CASE 4/2004

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 451

Decision date: 10 May 2004

J Block (Deputy President)

Part A - Introduction and general

1. The decision under review is the disallowance by the Respondent of objections dated 25 February 2000 and 25 May 2001 against assessments in respect of the (substituted) tax years ending 31 December 1992 to 31 December 1995 (both years inclusive) (collectively the ``relevant years'' and each a ``relevant year''); a reference to any relevant year which is preceded by the actual year is a reference to that particular relevant year.

2. The Applicant was represented by Mr R Edmonds SC and Miss E Collins of Counsel instructed by Middleton's solicitors while the Respondent was represented by Mr B Sullivan SC and Mr M Richmond of Counsel instructed by the Australian Government Solicitor.

3. The Tribunal had before it the T- Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with a large number of exhibits; the exhibits, (some of which proved to be of marginal relevance) are as follows:

4. The Tribunal was furnished with detailed and helpful submissions by the parties, in accordance with a schedule arranged by the parties with the Tribunal when hearings ended in February 2004. I have drawn on the submissions in these reasons. The hearings commenced on 5 August 2003 and commenced with a lengthy opening by Mr Edmonds. Evidence was given on 6, 7 and 8 August 2003.

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There was then a postponement until September 2003; after a brief hearing in September 2003, the matter was then further postponed to 9 and 10 February 2004, when evidence was taken. It was at that time that arrangements were made for the delivery of written submissions to be followed by argument on the written submissions; argument was heard on 5 and 6 April 2004.

5. The transcript in respect of the hearings is not numbered sequentially; accordingly references to the transcript are effected by setting out firstly the day of the hearing followed by TS, and the relevant page number. (Accordingly the numbers 5 to 8 refer to the hearings in August 2003 while the numbers 9 and 10 refer to the hearings in February 2004).

6. The matter was heard in confidence. The Applicant agreed that for the purposes of these reasons it is necessary only to disguise the names of the Applicant and certain companies related to it; it is also necessary to disguise the names of the witnesses; furthermore certain companies who were involved in the takeover of the Applicant's holding company (referred to as ``Target''), and also in one case the name of the controller of that company, must similarly be disguised. Disguise is necessary also in relation to the business acquired by the Applicant in 1991 (which is referred to in these reasons as the ``Peter Business''), the names of the vendors (who are referred to in these reasons as ``the vendors'') and also parties who were associated with the vendors; the name of the company which purchased the South Australian retail business of the Applicant has also been disguised. However it is not necessary to disguise the names of companies from whom product was purchased and equally it is not necessary to disguise the names of certain large organisations (such as Telstra and Digicall) with whom the Applicant contracted. Extracts from submissions, the evidence and exhibits have been edited in conformity with this clause 6. A disguised name is generally indicated by including it in quotes when it first appears. In some cases the word ``(blank'') appears to indicate that a name has been deleted and in circumstances where it is not considered necessary to insert a substitute name.

7. Evidence was given on behalf of the Applicant by Mr Black and Ms Light; a witness statement by Mr Charles tendered by the Applicant was accepted on the basis that he was not required for cross-examination. Mr Silver gave evidence on behalf of the Respondent. A disguised name is generally indicated by including it in quotes when it first appears.

8. As a matter of convenience, I commence by including a part only of the Respondent's written submissions dated 11 March 2004, and confined to its content under the heads of ``Summary of Main Issues'' and ``Background''; clauses 3 to 20 read as follows:

``SUMMARY OF MAIN ISSUES

3. The main issues which arise in these proceedings are:

  • (a) the identification of the date in 1991 on which the disqualifying change in the beneficial ownership of shares in Target Limited ( `Target' ), the parent company of the Applicant, occurred;
  • (b) whether the Applicant carried on at all times in each of the relevant years the same business as it carried on immediately before the disqualifying change;
  • (c) whether the Applicant at any time during the relevant years derived income from a business of a kind that it did not carry on before the disqualifying change occurred;
  • (d) whether the Applicant at any time during the relevant years derived income from a transaction of a kind that it had not entered into in the course of its business operations before the disqualifying change occurred;
  • (e) whether the penalties imposed by the Respondent are excessive.

4. On the first issue, the Applicant contends that the relevant date is 21 June 1991 and the Respondent contends that the relevant date is 24 May 1991.

5. The determination of the second issue involves two steps:

  • (a) first, the identification of the business carried on by the Applicant immediately before the disqualifying change occurred;
  • (b) second, the determination of whether at all times during the relevant years, the taxpayer carried on the same business as the one referred to in paragraph (a).

6. The first step requires the Tribunal to determine a preliminary issue, being

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whether the Applicant's business at the date of the disqualifying change included the activities carried on by the Applicant as a consequence of the `Peter Business' acquisition. The Applicant contends that it does and the Respondent contends that it does not, principally for the reason that, prior to 24 May 1991, the Applicant conducted those activities, at most, on a preliminary or investigatory basis - with the consequence that the required degree of commitment to those activities was absent.

7. Irrespective of the Tribunal's finding on that preliminary issue, the Respondent contends that the changes in the Applicant's business after 24 May 1991 were so significant that its business in each of the relevant years was not identical to the business conducted by it immediately before 24 May 1991. The nature of those changes is set out in detail in paras 73 to 77 below and Appendix C. There is a large number of matters with respect to which there occurred changes the nature of which were so substantial as to lead to the conclusion that the Applicant had ceased to carry on the same business. Those matters were:-

  • (a) there was a change in the trade name;
  • (b) there were changes in the geographic scope of the business;
  • (c) there were changes in the brands of goods sold;
  • (d) there were changes in the type of goods sold;
  • (e) there was a significant increase in the volume of sales after mid 1991;
  • (f) there was a significant increase in the number of employees in the business;
  • (g) there was an abandonment of retail sales with the sale to `Campbell' (SA) Pty Limited (`Campbell') in mid 1992;
  • (h) there was a termination of the assembly/manufacturing activities from 1992;
  • (i) there was receipt of payments from Telstra from October 1991 for acting as a Telstra MobileNet distributor;
  • (j) there was a receipt of income for services provided to Digicall;
  • (k) there was the receipt of income from warranty repairs;
  • (l) there was a cessation of importation of goods in late 1992 or 1993;
  • (m) the PhoneSave business commenced in 1994, and was sold as an ongoing business in 1996;
  • (n) there was income from the distribution of Acer fax machines;
  • (o) the Applicant entered into an agreement with Target to obtain from it advisory services for a period of 10 years.

8. The third and fourth issues referred to above will not arise if the Tribunal finds in favour of the Respondent on the second issue. The Respondent contends that the Applicant cannot succeed on these two issues, principally as a consequence of acting as a Telstra MobileNet distributor from October 1991 and (in the case of the 1994 and 1995 years) the conduct of the PhoneSave business activity. [See paras 82 to 88 below].

9. In relation to the fifth issue, there being no error in the Respondent's decision on the objections, the penalties imposed are not excessive.

BACKGROUND

10. The Applicant was incorporated in New South Wales on 5 September 1988. From 15 March 1989 to 24 June 1991 the Applicant was called Target Telecommunications Pty Limited. On 25 June 1991 it changed its name to Applicant Pty Limited.

11. As at 1 January 1991 `Clover' Pty Limited ( `Clover' ), an indirect wholly owned subsidiary of Clover Holding Company Limited, (`Clover Holdings') held 44.9 per cent of the issued capital of Target which was the parent company of the Applicant and a company the shares of which were listed on the Australian Stock Exchange.

12. In February 1991, Clover launched a conditional takeover offer (the `Offer' ) for Target which was declared unconditional on 24 May 1991. By 24 May 1991 Clover was entitled to 86.3 per cent of the issued capital of Target and this increased to 100 per cent of the issued capital by the end of June 1991.

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13. On 30 October 1991, Target changed its name to (blank) Limited. At all relevant times, the Applicant has been a wholly owned subsidiary of Target Limited.

14. The carry forward losses of Applicant as at the end of the year ended 31 December 1991 were $10,365,810 made up as follows: 

   (a) loss incurred in the year ended 31 December 1988 - $   571,232
   (b) loss incurred in the year ended 31 December 1989 - $ 1,734,745
   (c) loss incurred in the year ended 31 December 1990 - $ 4,336,976
   (d) loss incurred in the year ended 31 December 1991 - $ 3,722,857
                                                          -----------
       Total                                            - $10,365,810

15. In the relevant years, the Applicant claimed a deduction under s. 80(2) or s. 79E(3) of the ITAA 1936, as appropriate, in respect of its prior year losses as follows: 

   (a) year ended 31 December 1992 - $ 1,435,993
   (b) year ended 31 December 1993 - $ 3,618,301
   (c) year ended 31 December 1994 - $ 3,151,131
   (d) year ended 31 December 1995 - $ 2,160,385
                                     -----------
       Total                       - $10,365,810

16. In addition, in the year ended 31 December 1995 the Applicant claimed a deduction pursuant to s. 79E(3) and s. 80G(6) for a loss of $3,311,495 transferred from `Applicant (Australia)' Pty Limited ( `AA' ) and a loss of $1,225 transferred from Cranberry, both group companies in relation to Target. The loss transferred from Cranberry is not in dispute.

17. The loss of $3,311,495 referred to in the previous paragraph ( `transferred loss' ) was incurred by AA in the year ended 31 December 1990 and was purportedly transferred to the Applicant pursuant to an agreement under s. 80G of the ITAA 1936 executed on 13 February 1997. Pursuant to s. 80G(6) of the ITAA 1936 the transferred loss is deemed to be a loss incurred by the Applicant in the year ended 31 December 1990.

18. The Applicant has withdrawn its claim to carry forward the losses incurred in the years ended 31 December 1988 ($571,232) and 31 December 1989 ($1,734,745). Accordingly, what is in dispute is the Applicant's claim for deductions in respect of the losses incurred in the years ended 31 December 1990 ($4,336,976) and 31 December 1991 ($3,722,857) and the transferred loss ($3,311,495).

19. Under ss 80(2) and 79E(3), losses are taken to be recouped in the order in which they were incurred. Accordingly, the loss year and the recoupment year for each of the prior year losses at issue here are as follows: 

   +------------------------------------------------------------+
   | Loss year  | Amount of loss | Recoupment | Amount of loss  |
   |            |   incurred in  |    year    |   recouped in   |
   |            |    loss year   |            | recoupment year |
   |------------------------------------------------------------|
   | 31/12/1990 |   $4,336,976   | 31/12/1992 |   $1,435,993    |
   |            |                | 31/12/1993 |   $2,900,983    |
   |------------------------------------------------------------|
   | 31/12/1991 |   $3,722,857   | 31/12/1993 |     $717,318    |
   |            |                | 31/12/1994 |   $3,005,539    |
   +------------------------------------------------------------+

20. In relation to the transferred loss, the loss year and the recoupment year were the years ended 31 December 1990 and 31 December 1995 respectively.''

(I have edited the content of clause 8 to remove references to clauses of the submissions not included and also so as to remove footnotes; that content is, in the main, not controversial).

9. In the interests of balance I also include, in respect of the Applicant's written submissions dated 11 March 2004, its content under the head of ``Facts'' (but confined to those in Part A)

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edited on the same basis and consisting of clauses 1 to 7:

``Facts

1. On 28 February 1991, Clover lodged a Part A Statement with the Australian Securities Commission stating that offers were to be made, in the form attached, in respect of all shares in Target which Clover did not hold.

2. At that time Clover directly held 8,128,867 fully paid ordinary shares in Target representing 44.81 per cent of its issued ordinary capital.

3. At that time, `Tammany' Pty Limited [ `Tammany'] [a company associated with `Mr Jones'] directly held 3,482,250 fully paid ordinary shares in Target representing 19.20 per cent of its issued ordinary capital.

4. On 26 February 1991 Clover, Tammany and certain other shareholders entered into an Election Agreement under which Tammany and those other shareholders elected to receive bills of exchange issued by Cranberry in lieu of cash as the consideration for acceptance of the offer.

5. On 24 May 1991 Clover's offer was declared unconditional.

6. On 30 May 1991 Clover extended the period during which the offer remained open for acceptance from 31 May 1991 to 21 June 1991.

7. On 21 June 1991, Cranberry issued Bill of Exchange No. 12 as the consideration for Tammany's acceptance of the offer; this was within the time period specified within clause 5 of Schedule A to the offer behind the Part A Statement that is Annexure C to Ex A8.''

(I have edited the content of this clause 9 so as to eliminate references to evidence).

10. It is clear that it would always be necessary (having regard to the summary of issues set out previously) to establish the date of the disqualifying change in more than 50 per cent of the shares in Target, in order to establish the nature of the Applicant's business before and after the disqualifying change (referred to as ``the relevant change'') and for the purposes of the test contained in section 80E of the Income Tax Assessment Act 1936 (the ``Act'' or ``ITAA''). The Respondent contended that the Applicant bore the onus of establishing the date of the relevant change. The position was complicated by the fact that the share register of Target could not be located. The hearings in August 2003 ended on the basis that the Applicant would make further enquiries. Mr Charles' witness statement and being Exhibit A14 was produced thereafter in September 2003.

12. By the time that the hearings resumed in February 2004 the parties had reached agreement as to two specific matters. In the first place (and see clause 18 of the Respondent's submissions cited previously) the Applicant withdrew its claim to carry forward losses incurred in the years ended 31 December 1988 and 31 December 1989, and the objection decision under review can be considered having been dealt with to this extent accordingly. In the second place and notwithstanding a number of statements as to the fact that the relevant change occurred on an earlier date (and to be referred to later in these reasons in a different context), the parties agreed that the relevant change took place either on 24 May 1991 (the ``earlier date'') (as contended by the Respondent) or on 21 June 1991 (the ``later date'') (as contended by the Applicant). In these circumstances it is not necessary to refer to a chronology of relevant events in the take-over prepared by the Respondent and included in its written submissions. The question of which date is the correct date relates in turn to the purchase by Clover from Tammany (a company controlled by Mr Jones) of a 19.14% shareholding interest in Target. Tammany had entered into an Election Agreement with Clover pursuant to which it had agreed, inter alia, that it would upon the sale of its shareholding to Clover accept a bill of exchange by Cranberry, a company related to Clover. Clover was at all relevant times a subsidiary of Clover Holdings. The bid by Clover became unconditional on the earlier date and most selling shareholders in Target received payment for their shares within a short time thereafter; however Tammany received its bill of exchange on the later date. It may be noted in passing that some years later a cash payment was made in settlement of that bill of exchange and other bills of exchange issued in similar circumstances. In accordance with the offer the voting rights in respect of Tammany's shares passed to Clover on the earlier date. As to whether the relevant change

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took place on the earlier date or the later date did not in the context of the case as a whole seem to be material (and indeed both sides said as much during closing submissions); however this issue elicited a considerable volume of written and oral argument.

13. As to whether the relevant change took place for the purposes of section 80E(1) of the Income Tax Assessment Act 1936 (the ``Act'') on the date of contract, and being the date on which the bid was declared unconditional (the earlier date) or the date of payment and when the bill of exchange was delivered (and being the later date) is a question of law which is dealt with in Part B.

14. Much time was taken up by a consideration of the Peter Business which was acquired by the Applicant in 1991. The precise date of acquisition is an important issue and which is dealt with later in this decision.

15. Mr Black's original witness statement was dated 27 November 2002 and it was accompanied by a large number of annexures. However an amended witness statement dated 4 August 2003 and including an amended annexure E and two new annexures JA and JB was tendered as Exhibit A8. Mr Sullivan objected to a number of contentions contained in Exhibit A8. Deletions conceded by Mr Edmonds were made in respect of clause 25 and 26 of that Exhibit; in particular the words ``as provided in clause 2.3 of the formal agreement for purchase (annexure I)'' and the words ``in May 1991'' were deleted from clause 25. In addition the Tribunal directed the deletion of the last sentence of clause 8.

