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FC of T v MUNRO

Judges:
Lockhart J

Court:
Federal Court

Judgment date: 24 October 1997

Lockhart J

This is an appeal, pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth), by the Commissioner of Taxation from a decision of the Administrative Appeals Tribunal (``the Tribunal'') made on 19 November 1996. The Tribunal set aside the decision of the Commissioner disallowing an objection by Roger Gareth Munro, the taxpayer, against an amended assessment to income tax dated 14 May 1992 in respect of the year of income ended 30 June 1989. In that assessment the Commissioner included an amount of $400,000 in the taxpayer's assessable income.

The circumstances giving rise to the case are complex; but must be set out in some detail in order to understand the issues.

The taxpayer holds a degree of Doctor of Philosophy in Econometrics from the University of New South Wales. In about 1979 he commenced business on his own account, engaging in full time commercial research involving consulting work mainly for government departments and local councils. The work involved examining projects proposed by those departments to determine trends in population growth, the likely extent of that growth and how quickly infrastructures would have to be put in place to accommodate it. It involved developing econometric models to predict population growth in various parts of Australia, in particular of New South Wales. The North Coast was one of the fastest growing regions in Australia at that time. The taxpayer lived at Byron Bay, but operated his business out of Lismore.

In 1987 the taxpayer established a company known as Nommack (No 258) Pty Limited which on 11 January 1988 changed its name to Strategic Research Consultants (Australia) Pty Limited and then on 30 December 1988 changed its name to Lavender Grove Securities Pty Limited (``Lavender Grove''). The taxpayer's wife was the beneficial owner of all the shares in Lavender Grove.

On 16 June 1988 the taxpayer established a company known as Nommack (No. 282) Pty Limited (``Nommack''), which carried on business under the business name of Strategic Research Consultants (Australia)(``Strategic Research''). Nommack commenced business under that name as a consulting firm on 1 July 1988.

The taxpayer was employed principally by Nommack to provide consulting services. The taxpayer thus changed his business from consulting services as a sole trader to an employee of Nommack.

A company known as Hixson Holdings Pty Limited (``Hixson Holdings'') was the trustee of a unit trust known as The Seven Mile Beach Unit Trust (``The Trust''). Hixson Holdings, in its capacity as trustee, was the owner of a large tract of coastal land at Byron Bay. The whole of the units in the Trust consisted of nine units held in the name of and beneficially by Moncarnet Pty Ltd (``Moncarnet''), a company associated with Mr Kurt Schaefer, and one unit held in the name of and beneficially by Mr Dieter Horstmann. The capital of Hixson

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Holdings consisted of 2 shares, both beneficially owned by Schaefer.

An agreement dated 19 November 1987 (``the 1987 Agreement'') was entered into by the taxpayer, Hixson Holdings, Cape Byron International Academy Pty Limited (``CBIA''), Schaefer, and Moncarnet.

The 1987 Agreement recited the fact that:

  • • Hixson proposed to develop the site for a variety of uses, including erection of buildings and other works to enable the construction of an educational establishment on part of the site;
  • • Hixson had entered into a contract with CBIA and others to operate and manage the educational establishment under a long term lease;
  • • the majority of the issued share capital of CBIA was held by the taxpayer and Schaefer in equal proportions (ten shares each) and they were directors of that company (Horstmann was the owner of the other two shares in CBIA);
  • • the taxpayer and Schaefer had carried out consultancy activity including market research, educational development, promotional development and other essential commercial activity (``Facilitation Services'') since the incorporation of CBIA, to ensure the economic viability of the project;
  • • the parties acknowledged that the taxpayer and Schaefer had carried out equally the Facilitation Services on behalf of CBIA;
  • • the monetary value of the Facilitation Services was $1,100,000;
  • • the parties agreed that if any profit results from changes in ownership or sale of all or part of the project or interest therein, the pro rata proportion of participation by the taxpayer in the profit is 6.25 per cent of the profit; and that he shall receive a cash advance of not less than $50,000 from the profit on exchange of contracts effecting the sale or change with the balance due on settlement (clause 5).

