Case P100 (Public hearing: Clyne v. F.C. of T.)

Judges: HP Stevens Ch

JR Harrowell M
BR Pape M

Court:
No. 1 Board of Review

Judgment date: 26 November 1982.

J.R. Harrowell (Member)

This is a reference relating to the year ended 30 June 1978. It concerns Mr. Peter Clyne who claims that during that year if any income was derived in Australia it was derived by an anstalt incorporated in Liechtenstein and not by him. In other words he claims that his Australian taxable income for that year was nil.

2. The taxpayer appeared in person and the Commissioner was represented by senior counsel. In the course of his case the taxpayer tendered and referred to several books he had written on ways a person could reduce, eliminate or obliterate his Australian tax liabilities.

3. At the taxpayer's request the hearing was in public and as a consequence there is no requirement for those named by him in the course of giving evidence to remain anonymous.

4. The taxpayer in opening his case said:

``There have been seventeen courtroom engagements between the Commissioner and myself since the time that I first kicked the taxpaying habit and he first decided that he would like to collect some taxes from me. We have been in Petty Sessions, the Supreme Court, Court of Appeal, the High Court, the Bankruptcy Court and the Federal Court and this is our first visit to the Board of Review. It is therefore the eighteenth engagement and perhaps the most important one because it is the first court hearing which is being asked to decide on the merits whether I do or do not owe any taxes, and if so, how much.''

5. By information laid on 19 September 1978 the taxpayer was charged for not furnishing a return of income on or before 31 August 1977 in respect to the year ended 30 June 1977. The charge was upheld by a magistrate of the Federal Court of Petty Sessions and the taxpayer appealed from that decision to the Supreme Court challenging the validity of the Commissioner's notice in the Gazette in terms of sec. 161(1). On 19 November 1980 Cross J. upheld the validity of the Commissioner's notice -
Clyne v. D.F.C. of T. 80 ATC 4527 . Applications for leave and special leave to appeal were rejected by the Court of Appeal and the High Court. Subsequently Mr. Clyne appealed to the Supreme Court against the assessment issued by the Commissioner in respect to the year ended 30 June 1977. This appeal was struck out by Hunt J. on 1 March 1982 for want of prosecution -
Clyne v. F.C. of T. 82 ATC 4028 . Although the 1977 year is not one of the years now before this Board these various legal skirmishes do impinge on those years as the legal issues arising from the 1977 year were not resolved until March 1982.

6. On 18 July 1977 Mr. Clyne wrote the following letter to the Commissioner:

``As you probably know, I returned to

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Sydney in June 1976, and have been living and working here since that time, waiting for my discharge from bankruptcy and possibly for re-admission to the bar.

Meanwhile, I have been working as agent for one of my own overseas companies, and etablissement called WARLOCK INVESTMENTS ETABLISSEMENT (VADUZ). Copy of my agreement with Warlock is enclosed for your information. Indeed, a copy of this agreement will probably be printed in my next book: INCENTIVES, REWARDS AND TAX-FREE BENEFITS TO EXECUTIVES.

My contention is that Warlock Investments Etablissement is a totally separate legal entity from myself; that its income is not my income; and that all moneys received by me during the financial year 1976-1977 are Warlock's income, in terms of the agreement subsisting between myself and Warlock.

It may very well be that you will not agree with this contention, and I am writing you this letter to make it quite clear that I am not trying to deceive you in any way. My return for the relevant financial year will be a nil return, since I claim that I have had not taxable income between 1/7/76 and 30/6/77.

Would you be kind enough to let me know...

  • (a) Do you agree with my view that I have earned no taxable income during the relevant financial year?
  • (b) If not, what is the best way of testing the matter?''

7. The Board does not know if the Commissioner replied to that letter but it does know that the taxpayer was assessed for the year in respect to income said to have been derived by Warlock Investments Etablissement (Vaduz) hereafter referred to as Warlock. By 1977 the Commissioner had commenced an investigation of Mr. Clyne's affairs and by July 1979 he was ready to act.

8. On 9 July 1979 the Commissioner issued a notice of assessment for the income year ended 30 June 1979. This assessment was raised in terms of sec. 166 and 168 of the Act and it showed a taxable income of $206,042 and was due and payable on 8 August 1979. On 10 July 1979 the Commissioner issued sec. 218 notices on the Commonwealth Trading Bank where Mr. Clyne had three interest bearing deposits totalling $70,000. In the meantime Mr. Clyne had been in Australia since April 1979. He returned to Australia on 24 July 1979.

9. On 24 August 1979 the taxpayer called on Mr. F.E. Type, the then Deputy Commissioner of Taxation at his Sydney office. At that meeting he gave Mr. Type nil returns of income for the 1978 and 1979 years. At about that time Mr. Clyne lodged the following objection against the 1979 assessment issued on 9 July 1979:

``1. Your assessment was based on information received.

2. Since the due date for the relevant return had not yet arrived, you did not have any adequate information to support an assessment, as you would have had if you had waited for the return.