16. The Applicant is entitled to claim a deduction for losses incurred by it in the 1990 and 1991 years or to claim a deduction for the transferred loss deemed to have been incurred by the Applicant in the 1990 year if it satisfied the continuity of ownership test set out in section 80A of the Act (and it was common cause that there was a relevant and disqualifying change) or if it did not satisfy the continuity of ownership test, if it satisfied the continuity of business test set out in section 80E of the Act. Because the Applicant was a wholly owned subsidiary of Target the relevant test is found in section 80A(3) and not 80A(1) of the Act; since there is no issue in this context it is unnecessary to quote the text of section 80A of the Act.

17. The continuity of business test is set out in section 80E(1) of the Act; section 80E is set out as follows:

``Losses of previous years may be taken into account where company carries on same business

(1) Subject to subsection (2), where:

  • (a) the whole or part of a loss incurred by a taxpayer, being a company, in a year before the year of income would not, but for this section, by reason of a change that has taken place in the beneficial ownership of shares in the company or in any other company, be taken into account for the purposes of section 79E, 79F, 80, 80AAA or 80AA;
  • (b) the first-mentioned company carried on at all times during the year of income the same business as it carried on immediately before the change referred to in paragraph (a) took place; and
  • (c) the first-mentioned company did not, at any time during the year of income, derive income from a business of a kind that it did not carry on, or from a transaction of a kind that it had not entered into in the course of its business operations, before the change took place;

sections 80A and 80DA do not prevent the whole of the loss being so taken into account.

(2) Subsection (1) does not apply in respect of a loss incurred by a taxpayer being a company in a year before the year of income if:

  • (a) before the change took place, the company commenced to carry on a business that it had not previously carried on or entered into, in the course of its business operations, a transaction of a kind that it had not previously entered into; and
  • (b) the company commenced to carry on that business or entered into that transaction for the purpose, or for purposes that included the purpose, of enabling the company to take into account, by virtue of subsection (1), for the purposes of section 79E, 79F, 80, 80AAA or 80AA a loss that the company had incurred in a year before the first-

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    mentioned year or might incur in the first-mentioned year.''

It may be noted that whereas subsection (2) contains a test of purpose subsection (1) does not.

18. Clause 27 of the Respondent's written submissions dated 12 March 2004 reads as follows:

``27. It will be seen that s. 80E(1) will only be satisfied if four requirements satisfied:

  • (a) a change has taken place in the beneficial ownership of shares in the taxpayer or another company which, apart from s. 80E, would disqualify the taxpayer from claiming a deduction for a prior year loss (the `disqualifying change' );
  • (b) the taxpayer carried on at all times during the recoupment year the same business as it carried on immediately before the disqualifying change took place ( `same business test' );
  • (c) the taxpayer did not at any time during the recoupment year derive income from a business of a kind that it did not carry on before the disqualifying change took place ( `new business test' );
  • (d) the taxpayer did not at any time during the recoupment year derive income from a transaction of a kind that it had not entered into in the course of its business operations before the disqualifying change took place ( `new transaction test' ).''

Part B - The date of the relevant change

19. The contest between the earlier date and the later date is of course and as indicated previously, a contest between the date of contract and the date of payment. (It may be noted in this context that Mr Edmonds in opening said at 5 TS 47:

``What we will ultimately submit, Deputy President, is that the onus we carry to show when the relevant change in beneficial ownership occurred is that on the balance of probabilities the evidence would suggest that the change in the beneficial ownership of the shares, giving rise to the disqualifying event, was after 24 May 1991, but a few days before 31 May 1991.''

I make this point in order to demonstrate that in August 2003 the question of when the relevant change took place was still an important and unresolved issue; it was only at a later stage that the parties agreed that the Tribunal must decide only whether it occurred either on the earlier date or the later date. Subsequently and despite this opening statement by Mr. Edmonds, the Applicant contended that the relevant change took place on the later date, and being 21 June 1991.

20. In
Haque v Haque [No. 2] (1965) 114 CLR 98, Kitto J said (at 124):

``In each instance the deceased had the legal title to the land at his death, and subject to the contract he held it for his own benefit absolutely. But by the operation of well known equitable principles the making of the contract had to an extent transferred the beneficial ownership to the purchaser . The deceased was not a mere trustee for the purchaser, but his position was something between that of a mere trustee and a mortgagee. He could exercise for his own benefit such rights with regard to the land as were consistent with the contractual rights of the purchaser until payment of the purchase money in full, and until that event he had a lien or charge for the unpaid purchase money: see Lysaght v Edwards...''

(Underlining added)

This passage was approved by both the majority in
KLDE Pty Ltd (in liq) v Commr of Stamp Duties (Qld) 84 ATC 4793 at 4797; (1984) 155 CLR 288 at 296 and by Brennan J in his dissenting judgment at ATC 4800; CLR 301.

21. In
FC of T v Linter Textiles of Australia Ltd (in liq) 2003 ATC 4458 the question was whether the making of a winding up order in relation to Linter Group Limited had the result that it ceased to be the beneficial owner of its shares in the taxpayer (the loss company) with the consequence that the continuity of ownership test in section 80A(1) could not be satisfied. Hely J considered the meaning of the expression ``beneficially owned'' and concluded (2002 ATC at 4797):

``61. These factors suggest that `beneficial ownership' is used in s 80A(1) in the traditional sense which encompasses both equitable ownership, and legal ownership where nobody else would be regarded by a court of equity as having a proprietary interest in the shares . They also suggest that it is a change in that beneficial ownership by

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transmission from one person to another which enlivens s 80A(1). On that basis, LGL remained the beneficial owner of its shares in LTAL notwithstanding the liquidation of LGL as no one else acquired a proprietary interest in those shares.''

(Underlining added)

22. On appeal (2003 ATC at 4473) the Full Court agreed with the reasoning of Hely J but noted that the concept of a change was not limited to a transmission. The Full Court said clause 60:

``60. It follows that we agree with the learned Primary Judge that in the present circumstances there has not been a change in beneficial ownership of the shares held by LGL in LTAL by virtue of the fact that the companies became the subject of orders that they be wound up. We agree that the context of ss 80A(1) to (3), and other sections related to them, is concerned with cases where there has been a change in the ownership of shares or in the equitable ownership of them between two points of time. We would agree also that there is an implicit assumption in s 80A(1) that there is a need in identifying beneficial ownership to find, both in the year of loss and in the year of income, some person who is or some persons who are collectively the beneficial owners, and that this identification is not prevented by virtue that in consequence of the liquidation of the shareholder an obligation is imposed upon the shareholder which might prevent the shareholder from dealing with the shares for its own use or benefit. However, in so far as his Honour suggested at paragraph 61 of his reasons, as set out in paragraph 12 above, that a relevant change in beneficial ownership required there to be a `transmission' from one person to another we would, with respect, disagree if by that language his Honour intended to exclude the case where the shareholder, while remaining on the register, declared a trust of the beneficial ownership in favour of another or others. However, we do not think that this is what his Honour intended.''

23. My attention was drawn to the fact that the Respondent has received leave to appeal the judgment of the Full Court in Linter to the High Court; it is possible that Linter turns on its own facts. It must be noted however that there are very clear judicial statements (particularly by Hely J) which would have it that satisfaction of the test requires continuity of legal and beneficial ownership such that no other person would be regarded by a court of equity as having a proprietary interest in the shares. If Tammany had after the earlier date refused to transfer its shares in Target to Clover it is likely in my view that a court of equity would have granted an order for specific performance. It is also likely in my view that a court of equity would have restrained an attempt by Tammany to transfer the shares to a person other than Clover

24. Mr Edmonds cited the judgment of the Full Federal Court in
Gasparin v FC of T 94 ATC 4280; (1994) 50 FCR 73 where von Doussa J (with whom Jenkinson and Spender JJ agreed) said (at ATC 4286-4287; FCR 81):

``... In the present case the `trading stock' was real property. The allotments in question remained registered in the name of the vendors until settlement. Until then the vendors had not lost all dispositive power, and had not ceased to have any proprietary interest in the land. If, for any reason a purchaser under an unsettled contract of sale did not proceed, the vendors could elect to treat the contract at an end, and resell the allotment. Prior to settlement, under the contracts of sale the purchasers undoubtedly acquired interests in equity and rights to specific performance, but the vendors did not become bare trustees for the purchasers. The vendors retained substantial interests in the allotments which they enjoyed as beneficial owners: see
Kern Corporation Ltd v Walter Reid Trading Pty Ltd & Ors (1986-1987) 163 CLR 164 at 191 per Deane J, and
Stern & Anor v McArthur & Anor (1987-1988) 165 CLR 489 at 521-522 per Deane and Dawson JJ.''

25. I accept (in line with Gasparin) that on the earlier date Tammany did not become a trustee for Clover but at the same time Clover did obtain equitable rights of the nature referred to by Hely J in Linter. That judgment read with that of the Full Court is binding on me. This being so I conclude that the relevant and disqualifying change took place on the earlier date. As indicated earlier in these reasons nothing very much turns on this question and so that if I am wrong in this respect and in fact and as a matter of law the relevant change occurred

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on the later date this decision would not be altered.

Part C - The Peter Business and relevant documents

26. As to when precisely the Applicant acquired the Peter Business was always going to be an important issue. In this Part C, I deal only with the contractual arrangements and certain contentions of the parties as to those contractual arrangements.

27. The Heads of Agreement (``Heads'') are contained in Annexure G to Mr Black's statement. In a document so entitled prepared by Mallesons Stephen Jacques (Sydney office) and dated 3 May 1991 the seller is collectively described as Peter Communications Pty Limited, Peter Communications (WA) Pty Limited, Peter Communications (SA) Pty Limited and Peter Communications (NSW) Pty Limited; those companies are referred to in these reasons as the ``vendors''; the purchaser is Tricom Pty Limited. Pages 1 and 2 of that document are repeated in these reasons as follows:-

``THESE HEADS OF AGREEMENT are made on 3 May 1991 

   BETWEEN: PETER COMMUNICATIONS PTY LIMITED
            PETER COMMUNICATIONS (WA) PTY LIMITED
            PETER COMMUNICATIONS (SA) PTY LIMITED
            PETER COMMUNICATIONS (NSW) PTY LIMITED
            (`Seller')

   AND:     TRICOM PTY LIMITED
            (`Purchaser')

1. RECITAL

The Seller is, as at the date of these Heads of Agreement, engaged in the conduct of two separable businesses. One such business consists of the conduct of a dealership in cellular mobile telephone products, paging terminal products and key telephone systems products ( `Main Business' ). The other such business consists of the provision of paging and networking services.

These Heads of Agreement set out the basis on which the parties have agreed that, subject to the fulfilment of the conditions precedent referred to in clause 2 of these Heads of Agreement, the Seller will sell to the Purchaser the assets listed in Schedule A in consideration of the assumption by the Purchaser of the liabilities of the Seller listed in Schedule B, all such assets and liabilities relating to the Main Business. It also sets out agreed terms of employment for certain directors of the Seller which will form the basis of service contracts to be entered into between such directors and the Purchasers.

2. CONDITIONS PRECEDENT

These Heads of Agreement and the agreement of the parties hereunder are subject in their entirety to the fulfilment of the following conditions precedent:

  • (a) the negotiation and execution by the parties of formal documentation giving effect to the intention of the parties evidenced in these Heads of Agreement;
  • (b) the negotiation and execution by Messrs (blanks in respect of the names persons) of service contracts with the Purchaser, including, among other things, the terms and conditions set out in Schedule C;
  • (c) the absence of any material adverse change in relation to the assets, liabilities, financial or business condition or prospects of the Main Business as represented by the Seller to the Purchaser as at the date of these Heads of Agreement occurring prior to completion of the transactions envisaged by these Heads of Agreement including, without limitation, any material adverse change in relation to contracts, relationships or understandings with vendors or customers of the Seller;
  • (d) solicitors for the Seller and the Purchaser being reasonably satisfied as to compliance with all laws in relation to the transaction;
  • (e) approval of the transaction by the Board of Directors of Clover Holdings;
  • (f) compliance by the Seller with all reasonable requests by the Purchaser for the provision of information in relation to the Main Business;
  • (g) completion of the preparation of an audited balance sheet for the Main Business in accordance with clause 4 of

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    these Heads of Agreement and agreement upon any appropriate adjustments to be made as a consequence thereof; and
  • (h) all necessary contractual, legal or regulatory consents to the transaction having been obtained, including, without limitation, the consent of the lessors under the leases referred to in Schedule B.

All parties shall use their best endeavours to satisfy the above conditions. Prior to the fulfilment of such conditions no legally binding contract will arise.

3. WARRANTIES

The Seller and its current directors will jointly and severally make all representations and warranties in relation to the assets purchased and liabilities assumed by the Purchaser as may reasonably be requested by the Purchaser.

4. ACCOUNTS AND ADJUSTMENT OF CONSIDERATION

Schedule D to these Heads of Agreement is an unaudited balance sheet of the assets and liabilities of the Main Business as at 30 April 1991 prepared by management of the Seller. As soon as possible after the execution of these Heads of Agreement the parties will instruct (blank) to audit such balance sheet and prepare an audited balance sheet of such assets and liabilities. In the event that:

  • (i) the aggregate liabilities reflected in the audited balance sheet exceed the aggregate liabilities reflected in the balance sheet prepared by management by 5% or more; or
  • (ii) the total asset value reflected in the audited balance sheet is less than the total asset value reflected in the balance sheet prepared by management by 5% or more,

the parties will agree upon an appropriate adjustment to the consideration for the purchase of the Main Business.

5. INDEMNITY

The Seller and its current directors will jointly and severally indemnify the Purchaser against any liabilities incurred in connection with the purchase of the Main Business including any liabilities to employees of that business whose employment has been or may be terminated except to the extent to which such liabilities are expressly assumed by the Purchaser under these Heads of Agreement.

6. COSTS

Each party will be responsible for its own costs in negotiating these Heads of Agreement and fulfilling the conditions precedent set out in clause 3. Any stamp duty payable in respect of the transaction documentation will be paid by the Purchaser.''

28. The Heads were aptly described by the Respondent as no more than an agreement to agree. It is relevant that clause 2 (e) of the Heads provided that one of the conditions precedent was the approval of the transaction by Clover Holdings; although there was no specific evidence to this effect it is possible and indeed likely that this condition was inserted either in anticipation of the successful conclusion of the take-over bid or because Clover Holdings was already the holder of a substantial shareholding in Target and on the basis that Clover Holdings would provide such financial assistance as was necessary; this is so because Target was in financial difficulties. The Heads do by the insertion of this condition indicate that the consent of Clover was necessary and that it would is unlikely that the acquisition of the Peter business was, as Mr. Black implied, independent of the take-over. In its terms the Heads specifically recorded that it did not confer any legal obligations and that it was conditional inter alia upon the execution of a formal agreement. It may be noted that Tricom Pty Limited as a company which was a subsidiary of Target did not exist in the sense that there never was a company of that name owned by Target. There was however evidence of attempts to reserve that name; those attempts were unsuccessful. Mr Edmonds referred to Tricom as the Applicant's pseudonym, (not a concept familiar to me in relation to a corporate person), but I am prepared to accept that the Heads were entered into by the Applicant under a name (and being Tricom) which it hoped to be able to use. Put in other words and although there was not clear evidence to this effect I am prepared to accept that the reservation attempt was made on behalf of the Applicant and not a

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new company or any other company associated with or related to Target.

29. On 27 August 1991 a lengthy and comprehensive agreement entitled ``Agreement for Purchase of Business'' (referred to in these reasons as the ``Sale Contract'') was entered into between the same four Peter companies as vendors and the Applicant under its new name as purchaser, and a number of natural persons each of whom was referred to as a ``director'' (Annexure I to Mr. Black's affidavit). In respect of the Sale Contract:

Clause 13 of the Sale Contract reads as follows:

``13. LIABILITIES

13.1 Subject to Completion the Purchaser accepts responsibility for the Liabilities as from the opening of business on the Completion Date. Except as provided elsewhere in this agreement the Vendors will pay for all other liabilities connected with the Business on or before the due date for payment.

13.2 Without in any way limiting any of the Warranties the Vendors warrant that full details of the liabilities are set out in schedule 7.''