The 1987 Agreement was effectively a statement of intent which envisaged an investment in the development project by a major equity investor. Of particular relevance for the purposes of this case is that it provided for the grant to the taxpayer of a profit entitlement.

On 28 December 1987 it seems that an agreement titled the ``Principal Agreement'' and referred to in the Tribunal's decision as the ``Participation Agreement'', was executed by the taxpayer, Schaefer, Horstmann, Moncarnet, Rosechurch, Hixson Holdings and CBIA. Rosechurch was a subsidiary of Girvan Corporation Limited (``Girvan''). This agreement was not before the Tribunal although a letter written by the solicitors of the taxpayer and dated 8 December 1992, which was admitted into evidence, discussed the agreement. That letter indicated that the Principal Agreement eliminated the taxpayer's profit share (referred to in clause 5 of the 1987 Agreement) and replaced it with a management agreement and personal service agreement.

On 6 January 1988 a document titled ``Heads of Agreement'' was signed by Schaefer, the taxpayer, Horstmann, Moncarnet, Rosechurch Holdings Pty Limited (``Rosechurch''), Hixson Holdings and CBIA. The Heads of Agreement provided that it was to be a statement of the current intentions of the parties with respect to the proposed joint venture, that is to develop the Cape Byron land, and that no legally enforceable obligations were to arise until the formal documentation had been prepared and executed. The document provided that Rosechurch would subscribe for ten new units in the Trust at a price of $1 per unit together with a total premium of $6,699,990. The Heads of Agreement provided that the trustee would enter into a management agreement with CBIA for ten years with two successive option periods of five years each. Clause 4.2 of the Heads of Agreement provided that Rosechurch would acquire 51 shares in Hixson Holdings, whereas Schaefer would subscribe for 47, in consequence Rosechurch (and through it, and indirectly, Girvan) would control Hixson Holdings, having 51 shares while Schaefer held 49 in aggregate. Clause 4.3, of the Heads of Agreement provided that Rosechurch (and thus indirectly Girvan) would control CBIA through an issue to Rosechurch of 23 shares in CBIA. The Heads of Agreement contain many provisions but most of them need not be referred to further.

On 30 June 1988 a document called a ``Subscription Agreement for Units of the Seven Mile Beach Trust'' was executed by

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Moncarnet, Rosechurch, Hixson and Schaefer (``the Subscription Agreement''). Under this agreement Rosechurch (described as the new unitholder) and Moncarnet and Horstmann (both described as the existing unitholder) agreed that Rosechurch would acquire ten new units in the trust for $6,700,000, thereby acquiring 50% of the issued units.

On 10 August 1988 a deed was executed by Moncarnet and Lavender Grove (then named as Strategic Research Consultants (Australia) Pty Limited (``Strategic'')) which recited that, upon completion of the restructuring and refinancing of the Byron Bay project, the trustee of the trust (Hixson) would receive consideration of $6,699,990. Moncarnet agreed with Strategic that on ``the happening of that event'' (payment) it would immediately subscribe at par plus a premium of $999 per share for a number of shares in the capital of Strategic (category RL5) to a value of $350,000. The deed also recited that, in the event that, as a result of the restructuring and refinancing of the project Moncarnet receives as projected the additional sum of $800,000 as a reimbursement of its costs, the value of the RL5 shares subscribed for shall be $400,000. Moncarnet covenanted to subscribe for the relevant number of shares and Strategic covenanted to issue them.

In accordance with the deed Moncarnet subscribed for 400 $1 RL5 shares at a subscription price including premium of $1,000 per share amounting in all to $400,000. It appears that the RL5 shares are preference shares in Strategic that were owned by the taxpayer's wife, but they did not entitle the holder to any voting or dividend rights of any kind or the right to receive notices of or to attend meetings. On a winding up the holder of the preference shares is entitled only to a return of the par value paid up on such shares.

