Sole Luna Pty Ltd as trustee for the PA Wade No 2 Settlement Trust v FC of T; Wade v FC of T

Judges:
Steward J

Court:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2019] FCA 1195

Judgment date: 2 August 2019

Steward J

1. Following completion of an audit in June 2017, the respondent (the "Commissioner") issued three Notices of Assessment. One was issued to Sole Luna Pty Ltd ("Sole Luna") as the trustee of the PA Wade No.2 Settlement Trust (the "Wade Trust") for the year ended 30 June 2013. Two were issued to Mr Wade for the years ended 30 June 2015 and 30 June 2016. Mr Wade is a beneficiary of the Wade Trust. Two Notices of Assessment of Shortfall Penalty were also issued to the taxpayers. Sole Luna and Mr Wade objected to these assessments. Their objections were disallowed. The taxpayers now appeal those decisions to this Court.

2. The assessments, in general terms, raised the following issues for consideration by the Court in respect of which the onus of proof lay on the taxpayers:

(1) whether the trustee of the Wade Trust incurred a deductible loss in the year ended 30 June 2013 arising from the repayment of certain foreign currency denominated loans (the Commissioner denied the existence of any such loans) pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the "1997 Act"); alternatively, pursuant to former Div 3B of Pt III of the Income Tax

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Assessment Act 1936 (Cth) (the "1936 Act"); further and alternatively, pursuant to Div 775 of Pt 4-5 of the 1997 Act;
(2) if the trustee of the Wade Trust was entitled to such a deductible loss, whether Pt IVA of the 1936 Act applied to cancel that tax benefit;
(3) whether the trustee of the Wade Trust incurred a capital loss when part of an Australian dollar denominated loan (the Commissioner denied the existence of such a loan) was forgiven in the year ended 30 June 2013;
(4) whether the Commissioner correctly increased Mr Wade's assessable income for the 2015 and 2016 years of income on the basis that the trustee of the Wade Trust was not entitled to the deductible loss and/or to the capital loss; and
(5) whether both the trustee of the Wade Trust and Mr Wade were liable to pay additional tax by way of penalty, and if so, did the Commissioner err in law in failing to remit those penalties.

Facts

3. Most of the facts were not in dispute, although the legal characterisation of some key matters was the subject of significant argument.

4. In 1979, Mr Wade, who was born in Australia, established a successful travel agency business in the United Kingdom (the "UK") called "Travelbag". It was owned by a company incorporated in the UK called Travelbag plc. In 1991, Mr Wade sold his shares in that company (which comprised about 50% of its issued capital) to Delphos Holdings Ltd ("Delphos") in exchange for 100% of the issued shares (being one share) in Delphos. In 1998, the Delphos share was transferred to the Wade Trust which was established within the Bailiwick of Guernsey. Amongst others, Mr Wade was a named beneficiary of that trust. The Wade Trust was initially managed by an accounting firm on the island of Guernsey. In 1999, Mr Wade engaged Mr Phillip Evans ("Mr Evans"), of the accounting firm Moore Stephens Services SAM ("Moore Stephens") in the Principality of Monaco ("Monaco"), to take over the management of the Wade Trust. A new trustee was appointed. Its name was Port of Hercules Trustees Ltd ("POHTL").

5. In 2000, Mr Wade started to spend more time in Australia. Eventually, Australia became his main home. He used Davidsons Accountants and Business Consultants ("Davidsons") in Geelong as a local accounting firm. That firm started lodging tax returns on behalf of Mr Wade when in 2001 he became a resident of Australia for income tax purposes.

6. Also in 2000, the trustee of the Wade Trust became the owner of the shares formerly held by Delphos in Travelbag plc. Shortly thereafter, the trustee of the Wade Trust sold some of those shares to a UK company called "3i Group" for £500,000. The trustee of the Wade Trust then transferred the balance of its shares, to a company called Travelbag Holdings Ltd ("THL") in return for an issue of shares in THL. Certain other original shareholders also transferred their shares in Travelbag plc to THL. In 2003, all of the shares in THL were then sold to another UK company called "Ebookers plc" for £52,380,806. The Wade Trust's share of these proceeds was around £32.4 million.

7. What did the Wade Trust do with this money? The evidence about that before me was thin. Mr Wade's recollection was hazy. In part, this is because it was not disputed that Mr Evans controlled the Wade Trust at this time. Mr Wade received only limited information from Mr Evans concerning the trust on an annual basis.

8. It seemed to be accepted that the trustee of the Wade Trust owned a subsidiary called Starburst Enterprises Limited ("Starburst") which had been incorporated in those Virgin Islands which are known as the British Virgin Islands ("BVI"). Starburst was also administered by Moore Stephens from Monaco. Relevantly, the trustee of the Wade Trust owned another company incorporated in the state of Delaware in the United States called Three Stars, Inc. ("Three Stars") and another BVI company called El Condor Ltd ("El Condor").

Conceded foreign currency payments to Starburst

9. It was accepted by the parties before me that the trustee of the Wade Trust made payments to Starburst between 2002 and 2007

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in different currencies. The payments were summarised by the Commissioner in the following table which was contained in his outline of written submissions:

Date	£	US$	€
22 February 2002	500,000
27 February 2003	7,000,000
30 April 2003			500,000
6 February 2004	1,839,076
3 March 2004	337,993
23 March 2004	1,958,277
23 March 2004	2,198,679
23 March 2004				5,672,025
23 April 2004			946,032
12 August 2004			182,129
31 May 2005			1,189,195
22 June 2005				14,744
5 September 2006	1,000,000
17 October 2006	470,834
23 October 2007	858,518
TOTALS	£16,163,377		US$2,318,356	€5,686,7969 [sic]

10. The taxpayers contended that each of these sums constituted loans made by the Wade Trust to its subsidiary. The Commissioner disagreed. He submitted that the taxpayers had not discharged their onus of proof of showing that the making of each of these payments created a relationship of debtor and creditor. This is an important issue. If the payments were not made by way of loan, the taxpayers will fail in each tax appeal concerning primary tax.

Purported Australian dollar denominated loan to Starburst

11. The taxpayers also contended that the trustee of the Wade Trust lent a considerable sum of Australian dollars to Starburst. Unlike the payments of foreign currency, the Commissioner never conceded that such a payment had been made. The taxpayer submitted that this alleged borrowing arose from an assignment to Starburst of an existing Australian dollar denominated loan owed to the Wade Trust by PA Wade Management Pty Limited as trustee of the Peter Wade Investment Trust ("PWIT"). This alleged assignment took place in 2007, with retrospective effect from 2004. It was said that the consideration for this assignment was the making of "appropriate offsets" in an existing intercompany balance between the trustee of the Wade Trust, Starburst and PA Wade Management Pty Limited. In that respect, I had before me a letter dated 13 December 2007 sent by the trustee of the Wade Trust to Starburst referring to a board meeting held on 13 December 2007 at which the trustee had agreed to assign the purported loan to Starburst. The letter recited as follows:

RE: ASSIGNMENT OF AUD21,000,000 RECEIVABLE

…

It is understood that this assignment of debt is at book value; it will give rise to appropriate offsets in inter-company balances between us, [Starburst] and [PA Wade Management Pty Limited].

By signing below [Starburst] and P.A. Wade Management Pty Limited indicate their acceptance of this agreement.

At the bottom of the letter appeared signatures for the trustee of the Wade Trust, Starburst and PA Wade Management Pty Limited. Attached to the letter was the following resolution of the trustee of the Wade Trust dated 13 July 2004:

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Resolution in writing of the directors of PORT OF HERCULES TRUSTEES LIMITED as Trustees of P A WADE SETTLEMENT NO 2 in accordance with the Articles of Association.

Repayment by Peter Wade Investment Trust of Loan Advance of A$15,000,000 and further Advance of A$21,000,000 There is attached to this resolution a Loan Agreement between the trust and P A Wade Management Pty Ltd as trustee of the Peter Wade Investment Trust (PWIT) whereby PWIT repays the sum of A$15,000,000 to the trust and the trust makes a further advance of the sum of A$21,000,000 to PWIT in accordance with the terms of the said Loan Agreement. IT IS RESOLVED to approve the said Loan Agreement and to authorise the affixing of the Common Seal thereto in the presence of Phillip A Evans and Peter J Brigham.

Fixed and Floating Charge There is attached to this resolution a Fixed and Floating Charge whereby PWIT charges all its property in favour of the trust to secure the repayment by PWIT to the trust of the loan of A$21,000,000 and all interest due thereon. IT IS RESOLVED to approve the said Fixed and Floating Charge and to authorise the affixing of the Common Seal thereto in the presence of Phillip A Evans and Peter J Brigham.

12. The foregoing resolution appeared to express the proposition that PWIT would repay $15 million to the Wade Trust, and that the Wade Trust would then make a further advance back to PWIT of $21 million. I was asked to infer that an increase in indebtedness recorded in the accounts of the Wade Trust for the 2004 year (as to which see below) should be characterised as evidence of a borrowing by Starburst from the Wade Trust on account of this assignment translated into pounds sterling.

13. No witnesses were called who had direct knowledge about the making of any of the foreign currency or Australian-dollar denominated payments. Mr Wade had no such direct knowledge as the payments were made when the Wade Trust was being managed by Mr Evans. Mr Evans was not called to give evidence. No resolutions or minutes of the Wade Trust or of Starburst were adduced into evidence which explained the nature of the payments made between these entities, or purportedly so made. No written loan agreement or agreements were entered into at the time the payments were made. The terms of the purported loans were never identified. No interest payments were ever made. No repayments of principal were made until 2013 as contended by the taxpayers. No security was ever given by Starburst.

Evidence concerning the nature of the payments

14. A written loan agreement was eventually entered into on 18 March 2013 by Sole Luna (as lender) and Starburst (as borrower) (the "2013 Loan Agreement"). The 2013 Loan Agreement was signed by Mr Wade as a director of Starburst and by Ms Giovanna Faraone, Mr Wade's financial adviser, as sole director of Sole Luna in its capacity as trustee of the Wade Trust (it was appointed as sole trustee on 19 October 2012). The recitals to that document were as follows:

A. The Lender has agreed, at the request of the Borrower, to provide the Loan to the Borrower.

B. The Loan was advanced by the Lender to the Borrower on various dates up to 1 March 2013.

C. The Parties agree that interest shall be payable on the loan from 12 September 2013.

D. The Lender and the Borrower have agreed to enter into this Agreement to set out the terms and conditions on which the Loan was advanced to the Borrower.

These recitals are not evidence concerning the nature of the foreign currency and Australian dollar-denominated payments made set out above at [9] and [12]. Neither Mr Wade nor Ms Faraone were involved in the making of any of those payments. At best, they might reflect the understanding of the parties in 2013 as to what the payments represented. That understanding might be right; it might also be wrong.

15. The taxpayers relied on the following three different sets of accounts:

(a) financial statements of the Wade Trust for the years ended 31 December 2000 and 2001 and then for the income years ended 30 June 2002 to 30 June 2006 expressed in pounds sterling. These were found in boxes kept by Moore Stephens in Monaco. They were discovered by a Ms Patricia Osborne and a Ms Monica Longo, both of Moore

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Stephens. These accounts were prepared by Moore Stephens in Monaco around the same period when all but three of the foreign currency payments were made;
(b) financial statements of the Wade Trust for the 18-month period ended 30 June 2003 and for the years ended 2004 to 2013 expressed in Australian dollars. The 2003 to 2008 statements were restated accounts prepared by Moore Stephens and Davidsons in 2009 for the purposes of presentation to the Australian Taxation Office ("ATO") which was, at that time, undertaking a review of Mr Wade and his companies. They were restatements of the pound sterling denominated original accounts. Moore Stephens and Davidsons also prepared Australian dollar denominated statements for the 2009 to 2012 years. Thereafter, Davidsons alone prepared the financial statements for the Wade Trust. It was said that Davidsons had "audited" these accounts;
(c) financial statements of Starburst for the same period or similar periods as that set out in paragraph (b) hereof and prepared in Australia on the same basis in Australian dollars.

The authenticity of these documents was not in issue, but the Commissioner objected to their admission into evidence. I admitted them provisionally and subject to that objection.

16. I propose to put aside for one moment the Australian dollar denominated accounts prepared from 2009. They are not contemporaneous records of the payments made between 2002 and 2007. The pound sterling denominated records for the Wade Trust were prepared during the time of the making of the foreign currency advances (some were made shortly after the last foreign currency advances). The first set of accounts for the period ending 30 June 2003 had originally been sent to the ATO by Davidsons in a letter dated 30 April 2004. Those accounts do not expressly refer to any of the payments made in the 2003 year to Starburst. The accounts simply record in the balance sheet, as an asset, debtors of £13,403,385.

17. Another copy of these accounts, exhibited to Ms Osborne's affidavit, show that they appear to have been prepared in 2004. They are signed and dated 30 April 2004.

18. To similar effect are the Wade Trust's financial statements for the 2002 year. They record debtors of £560,562. They were also prepared in 2004.

19. The Wade Trust's financial statements prepared for the year ended 30 June 2004 are different. These appear to have been signed and dated on 17 December 2007. I infer that they were prepared sometime in the 2007 calendar year. These accounts record in the balance sheet, as an asset, debtors in the sum of £28,819,094 for the 2004 year and debtors of £13,403,385 for the 2003 year. In the notes to the accounts these aggregate figures are broken down as follows:

DEBTORS: amounts falling due within one year
	2004	2003
	£	£
Amounts owed by Starburst Enterprises Limited	22,958,982		6,139,995
Amounts owed by El Condor Limited	3,341,544		3,193,902
Secured interest bearing loan to life tenant	489,347		201,190
Other debtors	2,029,221		3,868,298
	28,819,094		13,403,385

20. A similar note may be found in the Wade Trust's financial statements for the year ended 30 June 2005, also prepared in 2007, as follows:

DEBTORS: amounts falling due within one year
	2005	2004
	£	£
Amounts owed by Starburst Enterprises Limited	23,529,861		22,958,982
Amounts owed by El Condor Limited	3,426,926		3,341,544
Secured interest bearing loan to life tenant	546,903		489,347
Other debtors	2,029,221		2,029,221
	29,532,911		28,819,094

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21. Finally, a similar note appears in the financial statement for the year ended 30 June 2006, again prepared in 2007, as follows:

DEBTORS: amounts falling due within one year
	2006	2005
	£	£
Amounts owed by Starburst Enterprises Limited	23,332,295		23,529,861
Amounts owed by El Condor Limited	3,499,411		3,426,926
Secured interest bearing loan to life tenant	630,015		546,903
Other debtors	2,029,222		2,029,221
	29,490,943		29,532,911

Admissibility of the financial statements and characterisation of the conceded payments

22. The taxpayers relied on the statement expressed in these accounts - "Amounts owed by Starburst Enterprises Ltd" - and the adjacent number as evidencing that, inferentially, the foreign currency payments conceded to have been made by the Commissioner were loans. It was not suggested that any other conceded payments had been made by the trustee of the Wade Trust to Starburst. The taxpayers contended that the statements were business records admissible pursuant to s 69 of the Evidence Act 1995 (Cth) (the "Evidence Act") and were proof that each payment created a relationship of debtor and creditor. They did not, and could not, also rely upon s 1305 of the Corporations Act 2001 (Cth) (the "Corporations Act") as the documents were not books kept under a requirement of that Act. Section 1305 is in the following form:

Admissibility of books in evidence

(1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.

(2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).

The Commissioner objected strenuously to the receipt into evidence of these financial statements. In his view, they were not business records for the purposes of s 69 of the Evidence Act and should otherwise be excluded pursuant to s 135 of the Evidence Act. Those provisions are as follows:

69 Exception: business records

(1) This section applies to a document that:

(a) either:

(i) is or forms part of the records belonging to or kept by a person, body or organisation in the course of, or for the purposes of, a business; or

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(ii) at any time was or formed part of such a record; and

(b) contains a previous representation made or recorded in the document in the course of, or for the purposes of, the business.

(2) The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made:

(a) by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or

(b) on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact.