The Sale Contract was expressed to be conditional on the fulfilment of a number of conditions and including a due diligence. There was no evidence before me as to when in fact the Sale Contract conditions were fulfilled. It will be noted also that Recital A provided that ``the Vendors carry on the business...'' It is significant also that the term ``Effective Date'' was defined so as to refer to 30 April 1991 and thus prior to the date of the Heads. In accordance with clause 2.2 the Applicant acquired the Assets free of encumbrances other than those set out in clause 2.2. There is no mention anywhere in the Sale Contract of Motorola; in particular the Sale Contract did not record any obligation on the part of the Applicant to take-over, assume and pay any debts of the vendors (but provided that the Assets were acquired subject to the encumbrances referred to in clause 2.2 of the Sale Contract). Clause 13 of the Sale Contract provided in specific terms that the debts remained with the vendors. The Sale Contract was entered into contemporaneously with a number of collateral agreements (all contained in Annexure I to Mr Black's statement). They bear all of the indicia of care and attention which one would expect of documents drawn by Mallesons Stephen Jacques who acted, as they did in relation to the Heads, for the Applicant. Having regard to the evidence before that the acquisition of the Peter business was effected inter alia to obtain a Motorola agency it is not clear why the Sale Contract was silent as to Motorola.

30. The Applicant claimed that it acquired the Peter Business as from 3 May 1991. The Applicant claimed also that it reflected the profits from that date and was allowed deductions from that date. It may be wondered whether having regard to the express terms of the Sale Contract a claim which referred to the Effective Date, and being 30 April 1991, would not have been more apposite and perhaps correct; it is possible that the Applicant selected 3 May 1991 because the Heads were entered into on that date.

31. To acquire a business or an asset with effect from a prior date is by no means uncommon. Concepts of pre-acquisition profits and the manner in which they are dealt with for accounting purposes are known to all accountants; it is hardly necessary for me to elaborate on so simple a concept. But it is equally clear that to acquire assets with effect from a prior date is binding only inter partes.

32. During closing submissions Mr Edmonds contended that the Peter Business was acquired in May 1991 and that this was so despite the terms of the Sale Contract. There was no evidence of any nature before me which would suggest that the Sale Contract was in any way erroneous. Mr Black said during his evidence that he remembered that the vendors had been legally represented and that there had been changes made but otherwise had little recollection of the circumstances in which the Sale Contract came to be negotiated and

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executed. The Sale Contact in its terms recorded that at the date of the Sale Contract the vendors were carrying on the Business; on this basis it was not open for the Applicant to claim that it was doing so. Apart from any other considerations the Sale Contract was then still contingent on the fulfilment of a number of conditions (as referred to in the Sale Contract) and including a due diligence.

33. There were significant differences between the Peter Business and the Applicant's business. The Peter Business operated as a retailer of telecommunications products, and particularly Motorola products, in all states except Queensland and Tasmania. The Applicant by contrast was a wholesaler, operating out of premises in New South Wales of telecommunications equipment and in particular Technophone (and as from about March 1991 Nokia) mobiles, ordinary telephones and PABX and KTL equipment. Mr Black's evidence, put in brief terms at this stage but dealt with in more detail later in these reasons, was that the Applicant wanted to acquire the Peter Business for two main reasons, being that it gave the Applicant access to Motorola and also that it gave the Applicant a nation-wide presence.

34. The Respondent contends that at some point in time the Applicant came to appreciate that it was of crucial importance to the Applicant that the relevant change occurred in point of time after the acquisition of the Peter Business. If this were so, the Applicant (so it was contended) would be in a position to argue that it carried on the same business both before and after the relevant change.

T19 is a position paper entitled ``Target Group Audit-Position Paper - application of section 80E of ITAA36'' issued by the Respondent after audit proceedings commenced; clause 3.1.1, 3.2.1, 3.3.2. 4.2.6 and 4.2.7 read as follows: 

3.1.1 (i) Importing and distributing mobile phones and mobile phone
      accessories (to the extent that there where (sic) such things)

3.1.1 (ii) Importing and distributing a PABX

3.1.1 (iii) Importing and distributing `plain old telephones'

3.1.1 (iv) A warranty repair function

3.1.1 (v) A manufacturing function

3.1.1 (vi) In geographical terms, its customer base was limited to
      dealers in NSW

3.1.1 (vii) Advice and assistance was given to dealers to enable them
      to program phones purchased by end users

3.1.1 (viii) The main product being distributed was the Technophone brand
      of mobile phone (`the brick'). The `Sales by Product Group'
      for April 1991 show Technophone and Nokia as the brands being
      distributed.

The Applicant replied to the position paper in October 2000; its reply appears at T29. In Clauses 3 and 4.3 (T pages 217 and 220) the Applicant said;

``3. Business immediately before change of ownership

The ATO Paper has set out at paragraph 3.1.1 the taxpayer's business immediately prior to the change in ownership.

The taxpayer agrees with the ATO's statements of facts, subject to one proviso. The so-called `manufacturing function' identified in paragraph 3.1.1(v) constituted simply of the assembly of battery packs, insertion of operating manuals/instructions and other minor labelling/packaging functions.

Given this context, the taxpayer submits that such manufacturing activities did not form an essential character of the taxpayer's business prior to the change in ownership. Thus, the cessation of these activities should not constitute a change in business. This

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issue is discussed later in respect of the year of income ended 31 December 1993.

4.3 Peter acquisition

At paragraphs 4.2.6 to 4.2.9 of the ATO Paper, the ATO details the takeover of the Peter group by the taxpayer. The ATO asserts this takeover caused the taxpayer to fail the same business test.

The taxpayer denies that the takeover caused a failure of the same business test.

The ATO at paragraph 60(f) of TR 1999/9 stated:

`The commencement or acquisition, by merger or otherwise, of new undertakings (including going concerns and similar or complementary undertakings) may cause a company to fail the same business test, e.g if the result is to alter the character of the overall business.'

The Ruling does not state that a merger or acquisition would prima facie cause failure of the same business test. Rather, the character of the overall business post merger/acquisition should be considered.

On this point, the taxpayer submits that the character of its overall business of telephone distribution did not change on acquisition of the Peter business. Both businesses were more than just complementary or similar, both businesses were the same type of business.

At paragraph 6.679 of the interview, Black notes that Peter was `a reseller of mobile phones in all States except Queensland'. This is the same business (except for geography, which is dealt with separately below) as that carried out by the taxpayer prior to change in its (the taxpayer's) ownership.

Also, the taxpayer did not acquire the Peter companies but rather the phone distribution business of Peter (paragraphs 6.697 and 6.698 of the interview). The Peter name was not used by the taxpayer and the business was absorbed into the taxpayer.''

It will be noted then that in its response to the position paper the Applicant accepted that the relevant change occurred in April 1991 and thus prior to the date of acquisition of the Peter Business. The Applicant's reply to the position paper does not bear the name of any professional firm of solicitors or accountants but it was couched in terms which incline me to the view that it was prepared with professional assistance. It is not surprising then that the Respondent's written contentions dates 11 March 2004 contain clauses 57 to 61 reading as follows:

``Time of acquisition of the Peter business

57. Prior to the commencement of the hearing, the Applicant had conceded that:

  • (a) before the disqualifying change in beneficial ownership, its customer base was limited to dealers in New South Wales; and
  • (b) the acquisition of the business of Peter Communications Pty Limited and three other related companies (collectively, `Peter' ) pursuant to an agreement entitled `Agreement for Purchase of Business' executed on 27 August 1991 (Black Annexure I) (the `Purchase Agreement' ) occurred after the disqualifying change in beneficial ownership.

58. Those propositions had been squarely put by the Commissioner of Taxation to the Applicant in the ATO Position Paper at T19-86 (para 3.1.1(vi)) and TD 19-87 (at para 3.3.2(i)).

59. In its replying to the ATO Position Paper the Applicant stated (at TD 29-217):-

`The taxpayer agrees with the ATO statement of facts, subject to one proviso. The so called ``manufacturing function'' identified in paragraph 3.1.1(v) constituted simply of the assembly of battery packs, insertion of operating manuals/instructions and other minor labelling/packaging functions.'

60. In its reply to the ATO Position Paper the Applicant also stated that its response was `based primarily on the finding of facts as set out in the ATO Paper' and that the factual circumstances were `correctly identified' in the ATO Position Paper save for the two specific matters addressed by it at TD 29-215 being:-

  • (i) a contention that the Applicant did not deal with end users after the change in ownership, because that activity `was ceased in a short period of time'; and

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  • (ii) a contention that the Applicant did not cease dealing in products other than mobile phones and accessories after the disqualifying change in beneficial ownership.

61. Accordingly the contention advanced in the Tribunal on behalf of the Applicant to the effect that the acquisition of the Peter business occurred before the disqualifying change in beneficial ownership represents a very dramatic change in the Applicant's case. No doubt that change was born out of the recognition that the Applicant had little prospect of success in the proceedings if all of the changes brought about by the acquisition of the Peter business occurred after the disqualifying change in beneficial ownership.''

In its notice of objection (T26) dated 25 February 2000 and in respect of the first three relevant years the Applicant said (in the third last dot point on T page 174) that the change of ownership occurred in June 1991. (The Applicant's objection for the last relevant year (T35) contains the same claim). The claim that the relevant change took place in June 1991 is inconsistent with the Applicant's response to the position paper in which it acknowledged that the relevant change took place in April 1991.

35. In its Statement of Facts and Contentions dated 29 May 2002 the Applicant stated in clause 5 that ``there was a change of 50 per cent of the majority beneficial interest in the Applicant in June 1991.'' That statement is silent as to the acquisition of the Peter Business.

36. When the hearings commenced on 5 August 2003, Mr Edmonds said in opening:

``Yes. But at the end of the day our submission is really a twofold submission, is that we say that the acquisition took place in May, and the business revenues and the business expenses of the business acquired were earned and incurred by the Applicant from that date, but that even if that is wrong, even if the view which my learned friends wish to make, that there was no acquisition of the business until August, we say, having regard to the manner in which the Peter Business was absorbed into our client's business, there was no change in business. So at the end of the day we say it doesn't matter.

THE D. PRESIDENT: And the manner in which it was absorbed into your business?

MR EDMONDS: The way in which the Peter activities, or business, were absorbed into the Applicant's business, and integrated with that business, that even if that did take place after the relevant date on which the beneficial threshold requirement was failed, that the business remained the same. (5/8 TS10)

And then a little later:

MR EDMONDS: I would just like to say a couple of things in reply what my friend has said about certain matters. He referred to the fact that there was more or less I think he said an admission by the applicant as to when the Peter business, or businesses were acquired in the response to the ATO position paper that one finds in the T documents. And then he says, `Well, of course then there was no comment in the statement of facts, issues and contentions that are filed in this Tribunal about the timing of that acquisition,' and he said - then he said, `All of a sudden it pops out of the woodwork.' Now, it didn't pop out of the woodwork. The respondent has been on notice since November last year, when it was served with Mr Black's statement, that the applicant's contention in this proceeding was that the business was acquired on 3 May 1991. And that appears from paragraphs 22, 23, 24, 25 of Mr Black's statement. (5 TS 28.)''

37. It would appear then that Mr Edmonds was contending that clauses 22 to 25 of Mr Black's statement put the Respondent on notice of the fact that the Applicant would contend that the Peter Business was acquired on 3 May 1991. Those clauses read as follows:

``PETER COMMUNICATIONS

22. In April 1991 I became aware that a small communications dealer named Peter Communications (`Peter'), was in financial difficulties. At that time I had discussions with Target management including Mr Packet about acquiring the business of Peter. I recommended to Target management that Target consider acquiring that business. I did so as I was aware that Peter had a distribution agreement with Motorola Corporation of the USA which at that time was a major manufacturer of mobile phones.

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Motorola mobile phones were the most popular brand on the market in Australia at the time.

23. Peter operated retail outlets in Melbourne, Adelaide, Perth and Sydney. They employed a sales force who sold telecommunications products (mostly mobile telephones) to end-users, but focussed on corporate clients such as Link Telecommunications (a subsidiary of Bell South), Peat Marwick and BHP.

24. I had meetings with the management of Peter in April 1991. I recall at that time learning from them that Peter had a considerable financial problem and owed an amount in the order of $600,000 to Motorola alone. Following discussions with Target Management Applicant reached an informal arrangement to take over the Peter business. The takeover occurred very quickly and even before the execution of a formal sale agreement because Peter had such an urgent need for financial support.

25. Annexed and marked `G', `H', `I' and `J' respectively are copies of:

  • `G' Heads of Agreement dated 3 May 1991;
  • `H' Report prepared by Ms Light, the financial controller of Target;
  • `I' Agreement for Purchase of Business dated 27 August 1991 between Peter Communications Pty Limited and others as vendors and Applicant as purchaser;
  • `J' Letter dated 27 August 1991 from Applicant to the Workcover Corporation, Adelaide;
  • `JA' Management accounts of Applicant for the month of May 1991;
  • `JB' Management accounts of Applicant for the month of June 1991.

As provided in clause 2.3 of the formal Agreement for Purchase (Annexure `I'), after 30 April 1991 the Applicant conducted the Peter business in its own right under licence. The formal transfer of assets was completed on or about 27 August 1991.

Prior to the acquisition of the business of Peter Communications by Applicant in May 1991, Peter was a dealer in telecommunications products including Motorola, NEC and Mitsubishi brand cellular phones. Prior to 1 May 1991 Applicant did not distribute any of these brands of cellular phones.

I refer to Annexures `JA' and `JB', particularly the fourth page of `JA' and the second page of `JB'. Applicant sold the Motorola, NEC and Mitsubishi brand products in May and June 1991.

Within a few weeks after Applicant took over Peter, I instructed Peter staff to stop selling products to end-users as soon as they could complete existing commitments and make suitable transition arrangements. That transition was completed quickly.

The Peter premises in Sydney were closed around the start of May 1991 and the staff moved to Applicant's premises at Rosebery. Soon afterwards the Peter premises in Melbourne, Adelaide and Perth were integrated with the Target premises. Target had had offices in Melbourne, Adelaide and Perth for some time. To the best of my recollection, the Peter staff in these cities either relocated to premises of Target or Applicant staff relocated to Peter premises. I cannot now recall the precise details. As a result of rationalisation of staff in all four cities a number of Peter staff were not employed with Applicant. The new Applicant staff in Melbourne, Adelaide and Perth took over responsibility for the Applicant's existing customers in their respective States.''

37. Statements by Mr Edmonds in opening preceded the statement by Mr Charles and which is exhibit A14. Mr Edmonds contended that the Respondent should not have drawn attention to his statement in opening as to the date of the relevant change having occurred in late May 1991. I do not see why not. He contended that the real ``culprit'', to use his own words, was the Respondent who had altered his Statement of Facts and Contentions on more than one occasion. The documents to which I have referred indicate that in its objection for the first three relevant years dated 25 February 2000 the Applicant contended that the relevant change took place in June 2001 and that subsequently and in October 2000 and in relation to the position paper the Applicant agreed with the Respondent's statement in his position paper that the relevant change took place in April 1991.

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It would seem then that it was only at a later stage that the Applicant came to appreciate that it is not so much the actual dates of acquisition of the Peter Business and the relevant change which are important, but rather that it is the order in which those events took place which is crucial This is so because the Peter Business acquisition (referred to in some of the documents cited previously as a merger or amalgamation) has the effect that if the relevant change took place before the Peter Business acquisition, the same business test becomes difficult, if not impossible, for the Applicant to satisfy. Mr Edmonds contended, and more than once, that Mr Black's statement and in particular the clauses referred to put the Respondent on notice as to the nature of the Applicant's case. I think that it is fair to say that it may perhaps be possible to read into the quoted clauses an implication to this effect although the reference to both of the Heads and the Sale Contract without comment as to the significance of the latter might be thought to limit and perhaps negate that implication. That said those clauses do nothing more than (at the most) sound a rather vague warning note. Such an allegation seriously intended should have appeared in the Applicant's Statement of Facts and Contentions and it did not; an amendment to the Statement of Facts and Contentions was at the least highly desirable and probably necessary.