With respect to the $400,000 payment there are a number of relevant facts:

  • • Schaefer, not Moncarnet, paid $400,000 to Strategic by cheque dated 11 August 1988;
  • • immediately on receipt of the sum of $400,000 by Strategic it was withdrawn and credited to a fixed deposit with a bank in the name of the taxpayer's wife;
  • • a copy of the balance sheet of Moncarnet as at 30 June 1989 reflects the shares in Strategic held by Moncarnet at a cost of $400,000; but it also contains a provision for write down of investments of $408,868.70;
  • • in essence as at 30 June 1989 Strategic had effectively one asset, namely, the loan to the taxpayer's wife of $400,000 represented by the preference share capital subscribed under the deed by Moncarnet. It was therefore clear that the 400 RL5 shares subscribed for by Moncarnet in Strategic have little value.

The payment of $400,000 to the taxpayer's wife was included in the taxpayer's assessable income.

The Tribunal's findings

Rather than attempt to summarize all of the findings of the Tribunal I shall set some of them out in the terms in which the Tribunal expressed them.

``(e) It is clear that as at the date of the Subscription Agreement, the Trust had not derived a profit; on the contrary its accounts annexed to the Subscription Agreement indicate a loss in respect of the year ending 30 June 1988, and an accumulated loss overall.

...

8. (a) The Subscription Agreement was entered into between the parties to the Heads of Agreement; it would seem that it was prepared by the same solicitors who prepared the Deed.

(b) The Subscription Agreement was conditional, inter alia, in accordance with item 9 of Schedule A, on completion of the Participation Agreement.

(c) The Subscription Agreement provided in item 12 Schedule A, that the Subscription Amount was $6,699,999; (this is the amount variously referred to in these Reasons as approximately $6.7 million or nearly $6.7 million).

(d) Clause (o) of Schedule B to the Subscription Agreement contains a warranty to the effect that the Accounts (as defined) fully disclosed all liabilities actual, contingent or otherwise.

(e) Exhibit A (the accounts of the Trust at 30 June 1988) reflected a loss of approximately $9,000 in that year and a loss overall in excess of $15,000.

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(f) Folio 87 of the T Documents indicates the payment of total fees of approximately $87,000 to the Applicant [i.e. the taxpayer] in that year, i.e. the year ending 30 June 1988.

(g) Although the Participation Agreement was not tendered in evidence, it is likely that it [sic] documents the terms upon which Rosechurch became a shareholder in each of Hixson Holdings and CBIA.

9. (a) The Consultancy Agreement was entered into on 29 January 1989 between CBIA and Nommack [Strategic Research].

(b) Under the Consultancy Agreement Nommack agreed to procure the services of the Applicant for CBIA.

(c) The Consultancy Agreement provides (in accordance with item 8) that it commenced on 1 July 1988 and that it endures for 5 years until 30 June 1993 with `a mutual option for a further 5 years'. (The effect of a mutual option is not clear).

(d) Under the Consultancy Agreement CBIA was to receive consultancy fees of $70,000 per annum increasing by 8% per annum or in accordance with the Consumer Price Index (Sydney) whichever increase was the larger.

(e) The Consultancy Agreement was terminated in accordance with a Termination Agreement in consideration of the payment by CBIA to Nommack of $25,000.

10. (a) There is a substantial dispute of fact between the Applicant and Schaefer as to the underlying reason for the execution and delivery of the Deed; the terms of the Deed make it clear that it was artificial.

(b) The Applicant in his evidence stated that Schaefer was under pressure from his creditors (and in particular Horstmann who had instituted proceedings against him, arising from the original relationship between Schaefer and Horstmann, as co- unitholders in the Trust). Schaefer, according to the Applicant wishes to shield funds from his creditors, and this factor motivated the payment; another motive (raised in clause 23 of T8 of the T Documents) involved the so-called `grubstake' element, and so that (according to the Applicant) the amount was paid, to enable Schaefer and the Applicant to fund other property ventures free of any restrictions imposed for the benefit of Girvan.

(c) The Applicant in his evidence disputed a number of statements by Schaefer contained in T12; he said also that the Applicant [sic - Schaefer] was comfortable at understanding English, but not comfortable in speaking it.

(d) The Applicant said that there had (post the ICAC report) been no payment of any money to Schaefer out of the sum of $400,000, because Schaefer had left Australia and he, the Applicant, was unable to make contact with him. (There was no clear evidence as to what eventually transpired in relation to the sum of $400,000; it seems likely that it was retained by the Applicant's wife and used by her and/ or the Applicant).

