The applicant pointed out that this would not have given CPM the capacity to explore and prospect. It would have simply transferred wealth between the shareholders and that there is no evidence that the applicant had the ability to take a share placement in CPM to invest funds in any exploration and prospecting activities of CPM.

(II) THE FORM AND SUBSTANCE OF THE SCHEME

154. The applicant again relied on the submissions set out above in support of his contention that the form and substance of the scheme does not point to a dominant purpose of the applicant obtaining a tax benefit.

155. The applicant asserted that the substance and form of the arrangements were the same and pointed out again that it is not alleged that this was a sham (see Carr J in Sleight at [214]). The applicant asserted that the arrangements entered into were neither complex nor artificial, but similar to other managed investment scheme projects carried on for commercial gain. The applicant said that of the all project agreements were entered into at arm's length (sic). The applicant argued that it could not be said that the substance of the arrangements was any different from their form, namely a commercial operation to earn income from exploration and prospecting.

156. The applicant submitted that, compared to the taxpayers in Cooke and in relation to the tax deductions claimed, the cash outlay required by the applicant to invest in the Project was substantial. In the initial year the applicant was required to outlay $4,225.00 to claim a deduction of $12,800.00. In Cooke, the taxpayer in the initial year claimed deductions of $429,750.00 (which were funded by borrowings) and made actual cash payments of just $6,750 (Cooke Full Court [95 (ii) and (iii)]).

157. The respondent contends that the applicant was not required to undertake any activity beyond completing the application form and making payments, or in other words was a 'passive investor'. It was submitted that the applicant's circumstances are, in this regard, similar to the taxpayers in Cooke where they too were 'passive investors' (see Cooke Full Court [73]).

158. It was claimed that the limited participation required of the applicant was seen by him as an attractive feature of the Project, similar to the taxpayers in Cooke. It was contended by the respondent in Cooke (as is in this case) that there had been a construction of liability to prepay management fees (Cooke Full Court [95(iv)]), but the applicant pointed out that the Full Court in Cooke concluded that the taxpayers' dominant purpose was to obtain a commercial return (Cooke Full Court at [99] - [100]), not to obtain a tax benefit.

159. It was contended that, similar to the taxpayers in Cooke, the applicant's decision to prepay his fees using borrowed funds, that he 'sought to maximise his commercial returns through the appointment of a manager', and was a 'passive investor' who did not physically take part in the Project, does not point to the applicant having a dominant purpose to obtain a tax benefit.

(III) THE TIME AT WHICH THE SCHEME WAS ENTERED INTO AND THE LENGTH OF THE PERIOD DURING WHICH THE SCHEME WAS CARRIED OUT

160. The applicant relied on the submissions set out above in support of his contention that the time at which the scheme was entered into and the length of the period during which the scheme was carried out, does not point to a dominant purpose of the applicant obtaining a tax benefit.

(IV) THE RESULT IN RELATION TO THE OPERATION OF THIS ACT THAT, BUT FOR THIS PART, WOULD BE ACHIEVED BY THE SCHEME - APPLICANT'S SUBMISSIONS

161. The applicant would be entitled to a deduction for the applicant's claimed expenditure under s 8-1 of the 1997 Act or s 330-15 of the 1997 Act i.e. there would be a tax benefit.

162. However, the applicant said that simply to show that a taxpayer has obtained a tax benefit does not show that Part IVA applies (Hart Gummow and Hayne JJ at [53] and Cooke at first instance per Stone J at [95]).

(V) ANY CHANGE IN THE FINANCIAL POSITION OF THE RELEVANT TAXPAYER THAT RESULTED, WILL RESULT, OR MAY REASONABLY BE EXPECTED TO RESULT, FROM THE SCHEME - APPLICANT'S SUBMISSIONS

163. It is settled law that this factor is to be assessed at the time that the relevant transactions were entered into. (Sleight per Carr J [at 224])

164. Section 177D(b)(v) of the 1996 Act requires one to have regard to any change in the financial position of (the applicant) that 'may reasonably be expected to result from the scheme'. The return on investment that was reasonably expected to be achieved (at the time of entry), without tax benefits, is highly relevant (see Sleight, Cooke, Calder).

