CASE 13/2005

Members:
RNJ Purvis DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2005] AATA 1039

Decision date: 20 October 2005

RNJ Purvis (Deputy President)

The applications

1. The appeals presently before the Tribunal relate to amended assessments issued by the Commissioner of Taxation (the ``Respondent'') against the Taxpayer Company (``the Applicant'') in respect of the financial years ended 30 June 1995, 30 June 1996 and 30 June 2000.

The assessments

2. Income Tax Returns were lodged on behalf of the Applicant for the above years showing the Applicant's position as being non taxable.

3. As a result of adjustments to the Applicant's assessable income following an audit conducted by the Respondent into the operation of a Research and Development joint venture involving the Applicant, the Respondent determined that amounts which had not been returned as assessable income in the Applicant's Income Tax Returns were derived by the Applicant pursuant to the joint venture. On 8, 16 and 19 August 2002 the Respondent issued Notices of Assessment to the Applicant for the years ended 30 June 1995, 30 June 1996 and 30 June 2000 (T15/158 - T17/163). Penalties by way of additional taxes for ``reckless'' understatement of income were applied at the rate of 50 per cent of the tax shortfall. Interest was charged on the amounts outstanding.

Objections and objection decisions

4. On 30 August 2002 the Applicant lodged objections against the above mentioned assessments (T18/164 - T20/180) briefly maintaining that a licence fee said to have been paid for the licensing of core technology of $2.4 million and deposited into an account in its name with ABN AMRO as well as interest earned on the deposit was not assessable to the Applicant as it did not receive the funds and was not in a position to control or deal with the funds in any manner.

Appeal

5. On 1 November 2002 the Respondent disallowed the Applicant's objections and on 18 December 2002 the subject applications for review were lodged with the Tribunal.

Contentions raised by the taxpayer

6. Whilst at an early stage in these proceedings, and indeed in the objections lodged by the Applicant, it was amongst other matters alleged that the joint venture agreements were void ab initio and that the doctrine of non est factum applied to both the deposit and the interest income, the same were not raised or maintained at the hearing.

7. The contentions that were maintained and upon which the Applicant relies in discharge of its onus are:

I. The Respondent was barred from issuing the 1995 and 1996 assessments by reason of the operation of section 170 (2) of the Income Tax Assessment Act 1936 (``the ITAA 1936'').
II. The amounts were received by the Applicant in a manner that made them not assessable in its hands.
III. The payment to the Applicant of the $2.4 million for the grant of the licence was a sham.
IV. The real value of the licence fee was not $2.4 million but significantly less. The amount was paid to maximise claimable tax losses. The additional amount beyond the true value of the licence is not assessable income. It is a windfall.
V. The Applicant was not reckless in the lodging of its income tax returns. It exercised reasonable care. In the alternative, the Applicant failed to take reasonable care

ATC 215
and the penalty tax should be 25 per cent of the tax shortfall and remitted in whole or part.
VI. A significant part of the interest imposed should be remitted.

The hearing

8. The hearing of the applications extended over 13 days. The Applicant was initially represented by its managing director. At the resumed hearing on 9 February 2005 and thereafter the Applicant was represented by Mr B Zipser of Counsel. The Respondent was at all times represented by Mr R Quinn of Counsel.

9. The documents lodged with the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (``T-documents'') were admitted into evidence and marked T1 to T50. Documentary material tendered by the parties was also admitted and marked Exhibit A to Exhibit AA on behalf of the Applicant and Exhibit 1 to Exhibit 50 on behalf of the Respondent.

10. Oral evidence was given by the managing director of the Applicant, Dr Venning, a valuer of identifiable and tangible assets, Mr Greenwood, Chartered Accountant, Mr Lonergan, Chartered Accountant and a valuer of companies and other entities, Mr Tyndale, currently an investment banker, Mr Morris, a company chief executive, Professor Officer and Mr Banks, Chartered Accountant, and upon which they were each cross examined.

Chronology of significant events

11. As is apparent from the volume of written material contained in the T-documents, as well as those tendered on behalf of the parties, a determination of the issues that arise in these proceedings will largely depend upon an understanding and construction of the written material.

12. Accordingly, it is necessary and relevant to detail the chronological sequence of the documentary material and relevant other evidence. Such chronology is as follows:

1989, May 25	Applicant incorporated
1994, April 8	AusAsean Advisors Ltd ("AusAsean") letter to Applicant regarding raising funding for eligible research and development (R&D) (T23/186; Exhibit 5; Exhibit 27) - "This core technology transfer is subject to independent valuation and will generate assessable income in the hands of the researcher ..."
1994, April 22	Applicant provides information in relation to the Transformer to AusAsean (Exhibit 18)
1994, May 5	Applicant makes notations on project draft (Exhibit 21)
1994, May 6	AusSean writes preliminary letter to Industry Research and Development Board (IR&D) Board) seeking approval of the project (Exhibit 22)
1994, May 18	AusAsean submits to Applicant run down of proposed R&D Syndicate including structure, cash flows, tax implications and need for valuation, seeking confirmation that it is acceptable to the Applicant (T24/184; Exhibit 36)
1994, May 19	AusAsean submits syndication proposal in respect of the proposed project to IR&D Board (T25/204; T37/336)
	AusAsean submits a summary of the project to Illawarra Mutual Building Society ("IMB") (Exhibit U)
1994, May 20	AusAsean sought exclusive mandate from the Applicant to arrange a R&D Syndicate to fund a research project for the development of transformer auxiliary construction equipment. The mandate was subject to a valuation being obtained of "the initial technology" (T3/15)
	Applicant submits to AusAsean list of distributors for commercialisation of the Transformer products (T25/215)
	ATC 216 AusAsean seeks confirmation of tax losses from Applicant's accountant (Exhibit O/5)
1994, May 23	Applicant responds to AusAsean's facsimile of 20 May 1994 and research proposal of 18 May 1994 (Exhibit A, annexure 20/7 and 26/1; Exhibit N/7)
	managing director of Applicant signs copy of letter of 20 May 1994, indicating a willingness to proceed on the terms described in the letter, and returns to AusAsean (T3/16)
1994, May 25	IMB Board meeting (Exhibit V)
1994, May 26	R&D Syndicate funding proposal prepared by AusSean (T9/98)
1994, May 30	IMB writes to Applicant confirming in principle preparedness to invest $3.706 million to fund research project subject to, inter alia, "independent valuation of core technology" (T27/223)
	AusAsean forwards information to Dr Venning for comment (Exhibit P)
1994, June 3	AusIndustry notified AusAsean that the proposal constitutes R&D under section 73B(1) of ITAA 1936 (T37/379)
1994, June 9	Applicant writes to its solicitors having read contracts seeking advice (Exhibit A, annexure 19/1; Exhibit O/14)
	AusAsean sends to Applicant formal approval from IR&D Board (Exhibit 23)
1994, June 14	AusAsean forwards information to Dr Venning for comment (Exhibit Q)
	Facsimile from Dr Venning to AusAsean and noted reply (Exhibit R)
1994, June 19	Applicant's solicitors letter detailing obligation under documents (Exhibit O/26)
1994, June 20	managing director of Applicant licences core technology of the Transformer to the Applicant for consideration of $10 (T29/227)
	Applicant writes to its solicitor commenting further on contracts (Exhibit A, O/36)
1994, June 21	Applicant executes Power of Attorney authorising appointee to, inter alia, sign relevant transaction documents on his behalf (T4)
1994, June 23	AusAsean letter to Applicant - instructions regarding settlement on 27 June 1994 (Exhibit 8)
1994, June 24	Applicant opens account with ABN AMRO Australia Ltd ("ABN AMRO") (Exhibit 1)
	Directors meeting of Applicant approving authority to sign and enter Agreements for the R&D Syndicate (Exhibit 6)
1994, June 26	Dr Venning valuation of coretechnology (Exhibit O/47)
1994, June 27	transaction documents executed by appointee in Canberra on behalf of Applicant referrable tothe syndicate (T5, T6, T7, T8, T30, T31, T32)
	Applicant signs authorisiation for term deposit and R&D Account (T48/559)
1994, June 28	AusIndustry informs AusAsean of coditional registration of R&D Syndicate including requirement of core technology valuation (T37/301)
1994, July 5	application made to Respondent for a private binding ruling in respect of the taxation consequences of the joint venture (T37) and refers, inter alia to valuation of core technology
1994, July 29	AusIndustry notifies registration of joint venture under section 39P of Industry Research and Development Act 1986 subject to provision of core technology valuation within 30 days (T38/389)
1994, September 20	Applicant's request for payment of $235,000 instalment, due 30 September 1994 (T48/547)
ATC 217 1994, October 5	Applicant's letter to AusAsean stating commenced R & D but no funding yet (Exhibit A, annexure 26/3; Exhibit O/74)
1994, October 24	Respondent issues private binding ruling (T39/391)
1994, October 26	AusAsean advises Applicant of tax ruling, including draw down for first quarter R&D budget (T40/399)
	Applicant signs notice of draw down being 30 June 1994 instalment $415,000 (T48/552; T40/400)
1994, October 27	notification by ABN AMRO of first instalment payment being paid to Applicant (T48/544)
	notification by ABN AMRO of instalment $420,375.67 being paid to Applicant (T48/550)
1994, November 1	Deauville Robins "invoice paid" to the Applicant (Exhibit 45/accounts 14 July 1994, 25 August 1994- including Mevon Pty Ltd and Norfeld Pty Ltd Invoices)
1994, December 7	solicitor's letter enclosing transaction documents sent to Applicant (Exhibit A, annexure 20/18)
1994, December 14	Applicant request to ABN AMRO for payment of $260,000 (T48/542)
1994, December 20	Quarterly Report No. 1 for the Joint Venture (for the Quarter ended 30 September 1994) (Exhibit O/81)
1994, December 31	notification by ABM AMRO to Applicant of deposit $260,000 (T48/540)
1995, February 16	Quarterly Report No. 2 for the Joint Venture (for the Quarter ended 31 December 1994) (Exhibit O/94)
1995, March 1	Technical Review Meeting, where the Applicant was confident of success and confirmed the potential for commercialisation exists (Exhibit 9
	Report on Syndicate Performance following meeting on 1 March 1995 (Exhibit 38)
1995, March 28	draft of Applicant's reply to AusAsean on report of Horwath & Horwath (Exhibit W)
	draft of Joint Venture 3rd Quarter Report (Exhibit X)
1995, March 29	letter of AusAsean to Applicant regarding review of draft report and issues raised by Horwath & Horwath (Exhibit 11)
1995, March 31	request by Applicant to AusAsean for payment of 31 March 1995 instalment - achieving some results but misguided in the payment of money and preparation of files (Exhibit O/101; Exhibit 13)
	Applicant's letter to AusAsean in reply to matters of concern (Exhibit 12)
	minutes of meeting at AusAsean regarding issues raised in draft audit report (Exhibit 14)
1995, April 4	notification by ABN AMRO of fourth (and last) instalment payment $95,059.82 received by the Applicant (T48/537) 1995, April 5 Horwath & Horwath report to Lafoten (Exhibit 10)
1995, May 24	3rd Quarterly Report (Exhibit O/104)
1995, May 26	meeting technical review committee where the Applicant expressed confidence and commercialisation was discussed (Exhibit 32)
	Applicant file note of a discussion with Mr Morris regarding financing of the commercialisation of the core technology (Exhibit O/115)
1995, May 31	Applicant's letter to AusAsean regarding its managing director's uncertainty as to the extent of the licence of the core technology (Exhibit A, annexure 20/32; Exhibit O/116)
ATC 218 1995, June 7	Applicant's letter to its solicitors regarding the core technology (Exhibit A, annexure 22/1, 26/4; Exhibit O/119)
1995, June 7 to July 4	correspondence between Applicant and its solicitors (Exhibit A, annexure 22/1-36)
1995, June 16	solicitors Gilbert & Tobin letter to Applicant regarding rights granted in relation to core technology (T41/401)
1995, June 7 to 28	letters from the Applicant to AusAsean regarding the core technology (Exhibit A, annexure 26/4 to 26/11)
1995, July 4	letter from AusAsean to Applicant in reply (Exhibit A, annexure 26/12; Exhibit O/125)
1995, July 13 and 25	Applicant seeks additional $250,000 funding and reduction from 7 per cent to 3 per cent in annual commercialisation royalty (Exhibit A, annexure 24/1, 24/2; Exhibit O/127)
1995, July 21	letter from IMB to Applicant in answer to request of 13 July 1995 (Exhibit O/128)
1995, August 3	letter from IMB to Applicant regarding prospective default notice (Exhibit A, annexure 24/4; Exhibit O/132)
1995, August 4	letter from Applicant to IMB regarding 3 August notice (Exhibit O/135)
1995, August 14	AusAsean to the Applicant regarding notice of potential default. The Applicant replied by facsimile: ``There will be no meetings or reports'' (Exhibit 49)
1995, August 29	Technical Review Committee meeting, managing director of Applicant not in attendance (Exhibit O/136)
1995, September 5	AusAsean writes to AusIndustry alleging Applicant had committed breaches of its obligations under Transactions Agreements (Exhibit 24 - enclosing minutes - Exhibit O/136)
1995, November 22	IMB Board meeting (Exhibit V)
1995, December 14	notes of meeting regarding dispute (Exhibit 39)
1996, February 12	Mallesons Stephen Jacque letter to Applicant requesting undertakings (Exhibit 30)
1996, March 7	AusAsean letter seeking to conduct financial and technical audit. Applicant writes ``no meeting'' until the matter is resolved (Exhibit 31)
1996, April 4	Supreme Court summons Lafoten v Applicant. Lafoten initiates proceedings against Applicant in Supreme Court alleging breaches of Applicant's obligations under the agreement (Exhibit 25)
1996, April 17	short minutes of orders - Lafoten obtains orders for specific performance by Applicant of its obligations under the agreements (Exhibit A, annexure 25/1)
1996, April 29	Connell Wagner Pty Ltd visits the Applicant's premises to conduct intellectual property audit - draft report (Exhibit 44)
1996, May 15	Applicant's letter to Mallesons Stephen Jacque regarding dispute with revised 4th Quarter Report (Exhibit Z; Exhibit 26)
1996, May 31	Horwath & Horwath report to Lafoten (Exhibit 33)
1996, June 28	Supreme Court stands over action by Lafoten. Relationship between Applicant and Lafoten effectively ceases 1996, July 6 Applicant's letter to AusIndustry stating it was its belief that it had done everything in accord with the Transaction Agreement (Exhibit 50)
1997, June 11	final report Technical Review Committee to IR & D Board - including IMB commercialisation objective (Exhibit 41)
ATC 219 1997, August	AusIndustry threatens to wind up syndicate under section 39N of Industry Research and Development Act 1986
1999, December 1	valuation of core technology by Mr Lonergan of Price Waterhouse Coopers (Exhibit N/177, Exhibit S)
2001, June 29	ABN AMRO default notice to Lafoten
2001, June 30	repayment date of Lafoten's liability under the loan agreement ($4,393,552)
2001, July 17	Put Option notice of exercise to Applicant (T21/182, Exhibit O/217)
	Applicant's facsimile to IMB ``not intend to do anything'' (T21/182)
2001, July 18	ABN AMRO issues Applicant with written demand for payment (T21/182; Exhibit N/218)
	right of set off exercised by ABN AMRO in repayment of Lafoten's loan
2002, March 6	Respondent's letter to Applicant regarding tax audit of joint venture, position paper (T45/447) - including audit report (T47/461)
2002, April 19	response to Respondent's position paper (T46/458)