(e) The Applicant was asked why the Consultancy Agreement was entered into in January 1989, some seven months after its commencement date. He replied that it could not be brought into final effect until Girvan's finance had become available. It may be noted that the Deed was similarly conditional on receipt of finance but that payment of the sum of $400,000 was made thereunder on 11 August 1988.

(f) The Applicant said that the Deed was structured in accordance with legal and accounting advice.

(g) The Applicant said also that the documentation involving Rosechurch gave him a consultancy contract for 10 years with two five year options. This may have been intended as a reference to the provisions in this regard of the Heads of Agreement (...) which provided for such an arrangement in favour of CBIA.

11. (a) T12 of the T Documents (Schaefer's evidence) indicates that the sum of $400,000 was paid in order to eliminate the Applicant's profit entitlement under clause 5 of the 1987 Agreement. While there is a reference (at the top of p 105 of the T documents) to the `grubstake', pages 105, and following indicate that CBIA was not prepared to complete the Subscription Agreement (and presumably also the

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Participation Agreement) until the Applicant's profit entitlement had been extinguished.

(b) Schaefer's evidence indicates that Girvan's solicitors were involved in the preparation of the Deed.

(c) Page 107 of the T documents contains references to the `encumbrance' referable to the profit entitlement and envisaged the possibility of it being substantial.

(d) The Tribunal heard the tape in respect of T12; Schaefer is clearly fluent in English.

12. The evidence of one of the tax offers indicates that while Schaefer left Australia and returned at various times, he left permanently only in 1992.

13. The version of events surrounding the payment of $400,000 given by Schaefer, is in the view of the Tribunal more probable than the version by the Applicant. The evidence indicates that the Subscription Agreement payment of approximately $6.7m was used to pay debts of the Trust, and including amounts owing to Schaefer and Moncarnet considerably in excess of $400,000. It is in the view of the Tribunal unlikely that Schaefer would have sought to shield $400,000 only; it is also likely that if Schaefer were entitled to a payment of a part of the sum of $400,000 he would have made some attempt to receive that entitlement.''

The deed of 10 August 1988 was attacked by the Commissioner in the Tribunal as a sham. The Tribunal said that it was reasonable to infer that that deed was entered into for reasons other than that of investment by Moncarnet with Strategic Research. Clearly Moncarnet did not pay $400,000 for something worth at best $400 without reason. The Tribunal said that the deed was demonstrably artificial and contrived, but that was not to say that it was a sham. It may be, said the Tribunal, that Moncarnet did indeed subscribe for the relevant RL5 shares, did in fact pay for them and the RL5 shares were in fact issued. The Tribunal relied substantially on the judgment of Lockhart J in
Sharrment Pty Limited v Official Trustee in Bankruptcy (1988) 82 ALR 530 in relation to the alleged sham and the principles to be applied in determining whether or not a transaction was a sham. The Tribunal held that in the light of the decision in Sharrment the deed could not be characterized as a sham. The transaction was legally effective, even if it was intended to achieve an unacceptable purpose.

Having found that it was not a sham, the Tribunal then considered whether the evidence established that the sum of $400,000 otherwise constituted income of the taxpayer. The Tribunal noted that there was no case made by the Commissioner based on the application of Part IVA of the Income Tax Assessment Act 1936 (Cth) (``the Assessment Act'') and furthermore that there was no attempt by the Commissioner to claim that the amount of $400,000 was taxable as a capital gain under Part IIIA of the Assessment Act. The Commissioner argued that the share subscription arrangement of 10 August 1988 was compensation for the profit share arrangement in the 1987 Agreement and that the $400,000 was income derived by the taxpayer pursuant to s 19 of the Assessment Act.

The Tribunal said that there were attempts during the hearing before it to relate the sum of $400,000 to an amount of nearly $6.7m subscribed by Rosechurch pursuant to the subscription agreement. The Tribunal found that it was not likely that those two amounts were related.