165. It was claimed that the Project forecast strong net before tax returns to the applicant. Based on what was said to be the unchallenged evidence of the returns as forecast in the Prospectus and the unchallenged evidence of the expert witness, Terrence Wilsteed, it was reasonable to expect the top range of revenue to be derived from the tenements the subject of the exploration and the prospecting activities.

166. This is not a case like Calder where it was found 'the project investment 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,' (Calder first instance per Nicholson J at [123]) or like Sleight where it was found the projected returns from the investment were ' miniscule over a long period of time ' (Sleight per Carr J at [216]).

167. According to the applicant in the face of clear Federal Court authority, to ignore evidence of the prospective commercial returns from the Project would not be the determination of a reasonable person.

168. The respondent contends that the tax benefits expected from the Project are 'certain', whereas the forecast returns of the Project were uncertain. Tax benefits are never 'certain'; but it is accepted that in this commercial venture, as in almost every commercial venture, there was no certainty about the returns. However, according to the applicant this cannot point to a dominant tax purpose.

169. The arrangement was again put that the applicant financed his investment in the Project by way of a full recourse loan and that this cannot be disregarded when considering the financial position of the relevant taxpayer that 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 - APPLICANT'S SUBMISSIONS.

170. The manager stood to profit from the receipt of management and marketing fees and license fees from the applicants and other investors over the life of the Project. The promoter's dominant purpose was to profit from the operation of the Project as was found to be the case in Vincent (
Vincent v Commissioner of Taxation (2002) 51 ATR 8) and Sleight. It cannot be concluded, viewed objectively it was argued that the promoter's dominant purpose was to obtain a tax benefit for the applicant. The professional manner in which the promoter managed the Project was said to indicate a prevailing purpose of the promoters to enhance their own commercial objectives.

171. Hart's case it was contended did not overturn or even consider the correctness of the statements and decisions by the Full Federal Court in Vincent and Sleight concerning the promoter's purpose. For the Tribunal to disregard the Full Federal Court decisions in Vincent and Sleight it was argued be to seriously err in law.

(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)

172. The applicant contended that he was at arm's length from the manager and all other entities included in the Project."

102. However, the Commissioner in at least as much detail, submitted that it would be concluded that the persons or one or more of the persons who entered into or carried out the scheme or part of the scheme did so for the sole or dominant purpose of enabling the applicants to obtain respective tax benefits. The person or persons entering into the scheme (or part of it) included:

(a) each applicant;
(b) Base Metals;
(c) EPF;
(d) Inteq; and
(e) the officers, servants and agents and advisors to Base Metals, EPF, Inteq and the applicants.

103. Given that the test posited by s 177D is objective, s 177D(b) does not require or 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. The Commissioner relied on
Commissioner of Taxation v Hart 2004 ATC 4599; (2004) 217 CLR 216 at [65]. Accordingly, the Commissioner expressly argued that the subjective knowledge, understanding or intention of the applicants (or anyone else) with respect to the scheme was irrelevant. In the global acceptance of the Commissioner's submissions, it appears clear that the learned Tribunal Member has accepted this submission. Except in relation to the question of penalty, the submission was correct.

104. The Commissioner drew on examples such as
Vincent v Commissioner of Taxation (Cth) (2002) ATC 4490 at first instance at [133] and [142] per French J. The Commissioner also submitted that as the terms of s 177D make clear, the reference in that section to purpose, objectively determined, includes not only the applicants' purpose in entering into the scheme but the purpose of the scheme's promoters in enabling the applicants and other investors who subscribed to the Project to obtain tax benefits in connection with the scheme. And again, the Commissioner drew on dictum in
Vincent v Commissioner of Taxation 2002 ATC 4742; (2002) 124 FCR 350 at [100], Puzey 50 ATR 595 at [105] and Sleight 136 FCR 211 on appeal at [65]-[66], [67.3], [96] and [239]-[240]. On consideration of the eight factors set out in s 177D(b), it does not mean that each of those matters must necessarily point to the purpose referred to in s 177D(b). As Hill J pointed out in
Peabody v Commissioner of Taxation 93 ATC 4104; (1993) 40 FCR 531 at 543, some of the matters may point in one direction and others may point in another. It is the evaluation of these matters alone or in combination some for and some against that s 177D requires in order to reach the conclusion to which it refers - see also Sleight 136 FCR 211 per Hill J at [67]. The relevant purpose may be so apparent on the evidence taken as a whole that consideration of the statutory factors listed in s 177D(b) can be collapsed into a global assessment of purpose -
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd 2001 ATC 4343; (2001) 207 CLR 235 at [94] and Sleight 136 FCR 211 per Hill J at [67].

