Case P100 (Public hearing: Clyne v. F.C. of T.)
Judges: HP Stevens ChJR Harrowell M
BR Pape M
Court:
No. 1 Board of Review
B.R. Pape (Member)
A taxpayer is defined by sec. 6(1) of the Income Tax Assessment Act 1936 (the Act) to mean a person deriving income. The issue in this reference is a simple one. It is whether Mr. Peter Clyne (the objector) is a taxpayer and if he is what was his liability to income tax for the year ended 30 June 1978.
2. On 24 August 1979 Mr. Clyne lodged his return of income for the 1978 year. In it, he stated that he had derived no income and that he made no claim for deductions. Annexure ``A'' to the return set out an alternative basis for assessment. It stated that he had incurred a tax loss of $32,349.
3. By notice of assessment issued on 29 November 1979 the Commissioner found the objector's taxable income was $117,587 and the tax payable thereon was $66,418.28. Additional tax of $1,099 was imposed for an incorrect return together with a levy of $150 for health insurance. A notice of objection dated 10 January 1980 was lodged against this assessment. The Commissioner in a letter dated 19 February 1980 asked Mr. Clyne to give further information. By a letter dated 5 March 1980 he replied to the Commissioner's request and on 18 June 1980 the Commissioner allowed the objection in part by allowing a deduction for commission paid of $2,500. An amended assessment was issued on the same date to give effect to this adjustment by reducing the taxable income of $117,587 to $115,087. This is the assessment to be dealt with in this reference. By a letter to the Commissioner dated 12 July 1980 he said he was dissatisfied with this decision and requested that it be reviewed by a Board.
4. The primary ground of objection was that all moneys received or paid to Mr. Clyne during the 1978 year belong to Warlock Investments Etablissement (Vaduz) to which I will later refer. Alternatively it was claimed his taxable income was $2,408.
5. Born in Austria in 1927, he immigrated to Australia in 1939. He was educated at Sydney Boys' High School and the University of Sydney where he graduated in Law with second class honours in 1949. He practised at the N.S.W. Bar from 1950 until disbarred in 1959. From 1959 to 1971 he was a consultant in tenancy matters and was a property developer. A Master of Laws degree from the University of Sydney was gained in 1969. In or about September or October 1971 he became a magistrate in Zambia. On 10 March 1972 the Federal Court of Bankruptcy made a sequestration order against his estate and declared him to be bankrupt. He resigned as senior resident magistrate in Lusaka on 31 March 1972. He went to Zurich. He stayed in Zurich until October 1972 when he took up residence in Vienna and for the next three years carried on activities in Austria and Switzerland with occasional visits to the United Kingdom and the United States of America. In September 1975 he went to the United States of America and was later convicted of an offence against
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its internal revenue laws and sentenced to a term of imprisonment for three years. He jumped bail and escaped to Canada where he arranged for a travel permit through the Australian High Commission to allow him to return to Australia. On 2 June 1976 he arrived in Australia.6. At the time he was residing in Vienna, Mr. Clyne instructed a Liechtenstein attorney to found two anstalts. They were founded on 29 November 1973; Warlock Investments Etablissement (Vaduz) and Peclyn Investments Etablissement. An anstalt is a legal entity which is unique to the laws of Liechtenstein. This is a tiny European state bounded on the east by Austria and on the west by Switzerland with a population of about 24,000 (see the Statesman's Year Book 1978-79 at p. 794). It is also a country named in the Schedule to the Notice published by the Treasurer in the Government Gazette of 23 December 1974. These countries are notorious tax havens.
7. The legal basis of the Liechtenstein anstalt or etablissement is derived from the Das Personen und Gesellschaftsrecht Personal and Company Law (P.G.R.) of 20 January 1926. Articles 534 to 551 inclusive deal with the law relating to anstalts as an independent legal entity. Where the articles of association do not provide to the contrary, the rules laid down for the trust enterprise - art. 932(a) - apply automatically. See Das Treuunternehmen of 10 April 1928.