The transaction documents

13. In its amended Statement of Facts and Contentions the Respondent set forth, in summary form, the effect of the transaction documents. Subject to a few amendments suggested on behalf of the Applicant, being material set forth in the Respondent's written outline of submissions (paragraphs 166 to 206), the effect of the documentary material constituting the R&D project was as follows:

1. The Applicant was a company involved in the auxiliary construction industry.
2. The managing director of the Applicant was the holder of several patents, including a patent relating to a multi-functional building platform called the ``Transformer''.
3. In April 1994 AusAsean Advisors Limited (``AAL'') sent a letter to the managing director of the Applicant regarding the prospect of syndication of a research and development project in respect of the patents. During April and May 1994, the managing director of the Applicant met with representatives of AAL to commence preparation of a report into the feasibility of the project.
4. On 19 May 1994 AAL submitted a Finance Scheme Proposal in respect of the proposed project to the Industry Research & Development Board (``AusIndustry''), under section 39EA of the Industry Research and Development Act 1986.
5. By way of a letter dated 20 May 1994 from AAL to the Applicant, AAL sought an exclusive mandate from the Applicant to arrange a Research & Development Syndicate (``the Syndicate'') to fund a research project for the ``Development of Transformer Auxiliary Construction Equipment'' (``The Transformer''). On 23 May 1994 the managing director of the Applicant executed a signed copy of this letter and returned it to AAL, indicating that the Applicant was willing to proceed with the proposal on the terms outlined in the letter.
6. By way of an agreement dated 20 June 1994 entitled the ``Head Licence'', the managing director of the Applicant licensed the core technology for the Transformer to the Applicant in return for a consideration of $10.
7. On 21 June 1994 the authorised officers of the Applicant executed a Power of Attorney in favour of the partners of McPhillamy Cummins & Gibson Solicitors and James Grant, (``the Attorneys'') authorising them, inter alia, to sign any relevant transaction documents in relation to the Syndicate on the Applicant's behalf.
8. On 27 June 1994, the Attorneys executed various transaction documents in relation to the Syndicate on the Applicant's behalf. These transaction documents consisted of:
- a. the Joint Venture Agreement;
- b. the Loan Agreement;
- c. the Licence Research & Commercial-isation Agreement;
- d. the Put Option;
- e. the Deposit Agreement;
- f. the Mortgage; and
- g. the Procedures memorandum.
  
  ATC 220
9. As a result of the agreement entered into by way of the transaction documents, the Applicant became a 0.1% shareholder in a Research & Development Syndicate known as the P- Joint Venture (``the PJV''), and was required to carry out research & development activities on behalf of the Syndicate as a contract researcher.
JOINT VENTURE AGREEMENT
10. The PJV was formally constituted by the Joint Venture Agreement. The parties to the Joint Venture Agreement were Lafoten Pty Ltd and the Applicant as joint venturers, and AusAsean Management (``AusAsean'') as the manager. The Syndicate was originally established for a period of 25 years from 27 June 1994, although there was provision for its term to be extended by one or more periods of five years.
11. The major investor in the Syndicate was Lafoten Pty Ltd, which held 99.9% of the investment. Lafoten was a wholly owned subsidiary of Lopphaver Pty Ltd, and in turn, Lopphaver was a wholly owned subsidiary of Illawarra Mutual Building Society Ltd (``IMB'').
12. The Recitals of the Joint Venture Agreement state that the Joint Venturers agreed to carry on a joint venture on the terms and conditions of the Agreement for the purpose of carrying out:
- - sub licensing and development of Core Technology; and
- - marketing and exploitation of Core Technology.
Under the agreement the Joint Venturers were required to contribute certain moneys to the Joint Venture on the terms set out in the agreement. The Joint Venturers appointed AusAsean as manager to carry out certain functions regarding the Joint Venture's business.
LICENCE RESEARCH &COMMERCIALISATION AGREEMENT
13. The parties to the Licence Research & Commercialisation Agreement were the Applicant as researcher and the Syndicate. Under the Licence Research and Commercialisation Agreement the Applicant granted an exclusive license of the core technology to the Syndicate for a period of twenty-five years in return for a licence fee of $2.4 million. The licence fee was payable to the Applicant on the ``Settlement Date'' - being a date on or before 30 June 1994.
14. The Licence Research and Commercialisation Agreement further provided that the Applicant was to carry out research (``the R&D Program'') into the Transformer project on behalf of the Syndicate during the 12 month period ended 30 June 1995 (``the R&D period''). The Syndicate paid the Applicant an amount of $1,306,500 (``the R&D Price'') for undertaking this research. The R&D Price was to be applied as per clauses 3.2 and 3.3 of the Procedures Memorandum.
15. The Syndicate maintained control over the Applicant's conduct of the R&D Program by requiring the Applicant to submit Quarterly Reports to quarterly meetings of the Technical Review Committee, comprising representatives of Ausindustry, AusAsean, Lafoten and the Applicant.
16. The Licence Research and Commercialisation Agreement also appointed the Applicant as Marketer of the ``Marketable Technology'' (being the Core Technology plus research results) for a seven-year period. Whilst the appointment was made on a non-exclusive basis during the initial R&D Period, the Applicant retained the right to be appointed exclusive Marketer thereafter. After it had paid a Commercialisation Fee of seven per cent to the Syndicate, the Applicant was entitled to keep the remaining 93 per cent of income from commercialisation.
17. The Syndicate owned all ``Research Results'' under the License Research and Commercialisation Agreement and remained in the final authority in commercialisation policy. The Applicant was not permitted to enter into any marketing arrangements without the prior written approval of the Syndicate.
DEPOSIT AGREEMENT
18. The parties to the Deposit Agreement were ABN AMRO as lender, Lafoten as borrower, and the Applicant as researcher. Under the Deposit Agreement, subject to payment of the Licence Fee and the R&D Price, the Applicant was required to deposit