105. Importantly, the pursuit of a commercial objective was not inconsistent with the existence of a dominant purpose of enabling a taxpayer to obtain a tax benefit. It was submitted this had been pointed out from the earliest authority (
Federal Commissioner of Taxation v Spotless Services Ltd 96 ATC 5201; (1996) 186 CLR 404 at 415-416) through authorities concerning agricultural investments (Sleight 136 FCR 211 per Hill J at [67.6] and ultimately confirmed by the High Court in Hart 217 CLR 216 per Gleeson CJ and McHugh J at [10]-[12], [16]-[18] per Gummow and Hayne JJ at [52], [68], [71] per Callinan J at [93]-[96].

106. The Commissioner relied on the fact that both in Spotless 186 CLR 404 and Hart 217 CLR 216 the High Court emphasised the shape or form taken by the scheme as pointing to the objective purpose of the participants.

107. The Commissioner emphasised that the scheme contemplated that the applicants' cost of participating in the Project would be covered by tax savings consequent upon the deductions which the scheme would generate for the applicants. The applicants were able to obtain for the year of income in 1998 and 1999 respectively, immediate tax deductions totalling $12,800 for each participation for a minimal cash outlay of only $25 which was the cost of the EPF shares. They committed themselves to pay the sum of $4,025 per participation no later than September of that respective calendar year. The tax saving from the deduction in that year of income more than covered the payment that was required to be made in the following year of income. On any construction of the loan agreements, the applicants would not be required to make any further payment of principal or interest under the loan agreements. Those agreements provided for that payment to be made from the Project. They contained no express provision for payment of the balance of the principal loan by the applicants personally. It was a feature of the Project that the debtors would be the owners of the lender. In any event, the scheme collapsed in 2001, the lender was dissolved in 2004 and the borrowers have not been required to pay the balance of the loans.

108. Because of the arrangements between Base Metals, Laton Corporate and EPF only up to $4,025 of the $12,000 supposedly contributed by each applicant per participation in each year would ever be available for use in the pursuit of the commercial objectives of the Project. Further, that sum could only become available when it was paid in September in the year the investment was made. The only explanation for the difference between the amounts of the proposed management fee and the amount that could actually be applied to the pursuit of the commercial objectives of the Project, according to the Commissioner's submission, lay in the purpose of the parties to enable each applicant to obtain tax savings that would exceed the actual cost of participation in the Project. That benefit of tax deductions for each applicant was immediate.

109. It appears to me that the Tribunal cannot be taken to have disregarded the applicants' evidence and arguments on this topic. Having recorded in detail the applicants' argument, it also recorded those of the Commissioner but accepted those arguments. In my view, acceptance of those arguments necessarily negated those of the applicants. They were as follows:

"238 The matters to which regard must be had under s 177D(b) include:

SECTION 177D(B)(I): THE MANNER IN WHICH THE SCHEME WAS ENTERED INTO OR CARRIED OUT

239. The manner in which the scheme was entered into or carried indicates that the applicants and/or Base Metals and/or EPF entered into and carried out the scheme for the dominant purpose of enabling the applicants to obtain the tax benefits. The material facts are as follows:

(a) the scheme was promoted and marketed as tax effective;

(b) the prospectus highlighted the taxation benefits for the applicant and identified them as immediate income tax savings. A participant, for a minimal outlay in the income year in which he joined, was provided with deductible outgoings sufficient to fund the further payment required of him in September of that year, and give him a cash surplus. The amount of the tax savings was greater than the outlay of money;

(c) in contrast the commercial consequences were promoted as speculative;

(d) the scheme was entered into by the applicant executing the three pro forma applications in the prospectus. Further agreements, including the loan agreement and the management agreement, were made by EPF or Inteq on behalf of the participants;