38. It may be noted that the Sale Contract records that the Applicant operated the Peter Business under licence as from the Effective Date, (and as to which see clause 2.3 of the Sale Contract). However the Heads contain no such provision and there was no evidence of any kind as to a licence arrangement at the time of entry into of the Heads. Nor do the Heads (aptly characterised as I have said, as no more than an agreement to agree) contain any provision for the contingency that there might never be a final and binding agreement. Mr Black in his evidence referred to the fact that there were other parties interested in the Peter Business. Ms Light's evidence was that in late May 1991 she conducted a due diligence into the Peter Business over a period of 4 days and covering four states. So speedy a due diligence was perhaps aptly referred to a ``mini'' due diligence. The evidence of Ms. Light and Mr Black will be referred to in more detail later in these reasons. If the Applicant acquired the Peter Business on 3 May 1991 when it entered into the Heads then there was no need for a due diligence later in the month. And even more to the point the Sale Contract was itself conditional (inter alia) on a further due diligence.

39. The Applicant did indeed take possession of the Peter Business, and presumably on 3 May 1991 and being the date of the Heads, although it must be noted that clause 2.3 of the Sale Contract refers to a licence in respect of the Peter Business as from the Effective Date, which as defined is 30 April 1991. The basis upon which the Applicant took possession is unclear. The Respondent contends that the Applicant did so on an exploratory basis and in order to determine whether it wished to acquire the Peter Business; one thing is clear and that is that it was not bound to acquire the Peter Business and correspondingly the vendors were not obliged to sell it to the Applicant. The fact that there were to be not one but two due diligences indicate that there was nothing binding as between the vendors and the Applicant, and indeed the Heads state in specific terms that this was so. The Applicant after taking possession acted in a manner which indicated that it had taken control; this appears from the evidence of Mr Silver. The circumstances in which the Applicant moved into the Peter Business are at least from a legal point of view shrouded in mystery. That the purchase price was one dollar does indicate that the Peter Business was in financial difficulties. But there are a number of questions to which there were no answers. What would have occurred if the Sale Contract had never been executed or having been executed its conditions not fulfilled? Who would have been entitled to the profits (if any) derived after 3 May 1991 or perhaps 30 April 1991, and who correspondingly would have been responsible for losses? It is likely that in such event the Applicant would have been treated as acting as the agent of or trustee for the vendors and thus giving rise to restitution claims, the resolution of which would have been complex and difficult in the light of the manner in which the Applicant took control. The Sale Contract however was no mere formality; so much is evident from its terms. And the collateral contracts were clearly relevant to the natural persons who were parties to them or the Sale Contract. Ms Light in her evidence spoke of

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profit share entitlements in favour of certain employees of the Peter Business. Mr Black in turn emphasised the importance of the Motorola agency. At the end of the day the documentation to which I have referred makes it clear that the acquisition took place pursuant to the Sale Contract on 27 August 1991 and being its date of execution, or later and upon fulfilment of the conditions, if the conditions had not previously been waived (and there was no evidence as to the precise date on which the Sale Contract became effective) and until that time the Applicant was not carrying on the Peter Business because it did not own it. The most that can be said is that it was engaged on some basis in the activities of the Peter Business prior to acquisition. The Respondent contends that the activities of the Applicant were preliminary or investigatory in nature precisely because the element of commitment was lacking. In
Goodman Fielder Wattie Ltd v FC of T 91 ATC 4438; (1991) 29 FCR 376, the taxpayer argued that research and development activities conducted by it gave rise to deductions under section 51(1) of the Act. Hill J said at ATC 4447-4448; FCR 387:-

``For the applicant it was submitted that the income-producing activity or business activity in which the applicant was engaged in the relevant period, should be characterised as an activity of researching and developing monoclonal antibody products for manufacture and sale. The difficulty in the path of the applicant, however, is that during the relevant period the element of commitment was absent. The evidence, which I have summarised above, makes it clear that the applicant was engaging in activities of a provisional kind only. It is true that it was contemplated that, if the research work funded by the Institute proved successful, there would be products to market and that it was hoped (and this hope was reflected in the initial budget with Dr Watson's proposal) that sales could be embarked upon at an early time. However, the funding of the centre in which research was to be carried on, was directed at research into such products as the work of the centre might show to be commercially viable. It was research, to quote the proposal of 7 July 1981 `from which a defined range of marketable products will emanate.' In fact, the July proposal identified two products, that concerned with brucella abortus and that concerned with campylobacter foetus which, in fact, were never marketed at all by the applicant in the period in which it was concerned with monoclonal antibodies.

The activity in which the applicant was engaged through until November 1982, can only be described as an activity of funding a research project in which it was an essential collaborator, both as to the provision of funds and as to serving on the management committee. Notwithstanding that the applicant accounted for this activity as a separate division , it is not possible, in my view, to characterise the activity as a business or, for that matter, as an activity of gaining or producing assessable income so as to fall within the first limb of s 51(1).''

(Underlining added)

See also
Softwood Pulp and Paper Limited v FC of T 76 ATC 4439;
Griffin Coal Mining Company Limited v FC of T 90 ATC 4870;
Esso Australia Resources Ltd v FC of T 98 ATC 4768; (1998) 84 FCR 541.

40. It will be remembered that Mallesons Stephen Jacques acted for the Applicant both in relation to the Heads and in relation to the Sale Contract and indeed drafted both of them, and as I have said, there is no suggestion that the Sale Contract was either incorrect or unnecessary.

42. In the circumstances I find that the relevant change occurred on the earlier date and that (and more importantly) it preceded the acquisition of the Peter Business. Insofar as the Applicant conducted the activities of the Peter Business before it acquired that business, it cannot be said that those activities were business activities in particular because the Peter Business did not at that stage belong to the Applicant. Section 80 E(1) of the Act in its terms refers to business activities.

Part D - The law as to the same business test

42. The starting point, having regard to the fact that it is so often cited in this connection, is
Avondale Motors (Parts) Pty Ltd v FC of T 71 ATC 4101; (1971) 124 CLR 97. Gibbs J said at ATC 4106; CLR 105:-

``The meaning of the phrase `same as', like that of any other ambiguous expression, depends on the context in which it appears. In my opinion in the context of the section

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the words `same as' import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. It seems to me natural to read the section as referring to the same business, in the sense of the identical business...''

In Avondale Motors the taxpayer had ceased business completely at the date of the change. However Gibbs J concluded that even if the former business had been carried on at the time of the change, it would not have satisfied the same business test because the business was of the same kind but not identical to the one previously carried on. Gibbs J said at ATC 4105; CLR 104:-

``... If sec 80E(1)(c) requires that the business carried on throughout the whole of the year of income should be identical with that carried on immediately before the change in ownership of the shares, i.e., that it should be the same business rather than the same kind of business, it is clear that the taxpayer cannot meet that test. Before 15 March 1968 the taxpayer carried on the business of dealer in motor parts and accessories at three different premises in conjunction with a motor dealer having franchises for certain vehicles. After that date it carried on the same kind of business but under a different name, at different places, with different directors and employees, with different stock and plant and in conjunction with a motor dealer having different franchises. The question whether a company has commenced a new business or has continued an old business under different conditions is simply one of fact. In some circumstances a company may expand or contract its activities, it may close an old shop and open a new one, without starting a new business, but the only conclusion that can be drawn from all the circumstances of the present case is that the business of the taxpayer after 15 March 1968 was different from that which it carried on before that date.''

Gibbs J recognised that the mere expansion or contraction of a business might not result in a change in the identity of the business. He said at ATC 4106; CLR 106:-

``... It does not, of course, follow that a business will not be the same because there have been some changes in the way in which it is carried on; some cases under sec 80E may give rise to questions of degree which do not arise in the present case.''

The Applicant in its submissions noted that the taxpayer in Avondale had admitted that it had acquired in order to utilise the losses. I do not read Avondale as being limited in its application to a situation in which it is clear that a company is acquired in order to utilise its carry-forward losses. The important point which emerges from Avondale is that the words ``same as'' import identity and not merely similarity.

43. The Applicant in its written submissions referred to the decision of this Tribunal in
Australasian Feed Pty Ltd v DFC of T 99 ATC 2462. The Tribunal said at page 2473:-

``48. The facts of this case are clearly distinguishable from those in Avondale Motors (Parts) . In the present case the applicant continued to produce the same (or identical) product from the same mill after the changes as it had before. It obtained its supplies from the same sources. It continued to trade under the same name. It kept on a critical mass of employees and after the second change in beneficial ownership of shares, it re-employed some who had been retrenched due to the downturn in business. The applicant retained the same manager employed prior to the change by the receiver-manager. The only significant change in the business is that in about March 1991 the applicant commenced to sell its product almost exclusively to a customer with which previously it had only one large sale some time after November 1999. Notwithstanding, the market into which the applicant made its sales remained generically the same - to suppliers of live sheep for export, either to their feed-lots near the wharves or for provision of feed during the voyage.''

The decision of the Tribunal in Australasian Feeds was affirmed on appeal.

It is to be noted that in Australasian Feeds (inter alia) the applicant produced from the same mill; it obtained its supplies from the same sources and it continued to trade under the same name. There appears to have been only one significant change in that there was a concentration on one particular customer. It is hard to see how Australasian Feeds assists the Applicant.

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44. The manner in which a business evolves may be such that its identity changes and it ceases to be the same as that carried on at an earlier time. Where there have been changes in the manner in which a business is carried on the question is whether there has been a change in the character such that it can no longer be said to have the same essential character as it had at the earlier time. In
Fielder Downs (WA) Pty Ltd v FC of T 79 ATC 4019; [1979] 45 FLR 242 Campbell J said at ATC 4024; FLR 250:-

``... If a business evolves it does not necessarily follow that during such process of evolution the essential character of the business is not changed.''

45. Where the evolution of a business involves a change in its goodwill that change can result in a change in the identity of the business such that it ceases to be the ``same business''. In
FC of T v Murry 98 ATC 4585; (1998) 193 CLR 605 the High Court said at ATC 4594-4595; CLR 623-624:-

``... The sources of the goodwill of a business may change and the part that various sources play in maintaining the goodwill may vary during the life of the business. But, as long as the business remains the `same business' (cf
Avondale Motors (Parts) Pty Ltd v FC of T 71 ATC 4101; (1971) 124 CLR 97), the goodwill acquired or created by a taxpayer is the same asset as that which is disposed of when the goodwill of the business is sold or otherwise or transferred (cf Taylor, Capital Gains Tax, at 212).

In determining whether the `same business' is being carried on, the sources of the goodwill may have changed so much that, although the business is of the same kind as previously conducted, it cannot be said to be the same business. Hotels in the inner suburbs of Sydney provide an example, especially those in Paddington. For decades, many of these hotels drew their custom from the nearby locality. The goodwill of those hotels was site goodwill based on the residence of customers. Some years ago, some of these hotels, often with little change to their structural appearance, began to market themselves to people from a broader geographical area. Custom is no longer based on residence. The class of person patronising these hotels is completely different from what it was . Revenues are probably dramatically higher than they were before the change of marketing. In so far as site goodwill is a source of the present goodwill, it is of a different kind. While previously it derived from the proximity of residents to the hotel, it is now derived from the fact that the hotel is in the same locality as other hotels seeking to attract custom from patrons with the same interests. It is arguable that the goodwill asset of those hotels is not the same asset as it was two decades ago because it is not the same business as it was then.''

(Underlining added)

It is significant that in Murry the High Court was of the view that a change in the goodwill of an inner city hotel might result in its ceasing to be the ``same business''. (See also RW Parsons Income Taxation in Australia (Lawbook Company 1985 at paras 10.401-10.415.)

46. The Applicant in turn referred to the explanatory memorandum pursuant to which s 80E of the Act was introduced, and which suggests that the section was introduced to prevent trafficking in losses. It also referred to Taxation Ruling TR 95/31 and CITCM number 847 in clauses 44 and 46 (respectively) of its submissions as follows:-

``44.... Sudden and dramatic change brought about by either the loss or acquisition of activities on a considerable scale is to be contrasted with an organic growth of a business: per Walton J in Rolls- Royce (Motors) Limited v Bamford (1968) 51 TC 344. As his Lordship there observed:

`Doubtless the trade of the company would remain the same trade even though, as a result of organic growth, in response to every factor which might influence it, the company adopted new compatible operations and discarded portion of its old'

...

46. This is exemplified in a number of public documents the respondent has issued over time:

  • (a) CITCM No 847: 15 December 1967 [ Doc 4]

106. As to what constitutes the same business, it is considered that the term is to be interpreted according to commercial realities on the basis that a business has a

ATC 147

heart or core which identifies it and that changes in operations ancillary to this essential function are not of themselves enough to change it into a different business.

107. By way of example, a company may be carrying on a large retail business with a number of departments and stores. After a change in shareholdings the departments may be extended to other goods normally sold by retail departmental stores. Alternatively, some departments may be discontinued on the grounds of unprofitability. A further variation may be to open up new stores in new areas as a normal expansion of the business. The company would nevertheless be carrying on the same business, ie., the business of retailing through departmental stores.

108. Questions of fact and degree will, of course, need to be carefully considered. A company may, for example, be carrying on the business of selling only electrical goods by retail prior to a change in shareholdings. After the change it commences to carry on a business of retailing, say, lawn mowers, and discontinues the sales of electrical goods. It is considered that, in these circumstances, the company would not be carrying on the same business although the business still falls within the broad category of retailing.

109. Many of the cases considered since the introduction of s 80E have clearly fallen within the scope of the section because of the established facts that:

  • (a) the company was actively carrying on a business immediately before the change in shareholdings;
  • (b) after the change in shareholdings the business was carried on without any material change as to its nature in the same premises and using the same equipment with substantially the same employees an principally with established customers;
  • (c) the company did not, or did not propose to, commence to carry on a business of a different kind or to enter into transactions of a new kind such as service agreements, purchasing from associated companies at heavily discounted prices or other transactions which had the effect of diverting income into the loss company from other companies in the take-over group.

110. In other cases there has been some change in the location of the company's business, its management, its markets or its products but the change has not been sufficient to alter the nature of the business of the company. In one case the company transferred the business to another suburb and dismissed many of the former employees but continued to use the same plant, purchase from the same suppliers, sell to old and new customers and produce the same products, as previously. It was decided that the facts of the case were such that the company was carrying on the same business.''

I should note at this point that it does not appear to me that this is a case where resort to the explanatory memorandum is necessary or relevant. As to rulings or statements by the Respondent, I am bound by and prefer the judicial authorities to which I have referred.

47. The Applicant referred also to the judgment of Shepherd J in
J Hammond Investments Pty Limited v FC of T 77 ATC 4311; I include clauses 49, 50 and 51 of the Applicant's submissions dated 1 March 2004 as follows:-

``49. In J. Hammond Investments, Sheppard J considered both limbs of this requirement in the context of section 106D(1) (now repealed) of the 1936 Assessment Act [ excess distribution companies as distinct from loss companies] but at 358 observed that:

`In my opinion it is not without significance that the provisions of s. 80E of the Act dealing with tax losses are in similar terms... The provisions of s. 106D(1)(c) ought not to be construed differently from those of s.80E(1)(c)...'

50. At 355, Sheppard J said:

`The answer to the question of whether the business was the same after the entry into the partnership agreement as it was before involves a factual inquiry: Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 97. It is a different inquiry from that which is posed by the first limb of par (c) although that too involves a factual investigation. The

ATC 148

distinction between the two concepts is, with respect, clearly brought out in the judgment of Gibbs J in the Avondale case. Despite the fact that the two inquiries are different it would seem to me that an answer to that posed by par (b) favourable to the taxpayer must also result in an answer favourable to it in relation to the inquiry posed by the first limb of para (c).'

In the applicant's submission, his Honour's view is correct, save perhaps where the taxpayer commences a new discrete business of a different kind, in addition to its existing business, which is in no way integrated with that business [see 48 above]. Certainly the facts of the present case do not permit a conclusion that at any time after 24 May/21 June 1991 the applicant commenced to carry on, in addition to its existing business, a new discrete business of a different kind. All its activities and the accounting and reporting of them were totally integrated.