(3) Subsection (2) does not apply if the representation:

(a) was prepared or obtained for the purpose of conducting, or for or in contemplation of or in connection with, an Australian or overseas proceeding; or

(b) was made in connection with an investigation relating or leading to a criminal proceeding.

(4) If:

(a) the occurrence of an event of a particular kind is in question; and

(b) in the course of a business, a system has been followed of making and keeping a record of the occurrence of all events of that kind;
the hearsay rule does not apply to evidence that tends to prove that there is no record kept, in accordance with that system, of the occurrence of the event.

(5) For the purposes of this section, a person is taken to have had personal knowledge of a fact if the person's knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact).

…

135 General discretion to exclude evidence

The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:

(a) be unfairly prejudicial to a party; or

(b) be misleading or confusing; or

(c) cause or result in undue waste of time.

23. The Commissioner submitted that, for the purposes of s 69, it should not be inferred that the maker or makers of the documents had personal knowledge of the facts asserted in the notes, or that the fact asserted was on the basis of information directly or indirectly supplied by a person who had or who might reasonably be expected to have had personal knowledge of that fact. I respectfully disagree with that submission. The relevant "fact", in that respect, is the statement in the notes that certain amounts were "owed by Starburst Enterprises Limited".

24. One starts with the proposition that ordinarily books of account cannot be used to prove the existence of the underlying transactions which give rise to the entries made in them, subject now to the operation of s 1305 of the Corporations Act: see
Potts v Miller (1940) 64 CLR 282 at 303 per Dixon J. What the accounts do is measure the financial performance of an entity, and they may usually be tendered as evidence of that performance (again, subject to the operation of s 1305, if applicable). However, for the moment, what is relied upon by the taxpayers is not an entry or entries in the balance sheet or profit and loss statement of the accounts of the Wade Trust, but rather the representation in the notes. If admitted as a business record, in my view, that statement is proof of the existence of a loan or loans between the Wade Trust and Starburst in the amounts stated for the 2004 to 2006 years. The fact that this statement appears in the accounts is neither here nor there. It is a statement in a business record of the corporate trustee of a trust.

25. Examining the 2004 accounts, it is clear that the maker of the statement was Moore Stephens and it was made from the "accounting records and information and explanations supplied to" that firm, at some time, I infer, in

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or before 2007. Moore Stephens, it will be recalled, managed the Wade Trust at this time. On the fourth page of the accounts there appears the signature of the trustee of the Wade Trust endorsing the following statement: "We approve these financial statements and confirm that all available information was provided for their preparation." Similar statements appear in the accounts for the 2005 and 2006 income years. In those circumstances, I infer that the maker or makers of the statement in the accounts either had personal knowledge of the fact asserted about the indebtedness of Starburst to the Wade Trust, or that the statement was based upon information supplied by someone that had that personal knowledge. The fact that the statements were made in 2007 (and not contemporaneously in the relevant income years) dilutes the force of that inference; but it does not defeat it. It follows that there was evidence before me that a loan or loans existed between Starburst and the Wade Trust from at least the 2003 year of income (being the earliest year referred to in the notes to the accounts). There being no contradictory contemporaneous evidence, I infer, on the balance of probabilities, that each of the conceded payments made between 2003 and 2006 by the trustee of the Wade Trust to Starburst constituted a loan or loans.

26. On the balance of probabilities, I infer that the conceded payment of £500,000 made in the 2002 year of income was also a loan. That is because the aggregate amount of debtors for the Wade Trust for the 2003 year of income, as recorded in the notes to the 2004 year of income account, was £13,403,385, and this matches the amount recorded as the Wade Trust's debtors in the pound sterling accounts struck for the 2003 year. Those accounts then record the aggregate debtors of the Wade Trust for the 2002 year of income as being £560,562, which matches the figure recorded as debtors in the pound sterling denominated accounts for the 2002 year. Absent any suggestion of other payments or loans made to Starburst by the Wade Trust, I infer that at least £500,000 of this amount was the first loan made to Starburst. Again, inferentially, it was an application of the £500,000 paid to the trustee by the "3i Group". I make this inference because the evidence in the Wade Trust's accounts from 2004 show that when the trustee of the Wade Trust made the conceded payments to Starburst it was by way of loan.

27. Three payments in pounds sterling were made by the Wade Trust to Starburst after the year ended 30 June 2006. However, pound sterling denominated accounts for the Wade Trust for the years ended 30 June 2007 and 2008 were not before me. As it was not suggested by the Commissioner that these payments bore a different and distinct character from those earlier payments made by the Wade Trust, I infer, on the balance of probabilities, that each said payment was also a loan.

28. Of course, we do not know the identity of the maker or makers of the asserted fact here. But that is of no moment. As Heerey J observed in
Guest v Commissioner of Taxation [2007] FCA 193; (2007) 65 ATR 815 at [25]:

The terms of s 69(2)(a) do not suggest that it is an essential precondition of admissibility that the "person" in question be identified. The ordinary meaning of the language is that it is sufficient that the person who made the representation, whoever he or she is, had or might reasonably be supposed to have had, personal knowledge of the asserted fact. The policy behind the provision is clear enough. Routine business records, made before any legal proceeding arises or is contemplated (cf the exception in s 69(3)), have an inherent likelihood of reliability which outweighs the common law's aversion to hearsay evidence where the maker of a statement cannot be tested by cross-examination. The utility of s 69 would be greatly diminished if it were necessary to locate among large organisations, perhaps over a long period of time, persons who made representations, often in circumstances where the practical needs of the organisation did not require any identification at the time the representations were made.

See also
DZE17 v Minister for Immigration and Border Protection [2018] FCA 1521 at [23] per Allsop CJ.

29. In Guest, records of a company, which a receiver and manager had taken control of, included loan account statements on which an unknown person had written in pencil the following: "cheque rec'd 2/10/87" and

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"cheque rec'd 4/1/88". These were admitted as evidence of the fact that certain repayments of funds had been made on the dates specified.

30. In my view, it would be very greatly inconvenient if factual representations in financial statements could only be admitted into evidence by calling the individuals who created them. That would diminish substantially the very point of having s 69 in the Evidence Act. That observation applies equally to descriptive statements about the quality or nature of a payment contained in those accounts.

31. The Commissioner also pointed out that there was no evidence that Starburst paid the Wade Trust any interest. I infer that this was because the loan or loans were not interest-bearing. There being no evidence of the terms of any loan, I would find that they were repayable on demand:
VL Finance Pty Ltd v Legudi [2003] VSC 57; (2003) 54 ATR 221 at [39]-[40] per Nettle J. The Commissioner also complained that there was no evidence that the loan or loans were secured. However the making of unsecured interest-free loans to a wholly-owned subsidiary is, in my view, entirely unsurprising:
Normandy Finance Pty Ltd v Federal Commissioner of Taxation [2015] FCA 1420; (2015) 102 ATR 409 at [84] per Edmonds J; overturned on appeal on a different issue:
[2016] FCAFC 180; (2016) 104 ATR 491.

32. For these reasons, I would admit the Wade Trust's pound sterling denominated accounts into evidence, and accept the statement in the accounts identified above as evidence that the conceded payments were loans pursuant to s 69 of the Evidence Act.

33. The Commissioner nonetheless submitted that the accounting records should be excluded pursuant to s 135 of the Evidence Act, in particular because, it was submitted, their admission into evidence would be unfairly prejudicial to him. Focusing for the moment only on the pound sterling denominated accounts, his contentions were as follows:

(1) the maker of the representation was not called to enable the accuracy of the financial statements to be tested. Nor were the source records produced from Monaco. In cross-examination, Ms Osborne admitted that she had no role in creating or maintaining the accounts, and that she had not personally gone through the boxes discovered - Ms Longo had done this, but she had not been called to give evidence. Nor, as already mentioned, was Mr Evans called to give evidence;
(2) the 2004, 2005 and 2006 balance sheets were prepared in 2007, many years after the first conceded payment had been made;
(3) the statements in the notes did not establish the source or nature of the alleged liability or liabilities;
(4) there were irregularities or errors in the accounts which made them unsafe to rely upon without calling their maker. For example, it was submitted that the interest income disclosed in the pound sterling denominated accounts was different from the interest disclosed in the Australian dollar restated accounts for the same year. Between 2004 and 2006 the pound sterling denominated accounts disclosed interest income of about £129,000, whilst the Australian dollar restated accounts for those years disclosed interest income of about A$472,591. Another suggested discrepancy concerned which assets were treated as current and non-current. A further discrepancy concerned the financial statements for the 2003 year. The original pound sterling denominated accounts recorded a loss on disposal of an investment of about £29 million. The Australian dollar restated accounts show no loss at all. Mr Wade could not explain this discrepancy; and
(5) Mr Wade had given ambiguous evidence about whether he had borrowed from the Wade Trust. In cross-examination, he said that the first payment of £500,000 from the Wade Trust had instead been paid to him as opposed to Starburst.

34. The irregularities and discrepancies relied upon by the Commissioner give rise to a doubt about the numbers contained in the accounts. But I am not concerned with that issue. The Commissioner did not dispute that the payments set out in his table above at [9] had been made to Starburst. The issue is whether those irregularities affect the probative value of the statement in the notes to those

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accounts that Starburst "owed" an identified amount to the Wade Trust. In my view, I think not. I have no doubt that the maker or makers of that statement understood what a loan was and was not. In that respect, the following passage from the reasons of Heerey J in Guest is apt (at [31]):

In this context I note that senior counsel for the Commissioner referred to various criticisms of the quality of Rural Finance's accounting systems. Whether valid or not, such criticism does not affect the admissibility of the document under consideration. Section 69 is not confined to business records kept in accordance with the best accounting standards. At most, such defects as there may be in record-keeping go to weight. Whatever shortcomings there may otherwise have been in Rural Finance's accounting systems, the particular documents in question here are simple ones which record simple facts, basic to any money-lending business. If otherwise admissible, there is no ground for rejecting them, as senior counsel urged, under the discretion conferred by s 135(b) of the Evidence Act. The evidence that the cheques were received on 2 October 1987 and 4 January 1988 is not misleading or confusing; on the contrary, it is straightforward and direct.

Asserting that Starburst owed money to the Wade Trust is also, in my view, a "simple" fact.

35. I also reject the contention that the statement made in each of the 2004 to 2006 pound sterling denominated accounts of the Wade Trust cannot be admitted into evidence without the source documents which supported the entries made in those accounts. Commercial litigation would be frustrated if that were always a requirement for the admissibility of business records prepared and kept by a corporate entity.

36. As to the fact that neither Ms Longo nor Mr Evans were called to give evidence:

(a) I accept, on the evidence before me, that Mr Evans was probably the only witness who could have given direct evidence concerning the nature of the conceded payments made by the Wade Trust to Starburst. However, there appears to have been a falling out with Mr Evans in 2010 (I shall come to this) which probably explains his non-appearance:
Fabre v Arenales (1992) 27 NSWLR 437 at 449-450;
Commissioner of Taxation v Cassaniti [2018] FCAFC 212 at [92]-[97];
(b) Ms Osborne supervised Ms Longo. It was appropriate, I find, to call the more senior person at Moore Stephens. Ms Osborne has been the managing director of Moore Stephens at Monaco since 2010. It was not suggested that Ms Longo had any greater knowledge concerning the affairs of the Wade Trust than Ms Osborne.

As to the delay in preparing the accounts, as already mentioned, this dilutes the strength of the finding that the payments were loans. However, I note that the 2006 year accounts were prepared without significant evident delay.

37. In assessing the prejudice to the Commissioner for the purposes of s 135 of the Evidence Act, I am mindful that he enjoys resources and powers not generally available to an ordinary litigant. In this case, Mr Wade had been the subject of an ATO Risk Review during 2004-2005. During that review the Wade Trust's pound sterling denominated financial statements for the year ended 2003 were given to the Commissioner. The Commissioner did not then suggest that there were no loans to Starburst. Mr Wade was the subject of another risk review for the 2006 and 2007 years of income. This took place over the 2009-2010 period. The restated accounts were given to the Commissioner. The Commissioner did not then suggest that there were no loans to Starburst. Mr Wade was finally the subject of a comprehensive risk review for the 2012 and 2013 years of income. Information requests were made and answered between 2014 and 2017. The opportunity also then existed for the Commissioner to use his powers to obtain information and evidence including the opportunity to issue offshore information notices pursuant to s 264A of the 1936 Act. Of course, the onus is on the taxpayer to demonstrate excessiveness on the balance of probabilities. But I would hesitate to exclude probative evidence bearing on a critical issue on the grounds of prejudice to the

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Commissioner, when he previously, by reason of his powers, had had a fair opportunity to test or address that material. In that respect, on the evidence before me, I accept, as already mentioned, that the only person able to give direct evidence about the payments made between the Wade Trust and Starburst was Mr Evans. He had complete control over the Wade Trust, and inferentially over Starburst. He chose to make the payments in issue here. However, the failure to call him, in the circumstances here, does not compel the conclusion that the pound sterling denominated accounts should not be received into evidence, at least with respect to the representations made about the amounts "owed" by Starburst to the Wade Trust.

38. My reliance upon the statements in the pound sterling denominated accounts is broadly consistent with the following observation of Nettle J in VL Finance Pty Ltd at [30]:

In the circumstances I think it suffices to say of the book entries point that, in the absence of any suggestion of sham, there is no reason why loans agreed to by made by a family company to members of the family cannot be created orally or by conduct and sufficiently evidenced by book entry …

It is also consistent with Edmonds J's reliance upon the accounts for the purposes of establishing a loan in Normandy Finance Pty Ltd at [85]-[86]; again, overturned on appeal on a different issue:
[2016] FCAFC 180; (2016) 104 ATR 491.

39. There were other irregularities and deficiencies which the Commissioner pointed out in relation to the Australian dollar restated accounts of both the Wade Trust and of Starburst. I have not addressed these because I generally agree with the Commissioner's submission that these accounts are not proof that the payments made by the Wade Trust to Starburst between 2002 and 2007 were intended to be loans. They did not contain the same or similar representations about the indebtedness of Starburst to the Wade Trust. In particular, it would appear that they were mostly prepared by Ms Tabury of Moore Stephens, who had travelled to Australia for that purpose together with staff at Davidsons. There was also some evidence before me, given by Ms Faraone that Mr Evans had been involved in reviewing and finalising these accounts. However, that evidence was very limited and did not describe with any precision the role played by Mr Evans. Moreover, Ms Faraone, was not personally involved in the preparation of those restated accounts. She did not check them for accuracy. Ms Tabury was not called to give evidence, and in those circumstances, whilst I accept that she worked at Moore Stephens, I cannot be confident that she either had a personal knowledge that the foreign currency advances made in 2002 to 2007 were loans or that Mr Evans told her they were loans. The only evidence about her was that she was an "accountant" at Moore Stephens who left that firm in 2010. Ms Faraone met her in Monaco in 2008 and dealt with her on occasion. In that respect, I accept that all of the witnesses called by the taxpayers before me were told that the payments were loans and their evidence went no further than this. In relation to the Australian dollar denominated accounts of the Wade Trust and Starburst after 2009, I again infer that they were prepared on the assumption that the conceded payments made between 2002 and 2007 were loans.

40. I should mention a spreadsheet tendered into evidence which ostensibly was a record of advances and repayments made between the Wade Trust and Starburst. It was prepared for the year ended 30 June 2012 by Davidsons. The evidence was that Ms Faraone, who by 2013 was a director of the new trustee of the Wade Trust (then Sole Luna - see below), saw this spreadsheet before signing a resolution of the trustee providing for the documentation of the loan or loans between the Wade Trust and Starburst, and for the repayment of the foreign currency loans (described below). The resolution was in the following terms:

It was noted that:

1. Starburst Enterprises Limited ( Starburst ) is indebted to the Trust for the following amounts:

• GBP 10,376,512.06

• EUR 5,362,039.90

• USD 1,848,733.50

• AUD 12,157,987 (the Debt ).

2. The Trust has been provided an Assignment Agreement pursuant to which

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the Trust will accept the assignment of Starburst's assets listed in Annexure A as part payment of the Debt.