ATC 221
the Deposit Amount with the Lender. The Deposit Amount totalled $2,714,257, comprising the $2,400,000 licence fee and a minor portion ($314,257) of the R&D Price.
19. Pursuant to Clause 2.2, the Applicant was required to pay the Deposit at the time of making of the advance on the Settlement Date (27 June 1994). The Deposit was to be entered into the books of the Lender, in an account held in the Applicant's name. The Deposit was to earn interest that accrued daily such that the value of the Deposit equalled the Final Sum. The Interest was required to be credited to the Deposit Account and form part of the Deposit annually in advance with the first payment to be made on the Settlement date.
20. A purpose of the Deposit was to secure the financial obligations of the Applicant under the Put Option that the applicant had granted to Lopphaver. Pursuant to Clause 5 the Applicant was required on demand by ABN AMRO to indemnify ABN AMRO against failure by Lafoten under the Loan Agreement. Pursuant to Clause 5.3 the Applicant was required to subscribe for sufficient of Lopphaver's shares on Lafoten to enable Lafoten to discharge its obligations under the Loan Agreement.
21. The funds in the Deposit could not be accessed by the Applicant unless the right of set off given to ABN AMRO was not exercised. However interest in the Deposit was credited annually in advance and was accumulated to the amount of the Deposit.
22. In accordance with the Procedures Memorandum the Applicant was to deposit the balance of the R&D Price, being an amount of $992,243 (``the R&D Deposit''), in a Term Deposit with ABN AMRO. The purpose of establishing the Term Deposit was to ensure that the Applicant had sufficient funds during the R&D Period to carry out the R&D Program.
23. The Term Deposit (including interest credited to the Applicant in advance) matured quarterly throughout the R&D Period. The proceeds of the Term Deposit were then paid into a current account designated the ``R&D Account'', from which the Applicant could draw down funds on a quarterly basis (``the Instalments'') to carry out the R&D Program. The amount of the Instalments made allowance for a profit component of approximately 23% that was owing to the Applicant as its remuneration for undertaking the research work on the Syndicate's behalf.
24. The Syndicate paid the Applicant four separate Instalment payments totalling $1,011,021.42 from the Term Deposit, the first payment being received on 28 October 1994 and the last on 4 April 1995. The Applicant fully expended this amount of $1,011,021.42 on research and development.
PROCEDURES MEMORANDUM
25. The parties to the Procedures Memorandum were the Applicant, the Syndicate, ABN AMRO, Lopphaver, and AusAsean. The purpose of the Procedures Memorandum was to define terms used in the transaction documents and to establish certain funding procedures and general conditions in relation to the Transaction Documents. Under Clause 3.1, subject to payment of all of the Licence Fee and the R&D Price, the Applicant was required to make the Deposit payment as required by the Deposit Agreement. Under Clause 3.2, subject to receipt of the R&D Price, the Applicant was required to immediately place the full amount of the R&D Deposit in the Term Deposit. The Term Deposit was required to be deposited at call and to mature with such a profile that on each Instalment Date, the Term Deposit matured in an amount equal to the relevant Instalment.
26. Under Clause 2.2(c) of the Procedures Memorandum, the Agreement was subject to the receipt of notification from AusIndustry confirming that the research and development provided for under the Agreement constituted genuine research and development activities for the purposes of the Industry Research and Development Act 1986, and that the Joint Venture be registered under section 39P of that Act for the year ended 30 June 1994. As a result, AAL submitted an initial funding proposal to AusIndustry pursuant to section 39EA of that Act on 19 May 1994. AusIndustry notified AAL that it had registered the PJV under section 39P of that Act on 29 July 1994.

ATC 222
27. Under Clause 2.2(d) of the Procedures Memorandum, the Agreement was also subject to receipt of a ruling from the Respondent in respect of the PJV transaction. As a result, on behalf of AAL, Atanaskovic Hartnell Solicitors applied to the Respondent for a Private Binding Ruling (``PBR'') in respect of the taxation consequences of the Joint Venture on 8 July 1994. The Respondent issued a PBR in response on 24 October 1994.
LOAN AGREEMENT
28. The parties to the Loan Agreement were Lafoten as borrower and ABN AMRO as lender. Under this Agreement, Lafoten obtained a loan of $2,537,167 from ABN AMRO. Pursuant to the agreement Lafoten was required to use the loan for the sole purpose of making its Joint Venture contribution. The repayment date under the loan was the earlier of the end of the 25 year term of the transaction, or the Purchase date under the Put Option if exercised. If requested in a drawdown notice, ABN AMRO was required to make the funds available on the Settlement Date. Interest on the loan was to accrue daily in advance, with the first payment due at the Settlement Date. Interest under the loan was to be capitalised. Lafoten was required to repay the Principal Outstanding on the Repayment Date.
29. Lafoten funded its 99.9% contribution to the Syndicate's capital requirements in two ways: by obtaining the loan of $2,537,167 under the Loan Agreement with ABN AMRO, and through the issue of shares to Lopphaver.
30. By the Repayment Date of 30 June 2001 it was expected that Lafoten's liability under the Loan Agreement would have increased to an amount of $4,393,552. This amount would exactly equal the projected balance of $4,393,552 in the Deposit Amount as at 30 June 2001. Under the right of set-off, the Applicant was required to use the balance of funds in the Deposit Amount to acquire Lopphaver's shares in Lafoten, thereby enabling Lafoten to fully discharge its loan liability.
MORTGAGE
31. The parties to the Mortgage were the Applicant as the mortgager and the Syndicate. Under the Mortgage, in return for the Syndicate entering into the Transaction Documents, to secure payment of the Secured moneys, the Applicant mortgaged to the Syndicate:
- - all of the Applicant's interest in the R&D Account.
- - all of the Applicant's interest in or relating to the Term Deposit. The purpose of the Mortgage of the R&D Account was that if the Syndicate transaction was terminated prior to the expiry of the R&D Period, the Applicant would be obliged to repay the unexpended amount of the R&D Deposit. The Mortgage over the Applicant's rights to the Term Deposit secured the Applicant's obligation to repay the balance of the R&D Deposit.
PUT OPTION
32. The parties to the Put Option were the Applicant, Lopphaver, ABN AMRO and AusAsean. The Put Option allowed IMB (through Lafoten) to terminate the PJV at the end of the 7 year Commercialisation Period or at an earlier date. The Put Option was to be exercised for a nominal consideration of $1. The Put Option was part of the indemnity arrangement that enabled Lafoten to exit from the PJV free of third party liability. Clause 5.1 of the Deposit Agreement required the Applicant to indemnify ABN AMRO should Lafoten default. Under clause 5.3 of the Deposit Agreement an exercise of the Put Option would compel the Applicant to subscribe for ordinary shares in Lafoten, on the earlier of the loan repayment date or the Put Option exercise date, of such an amount that would enable Lafoten to repay its outstanding loan balance. Lafoten would then be required to repay the ``secured moneys'' out of the amount subscribed by the Applicant.

Overall nature of the research and development syndicate

14. As has already been noted, this matter is one that will be largely determined on the basis of the documentary material tendered before the Tribunal. The above chronology details such material and it is not necessary to repeat the information that emerges from it. However, extensive oral evidence was given at the

ATC 223

hearing that not only provided a basis for admission into evidence of the documents but in relation to some aspects of the material enabled an explanation to be forthcoming as to its relevance.

15. The overall nature of the Research and Development Syndicate is as appears below. The evidence referable to the valuation of the licence of the core technology will be dealt with separately.

a) the Applicant was an investor (0.1 per cent) in the PJV, a research and development syndicate. The joint venture was to carry out research and development activities as a researcher. The other investor in the syndicate (99.9 per cent) was Lafoten Pty Ltd a subsidiary of Illawarra Mutual Building Society Limited.
b) In accordance with the provisions of the licence research and commercialisation agreement the Applicant was to licence core technology, as it stood developed at that time, to the syndicate for a period of 25 years. As consideration for the grant of the licence the Applicant was to receive a licence fee of $2.4 million.
c) The licence fee was pursuant to a deposit agreement between ABN AMRO, Lafoten and the Applicant, to be deposited together with an amount of $314,257 in an account in the Applicant's name maintained by ABN AMRO. The reason for the money being so deposited was to ensure that the obligation of the Applicant to Lopphaven, the beneficial owner of the shares in Lafoten, under a Put Option could be met.
d) The funds in the deposit account and the yearly interest accruing thereon could not be accessed by the Applicant pending the exercise or not of the put option in 2001. In that year the funds on deposit were pursuant to the deposit agreement and as a consequence of the Applicant not responding to a written demand for payment of the 18 July 2001 applied by ABN AMRO in repayment of the monies borrowed from it by Lafoten in 1994.

Valuation of the licence to the core technology

16. It is maintained on behalf of the Applicant that the licence granted by it to the licensee, Lafoten, of the core technology was worth considerably less than the $2.4 million. The difference, it is said, between the true value and $2.4 million was not paid to the Applicant as consideration for the licence but in order to maximise the claimable tax losses of Lafoten. This additional amount, it is further said, is not assessable in the hands of the Applicant. Indeed it is maintained that the licence agreement was a sham.

17. It is basic to the Applicant's argument that the value attributed to the licensing of the core technology was not a real value and that Dr Venning was influenced in arriving at his valuation by suggestions put to him by AusAsean. If this contention can be maintained, then a factor relevant to the sham argument has been established. It is said that Dr Venning had a relationship with AusAsean in which he provided reports. Whilst not submitting that Dr Venning was entirely ``a pawn'' it is contended that he was not wholly independent and that he submitted ``a false valuation and the figures were adjusted to come up with $2.4 million''.

