EGAN v FC of T

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2001] AATA 449

Decision date: Melbourne, 25 May 2001

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BH Pascoe (Senior Member)

These are applications to review decisions which disallowed objections to amended assessments of income tax for the years ended 30 June 1995, 1996 and 1997. The amended assessments were issued to increase taxable incomes by $107,466, $99,841 and $61,165 respectively as being income derived from the provision of personal services. Such net income had been included in returns of income lodged by the Tenth Mounpro Pty Ltd (``TM''), a company controlled by the applicant and his wife.

2. At the hearing the applicant, Mr M.J. Egan, was represented by Ms J. Batrouney SC, assisted by Ms A. Ionides of counsel and the respondent by Ms H. Symon SC, assisted by Mr T. Murphy of counsel. Evidence was given by Mr Egan; his wife, Mrs K.L. Egan; an associate, Mr D.J. Doubtfire, and an information technology project manager, Mr J.R. Moxon. The Tribunal had the documents provided by the respondent pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'') (T1-T338).

3. Mr Egan said that he commenced in information technology (``IT'') when employed by Victoria Police. After completing a degree in computer science he joined the ANZ bank in 1986. He and his wife established TM in 1987 which provided IT services to Australian Wheat Board. In 1988 a contract for services was entered into with the Shell Company of Australia Ltd (``Shell''). After several extensions of the contract, Mr Egan commenced full-time employment with Shell from 1990 to 1993. During this time TM entered into a contract to develop computer software for a food company. Mr Egan met Mr Doubtfire at Shell. In 1993 the two agreed to establish a company, Australian OutSourcing Pty Ltd (``AOS''), to be owned in equal share by TM and a company owned by Mr and Mrs Doubtfire, 81st Patriot Pty Ltd (``81P''). Mr Egan said that both TM and 81P had their own clients and it was agreed that both companies would provide contracting services to AOS for an equal fee with any surplus profits retained for development of AOS. It was decided that the initial funding of AOS would be by loan accounts from TM and 81P funded from each company's bank overdraft. Mr Egan said that, initially, it was agreed to pay each of TM and 81P 50 percent of the divisible profit of AOS in monthly instalments. Subsequently, it was agreed that each would be entitled to a fixed amount, called a management fee, of $11,000 per month. It was said that this amount was to be paid irrespective of the hours worked or availability of either Mr Egan or Mr Doubtfire. The first major assignment of AOS was with Telstra Corporation (``Telstra'') to implement a data storage management system. One requirement of the contract was that any contractor intending to work on the project had to sign a confidentiality agreement. The contract provided for an hourly rate fee. The project manager of Telstra was Mr Moxon who negotiated the contract. Mr Egan said that, initially, he was the only contractor and was the only person to sign the confidentiality agreement. He said that, after commencing in July 1993, he realised that further contractors were required and, over the five years of the contract, four additional contractors signed the confidentiality agreement and worked on the project. Mr Egan said that he was the technical team leader and the architect of the project but all AOS contractors were involved with its implementation.

4. Mr Egan said that, during the course of the project, Mr Doubtfire continued to seek further work for AOS. In the year ended 30 June 1995 gross revenue of AOS was $680,114 of which the Telstra project contributed $369,000 with the balance from five other clients and the sale and maintenance of commercial software

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packages. In the year ended 30 June 1996, gross revenue was $887,957 with Telstra contributing $493,000 and the balance from four other clients and software packages. For the year ended 30 June 1997, gross revenue of $1,048,995 came from Telstra, $635,000, seven other clients and software packages.

5. Mr Egan said that he undertook a considerable amount of work in developing, programming, installation and support of software developed or licensed by AOS. He was the author of a three day course in Hierarchical Storage Management which was subsequently taught at Telstra by another contractor to many of Telstra's technical staff. He maintained that his typical work involved 70 to 80 hours on AOS work, of which 40 hours on average was billed to Telstra. Several other contractors were engaged by AOS to provide services to clients of AOS and to assist in the development of services.