3. It would appear from subsequent discussions between your officers and the taxpayer that the only information you had available was as follows:

  • (1) Copies of the taxpayer's bank statements with the Commonwealth Trading Bank, Kings Cross.
  • (2) Copies of cheques indicating to whom moneys paid out of the said bank accounts were paid. But in this respect your records were inadequate and some payments out could not be vouched, identified or explained.
  • (3) Copies of deposit slips relating to moneys paid into the bank. But here again these were not complete, and those that were available did not, in many instances, indicate what payments made up the relevant deposit, or by whom such payments were made.
  • (4) Records kept by the N.S.W. Permanent Building Society showing what moneys were paid in and drawn out by the taxpayer during the income year. But none or almost none of the payments into the said Building Society could be explained or identified in any way, since these

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    payments were either in cash, or (where they were made by cheque) they could not be vouched in any way because the Society keeps no records as regards cheques paid into a shareholder's account, and one cannot ascertain what cheques were paid in, who drew them, where they were drawn or what were the individual amounts.

4. You appear to have assumed that all payments made into the bank and building society necessarily constituted taxable income, and this assumption was of course totally fallacious.

5. As you did not wait for the taxpayer's return to be lodged by the due date... perhaps because proceedings were then part heard and awaiting judgment in the Special Federal Court in which you asserted and the taxpayer denied his liability to lodge such returns, and you did not feel sure of winning... and as you did not trouble to require or even request further information in accordance with your powers under sec. 264, you were necessarily deprived of the assistance which the taxpayer would have been obliged to give you...

  • (a) to explain why many payments into the bank and building society were clearly not taxable income;
  • (b) to indicate which payments were at any rate disputed by the taxpayer, and the reasons why they were disputed;
  • (c) to indicate what claims he made as deductible outgoings, and on what such claims were based.

6. For the reasons set out in para. 2, 3 and 4 hereof it is respectfully submitted that the information on which you acted was inadequate, misleading and totally useless in relation to establishing, in any responsible sort of way, what the taxpayer's income really was during the relevant year.

7. It is further submitted that in acting upon information which was so obviously useless, and in doing so without giving the taxpayer (who was overseas at the time and with whom you made no attempt to communicate) any opportunity to assist you in your inquiries, you were not acting in good faith, and you were not acting (upon their proper construction) within the assessment-making powers vested in you by sec. 166.

8. In so far as you may wish to support the assessment by relying on other provisions of the Act, it will be submitted (if necessary)...

  • (1) That you could not act under sec. 167 because there was no default in lodging the relevant return.
  • (2) That your assessment could not be upheld as a `special assessment' because such assessment can only be made in response to a requirement to lodge a special return.
  • (3) That neither sec. 166 nor any other provisions of the Act support your purported assessment, which was therefore void and of no effect.

9. Having issued the assessment on the 9th July 1979, you issued and served notices in relation to the bank and the building society on the 10th July 1979, and obtained approximately $11,800 of the taxpayer's money in this fashion on the 10th July 1979, while approximately $127,000 were `frozen' in the bank and building society.

10. You made no effort, before taking such action, to warn the taxpayer, to communicate with him and seek information, to seek a special return, or to give him any opportunity of redress against what is submitted to have been a totally arbitrary seizure, and your actions (it is respectfully submitted) constituted a gross and arbitrary abuse of your powers, if indeed they were within your powers at all.

11. For this reason also it is contended that your assessment was made in bad faith. The taxpayer will contend that the powers vested in you by sec. 164 and 166, whilst they appear to be absolute, must in fact be exercised fairly, and that if this restriction is to be read into them then you acted outside the proper limits and the assessment was ultra vires, and void.

12. It will further be contended that your action was influenced by the following matters, each of which was extraneous to

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the matters which you are entitled to consider when making an assessment...
  • (1) The fact that the taxpayer had challenged your right to insist on the lodgment of tax returns, and had challenged the validity of the Gazette notice which purports to compel certain persons to lodge returns. These proceedings were heard by his Worship Mr. Rex Butler late in 1978, and his Worship had reserved his judgment and had not yet delivered the same when the purported assessment was made.
  • (2) Various books and articles in which the taxpayer had indicated that he would not lodge a return unless and until he was legally compelled to do so, and would defend any proceedings brought to compel him to lodge a return, if necessary by appealing to a higher Court.
  • (3) Various books, articles and speeches in which the taxpayer had advised others to adopt a similar course.
  • (4) The fact that the taxpayer was active as a professional tax fighter and advised his clients to embark on various ways of legally reducing or eliminating their liability to pay taxes, an activity of which you appear not to approve.

13. In short, it will be argued that you adopted a programme of bringing the taxpayer to heel, teaching him a lesson, and compelling him to conform to the law as you see it, and your officers have frankly admitted to the taxpayer that this was at least in part what you had in mind when deciding to adopt the procedures to which reference has been made, one of which was the impugned assessment.

14. If this is a correct assessment of your motives, it will be contended that these were extraneous considerations, and that for this reason also the assessment was ultra vires and void.