18. The criticism made of Dr Venning's report was based on a number of contentions, each of which it was said, cast doubt not only on its reliability but on it being genuine in the sense of a report and a valuation reached after an objective appraisal of all relevant factors. But even if the Applicant is able to satisfactorily establish that the valuation report was not correct in the sense of being based on a false premise or premises, there is other evidence before the Tribunal as to a proper valuation which may substantiate that of Dr Venning. Discussion is had elsewhere in these reasons as to the meaning that is to be ascribed to the word ``sham''. The valuations and opinion of valuers is relevant only if they are such as to cast sufficient doubt on the genuineness of Dr Venning's report and the $2.4 million valuation. As I have said, it is not sufficient to show, that the valuation was wrong.

19. So in order to establish the falsity of the valuation and the lack of independence on the part of Dr Venning, the Applicant refers to aspects of the report which are said to be faulty and calls in aid the opinions expressed by other valuers and experts who commented upon the report or themselves valued the licence.

20. Material was contained in Dr Venning's report (Exhibit O/58) relating to the ``potential

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size of the market for the transformer equipment''. This information was provided by the managing director of the Applicant. It was maintained that the ``figures were entirely unrealistic'' yet Dr Venning, whilst acknowledging that he could not corroborate what he been told, did say that there was no reason known to him to doubt the estimates made. Again when estimating potential revenue (Exhibit O/59) Dr Venning referred to discount rates reflecting the ``moderate risks'' associated with developing the product and introducing it to overseas markets of 20 per cent to 30 per cent (13.4 per cent to 20.1 per cent after tax). Even be it evidence was tendered to the effect that the setting of a discount rate is a subjective exercise, criticism was made of Dr Venning in that the figures used by him were said to have been ``much too optimistic'' in that one valuer (Mr Lonergan) had suggested a range of 35 to 50 per cent and another (Mr Banks) approximately 19 per cent. Professor Officer did not carry out a valuation but spoke of a discount figure of 30 per cent. Out of all this arose the contention that Dr Venning was so over optimistic as to the probability of the product's success that a Tribunal of fact could only conclude that the figures he used were influenced by the results he was asked to achieve. This Dr Venning strongly denied.

21. It seems to me that not only did Dr Venning use and rely upon the figures supplied to him by the Applicant but that the explanation given by him in his report for relying on them was open to him. Dr Venning placed a value on the core technology in the range of $2.6 million - $3.6 million stating that it was ``fair and reasonable for the syndicate to attach a figure of $2.6 million to the core technology'' (Exhibit O/64). It attached a figure of $2.4 million.

22. Dr Venning in his oral evidence said that he received a letter of instructions (Exhibit P) on 30 May 1994 following which he prepared preliminary material based on information received by AusAsean from the Applicant, attended the Applicant's premises and had a discussion with the Applicant on 24 June 1994 seeking such information for the report on that day as was made available to him. His report was finalised a few days later. A basis for his report was that the transformer embodying the core technology was ``a product that had been and was accepted in the market place''. It was not to be breakthrough research. It was to be only a one year program and the chief researcher, the Applicant, ``knew where he hoped to be. It was design and production. For a one year program a major breakthrough in the area was not needed''. The task, Dr Venning said, was inter alia to ``assess whether the task could be completed in one year at a cost of approximately $1.3 million''. In looking at the commercial risks he noted acceptance in the market, past performance and the way in which the product was widely seen by reason of awards won. He did say that it was not easy ``to get a lot of information out of the Applicant''. Subject to assessing their reasonableness he accepted the figures that were given to him. From his own experience and what he was told, he expected ``the product project to be achieved''. A significant figure, ``a yard stick'' in his valuation, was the expenditure incurred by the Applicant in generating the technology and the know how associated with the development of the multipurpose loading platform, the in- house knowledge which was given to him by the Applicant as ``at least $2.15 million''. The amounts spent to date were thus relevant to the valuation.

23. Dr Venning's overall impression of the Applicant and its managing director was that they ``were quite bullish, their expectations were high''. He was also fortified by the fact that the technology had a value by reason of the past success of the Applicant and its managing director.

24. The Tribunal accepts the evidence of Dr Venning. He supported his assertions with rational explanations. The more he was questioned the more persuasive were his answers.

25. It was the report by Mr Lonergan of Price Waterhouse Coopers, Chartered Accountants, of 1 December 1999 assessing the ``fair market value of the Core Technology as at 27 June 1994 to be zero'' (Exhibit S) that laid the foundation for an initial submission of the Applicant. Mr Lonergan in his oral evidence before the Tribunal took issue with conclusions drawn by Dr Venning, tending to minimise past success of the Applicant and its managing director and saying that ``value is to be determined by future benefits to be generated''. He spoke of removing ``the optimism of the developer'' and criticised various percentages

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used by Dr Venning. He was aware of reports by Mr John Banks and Professor Officer, which were critical of his own report and in cross examination (page 458 of the transcript) said:

``Mr Quinn:

In the business of valuation there are always - there is always scope for alternate views; is there not? - Yes.

And in fact the reports of Professor Officer and John Banks provide alternate views? - Yes

And are you aware as to whether there was a committee formed to consider all reports, including your own, the Banks' report, and the Professor Officer report? - I don't know the answer to that question.

One particular factor would be - in considering valuations would be whether the technology already had a presence in the marketplace? - Yes

And the position of the inventor, say, working in the garden shed on an invention and the position of an inventor who was established in the marketplace, had a track record, had successfully commercialised inventions, they are considerations as well, are they not? - Yes

And if it was - and I think you would agree that if there was a tax break which was available to IMB by reason of deductions, that is a factor which could affect valuations of core technology? - It could.

I think the Banks' report considered that the valuation should fall within a range between a fair market value and a market value where the buyer had special interests? - Yes

And that was a view taken by John Banks? - Yes''

26. Mr John Banks provided two reports (Exhibit 48) on the syndicate and the licence attributable to the core technology. He is a Chartered Account and a consultant with KPMG in Forensic Accounting. In his report of 30 March 2001 he stated:

"... It is my opinion that the value range of $(472,510) to $164,848 determined in the PwC Valuation for the Core Technology acquired by the [Applicant] R&D Syndicate is inappropriate and the conclusion that the Core Technology as at 27 June 1994 had a zero value is significantly flawed.

It is my view, based on the available data, that the valuations should fall within the following ranges for a `fair market value' (`FM Value') and a fair market value where the market consists of buyers with special interests (`SFM Value') (see Section 5 for detailed explanation of SFM Value) after adopting the PwC market share and the 7% royalty rate:

FM Value
(Tax Deductions Claimed as Income Earned) SM Value
(Tax Deductions Claimed Immediately available)

60%
Success Rate 80%
Success Rate 60%
Success Rate 80%
Success Rate

$000's $000's $000's $000's

7 Year Life

Low (20% discount rate) 500 974 1,166 1,599

High (16% discount rate) 877 1,438 1,373 1,877

12 year Life

Low (20% discount rate) 939 1,559 1,605 2,184

High (16% discount rate) 1,404 2,149 1,983 2,690"

27. It is not necessary for me to do other than note the areas in which Mr Banks differed with Mr Lonergan. This I have done. It is relevant to note that uppermost in Mr Banks' valuation was that ``it is clear that [the Applicant] had the ability to research, develop and commercialise products similar to the

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subject product''. He further expected ``that a valuer in June 1994 would have assessed the probability of success highly and likely to be greater than 80 per cent'' (Exhibit 48, Report 29 April 2002 page 3).

28. Mr Banks noted the commercial success achieved by the Applicant prior to June 1994 with patented products. This would impress him as a valuer he said, and encourage him to pay heed to what he would have been told by the Applicant. The project was to be short term and on the basis of such success and information supplied the probability of further success was enhanced. The product, he noted, put together component parts, which had been developed over a period of time and patented.

29. Professor Officer conducted a critique of the Lonergan Report, mainly restricted to the valuation methodology used, and a commentary on that of Mr Banks. After noting that Dr Venning ``relied heavily'' on the managing director of the Applicant for technical advice, Professor Officer noted the advantages accruing to an investor from investment in R&D projects and this undoubtedly being a relevant factor. He was critical of various basis used by Mr Lonergan and queried some of his findings. He concluded by saying that the criticism by Mr Banks of the Lonergan valuation was reasonable. He noted that Mr Banks was influenced by the Applicant's ``position in the market and its clear expertise in the product area for which the Research and Development is to be carried out'' (Exhibit 42). He would have sought as much corroboration as was possible. He discussed the use of tax losses (would have increased Dr Venning's valuation), commercialisation, risk factor, discount rates, royalty rates and the reliance that would be placed on the researcher (the Applicant) for the provision of information.

30. On the basis of the material tendered before the Tribunal and after considering the matters above discussed, I am satisfied that the licence of the core technology had a true value and I see no reason for finding that the valuation of Dr Venning was other than one open to him on the basis of the material provided and the conclusions that were properly drawn. The Applicant concurred in the provision of information and was an active participant in it being so provided.

31. The licence agreement was not a sham. Both parties intended for there to be a licensing of the core technology for its use in advancing the project and for a consideration of $2.4 million. A valuation of $2.4 million was a proper and true valuation. This is so even if other valuers would arrive at a different figure either more or less. It was based on information provided to Dr Venning. The assumptions made and conclusions reached in aid of arriving at the valuation were properly available to a competent and objective valuer. There was not a ``windfall gain'' to the Applicant.

Credibility of witnesses

32. As earlier discussed these applications will be largely determined on the basis of documentary material tendered before the Tribunal.

33. However, there were some issues that arose where it may be necessary to make findings as to the oral evidence that is accepted in aid of properly construing a situation or determining an appropriate meaning to be given to a set of documents. This is not to say that a witness did not tell the truth, although this might be so. More likely is the understandable fragility of the human mind after the passage of a decade. Thus where the Applicant's managing director alleges that IMB was not interested in the commercialisation of the product and relies on an isolated comment of Mr Morris, its chief executive officer, in May 1995 (Exhibit O/115) to the effect that its main interest was not at that time the future commercialisation of the product but resolving the emerging conflict between researcher and investor. The Applicant would seek to relate back this comment of Mr Morris to the intention of the investor in June 1994 as evidence of the commercialisation aspect of the arrangement from the investor's point of view not being of concern to it. Mr Morris denies that commercialisation of the product was not a relevant consideration for the investor to enter into the project. There is not here an issue of credit but of understanding the circumstances in which the parties found themselves in May 1995 and the factors that were at that time upper most in their minds. The Applicant wanted additional funds, the investor wanted to ensure compliance with the transaction documents.