8. Warlock's status as a juristic person under the Grundungsurkunde (certificate of formation) and the Statuten (articles of association) under the laws of Liechtenstein was established when it was registered as an anstalt in the commercial registry by its founder Dr. Ivo Beck. Its paid up capital at the date of registration was SF20,000. The Statuten consisted of some fifteen articles of which the following are relevant (see exhibit 11):
``Article 2 - Purpose; trade finance and legal businesses.
Article 4 - Liability; limited to the extent of the capital and assets.
Article 5 - Beneficiaries; its capital, revenues and net profits devolve upon the beneficiaries designated by the founder in additional statutes.
Article 6 - Organs; the founder, the administrator and the controller.
Article 7 - Founder; this is the highest organ of the anstalt. The founder has the power of decision about:
- a. the appointment and dismissal of the administrative council, the control agency and the beneficiaries
- b. amendments to statutes and the making of additional statutes
- c. liquidation and dissolution of the Institution
- d. distribution of the net profit.
The founder can transfer the rights devolving upon him to third parties, in written form by means of a declaration of cession.
Article 8 - Administrative Council; the administrative council consists of one or more members upon whom the conduct of the business and the representation of the Institution in unlimited manner in relation to third parties and before all domestic and foreign legal and administrative authorities without official supervision is incumbent. It is charged in particular with:
- a. the representation and conduct of business, both of which it can transfer by written power of attorney to authorised agents
- b. appointment and dismissal of authorised signatories and directors
- c. power of decision about annual accounts
- d. deciding the net profit
- e. change of domicile and establishment of branch offices.
Article 11 - Accounts; at the end of each calendar year, on 31 December 1974 for the first time, a balance sheet and profit and loss account - on solid commercial principles - is to be drawn up. The founder determines
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whether the resulting net profit is to be transferred to reserves or paid out to beneficiaries.''
No evidence was adduced of any statute in which the founder had designated who were its beneficiaries.
9. By a contract of mandate executed on 29 November 1973, Dr. Beck in consideration of an annual fee of SFI,500 accepted the position of legal representative and member of the Verwaltungstrat (Administration). On the same day Dr. Beck, in his capacity as the administrator of Warlock, executed on its behalf a general power of attorney to Mr. Clyne:
``... to conclude contracts on the firm's behalf and generally to act for the Anstalt in its relations with third parties.''
10. It was contended by Mr. Clyne that he was the founder of Warlock. The evidence, in my opinion, does not support his contention. It is clear from the Grundungsurkunde (exhibit J - certificate founder of formation) and the Statuten (exhibit H) that Dr. Ivo Beck was the founder of Warlock. Dr. Jehle - who testified as an expert witness on the laws of Liechtenstein was a judge and is now a practising attorney there - said that in his opinion Dr. Beck was the founder of Warlock, and not Mr. Clyne. The evidence is also clear that the founder's rights were not assigned to Mr. Clyne pursuant to a Zessionserklarung (a deed of assignment). It appears the usual practice was for a blank Zessionserklarung to be executed and retained by the attorney at law who founded the anstalt. No doubt the retention of this document provided some security for an attorney's fees.
11. On 1 July 1976 Mr. Clyne sought to execute a deed between Warlock (as principal) and himself (as agent) which conferred on him the sole and exclusive agency ``to carry on the business and profession of international consultant in matters of law, finance and taxation''. Clauses 3 and 4 of this agreement provided:
``3. The agent will in all districts and territories to which cl. 2 applies carry out his profession as international consultant in matters of law, finance and taxation as agent for the principal and not otherwise, and when carrying out his profession as aforesaid...
- (1) The agent shall be deemed to be carrying out the principal's profession as aforesaid.
- (2) The agent shall be entitled to carry out his professional activities in his the agent's own name and need not (though he may) disclose to his clients that he is acting on the principal's behalf.
- (3) All moneys, fees, costs and payments paid to or held by the agent shall be deemed to be held by him for and on behalf of the principal and in trust for the principal and it is the intention of the parties that such moneys, fees, costs and payments and all banking and other accounts in which the same may be held from time to time shall be the property of the principal.