(e) the payment required in the financial year in which an applicant joined was minimal ($25 per participation) for a tax deduction of $12,800 in that year;

(f) by that payment, the participants in the scheme wholly owned EPF, the company which provided finance to the participants;

(g) participants obtained loans, described in the prospectus as full recourse loans, but the documents did not envisage that the borrowers would have a personal liability for repayment of the loan, other than the principal repayment of $4,025 by 30 September of the relevant year;

(h) apart from doing what was required of him in order to obtain the tax deductions and to make the required outlay of money, namely signing the application forms, making the payment for shares in EPF, and making the single repayment of principal in September of the year in which he joined, each applicant carried out no activities in relation to the project;

(i) the payment of money to Base under the management agreement was effected as part of the round robin of funds involving Base, Laton and EPF. The only funds available to Base for use or employment in any exploration or prospecting activities were the cash payments which each participant made in September.

SECTION 177D(B)(II) - THE FORM AND SUBSTANCE OF THE SCHEME

240. The form of the scheme is that which appeared in the prospectus and which was embodied in:

(a) the applications for shares;

(b) the applications for loans;

(c) the applications for participations;

(d) the management agreement; and

(e) the loan agreement.

241. Under the loan agreements each applicant borrowed $12,800 for each participation to fund his participation in the project. This comprised $12,000 which was paid to Base under the management agreement in return for management services, and $800 interest.

242. In substance, those amounts were never available for the project. The only money outlaid by each applicant in the financial year in which he joined was $25 per participation for the purchase of shares in EPF (which was not available for the operations of the project). The only money outlaid in any subsequent income year was the sum of $4,025 per participation which he paid EPF in September of the year in which he joined.

243. For its part, Base received no funds from an applicant in the year in which he joined for its use or employment in any exploration or prospecting activities. The money which it purportedly received pursuant to the management agreement was advanced to it by means of bills of exchange, which it accepted in satisfaction of the management fees, and endorsed to Laton Corporate. Funds held by Laton Corporate under the Deposit Deed were not available to Base, other than to the extent of cash payments actually made by participants.

244. The form of the scheme enabled each applicant to obtain tax deductions for an aggregate amount that was well in excess of the amount outlaid by him. In substance, the participants were passive investors, whose cash contributions to the project were less than the tax savings made available by the form of the scheme.

SECTION 177D(B)(III) - THE TIME AT WHICH THE SCHEME WAS ENTERED INTO AND THE LENGTH OF THE PERIOD DURING WHICH THE SCHEME WAS CARRIED OUT

245. The scheme was entered into before 30 June in each year - as early as March in some cases. In each year, however, the applicant was required to contribute only the cost of $25 per participation to obtain shares in EPF before 30 June. Although $12,800 in management fees and interest per participation was purportedly incurred before 30 June, all further payment was deferred until 30 September when the repayment of $4025 of the principal sum was required.

246. The payment by EPF to Base of management fees was effected by the round robin under the bill facility and deposit with Laton Corporate on or before 30 June in each year.

247. Further, although the Project was nominally for 10 years and 5 months, a participant was required to do nothing further after the payment in 30 September of the year in which he joined. Further management fees were payable only out of income (if any).

248. The exchange of bills by which the payment of the participants' management fees was purportedly paid to Base, and then deposited in Laton Corporate, provided no funds for the operation of the business in the year of joining. The funds were not available to Base under the deposit deed with Laton Corporate until actual cash payments were made in September of each year, but gave the participant his deduction for the year of joining.

SECTION 177D(B)(IV) - THE RESULT IN RELATION TO THE OPERATION OF THIS ACT THAT, BUT FOR THIS PART WOULD BE ACHIEVED BY THE SCHEME

249. But for the operation of Part IVA, in the 1998 year of income the applicant would be entitled to deductions for the following amounts as a result of the scheme: ie $96,000 for the so called Application fees and $4,800 for interest compared with the amounts of $4,025 per participation actually paid by the applicant.

250. Thus, but for Pt IVA, the applicant would be entitled to deductions in an aggregate amount that was well in excess of the amount actually expended by him.

