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Re Fortex Pty. Limited.

Judges:
Enderby J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 7 May 1986.

Enderby J.

This matter comes before me by notice of motion seeking an order.

``That the respondent, within seven days produce for inspection to the appellant's solicitors... documents numbered 1 to 17 (both inclusive), 19, 20 and 24 referred to in Pt 2 of schedule 1 to the affidavit of Michael Parkes sworn 5 July 1985...''

The respondent claims that the documents are the subject of privilege.

ATC 4352

In 1977, the applicant company was a member of two partnerships for the purpose of taking advantage of the decision in
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409. It is now the appellant in an appeal to this Court pursuant to sec. 187 of the Income Tax Assessment Act.

Curran-type schemes were quite notorious means of saving tax and were outlawed by the Parliament in 1979. Before that however, by repeated utterances and statements, Parliament made it clear that the schemes had little or no commercial significance or motive and were entered into simply and purely for fiscal advantages. They were to be deplored and should and would be put outside the range of permissible activities.

The outlawing took place in 1979. It was seen by many to be long overdue and was made retrospective to 16 August 1977.

Rogers J. in
Hatfield Enterprises Pty. Ltd. & Companies Act 82 ATC 4122 at p. 4125 expressed similar views when he said that:

``... schemes of the kind here under consideration are unacceptable and unworthy of receiving the aid of the Court in validating facets of the scheme which have failed to comply with relevant legislation.''

Rogers J. was concerned with a case in which he was being asked to exercise a discretion in favour of a taxpayer, who had engaged in a Curran-type scheme, so that he might gain benefit, in the event that an appeal against another of his Honour's judgments, in
Deane v. F.C. of T.; Croker v. F.C. of T. 82 ATC 4112, was successful.

I am only concerned with a claim for privilege, and the question of whether the respondent should be ordered to produce the documents that have been discovered in the list of documents annexed to the affidavit of Michael Parkes sworn 5 July 1985, so that they can be inspected by the applicant. I am not concerned with the success or failure of the appeal.

The two partnerships were known as, and carried on under the names, ``Wilbercrown Trading Company'' and ``Wilterwin Trading Company''.

They were established on 9 June and 23 June 1977 respectively. The partnership agreements contained, inter alia, the following relevant provisions:

``2. To FIRM NAME. The partnership business will be carried on under such name as the partners from time to time agree.''

``10. PARTNERSHIP DECISIONS

  • (a) There shall be a Management Committee of the partnership which shall consist of three (3) members to be appointed by the partners. The partners hereby agree that the first members of the Management Committee shall be the persons whose names appearing in the Third Schedule hereto who have consented in writing to such appointment.
  • (b) The partners shall have the right to remove any member of the Management Committee appointed by them and to appoint another member in his place or in place of any member appointed by them who dies, resigns, retires or otherwise ceases to be a member of the Committee.
  • (c) All removals and appointments pursuant to this Clause shall be in writing signed by members who together shall be entitled to more than fifty per cent (50%) of the capital of the partnership and all such removals and appointments shall become effective forthwith upon lodgment of the same at the principal place of business of the partnership.
  • (d) The whole of the business of the partnership shall be under the control of the Management Committee which shall have the full power to make all decisions of or in any way related to the partnership and the partnership business and to bind the partnership in all respects.
  • (e) Notwithstanding the foregoing provisions of this Clause the power of the Management Committee to enter into contracts of purchase on behalf of the partnership shall be limited as follows: -
    • (1) When the Management Committee has entered into contracts of purchase whereunder the liability of the partnership has equalled a total of three hundred thousand dollars