6. Since June 1997, AOS has leased office premises in South Melbourne and, currently, has three employees at that office. While Mr Egan said that both he and Mr Doubtfire supervise staff, the principal administrative responsibility is with Mr Doubtfire, with Mr Egan being the main technician. He said that neither provide time sheets for AOS-related work other than details of time which can be directly charged to clients. He said that, while working at Telstra, he would receive up to seven or eight telephone calls a day relating to other clients and business of AOS.

7. Mr Egan maintained that his wife, Karen, was responsible for all bookkeeping and financial affairs of TM and acted as a communication link with Mr Doubtfire when Mr Egan was overseas or interstate. He acknowledged that during the years ended 30 June 1996 and 1997, his wife also worked part- time with the ANZ bank. Mr and Mrs Egan live in a country area over three hours drive from the office. TM rented a house in Wantirna, a suburb of Melbourne, at which Mr Egan would stay during week days. In March 1996, TM Superannuation Fund acquired a house in suburban Preston which Mr Egan used for 12 months.

8. In 1998, EMC Corporation acquired a 20 per cent interest in AOS. Mr Egan said that EMC required some formalisation of the arrangement between TM, 81P and AOS. At the time no written agreements were in existence. He said that they based the wording of contracts between AOS and TM and between AOS and 81P on one previously used for a subcontractor. These contracts, although clearly not prepared until at least 1998, showed a commencement date of 1 January 1995. The TM contract named TM as a contractor to perform consultancy services through capable personnel to AOS for a fee of $11,000 per month. In January 1999 AOS purchased the business of Integrity Consulting Group Ltd to secure business in open system platforms.

9. Mr Egan said that TM owns computers, a fax machine, printers and other office equipment located at his home for use by himself and his wife and used on a daily basis. TM owns two motor vehicles. In the year ended 30 June 1995, TM showed fees received of $158,275 and a net profit of $38,664 after salaries of $42,744 to Mr Egan and $28,496 to Mrs Egan and superannuation contributions for both totalling $15,550. In the year ended 30 June 1996, gross fees were $132,000, net loss of $96, salary Mr Egan $22,740, salary Mrs Egan $15,160 and superannuation contribution $35,477. In the year ended 30 June 1997 the figures were gross fees $121,013, net profit $8,618, salary Mr Egan $50,000, salary Mrs Egan $15,000 and superannuation $6,750. The balance sheet of TM at 30 June 1997 showed:

Issued Capital                           $     2
Accumulated profit                         5,515
                                          ------
                                           5,517
                                          ------
Motor Vehicles                            46,008
Furniture & Fittings                       2,644
Shares in a private company                    6
Loan AOS                                   2,000
Loan J & K Egan                           37,389
Prepayments etc                            9,132
                                          ------
                                          97,179
Bank loans etc                 57,748
Provision for Dividend         30,811
Provision for Tax               3,103     91,662
                               ------     ------
                                           5,517
                                          ------
      

Mr Egan acknowledged that salaries were based on the income less expenses but could not explain how they were purportedly set by resolution of directors dated the first day of the financial year. He acknowledged, also, that payment by the company on the private housing

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loan and other private expenditure had been classified as salary.

10. Mrs Egan gave evidence that she was involved in the establishment of TM and negotiated an overdraft facility for the company. She was involved, also, in the discussions which culminated in the establishment of AOS. She said that her predominant role was that of financial controller of TM and personal assistant to Mr Egan. She said that she does ``occasional things'' for AOS such as writing cheques and taking telephone calls for her husband. Mrs Egan accepted that TM would have no business without her husband. She worked as a part-time teller at the ANZ bank during the years ended 30 June 1996 and 1997 involving 10 to 15 hours per week. Mrs Egan considered that she spent at least the same number of hours per week for TM although no records of hours were maintained. She acknowledged that not a great deal of time was spent on the telephone relative to TM or AOS.