3. As at 25 March 2013, the term deposits listed in Annexure A will be valued at AUD 29,847,929.

4. As at 25 March 2013, the loan receivable from Snowflake Holdings Pty Ltd as trustee for the Snowflake Investment Trust will be valued at AUD 4,028,110.

5. As at 25 March 2013, the Other Assets listed in Annexure A will be valued at AUD 659,131.

6. The Trust has been provided with a Loan Agreement documenting the terms and conditions of the outstanding Debt, after the assignment of assets has been completed (the Loan Agreement ).

RESOLUTION

The director of the Company, resolves as follows:

1. The Trust accept repayment of an amount of AUD 34,535,170 of the Debt owed by Starburst by entering into an Assignment Agreement for Starburst's assets equal to AUD 34,535,170.

2. The Trust enter into the Loan Agreement with Starburst in respect of the outstanding Debt.

3. The Trust do everything necessary to complete the assignment and execute the Loan Agreement by 25 March 2013.

41. The spreadsheet was difficult to interrogate because of the tiny font size used in it. With a magnifying glass it did not appear to me that the balances matched those recorded subsequently in the 2013 Loan Agreement. Moreover, if it matters, because the document was prepared by Davidsons, I find that it was not proof of a relationship of indebtedness between the Wade Trust and Starburst. Section 1305 of the Corporations Act was not otherwise relied upon in relation to this document even though by the time of its preparation both entities may have migrated to Australia (as to which see below).

42. In finding that the conceded payments made by the Wade Trust to Starburst were loans or a loan, I have also had regard to the objective reality of the circumstances as they existed between Starburst and the Wade Trust as privately owned entities. In my view, and practically speaking, Starburst could have only received the conceded payments in one of three ways. The payments (in whole or in part) might have been: (i) a gift; (ii) a contribution of capital; or (iii) a loan. The memorandum of association and articles of association of Starburst were before me. Clause 7 of the memorandum provided that the authorised capital of the company was US$50,000. I infer, that the payments to Starburst, to the extent they exceeded this sum, were not contributions of capital. I reject the Commissioner's contention that the directors could always have increased the amount of authorised capital as speculation. Nor, I infer, were the payments a series of gifts. If they had been they probably would have been booked as a profit by Starburst in its accounts: cf
Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 at 460-461 per Gibbs CJ. They were not. The Commissioner contended that because the balance sheets were not accurate, this inference was not available to be made. In my view, that observation diminishes the force of, but does not preclude, the making of the inference that the payments were not a gift. It follows that, on the balance of probabilities, it is more probable than not that the payments were advances by way of loan. When all the circumstances are taken into account, that inference accords "with the probabilities of ordinary human experience":
The Republic of Nauru v WET040 [No 20] [2018] HCA 60; (2018) 93 ALJR 102 at [35].

43. I do not otherwise accept that I should find that the payments were "off the books" transfers of money. That was never put to a witness. Moreover, the business records produced close in time to the conceded payments (the pound sterling denominated accounts of the Wade Trust) described those payments as loans and booked them as such.

44. The foregoing conclusion is consistent with the evidence of Ms Osborne that there existed a "standard practice" at Moore Stephens whereby trust assets would be:

… held by a limited liability company, which is a [wholly-owned] subsidiary of the trust. The financing is in the form of

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nominal share capital and long-term loans from the trust; the loans are generally interest-free and repayable to the trust on demand, for example when funds are required for distributions or other trust expenditure.

I infer that this practice was adopted in relation to those trusts which Moore Stephens managed. I accept that this evidence rose no higher than a general observation, and that there was no direct evidence before me that this practice was adopted specifically in relation to the Wade Trust. Nonetheless, the making of loans as a means of funding a wholly-owned subsidiary is relatively commonplace and unremarkable: cf
Total Holdings (Australia) Pty Ltd v Federal Commissioner of Taxation (1978) 20 ALR 152; 8 ATR 664.

45. I do not think that the sighting by the Commissioner of an express contemporaneous loan agreement entered into by another wholly-owned subsidiary of the Wade Trust, namely McQueen Services Limited, and Starburst, bearing a date of 1 February 2007, requires a contrary conclusion. The loan identified appeared to be a very specific one used to purchase a Cessna Citation 550 aircraft.

46. Because I am satisfied that the conceded payments were loans, it is not otherwise necessary for me to consider the utility and admissibility of the Australian dollar restated accounts of the Wade Trust and Starburst.

Migration of the Wade Trust to Australia

47. As already mentioned, there was an ATO Risk Review in 2009-2010. Mr Wade perceived that the ATO wanted him to bring his offshore interests to Australia. Whether that perception was based upon anything said to Mr Wade by any officer of the ATO is not a matter I need determine. In 2011, the Wade Trust remained under the control of Mr Evans. It was thought that he would not allow the trust to migrate to Australia because the cost of doing so would be to lose the benefit of certain realised losses that were being carried forward. Nonetheless, Mr Wade remained firmly of the view that his offshore assets should be held from Australia. In his words: "I didn't want any more issues from the ATO". Mr Wade was also unwell. He wanted to "clean up" and simplify his business interests for the benefit of his family.

48. At this time Mr Wade also commenced to have concerns with Mr Evans' management of the Wade Trust. It was thought that Mr Evans had been involved in a "Ponzi" scheme in the United States. A friend of Mr Wade had lost money when Mr Evans invested on his behalf in a biofuels company. Mr Wade deposed that in 2010 he had dinner with Mr Evans and his partner in Nice, France. According to Mr Wade, "[the partner] appeared to know all about my private business affairs, which I thought was inappropriate". According to Ms Faraone, who also attended the dinner, Mr Evans "appeared to be drunk". Because Mr Evans had complete control over the assets of the Wade Trust, Mr Wade and his advisers were worried about him. Ms Faraone was also sent to Monaco in August 2012 to manage the migration of the Wade Trust to Australia. When she got there she discovered that Mr Evans was no longer at Moore Stephens. But he was still controlling POHTL. Ms Faraone became even more concerned. She was worried he might steal from the Wade Trust. From about this time, I infer that Mr Wade and his advisers had lost confidence in Mr Evans.

49. In September 2012, Mr Wade's brother, who was the designated "protector" of the Wade Trust, and who had the power to appoint more trustees, appointed Ms Faraone and Mr Steven Skoglund of Davidsons to be additional trustees of the Wade Trust. This was done in order to gain control of that trust from Mr Evans. It also had the consequence of rendering the Wade Trust a resident trust estate for the purposes of the 1936 and 1997 Acts. A few days earlier, Mr Wade had been appointed a director of Starburst and El Condor (which subsequently was renamed "II Condor"). Each company thereby became a resident of Australia for the purposes of the 1936 and 1997 Acts.

50. Moore Stephens had also submitted around this time what the taxpayers thought was an "extraordinarily high fee". They disputed it. Subsequently, Moore Stephens refused to release the Wade Trust's records.

51. The process by which the assets of the Wade Trust were transferred to Australia was not really disputed. Mr Wade had little to do with this undertaking because of his illness. The transfer was largely the work of Ms Faraone,

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Mr Skoglund and Mr De Zilva, then a partner at Deloitte, and his associate Mr Neil. The initial steps included: removing POHTL as trustee of the Wade Trust; changing the individuals who were the authorised signatories of the bank accounts of the Wade Trust; and the making of a payment on 10 September 2012, just before the Wade Trust became a resident trust estate, of $9,749,345 by Starburst to the Wade Trust. Part of this sum included a dividend of around $4.5 million. This was conceded by the Commissioner. The balance was said to be a part repayment of a pound sterling denominated loan in the sum of £3.4 million.

52. At this time, Mr Wade had already set up, with the assistance of Davidsons, a tax consolidated group for the purposes of Pt 3-90 of the 1997 Act. The head company, Ralhum Pty Ltd ("Ralhum") was wholly-owned by PWIT. Mr Wade controlled this trust and was a beneficiary of it. Ralhum had a wholly-owned subsidiary called Muhlar Pty Ltd ("Muhlar"). On about 28 September 2012, the trustees of the Wade Trust sold the shares it held in Starburst and El Condor to Muhlar in exchange for one share in Ralhum.

The Clean-up

53. There then took place what the taxpayers called the "clean-up". The following, in general terms, took place:

(1) On 19 October 2012, Ms Faraone and Mr Skoglund resigned as trustees of the Wade Trust. Sole Luna was subsequently appointed as sole trustee of the Wade Trust.
(2) A decision was made to document the perceived or assumed relationship of indebtedness between Starburst and the Wade Trust and to make the loan or loans interest-bearing. For reasons I have already given, I accept that this document is not, in and of itself, evidence that the conceded payments made to Starburst by the Wade Trust were loans. However, it is not uncommon, for an undocumented and pre-existing loan to become the subject of a more formal written agreement, especially when new external advisers are used and give advice concerning a pre-existing corporate structure. Moreover, subject to the one loan said to have been denominated in Australian dollars, it was not disputed that the aggregate payments made to Starburst by the Wade Trust, and the currency in which such payments were made, were accurately identified in this agreement. Clause 1.1 of the 2013 Loan Agreement defined the term "Loan" in the following way:
" Loan " means the following amounts advanced, paid or otherwise provided by the Lender:
- • GBP 10,376,512.06
- • EUR 5,362,039.90
- • USD 1,848,733.50
- • AUD 12,157,987
(3) This agreement contained a clause creating, it would seem, an obligation to pay interest from 12 September 2013.
(4) On 25 March 2013, pursuant to a written "Assignment Agreement" executed by Mr Wade on behalf of Starburst and by Ms Faraone on behalf of Sole Luna as the trustee of the Wade Trust, Starburst assigned to Sole Luna a series of Australian dollar denominated receivables with an agreed value of A$30,507,060 as part repayment of the outstanding loan or loans. The receivables were to be used to discharge the outstanding amounts in the following order:
- • GBP 10,376,512.06
- • EUR 5,362,039.90
- • USD 1,848,733.50
- • AUD 12,157,987
(5) A decision had earlier been made in early 2013 for the Ralhum consolidated group to make an election to apply the "Taxation of Financial Arrangements", or TOFA regime, contained in Div 230 of the 1997 Act. The election was made on 25 March 2013, with effect from 1 July 2012. Electing into the TOFA had the effect of eliminating a taxable exchange gain which Starburst would otherwise have incurred had Starburst repaid its loan to the Wade Trust. If it matters, that is why, at least in part, the TOFA election was made; it enabled the group to proceed with that repayment (the original plan had been to repay the loan or loans slowly over time).
(6) Following the assignment, Starburst made further payments to the Wade Trust,

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then by a "Deed of Forgiveness" dated 14 June 2013, and executed by Mr Wade on behalf of Starburst and by Ms Faraone on behalf of Sole Luna as trustee of the Wade Trust, the balance of the loan was forgiven by the trust. The recitals to the deed of forgiveness were in the following terms:
- A. Starburst is indebted to the Trust as a result of intercompany dealings, in the amount of $4,232,995.38 (the Debt ).
- B. The Trust has agreed to waive, release and forgive Starburst from its obligations to repay the Debt in its entirety under the terms of this Deed.

Dividend payments to the Wade Trust

54. I should say something about the contention of the taxpayers that Starburst had paid the following dividends from 2009 to 2013 to the Wade Trust:

(a) A$2,725,087 in the year ended 30 June 2010;
(b) A$150,000 in the year ended 30 June 2011;
(c) A$925,000 in the year ended 30 June 2012; and
(d) A$4,794,700 in the year ended 30 June 2013.

The Commissioner's outline of submissions filed and served before the commencement of trial appeared to accept the existence of these dividends. His Appeal Statement did not deny that they had been paid. But in submissions filed after the trial they were described by him as "alleged dividends", although he conceded that a dividend of $4.5 million had been paid on 10 September 2012 to the Wade Trust and he also, I think, accepted that payments in the sums set out above had been made. In his first affidavit, Mr Wade deposed to the dividends set out above having been paid. What he said was not objected to. That evidence was then not challenged in the cross-examination of Mr Wade. It ultimately does not matter whether the other dividends were paid. That is because it was conceded that Starburst did pay a significant dividend of around $4.5 million to the Wade Trust at a time when it was yet to become a resident of Australia for the purposes of the 1936 and 1997 Acts. If it matters, I am otherwise prepared to assume that the other dividends were paid, even though minutes or resolutions for the payment of those dividends were not adduced into evidence.

Claimed deduction for a foreign exchange loss

55. The trustee of the Wade Trust filed a tax return in 2014 for the year ended 30 June 2013 ("2013 Wade Trust Return"). In that, it claimed a deduction of $16,775,094 for a foreign exchange loss it claimed had been realised upon the repayment of those parts of the loan or loans expressed in foreign currencies. The tax return also claimed a net capital loss of $4,182,991. That loss was said to arise from the forgiveness of the balance of the Australian dollar denominated loan owing by Starburst.

56. On 1 June 2017, an officer of the Commissioner made a determination pursuant to s 177F of Part IVA of the 1936 Act to cancel a tax benefit for the 2013 year being a tax deduction in the sum of $13,159,489. On 6 June 2017, the Commissioner issued a Notice of Assessment to Mr Wade in respect of the year ended 30 June 2016. On 21 June 2017, the Commissioner issued a Notice of Assessment of Income Tax and a Notice of Assessment of Shortfall Penalty to Sole Luna in its capacity as trustee of the Wade Trust in respect of the year ended 30 June 2013. Then on 22 June 2017, the Commissioner issued a Notice of Assessment of Income Tax and a Notice of Assessment of Shortfall Penalty to Mr Wade respect of the year ended 30 June 2015. The amount of primary tax assessed to Mr Wade reflected his share (100%) of the net income of the Wade Trust in the 2015 and 2016 years for the purposes of s 97 of the 1936 Act as adjusted by the Notice of Assessment issued to the trustee of the Wade Trust for the 2013 year of income.

Issue 1 - Nature of the Conceded Payments

57. I have decided, for the reasons already given, that the foreign currency payments made by the Wade Trust to Starburst were probably by way of loan or loans. An important question in this proceeding is whether the foreign currency advances were made pursuant to one loan, or whether each foreign currency advance constituted a separate and discrete loan. That issue will determine the extent to which former Div 3B of the 1936 Act applies to the loan or loans. Division 3B, and its successor Div 775 of

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the 1997 Act, relevantly provide, in defined circumstances, a deduction for a foreign exchange loss incurred or made by a taxpayer. Division 3B, however, only applies to losses of a capital nature and to losses incurred under an "eligible contract entered into before" 1 July 2003: item 77 of Sch 4 to the New Business Tax System (Taxation of Financial Arrangements) Act (No.1) 2003 (Cth). The issue for determination is whether the foreign currency advances made between 2002 and 2007 were made pursuant to a singular contract entered into before 1 July 2003.

58. There was, of course, no written loan contract here until 2013. Nor was there any resolution of the Wade Trust which might have contained the terms upon which money was lent: cf
BHP Billiton Finance Ltd v Federal Commissioner of Taxation [2009] FCA 276; (2009) 72 ATR 746 at [21]. In its pleaded case, the taxpayers identified one loan, called the "Starburst loan" pursuant to which an initial advance of £500,000 was made on or around 22 February 2002, and "further advances" were made thereafter. In its closing submissions, the taxpayers changed their position following the raising of this issue by the Court at trial (without objection by the Commissioner). Now the taxpayers contend that each advance was an individual or discrete loan. They bear the onus of demonstrating this.

59. The taxpayers relied on two authorities. The first is the decision of Merkel J in
Ashton Mining Ltd v Federal Commissioner of Taxation [2000] FCA 590; (2000) 44 ATR 249. In that case the taxpayer wrote off a debt in its accounts and sought a deduction pursuant to s 70B of the 1936 Act. To be eligible to claim that deduction it had to show that the debt was a "traditional security" acquired after 10 May 1989, which had been disposed of or redeemed. The debt in question was a loan made by the taxpayer to its wholly-owned subsidiary. Merkel J described the advances made to the subsidiary as follows (at [4]):

From time to time Ashton Mining made advances of funds to Ashton Gold, which was the vehicle utilised by Ashton Mining for its diversification into the Australian gold industry. The advances were used by Ashton Gold to acquire shares in 2 gold mining companies which became wholly owned subsidiaries of Ashton Gold. In the result, the advances made by Ashton Mining by way of loans to Ashton Gold to acquire and fund the activities of the subsidiaries totalled the sum of $116.9 million as at 31 December 1991.