The Tribunal dealt with the argument of the Commissioner that s 19 of the Assessment Act operated to tax the $400,000 as income in the hands of the taxpayer. The Tribunal found that ``s 19 can operate only in relation to income which has `come home''' in the sense that the taxpayer is entitled to it; and said that a transcript of an interview with Mr Schaefer makes it clear (as do the accounts of the Trust) that no profit had in fact been derived and that at best for the Commissioner the sum of $400,000 was paid to eliminate a profit which might arise thereafter. The Tribunal found that the Commissioner was not entitled to conclude that the $400,000 was income and set the objection decision aside.

The submissions

The primary argument put on behalf of the Commissioner before this Court was that the Tribunal, having accepted the version of evidence of Schaefer over that of the taxpayer, albeit giving it only slight weight, was bound to find that the respondent had not discharged the burden of proof of demonstrating that the assessment was excessive. Or, put another way, the circumstances were such that the Tribunal

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was not in effect persuaded one way or the other, so that the statutory direction of s 14ZZK(b) of the Taxation Administration Act 1953 (Cth) came into play, with a result that the taxpayer necessarily failed.

The Commissioner also argued that, in order to determine whether the transaction was a sham, the Tribunal was required to ascertain the true intention of the parties either by making findings from the direct evidence or drawing inferences from the whole of the circumstances or both. Counsel submitted that there was no clear statement from the reasons which could suggest that the Tribunal embarked upon this analysis and that in the circumstances it erred in law.

It was further argued on behalf of the Commissioner that the payment of $400,000 was in the nature of income substitution, being an amount equivalent to the taxpayer's entitlement pursuant to the profit making, undertaking or scheme entered into in relation to the overall project. It was submitted that the Tribunal erred in finding that no income had ``come home'' to the respondent. This was said to be a fundamental error of law for the reason that if income ``comes home'' there would never be any need to invoke the principles of income substitution embodied in cases such as
Tinkler v FC of T 79 ATC 4641. It was argued that the entire project was a profit making undertaking or scheme and that any gain thereof was assessable in terms of s 25(1).

The taxpayer supported the findings of the Tribunal.

Findings of fact

It is difficult to gain a clear picture of the relevant facts. The written agreements themselves are obscure in some respects. I have done my best to piece together the various pieces of the puzzle; but the relevant events, and the relationship between the corporations and natural persons concerned is unclear in various respects. This is an important point to make because the Commissioner's primary submission before this Court was that the taxpayer had not discharged the onus which lay upon him of proving that the amended assessment was excessive.

The perception was that the Byron Bay land would be able to be realized in due course at a substantial profit, perhaps by a person who would pay by injection of equity funds. Two important participants were the taxpayer and Schaefer. Horstmann was a minor participant. At the date of the Heads of Agreement those parties had interests in the Trust, Hixson Holdings and CBIA. The capital of Hixson Holdings consisted of two shares, both of which were beneficially owned by Schaefer. There were ten units in the Trust, nine of those were held by Schaefer and one by Horstmann. The capital of CBIA was divided into twenty-two shares, ten each were held by the taxpayer and Schaefer and two were held by Horstmann.

While it seems that Schaefer was the most significant participant in the development his role is not clear.

The 1987 Agreement between Schaefer, the taxpayer, Hixson Holdings, Moncarnet and CBIA is important. It is a document that envisaged investment being made in the Seven Mile Beach Project by a major equity investor. The investor ultimately was Girvan. It seems that Rosechurch was a wholly owned subsidiary of Girvan and that both companies were controlled by Mr Paul Peterson, the Chairman of Girvan. Rosechurch it seems bought land, obtained relevant approvals from local councils and other statutory authorities, developed the projects and then when they were completed and construction finance had been arranged, the project was sold or ``passed on'' as an entity to Girvan which became the ``equity investor''.

The 1987 Agreement provided in clause 5 (the critical clause) in substance that if any profit arose from changes in ownership or the sale of any or part of the project or interest therein, the parties agreed that the pro rata proportion of participation by the taxpayer in that profit was to be 6.25 per cent of the profit together with a cash advance of not less than $50,000 from the profit on exchange of contracts effecting the relevant sale or change, the balance of the sum due to the taxpayer to be paid in cash on completion or settlement of the relevant transaction. The Tribunal suggested that perhaps the purpose of this clause was to grant the taxpayer a quasi equity interest in the Trust (bearing in mind that the taxpayer held no units in the Trust). I agree that this is a possibility, although it is speculation.