15. When the taxpayer returned to Australia, and perhaps in the light of the pressure you brought to bear by seizing or freezing all his money, the taxpayer collaborated with you and your officers in establishing a true picture of what his income was during the relevant year, and it is respectfully suggested that a personal approach before taking the Draconian actions referred to would have avoided a good deal of unnecessary conflict.

16. The result of these discussions was that on hundreds of items agreement was reached as to what was taxable income during the income year, and as to what outgoings were properly deductible.

17. In other areas it became apparent that while there was no complete agreement, the area of dispute was marginal.

18. In other areas again there was substantial dispute, but it was possible to isolate and define these areas of dispute and to estimate with some precision what amounts really were in dispute.

19. It also became apparent that the taxpayer claimed substantial outgoings which you had not even considered, for the very good reason that you had no knowledge of them. Here again, without wishing to be critical, it is submitted that you could have considered those more fairly if you had had some communication with the taxpayer before proceeding to an assessment which, whilst not arbitrary in law... because it did not purport to be based on sec. 167 ... was most certainly arbitrary in fact.

20. The taxpayer has made some critical comments about your actions, not because he wants to sound personal, but because these criticisms are an integral part of the argument about whether or not your assessment is intra vires, and must therefore be stated in this notice of objection.

21. The end result of the discussions referred to is that you have now been supplied with full, accurate and complete information that will enable you to make a proper assessment; and a return has been lodged.

22. Annexed to this notice of objection and marked annexure `A' is a summary prepared by the taxpayer of the areas of agreement and disagreement and the basic facts that emerged from the discussions referred to, which took place on the 21st August 1979 so far as this income year is

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concerned. Annexure `A' is intended to be and shall be deemed to be part of this notice of objection.

23. A copy of annexure `A' was also attached to the taxpayer's return for the relevant income year, which was lodged on the 24th August 1979.

24. In annexure `A' (p. 1) the taxpayer claims that the sum of $66,049 was gross taxable income during the income year, and in so far as you treated a sum in excess of $66,049 received by or paid to the taxpayer as gross taxable income it is contended that you were wrong.

25. In annexure `A' (p. 1) it will be seen that your officers and the taxpayer agreed on outgoings totalling $24,684 as being deductible to the taxpayer for the relevant income year, and in so far as in your assessment you did not fully allow such outgoings you were wrong.

26. In annexure `A' (p. 1) the taxpayer claims that $15,249 portion of moneys paid by him to Sebel Ltd. during the income year should be treated as deductible income, and in so far as in your assessment you did not allow this sum as a deductible outgoing you were wrong.

27. In annexure `A' (p. 1) the taxpayer claims that $15,600 should be allowed for miscellaneous outgoings, and in so far as you did not allow this sum, you were wrong.

28. In annexure `A' (p. 1) the taxpayer claims that $5,040 should have been allowed for payments made to the former trustee in his bankruptcy as a condition of discharge, and in so far as you did not allow these payments in your assessment you were wrong.

29. In annexure `A' (p. 2) the taxpayer claims that you should have allowed him $33,200 as a deductible outgoing in relation to various travelling and other expenses, and in so far as you did not allow this claim in your assessment you were wrong.

30. In annexure `A' (p. 3) the taxpayer claims that you should allow certain losses incurred in the year 1973/74 pursuant to sec. 80, and in so far as your assessment did not allow this sum, you were wrong.

31. The taxpayer also claims that during the financial year 1977/78 he incurred a loss of $32,349, and in so far as your assessment did not allow this loss to be carried forward into 1978/79 pursuant to sec. 80 (as he claims it should be) you were wrong.

32. The taxpayer claims, in the return lodged subsequently to your assessment, that the true position is that during the income year he incurred a loss of $73,743, and received no taxable income at all, and in so far as your assessment did not accept this as being the true position, you were wrong.

33. It is also submitted that because of an agreement made between the taxpayer and Warlock Investments Etablissement (Vaduz) on the 1st July 1976 all moneys paid to the taxpayer during the income year belonged to the said Warlock Investments Etablissement (Vaduz) and not to the taxpayer, and that for this reason (alternatively to the reasons set out in para. 22-34 both inclusive of this notice of objection) the taxpayer's income during the income year was nil, and in so far as you assessed him to any tax at all you were wrong.

34. The assessment was not notified to the taxpayer in accordance with the provisions of sec. 204 in that the date on which the notice of assessment stated that the relevant sum was due and payable was not (as required by the said section) thirty clear days from the date on which the notice of assessment was served. It would follow that the assessment, while perhaps technically valid... this is disputed... has not become nor can it ever become due and payable.''