34. The recollection of the managing director as to the events and their currency in

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1994 has become clouded by the conflict and possible frustration between the parties that developed in 1995. On the one hand the Applicant was seen as not complying with its obligations under the transaction documents, providing lists of expenditure without proper verification, not providing material for insertion in progress reports, and not properly accounting for expenditure and use of instalment money. It was also seeking further funds from the investor beyond the agreed investment. The researcher was confused as to the extent to which it had assigned the core technology maintaining, wrongly in my opinion, that the documentation did not clearly stipulate the property that was the subject of the licence.

35. I am satisfied that the Applicant by its managing director was fully aware of the nature and intent of the transaction document. He had access to the draft material and correspondence. He sought legal advice as to meaning of clauses where he experienced doubt. He discussed the matter with AusAsean and others. He was enthused by the prospect of having money available to develop the technology of which technology, but not the development, he would remain the owner. It was only in later years when he resisted any attempt to reactivate the arrangements that he misconstrued earlier intent and convinced himself that he had been mislead. The latter was not in fact the case. He then sought to return to the state of affairs and stage of development of the core technology as at June 1994, pretending to himself that nothing had changed, that the transaction had not been entered into and that although he had received the instalment payments they had not led to any significant development of the core technology. It was in this frame of mind that he put aside the entitlement of the Applicant to the licence fee of $2.4 million and the interest that was accruing. He regarded or thought to regard the whole R&D project to be at an end. He had not received any notification of interest being credited to the deposit account (there was no obligation for ABN AMRO to do so. It was provided for by the agreement). He also put the existence of the deposit and interest out of his mind. It was perhaps negligent of him to do so. But the statement he made to his tax accountant to the effect that the whole transaction came to nothing, namely,

``11. For the financial year ended 30 June 1995, I saw an amount of over $1 million which had been received by [the Applicant]. I spoke directly with [;the Managing Director] about this matter. We had a conversation to the following effect:
- [Tax Accountant]:
  - What is this amount of money for?
- [Managing Director]:
  - It is money from the AusAsean research and development syndicate. We received the money and then spent it on research and development.
- [Tax Accountant]:
  - What about the rest of the syndicate money?
- [Managing Director]:
  - There is no other money. I am in dispute with the investor. The scheme has fallen over.''

is confirmation of this belief at the time. His hopes had initially been high. For one reason or another, by his fault or that of others, the ambitious program did not materialise. Rightly or wrongly he felt let down. He then sought to visit the cause of his disappointment on others. His feeling at that time was maintained and did tend to colour much of his evidence.

36. This state of mind of the managing director did also affect his recollection of the extent of his awareness of the nature of the scheme. As I have already indicated, I am satisfied that he was fully aware and understood the nature and extent of the intended transaction.

37. I do not accept a submission made on behalf of the Respondent that the managing director was engaged in acts of duplicity referable to disclosure in the project schedule or he ``falsely allowed'' a suggestion as to the stage of development of the retractable platform to remain in the documentation. He may have been overly enthusiastic or optimistic as to the transformer. If there were errors at this time, I am satisfied that the representations were not made with any intent to deceive. Likewise market projections and expectations as to market share taken up by Dr Venning may well have been based on optimistic expectations, but honestly made.

38. As already stated I am satisfied that the managing director was enthusiastic about the

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project and the injection of in excess of $1 million into the development is indicative of this. He wanted the R&D project to succeed. He provided information as it was sought to AusAsean and the investor. I am also satisfied that he played a significant part in structuring the project schedule (Exhibits 18, 19, O/36). I do not accept that information in the R&D documents of a technical nature was created by others. I am satisfied that much of the oral evidence contradictory of documentary material was the result of faulty recollection.

39. I am not in these reasons seeking to discern responsibility for the breakdown in the contractual arrangements in 1995 and 1996. However, the managing director on a number of occasions sought to exculpate himself from an obligation to provide information to the investor and sought to excuse the Applicant from doing so or alleged that things had been done which ought to have been done. I have no doubt that by about May 1995, if not slightly later, he believed (wrongly in my opinion) that he had assigned more than he had intended and that he stood to lose the benefit and use of a valuable asset, namely the pre 27 June 1994 core technology. This belief coloured his then actions. He believed that the investor was seeking to obtain property to which it should not have been entitled (Exhibits 31, 49). This belief also coloured his evidence as it related to the commercialisation of the product and the interest of the investor in such commercialisation.

40. There was evidence of the way in which the Applicant accounted, or failed to account, for the use to which it put the R&D funds. The evidence as it related to an account from the tax accountant where it stated services had been provided, which the accountant denied performing, was unsatisfactory. As was that relating to work allegedly done by a firm Deauville Robbins or a company Deauville Robbins Pty Limited, the existence of the firm or the company being doubtful. The evidence of the managing director in relation to these matters was clearly unacceptable. His description of the ``principal'' of the ``business'' as a marketing engineer was wrong. It is open to the Tribunal to conclude that the existence of this person is dubious. It is very doubtful if work the like of that described in the invoices with the ``firm'' or the ``company'' is accurate or was indeed carried out by the designated person. If this be so the managing director might well have been endeavouring to obtain payment for work not in fact carried out.

41. I am not however in a position on the evidence before the Tribunal to make a finding in this regard. The Respondent maintains that the explanation was entirely false or in the alternative the managing director fabricated the invoices to falsely account for funds expended, this being consistent with amounts of R&D funds being ``diverted'' to companies controlled by the managing director. Again I am not able on the basis of the material before the Tribunal to make a finding in this regard. Suffice it to say that on the face of the material, the investigating accountants, Horwath & Horwath, were warranted in expressing their concern as was the investor.

Applicant taxpayer's contentions - submissions of the parties and decisions

42. As already noted the Applicant raised six contentions, referable to the amended assessments the subject of these applications, in aid of seeking to satisfy the onus that the assessments were excessive. It is convenient to now deal with the Applicant's contentions in light of the evidence, the Respondent's submissions in reply, and the findings made by the Tribunal to each of them.

1. Limitation period section 170(2)(b)

43. As relevant to these reasons section 170(2) of the ITAA 1936 provides:

``170(2) Subject to this section, where there has been an avoidance of tax, the Commissioner may:

(a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; or

(b) if paragraph (a) does not apply, the taxpayer is a relevant entity within the meaning of Division 1B of Part VI and the assessment is taken by section 166A to have been made - within 4 years after the day on which the assessment is so taken to have been made; or

...

amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment.''

44.

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There are three amended assessments relevant to the present applications: the assessment for the year ended 30 June 1995 issued on 1 February 1996, that for the year ended 30 June 1996 on 9 October 1996 and that for the year ended 30 June 2000 on 11 December 2000. The amended assessments, the subject of the present applications, issued on 8, 16 and 19 August 2002 (respectively), that is in the case of the 1995 and 1996 financial years more than four years after the original assessments issued.

45. The latter mentioned assessments were nil assessments. The Applicant maintains that section 170(2)(b) of the ITAA 1936 precludes the issue of the amended assessments in the absence of fraud and evasion. The Respondent does not in this matter allege that the Applicant avoided payment of tax by reason of fraud or evasion.

46. The matter raised on behalf of the Applicant was considered in
FC of T v BCD Technologies Pty Ltd 2005 ATC 4522 where at page 4525 it was stated:

``21. In my opinion, the concept of a deemed assessment introduced by s 166A was not intended to alter the fundamental nature of an assessment under the Act, as established by Batagol. The artificial state of affairs created by the lodging of a return only extended to bringing into existence at that time of a notional assessment without the Commissioner having to actually issue and serve one. But both kinds of assessments must qualify as assessments within the meaning of the Act. It would be an irrational and asymmetrical intention to impute to Parliament that `ordinary' assessment must specify an actual amount of tax payable but with `deemed' assessments a nil or negative amount will suffice.''

In light of the decision of the Federal Court in BCD Technologies the contention raised by the Applicant is without merit.

2. Amounts not received in a manner that made them assessable income

47. It is maintained on behalf of the Applicant that the $2.4 million as placed in an account in its name with ABN AMRO and being the purported consideration for the grant of a licence of the core technology by the Applicant to Lafoten Pty Limited was not received in such a way as to make the amount assessable in its hands. Likewise the interest recorded as credited to the account between 1994 and 2001 was said not to have been so received.

48. The Applicant accepts that the account with ABN AMRO existed and that the money was placed into the account. The deposit agreement required the Applicant to deposit the deposit amount with ABN AMRO and into such an account as directed. It was to earn interest which was to be added to the deposit account. An account was accordingly opened in the name of the Applicant and $2.4 million therein deposited. Interest accrued and was credited to the account over the period of the deposit.

49. It is contended however, that the amounts of principal and interest were not received by the Applicant in such a manner as to make the receipt assessable income. Reliance was placed upon the decision in
Arthur Murray (NSW) Pty Ltd v FC of T (1965) 14 ATD 98; (1965) 114 CLR 314. In the reasons for decision the Court at ATD 100; CLR 318 stated:

``The ultimate inquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income.... A judicial decision as to whether an amount received but not yet earned or an amount earned but not yet received is income must depend basically upon the judicial understanding of the meaning which the word conveys to those whose concern it is to observe the distinction it implies. What ultimately matters is the concept; book-keeping methods are but evidence of the concept.''

And at ATC 100; CLR 319:

``... The possibility of having to make such a payment back (we speak, of course, in practical terms) is an inherent characteristic of the receipt itself. In our opinion it would be out of accord with the realities of the situation to hold, while the possibility remains, that the amount received has the quality of income derived by the company.''

Reliance was also placed upon a part of what was said at ATD 100-101; CLR 320 namely:

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``... amounts received in advance of the goods being delivered or the services being supplied are not regarded as income.''

50. It is submitted that a relevant charge exists upon the deposit money and this is so where there is a possibility of having to make ``a payment back'' or to a third party. More so it is said where the obligation ``to pay back'' is ``an inherent characteristic of the receipt of the money''. I do not accept that this is the true position. The possibility of making a ``payment'' to the lender is not a characteristic of the receipt of the money. The receipt and a possible payment are separate and distinct rights and obligations. The one is not dependent upon the other. A payment would depend upon the occurrence or not of the situation provided for in the transaction documents.

51. It is to be noted however that Arthur Murray (supra) is distinguishable from the present matter in that the Court was there concerned with unearned income, income referrable to periods of time yet to come, refundable fees from students for a course of lessons. The receipt of income had not ``come home'' to the taxpayer company during the year of income. The payments made and thence monies received were contingent upon the possibility that they may have had to be paid back. It was held to be unrealistic to treat the monies as assessable income derived when received.