SECTION 177D(B)(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

251. The applicant was required to make a cash outlay of $25 for purchase of shares, and $4025 principal repayment for each participation he held. The financial position of the applicant was improved by the tax savings which the scheme generated. The applicant received immediate tax savings which exceeded his cash outlays in respect of the scheme in the 1998 year of income.

252. The applicant did not derive any income from his investment in the scheme.

SECTION 177D(B)(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

253. By 30 June 1998, Base was insolvent. In the following years, the money which became available to Base to meet it's obligations for exploration and prospecting was limited to the $4025 per participation which was paid by the participants in September 1998 and September 1999. In the event, the whole project collapsed. Base was placed in liquidation, and EPF was dissolved.

SECTION 177D(B)(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

254. There was no other relevant consequence.

SECTION 177D(B)(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)

255. The connection between the applicants and each of Base and EPF was embodied in the legal rights and obligations created by the prospectus and the applications and agreements referred to above. There is no evidence of any other connection between them.

256. In addition, as part of the scheme the applicants, together with each of the other participants in the project, became shareholders in EPF.

SECTION 177D(B) - CONCLUSION

257. The respondent submitted that having regard to the matters referred to in s 177D(b) referred to above a reasonable person would conclude that:

(a) the dominant purpose of the applicants, in entering into the scheme and carrying it out in the 1998 year of income and, where relevant, the 1999 year of income was to obtain the tax benefits in connection with the scheme; and

(b) the dominant purpose of the project entities, Base and EPF, was to enable the applicant to obtain the tax benefits in connection with the scheme. It is not to the point if the overall commercial objective of the project entities was to make money. They achieved their commercial purpose by creating a structure to which the attractiveness of the tax advantages it secured was central.

258. It follows from the foregoing that the respondent was authorised and entitled under s 177F(1)(b) of the ITAA 1936 to determine that the tax deductions claimed by the applicant in relation to the scheme for the year ended 30 June 1998 were not allowable."

Tribunal's conclusion on PT IVA

110. As to Pt IVA, the Tribunal said:

" 3. PART IVA

263. The Tribunal having found that the deductions claimed by the applicant should not be allowed for the reasons stated above there is strictly speaking no need for the Tribunal to consider the provisions of Part IVA of the Income Tax Assessment Act 1936.

264. However, it should be stated that if it had been necessary to decide the matter under Part IVA then the Tribunal would have found that, for the reasons contended by the respondent as set out above, Part IVA operates to deny a deduction. Amounts actually paid by the applicant would, however in the context of s 177F of the Act have been allowed, if the matter fell to be decided under Part IVA."

Penalty

111. As to penalty, the Tribunal also dealt with this topic succinctly, recording as follows:

259. The amount of assessed additional tax is not excessive.
260. The applicant is liable to pay the amount of penalty and additional tax included in the amended assessment by reason of ss 226 and/or 226L of ITAA 1936.
261. It was not at the time each applicant lodged his return and it is not now reasonably arguable, within the meaning of ss 226 and 226L, that the applicant is entitled to the claimed deductions under s 8-1 of the ITAA 1997 or s 330-15 of the ITAA 1997 or, alternatively, that Part IVA does not apply.

Conclusion on adequacy of reasons generally

112. In the absence of any submissions as to specific matters which the Tribunal failed to consider and rule upon, I have endeavoured to identify the major areas in respect of which the submissions of the parties as recorded in the Tribunal's decisions do not appear to directly coincide. In the end, in my view, there are only two areas of focus in the applicants' submissions which are not the subject of express response from the Commissioner.

113. The first of those areas was in relation to the degree of control that each of the participants was able, as a matter of law, to exert over the activities of the manager. This degree of control was said to support a conclusion of actual involvement by the applicants in the Project. In my view, adoption and acceptance of the Commissioner's submissions by the Tribunal in relation to the nature of the Project and the lack of income derived from it and the lack of connection between management fees and income meant that the extent of control over the manager had no bearing in any event on the deductibility of the amounts to be paid for "management fees". Once the Commissioner's submissions on these topics are accepted, the extent of control was irrelevant to deductibility.