10. The taxpayer's 1978 personal return showed a taxable income of nil. Attached was a schedule referring to the agreement dated 1 July 1976 between himself and Warlock. By 24 August 1979, the date this return was lodged, Mr. Clyne had been meeting with investigators from the Taxation Office. He had examined pass sheets and other records in their possession and in his view he had reached agreement on the

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receipts which were income and receipts which he did not accept as income. The same applied to deductible outgoings. In his 1978 return he summarised his understanding of the position as being: 
                                      $           $

      Receipts agreed as

        gross income                           40,768

      Less:

        Agreed deductible

          outgoings                10,919

      Bankruptcy payments           3,560

      Claim for Sebel

        outgoings                  14,638

      Miscelleous outgoings         7,200      36,317

                                   ------      ------

                                                4,451



      Less:

        Expenses to and from

          and incurred in

          Europe                               36,800

                                              -------

             Loss                             $32,349

                                              -------



      Receipts not conceded as being

        gross income                          $78,547

                                              -------

11. The Commissioner assessed the taxpayer by notice of assessment dated 29 November 1979 on a taxable income of $117,587. The Commissioner arrived at this figure by treating disputed and additional receipts totalling $90,521 as income. He allowed $10,833 as agreed deductions and a further deduction of $2,880 for telephone, telex, postages, copying and newspapers. The Commissioner also included additional tax of $1,099 for incorrect return. The taxpayer objected claiming that the receipts and outgoings for the income year related to Warlock not to him. He then put forward further grounds based on the assumption that the Warlock agreement would be decided in favour of the Commissioner. In these additional grounds he then proceeded to deal with specific items of income and expenditure. In summarising his objection he claimed that his gross income was now $78,679 and his deductible outgoings were $76,271 making a taxable income of $2,408.

12. In his covering letter dated 10 January 1980 enclosing the objection Mr. Clyne stated that he wished to include an additional ground - the additional tax was excessive.

13. In subsequent correspondence with the Commissioner, who had asked for more and precise details of expenditure claimed, he said in a letter dated 5 March 1980:

``Re various overseas expenditures, I kept no records, and cannot give you the details you require. But I will testify that my estimates are fair and accurate. You will say that unvouched estimates are nothing but guesswork, insufficient to discharge the onus of proving that your assessment is wrong. And I will respond that, where a reasonable explanation exists for the absence of documentary corroboration, a taxpayer's sworn estimate is an available way of proving his case.''

14. On 18 June 1980 the Commissioner issued a notice of amended assessment allowing a further deduction of $2,500 for commission paid. The taxpayer was dissatisfied with that decision and asked that it be referred to a Board of Review and so the matter is now before us.

The Warlock agreement

15. At the outset Mr. Clyne made it clear that his declared intention when signing the Warlock agreement (para. 20) was to bring about a situation where income that otherwise may have been derived by him would be derived by Warlock.

16. Warlock was formed on 29 November 1973 under art. 534 of Das Personen und Gesellschaftsrecht (P.G.R.) at Vaduz in Liechtenstein. Under the law of that country Warlock was an anstalt, a separate legal entity. An anstalt may establish branches in or outside Liechtenstein. If it operates outside Liechtenstein the anstalt is subject to the laws of the country where it resides. Under Liechtenstein law Warlock was established as a ``seat'' or holding company and as such was required to pay a minimum annual tax of 1,000 Swiss francs a year. This tax would increase once its assets were more than 1,000,000 Swiss francs. As a ``seat'' company its commercial activities were confined to outside Liechtenstein. In other words it could buy say watches in Switzerland and sell them in Australia. It could not buy watches in Liechtenstein for sale in Australia. Under the law of Liechtenstein Warlock was required to keep proper books of account and prepare annual financial accounts. Because it was a ``seat''

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company Warlock was not required to lodge an annual return of income in Liechtenstein.

17. The administration of an anstalt rests with an office holder called the founder and the administrator(s) - nearest Australian equivalent, the director(s).

18. In the case of Warlock the founder was a Dr. Beck, a lawyer of Liechtenstein. He was also the sole director. Mr. Clyne was not an office holder of the anstalt except that he was sole signatory for its Vaduz bank account. The founder had power to appoint and dismiss the administrator, he could alter its governing rules ( Statuten ), he could liquidate or dissolve the anstalt and determine the distribution of profits. The founder could transfer his rights to a third party by a written Zessionserklarung. The administrators conduct the business of the anstalt and contract on its behalf subject to its Statuten.

19. On 29 November 1973 Dr. Beck signed a general power of attorney in favour of Mr. Clyne. This document is not to be confused with a Zessionserklarung (supra) as it did not amount to the transfer of the founder's rights but rather a delegation of the power of the administrator (director).