      ATC 4353

    • ($300,000) the power of the Management Committee to enter into contracts of purchase on behalf of the partnership shall cease until renewed as hereinafter provided.
    • (2) During the period during which the power of the Management Committee to make such purchases has remained in effect the Management Committee may not purchase on behalf of the partnership shares, options, stocks or other securities of any one corporation of a cost of more than Ten thousand dollars ($10,000).
    • (3) Immediately after the power of the Management Committee to effect purchases on behalf of the partnership has ceased the Management Committee shall convene a meeting of the partners. Such meeting shall be conveyed by sending to each partner by ordinary post a notice specifying the time and place of the meeting.
    • (4) If at such meeting a majority in number of the partners collectively entitled to more than fifty per cent (50%) of the capital of the partnership so resolve the authority of the Management Committee to effect purchases on behalf of the partnership shall be renewed. Such resolution shall have the effect of substituting the amounts mentioned in such resolution for the amounts mentioned in sub-paragraphs (1) and (2) hereof. Any such renewed authority shall be subject to the same limitations as are imposed by sub-paragraph (1) and (2) hereof as varied by the said resolution. In the event of the power of the Management Committee to effect purchases on behalf of the partnership again ceasing by reason of the operation of this paragraph, it may be further extended for a further period of any number of further periods in the same manner as is set above.
  • (f) The Management Committee may meet together for the despatch of business adjourn and otherwise regulate their meetings as they think fit. Any member of the Management Committee may summon a meeting of the Committee.
  • (g) Questions arising at any meeting of the Management Committee shall be decided by a majority of votes and a determination by a majority of the members of the Committee shall for all purposes be deemed to be a determination by the Committee. In case of an equality of votes the Chairman of the meeting shall not have a second or casting vote.
  • (h) The quorum necessary for the transaction of the business of the Committee shall be Two (2) members thereof.
  • (i) The members of the Committee shall cause minutes to be made of all proceedings at all meetings of the Committee. Such minutes shall be signed by the Chairman of the meeting at which the proceedings were held or by the Chairman of the next succeeding meeting.
  • (j) Each member of the Committee shall be entitled to appoint a proxy to attend and vote at meetings of the Committee in his place and stead. The instrument appointing a proxy shall be deposited at the principal place of business of the partnership prior to the holding of the relevant meeting...
  • (k) A resolution in writing signed by all members for the time being of the Committee shall be as valid and effectual as if it had been passed at a meeting of the Committee duly convened and held. Any such resolution may consist of several documents in like form, each signed by one or more members of the Committee.''

At all relevant times, a Mr Jameson and a Mr Anderson were members of these management committees of the partnerships. Records of interview between officers of the respondent and those two gentlemen are part of the material for which the respondent claims privilege. The records of interview are the documents numbered 19 and 20 in the list of documents.

ATC 4354

The partnerships are said to have been established for the purpose of carrying on the business of share-trading and share-dealing. During the few weeks remaining of that financial year ended 30 June 1977 until the schemes were outlawed, the partnerships acquired shares. It is said the shares were acquired and treated as stock-in-trade of the partnership and that bonus shares were allotted by the companies concerned to the partnerships where they were treated as stock-in-trade.

At least some of the companies were P. & I Printing (Purchases) Pty. Limited, Continental Liquor Manufacturing Co. Pty. Limited, McNair Anderson Associates Pty. Limited, and Polar Investments Pty. Limited.

It is claimed that the deemed cost of the bonus shares should have been an allowable deduction in accordance with the decision in Curran's case.

The claim is that during that relatively short time, the various companies resolved to issue the bonus shares and that these resolutions were passed at meetings of members at which the partnerships were represented by Mr Jameson or Mr Anderson. The resolutions were to capitalise and distribute to the partnerships, the amount standing to the credit of a capital profits account in the particular company.

In the appeal, the essence of the applicant's case is to prove that the bonus shares were allotted and that the amount which was used to pay for the shares was debited to the credit of the capital profits account. In this task, the applicant carries the onus of proof.

Mr Bloom, who appears for the applicant, bases his principal argument on the obvious forensic fact that to succeed in the appeal, he will at least, require evidence of these facts.

It seems some of the companies, if not all of them, no longer exist and at least some of the material the applicant needs to prove its case on the appeal, is in the possession of the respondent. I infer from the presumption of regularity that it came into that possession, by the officers of the respondent performing their normal duties.

Some attempts have been made to obtain the material from other sources but with limited success.

It is accepted by both parties that the onus is on the respondent to persuade me that the documents are covered by privilege.