52. But as submitted on behalf of the Respondent, Arthur Murray (supra) was referring to a legal restriction being present such as to prevent the funds being received. In the present instance by the transaction documents the Applicant agreed to the funds being placed in an account in its name with ABN AMRO to be used if called upon to satisfy the indemnity it had also provided. By the loan agreement Lafoten was obliged to repay the principal outstanding on 27 June 2001 to ABN AMRO. But by the deposit agreement the Applicant was required on demand to indemnify ABN AMRO against non-payment by Lafoten.

53. Lafoten did not pay the monies and demand was made upon the Applicant. On the Applicant failing to pay, ABN AMRO applied the deposit in satisfaction of the monies owing to it as was provided for in the transaction documents. As submitted on behalf of the Respondent, and agreed with by the Tribunal, by 30 June 1994 the licence fee for the use of the core technology had been earned and received by the Applicant when paid into the account with ABN AMRO.

54. The ability of the Applicant to claim ownership of the monies and the benefit of them was affected, it is maintained by the Applicant, in the following respects:

i. The Applicant was unable to access the money during the deposit period even in the event of default.
ii. The indemnity whilst not in itself a charge was not dissimilar to a charge in the sense of the meaning given to that concept in Arthur Murray (supra).
iii. In the event of a default the monies could have been retrieved without the Applicant being able to maintain any control over the situation.
iv. In the event of the Put Option being exercised monies became due and payable, the amount due would be paid out of deposit funds without any participation of the Applicant.
v. It was submitted that it was the true intention of the investor that the Put Option would be exercised after the passage of the seven years (T24/202, 203). The flow charts (Exhibit V, pages 4 to 12) indicate that even at the time of the execution of the transaction documents it was contemplated that the put option might be exercised. It is noted that the document at T24/202 is illustrative of the events that would transpire if the investor did exercise the Put Option. The Tribunal is satisfied and agrees with the Respondent's submissions that the evidence tendered before it does not support a finding that the parties intended that the licence fee was not to be received by the Applicant. It is speculative to say what might have happened if the commercial relationship had not broken down and the ownership of the research and development had not been left with the Applicant. Likewise if the investor had not decided to withdraw from its association with the Applicant after the time period.
vi. The mortgage agreement (T31) constitutes a charge/security on the amount placed in the deposit account.

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It is a correct characterisation of the first transaction documents to say that the Applicant was beneficially entitled to the funds from the time it received them following which it placed them in the account with ABN AMRO for the agreed period of time to be released if the investor did not exercise the put option. There was not a charge upon the funds but an agreement as to how and in what circumstances they were to be applied at the end of the period. If Lafoten decided to continue with the project, the monies would be at the disposal of the Applicant. If the Put Option was exercised then the monies would be used in order to satisfy the indemnity. The Applicant accepted these terms and conditions when it became a party to the transaction documents.
In
Dunmore v McGowan (1978) 2 All ER 85 at 88 the Court of Appeal in discussing whether ``the interest in question enoured immediately to the benefit of the taxpayer'' stated:

``... Just as the £28,000 deposited with the bank was a debt due by the bank to the taxpayer subject to any claims that might arise under the guarantee, so on the interest being credited to the deposit account did the interest acquire the same characteristics. The interest was received or `got' when it was credited to the deposit account, an account of money which was at all times owed by the bank to the taxpayer, albeit charged in support of the guarantee... The interest which is credited to my deposit account is received by me at the date when it is so credited, notwithstanding that it may not be paid to me until a future date, and it is just as much mine whether it is or is not paid to me... There was no fund except a sum of money which historically had been deposited with the bank and for which the bank became liable (in one way or another either by discharging the amount due on the guarantee or by repayment to the taxpayer) to repay. I can see no fiduciary element in the transaction at all.''

55. It is contended on behalf of the Applicant that Dunmore v McGowan (supra) can be distinguished from the present matter in that in the former the taxpayer actually received an amount of money, even be it a charge was imposed by the guarantee. In the present case the imposition arises from the initial transaction documents and whilst the Applicant, it is said, became entitled to receipt of the monies, they were subject to the specific contingencies and charges which involved the return of money to the investor.

56. It is clear in the present case that the principle outlined in Dunmore v McGowan (supra) is applicable to the situation here being considered. The money deposited with ABN AMRO was a debt due by that company to the Applicant. The interest credited to the account acquired the same characteristic. The interest was received when credited to the deposit account. Subject to any claims that might arise under the indemnity ABN AMRO became liable to repay the deposit together with the interest.

3. Sham

57. It is contended on behalf of the Applicant that the agreement evidenced by the transaction documents and the payment by Lafoten to the Applicant of $2.4 million as consideration for the grant of the licence of the core technology was a sham. This it is said was the intention of Lafoten Pty Limited, IMB and AusAsean although not of the Applicant. Thus it is maintained that on this account alone the licence fee of $2.4 million and the interest credited yearly to the account should not be treated as assessable income.

58. I have earlier in these reasons found that the licence agreement for the core technology was not a sham and the value placed on it by Dr Venning was properly open to him.

59. In
Snook v London and West Riding Investments Limited (1967) 2 QB 786 at 802 it was stated by Diplock LJ in relation to the question of what is a sham:

``... I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the `sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principal, morality

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and the authorities... that for acts or documents to be a `sham' with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating...''

60. In
Richard Walter Pty Limited v FC of T 96 ATC 4550; (1996) 67 FCR 243 whilst referring to what had been said in Snook (supra) Lockhart J said at ATC 4552; FCR 245:

``There are many cases in the income tax field, particularly cases relating to s. 260 where the word `sham' has been considered. I discussed some of them in
Sharrment Pty Limited v Official Receiver in Bankruptcy (1988) 18 FCR 449, where I said (at 454):

`A ``sham'' is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.'''

In the same case Hill J defined a sham transaction as being one which involves ``a common intention between the parties to the apparent transaction that it be a disguise for some other and real transaction or for no transaction at all'' (at ATC 4562; FCR 257).

61. In
Scott, Associated Provident Funds Ltd and Belvidere Investments Pty Ltd v FC of T (No 2) (1966) 14 ATD 333 at 352; (1966) 40 ALJR 265 at 279 the Court noted the relevant question as ``did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a façade, a sham, a false front...''

62. It is implicit in what was stated in Richard Walter and Snook that all parties to the transaction must intend it to be a sham. There must be a common intention. In the present matter the Applicant clearly did intended to enter into the transaction documents. It did intend to create legal rights and obligations consistent with those details in the documents.

63. More specifically the Applicant now says that the amount of $2.4 million was not paid for the purpose of purchasing a licence to use the core technology but to maximise the tax deduction available to the investor. Thus this aspect of the transaction, it is said, was a sham, with AusAsean the syndicate manager and/or IMB its author.

64. In support of this contention the Applicant first points to a meeting of the board of IMB on 25 May 1994 where it was resolved (Exhibit V):

``That subject to favourable legal and taxation advice, the Society enter into an agreement with AusAsean Advisers Limited to become investors in the project put forward by researchers [the Applicant] ... for a total investment (excluding our advisers' fees) not exceeding ...

As required in projects of this type, it is also recommended that the Board approve the acquisition of 2 additional subsidiary companies, being single transaction companies for each R&D project.''

It is also stated in the minutes of the meeting:

``The most significant contribution to profits in the books of the parent company from an R&D project is the benefit received from a reduction in tax payable. This benefit is most evident in years 1 and 2 of a project.

...

The Society has a projected taxation liability of $2.5 million and will be looking to reduce this amount significantly upon entering into another project.

...

Following a full review of each project, the following 2 projects from AusAsean Advisers Limited have been selected for consideration by the Board.''

65. The Applicant maintains that the above resolution suggests that the true value of the core technology was of no interest to the investor. If it had been of interest, it is said, the approval resolution would have been subject to the obtaining of a valuation of the core technology.

66. The Applicant noted that Mr Morris, the then financial controller of IMB, gave evidence to the effect that the internal policy guidelines of IMB required that a valuation be obtained, even if this requirement was not in writing, and

ATC 233

that the obtaining of a valuation was implicit in the requirement that the approval of the transaction being subject to legal and taxation advice, even if he was unable to be more explicit. However, on 19 May 1994 Mr Morris received documents from Mr Tyndale of AusAsean (Exhibit U) with a summary only of the intended transaction and the transactions documents themselves were not given to Mr Morris until after the 25 May 1994. On the basis of the documentary material, it is said that no transaction documents were in the possession of IMB or its advisers requiring that the completion of the transaction be subject to obtaining a valuation.

67. In order to accept this contention of the Applicant the Tribunal would be required to disregard the evidence of Mr Morris and the stated procedure and guidelines which he said were in place. As elsewhere indicated in these reasons, Mr Morris is accepted as a truthful witness, his evidence being consistent with an honest recollection of events. There was to be an independent valuation of the core technology consistent with external advice given to IMB. A proper valuation was obtained from Dr Venning.

68. The Applicant secondly points, in support of its sham contention, to Exhibit U as evidencing a lack of interest on the part of IMB in the true value of the core technology. The report of AusAsean to IMB refers to the projected taxation position but it is said makes no reference to a valuation being required. This even be it that a valuation of $2.4 million is given to ``core technology licence'' in the financial structure of the overall project. It is also submitted that as of 19 May 1994 IMB had only a limited knowledge of the development prospects. In fact, prior to this report of 19 May 1994 being provided, the investor had considered a number of prospective projects and had selected that of the Applicant. The investor was clearly interested in the taxation position but this did not preclude the commercialisation being significant.

69. The Applicant thirdly makes reference to a file note of 25 May 1995 (Exhibit O/115) (referable to a discussion between Mr Morris and the managing director of the Applicant) where the words ``not interested in any commercial aspect'' appear. It is said that these words allegedly used by Mr Morris are consistent with IMB a year earlier not being interested in obtaining a valuation.

70. Mr Morris' oral evidence was to the effect that he denied using the alleged words, and said that he had requested that a business plan be submitted. Indeed the minutes of the meeting (Exhibit 32) under the heading ``Commercialisation Activities'' records that ``WM requested that JP submit formalised plans for the commercialisation of the product and for [;the Applicant's] role as the potential marketer''. Nevertheless in this regard it is submitted that the evidence of the managing director of the Applicant should be preferred to that of Mr Morris. The basis advanced on behalf of the Applicant for the Tribunal adopting this submission is that the file note of 25 May and the Applicant's letters of 31 May 1995 and 7 June 1995 were contemporaneous with the event. This submission is made notwithstanding IMB's letter of 21 July 1995 (Exhibit O/128) and what is stated in the final report of the technical review committee evidencing the intention of IMB (Exhibit 41, page 6).