20. On 1 July 1976 Mr. Clyne, presumably acting under the general power of attorney, signed the following agreement on behalf of Warlock (as principal) and on his own behalf as agent:

``Agreement made this first day of July one thousand nine hundred and seventy-six between WARLOCK INVESTMENTS ETABLISSEMENT an etablissement duly established and registered at Vaduz in the Principality of Liechtenstein in accordance with the laws and usages of the said Principality of Liechtenstein (hereinafter referred to as the principal) of the one part and PETER CLYNE of the Palais Schwarzenberg, Schwarzenbergplatz 9, Vienna in the Republic of Austria presently residing at Sebels Town House, 23 Elizabeth Bay Road, Sydney in the State of New South Wales (Commonwealth of Australia) International Law and Finance Consultant (hereinafter referred to as the agent) of the other part NOW WHEREAS the principal pursuant to its articles of association ( Statuten ) has power to carry on and does in fact carry on the business and profession inter alia of an international consultant in matters of law, finance and taxation AND WHEREAS the agent is qualified to carry on and does in fact carry on the same business and profession AND WHEREAS the principal has requested the agent to practise his profession of international consultant in matters of law, finance and taxation as agent for the principal in relation to the districts and territories to which this agreement extends AND WHEREAS in consideration of the agent's agreeing to do so the principal has agreed to confer upon the agent a sole agency in relation to such districts and territories as aforesaid AND WHEREAS the parties have agreed to govern and regulate the agent's said agency by and in the terms hereinafter set forth NOW BY THIS DEED and in consideration of the matters hereinbefore set forth the parties for themselves their executors administrators and assigns covenant and agree as follows that is to say:

  • 1. This agreement shall be of indefinite duration but may be terminated by three (3) months' written notice given by one party to the other.
  • 2. The districts and territories to which this agreement extends are Austria, West Germany, Switzerland, France, Holland, Belgium, Italy, the United Kingdom, the Commonwealth of Australia, the United States of America, St. Vincents, Bermuda, the Bahamas, Hong Kong, and such other countries, states, districts or territories as the parties may from time to time agree in writing should be included in the terms of this deed.
  • 3. The agent will in all districts and territories to which cl. 2 applies carry out his profession as international consultant in matters of law, finance and taxation as agent for the principal and not otherwise, and when carrying out his profession as aforesaid...
    • (1) The agent shall be deemed to be carrying out the principal's profession as aforesaid.

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    • (2) The agent shall be entitled to carry out his professional activities in his the agent's own name and need not (though he may) disclose to his clients that he is acting on the principal's behalf.
    • (3) All moneys, fees, costs and payments paid to or held by the agent shall be deemed to be held by him for and on behalf of the principal and in trust for the principal and it is the intention of the parties that such moneys, fees, costs and payments and all banking and other accounts in which the same may be held from time to time shall be the property of the principal.
    • (4) Out of the funds held pursuant to para. (3) of this clause the agent shall be entitled, from time to time, to draw and disburse whatever may be required to carry out his professional duties, including the cost of accommodation, fares, postage, telephone, transportation, cables, telex, research fees, fees payable to solicitors and counsel, accountancy fees, valuation fees, and all other relevant fees and expenses.
    • (5) Any moneys held pursuant to para. (3) of this clause and disbursed for purposes other than those outlined in para. (4) of this clause shall be deemed to have been advanced by the principal to the agent and the agent undertakes to repay the same wholly or partly on demand. No interest is to be payable for such advances.
  • 4. The principal hereby confers on the agent a sole and exclusive agency for the districts and territories herein-before referred to and will not during the term of this deed engage or employ any other person to perform similar duties in the said districts and territories or any part thereof.
  • 5. Any books articles or written matter written or published by the agent in any of the districts or territories hereinbefore referred to during the operation of this agreement shall (in so far as the same relate directly or indirectly to law, international law, finance or taxation) be deemed to have been researched and written for and on behalf of the principal and it is the intention of the parties that if and in so far as the copyright of the said books or writings would but for the provisions of this agreement vest in the agent they shall vest and be deemed at all relevant times to have vested in the principal AND ALL MONEYS PAYMENTS FEES OR ROYALTIES received by or paid to the agent in relation to such books or writings as aforesaid or any of them shall be deemed to be received by and paid to the agent for and on behalf of and in trust for the principal and all funds and banking accounts in which such payments or receipts are held shall to the extent of such payments and receipts be dealt with in accordance with the provisions of cl. 3 hereof and to be held for and in trust for the principal.

IN WITNESS WHEREOF the parties have hereunto set their hand and seal on the date hereinbefore mentioned.

SIGNED SEALED AND DELIVERED by the aforesaid PETER CLYNE, etc.

SIGNED, SEALED AND DELIVERED by PETER CLYNE, etc.

WARLOCK INVESTMENTS ESTABLISSEMENT at Sydney aforesaid, etc.

.....

(Peter Clyne)

WARLOCK INVESTMENTS ETABLISSEMENT (VADUZ) p.p.

.....

(Peter Clyne)''

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21. On the evidence before the Board Dr. Beck, the sole director of the anstalt on whose behalf Mr. Clyne was acting under the general power of attorney, was never informed of this agreement. A witness, an expert on Liechtenstein law, whose evidence was not disputed, said that Mr. Clyne's action in signing the agreement as agent as well as on behalf of the principal amounted to a conflict of interest and under Liechtenstein law the agreement was not valid. It could have been made valid if Dr. Beck as sole director had ratified the agreement on behalf of Warlock. This however was not done.