11. Mr Doubtfire gave evidence similar to that of Mr Egan relating to the establishment of AOS. He said that he believed it was mutually understood that TM and 81P would not provide services outside AOS unless it was something that AOS would not want to do. He instanced services provided by his wife to market a range of magazines. Mr Doubtfire did not consider the $11,000 per month paid to TM and 81P as dividends but as management fees for services provided by the two companies. He said the amounts were what AOS could afford to pay, although considerably lower than the amounts he and Mr Egan could earn in the marketplace and lower than amounts paid to most contractors engaged by AOS. Mr Doubtfire said that he heard of a possible Storage Management System (``SMS'') contract with Telstra and AOS made a successful bid for the contract in 1993. He accepted that Mr Egan was crucial to that contract to provide the initial project design and scope and to manage the project. He said that the contract required different technical, logistics and business skills and additional staff had to be found to complete the project. Mr Doubtfire said that his own role in AOS became management, administration and seeking new business. The role of Mr Egan was primarily the technical management of the more significant projects.

12. Mr Moxon was the project manager of the SMS project in 1993 who selected AOS for the SMS contract. He said he selected AOS because, through Mr Egan, it exhibited the requisite knowledge and capabilities in the storage management area and had the ability to provide additional resources as required to complete the project. He said that Telstra policy required each individual contractor who would be logging on to Telstra systems to execute an individual Confidential Information Undertaking. He said that he had always regarded Mr Egan as a principal partner of AOS rather than an individual contractor. He believed that both Mr Egan and Mr Doubtfire were important for AOS to deliver on its contract.

13. In issuing the relevant amendments of income tax for the years ended 30 June 1995, 1996 and 1997 and in the decision on the objections to those amended assessments, the respondent had relied on Part IVA of the Income Tax Assessment Act 1936 (``the Act''). In the reasons for decision, the scheme to which Part IVA was said to apply was the:

``... arrangement under which income from your personal services is diverted to associates including the Tenth Mounpro Superannuation Fund Pty Ltd and in combination with the retention of profits within the company structure, substantially less income was paid to you.''

Included in the elements which were said to constitute the scheme was the incorporation of TM and the employment by TM for supplying Mr Egan's ``personal services to Telstra via AOS''. The audit report (T67) in the respondent's documents referred to Mr Egan as having worked ``under contract, through an agency, for Telstra'' and that ``all the taxpayer's consultancy income was in relation to the Telstra contract through AOS'' and ``income received from AOS directly in respect of John Egan's consultancy work with Telstra''. The formal determinations attached to the respondent's letter of 12 August 1999 (T66) made no reference to the specific details of the alleged ``scheme'' but stated that pursuant to section 177F(2) of the Act, the amounts of $115,531, $109,260 and $71,013 were deemed to be included as assessable income for the 1995, 1996 and 1997 years respectively and that, in accordance with section 177F(3)(b) deductions of $8,065, $9,419 and $9,848 were

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allowable. The amounts included as assessable income represented the difference between the gross fees received by TM and the salary from TM to Mr Egan. The deductions allowed under section 177F(3)(b) represented part of the expenses shown in the TM profit and loss account. Excluded from those expenses in arriving at the deductions allowed were salaries, superannuation, car expenses, interest and expenses relative to the residence.

14. The relevant provisions of Part IVA of the Act are:

``177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where-

• (a) a taxpayer (in this section referred to as the `relevant taxpayer' ) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
• (b) having regard to-
  • (i) the manner in which the scheme was entered into or carried out;
  • (ii) the form and substance of the scheme;
  • (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
  • (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
  • (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
  • (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
  • (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
  • (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).''

Definitions of terms used in section 177D which are relevant to this matter are contained in section 177A and 177C(1) as follows:

``177A(1) In this Part, unless the contrary intention appears:

...

`scheme' means:

• (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal proceedings; and
• (b) any scheme, plan, proposal, action, course of action or course of conduct;

...

`taxpayer' includes a taxpayer in the capacity of a trustee.

177A(2) The definition of `taxpayer' in subsection (1) shall not be taken to affect in any way the interpretation of that expression where it is used in this Act other than this Part.

177A(3) The reference in the definition of `scheme' in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan,

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proposal, action, course of action or course of conduct, as the case may be.

177A(4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons.

177A(5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

...

177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to-

• (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

...''

The relevant operative provisions are contained in section 177F as follows:

``177F(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may-

• (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or
• (b)...

177F(2) Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.

...