After the 1987 Agreement, came the Heads of Agreement of 6 January 1988 between Schaefer, the taxpayer, Horstmann, Moncarnet, Rosechurch, Hixson Holdings and CBIA. Although expressly stating that no legally

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enforceable obligations would be deemed to arise between the parties unless and until formal documentation had been executed between them relating to the proposed joint venture to acquire and develop the Cape Byron land, nevertheless the document provided that Girvan (described in clause 1.1(v) of the Heads of Agreement as Rosechurch) would acquire ten new units in the Seven Mile Beach Trust at a price of $1 per unit together with a total premium of $6,699,990, a total investment of $6.7m.

Then came the subscription agreement of 30 June 1988 between Moncarnet, Horstmann, Rosechurch, Hixson Holdings and Schaefer in which in substance Rosechurch was to subscribe to ten units in the Seven Mile Beach Unit Trust for $6.7m, thus reflecting the entry of Girvan (or Rosechurch) into the project as the principal equity participant.

After 30 June 1988 when Girvan had come in as the equity investor and settlement was reached, Girvan subscribed for twenty-three shares in CBIA. Thus Girvan controlled CBIA, Hixson Holdings and owned 50% of the units in the Trust. There was apparently a falling out between Horstmann and Girvan, Horstmann having originally subscribed for approximately $1m worth of units in the Seven Mile Beach Trust prior to Girvan's entry. Horstmann appears to have been unhappy with Girvan coming in and what he regarded as ``watering down'' his interest. Litigation ensued between them, which appears to have ended in success for Horstmann. This evidence I have just related is not clear and there is some suggestion in other parts of the evidence that it is inaccurate. Again, this reflects the cloudy state of the evidence and the odd financial arrangements that were made in this case relating to the introduction and departure of parties to the development of the land, being the asset of the Seven Mile Beach Unit Trust.

On 10 August 1988 the deed was entered into between Moncarnet and Strategic. It will be remembered that SRAL is a company in which the taxpayer and his wife (Kathleen Susan Munro) were the directors; and of the 100 issued ordinary shares in its capital, Mrs Munro owned all the ordinary shares beneficially (the taxpayer held one share on behalf of his wife). This agreement was intended to reflect the arrangements that were thought to be necessary by the parties upon Rosechurch entering the scene as the developer and owner of the major interest in the project. It will also be remembered that Moncarnet appears to be the corporate arm of Schaefer. Under this agreement of 10 August 1988 the recitals and the operative provisions recognize that Hixson Holdings, as trustee of the Seven Mile Beach Unit Trust, would receive some $6,699,990 as, in effect, Girvan's contribution to the project (approximately 50 per cent it seems); and this event would trigger the entitlement of the taxpayer to the 6.25 per cent of profit made upon the acquisition by Rosechurch of approximately 50% of the equity in the project. Moncarnet would immediately subscribe at par plus a premium of $999 for a number of shares in the capital of Strategic to the value of $350,000. The important point is that, if, as a result of the restructuring and refinancing of the project Moncarnet would receive the additional sum of $800,000 as reimbursement of its costs, then the value of the RL5 shares subscribed for would be $400,000. Those shares carried no voting, dividend or return of capital rights and the investment was written down to nil at the first balance date following the investment. The $400,000 was in effect very close to the 6.25 per cent of the profit referred to in clause 5 of the 1987 Agreement. Incidentally, 6.25 per cent of $6.7m is $418,750 and not $125,000 as stated by the Tribunal.

What actually happened with the $400,000 appears to be that that sum of money was paid not by Moncarnet but by Schaefer to Strategic (of which the taxpayer and his wife were the directors) and the wife owned all shares beneficially in its capital. That money was paid on 11 August 1988, the day following the entry into the agreement. The cheque was deposited the same day (11 August 1988) into Strategic's banking account and on the following day, 12 August 1988, an identical sum was withdrawn from that account and paid into an account of the taxpayer's wife.

There is also evidence before the Tribunal that Schaefer said in interviews with taxation officers that that $400,000 represented money which he had agreed to pay to the taxpayer as a result of his work with the ``Academy''.