- (4) Out of the funds held pursuant to para. (3) of this clause the agent shall be entitled, from time to time, to draw and disburse whatever may be required to carry out his professional duties, including the cost of accommodation, fares, postage, telephone, transportation, cables, telex, research fees, fees payable to solicitors and counsel, accountancy fees, valuation fees, and all other relevant fees and expenses.
- (5) Any moneys held pursuant to para. (3) of this clause and disbursed for purposes other than those outlined in para. (4) of this clause shall be deemed to have been advanced by the principal to the agent and the agent undertakes to repay the same wholly or partly on demand. No interest is to be payable for such advances.
4. The principal hereby confers on the agent a sole and exclusive agency for the districts and territories hereinbefore referred to and will not during the term of this deed engage or employ any other person to perform similar duties in the said districts and territories or any part thereof.''
12. This document (exhibit U) was said to take effect as a deed. It is seen to be signed by Mr. Clyne on his own behalf and on behalf
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of Warlock under the general power of attorney. Because the signatures of Mr. Clyne were not attested as required by sec. 38(1) of the Conveyancing Act, 1919 (N.S.W.) the document was not executed. It is invalid. Section 38(1) of the above Act provides:``Every deed, whether or not affecting property, shall be signed as well as sealed, and shall be attested by at least one witness not being a party to the deed; but no particular form of words shall be requisite for the attestation.''
In
Commonwealth Dairy Produce Equalisation Committee Ltd.
v.
McCabe
(1938) 38 S.R. (N.S.W.) 397
Jordon
C.J. at p. 403 said:
``Thus if a deed unconnected with land purports to confer benefits and impose obligations upon a person who omits to execute it, that person by accepting the benefits may supply evidence of an implied agreement to be bound by a simple contract in terms of the deed; but he does not thereby become liable under the deed itself or liable to be sued in covenant.''
13. Mr. Clyne's evidence was that at no time since 29 November 1973 when Warlock had been formed had he:
- (i) paid fees of SFI,500 per annum to Dr. Beck under cl. 4 of the contract of mandate;
- (ii) any knowledge whether Warlock had paid Liechtenstein tax of SFI,000 per annum;
- (iii) caused to be kept any books of account or annual accounts as required by art. 11 of the Statuten and cl. 5 of the contract of mandate;
- (iv) any knowledge that Dr. Beck had resolved to liquidate Warlock on 23 April 1979 and its cancellation on 21 November 1980. The only knowledge he had was after he sought the various Warlock documents from Dr. Beck in February 1982 for the purpose of pursuing his appeal against the 1977 assessment in the Supreme Court of N.S.W.;
- (v) communicated with Dr. Beck concerning the affairs of Warlock prior to February 1982.
14. On 1 July 1978 Henry Frederick Heaton Walsh supposedly executed a deed ``the Walsh agreement'' in which he agreed to sell his practice as a tax consultant to Warlock for SF280,000 payable in seven annual instalments of SF40,000. Under cl. 3 of the said deed, Warlock agreed to engage Mr. Walsh as its sole representative in Australia at an annual salary of $10 for a period of seven years from 1 July 1978. The deed was said to have been executed by Mr. Clyne in his capacity as administrator of Warlock and was deemed to be executed and governed by the laws and usages of Liechtenstein. One defect in the said deed was that the address of Warlock's registered office was said to be at Heiligenkreng No. 18 Schaan near Vaduz. Mr. Clyne admitted its registered office had never been at this address. It was the address of an attorney at law, who was known to him, but who had never received instructions to act on behalf of Warlock. Whilst he denied it was a fictitious address, I find his explanation of its use difficult to accept. The other defect was that he signed it on behalf of Warlock as its administrator when the evidence shows that at all relevant times the administrator of Warlock was Dr. Ivo Beck. The Walsh agreement was in my view a sham.