22. Clause 4 of the agreement conferred exclusive agency rights on Mr. Clyne. In spite of the undertaking contained in that clause Warlock on 1 July 1978 (signed by the taxpayer as administrator which he was not) entered into an agreement with Mr. H.F.H. Walsh which amongst other things engaged Mr. Walsh ``as its sole representative for'' various countries including Australia. In that agreement the address given for Warlock was not its registered address. Under that agreement Mr. Walsh was purported to have sold his practice for SF280,000 payable by seven equal annual instalments of SF40,000 each, the first instalment payable on 1 July 1979. Warlock undertook to pay Mr. Walsh a ``salary'' of $10 per annum also payable as from 1 July 1979, the ``employment'' to continue for a period of seven years. Under cl. 11 of the agreement the parties could adjust their obligations to one another by means of a formula whereby Warlock's annual payments totalling $40,010 could be offset by the fees collected by Walsh as agent less expenditure incurred by Walsh on behalf of Warlock. Further the sum of SF40,000 per annum could be varied or postponed at the will of the parties. In evidence Mr. Clyne admitted that it was never intended that anything should be collected under the agreement. His signature on behalf of Warlock was supported by a blob of wax which he agreed was placed there as a ``jest''.

23. On 20 May 1979 a further agreement was signed by a Robert Alfred Gray as vendor and Josef Reissi (Consulting Engineers) Anstalt Vaduz formerly known as Warlock Investments Etablissement (Vaduz). This agreement was ``deemed to have been executed and to take effect within the Principality of Liechtenstein on and as from the 1st day of July 1978''. It was signed on behalf of Warlock under its new name by Mr. Clyne and a rubber stamp seal bearing the new name was affixed to the agreement. Under that agreement Gray agreed to sell his consulting civil and structural engineering practice to the anstalt for SF450,000. Clause 9 appears to put some embargo on Gray carrying on his profession within a radius of 200 km from the post office of the city of Mackay, Queensland. In consideration of that undertaking Gray was to be paid a further SF200,000.

24. The Commissioner issued a sec. 264 notice against Gray but he refused to comply pleading the ``fifth amendment''. He was subsequently fined. Later Warlock (Clyne) demanded the documents relating to this transaction from Gray. Mr. Clyne on receipt sent these documents off to Vienna. Gray then attended the Taxation Office in compliance with the sec. 264 notice. When asked where the documents were he replied ``I have given them to Dr. Clyne''. He was asked why was that and he answered ``Because he asked me for them''. He was then asked ``Have you got the letter?'' In Mr. Clyne's words ``He produced the letter and it more or less killed the investigation stone cold dead because they then asked him verbally about what had happened and without the aid of the documents he had no idea of what had happened...''

25. According to Mr. Clyne the sale by Gray to the anstalt never eventuated but that statement was not supported by any other evidence. At the outset Mr. Clyne said he would refuse to answer questions relating to the Gray transactions on the grounds that they may tend to incriminate him. However he later modified that view.

26. At the time the Gray sale agreement was executed Mr. Clyne was in Austria. Unbeknown to him Dr. Beck had placed Warlock into liquidation on 23 April 1979 by a resolution of that same date. Warlock was finally struck off on 21 November 1980.

27. Between its formation on 29 November 1973 and the ultimate demise in 1979/80 it would appear that Mr. Clyne had no association with Warlock apart from the foregoing ``transactions''. On the evidence there was a complete lack of communication

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between Dr. Beck, Warlock's founder and sole administrator, and Mr. Clyne until 1982 when Mr. Clyne sought certain documents. The anstalt kept no accounting records. The ``agreements'' with Mr. Clyne, Walsh and Gray were known only to Mr. Clyne as Dr. Beck was never informed of their existence. In fact Dr. Beck liquidated the anstalt in complete ignorance of the fact that under those ``agreements'' the anstalt was supposed to have acquired assets, incurred liabilities and even had changed its name. Further in regard to these ``agreements'' no formal advice was ever given to Walsh, Gray or the Commissioner that Warlock had been placed in liquidation on 23 April 1979. This is hardly surprising as I do not believe that even Mr. Clyne knew of Warlock's liquidation until 1982 at the earliest. Mr. Clyne himself has no knowledge of what happened to the bank account opened in Liechtenstein for Warlock in November 1973 presumably with an opening deposit of $20,000 for capital. Mr. Clyne believed that the account was never used. He paid no fees to Dr. Beck nor did the anstalt, in Mr. Clyne's knowledge, ever pay the annual tax of SF1,000.

28. As to any other transactions Mr. Clyne's evidence was ambiguous. When it was put to him that following incorporation Warlock had remained passive he replied ``I do not agree with that. It has entered into other transactions''. Later he said ``I cannot be specific but I rather think that I have used Warlock from time to time on at least one occasion, maybe more, in transactions similar to the Walsh transactions but not similar to the one that is here''. He then went on to say:

``Warlock has had no commercial transactions, it has had no what you might call normal transactions. It has been used as a pawn in the game of taxopoly that I play with the Commissioner in different kinds of transactions, this being one of them, the Walsh transaction being one of them and perhaps one or two others similar to the Walsh transaction. But it has had no normal transactions.''