I have been referred to a large number of authorities which include.
Rowell v. Pratt (1983) A.C. 101;
Honeychurch v. Honeychurch (1943) S.A.S.R. 31;
O'Flaherty v. McBride (1920) 28 C.L.R. 283;
Canadian Pacific Tobacco Co. Ltd. v. Stapleton (1952) 86 C.L.R. 1; Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409;
Grant v. Downs (1976) 135 C.L.R. 674;
National Employers' Mutual General Insurance Association Ltd. v. Waind (1979) 141 C.L.R. 648;
L'Estrange v. F.C. of T. 73 ATC 4061; (1973) 47 A.L.J.R. 319;
Krew v. F.C. of T. 71 ATC 4213; (1971) 45 A.L.J.R. 249;
Associated Dominions v. John Fairfax (1952) 72 W.N. 250;
Oudman v. Warren (1962) 80 W.N. (N.S.W.) 546;
Norper Investments Pty. Limited v. D.F.C. of T. 77 ATC 4211;
D.F.C. of T. v. Glastonbury Steel Fabrications Pty. Ltd. 84 ATC 4639;
R. v. Clarkson (No. 2) (1982) V.R. 522;
Seidler v. John Fairfax & Sons Ltd. (1983) 2 N.S.W.L.R. 390;
The Companyie etc. v. Peruvian Guano Co. (1882) 11 Q.B.D. 55;
Foster v. F.C. of T. (1951) 82 C.L.R. 606;
Naismith v. McGovern (1953) 90 C.L.R. 336;
Bailey & Ors v. F.C. of T. 77 ATC 4096; (1977) 136 C.L.R. 214; Bray on Discovery 1885; Halsbury 4th ed., Vol. 13;
Murtagh v. F.C. of T. 84 ATC 4516; (1983-1984) 54 A.L.R. 313;
Sankey v. Whitlam & Ors (1978) 53 A.L.J.R. 11 and Deane v. F.C. of T.; Croker v. F.C. of T. 82 ATC 4112.

Because of the views I have formed, I do not propose to analyse them.

The documents fall into categories which have been called ``A'', ``B'', ``C'', ``D'' and ``E''.

Taken from the list they are as follows:

PART 2

``1. Returns of income of P. & I. Printing (Purchases) Pty. Ltd., Continental Liquor Manufacturing Company Pty. Ltd. and McNair Anderson Associates Pty. Ltd. and Polar Investments Pty. Ltd. for the year of income ended 30 June 1977 and copies thereof or parts thereof.

2. Copies of minutes of meeting of directors of P. & I. Printing (Purchases) Pty. Ltd. dated 29 June and 30 June 1977 respectively.

ATC 4355

3. Copies of portion of share register of P. & I. Printing (Purchases) Pty. Ltd.

4. Copies of minutes of extraordinary general meeting of members of P. & I. Printing (Purchases) Pty. Ltd. dated 28 and 30 June 1977.

5. Copies of portion of ledger and journal of P. & I. Printing (Purchases) Pty. Ltd.

6. Copies of various bank statements of P. & I. Printing (Purchases) Pty. Ltd. account No. 00810265 with the Commercial Bank of Australia Limited.

7. Copies of various paid cheques and deposit slips in respect of account No. 00810265 in the name of P. & I. Printing (Purchases) Pty. Ltd. with the Commercial Bank of Australia Ltd., Hunter and Bligh Streets, Sydney.

8. Copies of portion of ledger and journal of Continental Liquor Manufacturing Company Pty. Ltd.

9. Copies of minutes of meeting of the directors of Continental Liquor Manufacturing Company Pty. Ltd. dated 30 June 1977.

10. Copies of minutes of extraordinary general meeting of members of Continental Liquor Manufacturing Company Pty. Ltd. dated 30 June 1977.

11. Copies of portion of share register of Continental Liquor Manufacturing Company Pty. Ltd.

12. Copies of minutes of extraordinary general meeting of members of McNair Anderson Associates Pty. Ltd. dated 30 June 1977.

13. Copies of minutes of meeting of directors of McNair Anderson Associates Pty. Ltd. dated 30 June 1977.

14. Copies of portion of journal and ledger of McNair Anderson Associates Pty. Ltd.

15. Copies of portion of share register of McNair Anderson Associates Pty. Ltd.

16. Copies of minutes of meeting of extraordinary general meeting of members of Polar Investments Pty. Ltd. dated 30 June 1977 and draft balance sheet of Polar Investments Pty. Ltd. as at 23 June 1977.