15. An agreement ``the Gray agreement'' was said to have been made on 20 May 1979 between Robert Alfred Gray as vendor in which he agreed to sell his practice as a consulting civil and structural engineer for SF450,000 to Josef Reissi (Consulting Engineers) Anstalt Vaduz formerly known as Warlock Investments Etablissement (Vaduz). The agreement was said to take effect from 1 July 1978. The most unusual feature about it is that the purchaser was Warlock though under a new name. I infer from the change of name that Mr. Gray was its new owner. When questioned about the change in ownership Mr. Clyne claimed privilege on the grounds that his answers may tend to incriminate him. Another inconsistency is that Warlock was put into liquidation by its founder Dr. Beck on 23 April 1979 some four weeks before the Gray agreement was executed. Dr. Jehle said that once a liquidator had been appointed it was not authorised to commence a new business. In my view the Walsh and Gray agreements show that Warlock was no more than a name
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to be used by Mr. Clyne in his dealings. If Warlock was a puppet of Mr. Clyne's, then he did not pull the strings to make it work.16. It was submitted by Mr. Clyne that as the Warlock agreement did not take effect as a deed, it took effect as a declaration of trust. The first ground of his objection was:
``1. Pursuant to an agreement made between the taxpayer and Warlock Investments Etablissement (Vaduz) on the 1st July 1976 all moneys received by or paid to the taxpayer during the said income year belonged to the said Warlock Investments Etablissement (Vaduz) and not to the taxpayer and accordingly the taxpayer's income during the income year was nil and should have been assessed at nil, and in so far as you assessed him to any tax at all you were wrong.''
Implicit in this submission is an application to amend the grounds of objection. By sec. 190(a) Parliament has enacted that ``the taxpayer shall be limited to the grounds stated in his objection''. My tentative view is that the application is not permitted by the Act. Nevertheless the definition of trustee in sec. 6(1) of the Act includes a person acting in a fiduciary capacity. Because this definition includes persons who would not otherwise be held to be trustees, such as agents, I think it is open to Mr. Clyne to argue that he held these moneys as trustee for Warlock.
17. However, I reject the submission that the Warlock agreement operates as a declaration of trust. The thrust of the submission is that the moneys paid to and received by him were the assessable income of a trust estate and that Warlock was the sole beneficiary. There is no evidence that any trust property was vested in him by Warlock. The moneys received by Mr. Clyne arose from personal exertion. The unilateral declaration of trust was submitted to be a voluntary assignment of his
future income
to Warlock. Because of the lack of valuable consideration this assignment must fail: see
Norman
v.
F.C. of T.
(1963) 109 C.L.R. 9
, per
Windeyer
J. at p. 24.
18. If it could be found that Mr. Clyne derived his fees as trustee for Warlock, then the trust would, in my view, be illegal and void. A trust in which the trustee derived income from carrying on business as an unregistered tax agent is in my view impliedly prohibited by Pt. VIIA of the Act and in particular sec. 251L: see
Beneficial Finance Corporation Ltd.
v.
Conway (No. 2)
(1971) V.R. 594
;
St. John Shipping Corporation
v.
Joseph Rank Ltd.
(1957) 1 Q.B. 267
at pp. 285-287
;
Yango Pastoral Company Pty. Limited
v.
First Chicago Australia Limited
(1978) 139 C.L.R. 410
. The Courts will not give assistance to anyone attempting to carry out objects contrary to the policy of the law. See
Jacobs' Law of Trusts
4th ed., R.P. Meagher, W.M.C. Gummow at para. 902 et seq.
19. I accept the submission of counsel for the Commissioner that the Warlock agreement was a sham. By his overt acts and failure to act Mr. Clyne showed that he treated Warlock as no more than a name to be indiscriminately used in his dealings. His lack of interest in its affairs is partly explicable, in my view, because from 23 December 1974 a taxation clearance certificate (Pt. IV of the Taxation Administration Act 1953) would have been required. Because he had entered into the agreement for the purpose of avoiding Australian tax, the probability of getting a certificate would have been remote: see sec. 14C, 14D Taxation Administration Act 1953.