The Commissioner in that case submitted that there had been a single running account operative between the parent and subsidiary, analogous to a bank account a customer might hold with a bank. That submission was rejected. Instead, because there was no pre-existing written agreement setting out the terms of loan, Merkel J decided that each advance was a separate and discrete loan. His Honour reasoned at [27]:

… The inter-company loans made by Ashton Mining to Ashton Gold were not governed by the terms of any initial contract entered into between them. Rather, Ashton Mining retained a discretion to make loans to its subsidiary upon such terms as it saw fit when each loan was made. Although Ashton Mining may have intended to make the loans interest free and repayable on demand, it was open to it to determine whether those terms, or any other terms, were to govern each particular advance. In the present case, unlike the situation with banker and customer, there was no pre-existing agreement establishing the inter-company loan account and the terms upon which advances to or from that account were to be made. Accordingly, there was a new unsecured loan made each time an advance was made by Ashton Mining to Ashton Gold.

60. The second authority is a decision of the Supreme Court of Western Australia in
Erceg v Erceg [No 2] [2018] WASC 9. In that case a brother had lent monies to another brother on nine occasions. There was no written agreement. An issue was whether there had been a singular loan or nine separate loans. It was submitted that a running account existed between the brothers. Allanson J rejected that submission. At [42]-[43], his Honour said:

Whether a payment is part of a running account has been considered in the context of whether the payment has given a

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preference to one creditor over others. The essential feature of a running account has been said to be that it predicates a continuing relationship of debtor and creditor often in connection with an ongoing supply of goods or services with an expectation that further debits and credits will be recorded:
Airservices Australia v Ferrier (1996) 185 CLR 483, 504 505.

On the facts pleaded and the evidence given by John, I am not satisfied that there was a true running account. I am not satisfied for any of the loans that the parties assumed a continuing balance, rather than that each loan would be treated as a discrete transaction.

61. Deciding whether here individual advances constitute a discrete loan is a somewhat artificial task. Doubtless if Mr Evans had been called to give evidence about this, he would have said that he had never thought about it at all. Indeed, but for the necessity of deciding here whether Div 3B or Div 775 applied to the foreign currency advances, the issue would have been of no moment. It would not have mattered to either Starburst or the Wade Trust to specify whether there subsisted between them only one agreement or a series of agreements, so long as Starburst was sufficiently funded.

62. On balance, I have decided to impute to the parties an intention that each advance was a distinct loan agreement, although for reasons which are expressed below, this finding is not dispositive of any issue. I do so for the reasons expressed by Merkel J, which I respectfully adopt. I also do so because the loans were made in three different currencies. That tells against the existence of one loan only. In addition the foreign currency advances were made on various dates in various amounts. According to the Commissioner's written outline of submissions, the smallest advance was €14,744 whilst the largest was £7 million. In my view, these factors also support an inference that each advance was made pursuant to a discrete agreement relating to that advance.

Issue 2 - Section 8-1 - Was a Loss Incurred?

63. Section 8-1 of the 1997 Act relevantly provides:

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.

(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.

…

64. Critical to the disposition of this case is the fact that when the foreign currency loans were made neither the trustee of the Wade Trust nor Starburst were residents of Australia, and there was at those times, no plan or intention that either entity should become a resident of Australia. It was not suggested that the functional currency of either the Wade Trust or its subsidiary was Australian dollars. It was not suggested that the currency of payment of any loan was Australian dollars: cf
Bonython v The Commonwealth (1948) 75 CLR 589. Nor, at the time of the making of each advance, was either entity under an obligation to report its financial performance in Australian dollars or to file Australian income tax returns.

65. The starting point for the application of s 8-1 is to determine whether a "loss" was made in the 2013 year of income for the purposes of calculating the net income of the Wade Trust. To be deductible, the loss must be a realised loss which has been definitively encountered, run into or fallen upon by the taxpayer:
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492. In the area of foreign exchange gains and losses, the "loss" which is deductible under s 8-1 is not any economic loss; it is not an unrealised loss; rather, in the context here, where the taxpayer is a lender, it is the identification of a loss arising from a decrease in Australian dollars received upon repayment of a loan in a foreign currency. In the case of a borrower, it is an increase in the amount of Australian dollars needed to discharge a foreign currency loan.

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66. In
Federal Commissioner of Taxation v Hunter Douglas Ltd [1983] FCA 229; (1983) 78 FLR 182, a taxpayer claimed a deduction for an exchange loss arising from borrowings in United States dollars and other foreign currencies. All drawdowns were used by the taxpayer to finance the expansion of its business. Each drawing after conversion into Australian dollars was paid into one or other of the current accounts which the taxpayer held with its Australian bankers. Before payment was made to discharge the loans, the relevant rates of exchange moved against the Australian dollar. Thus, Fisher J observed at 193:

In this matter the exchange loss was an increase in the amount of Australian currency required to repay the borrowing. It was a windfall disadvantage stemming from an increase in the liability to repay.

To similar effect, Lockhart J said at 197:

Exchange losses are in reality an addition to the amount of Australian currency which a borrower requires to repay his foreign indebtedness. Similarly an exchange gain is a reduction in the amount of Australian currency which a borrower requires to repay his foreign indebtedness.

The majority of the Full Court held that the foreign exchange loss incurred by the taxpayer in Hunter Douglas Ltd was on capital account as the funds borrowed were not used in or as an integral part of the profit-making activities of the taxpayer.

67. In the case of a foreign exchange loss encountered in relation to the acquisition of goods or services, the "loss" is also really the increase in the amount required to discharge a liability previously recognised on an accruals basis in an income tax return. It arises when an accruals taxpayer purchases goods or services with foreign currency in one year, thus incurring a liability for the purposes of s 8-1, and then in the following year when the occasion for payment arises, by reason of a change in the exchange rate, the taxpayer is required to pay more Australian dollars to purchase the foreign currency required to discharge that liability. The increase in the outgoing in the second year is the foreign exchange loss which is often deductible. This was explained by Dixon J (as his honour then was) in
Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1948) 76 CLR 584 at 618:

The comparison made between the beginning and end of an accounting period means that stock in trade and purchases are taken into account not by reference to what is actually paid for them, but according to the value assigned to the one and the liability incurred in acquiring the other. That is done, of course, entirely independently of the period within which the actual disbursement of money is made to discharge the liability. If, as is commonly the case, the amount of the liability is fixed and incapable of subsequent variation, the disbursement itself whenever made could never matter for the purpose of computing profit or loss in that or any subsequent period. But if for any reason the amount is capable of changing, as is the case when the indebtedness is in a foreign currency and the rate of exchange may alter, a further question arises. If the change takes place in a subsequent period and actual payment is then made, is the increase or decrease, as the case may be, to be attributed to the prior period and the net profit or loss reassessed? Obviously not. It is to be taken in as an item belonging to the subsequent period; for the reason that, with continuing trading, when increases beyond the estimates by which assets and liabilities are carried out of one period into the next occur, they must be treated as incidents of the system and they must be regarded as belonging to the period in which they accrue or are realized.

68. Care must be taken in this area to ensure that a loss has actually been incurred. This is illustrated by the High Court's decision in
Caltex Ltd v Federal Commissioner of Taxation (1960) 106 CLR 205. In that case, a taxpayer had accrued a liability in United States dollars to a related entity which it repaid using United States dollars borrowed from another related entity. The liabilities arose from the purchase of the taxpayer's stock in trade. At the date of repayment, an adverse movement in the exchange rate meant that the Australian currency equivalent of the United States dollars paid in discharge of the liability was substantially higher than either the cost at which its stock had, in Australian currency, originally been taken into account, or, the amount at which, by reason of adjustments, that cost then stood in the taxpayer's books. The taxpayer subsequently claimed to have incurred an "exchange loss". A majority of the High Court disagreed. Because one liability in foreign currency was replaced by another in the same amount and in the same currency, it was found that no "loss" had been made by reason of variations in the exchange rate. Significantly, Dixon CJ said at 219-220:

The Australian law of income taxation does not enable traders who incur liabilities in money of other countries in purchasing stock in trade to treat a movement of exchange against this country as establishing a loss deductible as such in the year in which the movement takes place simply because a liability incurred for stock in a prior year remains undischarged. The movement of exchange may have other consequences in a current assessment; it may, for example, indirectly affect the value of trading stock for the purpose of s. 31. But if there is nothing amounting to a realization or definite accrual or establishing of the loss or outgoing in the manner described in Flood's Case [
(1953) 88 CLR 506] as one to which the taxpayer is at least definitively committed, as an outlay ascertained and unavoidable, s. 51(1) will not avail him. In the previous case of the appellant company [
(1940) 63 CLR 382] that had occurred: the exchange was purchased and the dollars transmitted. In the present case it appears to me that nothing has happened but the novation of a dollar indebtedness, or something equivalent or akin to a novation. If it be said that the appellant company gained possession of dollars which it might have transmitted to Australia converting them in Australian money, one answer at least is, as it seems to me, that it was not so. The special case seems to me to mean that it was not open to the appellant company to do anything else with the proceeds of the cheque given by the California Texas Oil Company Limited than to use them to discharge pro tanto the existing indebtedness to the Texas corporation or corporations (of Delaware or California). But I do not see that it matters. There stood the answerable indebtedness in the same number of dollars to the California Texas Oil Company Limited. In many respects the money of another country must be treated in point of law like goods. It is not currency of this country and it is not a measure of value in this country. It is true that unlike goods, but like some forms of immediately convertible security, the receipt of foreign money may be treated as a derivation of income. But the purpose of introducing the analogy of goods is to illustrate the differences between the changes of value expressed in terms of Australian money and the actual realization of a loss or the "incurring" of a loss or outgoing. It is one thing to deal in values without realization for the purpose of s. 31; another for the purposes of s. 51(1). Values are ever changeable: so is a rate of exchange.

(Emphasis added.)

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69. The facts here are that the trustee of the Wade Trust lent monies in various currencies to Starburst when both companies were not residents of Australia and was repaid in part by an assignment of Australian dollar denominated receivables at a time when both entities had become residents of Australia. To the extent that it was not repaid, the Wade Trust may have incurred a loss (discussed below). But I am not satisfied that it incurred a foreign exchange loss. No loss of $16,775,094 was recorded in the accounts for the Wade Trust for the year ended 30 June 2013, which were declared to be a fair presentation of the trust's financial position in that year by Moore Stephens. The Wade Trust accounts instead record a loss on "FX Realised on Loans" of only $685,862.

70.

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Senior counsel for the Wade Trust submitted that a loss arose because the trust "got fewer Australian dollars than it otherwise would have if there hadn't been a movement in the exchange rate". When asked by the Court to identify the loss, he pointed out that the Australian dollar restated accounts for the Wade Trust for the year ended 30 June 2004 recorded in the balance sheet a trust corpus of $75,820,731. In contrast the trust corpus recorded in the 2013 account was only $55,816,029. It was said that the difference was "mainly attributable to the Forex movements". However, and with respect, even if those accounts were admissible, there was no evidence before me to support that conclusion. Moreover, as it happens, the "Total Trust Funds" increased in 2013 from the $54,408,398 identified in the 2012 accounts. In any event, the proposition that the Wade Trust got fewer Australian dollars is misconceived. It was not established that at the time of each foreign currency advance the Wade Trust accounted in Australian dollars; and it was not contended that it expected to receive Australian dollars in repayment of the amounts lent in the foreign currencies.

71. Senior counsel for the taxpayers relied upon the decision of the Full Court of this Court in
Federal Commissioner of Taxation v Messenger Press Pty Ltd (2013) 212 FCR 298. He said that when the loans were advanced there was a notional conversion of their face value into Australian dollars. It was not clear to me why that should be so. But it would appear, at least in part, to be because Mr Wade was then an Australian resident and an attributable taxpayer of the Wade Trust for the purposes of Div 6AAA of Part III of the 1936 Act and also because "that money was all going - was all likely to end up in Australia". I do not accept, on the evidence before me, the last proposition. There was no evidence that the Wade Trust and Starburst would become, for tax purposes, Australian residents in the years in which the foreign currency advances were made. I shall return to the reliance upon Div 6AAA.

72. Before considering Messenger Press, I must first address the decision of the High Court in
Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1996) 185 CLR 66. In that case, the taxpayer had issued promissory notes in United States dollars at a discount to the face value. The funds raised were used to discharge United States dollar denominated liabilities incurred under an earlier facility and to discharge liabilities arising under each preceding issue of notes. None of the proceeds of the issue of any notes was remitted to Australia. It was accepted that the difference between the face value of the notes and their issue price, after conversion into Australian dollars, was an allowable deduction. For the purposes of calculating that discount, the Commissioner contended that the taxpayer should have deducted the proceeds of the notes as converted into Australian dollars at the issue date from the cost of discharging the notes at maturity as also converted into Australian dollars. Alternatively, it was contended that the taxpayer should have converted the discount into Australian dollars at the maturity date and then deducted from that the reduced value of the proceeds of issue as at the maturity date. In contrast, the taxpayer contended that all it needed to do was convert the discount into Australian dollars at the time of maturity.

73. To succeed, the Commissioner contended that the 1936 Act required the taxpayer to undertake a "notional" conversion of its United States dollar denominated liability into Australian dollars as at the date of issue and as at the date of discharge. It was said that this was mandated by ss 20 and 21 of the 1936 Act. The High Court disagreed. It decided that the taxpayer's loss was incurred on the issue, and not on the maturity, of the notes. It said that the Commissioner's case turned upon the existence of a "time gap" between the acquisition of the legal right to the proceeds of issue and the incurrence of the liability to pay the face value of the notes. But no such "time gap" in fact existed. Their Honours then said that there was another reason why the Commissioner's submission should be rejected. The Court said at 79:

Another answer is that, since the taxpayer dealt only in US dollars, any loss or gain could only be in US dollars, and it was that loss or gain that the Act required to be converted into Australian dollars, not some hypothetical loss or gain arising from fluctuations in the US/Australian exchange

ATC 21938
rate. The taxpayer received US dollars, paid in US dollars, and did not convert the US dollars into Australian dollars. Where a taxpayer borrows money on capital account in US dollars and repays the loan in US dollars, it makes no revenue profit or loss from the borrowing even though the exchange rate may be different at each date. Indeed, arguably it makes no profit or loss. If it converts the US dollars that it receives into Australian dollars and then converts Australian dollars into US dollars to repay the loan, it may make a profit or loss on the transaction. But the profit or loss results from the exchange transaction and not from the borrowing. Where there is no exchange transaction and the loan is on capital account, the taxpayer makes no loss or gain for the purpose of s 25 or s 51 of the Act simply because the rate of exchange has changed between the date of borrowing and the date of repayment. There was, therefore, no revenue loss or gain to the taxpayer from fluctuations in the rate of exchange during the 90 day periods. For income tax purposes, the fluctuations of the US/Australia exchange rate were as irrelevant to the taxpayer's transactions as the fluctuations in the Japan/Australia exchange rate.

(Footnote omitted.)

74. It has since been observed by the Full Court of this Court in Messenger Press that a loss may be encountered without a physical conversion of cash or coin: see
(2013) 212 FCR 298 at [81]-[82]. I shall return to that decision.