51. Sheppard J went on to consider the second limb of this requirement and concluded (at 359):

`Whilst... I do not regard the matter as free from difficulty, I have reached the conclusion that the second limb of the paragraph is not intended to refer to the daily transactions involved in carrying on a business but to transactions of an isolated and independent kind, which transactions have nevertheless arisen in the course of the taxpayer's business operation.'

52. In Fielder Downs (WA) Pty Limited (supra) Campbell J...after referring to what Shepherd J said in J Hammond Investments... said at 252:

`I think that the second limb of par (c) contemplates that the transaction not previously carried on was one which could have been carried on in the course of the company's business operations prior to the change- over. Sales of stock had not been carried on prior to that time, and indeed prior to that time the company had no stock available which it could have sold. So, it seems to me, that the sale of stock was a transaction of a different character from any which had been previously entered into by the company.'''

The statements by Campbell J in Fielder Downs as to the second limb of paragraph (c) were obiter. However, and in relation to J Hammond Investments and again in relation to the second limb of paragraph (c), Shepherd J was dealing with s 106D(1) of the Act and not s 80E notwithstanding the fact that there are similarities; J Hammond Investments is thus not binding on me in relation to this decision. I prefer the view of Campbell J even if it was obiter. This is so because in my view it accords with the terms of the section. Professor Parsons dealing with the judgment of Shepherd J in J Hammond Investments said in clause 10.405:-

``[10.405] However, Sheppard J. in J Hammond Investments Pty Ltd
77 ATC 4311 has endeavoured to limit the operation of the second limb of para. (c) in excluding the saving effect. He said (at 4318):

`I have reached the conclusion that the second limb of the paragraph is not intended to refer to the daily transaction involved in carrying on a business but to transactions of an isolated and independent kind, which transactions have nevertheless arisen in the course of the taxpayer's business operations.'

On this interpretation, regular credit transactions, though they are of a kind not previously entered into, will not preclude the saving effect of s 80E. But an isolated lease transaction, producing rent, which occurs in the course of property dealing - property having been acquired that is tenanted - will preclude the saving effect, if no lease transaction has been entered into prior to the change. Regular transactions, though of a different kind will go only to the question whether there is a business that is the same as a business carried on before the change, or whether there is a business after the change of a new kind. Only an isolated transaction can involve the risk of precluding the saving effect of s. 80E by attracting the operation of the second limb of para (c). The interpretation proposed by Sheppard J will favour the company whose experience before the change has included the greatest diversity of income producing transactions. And it has the consequence that, though the saving effect of s 80E may be precluded by a transaction in the year of

ATC 149

income, the saving effect may be restored in a later year of income by ensuring that no isolated transaction is entered into. The interpretation of Sheppard J., it should be noted, is not endorsed by the judgment of Campbell J in Fielder Downs (W.A.) Pty Ltd
79 ATC 4019. The interpretation gives the second limb an operation that might be considered fortuitous .''

(Underlining added)

It will be appreciated then that Professor Parsons had doubts as to the views of Shepherd J in J Hammond Investments.

48. The term ``business'' is defined in the Oxford English Dictionary relevantly as follows:-

``A commercial enterprise regarded as a `going concern', a commercial establish- ment with all its `trade', liabilities etc.''

That definition was adopted by Mason J in
Hope v The Council of the City of Bathurst 80 ATC 4386; (1981) 144 CLR 1. Mason J with whom the other members of the Court agreed said at ATC 4390; CLR 8-9:-

``Although it has been common ground that `business' is used in its ordinary meaning in sec 118(1), the Courts below have refrained from saying what that meaning is. This is perhaps understandable because, as a glance at the Shorter Oxford Dictionary will show, the word has many meanings. Ironically it is the last meaning given by the Shorter Oxford Dictionary, `19. A commercial enterprise as a going concern', that comes closest to the popular meaning which the Courts appear to have acted on in the present case. In truth it is the popular meaning of the word as used in the expression `carrying on a business', rather than the popular meaning of the word itself, that is enshrined in the statutory definition. It is the words `carrying on' which imply the repetition of acts (Smith v Anderson (1880) 15 Ch D 247, at pp 277-278) and activities which possess something of a permanent character....

I accept, then, that `business' in the subsection has the ordinary or popular meaning which it would be given in the expression `carrying on the business of grazing'. It denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis. Putting aside the question whether the activities have a `grazing' character, the critical issue for decision is whether the material before the Court reasonably admits of different conclusions on the question whether the appellant's activities constitute a `business'. On the facts as found, I conclude that the appellant's activities amounted to a business and that no other conclusion was reasonably open. In this respect I agree with what Reynolds JA said in his dissenting judgment. Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit. The activity had a permanent character in that it had been carried on without interruption since 1965. The appellant sought customers by advertising and kept appropriate financial records. The land, though small in area, was put to its best potential use and the pastures were improved and facilities including fences were provided for that use. There is nothing in the findings to suggest that the activities were other than genuine and real.''

49. It must be accepted that the concept of a ``business'' relates to activities undertaken as a commercial enterprise and as a going concern and being activities for profit on a continuous basis. It is therefore necessary to examine all of the activities carried on in the course of that business. To single out any particular activity would be incorrect; see
JG Imgram & Son Ltd v Callaghan (Inspector of Taxes) [1969] 1 ALL ER 433 at 436;
Rolls-Royce Motors Ltd v Bamford (1976) 51 TC 319 at 346; Case Y45,
91 ATC 426 at 431.

In JG Imgram & Son Ltd v Callaghan (Inspector of Taxes) Lord Donovan said at page 436:-

``44. It is first argued for the taxpayer company that, throughout, the essence of its trade has been selling. There is not much use (it is said) in simply manufacturing goods and looking at them; what produces the profit - and, incidentally, tax for the Crown - is the profitable sale of the goods so made. It is immaterial on this view that in one period the goods are made by oneself and in another period are purchased ready- made from somebody else; this is simply a change of means. The end remains the same - a profitable sale. Here that was the end in all the three periods, and on that view the trade has remained one and the same

ATC 150

throughout; there has been no discontinuance, and not even a suspension.

I have some sympathy with this view, which I fear, however, derives from somewhat far- off days when I tried to establish it myself. I failed; and looking aback at the attempt, I think now that I rightly failed. I doubt if one can, as a rule, segregate the various activities involved in carrying on a trade, select one of them as being of the essence, and then designate the one selected as being the real trade. There is, I think, an organic unity about a trade which invalidates this sort of dissection ; and I think that Rowlatt, J., was saying much the same thing, though more incisively, when he remarked in Graham v Green (Inspector of Taxes) that a trade differs from the individual acts which go to make it up, just as a bundle differs from odd sticks. If the taxpayer company had been asked in period no.1 what its trade was, it would have replied: `Making and selling surgical products' - not merely `Selling surgical products'. And in period no. 2, if asked the same question, I think the company would have replied, and properly replied, `We have changed over now simply to selling' . For what it is worth, moreover, the definition of `trade' for the purposes of the Income Tax Acts includes `every manufacture'. This may not be worth much (indeed the whole definition is not worth very much) unless it is to be implied that the definition assumes in this respect that the goods manufactured will be sold. But the definition does, I think, show that manufacture is to be regarded as more than a means to an end. I respectfully agree on this aspect of the case with the decision of the Court of Session in Gordon & Blair, Ltd. v Inland Revenue Comrs., which decided in 1962 that commissioners were entitled to find that a brewery company, which discontinued an existing trade of brewing and selling beer, and changed over simply to selling it, had discontinued one trade and started another. I am not able, therefore, to say that there was one continuing trade throughout in this case, viz., that of selling these surgical products. (Underlining added)

45. I think it follows from this that `the essence of the trade'... comprises every activity which goes to constitute that trade. Or, put in another way, however the trade of Rolls-Royce Limited in 1961 is to be defined, it includes the activities, whatever they were, all ultimately directed towards making the profits, whatever their actual result, in all its six divisions.''

50. The Respondent contends (correctly in my view) that the Applicant made the error of singling out some only of its activities when it sought to characterise its business as being ``a distributor of telecommunications equipment and the provision of telecommunications services'' (5 TS 11 and 5 TS 54).

51. As I have noted the Applicant has consistently argued that it was involved in the telecommunications business and that the Peter Business was also involved in the telecommunications business. That this is not of itself sufficient is demonstrated by a consideration of the decided cases.

52. If the Peter Business had been acquired prior to the relevant change, the Applicant has another difficulty. This would be so because the Applicant would in that event have been involved in the retail business as from either 3 May 1991 or 30 April 1991. Mr Black said that the retail business was abandoned within 12 weeks thereafter. It was not; the sale of the South Australian business to Campbell took place in June 1992.

53. In any event there were other changes in the years which followed which were fundamental and were indicative of far more than mere organic growth. The various Telstra agreements constituted the most important of those changes because in consequence of the Telstra contracts the Applicant became, to a large extent an agent for Telstra in relation to the sale of Telstra stock.

Part E - Surrounding circumstances and (in part) Mr Black's evidence

54. It is necessary then to consider the surrounding circumstances. In January 1991 Mr Black was appointed managing director or the Applicant. He said that this was a title only at the commencement of appointment in that he joined the board of directors of the Applicant at a later date. It seems clear though that he was the chief executive officer. His evidence was that he did not recollect having seen the financial accounts of the Applicant when he first took up his position. The financial accounts of the Applicant indicated in the clearest possible terms that it was in difficulties; it had

ATC 151

accumulated substantial losses. At that time the Applicant's business consisted of:-

``(a) the sale of technophone mobiles

(b) the sale of PABX and KTL equipment

(c) Services under warranty; and

(d) the sale of ordinary telephones.''

The Applicant carried on business from its premises in Sydney as a wholesaler. There were some sales outside New South Wales but they were infrequent. Mr Black said that to send sales agents out of New South Wales was too expensive and so that business outside New South Wales was negotiated over the telephone.

It must be remembered that Mr Black was the chief executive officer of the Applicant which was a subsidiary of Target. He was aware of the take-over bid by Clover without being actively involved in it; in particular he was aware in general terms of the progress of the bid. It is in this context that there was an implication that the acquisition of the Peter Business was independent of the take-over bid. (The fact that the Heads were in their terms conditional on the consent of Clover Holdings indicates that its views were at the very least a relevant consideration; at that time the financial position of Target and its subsidiaries was weak.)

55. In or about March 1991 Mr Black became aware of the fact that the Peter Business was in difficulties. Having regard to the terms contained in the Sale Contract its position was difficult indeed. Mr Black said that the Applicant was anxious to acquire the right (but not necessarily an exclusive right) to sell Motorola equipment. The Applicant foresaw an exponential rise in the sales of mobiles. The Peter Business offered an entrée to Motorola which was a very attractive feature. Mr Black's evidence was that it was not possible to obtain an entrée to Motorola directly. In addition the Peter Business offered a country-wide presence which was also attractive.

56. Mr Black's evidence as to Motorola was inconsistent with the Sale Contract. The Sale Contract as I have noted, makes no mention whatever of Motorola. However Mr Black said that it was integral that the Applicant take over debts of the Peter Business and in particular the debt to Motorola in an amount of about $600,000. He said that Motorola was prepared to negotiate only if its debt was paid; Motorola had according to Mr Black had previous bad experiences with distributors in Australia. The Applicant did assume liability for the Motorola debt and paid it over a period. The Sale Contract did not oblige the Applicant to pay the Motorola debt.

57. Mr Black said that to gain supply from Motorola required the purchase of the Peter Business. He said that Motorola was meticulous about legal documentation; that particular allegation is inconsistent with guarantees provided to Motorola. They were executed by Tricom (and being the pseudonym to which I referred earlier); they were expressed to endure for limited periods and there were gaps in between the periods; most importantly of all perhaps the guarantees cannot be categorised as being in any way comprehensive. The guarantees read as follows:- 

        


Motorola Australia Pty Limited
Building 1, 303 Burwood Highway
Mount Waverley VIC 3149
Australia

Attention: Mr Simon Peutrill, Financial Controller
--------------------------------------------------

Dear Sirs,

Letter of Guarantee

In consideration for your extending trade receivable facilities to Tricom Pty
Limited, Sydney, Australia (`Tricom'), in accordance with the terms of your
Cellular Distributor Agreement dated 1 May 1991, we guarantee that we will
honor in full Tricom's obligations for payment of principal and interest under the
facilities if Tricom fails to do so. This guarantee is limited to a maximum amount
of Australian Dollars One Million (A$1,000,000.00).

This guarantee shall expire on 28 June 1991.

Yours faithfully,
For and on behalf of
Clover Holdings LIMITED
Managing Director.''

...

``2 July 1991
Motorola Australia Pty Limited
Building 1, 303 Burwood Highway
Mount Waverley VIC 3149
Australia

Attention: Mr Simon Peutrill, Financial Controller
--------------------------------------------------

Dear Sirs,

LETTER OF GUARANTEE
-------------------

In consideration for your extending trade receivable facilities to Tricom Pty
Limited, Sydney, Australia (`Tricom'), in accordance with the terms of your
Cellular Distributor Agreement dated 1 May 1991. We guarantee that we will
honor in full Tricom's obligations for payment of principal and interest under the
facilities if Tricom fails to do so. This guarantee is limited to a maximum amount
of Australian Dollars One Million (A$1,000,000.00).

This guarantee shall expire on 30 December 1991.

Yours faithfully,
For and or behalf of
Clover Holdings LIMITED
Managing Director.''

...

``2 January 1992
Motorola Australia Pty Limited
Building 1, 303 Burwood Highway
Mount Waverley VIC 3149
Australia

Attention: Mr Simon Peutrill, Financial Controller
--------------------------------------------------

Dear Sirs,

LETTER OF GUARANTEE
-------------------

In consideration for your extending trade receivable facilities to Tricom Pty Ltd,
Sydney, Australia (`Tricom'), in accordance with the terms of your Cellular
Distributor Agreement dated 1st May, 1991, we guarantee that we will honor in
full Tricom's obligations for payment of principal and interest under the facilities if
Tricom fails to do so. This guarantee is limited to a maximum amount of
Australian Dollars One Million (A$1,000,000.00).

This guarantee shall expire on 30 April 1992, payment in full being received by
Motorola for all invoices rendered to Tricom dated up to and including 30 April,
1992, or alternative credit terms having been agreed as per Schedule E,
paragraph 4 of the Cellular Distributor Agreement dated 1st May 1991.

Yours faithfully,
For and on behalf of
Clover Holdings LIMITED
Managing Director.''

(It will be remembered that Target never had a subsidiary called Tricom)

58. The Peter Business was that of a retailer. Mr Black's evidence was that the retail operation was closed down within 12 weeks. As I have noted that statement was incorrect bearing in mind that the retail business in South Australia was sold to Campbell a year later pursuant to an agreement which is exhibit R4.

59. The Peter Business was thus in important respects very different from that of the Applicant's business. Its customer base was different; its product was different; it was a retailer where the Applicant was a wholesaler and its area of operations was much wider. It had many more staff, and particularly sales staff, many of whom were absorbed into the Applicant's business. And perhaps most importantly of all it was the key (per the evidence of Mr. Black) to the Motorola rights and the evidence before me was that Motorola products were more desirable than those of Technophone, which were described in uncomplimentary terms by Ms Light.

60. Because the relevant change took place prior to the acquisition of the Peter Business, it cannot be said that the Applicant's business activities were the same as those carried on prior to the relevant change. The most that could be said in that event is that in a general way each of the two businesses had something in common and that is that each was involved in the telecommunications business albeit at different economic levels. The Applicant has consistently throughout these proceedings adopted a ``broad brush'' approach and so as to contend that the fact that the two businesses had telecommunications in common was sufficient.

62. The Respondent contends (as I have noted) that in taking possession of the Peter Business prior to the Sale Contract the Applicant was engaged in activities of a preliminary or investigatory nature and moreover that they did not form part of the Applicant's business at that time because the element of commitment was lacking. I agree with that contention.

63. I have come to conclusion that the Peter Business was acquired in August 1991 or later

ATC 153

under the Sale Contract and depending on when the conditions precedent were fulfilled or if they were waived when waiver occurred, and not earlier; it follows then that the date of acquisition was not the Effective Date as defined in the Sale Contract or 3 May 1991 and being the date of the Heads. It follows furthermore that the acquisition occurred after the relevant change and regardless of whether the relevant change occurred on the earlier or the later date.