20. The cumulative effect of the following omissions by Mr. Clyne show, in my view, that the Warlock agreement was a mere facade to deceive the Commissioner:
- (i) to pay fees to Dr. Beck;
- (ii) to remit funds to pay the annual Liechtenstein tax or alternatively to explain how these taxes were paid if in fact they were paid;
- (iii) to keep proper books of account for Warlock;
- (iv) to communicate with Dr. Beck or to account to him for moneys alleged to have been received on behalf of Warlock;
- (v) to have any knowledge of the liquidation of Warlock until 1982;
- (vi) to obtain a taxation clearance certificate for the Warlock agreement;
- (vii) to recognise that the granting of the exclusive agency to Mr. Walsh was inconsistent with the Warlock agreement;
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- (viii) to explain the circumstances surrounding the Gray agreement and the change in name of Warlock after it had been put into liquidation;
- (ix) to use a fictitious address for the registered office of Warlock in the Walsh agreement;
- (x) to know that he was not the founder of Warlock;
- (xi) to apply for registration as a tax agent;
- (xii) to cause Warlock to be registered as a foreign company in accordance with Div. 3 of Pt. XI of the Companies Act, 1961.
It was an agreement, which in my view, was one which was never intended to create legal relations between the parties.
``Looking at the whole of the circumstances, I do not think that the document records an agreement that the parties to it, [Mr. Clyne] and [Warlock], really intended should govern them. Everything about it seems to me to point to it having been entered into without an intention on their part to act upon it according to its terms.''
Albion Hotel Pty. Ltd. v. F.C. of T. (1965) 115 C.L.R. 78 , per Windeyer J. at p. 90.
21. In view of the conclusion I have reached it is unnecessary for me to consider the effect of sec. 260 of the Act or alternatively whether Mr. Clyne was authorised by the power of attorney of 23 November 1973 to execute the Warlock agreement on behalf of Warlock. If I am later found to be wrong, I make the observation that Mr. Clyne would appear to be personally liable for the tax he should have retained on behalf of Warlock: see sec. 254 and 255.
22. I turn now to deal with the alternative grounds of the objection that the taxable income was no more than $2,408. The objection in effect claims that the amended taxable income as found by the Commissioner is excessive by $112,679. Mr. Clyne conceded, with the exception of an amount of $2,600 for unbanked fees received in cash, that the amounts included in his assessable income by the Commissioner were properly included. From those admissions reductions were also made in the amounts claimed for overseas travelling expenses. Therefore the following items of alleged income and allowable deductions were in dispute, being a net amount of $25,110 which was claimed to be excessive. By a process of attrition the dispute proceeded as follows:
- (i) first, it was alleged by Mr. Clyne that he derived no income as it was the income of Warlock;
- (ii) if he had derived any income then he had incurred a tax loss of $32,349;
- (iii) the objection lodged by him then claimed that his taxable income was no more than $2,408;
- (iv) finally it was conceded during the course of the hearing that his taxable income was no more than $89,977.
The following statement reconciles the amount conceded by Mr. Clyne and the taxable income as found by the Commissioner.
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$ $
Taxable income as conceded by Mr. Clyne 89,977
Add items disputed -
(i) Income - fees received in cash 2,600
(ii) Overseas travelling expenses
* air fares to Europe 23.12.77 2,932
* air fares to Europe 2.5.78 1,473
* accommodation Hotel Sacher 7,800
* other travelling expenses 3,000 15,205
-----
(iii) Telexes and postage - Europe 1,500
(iv) Accommodation Sebel Town House 4,590
(v) Hire cars 189
(vi) Restaurant expenses 860
(vii) Miscellaneous 166
--------
Taxable income as ascertained by the Commissioner $115,087
--------
23. (i) Unbanked fees received in cash. The Commissioner included an amount of $150 per week or $7,800 per annum for fees received in cash which were not banked. Mr. Clyne considers that $100 per week or $5,200 per annum is a more accurate guess. As he has failed to adduce any evidence which warrants the displacement of the Commissioner's estimate, I reject this submission. See sec. 190(b) of the Act.