71. The Tribunal does not accept that IMB proceeded with the transaction mindless of the commercialisation prospects. Mr Morris spoke of the interest of IMB in promoting innovative and enterprising commercial activities. The Tribunal accepts this as having been so. By May 1995 the parties were experiencing difficulties. Indeed as early as March 1995 anomalies in the Applicant's accounting had been drawn to the attention of the other parties. The report of Horwath & Horwath was commissioned (Exhibit 10) and information was sought from AusAsean (Exhibit 11). Compounding the estrangement that was then developing was the request by the Applicant for further monies, this outside of the transaction documents upon which all parties were then relying. It is apparent that little had been achieved by way of developing the core technology and following payment of the fourth instalment and a lack of willingness to provide further funds, the project was not progressed to any measurable extent. All of this does not evidence a lack of interest on the part of the investor in commercialisation of the product. In July 1995 the investor was requiring the Applicant to meet outstanding obligations before further funds were provided. The letter

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of 21 July 1995 (Exhibit O/128) does refer to the investor being ``desirous of a viable and commercial result at the end of the research period''.

72. The Tribunal does not accept that the investor was not interested in commercialisation of the product.

73. In order to maintain the contention that the transaction was a sham it is necessary, at least in part, for the Applicant to satisfy the Tribunal that the valuation by Dr Venning of the licence of the core technology was not a true valuation. In support of this position it is submitted:

I. Dr Venning was influenced by what was written by Mr Tyndale of AusAsean in a fax of 14 June 1994 namely (Exhibit R):
- ``re [the Applicant]
- 1. looking for 2.4 m dollars
- 2. I exclude it from export sales
- 3 ...''
II. Dr Venning was in a relationship with AusAsean providing it with valuation reports. Dr Venning was not then ``wholly independent''.
III. The valuation was false, the figures being adjusted to arrive at the figure of $2.4 million.

74. The basis upon which the above contention is advanced is:

a) In the valuation report (Exhibit O/58) reference is made to annual expenditure and at page 68 to market size. These figures it was suggested were accepted by Dr Venning without his seeking any verification from an outside source. He accepted uncritically the information given to him. It was entirely unrealistic for the transformer product to capture 50 per cent of the market.
b) The report of Dr Venning at page 59 discusses a relevant discount rate. Whilst conceding a discount rate is a subjective exercise, the Applicant maintains that rates of 13.4 per cent to 20.1 per cent are ``much too optimistic'' and that the estimates of Mr Lonergan of 35 to 50 per cent and Mr Banks of approximately 19 per cent are to be preferred. It was the evidence of Professor Officer that as to the probability of success, whilst he did not carry out a valuation, he would have used a percentage of about 30 per cent.
The above, it is contended, should lead the Tribunal to conclude that Dr Venning in using the lower percentages was ``over optimistic'' as to the probability of success of the project. The conclusion is open, it is maintained to the effect that the figures used were influenced by the results that ``he was asked to achieve''.
c) Overall it was submitted the Tribunal should be concerned about the fact that the transaction documents were near to completion before Dr Venning's valuation of $2.4 million was obtained. Indeed following the documents being prepared a valuation of $2.6 million was suggested. There was, it is said, no satisfactory explanation from Dr Venning as to how his figure was arrived at.
d) Two other valuations, that of Mr Banks and Mr Lonergan and a review by Professor Officer were prepared. These valuations should, it is said, be sufficient to cast doubt on that of Dr Venning and sufficient to establish that the transaction was a sham.

75. The issue of the Venning valuation has already been the subject of discussion in these reasons and relevant findings have been made. However, in the context of the sham argument, the Applicant has made the above submissions and they should be answered. The Applicant is required to show that the valuation was false in order to sustain its sham argument.

76. Dr Venning has been accepted as a truthful witness who made a valuation of the core technology uninfluenced by the client's expectations but mindful of the end that was being sought. The final valuation was in the range of $2.6 million to $3.6 million (Exhibit O/64).

77. The differing views of the valuers as to a discount rate has been discussed. Their views were explained and open to each of them. The Applicant's managing director did not demure to the valuation at the time it was done and indeed had provided much of the information on which it was based (Exhibit O/80). Be it the Applicant's argument is that the valuation of the licence was a sham and not the entire transaction, it is relevant to note that the Applicant at all relevant times and even up until it acquired a shareholding in Lafoten in 2001 accepted that its legal rights and obligations were governed by the transaction documents.

ATC 235

Even the complaint by the Applicant in May 1995 that the documents did not reflect its intent so far as the technology was concerned was reliant on the documents.

78. As is evidenced by the documentation described by the above chronology, the Applicant became willingly involved in the research and development syndicate in order to carry out research and development on the transformer. The Applicant's managing director actively participated in each stage of the documentation, reading the material and asking relevant questions. The Applicant entered upon the development project and utilised the funds provided by the investor to that end. When queries were raised as to the purpose for which monies were spent, the Applicant vigorously maintained that such expenditure was in aid of the development project.

79. Likewise the investor, which not only had sought out the Applicant, but thereafter progressed the documentation of the agreement and funded the development. It watched over its investment by attendances at meetings and the requiring of audit reports of expenditure and research and development.

80. As was submitted on behalf of the Respondent and is accepted as a true statement of the position by the Tribunal

``...

61. The benefits of the transaction were clear to both Researcher and the Investor and each availed itself of those benefits on entering the transaction. The Applicant received funds to conduct R&D which was central to its enterprise while the investor was able to leverage a tax advantage on its investment with the possibility that if the R&D was successful, it would receive revenue from a successful commercial-isation of the research results. R&D was a high risk investment and while attracting the support of government policy in the form of deductions, there was always the possibility that the objective of commercialisation of the results might not be met. In the event that the expected levels of commercial revenues were not achieved then in July 2001 on reviewing the future commercial potential of the research it was open to the Investor to exercise the put option to put its interest in Lafoten back to [the Applicant], the proceeds from the Deposit account being used by the Applicant to subscribe for the additional shares in Lafoten to enable the latter to repay the loan principal and accrued interest to ABN AMRO.

62. This mechanism apart from allowing the Investor to exit the transaction also of itself created an incentive for the Researcher to ensure that there would be a successful commercial outcome for the Investor. Provided the Researcher had tax losses to offset the income received from the sale of the licence of the core technology and any interest accruing on that amount during the currency of the arrangement there was no down side to the Researcher if the Investor exercised that option. There was the concomitant advantage that the Researcher would become the owner of the R&D results.

...

97. By reason of [the Applicant's] refusal to co-operate, the R&D project which by June 1995 was about to enter the commercialisation phase, was placed in jeopardy. The Investor was not in any position to go forward until the Applicant disclosed to it the results of the R&D and was unable to meet the reporting obligations to AusIndustry. Clearly this was the most credible explanation as to why the project foundered [sic] and was directly linked to [the Managing Director's] attitude to his obligations. The clear explanation to be educed from the contemporaneous documents and the evidence was that [the Managing Director] did not want the project to result in a successful outcome which on his view could result in the Investor competing with him. Certain inevitable consequences flowed from this. In particular ABN AMRO on the failure of Lafoten to repay the loan sought indemnity from [the Managing Director] pursuant to its rights under the transaction documents and applied the deposit monies in discharge of the loan.

...''

81. The Tribunal is satisfied that the Applicant willingly entered into the transaction having been informed and being appreciative of the taxation consequences (Exhibit 5, pages 2/3; T23/186; Exhibit 27). The managing director

ATC 236

was confident that the project would succeed (Exhibit 9).

82. The contention of the Applicant that the core technology valuation and the licence transaction was a sham has not been made out.

4. Real value of the licence was not $2.4 million. It was significantly less.

83. It was submitted on behalf of the Respondent (Respondent's outline of submissions paragraph 105) the question of whether a receipt by a taxpayer has the character of income is to be determined by reference to what the payment was received for having regard to the scope of the taxpayers activities and purpose. The Applicant derived the licence fee as assessable income in the year ended 30 June 1994. Clause 2.2 of the Licence Research and Commercialisation Agreement (``LRC Agreement'') provides: ``In consideration of the grant of a licence [of the core technology] the investor shall pay to the researcher the licence fee.'' Section 25 (1) of the ITAA 1936 and section 6-5 of the Income Tax Assessment Act 1997 (``ITAA 1997'') provide that the assessable income of a taxpayer shall include, where the taxpayer is a resident, ``the gross income derived directly or indirectly from all sources whether in or out of Australia''.

84. It is contended on behalf of the Applicant that the real value of the licence was less than $2.4 million and the difference between the real value and the $2.4 million was paid in order to maximise the claimable tax losses of Lafoten and IMB Limited. The assessable income arising from payment of the licence fee was limited, it is said, to the real value of the licence. The additional amount was not income assessable to the Applicant.

85. The Applicant relied upon the propositions discussed in
FC of T v The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199 to advance its argument. At ATC pages 4366-4367; CLR page 209 the Court stated:

``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income.... Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business.... The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.''

Again at ATC 4367; CLR 211 it was said:

``Several different strands of thought have combined to deter Courts so far from accepting the simple proposition that the existence of an intention or purpose of making a profit or gain is enough in itself to stamp the receipt with the character of income. The first was the notion that the realization of an asset was a matter of capital, not income. The second was the apprehension that windfall gains and gains from games of chance would constitute income unless the concept of income, apart from income from personal exertion and investments, was confined to profits and gains arising from business transactions. And the third notion, itself associated with the idea that the carrying on of a business involves a systematic series of recurrent acts or activities, was that a gain generated by recurrent transactions is income, whereas a gain generated by an isolated transaction is capital.''

And at ATC 4370; CLR 215 it was stated:

``... Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income.''

86. The Applicant will need to come within the exception discussed in Myer in order to maintain its contention that the real value of the core technology licence was not $2.4 million but considerably less and hence that there has been what is described as a ``windfall gain'' or

ATC 237

as it is called in
FC of T v Montgomery 99 ATC 4749; (1999) 198 CLR 639 an ``inducement payment'' or in
Glennan v FC of T 99 ATC 4467; (1999) 90 FCR 538 an ``increment''. It is maintained that there is ``some similarity [to an inducement payment] with the amount added on to the core technology licence''.

87. This contention is basic to the argument referable to the reasonableness of the Venning valuation. Reliance is placed upon the commentary on the valuation made by Mr Banks (Exhibit 48, pages 2-3) and the cost of capital being adjusted so that any valuation made by Professor Officer would be less than that of Mr Banks (Exhibit 42).