114. The second major area was the submission that the returns from the Project over a 10 year period, although not necessarily even, were significant. Thus it was said the applicants could not be put into the category of those cases where it was clear that the main interest was in recovering tax deductibility for the payments. Once again, it appears to me that when the Commissioner's submissions in relation to the lack of income to be derived from the Project by the claiming entities especially within the relevant years having been accepted by the Tribunal, the applicants' submission as to the likely return necessarily falls away.

115. In short, while the Tribunal did not set out expressly its considerations of each and every argument raised by the applicants, it seems to me that acceptance of the submissions of the Commissioner necessarily meant that those arguments of the applicants were rejected.

116. Subject to what is said below on penalty, as to s 226 and s 226L, the Tribunal's statements on this topic (at [259]-[261]) were certainly succinct. However once the Tribunal has agreed with, recorded and accepted all that has been submitted for the Commissioner, the process of reasoning requires little more to be said to justify the conclusion in these paragraphs.

Conclusion on subjective purpose and penalty

117. On the second limb of the "appeal", the applicants argue that within the context of the imposition of a penalty, the Tribunal erred in law in failing to make the critical material finding as to the applicants' subjective or actual purposes. The applicants submit that the Tribunal was required to record its conclusion in relation to that evidence. It is argued that it failed to refer to the evidence it relied upon in deciding that the Commissioner was entitled to impose additional tax by way of a penalty.

118. The applicants rely on the decision of
Starr v Commissioner of Taxation of the Commonwealth of Australia 2007 ATC 4080; (2007) 65 ATR 86. At the time of arguing the matter before the Tribunal the decision in Starr had not been delivered. By the time the Tribunal published its reasons in April 2007, however, the decision had been delivered. It appears to be common ground that no submission was made to the Tribunal that the decision should be taken into account. (The first instance decision in Starr was appealed by the Commissioner). In Starr at first instance French J said at [50], [52] and [53]:

"50 The text of the definition of 'tax avoidance scheme' in s 224(2) had the following inter-related features:

1. It used the relevant purpose to define the subclass of schemes which are 'tax avoidance schemes' for the purpose of s 224.

2. The relevant sole and dominant purpose was that for which the scheme 'was entered into or carried out'.

3. The use of the words 'entered into' or 'carried out' suggest that the provision was formulated on the apparent assumption that the relevant inquiry was into the existence of an actual rather than attributed purpose.

The definition is used for the purpose of imposing liability to a penalty by way of additional tax. In my opinion the word 'purpose' in the definition of 'tax avoidance' in s 224(2) should be taken, like 'purpose' in s 4D of the Trade Practices Act 1974 (Cth), to have referred to the purpose of those who entered into the relevant scheme. In this case the purpose is that of the taxpayers, Messrs Starr and Hopkins, and possibly also those of their advisors. The uncontested evidence of all of them was that their purpose in entering into the scheme was to obtain a commercial return. While tax benefits were relevant, they were not the sole or dominant purpose.

…

52 It is to be recalled that s 226L was a penalty provision. The fact of entry into a tax avoidance scheme was a necessary condition of the imposition of the penalty for which it provided. If the purpose of penalties is to secure compliance with the tax laws, they may ordinarily be expected to be concerned with the conduct and purposes of defaulting taxpayers. That is to say their actual conduct and actual purposes. It is difficult to see why if 2 constructions of s 224(2) be available that construction should be adopted which would permit the imposition of a penalty by reference to a purpose which the taxpayer never had. Of course, purpose could be assessed even under s 224(2) by reference to objective factors. It may also be that the statements of individual taxpayers about their purposes relevant to the imposition of penalty would be given little weight. But the relative weight and extent of subjective and objective evidence relevant to that determination will be an accident of the particular proceedings in which the question arises. In this case the evidence of the taxpayers and the advisors was unchallenged.

53 In my opinion, the tribunal erred in law in excluding consideration of the stated purposes of Messrs Starr and Hopkins. Their statements were not contested. They were not inherently improbable. The tribunal came to a contrary conclusion evidently based upon that reached by the Federal Court in
Vincent v FCT (2002) 124 FCR 350; 51 ATR 18; 2002 ATC 4742; 193 ALR 686 about the application of Pt IVA."