177F(3) Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the `relevant taxpayer' )-

• (a)...
• (b) if, in the opinion of the Commissioner-
  • (i) an amount would have been allowed or would be allowable to the relevant taxpayer as a deduction in relation to a year of income if the scheme had not been entered into or carried out, being an amount that was not allowed or would not, but for this subsection, be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income; and
  • (ii) it is fair and reasonable that that amount or a part of that amount should be allowable as a deduction to the relevant taxpayer in relation to that year of income,

  determine that that amount or that part, as the case may be, should have been allowed or shall be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income; or

• ...''

15. It was submitted for the applicant that TM was established by Mr and Mrs Egan in 1987, well prior to any contemplation of AOS or a contract with Telstra and could not be said to be part of any scheme relative to those later arrangements. It was said that what TM received in the three years to 30 June 1997 was a profit share from the net profit of AOS derived from a variety of sources, only one of which was Telstra, and not for the provision of Mr Egan's personal services. Alternatively, it was said that the fees paid by AOS were for access to the overdraft facility of TM and the provision of office equipment and expertise of

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TM. Ms Batrouney argued that the respondent had identified the scheme as diversion of fees from Telstra but that this approach appeared to ignore the fact that AOS derived income from other sources, the fee was paid by AOS to TM and that an equal fee was paid to 81P, a company owned by Mr and Mrs Doubtfire. It was submitted that AOS was carrying on a commercial business and it could not be said that the contract between AOS and Telstra was established or carried on with the dominant purpose of obtaining a tax benefit or to supply the applicant's personal services to Telstra through AOS for such a purpose.

16. For the respondent it was submitted that, while AOS had a commercial reason to exist in combining the talents of Mr Egan, Mr Doubtfire and other consultants for an economic result, TM was not capable of providing anything other than the skills of Mr Egan. It was said that the only purpose for the existence of TM was to insert it between AOS and Mr Egan, to receive payment for his services. It was submitted that the payment was not made to TM in its capacity as a shareholder but solely as payment for the provision of the personal services of Mr Egan. Ms Symon argued that the contract prepared as a result of negotiations with EMC and said to have formalised the arrangement between TM and AOS was solely a contract for the provision of services of Mr Egan as a consultant and for no other services. It was argued further that there was no evidence of anything else provided by TM other than Mr Egan's personal services. There was said to be no commercial reason for Mr Egan to accept such a low salary from TM and it must be seen as being tax driven. While the payments to TM and 81P were equal, it was put that this was simply an agreed basis by Mr Egan and Mr Doubtfire for the remuneration of their respective personal services. Ms Symon maintained that Mr Egan had the benefit of the fees paid to TM by way of his salary, a salary to his wife that could not be justified commercially, superannuation contributions for the benefit of his wife and himself and domestic expenses debited to a loan account.

17. This case has been somewhat confused by the respondent having referred to the services to Telstra by Mr Egan. I have no difficulty in finding that the fees paid by Telstra were paid to AOS under a commercial contract to a company carrying on a business of providing such services using a number of contractors. While it is clear that the particular expertise of Mr Egan was an essential factor in obtaining the Telstra contract, this is no different to many contracts of service by a professional and commercial organisation where the particular attributes of a principal, partner or employee were the reasons for the client selecting such organisation. The respondent accepted, in my view quite properly, that AOS was such a commercial organisation carrying on a business of providing consulting services and the development of commercial software. However, irrespective of what was said in the various documents of the respondent prior to the hearing, it is clear that what has been included in the income of Mr Egan in the amended assessments in dispute, is the fee paid by AOS to TM. It is equally clear that this fee is in respect of services provided to AOS which has enabled AOS to derive income from Telstra, several other clients and the sale of software. The question is whether that fee paid to TM can be included in the assessable income of Mr Egan pursuant to section 177F(1)(a) of the Act.

18. The elements which must be found for Part IVA of the Act to apply can be summarised as:

• • the existence of a scheme entered into after 27 May 1981
• • a taxpayer obtaining a tax benefit
• • the scheme being entered into for the dominant purpose of obtaining a tax benefit.