Part F - The evidence of Mr Black in particular

64. Mr Black as I have said joined the Applicant early in 1991. He claimed at first that he was unfamiliar with the 1990 year accounts (6 TS 58, 59). Those accounts were prepared at a time when he was the Applicant's managing director. At 6 TS 59, the following exchange took place:-

``I am suggesting to you, Mr Black, that you would have been familiar with the document of this kind at the time at which it was prepared? - I cannot recall that.

Well, would you please take a look at the document and tell me whether it refreshes your recollection as to what the results of the company were for the 1990 year and whether or not so far as you can tell this is a document which correctly represents the results of the company for the 1990 year? - I was aware that the company had conducted-

Mr Black, I have asked you to look at the document and answer that question. Would you please do that.

MR EDMONDS: I object. He asked him about three questions. Could he ask him one question at a time and the objection will be withdrawn.

MR SULLIVAN: I asked Mr Black, Deputy President, if he could look at the document and ascertain whether so far as he could tell it correctly represented the results of the company for the 1990 year. That was what I asked him. It's not two questions, it's asking him to look at the document and answer that question? - My answer is I cannot.

You cannot look at the document? - I can look at the document and I cannot say whether this document truly reflects the state of affairs of the company during 1990.''

Mr Black subsequently agreed that the sales figures in the 1990 accounts were correct (6 TS 60). He also said that he remembered the relevant EBIT figure.

Mr Black had an interview with the Respondent on Monday 20 December 1999; that interview record appears at T24 of the T- Documents. At T168, Mr Black said:-

``MB: Yes. This was I believe in May 1991. Peter Communications was a reseller of mobile phones in all States except Queensland. Peter Communications was unable to meet its financial obligations and had an important relationship with Motorola. We negotiated taking over Peter Communications with the object of (A) obtaining the Motorola distribution agreement, and (B) utilising the State offices as branch offices at Target for distribution purposes. This we did.

CF: OK. So, the business of Peter was simply one of distribution of mobile phone?

MB: Yes.''

And at T24 pg 169 he said:-

``MB: No. That was the second point that I raised, that they were present in all States except Queensland. We did not have a presence in other States, they gave us the presence.

JO: So that's when you came into all those various States?

MB: Yes.

JO: And I'm not familiar with the history of the xxx, I might be getting it wrong xxx but I'll ask it, Peter was taken over... was the business of Peter taken over or was it actually the company taken over?

MB: It was the business.''

In evidence Mr Black said that the substantial reason for taking the Peter Business was to obtain Motorola distribution rights. At 6 TS 75 he said:-

``Now it is the case, isn't it that a substantial reason for purchasing the Peter business was to give you that presence in other States? - No. The substantial reason for taking Peter was to gain the Motorola distribution agreement.

ATC 154

You mentioned on the previous page, Mr Black, that you had two objects,

  • (a) obtaining the Motorola distribution agreement; and
  • (b) utilising the State offices as branch offices of Target for distribution purposes; and then on the next page you said: ``We did not have a presence in other States, they gave us the presence. `Now it was the case that you were telling those gentlemen at that time, wasn't it, that a significant purpose of purchasing the Peter business was to get a presence in other States and that was your purpose, wasn't it, Mr Black, in a substantial part? - Mr Sullivan, I would agree with you, your statement until you said the purpose. I think the purpose was (a) obtaining the Motorola distribution agreement, because remember we only had Technophone; and (b) utilising the State offices as branch offices.'''

And at 6 TS 79 he said:-

``I would suggest to you, Mr Black, that the reason why you went down that path was because you were after the other benefits of acquiring the Peter business and that is, as you explained to the taxation officers, the presence in Victoria, South Australia and Western Australia. That was what was worth $600,000 to you, wasn't it? - We respect, I won't resile from what I said to the taxation office and I will put it in exactly that order. (A) the Motorola product; (B) the states.''

And in cross-examination on the following day (7 TS 25), Mr Black agreed that the Motorola agreement was not listed as a material contract and moreover that there was no mention of Motorola anywhere in the Sale Contract.

65. Generally as to the situation in relation to Motorola I refer to the evidence at 6 TS 76 and 77 as follows:-

``Well, obtaining the branch offices as a substantial part of your reason for buying it? - If I didn't have the Motorola agreement the State offices would be useless.

Insofar as distributing other brands of mobile phones was concerned, how did you come into the distribution of Nokia mobile telephones? - As I said earlier, that negotiation had commenced some time in the latter half of 1990 by Mr `Kater'. I picked up those negotiations I think in February of 1991. In May of 1991 Nokia took over Technophone. They are the - that is the sequence of events.

And do you mean by that that it was your existing distribution arrangements in relation to the Technophone phones that gave you the capacity to negotiate with Nokia for distribution of their phones? - I - no, I couldn't say that. All I can say is there was some negotiations going on in 1990 to take up Nokia. I concluded those negotiations I believe in February. Whether Technophone was relevant to that we didn't know. We didn't know about what Nokia's intentions were but they did take over Technophone in May.

THE D. PRESIDENT: That is 1991? - Yes.

MR SULLIVAN: In relation to Motorola telephones, if you were a significant player in the market what was to prevent you from just off your own bat going to Motorola and negotiating an arrangement to commence distribution of their telephones? - If you were a significant player in the market the only prevention of such a relationship would have been Motorola itself.

Given that you were not purchasing or when you took over the business of Peter you didn't purchase the Peter entities, you purchased the assets of the business. If Motorola had at that point indicated that it didn't wish to provide its phones to your organisation then the flow of Motorola phones could have been terminated at their whim, couldn't it? - Absolutely.

So isn't it the case that the reality of the situation was that your capacity to obtain and maintain distribution of Motorola telephones was going to depend upon your capacity to persuade them that you were a worthwhile customer for them? - Motorola had incurred a $600,000 debt - sorry, I will start again. Peter had incurred a $600,000 debt with Motorola. All Motorola were concerned about was that they got that billed paid. We put a proposal to them about how that bill would be paid over time by trading out on the proviso that we became a distributor, a wholesale distributor of Motorola phones. They agreed.

ATC 155

THE D. PRESIDENT: But not the exclusive distributor? - It was never an exclusive distribution. I mentioned before about the culture of Target. It is not the culture of Target to have exclusive distribution arrangements.

Understood but let us assume that you had in March 1991 watching - I must watch my words now. Peter is in difficulties. Now you see an opportunity. There were two ways. If your main motive was to get a tie-in with Motorola you could do it in one of two ways. One was the way you did, which is you bought Peter and agreed to pay off Peter's debt to Motorola. Obviously a negotiating tactic which was designed to gain you favour with Motorola but you could have done it another way, you could have gone to Motorola and said, look, we are a very big player in this field and we would like to buy your phones and here is a bank guarantee to secure our purchases. They would have jumped at you, wouldn't they? - If we were a big - I answered Mr Sullivan, if we were a big player, yes but we were not at that time.

Am I correct, should I understand your evidence as this, in order to get to Motorola you had to go and buy Peter, you couldn't do it any other way? - Yes, no. That is correct.

I don't see why though. I mean if Motorola needed representatives in Australia. Peter falls away, if you hadn't rescued them. It may be that Motorola would have lost its $600,000 or a substantial part but now they would be looking for somebody new and you were one of the people who could fill the gap, wouldn't you? - I don't know how to put this, Deputy President.

Think about it and try? - Right. Motorola had had a couple of other failures with distributors during 1990 and this was the third.

Are these Australian distributors? - Yes. This was the third, it was a significant amount and they looked for a solution.

It's not a huge amount to an American company of that size? - At that time, Deputy President, I think the number of mobile phones actually connected in 1991 was something in excess of 250,000. $600,000 worth of debt in that market was significant.

Am I wrong in thinking that even at the time Motorola was one of the big corporations in the States, millions of dollars? - Indeed they were but the Australian arm had had its difficult times and the deal was that they did not want to lose the $600,000 to add to their debts.

At the risk of labouring the point, think about this for a moment, Mr Black, you wanted to get to Motorola because you thought their product was good and you felt that you could make profits out of selling Motorola phones? - Yes.

Now the next question is how did you get to Motorola, one way is to just go and approach them and say we would like to represent you. They must already have been having trouble getting money from Peter. So couldn't you have got representation from Motorola and a supply of products without buying Peter? - No. We tried and they wouldn't entertain our presence.

You did try? - Yes.

Did they say to you if you buy Peter and if you pay the amount that they owe then in that event we will give you a deal? - Whether it was as blatant as that I can't say but it was at about that time that those things came together. That consideration came together.

I see.''

66. Mr Black was very vague as to the persons involved in sales in the Applicant's business in early 1991; he could remember only one person but he did remember the names of specific customers outside New South Wales in early 1991 (7 TS 7/8), although there was no documentary evidence as to those customers.

67. Mr Black was firm as to the fact that all retail activities in the Peter Business were terminated within 12 weeks (6 TS 22). In cross- examination he said (7 TS 12) ``and I think it was then completed within 12 weeks - three months -something like that''.

And then (7 TS 15) Mr Black said:-

``If I can just take you back to the topic, Mr Black of the period within which retail sales were carried on. Your recollection was that you tried to close those down within a

ATC 156

period of approximately 12 weeks but I would suggest to you that in some respects at least retail sales went on for a longer period than 12 weeks? - Mr Sullivan, my evidence is that I would have been very angry if it went beyond that period. My whole drive was to get out of that business.''

68. Mr Black was then shown the agreement of sale which is exhibit R4 being the sale of the retail business in South Australia to Campbell. That agreement was executed in either May or June 1992. Notwithstanding that that agreement had been signed by him personally and notwithstanding that it recited that the Applicant had for some time carried on the business as described in page 20 of exhibit R4 as ``Sale of Telecommunications equipment direct to end users'' Mr Black continued to attempt to deny that the Applicant had been carrying on a retail business in South Australia until June 1992.

69. The Respondent contends (correctly) that Mr Black's evidence is inconsistent with exhibit R4, exhibit R17 and the evidence of Mr Silver who worked in the South Australian business and whose evidence in this context must be preferred. Mr Black gave evidence in this context that the Applicant's offices outside New South Wales did not maintain stock and was supplied by overnight courier from Sydney (6 TS 40 - 41). Mr Silver's evidence was that the Applicant had its own stock until the sale to Campbell in May or June 1992 (10 TS 10).

70. As I have indicated previously Mr Black's evidence was that it was necessary for the Applicant to pay the outstanding debt of $600,000.00 due to Motorola. That evidence was inconsistent with the terms of the Sale Contract; see in particular clause 13 quoted earlier in these reasons.

71. Mr Black had said that limited consultation advice was furnished to the Applicant and that advice (as needed) was furnished pursuant to conversations which he had with two other executive employees. When asked whether there were any people who were specifically allocated to the function of providing management assistance he answered 'no' and confirmed that assistance was only ``occasional consultation'' (7 TS 79).

When shown the formal agreement (exhibit R11 between the Applicant and Target Holdings for the provision of services in consideration of the payment of $1,398,000.00 for the 1994 year, his evidence changed and he said (7 TS 80):-

``I would say - I would say that in particular in reference to financial services, banking services, MIS and in particular the relationship with (blank), yes, I did get considerable assistance on those things.''

72. Mr Black in general terms presented as an intelligent and articulate man well versed in telecommunications generally. However his evidence was adversely affected by inconsistencies of the nature previously set out in these reasons. He had little recollection in particular of the circumstances in which the Sale Contract came to be negotiated and executed.

Part G - The evidence of Ms Light

73. Ms Light was the financial controller of the group; her witness statement is exhibit A11.

74. At 9 TS 28 the following exchange took place:-

``MR RICHMOND: It is page 6 of the exhibit as I calculate it, Deputy President.

Can you tell the Tribunal what the word `branch' means in the context of this document? - Well, this would be the branch of the ACT, so Branch ACT, it's the - reflecting sales to customers in the ACT.

Right, so it is reflecting sales to customers there, it is not reflecting the fact that you had an office physically located in the ACT? - We did not have an office in the ACT.

No. At this time you didn't have any offices, when we say `this time' I mean January 1991, you didn't have any offices outside New South Wales, did you? - No, we had offices in other States. ACT was serviced by the Sydney office.

Right. Well, where were your offices outside New South Wales in January 1991? - There were sales - there was offices in Queensland, Western Australia, New South Wales.

You are not confusing the times here, are you? It is the case, is it not, that you acquired through the Peter acquisition some offices in -? - We actually had master dealers. I had better be specific here: we had master dealers in each State. We didn't physically have a presence of an office but we had what we called master dealers, and

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those master dealers, under each master dealer then there was a list of other dealers but there was a master dealer in each State.''

75. During the course of Ms Light's examination exhibit R14 which was in fact an amended calculation, was tendered. That exhibit sets out the nature of the Applicant's revenue during the relevant period and it is set out in full in these reasons as follows; 

                                      ``The Applicant Pty Ltd
                                          Sources of income
                                              1990-1995

+-----------------------------------------------------------------------------------------------+
|               |   1990 ($) |   1991 ($) |   1992 ($) |   1993 ($) |   1994 ($)  |   1995 ($)  |
|-----------------------------------------------------------------------------------------------|
| Sales Revenue | 12,063,994 | 14,390,000 | 40,290,000 | 82,264,000 | 111,456,000 | 178,188,000 |
|-----------------------------------------------------------------------------------------------|
| ``Service''   |            |            |            |            |             |             |
| Installations |            |    195,000 |     78,000 |            |             |             |
| Service       |            |    227,000 |    287,000 |    338,000 |     288,000 |     338,000 |
| Other         |            |     80,000 |    136,000 |            |             |             |
|-----------------------------------------------------------------------------------------------|
| Warranty/     |            |    220,000 |     94,000 |    215,000 |     626,000 |     542,364 |
| service       |            |            |            |            |             |             |
|-----------------------------------------------------------------------------------------------|
| Technophone   |            |     63,000 |            |            |             |             |
| claim         |            |            |            |            |             |             |
|-----------------------------------------------------------------------------------------------|
| Air Time      |            |     37,000 |    119,000 |    871,000 |   1,505,000 |   1,388,155 |
|-----------------------------------------------------------------------------------------------|
| Management    |            |            |     55,000 |    292,000 |     572,000 |     396,800 |
| Fee --        |            |            |            |            |             |             |
| MobileNet     |            |            |            |            |             |             |
|-----------------------------------------------------------------------------------------------|
| Distribution  |            |            |            |    489,000 |   1,708,000 |   3,146,361 |
| Fee --        |            |            |            |            |             |             |
| MobileNet     |            |            |            |            |             |             |
|-----------------------------------------------------------------------------------------------|
| Discount      |            |            |     26,000 |            |             |             |
| received      |            |            |            |            |             |             |
|-----------------------------------------------------------------------------------------------|
| Phonesave     |            |            |            |            |      85,000 |  11,042,000 |
|-----------------------------------------------------------------------------------------------|
| Sundry income |     25,199 |            |            |            |             |     286,320 |
+-----------------------------------------------------------------------------------------------+

In its written submissions, the Applicant furnished figures which tend to suggest that the Applicant's revenue was predominately derived from sales; those contentions suffer from a serious defect and that is that the sales figures were in respect of gross sales revenue and without reflecting the cost of sales. Those figures were thus distorted; exhibit R14 must be preferred.

78. Ms Light gave evidence as to the fact that certain Peter Business employees were entitled to profit shares.

76. Ms Light said that she did not know that the Peter Business was a retailer of mobile phones (9 TS 80-81) and that during the period after the Peter Business acquisition the Applicant did not engage in retail sales (9 TS 80 and 9 TS 87-89). That that evidence cannot be accepted is indicated by the contrary evidence referred to in clause 20 of appendix B of the Respondent's written submission as follows:-

``20. This is contradicted by:

  • (a) a memorandum jointly authored by Ms Light and Mr Black which is incorporated in the April 1991 management accounts (Light, Annexure E) which states (at p. 2):

    ATC 158

    `Peter specialise in the retail sector or end user sector...'