119. That decision was unanimously upheld by the Full Court in
Commissioner of Taxation v Starr 2007 ATC 5447; (2007) 164 FCR 436 at [63]-[67]:

"63 Nor, in our view, is it anomalous that Parliament would provide that liability for penalty tax would in some, but not other circumstances, be assessed by reference to subjective considerations. As French J observed, if the purpose of additional penalty tax is to promote compliance with tax laws, it was not surprising that a penalty provision may look to actual purpose. Further, there is, in our view, no necessary inconsistency in a penalty provision requiring an examination of the actual purpose of a taxpayer and an anti avoidance provision not requiring such an examination. Section 226H of the Act, which deals with recklessness, and s 226J, which deals with intentional disregard of the law, are examples of other penalty provisions which call for an examination of the taxpayer's subjective state of mind.
64 The Commissioner also contended that a construction of s 224(2) which imported subjective considerations, offended a fundamental principle concerning the construction of taxation legislation. It was said that such a test would cause the additional tax to be imposed in an arbitrary fashion because it would not be imposed by reference to ascertainable criteria. Further, said the Commissioner, it would make the application of the Act more difficult and produce arbitrary and capricious results amongst taxpayers in the same scheme.
65 In our view, the argument that the adoption of a subjective test would mean that liability for additional tax would be imposed on other than ascertainable criteria, is not be accepted. Liability to additional tax would be ascertained by reference to the actual purpose of the parties to the scheme. That is an ascertainable question of fact. It is the case of course, that, as Kirby J observed in the passage from News 215 CLR 563 referred to at [46] above, the process of determining the actual purpose of the parties to a scheme has the potential to be more difficult than attributing a purpose to the parties to a scheme objectively, but this does not mean that the actual purpose is not ascertainable. It is also accepted that the administration of the provisions under s 224 and s 226L would require a different approach by the Commissioner than in relation to the scheme sections applying to Pt IVA. However, the difficulties associated with the adoption of a subjective test did not inhibit the High Court in giving effect to the subjective tenor of the language of s 4F of the TPA in News 215 CLR 563.
66 In our view, French J did not err in concluding that s 224(2) and, therefore, s 226L, imported a subjective test.
67 The Commissioner also contended that even if the test under s 224(2) allowed consideration of the taxpayer's subjective purpose, French J could not reasonably have come to the conclusion that it was not the sole or dominant purpose of the taxpayers in entering into the scheme, to pay no tax or less tax. In our view, it was open to French J to have concluded, on the evidence, that it was not the sole or dominant purpose of the taxpayers in entering into the scheme to pay no tax or less tax. Before the Tribunal, the Commissioner elected neither to lead any evidence nor to cross examine any of the witnesses, including the taxpayers. In those circumstances, it was reasonably open to French J to conclude that on the evidence that was before the Tribunal, the purpose of the taxpayers was not the impugned purpose. Once one of the parties to the scheme did not have the impugned purpose, that was the end of the inquiry. The fact that French J had determined in Vincent 124 CLR 350 that, on the application of a different test, Pt IVA applied to the scheme entered into by Ms Vincent, is not to the point."

120. Regard then must be had to the applicants' subjective purpose when determining whether penalties under s 226L of the ITAA 1936 can be imposed. The Tribunal cannot disregard or make no finding on the applicants' actual purpose.

121. The Commissioner submitted that the way the applicants conducted the applications in the Tribunal was that the issue of penalty was taken as following the result of the issue of deductibility. If they succeeded on deductibility, the penalty question would fall away whereas if they failed on deductibility, they would fail on penalty. In this regard, the Commissioner relied on the observations of Hill J in
Commissioner of Taxation v Zoffanies Pty Ltd 2003 ATC 4942; (2003) 132 FCR 523 at [29]:

"Particularly in considering whether the Tribunal has erred in law by failing to consider an argument advanced by a party it will be necessary to consider not merely the reasons for the decision but also the submissions made to the Tribunal. It may be said, at least generally, that a Tribunal will commit no error of law by failing to deal with an argument that was not put to it:
Re Minister for Immigration and Multicultural and Indigenous Affairs;
Ex parte Applicants S134/2002 (2003) 211 CLR 441 at [32] per Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ."