In this case it is clear that the technical expertise of Mr Egan was the principal or sole reason which enabled TM to derive fees. I do not find that the incorporation of TM in 1987, some six years prior to the establishment of AOS and its first major contract with Telstra as significant in dealing with the 1995, 1996 and 1997 assessment. Little information was provided as to what TM did in that intervening period other than it earned some relatively modest fees. It would seem that the respondent has not sought to apply Part IVA in the years prior to the year ended 30 June 1995. If it can be found that the incorporation and use of TM for the receipt of fees from the provision of personal services of Mr Egan had as its dominant motive the diversion of personal services income to his wife and to a corporation with a tax rate lower than his, it may well be that Part IVA could have applied in those prior years if the respondent had chosen to so apply

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that Part. However, no details of the income or how it was dealt with has been provided.

19. What is clear is that Mr Egan provided services over long hours to AOS in assisting to generate the income of that company. He received no direct remuneration from AOS. He was a director and one of the two driving forces behind AOS obtaining contracts with Telstra and other clients and the development of commercially saleable software. It is of interest to note that his letter of objection to the amended assessments was on AOS letterhead signed ``Director, Research and Development''. He was not paid director's fees, salary or any other form of income by AOS. It was argued that he provided these services to AOS in his capacity as a director/employer of TM who charged AOS a fee for the services. I am satisfied on the evidence that such fee was for the services of Mr Egan. I am unable to find that any other services were provided by TM to AOS. The contribution of Mrs Egan was minimal in relation to AOS. She signed a few cheques over the years and took messages for and from Mr Egan when he was overseas or interstate. Her contribution to the business of AOS appeared to be little more, if any, than a spouse of a busy consultant might provide.

20. The evidence of Mr Doubtfire was that the fees paid to TM and 81P were what AOS could afford, lower than the amounts which both he and Mr Egan could earn in the marketplace and lower than amounts paid to most other AOS contractors. Given that, it is difficult to accept that Mr Egan regarded his salary from TM of $42,744, $22,740 and $50,000 respectively in each of the three years as an appropriate remuneration for his services. It is to be noted that, in the years ended 30 June 1995 and 1996, his salary was only 50 per cent higher than that of Mrs Egan. It represented 27 per cent of the 1995 fees, 17 per cent of the 1996 fees and 41 per cent of the 1997 fees. As can be seen, it fluctuated significantly over the three years and appeared to have little relevance to the services provided.

21. There is no difficulty in this case in finding that there was a ``scheme'' within the meaning of section 177A(1). There was an arrangement and a course of action in which TM was incorporated to be the recipient of fees from services performed by Mr Egan initially to outside clients and, from 1993 to AOS and clients of AOS. The scheme involved paying Mr Egan a modest salary by TM, paying a salary to Mrs Egan, making superannuation contributions for both and retaining excess income in the company to be taxed at corporate rates. There is no evidence that the salaries paid to Mr and Mrs Egan were based on relative contribution to the income earning of TM.

22. There is, equally, no doubt that Mr Egan obtained a tax benefit from the scheme. His salary from TM was significantly less than the fee paid for his services to AOS. The balance of that fee was used to pay a salary to Mrs Egan, superannuation contributions for both and domestic expenditure which was charged to a loan account in the name of his wife and himself. As a consequence, the whole of the AOS fee was available for the benefit of Mr Egan and his family with a major part of such fee not being included in his assessable income without the application of Part IVA of the Act.

23. The final element required is that the scheme was entered into for the dominant purpose of obtaining a tax benefit. In determining this question, it is necessary to consider the matters set out in clauses (i) to (viii) of paragraph (b) of section 177D. It is relevant to note that there is no evidence that, since the establishment of AOS in 1993, TM has purported to provide services to any person other than AOS. Mr Egan said that TM accepted a contract to develop a software package for a food company in approximately 1989 and this lasted some five years before the food company went into liquidation in early 1994. Total revenue from this contract was approximately $40,000. Even if some of this work was done after the establishment of AOS, it appears unlikely that it was of any great significance. This leaves the predominant or sole role of TM to provide the services of Mr Egan to AOS after 1993 and for the three years in dispute, its sole role. That was the form and substance of the arrangement to have the earnings from the services of Mr Egan to AOS received by TM. I am unable to find that any other service of any significance was provided. As stated earlier, any work for AOS by Mrs Egan was minimal. It was submitted that TM provided the use of assets owned by TM. It appears that TM owns some computer and other office type equipment but the accounts of the company do not show any extensive investment in equipment and all indications are that it was

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no more than a busy computer consultant would have at his home.