  • (b) a memorandum she prepared for the June 1991 management accounts which refers to `retail sales' (Exhibit R15);
  • (c) the evidence of Mr Black that Peter was `the retailer of phones' (Transcript 6 August, p. 22);
  • (d) the evidence of Mr Silver that the Applicant office in South Australia in which he worked engaged in retail sales until June 1992 (Silver, paras 5-14; Transcript 10 February, pp, 10-12).''

77. In the context of the sale of the retail business in South Australia to Campbell I refer to 9 TS 101 and 102 the following evidence was given:-

``Yes, certainly. It is exhibit R4, Deputy President. If Ms Light may be shown exhibit R4, please? - Thank you. So I was presented with this document to sign as company secretary and it says, `Agreement for the sale of business,' and it was between Applicant and Campbell in South Australia, and I read the first page and the `whereas' it says:

`The vendor has for some time carried on the business described in part 1 of the schedule under the name set out in part 2.'

So I went to part 1 of the schedule, and part 1 of the schedule describes the business as, `The sale of telecommunications equipment direct to end users,' and I said to Mr Black at the time - because he was the person that had given me the document to sign - I said, `That's describing their business. It's not our business, it's their business. That's not our business.'

Right? - I said, `I think the lawyers have got this around the wrong way. They've the vendor and they've got the purchaser mixed up,' and he said to me at that time, `No, it's a legal document. We need to get this executed straight away. It doesn't matter.'

Right, as you say in your statement? - It did matter to me because it was, as far as I was concerned - and that's why I remember this document well, is because Mr Black insisted that it get signed, like, the seal get affixed, but at the time I remember having a detailed conversation with him that the description was wrong and should be altered and should be initialled on execution.

And you have just recounted the substance of that conversation, right? - That's how I happened to remember this document when I was shown this document, because things come back to haunt you.

What knowledge did you have, at the time, of the business conducted by Applicant in South Australia if you were in the head office, effectively, and out of the -? - I remember from my due diligence and for the 12 months that I was involved with the company, or six months that I was involved with the company after the acquisition of Peter, that we don't deal with end users; and so the description here was totally misleading. I said, `How can you sell a business that's not our business?'

Also, the other thing that I couldn't understand was the consideration. But I signed the document, I affixed the seal and I put it in the seal register.

Well, I put it to you that it is, or was, a correct description at the time the document was signed of the business conducted by the taxpayer company at that time? - Well, I put it to you that it's not, because I wouldn't have had the argument with Mr Black - and the argument went on for over half an hour.''

Ms Light's evidence in this context cannot be accepted in the light of the other evidence. And one has to ask why, if the agreement with Campbell was wrong, and she told Mr Black that it was wrong, it was nevertheless signed by her and Mr Black in that form.

78. That Ms Light did not recollect the precise nature of the Peter Business is demonstrated by her evidence at 9 TS 87 and 88 as follows:-

``The first paragraph, yes, and do you still say that Peter was not a dealer of mobile phones? - See how it says `the conduct of a dealership in cellular mobile telephones'?

Yes? - They were an accredited Motorola dealer.

So they were selling -? - They were an accredited Motorola dealer and that's how Motorola referred to - like, we became - Applicant became an accredited Motorola dealer. That's any contract that you enter

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into with Motorola for the supply of phones, that's the terminology that's used by Motorola.

Right, so it means that they are selling to members of public like you and me, does it not? - No, it means that you're buying phones from Motorola. You're an accredited Motorola-

No, Peter. Peter, as a dealer in mobile phones, is selling mobile phones to members of the public, is it not? - No. It says here that one such business consists of the conduct of a dealership in cellular mobile telephones. It means that they are a Motorola dealer.

Yes, selling phones -? - Distributing phones.

So you say that they didn't sell any mobile phones to members of the public? - I'm not saying that. I'm saying I don't know where they sold all their phones but they were a Motorola dealer and their business was similar, I understood, to the Applicant business. We had the same businesses. They had one product called Motorola. We had two products called Technophone and Nokia. We wanted Motorola. We bought Peter.''

79. Ms Light said in relation to her due diligence at 9 TS 82:-

``The whole purpose was - the whole point I'm trying to make there is that I almost put that in my report as a disclaimer that a full due diligence prior to the acquisition of this business on 1 May had not been conducted.

Just two more questions if I may, Mr Richmond.

I hear you, Ms Light, and I think I understand what you are saying. You say, though, in your report it was too late because you have already signed heads of agreement. My recollection is that, according to Mr Bailey's evidence, they were non-binding heads of agreement. Put in other words, your company, Applicant as it then was, could have said, `Peter, you have turned out to be rather less than we had expected rather than less than was promised. Good-bye' - and no one could have sued you. Is that right? - That's correct, but we wanted the Motorola agency. The whole point of this acquisition was to get the Motorola agency.

Okay, I see; so, in other words, although you could have walked away, you were desperately keen to get the Motorola agency? - That's right.

I understand that? - Because if you go back through the sales for the various months that we have looked at today, you will see that every single month was producing a loss because we didn't have enough product to sell because we only had Technophone.''

80. Ms Light said at 9 TS 84 and 85:-

``So, I see, you had a balance sheet. But, again, let me understand you. You had before you as you took off for each State, a balance sheet which showed book debts X? - Fixed assets Y; inventory Z.

So all you were concerned about was to see whether when you went there in May book debts were at about the same level? - No, when I went there in May I wanted to see an aged trial balance of all the people who made up the debtors and how old they were.

I see? - Were they 30, 60, 90 days old? I wanted to be able to ascertain the collectability of those debts or whether I needed to provide for a bad debt.

Of course, but there would have been two things in particular for you to look at: age, obviously a vital factor? - Yes.

But even more important, or perhaps as important, the identity of the debtor. If IBM owes for 30, 60, 90 or 120 days, it is still good, whereas it might be different with some other debtors? - But I wasn't familiar with the people in Western Australia or South Australia or Victoria. Obviously IBM, you're right. American Express, I'd say, well, they're not going to go down the tube tomorrow; but for any other people, I wouldn't be able to make a - I could make an informed decision if I went through history, on their payment history, or something like that.

Are you saying that your due diligence exercise was really, from the word `go', futile in that you were committed to go on with this and you weren't really concerned, no matter how bad it had turned out, you were still going to buy this business because

ATC 160

you wanted the Motorola agency? - We wanted the Motorola, that's right. We only had two products in terms of mobile phones. One was called Technophone, which was always held up by delivery problems.

Right? - And the second one was Nokia. Both of them were imported products and it was very difficult to forecast.

And was there anything wrong with Nokia? - No, they were two good products but we couldn't get enough of them. But Motorola was a local product which wouldn't have had the same delivery delays, because the others were coming from overseas.

Wasn't there a way around this question of whether or not you bought a business which was, at least in theory, bankrupt - it had negative assets?

You could have bought the assets rather than the shares in the company? - We didn't buy the shares in the company; we just bought the assets. We didn't buy the company.''

81. The evidence of Ms Light was in (important) respects unreliable, perhaps in consequence of a lack of relevant knowledge of the precise nature of the Peter Business at the relevant times.

Part H - The evidence of Mr Silver

82. Mr Silver was called by the Respondent; his witness statement is exhibit R22 to which was attached his sales book NS1. Mr Silver was employed by Peter Communications (SA) Pty Limited from early 1991 or perhaps even before that.

83. Mr Silver said that sales were made by him both to dealers and also to end users. The price to a dealer was less than the price charged to an end user, although the differential was not large.

84. At 10 TS 16 and 17 Mr Silver said:-

``But it was on the Monday morning that you learned when you came in after the weekend that -? - From my recollection I believe so.

The business had been acquired by Applicant? - I believe so.

Your role within the premises which had previously been Peter and were now Applicant, your role as a communications consultant sales representative, did that remain the same? - At that time there was no foreseeable change, no obvious change.

I'm only talking about you personally? - Yes, there was no change as far as the sales were concerned.

Of course, just as you did with Peter, you had no role to play in any management activity or knowledge of the business as such other than through the activities that you carried out as a sales rep? - That's correct.

Can you recall anyone visiting the premises from Applicant in New South Wales at that time or recall any conversations you had with any Applicant management personnel? - No, I don't remember. It's quite possible but I certainly don't recollect it. In fact, Sydney, I'm not sure from Sydney whether there was anyone at all. I think there was someone came from Melbourne originally. Now, whether that was (blank) I'm not sure. That name rings a bell to me but I couldn't say further than that.

Again I know it's a long time ago, Mr Silver, but do you have any recollection of receiving any instructions from Applicant personnel as to the conduct of your role as a sales rep? - No. I don't have any recollection of that, no.

You just continued -? - I continued marketing as we had been.

Were there any conversations or instructions given to you in relation to either at this time or subsequently as to the markets into which you were to sell your products? - Not initially, at a later time there was a change in the focus of the organisation but not in the early days.

Are you able to recall from your independent memory, or by recourse to your book, when that change in focus occurred? - I think the sales book tells more than I can from memory and if we look through there's a change in focus that continues through August, basically the same, continues later in the year and it becomes some time -.''

85. And at 10 TS 18 he said:-

``Could I take you back to the Monday when you walked in and you were told, welcome to Applicant, what other visible indications

ATC 161

can you recollect that you observed at the time, around that time, that the business had been taken over? - Within five to six weeks from there the signage around the building had changed, obviously. The signwriting on vehicles had changed. The registration plates on the vehicles had changed as well. The registrations were relating to the business itself. They were originally PR something for Peter Communications and they changed to (blank) for Applicant.

What about matters such as office stationery? - Oh, certainly.

Invoicing? - Yes, it all changed very quickly.

Very quickly? - Very quickly, Invoicing, from memory, changed the same day.''

After the sale of the South Australian business to Campbell Mr Silver was employed by that company until June 1994.

Part I - Changes to the applicant's business during 1992 to 1995

86. I have previously noted that I find that the relevant change preceded the date on which the Peter Business was acquired. I would make this finding whether or not the acquisition of the Peter Business was or was not independent of the take- over bid, and having regard to the express terms of the Heads and the Sale Contract respectively. On that basis, the Applicant must fail because the Peter Business as acquired by the Applicant was such that the Applicant could not pass the same business test.

87. However, the Respondent has furnished the Tribunal with written contentions which apply if, and only if, that the Tribunal finds that the acquisition of the Peter Business occurred prior to the relevant change. As I have said, I have found that this was not the case. In the interests of completeness and in case it can be said that my finding as to the order of the two relevant events (that is the date of the relevant change and the date of acquisition of the Peter Business) is incorrect I include the content of this part I. (I emphasise however that my finding is that the relevant change preceded the date of acquisition of the Peter Business).

88. I commence by including the whole of appendix C of the Respondent's contentions, which appear to me to be accurate, as follows:-

``Appendix C

Changes to the Applicant's business during 1992 - 1995

This Appendix sets out changes to the Applicant's business in the relevant years IF the Tribunal finds that the Peter acquisition occurred before 24 May 1991.

Changes in the Applicant's business in the 1992 year

1. The following are the main differences between the business carried on by the Applicant in the 1992 year compared to the business conducted by it immediately before 24 May 1991:

  • (i) it carried on business under a different name, i.e. `(blank)' rather than `Target Telecommunications';
  • (ii) it conducted business through an office in Queensland which was opened in the second half of 1991;
  • (iii) it no longer imported Nokia and Technophone mobile phones;
  • (iv) it no longer manufactured Nokia and Technophone mobile phones, KTS systems and standard telephones;
  • (v) it commenced deriving income from warranty repairs, mainly for Nokia;
  • (vi) it no longer sold mobile phones by retail;
  • (vii) pursuant to a contract with Telstra entered into on 4 October 1991, it had become a Telstra MobileNet dealer.

Change of name

2. The change of name was designed to distance the Applicant from the `baggage' which was attached to the name `(blank)'. The Applicant engaged a public relations company (blank) to assist with publicity surrounding the name change, including publicity materials directed to customers. This indicates a change in the identity of the Applicant's business: see Parsons, Taxation in Australia, para 10.412.

Cessation of importing and manufacturing

3. Immediately before 24 May 1991, most (if not all) of the mobile phones, KTS and PABX systems and standard telephones which the Applicant distributed were imported. As a consequence, under the IDA scheme, the Applicant was required, albeit

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reluctantly, to undertake `manufacturing' of the equipment and this brought with it an obligation to provide a warranty to the customer.

4. Once the Applicant was able to purchase mobile phones and other equipment locally, which occurred in 1992, it was no longer necessary for it to engage in the manufacturing activity or to provide a warranty to its customers as the warranty obligation lay with the local manufacturer. At about this time it commenced warranty work for Nokia under a separate arrangement.

5. Where, as in the case of the Applicant's business immediately before 24 May 1991, the essence of the business of a company involves the sale of product manufactured by it, the discontinuance of that function and the sale instead of products made by another manufacturer is a change in the essential structure of the business: see Gordon & Blair Ltd v Commissioners of Inland Revenue (1962) 40 TC 358 at 363; JG Ingram & Son Ltd v Callaghan (Inspector of Taxes) [1969] 1 All ER 433 at 436.

Cessation of sales by retail

6. Mr Black gave evidence that:

  • (a) prior to the Peter acquisition, the Applicant was a wholesaler not a retailer;
  • (b) as soon as he took control of Peter business, he changed the nature of that business to a wholesale distribution business;
  • (c) the agreement signed in May/June 1992 between the Applicant and Campbell did not correctly describe the business of Applicant at that time;
  • (d) retail activities continued for a `transition phase' of only 12 weeks;
  • (e) the Applicant's offices outside New South Wales did not maintain any stock and were supplied by overnight courier from Sydney.

However that is contradicted by the following:

  • (a) Mr Silver's evidence that the Applicant's office in South Australia where he worked engaged in retail sales and sales to dealers throughout the period from early May 1991 to June 1992.
  • (b) The Agreement signed in May or June 1992 between Target and Campbell which describes the business being sold as `sale of telecommunications equipment direct to end users'.
  • (c) Exhibit R17 contains (at p.2) a memorandum dated 5 May 1992 from Mr Black to Mr `Packet' (Group Managing Director) in which Mr Black states:

    `It is worth recalling that it was only last year that we excised both Strathfield Car Radios and Century 21 from our list of accounts (comprising some 35%-40% of revenues at that time) and have virtually built a new Dealer Customer Base from scratch. In addition, after trying the retail strategy until October/November last, we changed direction and concentrated our resources upon the distribution strategy. The results have spoken for themselves. Replacing the incessant problems of managing these two accounts has come good, ``clean'' business from a Dealer channel we must now nurture and preserve. (Dealers recognise Applicant now as being a serious player in the industry and look to the Company for direction and vision.) Considerable effort was required by the Financial Controller's team in setting up literally hundreds of new accounts with the attendant credit and reference checks. This activity in itself demands recognition because it represents the foundations upon which current achievements were able to be built.'

  • (d) Mr Silver's evidence that the Applicant's office in South Australia where he worked had its own stock.

7. It is apparent from this evidence that:

  • (a) The Applicant conducted retail sales for considerably longer than 12 weeks;
  • (b) the abandonment of retail sales activity was not a result of a mere `transition' phase but rather resulted from a decision in late 1991 to make a change in strategic direction in order to concentrate on the `dealer channel';
  • (c) that decision, in the words of Mr Black, involved the Applicant building a `new Dealer Customer Base from scratch'.

    ATC 163

8. The retail business of the Applicant had its own separate goodwill (being the relationships with the retail customers) as it involved a separate market from the wholesale business. See
FC of T v Murry (1998) 193 CLR 605 at 623. The Applicant relinquished this goodwill when retail sales activity ceased in 1992.

Telstra agreements

9. The agreement between the Applicant and Telstra was entered into on 4 October 1991 (Black Annexure L) ( `First Telstra Agreement' ) and was not preceded by any period of negotiation. Target first derived revenue from `Airtime' in that month. Mr Black acknowledged in cross examination that the first time Telstra entered into similar agreements with some of the larger mobile phone dealers (such as Strathfield Car Radio) was in the second half of 1991.