75. One of the decisions cited with evident approval by the High Court in Energy Resources of Australia was a decision of the House of Lords in
Pattison v Marine Midland Ltd [1984] 1 AC 362. In that case, the taxpayer was an English subsidiary of an American bank. In 1971 it borrowed US$15 million which it then used to make loans in that same currency, without there being any conversion of dollars into pounds sterling. It repaid the loan in 1976 using existing United States dollars. Between 1971 and 1976 the value of the pound decreased against the United States dollar. The Inland Revenue Commissioners sought to claim that the taxpayer had thereby incurred a non-deductible capital loss. The House of Lords disagreed and found that no such loss had been made. Lord Templeman (with whom Lords Fraser, Keith, Roskill and Brandon agreed) said in his speech at 372 the following:

My Lords, a profit or loss may be earned or suffered if a borrower changes the currency he borrows but that profit or loss arises from the exchange transaction and not from the borrowing. For example, the company could have borrowed £6m. sterling by means of unsecured loan stock. The company could have changed the £6m. thus raised into U.S. $15m. in 1971 and lent those dollars to its customers. If then the customers had finally repaid their loans of $15m. in 1976 and the company had converted those dollars into sterling, realising £8m. available to redeem the loan stock of £6m., the bank would have made an exchange profit of £2m. That profit would have been made by converting sterling into dollars in 1971 and reconverting dollars into sterling in 1976. The company would have gambled and won on an increase in value of the dollar vis-a-vis sterling between 1971 and 1976. Similarly if the company, having in fact borrowed $15m. worth £6m. by the issue of unsecured loan stock at par in 1971, and having lent those $15m. to its customers, had called in the loans of its customers in 1973, received back $15m. and converted those dollars into sterling, producing say £7m. at that stage, then the company would have made an exchange profit of £1m. by acquiring dollars in 1971 and selling dollars in 1973. The bank would have gambled and won on an increase in value of the dollar vis-à-vis sterling between 1971 and 1973. If then in 1976 the bank had been obliged to purchase $15m. at the then current sterling cost of £8m. in order to repay the $15m. owing under the unsecured loan stock, the company would have made an exchange loss of £2m. by converting dollars into sterling. The bank would have gambled and lost on an increase in value of sterling vis-à-vis the dollar between 1971 and 1976. The exchange profit of £1m. realised in 1973 and the exchange loss of £2m. suffered in 1976 would both be taken into the bank's profit and loss account for income and for corporation tax purposes as incidents

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in the company's currency transactions in the course of carrying on a commercial banking business. But as between the company and the holders of the unsecured loan stock and as between the company and its customers, there was and never could be any profit and loss to lender or borrower except for interest paid and received. The revenue argument that the company made a capital loss on its unsecured loan stock and an income profit on its customers' borrowing is misconceived. There never was any loss or profit from the lending and borrowing and there never was any exchange profit because the company did not make any relevant currency conversions.

The taxpayers contended that this passage supported their case because of his Lordship's reference in the second example to a borrowing of US$15 million "worth £6m" for the proposition that one did not need two conversion events in order to incur an exchange loss. With respect, that may not be the correct way to read what his Lordship said given the emphasis on the need for "currency conversions". If that reading of what was said is incorrect, then that part of his Lordship's speech may be inconsistent with the High Court's reasoning in Energy Resources of Australia.

76. Returning to Messenger Press, the taxpayers relied upon the following obiter dicta from the first instance decision of Perram J reported at
[2012] FCA 756; (2012) 90 ATR 69 at [198]-[202] as follows:

198. Both parties devoted considerable attention in their submissions to the Commissioner's contention that Division 3B could be enlivened only if there were 'two conversions'. This expression was a shorthand for suggesting that there needed to be an initial conversion from Australian dollars to a foreign currency (or, as I have held, a conversion from a liability denominated in Australian dollars to a liability denominated in a foreign currency) and, at some later time when the exchange rate had moved, a second exchange in the opposite direction. This is the classic form of an exchange loss. I do not doubt that the word 'loss' in Division 3B embraces losses and gains of that character.

199. For the reasons I give below I generally accept that the losses claimed by the taxpayers were exchange losses arising from two conversion events. The difficulties associated with this issue do not therefore arise. Had it been necessary to decide the issue a number of difficulties would have confronted the Commissioner's position. The first problem is that there is no textual foundation in Division 3B for any prescription on the number of conversions there needs to be. The only concept it utilises is the necessity that there be a loss or gain on capital account arising from fluctuations in currency exchange rates. No doubt the classic kind of exchange loss where there are two conversions will be such a loss. But it does not follow that all the losses contemplated by Division 3B need to be exchange losses of that kind. In that regard it is to be noted that what Division 3B calls for are losses arising from exchange rate fluctuations rather than exchanges.

200. The second problem is that the House of Lords' decision in
Pattinson v Marine Midland Ltd [1984] AC 362 at 372 appears, at least in part, to be against the proposition as are, I think, the reasons of Hill J in Energy Resources (Full Federal Court) at 72-73.

201. The third problem is that, contrary to the Commissioner's submissions, it is unlikely that the High Court's decision in Energy Resources says much about the matter at all. The passage upon which the Commissioner sought to rely (at 79, set out above at [191]) says nothing about a single conversion situation. Had the Court addressed that issue in Energy Resources it might have needed to confront the question of where the funds were coming from to fund the difference between the face value of the Euronotes and the proceeds of each new tranche (a matter dealt with both by Hill J in the Full Court at 57-58 and by Davies J at trial:
Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 28 ATR 67 at 71). See also: M Ferrier, 'Hedging of Foreign Currency'
(1997) 26 Australian Tax Review 83 at 86 ('It is a pity that the High Court did not focus...').

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202. The fourth problem is that it is not difficult to imagine circumstances in which a single conversion may generate losses. A US dollar loan used by a taxpayer to acquire a capital asset in the United States but serviced from a supply of Australian dollars converted at the time of each repayment to US dollars will generate losses if there is an adverse shift in the exchange rate. In this context an increased expense is a loss.

On appeal, the Full Court neither rejected nor adopted the foregoing observations. Rather, the Court said, in response to a question asked by the primary judge about the need for two exchange transactions, the following at [43]:

… the primary judge foreshadowed that he would proceed to find that the losses claimed by the respondents were exchange losses arising from two conversion events. In the result, he did not need to determine whether Div 3B was limited as asked in this question. His Honour did proceed to give some limited consideration to that question but, given the way the parties' cases were conducted on appeal, that consideration does not require further illumination at this point.

77. The conversion events in Messenger Press were the conversions on two occasions (called inward and outward conversions) of liabilities denominated in one currency to one party into liabilities in different currencies. The conversions did not involve any exchange of cash, but rather exchanges of promissory notes or cheques which the law recognised as effective payments. That was found to be sufficient. That is made clear in the following passage in the judgment of the Full Court at [87]:

What matters is whether a difference is made if the taxpayer in question funds the discharge of his or her existing foreign currency debt by supplying a note obtained in return for an increase in his or her Australian currency borrowings rather than borrowing Australian money as such and using that money to discharge the debt. The primary judge considered not, and we agree.

It is unnecessary to say anything more about that case or about Perram J's important observations. They were made, I infer, about an Australian resident taxpayer at all relevant times. That is not the position here.

78. Without necessarily foreclosing how losses can arise from fluctuations in the rate of exchange with other currencies, ordinarily what is required, at least in the case of a loan, is a comparison between two times, namely and relevantly here, the act of advancing monies and the act of repayment. That is because, generally speaking, a loss or profit, is the arithmetic outcome of a comparison of value between two dates. As Fletcher Moulton LJ said in
Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 at 98:

'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates.

The foregoing passage was most recently approved by the High Court in
Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liquidation) (2005) 225 CLR 488 at [43]. Thus, in a simple case of a loan of foreign currency, the amount of Australian dollars needed to make that advance is compared with the amount of Australian dollars achieved when that loan is repaid. Where because of a movement in the rate of exchange the taxpayer gets fewer Australian dollars than it outlaid, it has definitively encountered, run into or fallen upon a loss of the kind recognised by s 8-1.

79. In that respect, two observations made by Dixon CJ in Caltex are pertinent:

(1) first, whether a loss has been encountered does not depend upon "proper commercial principles or accountancy practice but upon the legal criterion" now supplied by the words of s 8-1 (at 218). In Caltex, Dixon CJ recognised that the cost in Australian money needed to discharge the United Stated dollar liability greatly exceeded the cost in Australia "at which the stock in trade had been taken into the

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merchandising accounts…" (at 217). Yet, Caltex made no loss for the purposes of former s 51(1); and
(2) secondly, as set out in the passage from Caltex above, it is one thing to deal in values without realisation. But s 8-1 (and former s 51(1)) is concerned only with realised losses.

80. It remains to be considered on another occasion whether physical conversions of currency (whether in cash or the equivalent to cash, such as a promissory note) are always needed in order to realise a foreign exchange loss. The issue was not definitively decided in Energy Resources of Australia: see 80. In Caltex, on one view, Fullager J (at 228) thought that an actual exchange was not necessary. Nor, perhaps, did Kitto J think it was necessary (at 229).

81. Here, and to recapitulate, when the Wade Trust advanced money to Starburst in various foreign currencies there was no conversion of that receivable into Australian dollars for any purpose. Both entities were at the time resident overseas. There was no evidence that either used Australian dollars as their respective functional currency. Nor did the Wade Trust need to use or deploy any Australian dollars to buy the necessary foreign currencies to advance to Starburst. There was no evidence before me that when the foreign currency advances were made the Wade Trust expected to be repaid in Australian dollars. Nor was there any evidence before me that the Wade Trust considered that each advance comprised an outgoing of Australian dollars. It follows that there was no relevant "time gap", to use the language of Energy Resources of Australia, which finds expression as a comparison between Australian dollars held at two different dates. The contention of senior counsel that the Wade Trust "got fewer Australian dollars" is respectfully rejected because the trust never had or expected Australian dollars when each advance was made.

82. The taxpayers also contended that the loss arose here because the "base currency" for assessing the loss was Australian dollars given that the funds of the Wade Trust were held largely for the benefit of Australian resident taxpayers, including Mr Wade. There was a loss to those beneficiaries because there was a diminution in Australian dollars in respect of which they held equitable interests or rights. It was said that one must look to the ultimate beneficiaries of a transaction to determine whether a loss had been incurred.

83. I respectfully disagree with that submission. It conflates the position of the trust with that of potential beneficiaries. During the years of the foreign currency advances, the Wade Trust did not deal in Australian dollars, save in the case of the alleged $21 million Australian dollar loan, which I deal with separately below.

84. It was also contended that Div 6AAA required the trustee of the Wade Trust to account for its net income in Australian currency. Again, I respectfully disagree. That division obliges Australian resident beneficiaries, where applicable, to calculate the "notional attributable income of the trust". That in turn obliges the beneficiary to calculate the attributable income of the estate - relevantly here "the net income of the non-resident trust estate" - reduced by certain defined amounts (s 102AAU). But, again, the calculation is made to discern the liability of the beneficiary to pay tax in Australia. No liability is imposed upon the trustee of the trust itself or the trust estate. At no point does that trustee itself convert its assets and liabilities into Australian dollars to determine its net income. Rather the resident beneficiary does this for the purposes of calculating its own liability; it is then taxed on income described as "notional" attributable income. The income is "notional" because the taxpayer never received it. I finally note that there was no evidence before me that Mr Wade had included any notional assessable income of the Wade Trust in his tax returns in the years the foreign currency advances were made.

Issue 3 - Section 8-1 - Nexus with the Gaining of Income

85. Assuming that my conclusion is wrong, I next turn to consider whether any suggested loss was incurred in gaining or producing assessable income or was necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income. In that respect, the taxpayers accepted that the occasion of the incurrence of the loss was to be

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found in the loans made to Starburst. The taxpayers put their case in various ways.

86. First, they submitted that the loans were advanced in order to obtain dividend income from Starburst. The case, it was said, was analagous to the decision in
Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd [1979] FCA 30; (1979) 9 ATR 885, where a deduction was allowed for interest incurred on a loan or loans part of which was on lent interest-free to a subsidiary of that taxpayer. It was held that the taxpayer carried on a business as a holding company. The Full Court of this Court decided that the interest incurred exhibited a sufficient nexus with the likelihood of the derivation of assessable dividend income, even though there was no guarantee that such dividends would ever be paid. Here, it was submitted that actual dividends were paid in the years ended 30 June 2010 to 30 June 2013.

87. In
Spassked Pty Ltd v Commissioner of Taxation (No 5) [2003] FCA 84; (2003) 52 ATR 337, the taxpayer borrowed money to invest in a subsidiary. It claimed a deduction for the interest it paid and claimed that the positive limbs of former s 51(1) of the 1936 Act (the predecessor of s 8-1) were satisfied because it expected to be paid dividends by that subsidiary. Lindgren J observed at [175] that for the interest to be deductible, the "occasion, purpose or explanation of the borrowing must be the derivation of dividend income, even if deferred".

88. I accept that the trustee of the Wade Trust lent money to Starburst in the reasonable expectation of being paid dividends from Starburst's investments of the monies so advanced. However, subject to the taxpayer's reliance upon s 95 of the 1936 Act, at the time of the making of each such advance, any dividends that the Wade Trust would have expected to have earned would not have constituted assessable income. Both Starburst and the Wade Trust were not residents of Australia and there was no evidence that Starburst's profits were expected to be derived from sources in Australia for the purposes of s 44 of the 1936 Act. Section 44 relevantly provides:

Dividends

(1) The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes:

(a) if the shareholder is a resident:

(i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

(ii) all non-share dividends paid to the shareholder by the company; and

(b) if the shareholder is a non-resident:

(i) dividends (other than non-share dividends) paid to the shareholder by the company to the extent to which they are paid out of profits derived by it from sources in Australia; and

(ii) non-share dividends paid to the shareholder by the company to the extent to which they are derived from sources in Australia;

…

89. It was not otherwise suggested that any dividends that Starburst might have paid to the Wade Trust would have been assessable income (as distinct from "ordinary income") for any other reason: cf
Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656. Distributions to the Wade Trust would have been foreign source income paid to a non-resident. In that respect, I also note that until 13 September 2006 all income derived by a non-resident from sources wholly outside of Australia (except income that a provision of the 1936 Act included in the taxpayer's assessable income on some other basis than having an Australian source) constituted exempt income: former s 23(r) of the 1936 Act. Thereafter, such foreign source income simply was not assessable income: ss 6-5(3) and 6-10(5) of the 1997 Act. I shall return to McNeil.

90. The taxpayers submitted, however, that the loss was incurred in gaining or producing assessable income because the definition of "net income" in s 95(1) of the 1936 Act renders all the income of a trust estate assessable income regardless of source and irrespective of whether the trust is a resident trust estate or not. It does this by creating a

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fiction of a hypothetical resident taxpayer. Section 95(1) relevantly provides as follows:

net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (Farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

(Emphasis added.)

It was submitted by the taxpayers that this provision created a "residency assumption" for the trustee of a trust estate that operated for all relevant purposes under the provisions of the 1936 and 1997 Acts. It followed that all of the ordinary and statutory income of the Wade Trust, whilst it in fact remained a non-resident, was Australian assessable income regardless of source.

91. Section 95 was amended in 1979 to overcome an aspect of the decision in
Union-Fidelity Trustee Company of Australia Ltd v Federal Commissioner of Taxation (1969) 119 CLR 177. In that case, the High Court decided that the net income of a trust estate for the purposes of Div 6 of Part III of the 1936 Act could not include income from a foreign source. The definition of "net income of a trust estate" in s 95 was at the time relevantly in the following form:

... 'the net income of a trust estate' means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions, except the concessional deductions and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deduction of such of the losses of previous years as are required to be met out of corpus.

The words "and were a resident" did not appear in this version of the definition of "net income of a trust estate". Kitto J observed at 187 that the hypothetical taxpayer contemplated by the definition of "net income of a trust estate" did not include anything which would make that taxpayer a resident of Australia. His Honour said:

In the light of the definition of "taxpayer" the expression "calculated under this Act as if the trustee were a taxpayer in respect of that income" may be expanded to read "calculated under this Act as if the trustee were a person deriving that income". But the "as if" shows beyond question that the basis of the calculation is to be a hypothesis different from the actual fact. Since the fact is that the trustee derived the income, the hypothesis that it was derived by "a person" must be that it was derived not by the trustee but by a hypothetical person as to whom none of the facts is postulated which would make him a "resident" within the definition of that word in s. 6 (1). Unless a person is a "resident" of Australia he is by definition a "non-resident". Accordingly, by limiting the meaning of "the net income of a trust estate", for the purposes of (inter alia) s. 99, to the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income, less all allowable deductions except concessional allowances, s. 95 excludes from gross income all income which s. 25 (1) brings into assessable income in the case only of a taxpayer who is a resident (i.e., income from sources outside Australia), and, as consistency requires, excludes from the allowable deductions to be subtracted from the gross income which remains included in the assessable income those deductions which are allowable only in the case of such a taxpayer.