17. Extract from Journal of Notron (No. 23) Pty. Ltd. and paid cheques and deposit slips relating to Notron (No. 23) Pty. Ltd.

18. Investigation report of respondent into the affairs of the appellant, Wilterwin Trading Company and Wilbercrown Trading Company and copies thereof together with transcript and typed notes in relation thereto and copies thereof.

19. Records of interviews and reports thereon held between officers of the respondent and Lindsay Jamieson and Neil McAnderson.

20. Records of various telephone discussions between officers of the respondent and Neil McAnderson.

21. Various charts, schedules and diagrams and copies thereof prepared by officers of the respondent showing movements of funds and assets, summaries of share transfers, purchases, sales and brokers statements and exhibitions of the management committees meetings.

22. Internal correspondence and memoranda prepared by the respondent or his officers for the purpose of this appeal.

23. Correspondence passing between the respondent and his legal advisers relating to the carriage and conduct of this appeal, notes and memoranda relating to conferences held in respect of the appeal and notes and observations prepared by the appellant's solicitor.

24. Copies of handwritten notes.''

The privilege claimed is as to documents marked ``A'', on the basis that they were brought into existence for the purpose of the defence of this action or with the likelihood of litigation in mind.

As to documents marked ``B'', on the basis that the documents are communications of a confidential nature between the respondent and his legal advisers in that capacity and between his legal advisers and counsel instructed by the respondent.

As to documents marked ``C'', on the basis that sec. 16 of the Income Tax Assessment Act 1936 gives a statutory privilege to the respondent.

As to documents marked ``D'', on the ground that they were brought into existence

ATC 4356

for the purpose of the defence of this action or with the likelihood of litigation in mind and further on the ground that they relate solely to the respondent's own case and contain nothing supporting or tending to support the appellant's case or impeaching the respondent's case.

As to documents marked ``E'', on the ground that the documents were brought into existence for the purpose of the defence of this action or with the likelihood of litigation in mind and further as to part thereof that pursuant to sec. 16 of the Income Tax Assessment Act 1936 the respondent is entitled to and does claim privilege for production in respect of the documents and further as to part thereof that the documents relate solely to the respondent's own case and contain nothing supporting or tending to support the appellant's case and further as to part thereof are not in any event relevant to any matter in dispute in the proceedings herein.

  • Documents numbered 1 to 17 and 24 are in category ``C''.
  • Documents numbered 18, 20 and 21 are in ``D''.
  • Document numbered 19 is put in both ``A'' ``C'' and ``E''.
  • Document numbered 22 is in ``A''.
  • Document numbered 23 is in ``B''.

I proceed to consider the privilege claimed for documents 1-17 and 24 and said to arise from the operation of sec. 16 of the Act.

The section is in the following terms:

``16(1) In this section, unless the contrary intention appears -

  • `officer' means a person who is or has been appointed or employed by the Commonwealth or by a State, and who by reason of that appointment or employment, or in the course of that employment, may acquire or has acquired information respecting the affairs of any other person, disclosed or obtained under the provisions of this Act or of any previous law of the Commonwealth relating to income tax;
  • ...
  • `Royal Commission' means a Commission that has been commissioned by the Governor-General, by Letters Patent in pursuance of the Royal Commissions Act 1902 or of any other power, to conduct an enquiry, and includes any member of such a Commission.
  • ...

(2) Subject to this section, an officer shall not either directly or indirectly, except in the performance of any duty as an officer, and either while he is, or after he ceases to be an officer, make a record of, or divulge or communicate to any person any such information so acquired by him.

(3) An officer shall not be required to produce in Court any return, assessment or notice of assessment, or to divulge or communicate in any Court any matter or thing coming under his notice in the performance of his duties as an officer, except when it is necessary to do so for the purpose of carrying into effect the provisions of this Act or of any previous law of the Commonwealth relating to Income Tax or for the purpose of carrying into effect the provisions of a State income tax law or provisions of the law of the State referred to in section 15 of the Income Tax (Arrangements with the States) Act 1978 or the provisions of section 78 of the Income Tax (Arrangements with the States) Act 1978.''

The remaining subsections of sec. 16 do not have to be considered.