As mentioned earlier, the Commissioner's case before the Tribunal and this Court was that the share subscription arrangement embodied in the deed of 10 August 1988 was, so far as the taxpayer was concerned, an agreement that led

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to the taxpayer receiving $400,000 in truth as compensation to him for the loss of the profit to which he was entitled under the 1987 Agreement (clause 5). The Commissioner argued that that payment should be viewed as compensation for cancellation of the taxpayer's entitlement to profit under the 1987 Agreement and that at the taxpayer's direction the payment was made to Strategic. The Commissioner relied strongly on s 19 of the Assessment Act to found the argument that the operation of that section ensured that $400,000 was deemed to be derived by the taxpayer because, although not paid to him, it was nevertheless dealt with as he directed, namely, that it be used to enable Moncarnet to subscribe for shares in the capital of Strategic, the company in which the taxpayer's wife held all shares beneficially. There is, I think, much to be said in support of the Commissioner's argument.

However, the question on which this case ultimately turns, in my opinion, is whether the taxpayer has discharged the burden of proof that lies upon him to prove that the amended assessment was excessive.

Principles relating to onus of proof

The taxpayer has the burden of proving that the amended assessment is excessive (s 14ZZK(b)(i) of the Taxation Administration Act). That section is expressed in substantially the same language as s 190(b) of the Assessment Act which was repealed by Taxation Laws Amendment Act (No 3) 1991 (Cth).

In
McCormack v FC of T 79 ATC 4111; (1978-1979) 143 CLR 284 Gibbs J said that s 190(b) of the Assessment Act placed the burden of proving that the assessment was excessive upon the taxpayer and that on ordinary principles the taxpayer therefore bore the burden of proving the facts necessary to make out his or her case (at ATC 4120; CLR 301). To discharge the burden of proving that the assessment is excessive the taxpayer in McCormack (a s 26(a) case) was required to prove affirmatively on the balance of probabilities that the property was not acquired for the purpose of profit making by sale. His Honour said that the burden may be discharged by drawing inferences from the evidence, but he rejected (at ATC 4121; CLR 303) the argument that a taxpayer can succeed simply because there is no evidence from which it can be concluded that the relevant purpose of profit making existed; since this would mean that the burden of proving the existence of that purpose lies on the Commission. That would, his Honour said, be to invert the onus of proof. His Honour also said at ATC 4121; CLR 303:

``... The taxpayer will succeed if the proper inference from the evidence is that the property was not acquired for the relevant purpose, but if there is no evidence as to the purpose for which the taxpayer acquired the property the appeal must fail.''

Gibbs J agreed with the statement of Mason J a few years earlier in his dissenting judgment in
Gauci & Ors v FC of T 75 ATC 4257 at 4261; (1975) 135 CLR 81 at 89-90 in these terms:

``The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessment should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with sec 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.

...

The crux of the matter is that when in a sec 26(a) case an appellant seeks to overcome the onus created by sec 190(b) by adducing evidence as to his intentions with a view to establishing the purpose of the acquisition was not a sec 26(a) purpose and that evidence is not accepted, he has not discharged the onus which he bears. At best, from the appellant's viewpoint, the evidence stands in a situation in which it is equivocal, neither establishing a sec 26(a) purpose nor denying the existence of such a purpose. At worst, the judge may, in the circumstances, be able to infer the existence of a sec 26(a) purpose. In either event the appellant fails to discharge the onus and the appeal fails.''

Stephen J agreed with what was said on this matter by Gibbs J and he too endorsed the statement of Mason J in Gauci (at ATC 4123; CLR 306).

In
Macmine Pty Ltd v FC of T 79 ATC 4133; (1979) 53 ALJR 362 Gibbs J confirmed the views expressed in McCormack by him about the onus of proof which lies upon a taxpayer by virtue of s 190(b) of the Assessment Act (at ATC 4139; ALJR 366). Stephen J confirmed his agreement in McCormack with what Gibbs J

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said on the subject of s 190(b) (at ATC 4146; ALJR 371).