29. Mr. Clyne did not register Warlock as a foreign company in Australia. The 1 July 1976 agreement, where Mr. Clyne was signatory for both parties, was never referred to the Reserve Bank. Mr. Clyne carried on his business as a writer and international tax attorney in his own name without his clients or the public generally knowing of the existence of Warlock. Neither Mr. Clyne nor Warlock were registered as tax agents under Pt. VIIA of the Income Tax Assessment Act 1936.

30. At the conclusion of evidence Mr. Clyne opened his address by saying:

``It has been clearly established that Warlock is not a mythical beast or a figment of Peter Clyne's imagination or some sort of alias but a separate independent, juristic entity, having its own separate personality, able to own and administer property on its own account and that it has a personality quite separate from the personality of Peter Clyne, who caused it to come into being.''

31. Mr. Clyne's task was to connect this separate legal entity with the income Mr. Clyne derived during the years 1978, 1979 and 1980, the years now before this Board. This brings me to the agreement signed on 1 July 1976 between the taxpayer and Warlock (the Warlock agreement) with Mr. Clyne signing on behalf of both parties. This agreement was described as being invalid by the expert witness from Liechtenstein through conflict of interest. However putting that to one side the facts are these:

32. On the facts of this case I find that the purported disposal of Mr. Clyne's business to Warlock through the Warlock agreement was a sham. Nothing Mr. Clyne did subsequently to the agreement would indicate that the arrangement was anything but a sham. As I so find it is not necessary for me to consider the matter under sec. 260.

1978 taxable income

33. My colleague Mr. H.P. Stevens, Chairman, in para. 10 of his reasons compared the Commissioner's calculation of taxable income with the taxpayer's calculation in respect to the year ended 30 June 1978. The gross income conceded by the taxpayer in his nil return of income was $40,768. In his objection he increased this figure to $78,679. During the hearing he made further concessions which brought the gross income to within some $2,600 of the Commissioner's figure of $131,300. This small difference concerned an acceptable estimate for unbanked fees paid in cash - the Commissioner saying $150 per week and the taxpayer settling for $100. The expenditure at issue has been summarised by Mr. Stevens in para. 11 of his decision.

34. At the outset it should be understood that the taxpayer's return for 1978 was not based on a statement of income and expenditure prepared from his own records. The taxpayer had no accounting records to tender detailing the receipt of fees. His method of arriving at the figure of income was to go over whatever information had been collated by the investigators from the Taxation Office and then to reach a consensus as to what was agreed income and what was in dispute.

35. By some strange twist of logic Mr. Clyne seemed to believe that this particular exercise with the investigators amounted to a full disclosure. Because he had no records he could not answer questions on specific receipts with anything better than ``I think'' or ``I don't remember''. In his 1978 objection and later in evidence he conceded further income for reasons known only to him. Sometimes he conceded that particular receipts were income for the simple reason that the Commissioner had the evidence and he had none. Such concessions were made in a clear-cut articulate fashion which tended at times to create an atmosphere of open rather than forced disclosure.

36. In his books, many of which he tendered, this philosophy of no records and ``tell him nothing'' is dealt with in a manner which many would find amusing. The reality emerges in the witness box when it all becomes rather pathetic and sad. Certainly distance lends enchantment.

37. Whether one approves or not Australian tax law is based on the broad proposition that the taxpayer alone knows what he received and paid out during a year. Where the taxpayer fails to keep records, in this instance as a matter of a publicly stated policy, the tax revenue must still be protected. Under sec. 166, 167 and 168 the Commissioner is entitled to raise an assessment on what information he has in his possession. Should the taxpayer object against such an assessment the burden of proving that the assessment is excessive rests

ATC 509

with the taxpayer: sec. 190(b). As I see it it is not for Mr. Clyne to base his case on the Commissioner's figures and thereupon to set about showing where the Commissioner has erred. In my opinion his first task is to reconstruct and rectify his own lack of records and independently produce his own detailed figures to show where the Commissioner erred. If he does not do this then all he would achieve is to show where the Commissioner may have erred but to leave unanswered the real question - what are the figures for income and expenditure based on a full and true disclosure by the taxpayer?

38. The only details of income before the Board are from the Taxation Office's work papers or from details emerging under cross-examination. Mr. Clyne has made no attempt to arrive at a detailed summary of income prepared from sources quite independent of the Commissioner and representing a full and true disclosure. In spite of the many words spoken in this case Mr. Clyne's argument comes down to this - here are the figures of the Commissioner amended by Mr. Clyne. If the Commissioner has omitted any income so has Mr. Clyne.

39. Whilst all tax decisions come down to a resolution of the quantum of tax payable, certain things must be resolved before that figure can be determined. Where the taxpayer is carrying on business, as in this reference, and he has kept no records it is necessary to determine the gross assessable income from which are deducted allowable deductions in order to arrive at a taxable income and finally the tax payable. The alternative, not adopted here, is to arrive at a figure for taxable income on an assets betterment basis. This method provides no figure for gross income or for deductions.