Barwick CJ reached the same conclusion. His Honour said at 181:

Income for the relevant purposes of the Act falls into one of two categories - that which is derived from an Australian source and that which is not derived from an Australian source. The scheme of the Act is to bring to tax both kinds of income where the taxpayer

ATC 21944
deriving it is a resident of Australia but to bring to tax only income of the former kind where the taxpayer is not a resident of Australia. It is therefore clear to my mind that if nothing is known as to the residence of a taxpayer the only income which can certainly be said to be assessable income is the income derived by the taxpayer from an Australian source. Unless it is known that he is a resident, it cannot be said that any other income is to be included in his assessable income.

See also Menzies J at 190.

92. By the Income Tax Assessment Amendment Act 1979 (Cth) (the "1979 Act"), a new version of the definition, now simply called "net income", was substituted for the old. The new definition inserted the words "and were a resident" to the content of the hypothetical taxpayer. The Explanatory Memorandum which accompanied the 1979 Act (Income Tax Assessment Amendment Bill (No.5) 1978 (Cth)) made it clear that Parliament was of the view that the taxable income of a resident trust estate should include income from all sources. The Explanatory Memorandum stated as follows at 16:

In broad terms, the amendments to be made by these clauses are designed to ensure that resident beneficiaries are subject to Australian tax under the trust estate provision both on income from Australian sources and, subject to relief from double taxation where it is also taxed in the country of source, on income from foreign sources, while non-resident beneficiaries are taxed only on income from Australian sources. To achieve these results, the net income of a trust estate is to be calculated as if the trustee were a resident taxpayer. The assumption that the trustee is a resident will have the effect of bringing into the calculation of net income, assessable income from foreign sources and deductions related to that foreign source income.

The new definition in s 95 was described as follows at 21:

The term "net income" is to be defined as meaning, in relation to a trust estate, the total assessable income of the trust estate calculated as if the trustee were a resident taxpayer less all allowable deductions other than those deductions that are excluded from consideration by the present definition of "the net income of a trust estate" …

93. It followed from this change, the taxpayers submitted, that the net income of the Wade Trust had to be computed in accordance with the statutory fiction that its trustee was a resident taxpayer. As such, any dividends paid to it by Starburst would be necessarily assessable income of the Wade Trust pursuant to s 44 of the 1936 Act, even though Starburst did not, it would seem, have any profits derived from sources in Australia. In that respect, the statutory fiction created by s 95(1) was one that operated for all purposes of the 1936 and 1997 Acts, including relevantly s 8-1. Accordingly, the occasion of the loss alleged here bore a sufficient nexus with the gaining or producing of assessable income because when each loan was advanced, by reason of s 95(1), the Wade Trust expected to derive dividends which would be assessable income.

94. It was not suggested that the statutory fiction extended in any way to Starburst. As such, any dividends paid to the trustee of the Wade Trust under that statutory fiction would probably have constituted dividends paid by a non-resident company to its resident parent. This raised the possibility of the application of former s 23AJ of the 1936 Act. That provision, during the years in which the foreign currency advances were made, in defined circumstances, rendered dividends paid by a non-resident company to its resident parent to be either exempt income or non-assessable non-exempt income. This issue was raised by the Court after the trial. Written submissions were received from both the taxpayers and the Commissioner which contended that s 23AJ would not have applied to any such dividends paid by Starburst. The Court is grateful to the parties for their submissions. As they were in agreement on this issue, I say nothing more about s 23AJ.

95. The Commissioner disagreed with the taxpayers' submission about s 95. He contended that the fiction created by s 95 served the purpose of the computation of the net income of a trust estate and no more. It was said to be only the "first step" in determining the amount to be assessed to either the trustee or a

ATC 21945

beneficiary pursuant to ss 97 to 99A of Div 6 of Part III of the 1936 Act. The net income calculated in accordance with s 95(1) was described as being only "notional" income, or to use the expression of Sundberg J in
Zeta Force Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 70 at 75, as being only an "artificial tax amount".

96. Notwithstanding the original nature of the taxpayers' argument, presented with commendable skill by senior counsel for the taxpayers, I am, respectfully, unable to agree with it for the following reasons:

(1) First, a basal proposition about statutory fictions is that they should be construed strictly and only for the purpose for which they are resorted to:
Federal Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96 per Fisher J, citing
Re Levy; Ex parte Walton (1881) 17 Ch D 746 at 756 per James LJ;
Financial Synergy Holdings Pty Ltd v Federal Commissioner of Taxation (2016) 243 FCR 250 at [34] per Middleton and Davies JJ. The force of this proposition may now be diminished (cf
Newcastle Airport Pty Ltd v Chief Commissioner of State Revenue [2014] NSWSC 1501; (2014) 99 ATR 748, citing
DCC Holdings (UK) Ltd v Revenue and Customs Commissioners [2010] UKSC 58; [2011] 1 WLR 44), but it remains a valid starting point.
(2) Secondly, the purpose of the amendment made in 1979 had nothing to do with non-resident trust estates. Its purpose was to undo the High Court's decision in Union-Fidelity. Its objective was to ensure that beneficiaries of a resident trust estate or an applicable trustee paid tax on the net income of a trust estate from all sources. It was considered anomalous that tax had been only payable on income which had an Australian source. The means used to achieve that objective was to add words to the statutory fiction already created by the former definition of "net income of a trust estate" in s 95. The original fiction was to treat the trustee as a "taxpayer". The substituted fiction added the words "and were a resident".
(3) Thirdly, the definition of "net income" in s 95(1) does not operate to include anything in the assessable income of a beneficiary or trustee. It is definitional. Upon completion of the calculation required by it, there is no resulting assessable income included in the taxable income of any taxpayer. No assessable income has thereby been gained or produced at that moment for the purposes of s 8-1. That is the work of ss 97 to 99A of Div 6 of Part III of 1936 Act. Those provisions operate to include in the assessable income of a beneficiary or trustee a share of, not the gross income of a trust estate, but the net income of such an estate as ascertained in accordance with s 95(1). That net income is a species of statutory income "having no single character":
Federal Commissioner of Taxation v Greenhatch (2012) 203 FCR 134 at [31].
(4) Fourthly, contrary to the submission of the taxpayers, who would have the trustee of a non-resident trust estate gaining or producing assessable income which has no Australian source, the express "policy" underlying the amendment made in 1979 was that "a non-resident is not liable to tax on ex-Australian source income": see Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No.5) 1978 (Cth) at 4. That policy is reflected in the provisions of Div 6, and in particular s 99D which provides for a refund of tax where a resident trustee pays income tax on foreign source income which is subsequently distributed to a non-resident beneficiary. It is also reflected in the definition of resident and non-resident trust estates in s 95(2) and (3), also introduced by the 1979 Act. Because the net income of a trust estate is calculated as if the trustee were a resident taxpayer, provisions are included in Div 6 to ensure that a non-resident trustee can only be liable to pay tax on Australian source income: s 99(4) and (5).
(5) Fifthly, because of the confined but explicit purpose of the statutory fiction introduced in 1979, I find that practically speaking, until a time is encountered when a computation of the net income of a trust estate needs to be made, whether because a trust estate must prepare and file an income tax return under the 1936 and 1997 Acts (or,

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if necessary, is deemed to have done so), or because the Commissioner must issue an assessment to that trust estate, no occasion for the application of the fiction arises. It was not suggested, and nor could it be, that when the trustee of the Wade Trust made the foreign currency advances here it was under any obligation to file Australian tax returns and thus to ascertain the net income of that trust estate. Accordingly, at that time, the trustee of the Wade Trust was not expected to derive dividends from Starburst that would constitute the gaining or production of assessable income for the purposes of s 8-1. However, after the Wade Trust migrated to Australia and was required to file its first income tax return, the trustee needed to do so by starting with the calculation mandated by the definition of "net income" and by an application for the first time of the statutory fiction created by that definition. No part of that calculation required the trustee to treat the Wade Trust in prior years to be that which it was not, namely, a resident of Australia.

97. For the foregoing reasons I respectfully reject the taxpayers' reliance upon s 95(1) to establish a nexus with the gaining or producing of assessable income.

98. The taxpayers also relied on the creation of the obligation to pay interest in the 2013 Loan Agreement as demonstrating a sufficient nexus with the gaining of income. The Commissioner submitted, amongst other things, that any such interest was payable in relation to an entirely new loan, which replaced the original loans. The right to receive any such interest could thus not create the required nexus. In essence, the Commissioner submitted that liability under the old loans was extinguished by the entry into of a new loan on very different terms. This was not a case of merely documenting, it was said, a pre-existing loan or loans.

99. It is not necessary for me to decide that issue at this point (but see below), as I am not satisfied that the creation of the obligation to pay interest in 2013 created a sufficient nexus here with the gaining of income for the purposes of s 8-1. That is because there was no evidence that when the foreign currency advances were made there was any realistic expectation that the loans to Starburst would become subject to the payment of interest which would be assessable income for the purposes of the 1936 and 1997 Acts.

Issue 4 - Section 8-1 - Capital Account

100. I should also record my conclusion that if, contrary to my opinion, the Wade Trust had incurred a loss, the loss was, in any event, an affair of capital. This point was not greatly pressed by the taxpayers. In essence, they submitted that the Wade Trust was in the business of lending to its subsidiaries, and that an incident of such "money-lending activities" was the incurrence of a currency exchange gain or loss from time to time. I respectfully do not agree with that submission. I do not think that the Wade Trust was in a money lending business of the kind considered in
Avco Financial Services Ltd v Federal Commissioner of Taxation (1982) 150 CLR 510 and
Commercial and General Acceptance Ltd v Federal Commissioner of Taxation (1977) 137 CLR 373. In my view, the trustee of the Wade Trust was not a finance company but relevantly was in the business of being a holding company for its subsidiaries. The loans it made were like the shares it held in its subsidiaries: they comprised its capital structure from which to drive dividend income. Those loans are not analogous to trading stock: Commercial and General Acceptance Ltd at 384-385 per Mason J (as his Honour then was). Rather, if a foreign exchange loss occurred in relation to the loans here, that would have been a loss of capital: see Hunter Douglas Ltd.

101. It follows that the trustee of the Wade Trust is not entitled to an allowable deduction pursuant to s 8-1 of the 1997 Act.

Issue 5 - Former Division 3B of the 1936 Act

102. Like s 8-1, former Div 3B requires the making of a "loss": see definition of "currency exchange loss" in former s 82V of the 1936 Act. As I have found that the trustee of the Wade Trust did not make any such loss, it follows that I need not consider its provisions any further.

Issue 6 - Division 775 of the 1997 Act

103. It is also unnecessary for me to set out the provisions of Div 775 of the 1997 Act in any detail. That is because the Commissioner

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really only relied on two points. The first was that there were no loans. I have rejected that for the reasons already given. The second was, that if there were loans, the Commissioner did not dispute that "Forex Realisation Event 2" had occurred upon the repayment of them (this event occurs when a right to receive foreign currency ceases), and he did not dispute the size of the loss said by the taxpayers to have arisen from that event. That loss, in general terms, was the difference between the amounts advanced to Starburst as translated into Australian dollars at the time of the making of each advance and the amount received when the loans were repaid, the difference being attributable to a currency exchange rate effect. These statutory translations of currency are mandated expressly by Div 775 (unlike the position arising under s 8-1 and former Div 3B). The Commissioner's point, however, was that this loss was not deductible by reason of s 775-35(1) which relevantly provided as follows:

A forex realisation loss you make as a result of forex realisation event 1, 2 or 5 is disregarded to the extent that it is made in gaining or producing exempt income or non-assessable non-exempt income.

In my view, the Commissioner's submission is correct. It is, I think, odd to describe a loss of the kind encountered here as having been made in gaining income, let alone exempt or non-assessable non-exempt income. However, it appears to have been accepted by the parties that the occasion of the loss arising under Div 775 was the making of the foreign currency advances to Starburst.

104. Absent acceptance of the taxpayers' argument in relation to s 95(1), they did not contend that s 775-35(1) did not otherwise apply as submitted by the Commissioner. However, the matter is not as simple as that. Section 775-35(1) only refers to exempt income and non-assessable non-exempt income; it does not also refer to income which is neither of this kind but nonetheless is not assessable income. Whilst I have accepted that any dividends that might have been paid by Starburst to the trustee of the Wade Trust at the time of the making of the foreign currency advances would not have constituted assessable income, it would not follow from that conclusion that such income would either have been exempt or non-assessable non-exempt income as required by s 775-35(1). The starting point is former s 23(r) of the 1936 Act. I accept the dividends paid whilst that provision remained in force (up until 13 September 2006) would have been exempt income because generally speaking that provision treated income derived by a non-resident from foreign sources to be exempt. Thereafter, the matter is more complicated. In 2013, the term "exempt income" was defined by s 6-20 of the 1997 Act as follows:

Exempt income

(1) An amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law.

(2) Ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income.

(3) By contrast, an amount of statutory income is exempt income only if it is made exempt from income tax by a provision of this Act outside this Division or another Commonwealth law.

(4) If an amount of ordinary income or statutory income is non-assessable non-exempt income, it is not exempt income .

The term "non-assessable non-exempt income" was defined by s 6-23 of the 1997 Act as follows:

An amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or of another Commonwealth law states that it is not assessable income and is not exempt income.

105. Neither the Commissioner nor the taxpayers addressed the application of these provisions. I am not aware of any provision of the 1997 Act or any other Commonwealth law that provided that dividends which might have been paid by Starburst would have constituted non-assessable non-exempt income. To that extent s 775-35 is not made out. Nor am I aware of any provisions of the 1997 Act or another Commonwealth law (other than s 23(r) when it

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was in force) which would have expressly treated such dividends to be exempt income.

106. Nonetheless, in my view, whilst any such dividends could not have satisfied the statutory test in s 44 of the 1936 Act, they otherwise represented a species of ordinary income which the 1997 and the 1936 Acts "by implication" (s 6-20(2)) exclude from "being assessable income" by reason of s 6-5(3) of the 1997 Act. That provision is in the following terms:

If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

107. In that respect, following the High Court's rejection in McNeil of the proposition that s 44 of the 1936 Act is a code, I find that dividends that might have been paid by Starburst to the trustee of the Wade Trust when the foreign currency advances were made would have constituted ordinary income, being income from property: see McNeil at [39]-[43]. I also find that such income would have been exempt income either because:

(a) of an application of s 23(r); or
(b) following the repeal of that provision, because, being ordinary income, it was impliedly excluded by reason of s 6-5(3).

108. It follows that s 775-35(1) thus applies to deny the taxpayers a loss arising from "Forex Realisation Event 2".

Issue 7 - Part IVA

109. For the foregoing reasons, there was no tax benefit for the purposes of s 177C of the 1936 Act which the Commissioner could cancel. Part IVA cannot, accordingly, apply:
Vincent v Commissioner of Taxation (2002) 124 FCR 350. In those circumstances, it would not be appropriate to make any further observations about its possible application here.

Issue 8 - Capital Loss

110. The final issue concerning primary tax concerned the claim of a capital loss arising from the forgiveness of the remaining alleged Australian dollar denominated debt in the sum of $4,232,995.38 which took place by the deed of forgiveness made on 14 June 2013. The applicant submitted that when the forgiveness took place "CGT event C2" happened pursuant to s 104-25 of the 1997 Act, which relevantly provides:

Cancellation, surrender and similar endings: CGT event C2

(1) CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option-being exercised; or

(f) if the asset is a convertible interest-being converted.

(2) The time of the event is:

(a) when you enter into the contract that results in the asset ending; or

(b) if there is no contract-when the asset ends.