24. If it were not for the interposition of TM between AOS and Mr Egan it would have been reasonable to expect that Mr Egan would have derived assessable income for his services provided to AOS in deriving the income of that company. I am unable to find any objective commercial explanation for the fees paid by AOS to be paid to TM other than to enable Mr Egan to spread the earnings between himself, his wife and TM. Consequently, having regard to the matters set out in the clauses (i) to (viii) of paragraph (b) of section 177D, it must be concluded that Mr Egan entered into the arrangement of having the fees paid to TM for the purpose of enabling Mr Egan to obtain a tax benefit.

25. At the hearing of this matter, much was made by Ms Batrouney of the apparent identification of the scheme as a diversion of the fee for services to Telstra. It was argued that the respondent could not now change his identification of the scheme to that which diverted fees from AOS. However, the amounts identified in the amended assessments as the assessable income subject to the Part IVA determination are clearly the fees received by TM and it is equally clear that they came from AOS. At the hearing, the respondent's case was that the fees paid by AOS to TM were by way of remuneration for services of Mr Egan and not a distribution to TM as a shareholder or a provider of actual services. In my view the erroneous reference to the Telstra fees is not fatal to the respondent's case. As the High Court said in
FC of T v Peabody 94 ATC 4663 at 4669-4670:

``Under s. 177F(1), the Commissioner's discretion to cancel a tax benefit extends only to a tax benefit obtained in connection with a scheme to which Pt IVA applies. The existence of the discretion is not made to depend upon the Commissioner's opinion or satisfaction that there is a tax benefit or that, if there is a tax benefit, it was obtained in connection with a Pt IVA scheme. Those are posited as objective facts. The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connection of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s. 177F(1) only if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner. An error of a more fundamental kind, however, may have that result - where, for example, it leads to the identification of the wrong taxpayer as the recipient of the tax benefit. But the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connection with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner.

Of course, the Commissioner may be required to supply particulars of the scheme relied on and in this case has supplied them in the form of the ten steps identified by the Commissioner. But the Commissioner is entitled to put his case in alternative ways. If, within a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the requirements of Pt IVA, then in our view there is no reason why the Commissioner should not be permitted to do so, provided it causes no undue embarrassment or surprise to the other side. If it does, the situation may be cured by amendment, provided the interests of justice allow such a course.''

In this case, the tax benefit which the respondent purported to cancel was, in my view, a tax benefit obtained in connection with a Part IVA scheme and is clearly susceptible to cancellation.

26. It is with no disrespect to counsel that I have not referred to many cases regarding the application or otherwise of Part IVA. What is clear from these cases is that the particular arrangement or scheme has to be examined against the factors to be taken into account under section 177D and an objective conclusion reached that the taxpayer entered into or carried out the arrangement or the scheme for the dominant purpose of obtaining a tax benefit. It is the particular facts of the subject arrangement or scheme which leads to such a conclusion. In this case, I have reached such a conclusion.

27. No submissions were made relative to the respondent's determination under section 177F(3)(b) or the quantum of additional tax of 25 per cent imposed under section 226 of the

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Act. Whilst there may be some dispute by the applicant that further expenditure should be allowed pursuant to section 177F(3)(b), no details or submissions were made on that matter at the hearing. At the end of the hearing the parties agreed that, if the Tribunal affirms the determinations of the respondent under section 177F(1), the matter of the determinations under section 177F(3)(b) and the additional tax should be remitted to the respondent for reconsideration under section 42D of the AAT Act. It is clear that additional tax of 25 per cent is appropriate under section 226 but it is equally appropriate to consider section 227.

28. As a consequence, the decisions under review should be affirmed to the extent of affirming the determinations under section 177F(1) of the Act and remitting the matter to the respondent for reconsideration of the determinations under section 177F(3)(b) of the Act and whether any part of the additional tax under section 226 should be remitted pursuant to section 227. Liberty should be granted to the applicant to proceed with a review of the decision on such reconsideration.