122. The Commissioner rejects the suggestion that the applicants' evidence in their witness statements about their subjective purpose was uncontested. It was submitted that each applicant gave evidence (but was challenged) to the effect that his subjective purpose for entering into the scheme was to obtain a return and not to pay less tax. The Commissioner relies on the fact that a finding as to the relevant subjective purpose for the purposes of s 226L is not to be based solely on the evidence of the taxpayer: Starr 65 ATR 86 at [29], [38] and [52]. The Commissioner says that in reality each applicant was cross-examined about entry into the Project and in particular why it was thought that such entry would obtain a return on investment.

123. The Commissioner submits that the appropriate way to treat the reasons when the Tribunal has expressed no finding in relation to the evidence as to subjective purpose is that the Tribunal found the evidence of subjective purpose was of little or no assistance. That approach, it is submitted, would accord with the observation in Starr 65 ATR 86 that the subjective purpose conclusion should be reached not solely from the evidence of the taxpayer.

124. However, I am inclined to accept the submission of the applicants that for the Tribunal not to refer to the subjective purpose at all and to the evidence and its findings on that issue, even though it may prove to be only one component making up the ultimate finding in relation to purpose, was an error. Doubtless, had the decision of Starr 65 ATR 86 gained greater notoriety prior to the publication of the reasons in these applications, (which could easily have been achieved by the applicants seeking leave to make additional submissions as a result of the decision) then this matter could have been drawn to the attention of the Tribunal.

125. The Commissioner complains that it is inappropriate for the applicants to attack the Tribunal's decision on this basis when at no time did it seek to emphasise to the Tribunal after the handing down of the decision in Starr the importance of reaching a finding in relation to the credibility of the applicants on the topic of their subjective purpose. While there may be some force in that observation, nevertheless, it appears to me that on the authorities, it is necessary on the issue of penalty, for the Tribunal to take into account the subjective purpose of the applicants and particularly to express its conclusion on whether or not it accepted the evidence given by the applicants on that topic. This, the Tribunal did not do. In my view, although the error of law which this omission constitutes is understandable in light of the failure to refer the Tribunal to the decision of Starr 65 ATR 86, nevertheless it constitutes a reviewable error.

126. It follows that I would allow the application on the limited aspect of penalty. I will hear from the parties as to appropriate consequential orders.

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NARBEY v FC of T

Grounds 4.1 to 4.6

Grounds 4.7 to 4.11

Mining deduction

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Item	For this type of expenditure:	the deductibility tests are:
1.	Exploration or prospecting for minerals (other than *petroleum)	1. You carried on eligible mining operations (other than petroleum mining).
		2. It would be reasonable to conclude you proposed to carry on such operations.
		3. You carried on a business of, or a business that included, exploration or prospecting for minerals (other than *petroleum) obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.
2.	Exploration or prospecting for quarry materials	1. You carried on *eligible quarrying operations.
		2. It would be reasonable to conclude you proposed to carry on such operations.
		3. You carried on a business of, or a business that included, exploration or prospecting for quarry materials obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.
3.	Exploration or prospecting for petroleum	1. You carried on eligible mining operations in the course of petroleum mining.
		2. It would be reasonable to conclude you proposed to carry on such operations.
		3. You carried on a business of, or a business that included, exploration or prospecting for petroleum obtainable by such operations, and the expenditure was necessarily incurred in carrying on that business.

No of bills	Face value of each	Aggregate face value	Acceptance date
32	$996,000	$31,872,000	17 June 1998
7	6 × $996,000 1 × $984,000	$6,960,000	25 June 1998
2	$996,000	$1,992,000	26 June 1998
5	4 × $996,000 1 × $984,000	$4,968,000	30 June 1998
2	1 × $996,000 1 × $972,000	$1,968,000	30 June 1998
3	$996,000	$2,988,000	30 June 1998
30	28 × $996,000 1 × $684,000 1 × $336,000	$28,908,000	30 June 1998
4	2 × $996,000 1 × $780,000 1 × $468,000	$3,240,000	30 June 1998
1	$372,000	$372,000	6 July 1998
86		$83,268,000.00"