(3) You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.
…

111. The taxpayers submitted that the Australian dollar denominated receivable owed by Starburst was a CGT asset of the Wade Trust; that this asset was disposed of when the Wade Trust waived, released and forgave that loan; that this forgiveness constituted the release, discharge or cancellation of that asset for the purposes of s 104-25; that applying the market value substitution rule in s 116-30 of the 1997 Act (which applies when no capital proceeds are received when a CGT event occurs) the value of the asset disposed of could have been no more than the value of Starburst's then assets (said to be around $50,000); that the reduced cost base of the asset was the

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amount of Australian dollars advanced by the Wade Trust to Starburst; and that subtracting the capital proceeds of $50,000 from the reduced cost base resulted in a capital loss of $4,182,995. Carrying forward this loss meant that there were nil net capital gains for the 2015 and 2016 years of income for the purpose of calculating the net income of the Wade Trust to which Mr Wade was presently entitled.

112. The Commissioner disagreed with these submissions. First, he contended that there was never any loan. He never conceded that an Australian dollar denominated payment had ever been made to Starburst. Secondly, he submitted that the taxpayers had not proven either the reduced cost base of any asset said to be the receivable from Starburst or the capital proceeds deemed to have been received by the Wade Trust. I will return to that contention. Thirdly, if an Australian dollar denominated loan did exist, it was created by the 2013 Loan Agreement. This was the same argument referred to earlier that this written agreement brought to an end any earlier oral loan agreements. In that respect, it was said that the cost base of the right to be paid $4,232,995 (said to be the balance owing under the 2013 Loan Agreement) was the market value of the property given by the Wade Trust in respect of acquiring that right (s 110-25(2)(b)) of the 1997 Act). That property given was said to be a release to Starburst of its obligations under the original oral loan agreement. The Commissioner submitted that the market value of that release was nil (or very low) because Starburst did not have the capacity to repay the amounts said to have been originally lent. It followed, it was submitted, that when the right under the 2013 Loan Agreement was disposed of on 14 June 2013, there "would thus be little or no capital loss".

113. Assuming for the moment that there was an Australian dollar denominated loan, I reject the Commissioner's submission that the 2013 Loan Agreement operated as a discharge of that loan or loans and the entry into of a new loan. I do not think that, objectively ascertained, that this was the intention of the parties. Recital D of the 2013 Loan Agreement is an acceptable expression of that intention. For convenience it is reproduced below:

The Lender and the Borrower have agreed to enter into this Agreement to set out terms and conditions on which the Loan was advanced to the Borrower.

(Emphasis added.)

In my view, the parties were intending to document loans previously advanced, or perceived to have been advanced, that were undocumented. They were also amending the terms of the loan agreement or agreements going forward.

114. The Commissioner relied upon the decision of the High Court in
Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520. In that case, a purchase and sale agreement ("PSA") in relation to a business was entered into on 31 May 1991. Prior to completion on 30 August 1991 an agreement amending the PSA was executed. The issue was whether the assets of the business, for capital gains purposes, had been sold pursuant to the contract executed on 31 May or the contract as amended on 31 August. At [22], Gleeson CJ, Gaudron, McHugh and Hayne JJ said:

When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. In the present case, if the effect of what occurred on 30 August 1991 had been to rescind the agreement of 31 May 1991, then that would go a long way towards providing an answer to the appellant's argument that the assignment which occurred on 30 August was pursuant to the agreement of 31 May, with whatever that entails for the application of Pt IIIA of the Act.

115.

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The plurality also affirmed the following passage from
Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 144:

It is firmly established by a long line of cases ... that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement.

The plurality decided that the amending agreement did not operate as a rescission of the original contract. Their Honours said at [25]:

… It is also to be observed that the deed of assignment executed by the respondent and Nicholas Products Pty Ltd on 30 August 1991 recited that it was entered into pursuant to the agreement of 31 May 1991, as amended. The manifest intention of the parties was not that the agreement of 31 May 1991 should be wholly rescinded and replaced by a new agreement, but that the rights and liabilities under, and the mode of performance of, the agreement, should be varied in certain respects.

(Emphasis added.)

116. The Commissioner submitted here that there was no equivalent clause in the 2013 Loan Agreement expressly stating that the original loan agreements remained on foot. Instead, he pointed out that there was an "entire agreement" clause which was in the following terms:

This Agreement constitutes the entire Agreement between the parties in connection with its subject matter and supersedes all previous agreements or understandings between the parties in connection with its subject matter.

I respectfully disagree with the Commissioner's submission. In my view, when the word "supersedes" in the foregoing clause is read with Recital D (and B), I do not think it should be concluded that the parties intended wholly to rescind the old loans and have them replaced with a new loan. Objectively, there was no need for the parties to do this. In the context of an attempt to document pre-existing loans, I would read the word "supersedes" as not referring to a substitution of rights, but as referring to the succession in writing of rights which already existed, and which were intended to remain in existence as varied and as documented.

117. I turn to consider the issue of proof raised by the Commissioner. As to the capital proceeds, it would appear that the Commissioner agreed that Starburst's assets were "nil (or very low)". That is consistent with the taxpayer's contention that its net assets were only $50,000. It follows that I accept that the value of the capital proceeds deemed to have been received by the trustee of the Wade Trust by reason of s 116-30 of the 1997 Act was no more than $50,000.

118. However, I accept that the evidence of the cost base of the loan was insufficient. Critically, and unlike the foreign currency denominated loans, the existence of an Australian dollar payment or payments made to Starburst by the Wade Trust was not admitted by the Commissioner. It will be recalled that the taxpayers had submitted that this Australian dollar denominated loan arose from the assignment of a $21 million debt owed to the trustee of the Wade Trust by PA Wade Management Pty Limited (as trustee of PWIT) to Starburst. It was said that in exchange for this assignment, Starburst agreed to "appropriate offsets in intercompany balances between" the trustee of the Wade Trust, PA Wade Management Pty Limited and Starburst. In that respect, the Commissioner made the following written submission:

In summary the Commissioner notes:

(a) No person could give evidence from their personal knowledge of either the original loan to PWIT [(Peter Wade Investment Trust)] or the circumstances in which it was purportedly assigned to Starburst and Sole Luna has chosen not to call any person who would have personal knowledge;

(b) The evidence of the original $15 (or $21) million loan by the Trust to PWIT is weak, there is no evidence of movement of funds from the Trust to PWIT only of the partial

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execution of a loan agreement dated "July 2004";

(c) Starburst itself provided $6 million of the $21 million directly to PWIT so the basis on which it could be said that the Trust could have assigned a $21 million receivable to Starburst is inexplicable;

(d) The accounts are inconsistent with the assignment having occurred in the manner and timing claimed;

(e) The Deed of Assignment that supposedly effectuated this backdated assignment has never been produced. Accordingly there is no evidence that it was legally effective or that the assignment of the receivable could give rise to a debt owed by Starburst to PWIT in the amount of $21 million;

(f) The Trust had the benefit of security over PWIT to secure its loan to PWIT but it did not assign this security to Starburst. As s 110-25(2) requires the market value of property given to be included in the reduced cost base Sole Luna should have led evidence to prove that the loss of security did not affect the market value of the right assigned to Starburst. This would have required an analysis of the financial position of the PWIT, in particular, the existence of other creditors and the asset position of the PWIT.

119. These criticisms reflect the thinness of the evidence concerning this alleged loan. There was no direct evidence of what "appropriate offsets" had taken place to create this loan. No witness with knowledge of these offsets gave evidence about this loan. It would appear that the original loan to PA Wade Management Pty Limited had been secured by a fixed and floating charge in favour of the Wade Trust (it is referred to in the resolution of the Wade Trust dated 13 July 2004 set out above). Whether a similar charge was created in favour of Starburst remains unknown. There was also no evidence of the making of repayments by Starburst to the trustee of the Wade Trust which would corroborate the Australian dollar balance of that loan which appears in the 2013 Loan Agreement. It is true that a description of these repayments appears in the affidavit of Mr De Zilva, but that description was admitted only as evidence of that witness' understanding of the loan balance; Mr De Zilva could not otherwise give direct evidence of the creation of this loan as he was not involved in its establishment. Nor was he involved in the making of any repayments by Starburst. The accounts of Starburst and of the Wade Trust do not otherwise provide a sufficient breakdown of the amounts owing which might have evidenced the Australian dollar denominated loan. Section 1305 of the Corporations Act is thus of no assistance.

120. In that respect, the representation of "Amounts owed by Starburst" in the Wade Trust's pound sterling denominated accounts on this occasion does not help the taxpayers. Absent a concession that Australian dollar denominated payments had been made to Starburst by the Wade Trust of a kind similar to that made about the foreign currency amounts lent, I cannot be sure that the amount described as "owed" included the alleged Australian dollar loan. I was asked to infer that this was so because the accounts record an increase in the amount "owed" by Starburst in the 2003 year (being £6,139,995) and the amount owed in the 2004 year (being £22,958,982). Again, I cannot be certain that this increase reflects the purported Australian dollar denominated loan. As it happens, in Starburst's restated Australian dollar denominated account in respect of the 2004 year, a "trade and other receivable" of $21 million is recorded as an asset, but the company's non-current liabilities were far larger than this sum; they had increased by about $45 million (its current liabilities remained largely unchanged). In the circumstances, I cannot be confident that the $21 million "asset" reflects a borrowing of $21 million booked as a non-current liability. Moreover, these Australian dollar denominated accounts, prepared as they were in 2009, are at best, like the Wade Trust's restated accounts, evidence of what the maker or makers of these accounts assumed to be the case. They are not contemporaneous evidence of the contended for loan. Nor is the statement in the letter dated 13 December 2007 that the assignment of debt "will give rise to appropriate offsets" between Starburst and the Wade Trust, a sufficient basis for inferring both that offsets took place, and how many

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"appropriate" offsets took place. Given this state of the evidence, I cannot make the inference urged upon me by the taxpayers.

121. One is left with the identification of the loan balance in the 2013 Loan Agreement. But for reasons already given, that agreement again reflects what the parties to it assumed had occurred, and no more. It follows, with great respect, that I am not satisfied that the taxpayers have discharged their onus of proving the cost base of the alleged loan.

Issue 9 - Assessments to Mr Wade

122. By reason of the foregoing, the two Notices of Assessment issued to Mr Wade were not excessive in relation to primary tax.

Issue 10 - Penalties

123. The Commissioner imposed penalties on both Sole Luna as trustee of the Wade Trust and Mr Wade. It was said that each of the trustee and Mr Wade, for the purposes of s 284-75(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) (the "TAA"), made a statement to the Commissioner that was false or misleading in a material particular. Each statement said to be false was the claim made in the 2013 Wade Trust Return concerning the alleged foreign exchange deductible loss and in the 2015 tax return of Mr Wade concerning the alleged capital loss. I have found that the foreign exchange loss was not deductible and that there was no capital loss. I am therefore satisfied that false statements about these matters were made. The Commissioner further claimed that in connection with the making of each statement the taxpayers did not take reasonable care (s 284-75(5)). He also contended that the Wade Trust and Mr Wade made statements about the treatment of income tax law that were not reasonably arguable (s 284-75(2)). Section 284-75(1), (2) and (5) of Sch 1 to the TAA provide as follows:

(1) You are liable to an administrative penalty if:

(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law (other than the Excise Acts); and

(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25.

(2) You are liable to an administrative penalty if:

(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under an income tax law or the petroleum resource rent tax law; and

(b) in the statement, you treated an income tax law, or the petroleum resource rent tax law, as applying to a matter or identical matters in a particular way that was not reasonably arguable; and

(d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you.

…

(5) You are not liable to an administrative penalty under subsection (1) or (4) for a statement that is false or misleading in a material particular if you, and your agent (if relevant), took reasonable care in connection with the making of the statement.

124. A base penalty, for the purposes of s 284-90 of Sch 1 to the TAA, of 25% was imposed because that there had been a failure, either by the taxpayers or their agent, to take reasonable care (item 3 of s 284-90), or on the basis that either the taxpayers or their agent had treated the 1936 Act and/or 1997 Act as applying in a way that was not reasonably arguable (item 4 of s 284-90). The Commissioner also contended that a penalty of 50% of the shortfall amount payable was then justified in the case of Sole Luna because that shortfall had resulted from the recklessness of that taxpayer or their agent (item 2 of s 284-90). The Commissioner finally imposed a penalty of 50% on the basis that Sole Luna had entered into a scheme for the purposes of Part IVA of the 1936 Act and it was not reasonably arguable that Part IVA did not a apply to that scheme (ss 284-145 and 284-160). As I have found that Part IVA did not apply, it is unnecessary for me to consider this penalty. In the case of Mr Wade, an additional 20% uplift penalty was

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applied to him pursuant to s 284-220 of Sch 1 to the TAA.

Was reasonable care taken in the making of the statements to the Commissioner?

125. I will consider the issue of reasonable care first. There was no dispute before me as to the applicable principles. The reasonable care test "calls upon a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer in fulfilling the taxpayer's tax obligations":
Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) (2011) 196 FCR 457 at 465 [38] per Greenwood J.

126. As it happens, the issue of reasonable care arises in two ways. First, it appears in s 284-75(5) as a defence to be invoked by a taxpayer (as here). No penalty for making a false statement can be imposed if the taxpayer and its agent "took reasonable care in connection with the making of the statement". Where, as here, the statement is an assertion or conclusion of law about the application of the 1936 Act or 1997 Act to particular facts, care is needed to ensure that the test of reasonable care is not confused with a consideration as to whether that application of law was reasonably arguable:
Federal Commissioner of Taxation v Traviati (2012) 205 FCR 136. However, there may be cases where, practically speaking, there may be some overlap between the two tests. Secondly, the test of reasonable care appears as an item in s 284-90 as a measure of the degree of penalty to be imposed. By item 3 of that section, a penalty of 25% is applicable if the shortfall amount "resulted from a failure" by the taxpayer or its agent "to take reasonable care to comply with a taxation law".

127. The evidence before me concerning this issue supported the following findings, which I make:

(1) The 2013 Wade Trust Return was in evidence before me. On its face, it was prepared and lodged by Mr Skoglund of Davidsons. It was Mr De Zilva's belief that it was lodged on 30 January 2014. It disclosed a deduction of $16,775,094 which was described as "FX loss on repayment of loan". It also disclosed the net capital loss carried forward of $4,182,991, which Mr De Zilva believed reflected the claiming of the capital loss of $4,232,995 (arising from the purported forgiveness of the balance of the Australian dollar denominated loan). Leaving aside the legal and evidentiary conclusions underpinning these statements, there is nothing about the preparation of this return which appeared to be in any way careless or negligent. The same observations may be made about the returns filed by Mr Wade in relation to the capital loss claimed.
(2) The 2013 Wade Trust Return was, I infer, the product of the advice and work of Mr Skoglund. It was not suggested that he was not a properly qualified tax agent. I also infer that they were the product of advice given by Mr De Zilva, or his firm at the time. He, and a solicitor at Deloitte, Mr Neil, had worked out how the loans to Starburst could be repaid immediately without the incurrence of a significant tax liability. It was not suggested that either individual lacked the necessary skill to give tax advice. In that respect Mr De Zilva is a reasonably well-known tax lawyer.
(3) In or around 2015, Mr Wade engaged a new tax agent, a Mr Andrew Bethune, who prepared the 2015 tax return. I infer that it was prepared on the assumption that the deduction and losses claimed in the 2013 Wade Trust Return were correctly claimed.
(4) The ATO was kept appraised by Mr De Zilva of the migration of the Wade Trust and associated entities to Australia. Thus, on 6 November 2012, Mr De Zilva sent the following email to Messrs McAlister and Martin of the ATO:
Hi Jeff / Chris

As previously discussed, the P A Wade No 2 Settlement Trust and associated entities connected with Mr Peter Wade have relocated their tax residency to Australia.

After our last meeting we undertook to provide further information once the transactions had occurred. In this regard, we would like to schedule a meeting with yourselves and any other relevant ATO personnel.

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Could you please let me know if any of the following times are suitable for a meeting:
- • Wednesday 28 November 9am-12am
- • Wednesday 28 November 3pm-5pm
- • Thursday 29 November 10am-5pm
- • Friday 30 November 10am-5pm
Thanks

Kind regards

Aldrin De Zilva
(5) A meeting then took place between the ATO and Messrs De Zilva and Neil on 30 November 2012. A slide pack explaining the creation of a new structure for the Wade group going forward was prepared and given to the ATO. The slide pack was detailed and contained the following diagrams:
(6) At that meeting the ATO asked to be informed when the 2013 tax return for the Wade Trust was going to be lodged. This took place on 11 February 2014.