(ii) The accommodation and overseas travelling expenses of $15,205 were in my opinion not incurred in carrying on a business for the purpose of producing assessable income as they were of a private nature. During the year he visited Austria from 23 December 1977 to 19 February 1978 where he resided at the Palais Schwarzenberg for some three weeks and for the remainder at the Hotel Sacher in Vienna. On 21 December 1977 he made an application to the Reserve Bank for approval to take $A10,000 in travellers cheques out of Australia. He stated on this form that the purpose of the journey was for a holiday. Again on 28 April 1978 he made another application for exchange control approval to purchase Swiss francs to the equivalent of $A9,929. It appears that on the application he stated the purpose of this journey was business/holiday. This overseas visit was for the period 16 May 1978 to 7 August 1978 of which six weeks has been claimed in respect of the 1978 year of income. At p. 283 he said in answer to these questions:
``Q. However, you mentioned yesterday that when you are in Sydney you have very little social life? A. Yes.
Q. Does it follow from that that you endeavour to live your personal and social life in Europe? A. Yes. I think it is fair to say I live in Europe and I work in Sydney, although I do a bit of work in Europe too, and not much living in Sydney.
Q. So that Europe is where you have your recreation, holidays...? A. Yes, it is my home, I have my friends there, my interests there, and I enjoy living there. I come back here to try and pick up some more money to spend overseas. It seems that we are in agreement about something, Mr. Chairman.''
In my opinion the evidence supports the finding that the outgoings incurred for air fares and accommodation expenses were of a private nature. Hence I would reject the submission that the amount totalling $15,205 is an allowable deduction under sec. 51(1) of the Act.
(iii) The claim for telexes and postage of $1,500 is based on the estimate by Mr. Clyne. I reject this claim as there was no evidence adduced to support the amount of the claim.
(iv) Expenditure re Sebel Town House -
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$4,590. This expenditure was incurred for the purpose of providing accommodation. The reason for its incurrence is not to be found as was urged upon the Board by Mr. Clyne in the necessity to have a place to carry on his business but for a place to live. It was submitted that the room had a dual role, one for carrying on his business and one for domestic purposes. I would reject this submission for the reason that whilst it may be said there was a dual use for the room its essential use and the reason for the incurrence of the expenditure was the provision of accommodation. It was an outgoing incurred independently of whether he carried on business from his room at the Sebel Town House. The expenditure had the essential character in my opinion of being for private and domestic purposes - seeHandley v. F.C. of T. 81 ATC 4165 ,
F.C. of T. v. Forsyth 81 ATC 4157 .
(v) to (viii) These items are not referred to in the notice of objection and therefore the amendment sought by exhibit AP is not authorised by sec. 190(a) of the Act. (See
Case
P101 (
Clyne
v.
F.C. of T.)
,
82 ATC 520
.)
24. The Commissioner said in the statement given to the Board, under reg. 35, that Mr. Clyne had omitted to include in his 1978 return of income amounts totalling $2,624. These amounts were:
$
(i) Royalties and advance paid to
trustee in bankruptcy by Rydge
Publications 1,124
*(ii) Other royalties and advance
paid by Rydge Publications
(endorsed to Sebels Ltd.) 1,000
*(iii) Fee of $500 paid by T. English
(cheque endorsed to Sebel Town
House) 500
------
$2,624
------
The items marked with an asterisk were conceded as income in para. 10 and 11 of the objection and the remaining amount was later admitted as income. Due to the omission of this income from the return, additional tax of $3,300 was imposed under sec. 226(2) being double the difference between the tax properly payable and the tax payable on the basis of the income disclosed. The Commissioner in exercising his discretion to remit the additional tax imposed has remitted two-thirds of the amount imposed. In view of the lack of any explanation as to why this income was omitted from the return and the admission made I can see no reason to make any further remission of the additional tax imposed by the Act.
25. I find that Mr. Clyne is a taxpayer. I would uphold the Commissioner's decision on the objection and confirm the amended assessment.
Claim disallowed
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