Mr Bloom made a number of submissions the effect of which was that the various requirements to be met before sec. 16 could operate were not met on the facts of this case. He submitted that sec. 16 made a distinction between the production of documents and the disclosure of information and submitted that the documents were not information.

He also submitted that there was no evidence before me that the documents had been obtained as required by the Act.

He submitted that the information in question concerned the affairs of the taxpayer as a member of partnerships and as such was not covered by the section.

He relied in part on Murtagh v. F.C. of T. 84 ATC 4516; (1983-1984) 54 A.L.R. 313 and submitted that the proper interpretation of sec. 16 was that if a document related to the taxpayer's affairs and not exclusively to the

ATC 4357

affairs of some other person then the section did not apply. Mr Burns, for the respondent, submitted that Murtagh's case was wrongly decided.

Mr Bloom put a halfway submission that if the documents contained information relating partly to other persons then I could excise that information and still make what was left available to the applicant. He referred me to
Gamini Bus Co. Ltd. v. Commr of I.T. (Colombo) (1952) A.C. 571 which he submitted supported the proposition that there could be no objection to information relating to the affairs of the taxpayer. He submitted that the taxpayer, represented by either Mr Jameson or Mr Anderson, as other members of the partnership, had been present at the meetings of the directors of the companies and that the applicant had been a shareholder in the companies at the relevant time. Some of the information required, which was said to be vital to enable the taxpayer to prove its case in the appeal, related to the declaration of income by the partnerships.

He made a final submission that, if all these submissions failed, then the applicant came within the exception to sec. 16 in subsec. (3) that ``... it (was) necessary... (that there be inspection) for the purpose of carrying into effect the provisions of this Act...''. This last submission would involve a finding that the role of the respondent in such an appeal is a role performed by his officers and cast upon him and them by the provisions of the Act and as such, a role he has necessarily to perform. In my opinion, the appeal sections of the Act do have that effect. I have little difficulty accepting that part of the submission. However, the applicant has to go further than persuade me that the respondent's role as a litigant is a role necessarily cast upon him by the Act. He has, also in my opinion, to persuade me that it is necessary for the proper performance of that role as a litigant that the documents be inspected. This is not an application for discovery. Discovery has been had. If it is not necessary that the documents be inspected by the applicant, then the applicant would not bring himself within the exception.

I propose to consider this last submission first, because if it is upheld then the other submissions do not arise for consideration. Even if the documents qualify for the privilege described in sec. 16, they would escape, in the circumstances of this case, because of the exception.

However, before doing so, it should be noted there is a question of whether the appropriate source of the privilege is sec. 16(2) or 16(3). In my opinion, it doesn't matter. In my opinion, sec. 16(2) does not give privilege in a situation where an ``officer'' is ordered by a court, in a situation such as this, in the interests of ensuring a fair and just hearing of an appeal, to allow a person, such as the applicant, to have inspection of a document for which the only privilege claimed is a sec. 16 privilege. Such an inspection would be a divulging or communicating of information to another person but it would be a divulging or communicating done as an incident to the performance of his duty as an officer because those duties, in my opinion, extend to complying with orders of a court in the conduct of litigation such as this in which the respondent is a party.

A consideration of sec. 16(3) also requires a consideration of the part played in the administration of justice by discovery and inspection. It also requires a consideration of the words of its exception and in my opinion, comes closer to the problem I have to consider than subsec. (2). If the Parliamentary draftsman directly put his mind to the question I am considering, I consider he thought of the solution in terms of subsec. (3) rather than subsec. (2).

Subsection (3) by itself strictly only applies to the court. It does not apply to a person other than the court unless that is an implication to be read in. There is no point in there being a prohibition against production to a court unless the prohibition extends to the parties.

Notwithstanding the clear prohibition in subsec. (3), Mr Burns, while arguing strongly against the inspection of the documents by the applicant, accepted and told me that the respondent had no objection to the documents being produced to me and seen by me.

This seemed to involve an acceptance that if the court thought it necessary to see the documents then the subsection did not apply. It seems to follow that if it does not apply to that extent, it would be because the divulging or communicating would be done for the purpose of carrying into effect the provisions of the Act.

ATC 4358

It is clear there can be cases where a judge declines discovery and also inspection because discovery and inspection are not necessary for a fair trial. There are other cases where they are essential.