Murphy J said (at ATC 4156; ALJR 378) that s 190(b) places on the taxpayer the burden of showing that the assessment is excessive and therefore that the circumstances giving rise to liability to such assessment did not exist. His Honour said that:

``... The plain intention of Parliament is to raise a presumption of the existence of the circumstances which attract liability to the tax assessed.''

In
McCauley v FC of T 88 ATC 4605, Lockhart J at 4613 stated:

``... It is for the taxpayer to prove that the assessment is excessive and the onus lies upon the taxpayer to prove that funds to acquire the assets in question were not derived from undisclosed income. The source of these funds is peculiarly within the knowledge of the taxpayer.''

In
FC of T v Dalco 90 ATC 4088 the views expressed in McCormack's Case were followed by the Full Court of the High Court. Brennan J said at 4093 that ordinarily:

``... The Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment,...''

Conclusion

The Tribunal found that the version of events surrounding the payment of $400,000 given by Schaefer was in its view more probable than the version by the taxpayer. As mentioned earlier, Schaefer said, in an extract from his interview with officers of the Taxation Department on 2 September 1991 which was in evidence before the Tribunal, that the $400,000 was paid in order to eliminate the taxpayer's profit entitlement under clause 5 of the 1987 Agreement.

In my opinion, the taxpayer did not discharge the onus of proof which lay upon him pursuant to s 14ZZK(b) of the Taxation Administration Act. Once Schaefer's evidence was accepted about the $400,000 and the taxpayer's evidence rejected, it seems to me that there is nothing left upon which a conclusion could be founded that the taxpayer had discharged the onus of proof. The curious and obscure documentation which underlies this case support this conclusion.

The Tribunal said that it would be unsafe in all the circumstances to attribute anything other than slight weight to the unsworn untested evidence contained in the extract from Schaefer's interview. The Tribunal also said that it considered that the version given by Schaefer about the agreement of 10 August 1988 was more probable than that given by the taxpayer, but that it would not be safe to rely on Schaefer's untested and unsworn evidence. Yet earlier the Tribunal had said that the version of events surrounding the payment of $400,000 given by Schaefer was more probable than the version given by the taxpayer. On balance it seems that what the Tribunal did was to reject the taxpayer's evidence on this question, not necessarily accept Mr Schaefer's evidence, but conclude that it was more probable than the evidence given by the taxpayer.

The deed of 10 August 1988 was found by the Tribunal to be ``demonstrably artificial and contrived'', but the Tribunal did not find that it was a sham. The importance of this finding is that it is impossible to be comfortable in this case with any of the relevant agreements that are in evidence, including the critical 1987 Agreement and the deed of 10 August 1988. Hence, when consideration is being given to whether the taxpayer discharged the burden of proof that lay upon him, reliance upon these documents is a shaky foundation.

The Tribunal was mindful of s 14ZZK of the Taxation Administration Act (see para 19(c) of the Tribunal's reasons) and said that the deed of 10 August 1988:

``reflects little credit on the [taxpayer] and his legal and accounting advisers; however, that the deed was artificial and contrived did not, in my view, entitle the respondent to conclude that the payment under it was income of the applicant in the relevant year, and this would be so, in my view, even if [ Mr Schaefer's] evidence were fully acceptable.''

The Tribunal made no reference to the principles which govern the application of s 14ZZK. Whether arguments were fully put to the Tribunal on that question is not clear.

The conclusion to my mind is inescapable that the taxpayer did not discharge the onus of proof which lay upon him and the absence of a finding to this effect by the Tribunal constituted an error of law: cf
FC of T v Cooper 91 ATC 4396 at 4408-4409; (1991) 29 FCR 177 per Hill

ATC 5051

J at 192-194;
Lombardo v FC of T 79 ATC 4542 at 4545; (1979) 40 FLR 208 per Bowen CJ at 212.

The taxpayer did not discharge the onus cast upon him by s 14ZZK(b); so the appeal must be allowed.

It is unnecessary in the light of these findings to consider the other arguments advanced by counsel.

THE COURT ORDERS THAT:

1. The appeal from the decision of the Administrative Appeals Tribunal on 19 November 1996 be allowed.

2. The said decision of the Tribunal be set aside.

3. The respondent pay the costs of the applicant of the appeal to this Court.


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