10. Under the First Telstra Agreement,

  • (a) The Applicant was appointed as an `approved Telecom MobileNet dealer' for the whole of Australia (clause 2.1);
  • (b) The Applicant agreed to use its best endeavours to promote `MobileNet' throughout Australia, to procure customers throughout Australia and to maximise the number of applications for MobileNet services (clause 4.1);
  • (c) Telstra provided a number of computer terminals to the Applicant to enable it to connect purchasers of mobile phones to the Telstra network (clause 5.3(d));
  • (d) Telstra agreed to pay to the Applicant the fees set out in Schedule 4 (clause 5.1);
  • (e) the agreement had a term of 4 years (clause 7.1).

11. While the revenue derived by the Applicant from the First Telstra Agreement was initially low ($37,000 in the last quarter of 1991), Applicant s revenue from its role as a MobileNet dealer increased significantly over the period from 1992 to 1995. By 1995, revenue from this activity was $4.93 million which was equivalent to, if not greater than, the Applicant's gross margin on the sale of mobile phones.

12. There were further developments in the relationship between the Applicant and Telstra in the 1992 year.

13. In a memorandum entitled `Update March 1992' from Mr Black to Mr Packet dated 12 April 1992 (which is found in the Applicant's management report for March 1992, Ex R21 at p. 2), Mr Black stated:

`Telecom and Optus have indicated that they will make presentations to the Applicant in the next few weeks with a view to utilising the Applicant's Dealer Network. Details are not available at this time however it should be noted that Optus will be the company that robs market share from Telecom.'

14. In a memorandum entitled `The Applicant Update - April 1992' from Mr Black to Mr Packet dated 14 May 1992 (which is found in Applicant 's management report for April 1992, Ex R16 at p. 2), Mr Black states:

`• During the month the Applicant distributed 2100 mobile phones which represented 17% of the net connects to Telecom MobileNet. This achievement has been recognised by MobileNet (see below) and other industry participants. It is a significant penetration of the market and is an indication of the success of the distribution strategy adopted by the Applicant.

•...

• Discussions have commenced with Telecom MobileNet, with the object of the Applicant taking full account management for a large group of MobileNet dealers. In addition MobileNet has expressed interest in a Dealer cellular phone based upon the Nokia PT612. Discussions have been held at senior management level - also involving Target's Group Managing Director - and the prospects for a long term agreement are positive.'

(Underlining added)

15. The `distribution strategy' here referred to is clearly the strategic decision to concentrate on the `dealer channel' made in October/November 1991 described in Mr Black's memorandum dated 5 May 1992

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(referred to above). That memorandum included the following (at p. 4):

`CARRIER RELATIONS

After a considerable period of positioning activity involving (blank) at local management level Telecom MobileNet tabled a Statement of Intention with the Applicant regarding future commercial arrangements. (Copy attached).

A more detailed report on the outcome of this arrangement will be tabled with next month's report.

CONCLUSION

This months performance is outstanding from a sales point of view and with refinement I believe overall financial performance will continue to improve.

The sales objective for the next few months is to maintain sales activity at or about the current level which is within the Budget projections. At the same time we need to ensure that we can service the newly created Dealer Customer Base well.

The attainment of a profitable level of business this month is most encouraging and together with the strategic moves being taken with MobileNet will ensure continued satisfactory performance of the Company for the foreseeable future.'

16. It will be seen from this passage that the Applicant instigated the discussions with Telstra which led to the `Statement of Intention' which is the document entitled `Letter of Intention' between Telecom MobileNet and the Applicant which is included in Ex R17 (at pp. 10-12). This document refers to the Applicant being given access to `Band 4 dealers' to enable the Applicant to become the preferred validation point for their connections and consideration being given to the Applicant handling the warehousing and distribution of a range of Telstra phones.

17. This letter of intention is expressed to be non-binding on the parties. Telstra and the Applicant did enter into a further agreement on 11 August 1992 (Black Annexure L, clause 2.4) which is not in evidence. The passage quoted above from Mr Black's 5 may 1992 memorandum refers to a `more detailed report' to be provided in the June management report. This is not in evidence. In response to the Respondent's summons filed with the Tribunal and returnable on 1 August 2003 the Applicant did not produce any monthly reports after May 1992.

18. It will be seen that prior to May 1992 the Applicant was still in discussions with Optus (which was Telstra's main competitor). By May 1992 (or at the latest August 1992) the Applicant had committed to being an exclusive distributor for Telstra's MobileNet network.

19. Mr Black's memorandum dated 5 May 1992 indicates that in the period from late 1991 to mid 1992 the Applicant made significant changes to its corporate strategy:

  • (a) The Applicant's decision to cease retail sales is the result of a strategic decision made in October/November 1991 to concentrate on the `dealer channel' which involved a `change in direction' for the Applicant
  • This strategic change involved the creation of a `new' dealer customer base. That customer base was quite distinct from the retail customer base which it gave up.
    • (b) This was accompanied by `strategic moves' with Telstra, under which the Applicant became an exclusive distributor of the MobileNet network.

20. As Mr Black put it in cross examination, from October 1991 the Applicant began `representing' Telstra and `promoting' Telstra's MobileNet network, which it had not done before that time.

21. Mr Black gave evidence that the Applicant performed a validation service for Telstra before 24 May 1991 without being paid for it. It is submitted that the arrangements entered into by the Applicant with Telstra in October 1991 and then in 1992 amounted to far more than the provision of remuneration to the Applicant for a validation service. Pre May 1991 the Applicant merely assisted dealers to connect mobile phones to the Telstra network. From October 1991, the Applicant was a MobileNet distributor, and this reflected a

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strategic change in the structure and focus of the Applicant's business in October/ November 1991. This resulted in a change in the identity of the Applicant's business.

Changes in Applicant's business in the 1993 year

22. The following are the main differences between the business carried on by the Applicant in the 1993 year compared to the business conducted immediately before 24 May 1991:

  • (i) it carried on business under a different name, i.e. `the Applicant' rather than `(blank)';
  • (ii) it no longer imported mobile phones (see above);
  • (iii) it no longer manufactured mobile phones, KTS equipment and standard telephones (see above);
  • (iv) it no longer sold mobile phones by retail (see above);
  • (v) it had commenced warehousing and selling mobile phones as agent for Telstra;
  • (vi) it warehoused and distributed stock owned by Digicall to Digicall's dealers in return for a fee.

23. The arrangements under which the Applicant warehoused and sold mobile phones as agent for Telstra were recorded in an agreement entered into between the Applicant and Telstra on 14 January 1994 (Black Annexure L) ( `Third Telstra Agreement' ).

24. Under the Third Telstra Agreement,

  • (a) The Applicant was appointed to promote the sale of, and extend the demand for, the MobileNet service to and through non-approved dealers and mobile phones to approved dealers, in Australia (clause 2.1).
  • (b) The Applicant undertook the obligation to promote the sale of, and extend the demand for, the MobileNet service to and through non-approved dealers in Australia (clause 2.3).
  • (c) The Applicant undertook to warehouse and sell as agent for Telstra, mobile phones owned by Telstra (clause 4.1(f) and 4.3);
  • (d) The Applicant agreed to have at least 10 members of staff dedicated to performance of its obligations (clause 6.1(o));
  • (e) The Applicant agreed not to promote the public mobile telecommunications service of Telstra's competitors (clause 6.3);
  • (f) Telstra agreed to pay the Applicant the fees set out in clause 3.1.

25. The arrangements regarding the warehousing and sale of mobile phones as agent for Telstra involved the Applicant warehousing the stock of phones separately from its own stock and issuing invoices on Telstra letterhead to dealers who purchased the phones.

Changes in the Applicant's business in the 1994 year

26. The following are the main differences between the business carried on by the Applicant in the 1994 year compared to the business conducted immediately before 24 May 1991:

  • (i) it carried on business under a different name, i.e. `the Applicant' rather than `(blank)';
  • (ii) it no longer imported mobile phones (see above);
  • (iii) it no longer manufactured mobile phones, KTS equipment and standard telephones (see above);
  • (iv) it no longer sold mobile phones by retail (see above);
  • (v) it continued and expanded its role as a Telstra MobileNet dealer pursuant to the Third Telstra Agreement dated 14 January 1994 (Black Annexure L);
  • (vi) it conducted `Phonesave' activities under a separate trade name and logo from October 1994;
  • (vii) it had expanded its range of mobile phones to include Ericsson and commenced warehousing and relabeling of stock for Ericsson;
  • (viii) from mid 1994 it outsourced various services to Target (Exhibit R11).

PhoneSave

27. PhoneSave involved the aggregation of the landline bills of a Telstra customer to

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enable the Telstra customer to obtain a bulk discount. The Applicant obtained the bulk discount from Telstra and passed it on to the Telstra customer.

28. Exhibit R6 is an example of a `PhoneSave account' which is typical. It will be seen from Exhibit R6 that the Applicant used a separate common law (unregistered) trade mark for this business.

29. The nature of the PhoneSave business is described in Exhibit R9 (which is the 1996 statutory accounts of Scale Tele- communications Pty Ltd, an associated company of the Applicant to which the PhoneSave business was sold in 1996), as follows (at p. 2):

```scale'' telecommunications was incorporated on 6 May 1996, after successfully operating as a division of the Applicant since October 1994. The company acquired the business assets and liabilities of the previous operating division from the Applicant upon incorporation.

Since inception of this business operation in 1994, scale telecommunications has grown rapidly, now providing telecommunications services to thousands of businesses throughout Australia.'

(underlining added)

30. The Applicant's management report for March 1995 (Ex R10) includes the following:

`PhoneSave, the new service provider department, has increased its customer base. Currently 760 customers. The Applicant customers for YTD June 2,300. There will be an increase in resources to cope with the sign up of new accounts.'

(Underlining added)

31. Phonesave represents a significant change in the structure of App business because:

  • (a) it involved the aggregation of landline accounts not mobile phone accounts;
  • (b) it resulted in the Applicant developing a new customer base - existing Telstra customers with a landline not a mobile phone;
  • (c) it was a separate division of the Applicant, i.e. separate from the Applicant's other business of distributing mobile phones to dealers, as confirmed by the sale of the entire Phonesave business to Scale Telecommunications Pty Ltd in 1996.

Changes in the Applicant's business in the 1995 year

32. The following are the main differences between the business carried on by the Applicant in the 1992 year compared to the business conducted by it immediately before 24 May 1991:

  • (i) it carried on business under a different name, i.e. `Target' rather than (blank);
  • (ii) it no longer imported mobile phones (see above);
  • (iii) it no longer manufactured mobile phones, KTS equipment and standard telephones (see above);
  • (iv) it no longer sold mobile phones by retail (see above);
  • (v) it continued its role as a Telstra MobileNet dealer entering into a further distribution agreement with Telstra in August 1995 (Black, Annexure N);
  • (vi) it had commenced the distribution of a fax machine (Acer).''

89. The contractual arrangements with Telstra were of particular importance. Even prior to the acquisition of the Peter Business, the Applicant had facilitated the connection of mobile phones but it was not paid for that service. Moreover the Applicant was free to contract with whomsoever it pleased in respect of telecommunications services. From and after the 4 October 1991 when the First Telstra Agreement was entered into, revenue derived through the Applicant's contractual relationship with Telstra increased dramatically: that revenue was derived in consideration of services provided. By 1995 the revenue from this source had risen to 4.93 million dollars and which may, as the Respondent says, have exceeded the Applicant's profit on the sale of mobile phones. I note in this context that Mr Black was prescient in one respect; he foresaw exponential growth in the sale of mobile phones. One has only to be alive in the year 2004 to realise that the use of mobile telephones is now prevalent to an extent which is enormous; mobile phones are undeniably useful but also and often something of a nuisance. Hearings in this Tribunal are frequently

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disturbed by mobile telephones sounding because their owners forget to switch them off. But there is another aspect which is also well- known. When mobiles first appeared, the cost of acquisition of a mobile telephone was high. That cost has steadily declined to a point which would have been difficult to anticipate ten years ago. The real revenue from the use of mobiles is derived from just that, their use. The cost of using a mobile is high in relation to the cost of acquiring the mobile in the first place. Companies which market mobiles would seem to expect to derive their profit from use rather than from sale. This is another reason why in my view, to reflect revenue on a gross basis from the sale of mobile phones did not reflect the true position. Moreover, and under the arrangement with Telstra, the Applicant committed itself to the promotion of the sale of Telstra product. The Telstra agreements were of particular importance for yet another reason; in relation to Telstra, the Applicant acted as agent for the sale of Telstra stock and so that and to that extent the Applicant was relieved of the cost of carrying its own stock.

90. In 1994 PhoneSave was commenced under a separate trade name and logo; PhoneSave involved the aggregation of landline bills. That business was eventually sold to a company associated with the Applicant (Scale) but that sale occurred after the expiry of the relevant years. The Digicall agreement was yet another significant development which cannot be categorised as pure organic growth.

91. It follows then that on the basis assumed for the purposes of this part I, the Applicant was at the date of the relevant change engaged primarily in the sale of mobile telephones, ordinary telephones and other telecommunications equipment. In relation to mobile telephones, it was engaged in sales by wholesale and also by retail. The retail arm was terminated, notwithstanding Mr Black's evidence to the contrary, only in June 1992 and when the Applicant became once again a pure wholesaler. It is for this reason that Mr Sullivan described the reverse position for the Applicant as being in the nature of a double edged sword.

92. But there were other and very significant developments as set out in this part which transformed the Applicant's business from that of only a seller of its own stock to, and to a considerable extent, that of an agent for Telstra. That shift alone was sufficiently fundamental to ensure that the Applicant could not in the succeeding relevant years pass the same business test. When considered in conjunction with all of the other developments set out in this part I, a finding to this effect becomes all the more obvious.

Part J - Penalty tax and the culpability component

93. Mr Edmonds contended that the culpability component of the additional tax commenced at 25 per cent and thereafter through the operation of section 226X of the Act increased cumulatively each year. That contention was incorrect. In fact the culpability component was initially assessed at 25 per cent; it increased in the next year to 30 per cent through the operation of section 226X of the Act but it remained constant at 30 per cent thereafter (T20, T21, T22 and T33).

94. Mr Sullivan contended that the 25 per cent culpability component was imposed on the basis that the returns were made negligently and without due regard to the true position and that it should be affirmed and with the increases to which I have referred, simply because there was no evidence before me as to the fact that the questions at issue were properly addressed. Mr Edmonds contended that a culpability penalty of this order is in all the circumstances too high and should be reduced.

95. It is in my view true to say that important aspects do appear to have been overlooked by the Applicant. The manner in which the Applicant changed tack as to the date of the relevant change indicates that this is so. On the other hand I also think it fair to say that although the resolution of this case does not now seem to be very complex, this was by no means clear at the outset and when the hearings commenced, and when the position seemed to be more involved. It is possible that it was only after the hearings commenced that it was fully appreciated (by the Applicant) that the date of the relevant change was less important than the order in which the relevant change and the acquisition of the Peter Business occurred. Mr Edmonds criticism of the Respondent as the only ``culprits'' was not in my view tenable; on the contrary the culprit was the Applicant.

96. In my view then the Applicant was indeed negligent in its approach, and moreover it did not fully address all relevant and necessary issues; see in this regard and as just one example its Statement of Facts and

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Contentions. Had it considered the situation with sufficient care it would have or should have appreciated that it could not pass the same business test especially in the light of the Heads and the Sale Contract respectively. However I can, I believe, take into account the fact that the issues involved in this matter were (at least at first) not simple. I am inclined then to the view that the degree of negligence was not at the highest end of the scale, and in consequence of which it is reasonable to reduce the culpability component to some extent. I propose to do so by reducing the culpability component only of the additional tax by ten per cent in respect of all relevant years. It follows then that the culpability component for the first relevant year will be reduced from 25 per cent to 15 per cent whereas for the other relevant years it will be reduced from 30 per cent to 20 per cent.

97. Accordingly and excepting only for the reduction by 10% in the culpable culpability component of the additional tax in respect of all relevant years, the objection decision under review is affirmed.

 

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