In my opinion, sec. 16(2) does not prevent a divulging or communicating by an officer of the respondent by the production of documents in this way, if the court, in the exercise of its judgment, considers that the administration of justice requires that it be done and so orders. In such a case, the officer would be acting in the performance of his duty.

Similarly in my opinion, in such circumstances, sec. 16(3) does not operate to prevent production to the court. It may so operate in other circumstances but not these. Mr Burns was correct in the concession he made. I am also of the opinion that the subsection does not prevent the court ordering that in the interests of justice and the proper fair hearing of an appeal, a litigant such as the applicant should have inspection of the documents if the court considers them relevant and necessary. The court's order makes the divulging or communicating necessary for the purpose of carrying into effect the provisions of the Act.

The next question is whether I am in a position, with only the descriptions of the documents given in the list, to decide whether the interests of justice require that inspection should be given or whether I need to examine the documents myself. In my opinion, with the possible exception of item 24, the descriptions are sufficient. The documents relate, on the face of the description, to the factual issues the parties will litigate in the appeal. No challenge has been made to the descriptions. They appear on the face, to relate to the relationship said to have existed between the applicant and the other taxpayers. They appear to relate and be relevant to establishing a Curran-type scheme.

I find it not to be necessary that I examine them. It is sufficient to rely on descriptions sworn to in the affidavit of Mr Beath.

I order that items 1 to 17 be produced for inspection, no claim being made that they relate to other heads of privilege, such as that which relates to say informers. I make no ruling about the other submissions made by both Mr Burns and Mr Bloom about other aspects of the sec. 16 argument.

I turn to item 24. Mr Burns filed in court during the hearing, an affidavit of Mr Stephen James McMillan sworn 8 August 1985. Perhaps per incuriam that affidavit does not appear to have been read. I notice from the transcript that the other affidavit filed by the respondent was taken as read and that may account for the omission. The affidavit of Mr McMillan describes item 24 as follows:

``... the documents so described comprise six pages of handwritten notes which in essence detail movement of funds between various companies and partnership including, Wilterwin Trading Company and Wilbercrown Trading Company, and give settlement dates and the amounts of bank cheques required for these settlements.''

On the assumption that that affidavit was meant to be read, I indicate my view that the notes in item 24 would be covered by my ruling re: items 1-17. The same principles apply. If for some reason it was not meant to be read, I indicate I would wish to examine the notes myself. In this regard, I give leave to the parties to apply if they consider it necessary or desirable.

With some regret, I have had to reject Mr Burns' attractively put and tempting submission that I should not order inspection by taking into account the fact that the applicant is seeking only to exploit a totally artificially created unsavoury scheme to avoid paying ``unnecessary'' tax. Despite the lack of social morality involved, I find I cannot do so.

I proceed to consider the other documents listed.

Item 18 has privilege claimed on the basis of category ``D''. The description in the list clearly indicates that this is so and I uphold the claim of privilege.

Section 16-type privilege has been claimed for part of item 19 and type ``A'' and ``E'' for the rest. Since the hearing, I have been supplied with items 19 and 20 so that I may look at them. Item 20 has type ``D'' privilege claimed for it.

I have examined these documents and in my opinion, they relate not to events, as they were in 1977 but to subsequent discussions and enquiries made by the respondent and his officers. These would not appear at first sight to be relevant as admissions against the applicant

ATC 4359

or the respondent, although they may have relevance for cross-examination or other purposes.

My previous ruling would permit them to be disclosed to the applicant but the question arises of whether they are privileged on the additional grounds of ``A'', ``D'' or ``E''. In my opinion, on the basis of the description, they are privileged on each basis and I uphold the claim for privilege.

I move to items 21, 22 and 23.

In the case of item 21, in my opinion, the description in the list is sufficient to disclose that the documents relate to the head of privilege claimed. I uphold the claim.

In the case of item 22, again the description is sufficient and I uphold that claim.

In the case of item 23, again the description is sufficient and I uphold the claim of privilege.

I make the orders sought in respect of documents 1-17 and 24. I decline to make the orders in respect of documents 18-23.

The result of the hearing before me is that both the applicant and the respondent has had some success.

In consequence of that fact, I make no order as to costs.


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