88. It is of note to mention the evidence of the managing director of the Applicant in paragraph 8(b) of his statement of 4 February 2005 (Exhibit J) where he says that ``accordingly I did not consider the amount of $2.4 million extraordinary'', this in the context of the Applicant group of companies at that time being involved in ``deals worth millions of dollars'' and having sold a patent in 1989 for $3.25 million.

89. For the reasons earlier given when considering the valuation of the licence of the core technology, the Tribunal is satisfied that a valuation of $2.4 million for the technology licence was open to the parties to accept. The real value of the licence was not significantly less than a value of $2.4 million.

90. The licence which was granted was an exclusive licence to perform research and development of the core technology. The investor appointed the Applicant as researcher to conduct a program of research and development in relation to the technology with a view to deriving commercially marketable technology. In determining whether an amount has the character of income it is necessary, so submitted the Respondent, to look at that amount and determine its character in the hands of the taxpayer and where a taxpayer is carrying on business, to determine the nature of the taxpayer's business and the relationship of that payment to that business (
Richard Walter Pty Limited v FC of T 96 ATC 4550 at 4563-4564; (1996) 67 FCR 243 at 260). It is the quality of the payment of benefit in the taxpayer's hands viewed from the standpoint of the taxpayer that must be ascertained (
FC of T v The Myer Emporium Ltd 87 ATC 4363 at 4370; (1986-1987) 163 CLR 199 at 216). The test is objective. The taxpayer's motives for entering into the transaction are not determinative (
FC of T v Cooling 90 ATC 4472 at 4479; (1990) 22 FCR 42 at 50).

91. The Applicant was part of a group of companies, and development was a part of the group's business. The group developed, patented and commercialised nine products of which two had been particularly successful. It was a major part of the Applicant's business to grant licences of its products and develop technology in the building and construction industry. The receipt of the licence fee of $2.4 million had the character of income.

5. Penalty Tax sections 226G, 226H

92. The ITAA 1936 relevantly provides:

``SECTION 226G PENALTY TAX WHERE SHORTFALL CAUSED BY LACK OF REASONABLE CARE

Subject to this Part, if:

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

(b) the shortfall or part of it was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.

SECTION 226H PENALTY TAX WHERE SHORTFALL CAUSED BY RECKLESSNESS

Subject to this Part, if:

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

(b) the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part.

...

SECTION 226K PENALTY TAX WHERE UNARGUABLE POSITION TAKEN

Subject to this Part, if:

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

ATC 238

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

(c) the shortfall or part, as the case may be, so caused exceeded whichever is the higher of:

(i) $10,000; or

(ii) 1% of the taxpayer's return tax for that year; and

(d) when the statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part.''

93. The Respondent imposed a penalty tax at the rate of 50 per cent of the amount of the tax differential on the basis that the shortfall was consequential upon the recklessness of the Applicant. The Applicant contends that it used reasonable care and the penalty tax should be nil. Alternatively, it was argued that the Applicant may have failed to take reasonable care in which case the penalty should be 25 per cent of the amount of the tax shortfall. In either case the penalty should be remitted in whole or in part. The evidence of the managing director of the Applicant (Exhibit J, paragraph 53-54) is to the effect that the Applicant retained a firm of Chartered Accountants in order to prepare financial statements and tax returns. The Applicant employed an in-house accountant who prepared relevant documents for the tax accountant. At the time of the 1994 financial year return being prepared in about August or September of that year, the managing director told the tax accountant that he had not received anything from the project and ``I think the deal has fallen over. It was too good to be true''. Indeed at that time the Applicant had not received any funding under the scheme. At the time of the 1995 year return being prepared, the managing director does not recall the tax accountant asking him ``any question about the research and development project''.

94. The tax accountant himself said in this regard that whilst not having a specific recollection as to the 1994 or 1995 years, it is normal procedure to take possession of relevant books and records and draft financial statements and tax returns from them. If there were any queries he would have asked the relevant person employed by the Applicant. He said that ``he also occasionally'' would speak with the managing director directly in order to resolve some queries. In reference to the 1994 year, he says that one of the matters he raised with the managing director was ``whether anything had happened with the AusAsean syndicate'' to which the reply was ``not yet''. The tax accountant ``did not record any income received by [the Applicant] from the syndicate for the financial year ended 30 June 1994''. With reference to the 1995 year he noticed that money had been received by the Applicant and when he asked the managing director a question in relation to this money, he was told ``it is money from the AusAsean research and development syndicate. We received the money and then spent it on research and development''. The accountant then asked ``what about the rest of the syndicate money?'', to which the managing director replied: ``There is no other money. I am in dispute with the investor. The scheme has fallen over.'' (Exhibit L). The money in fact received was recorded. No other entries were made.

95. The amount of the adjustments in respect of the relevant years were as follows:

Year	Taxable Income	Primary Tax	Penalty
1995	785,311	259,152.63	129,576.31
1996	381,463	137,326.68	68,663.34
2000	210,362	75,730.32	37,865.15

96. It is true that in 1994 the Applicant was informed of the taxation implications of the research and development scheme and of the deposit money and interest thereon being taxable income. The transaction was ``to generate assessable income in the hands of the research'' (Exhibit 5/page 2). This information was also given to the tax accountant.

97. However, the events of 1995 and the cessation of the development led to the Applicant being of the belief that the syndicate project was terminated. The Applicant did not receive on a yearly basis or at all notices or advices as to the interest that was being credited to its account with ABN AMRO, even be it the

ATC 239

transaction documents made provision for interest to be paid.

98. Whilst it is not a defence for the Applicant to say that it employed a tax accountant to handle its taxation affairs, the Applicant's managing director and the tax accountant discussed the development project and both believed that there was no need to enquire further. The Tribunal accepts that the Applicant did not apply its corporate mind to the need of declaring the receipt of the licence fee or the interest. It did not deliberately seek to avoid disclosure. The Tribunal does not consider that the Applicant was reckless in its non-disclosure. It clearly however, as did the tax accountant, failed to take reasonable care. The penalty should be imposed at the rate of 25 per cent of the tax shortfall.

6. INTEREST

99. The Applicant is liable to pay the general interest charge on the tax shortfalls pursuant to section 170AA(4)(a) of the ITAA 1936. In respect of the years ending 30 June 1995 and 30 June 1996, the Respondent imposed interest in the amount of $352,201.

100. The Applicant contended that the principal reason for the large interest component was the delay of the Respondent in investigating the situation and issuing the amended assessments. In light of the matters raised under contention 5 above, it is submitted that a significant part of the interest should be remitted.

101. In his supplementary statement (Exhibit K) at paragraphs 14 and 15, the managing director of the Applicant says that in relation to the syndicate and the tax returns of the Applicant, he cooperated with the Respondent in Sydney and Canberra at their request and was prompt in responding to their correspondence. He maintains that apart from the present dispute, the Applicant has always complied with the Australian taxation laws and has submitted its tax returns on time. Further, all tax obligations, with the exception of those the subject of the present applications, have been duly paid.

102. The Respondent maintained that there is no jurisdiction in the Tribunal to consider this contention of the Applicant as it did not form part of the assessment and there is no objection right available to the Applicant. In support of this contention, the Respondent referred to section 170AA(13) of the ITAA 1936 which read:

``The ascertainment of an amount of interest under this section shall be deemed not to be an assessment within the meaning of any of the provisions of this Act.''

The Respondent did not advance any other argument in relation to the remission of interest.

103. Pursuant to section 14ZZA of the Taxation Administration Act 1953 (``the TAA''), the Tribunal has jurisdiction to review a reviewable objection decision. Section 14ZQ of the TAA defines a ``reviewable objection decision'' to mean an objection decision with the exception of various decisions not presently relevant. An ``objection decision'' is the response to a taxation objection: s. 14ZY of the TAA. A ``taxation objection'' is made by a person who is dissatisfied with an ``assessment, determination, notice or decision'' (s. 14ZL of the TAA).

104. Section 175A of the ITAA 1936 provides that a taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the TAA. An ``assessment'', as defined in section 6 of the ITAA 1936, does not include the general interest charge referred to in section 170AA of the ITAA 1936 (see Case 11/2004,
2004 ATC 220 andCase 5/2005,
2005 ATC 151;
[2005] AATA 300).

105. It should be noted that section 170AA(13) of the ITAA 1936 was repealed by the Taxation Laws Amendment Act (No. 3) 1999 and was substituted for the new section 170AA(9), which reads:

``(9) Unless the contrary intention appears, in sections 172, 205, 206, 215, 216, 254, 255, 258, 259 and 265, but not in any other section, income tax or tax includes the general interest charge payable under this section.''

Thus, only in those sections listed in subsection (9) (none of which are relevant to the decisions under review) and unless the contrary intention appears, does ``income tax'' or ``tax'' include the general interest charge.

106. Under Part VII - Penalty Tax of the ITAA 1936, section 227 provides for the assessment of additional tax payable by a

ATC 240

person and gives the Commissioner the discretion to remit the whole or any part of that additional tax. It is clear from the construction of the legislation that the general interest charge does not form part of the ``additional tax'' which a taxpayer may be required to pay.

107. Accordingly, the Tribunal finds that the general interest charge is not part of the assessments and is satisfied that it does not have jurisdiction to consider the remission of the general interest charge.

Decision

108. The onus of proving that the assessments are excessive lies upon the Applicant, although as has been earlier indicated in these reasons and as it was put in Richard Walter Pty Limited v FC of T (supra) at ATC 4552; FCR 246 ``the evidentiary onus in a particular case may shift from time to time''. In the present applications, the Applicant has the burden of establishing the various matters raised by it in its contentions. If this burden is discharged and it is established that a contention made by the Applicant has merit then the Applicant may well succeed. It remains however that the burden of proving that an assessment is excessive lies upon the taxpayer.

109. For the reasons given with reference to each of the contentions 1 to 4 raised by the Applicant, the decisions under review are affirmed. The Applicant has not discharged the onus resting upon it. With reference to the matters raised in contention 5 and for the reasons set forth when discussing that contention the Tribunal is satisfied that the imposition of penalty tax at the rate of 50 per cent was not warranted in the circumstances of this matter and that the rate of penalty should be 25 per cent and be accordingly remitted to this extent. With reference to contention 6 the Tribunal is satisfied that it does not have jurisdiction to review the imposition of interest referrable to the relevant years.

JUD/2005ATC213 history

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