128. The Commissioner submitted that the taxpayers had not shown that proper consideration of the deductibility of the foreign exchange loss and the capital loss had been made at the time of the lodging of the returns and that because Mr Skoglund had not been called to give evidence, it had not been shown that reasonable care had been taken by the taxpayer or their agents. The failure to call Mr Bethune was not relied upon in this specific context in the Commissioner's written submissions, but fleeting reliance was verbally expressed in closing before me.

129. I respectfully disagree with this submission. What follows applies equally to the taxpayers and their agents (although in the case of Mr Bethune it follows really from the work of the taxpayers' advisers in 2013). This is not a case where a taxpayer had failed to take reasonable care because, for example, it negligently and mistakenly miscalculated an integer of a tax return. This is a case concerning a view taken of the law and an application of that view to facts reasonably perceived. In that respect, for the purpose of making a claim in a tax return, ordinarily a taxpayer is not required in exercising reasonable care to have the capacity to know what might or might not be admissible in court or be probative as a matter of the law of evidence. All that is required is that a taxpayer should form a view

ATC 21955

of the taxable facts underpinning a statement made in a return in a reasonable way and at a standard suitable for that taxpayer. Where transactions are not documented, the taxpayer (for the purpose of making statements in a return) may rely on recollection, hearsay statements, and in a given case, even the collective corporate assumption about what might have happened in the past, so long as, on each occasion it was reasonable to do so. It may rely on logical deductions flowing from the adoption of a given corporate structure, and measure their probability by broader commercial practices and by any particular mercantile culture pursued by the taxpayer. But it cannot rely on speculation or conjecture. Thus here, it was reasonable in my view for the taxpayers and their advisers to assume that the foreign currency payments made to Starburst by the trustee of the Wade Trust were loans, even though, it was probably only Mr Evans who had direct knowledge of that matter. It was also, in my view, reasonable for them to assume that an Australian dollar payment had been made by the Wade Trust to Starburst which was a loan. Whether reasonably held assumptions, hearsay evidence and logical deductions would ever be sufficient to constitute a discharge of the onus of proof in a court is another matter.

130. In my view, Mr Wade and the trustee of the Wade Trust also took reasonable and prudent steps to retain a qualified tax agent and took reasonable and prudent steps to seek tax advice about the application of the 1936 and 1997 Acts from suitably qualified tax experts. Migrating a group of companies and a trust structure from overseas to Australia is a complex process and calls for a deft hand. This judgment shows that the decision to claim the deduction and capital loss was wrong. But it would not follow from that conclusion that reasonable care had not been taken.

131. I have given consideration to the possibility that Mr Wade's record keeping was negligent. The foreign currency loans were not documented until 2013. No minutes of meetings recording resolutions relating to the creation of these loans was ever produced. A full set of the pound sterling denominated accounts was not adduced into evidence. It would also appear that there were many documents still in Monaco that did not make their way to Australia. Nonetheless, the thinness of the evidence did not prevent me from concluding that there were foreign currency denominated loans here, although a lack of evidence was dispositive of the claimed capital loss in respect of the Australian dollar denominated loan. But, as framed by the Commissioner in his written submissions, he did not rely on the treatment of the loan forgiveness as evidencing a lack of reasonable care. His case, rather, appeared to be confined to the claiming of the foreign exchange loss. In that respect, the sparse evidence was not causative of the shortfall arising from that claimed loss; the evidence was sufficient to support the existence of the foreign currency loans and thus sufficient to justify the making of the statement in the returns. It was the view reached by the taxpayers and their advisers about the application of the 1936 and 1997 Acts to the perceived facts that was causative of both the statement and the shortfall. In my view, the taxpayers took reasonable care in forming and then applying that view of the law. They did so by engaging qualified tax advisers. As for the capital loss, if I have misconstrued the Commissioner's submissions before me, I am nonetheless of the view that reasonable care was taken in making that claim. It was reasonable of Messrs Wade and Skoglund to believe that an Australian dollar payment was made which was a loan. The letter of 13 December 2007 and accompanying resolution justified that belief. Whilst the record keeping was far from perfect, I have taken into account both the fact that the Wade Trust was privately held and would not have the resources of a large public company or government department, as well as the age of the records that needed to be found. I am mindful that the Commissioner's assessments issued in 2017 related to events stretching as far back as 2002, and put the taxpayers to proof of matters which he himself had not raised in his 2004/2005 and 2009/2010 reviews. I have also taken into account the circumstance that a third party, namely Mr Evans, was the controller of the Wade Trust during the relevant years of income. In the end, I was not satisfied that the capital loss had been proven. But I so found based on the higher standards of proof required by a court. As already mentioned, that is unlikely to be the

ATC 21956

required standard when preparing a tax return; it was not the required standard of reasonable care here.

132. That conclusion is not negated by either of the following:

(a) The lack of "specific" advice, to use the language of the Commissioner, given by Deloitte or Davidsons about claiming the foreign exchange loss and capital loss as a deduction. Mr De Zilva did not disclose the existence of any such contemporaneous written advice. However, I infer that such advice was given, whether in writing or otherwise. The slides disclosed to the ATO reveal a relatively sophisticated application of the 1936 and 1997 Acts to a series of complex steps. They are accompanied by a detailed set of structure diagrams, as set out above. All this is consistent with what I infer was specific advice given to Mr Wade and to the trustee of the Wade Trust about the application of income tax law to the restructure, which included the repayment of the foreign currency loans and the claiming of the capital loss. What happened was not accidental but was intended. Whilst the form of that advice is unknown, that does not matter.
(b) As to the failure to call Mr Skoglund, there will be cases where a failure to call a tax agent will be decisive in establishing that the taxpayer and the agent did not discharge its onus of proof concerning the issue of reasonable care. The decision of Gordon J in
Federal Commissioner of Taxation v White (No 2) [2010] FCA 942; (2010) 80 ATR 373 is illustrative of that principle, although that case concerned "recklessness" and the now repealed s 226H of the 1936 Act. Nonetheless, in the circumstances here, I do not consider that the failure to call Mr Skoglund compels a conclusion that the taxpayers were unable to show that they and Mr Skoglund had taken reasonable care in connection with the making of the statement about foreign exchange losses and capital losses in the returns. The critical reason for making that statement was the view formed by the taxpayers' advisers about the operation of s 8-1, Div 775 and Pt 3-1 of the 1997 Act and former Div 3B of the 1936 Act to the perceived facts. I infer that this view would have been the product of discussions held between Messrs Skoglund, De Zilva and Neil. The evidence before me is that they were working together when addressing the tax outcomes of the migration to Australia. Whilst Mr Skoglund was not called, Messrs De Zilva and Neil both gave evidence before me. They were available to be cross-examined. Mr De Zilva, in particular, gave very detailed evidence about how the restructure of the Wade group took place over time. I would infer that he was the "senior" member of the team on complex issues; in that respect he is a Senior Fellow and lecturer in taxation law at the University of Melbourne. Because Messrs De Zilva and Neil were called to give evidence, and because the shortfall was the product of the view taken about the law or about the evidence in the case of the capital loss, I reject the Commissioner's submission that the failure to call Mr Skoglund supported the conclusion that the taxpayers had not taken reasonable care.
(c) As to the failure to call Mr Bethune, it was faintly pressed. Given the inference I have drawn about the preparation of the 2015 return for Mr Wade, I doubt whether Mr Bethune could have added much that was useful given that the decision to claim the foreign exchange loss and capital loss was the result of analysis and decisions made in 2013 by Messrs Skoglund, De Zilva and Neil. In my view, the failure to call Mr Bethune did not prevent the taxpayers from showing that they and their agents took reasonable care, for the reasons I have given in relation to the failure to call Mr Skoglund.

It follows that I find that s 284-75(5) is satisfied and no penalty is payable for the making of false statements in the returns about the claiming of the foreign exchange loss as a deduction and the capital loss for the purposes of s 284-75(1).

133.

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I should for the sake of completeness record my views concerning the contention that the trustee was reckless. I would have rejected the claim that Sole Luna and/or Mr Skoglund were reckless for essentially the same reasons I have given about the presence of reasonable care.

Did the taxpayers or their agent treat the 1936 Act and/or 1997 Act in a way that was not reasonably arguable?

134. As to whether the position taken by the taxpayers was reasonably arguable, there was again no dispute before me about the applicable principles. In
Cameron Brae Pty Limited v Federal Commissioner of Taxation (2007) 161 FCR 468, an issue for determination was whether a taxpayer's application of s 82AAE of the 1936 Act had been reasonably arguable. Stone and Allsop JJ (as his Honour then was) said at [70]:

In our view, the question of construction and interpretation of s 82AAE was reasonably open and arguable. No authority squarely covered it. The proper interpretation depended upon the construction of s 82AAE informed by a full appreciation of the statutory history. The argument about the applicability or satisfaction of s 82AAE was arguable. That question can be seen as subsuming s 8-1, if it were answered one way. If it be necessary to decide, we are also prepared to conclude that the issue as to the characterisation of the outgoing as capital or revenue was arguable. Whilst in our view it is clear that it was a payment of a capital nature, the question is open to debate in the sense of being arguable.

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

In
Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468 at [70] (Cameron Brae) Stone and Allsop JJ concluded that, even though they considered that the correct view was "clear", the question was "open to debate in the sense of being arguable". The approach taken by Stone and [Allsop]JJ in Cameron Brae, with which we respectfully agree, is somewhat less strict than that suggested by Hill J in Walstern. On the approach in Cameron Brae, while a Court may come to a clear view on a question of statutory construction adverse to a taxpayer, that view is not decisive against the conclusion that the taxpayer's position was reasonably arguable.

136. Earlier, in
Walstern v Commissioner of Taxation (2003) 138 FCR 1, Hill J expressed the following well-known principles in relation to former s 226K of the 1936 Act at [108] which must be read in light of what was said in Cameron Brae:

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

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

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

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

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

ATC 21958
there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer's argument can objectively be said to be one that while wrong could be argued on rational grounds to be right;

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

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

137. The application of the 1936 and 1997 Acts to the deductibility of foreign exchange losses pursuant to s 8-1 or former Div 3B has been the subject of much debate within the tax profession over the years. In particular, whether the Acts required the presence of physical conversions of money, whether one or more conversions were required and whether notional conversions of amounts into Australian dollars could be sufficient to realise a loss, has long been the subject of detailed debate at "tax discussion groups" across the country. In 1993, the Commissioner issued a ruling, called TR 93/8, concerning the deductibility of foreign exchange losses. It assumed that no physical conversions of currency were required in order to crystallise such a loss. Then, in 1996 the High Court published its reasons in Energy Resources of Australia. The Commissioner was then obliged to withdraw his ruling. Thereafter, he adopted a "practice" of not disturbing assessments based upon his earlier ruling. Following the decision of the Full Court of this Court in Messenger Press, that practice was withdrawn. At first instance, in that case, the learned primary judge made a number of important observations about the possible reach of Div 3B. I have set these out above at [76]. However, they were neither rejected nor accepted by the Full Court on appeal. In 2003, new Div 775 was enacted in order to, amongst other things, clarify the law. Thus, in the Explanatory Memorandum to the New Business Tax System (Taxation of Financial Arrangements) Bill (No.1) 2003 (Cth) (which introduced new Div 775), the following appears:

This bill also outlines the proposal to address a number of uncertainties and anomalies relating to the tax treatment of foreign currency.

138. In my view, the law relating to the claiming of a deduction for foreign exchange losses pursuant to s 8-1 and former Div 3B has not been fully certain. At least one critical issue - namely, the need for physical conversions - was expressly not decided by the High Court. Whilst the introduction of Div 775 may have resolved some of those uncertainties, I was not taken to any authority of this Court concerning the application of that Division. Moreover there appears to have been no authorities concerning the relationship between the incurrence of a loss for the purposes of Div 775 and the gaining of income, whether or not exempt. The fact that the Commissioner himself has changed his position concerning one of the issues before me - the existence of a foreign exchange loss - dramatically on two occasions, suggests to me, and with respect, that he should have adopted a far less zealous and more moderate approach to the issue of penalty here.

139.

ATC 21959

Using the language from Cameron Brae, I have reached the view that the contentions relied upon by the taxpayers in support of their claim to foreign exchange losses were "open to debate in the sense of being arguable". While I have disagreed with those contentions, respectfully they were, given the state of the law, "about as likely as not as correct". Therefore, I respectfully disagree with the Commissioner's contention that the taxpayers' or their agents' treatment of the 1936 and 1997 Acts to its claimed loss was not reasonably arguable because of what was said by the High Court in Energy Resources of Australia. The obiter dicta of the learned primary judge at first instance in Messenger Press requires that submission to be rejected.

140. I am also of the view that the contentions concerning the statutory fiction created by s 95(1) of the 1936 Act were complex and novel. Other than Union Fidelity, I am not aware of any other decision of a superior court concerning that fiction and its application. In my view, it was reasonably arguable as well.

141. Little time was spent before me concerning whether the taxpayers' or their agents' treatment of the 1936 and 1997 Acts to the forgiveness of the loan was reasonably arguable. On balance, I think it was. There were sufficient glimmers in the evidence of the origin of the Australian dollar denominated loan to merit its investigation. Thereafter, I find that the taxpayers assumed its existence based upon what they had been told by Moore Stephens. This was the basis for the working assumption used about the existence of this loan in the Australian dollar restated accounts prepared from 2009. In effect, the taxpayers relied upon hearsay evidence for the existence of this loan. Ultimately, before me the taxpayers failed to discharge their onus of proof as prescribed by the Evidence Act to show the cost base of any such loan, and that its balance was as identified in the 2013 Loan Agreement. But that failure is not inconsistent with the holding by the taxpayers and their agents of a reasonably arguable view concerning the existence of that loan, and its balance in 2013 for the purposes of preparing their return.

142. In that respect, the taxpayers' application of Pt 3-1 to the perceived facts appeared to me to be correct. Regrettably for them, the evidence fell short of proving all of the perceived facts needed to satisfy CGT Event C2.

143. It follows that no penalty arises under s 284-75(2) of Sch 1 to the TAA. It also follows that the 20% uplift penalty does not apply to Mr Wade.

Issue 11 - Remission

144. Finally, because I have found that the taxpayers are not liable to pay penalty, it is unnecessary for me to consider their submission that the Commissioner erred in law in not remitting tax pursuant to s 298-20 of Sch 1 to the TAA.

Conclusion

145. For the foregoing reasons, and notwithstanding that the taxpayers have been successful on some issues, they have failed to show that the assessments of primary tax were excessive. However, they have succeeded on the issue of penalty. The parties will have 14 days to file orders by agreement which give effect to my reasons, or submissions limited to five pages, concerning the form of final relief.

THE COURT ORDERS THAT:

1. Within 14 days the parties are to file orders by agreement giving effect to the reasons for judgment, or if no agreement is reached, submissions of no more than five pages as to the form of final relief to be ordered.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

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Repayment by Peter Wade Investment Trust of Loan Advance of A$15,000,000 and further Advance of A$21,000,000	There is attached to this resolution a Loan Agreement between the trust and P A Wade Management Pty Ltd as trustee of the Peter Wade Investment Trust (PWIT) whereby PWIT repays the sum of A$15,000,000 to the trust and the trust makes a further advance of the sum of A$21,000,000 to PWIT in accordance with the terms of the said Loan Agreement. IT IS RESOLVED to approve the said Loan Agreement and to authorise the affixing of the Common Seal thereto in the presence of Phillip A Evans and Peter J Brigham.

Fixed and Floating Charge	There is attached to this resolution a Fixed and Floating Charge whereby PWIT charges all its property in favour of the trust to secure the repayment by PWIT to the trust of the loan of A$21,000,000 and all interest due thereon. IT IS RESOLVED to approve the said Fixed and Floating Charge and to authorise the affixing of the Common Seal thereto in the presence of Phillip A Evans and Peter J Brigham.