40. Where as I find here that the taxpayer has failed to establish a figure for gross assessable income I see no point in then proceeding to determine his claim for allowable deductions. To deduct a correct figure for allowable deductions from a wrong figure of gross assessable income cannot produce a correct figure for taxable income. When the Commissioner, in the absence of information from the taxpayer, attempts to calculate a figure for gross assessable income he in effect says ``I have no knowledge of the taxpayer's total assessable income but it should include this figure of mine.''

41. As to credit Mr. Clyne, in the witness box and through his own writings tendered in evidence, was his own detractor.

42. In Ch. 11 of his book How Not To Pay Any Taxes he described and advocated money ``laundering'' transactions ``which had figured quite frequently in my writings''. In the 1978 year he took part in such a transaction with a Melbourne firm of chartered accountants. In evidence he named the firm and the partner concerned but I will not do so here owing to the legal consequences which may flow from the transaction and as the transaction itself plays no important part in these references. The transaction concerned an amount of $12,500 which the chartered accountants wished to ``launder''. A bank account was opened in Mr. Clyne's name. Mr. Clyne accompanied by the partner went to that bank and deposited $12,500 to the credit of the new account. At the same time a bank cheque was drawn against the deposit and given by Mr. Clyne to the partner as a loan from a Swiss company called Compagnie de Credite a de Commerciale (C.C.C.) in which Mr. Clyne had a third interest. The ``loan'' was supported by a document executed by that company with Mr. Clyne as the signatory. Also about that time the chartered accountant partner was given a receipt from the Swiss company evidencing the repayment of the loan and ``either one or several receipts for interest''.

43. In regard to this transaction the following exchange took place between senior counsel for the Commissioner and Mr. Clyne:

``Q. So that that client would then be in a position if he chose to use the documentation to claim a deduction for the interest? A. I imagine so yes.

Q. Well, that would be one of the purposes of the transaction, would it not? A. Yes, I usually advise people not to do that, it is sort of adding insult to injury, but he could, yes.

Q. Do you remember whether you discussed with Mr. B. that it would be open to the client to do that if the client

ATC 510

chose? A. I think we did discuss that possibility and I said that the object of these documents being to explain the money in the client's possession, the last thing that he should do is to attract attention to the transaction by claiming the interest.

Q. But this overall type of transaction is one that you have explained to people from time to time, is it not? A. Yes, not very often, I have explained it in most of my books in some detail - at least two books - one book that is before the Board, but I do not do it as often as the books might suggest.

Q. Well, in your book How Not To Pay Any Taxes at p. 28, you say:

  • `One final scurrilous thought. You can add insult to injury by borrowing money from yourself to launder it, paying yourself interest and treating the interest as a deduction to reduce what little tax you do pay.'

Now that is the description in your book at any rate, of the final step in the transaction that you have just spoken of? A. That is what the book says, yes. I still do not think it is really a very good idea though.

Q. The difference between the $12,500 that was paid into the account and the amount of approximately $10,000 that went back to Mr. B, presumably remained with you, did it? A. I have a feeling I shared it with B, C & Co. but I am not sure about it.''

44. Mr. Clyne was later asked if he thought the transaction legal and he answered ``No I cannot really answer that, I have just got a feeling in my bones that my opinion may not be the correct one.''

45. C.C.C. was formed in Switzerland in 1972 and was liquidated by the Swiss authorities in 1973. Notwithstanding its liquidation Mr. Clyne maintained that the company as far as he was concerned still existed. A strange state of mind for one trained in law.

46. Mr. Clyne was asked if he supplied documents for money laundering purposes to other persons besides the client on this occasion in which the purported lender was C.C.C. He answered:

``I think at this point Mr. Chairman I do propose to refuse to answer on the ground that the answers may tend to incriminate me.''

47. Mr. Clyne's attitude to this type of transaction is best summed up by the following questions and answers:

``Q. You said yourself a little while ago that the transaction was non-existent? A. I suppose in a practical sense it is and yet in a legal sense it happens.

Q. In a practical sense the client will be telling lies to the Taxation Commissioner, would you not agree with that? A. I do not know, perhaps you are right. I have not really thought about it.

Q. Really, Mr. Clyne...? A. You are talking about a hypothetical discussion...

Q. That is obviously correct, is it not? The man will be telling lies to the Commissioner? A. I do not accept it. It depends on exactly what he says to the Commissioner, but I will not accept it in that form.

Q. Let me put a hypothetical question to you...? A. He may tell lies - I am sorry, I did not want to interrupt you.

Q. No, continue? A. If he shows the Commissioner that document or a hypothetical investigator that document and says, `I borrow the money and here is the document' I do not think this would even raise a smile on the face of an investigator, no investigator would take any notice of this, but the client feels happy in having such documents. Strictly speaking if we are going to be hypothetical, if that is all that happens he has not deceived the hypothetical investigator. If the investigator, having stopped laughing hysterically, then asks him some further questions I would have thought the whole system would break down there and then. There is no earthly chance of this system deceiving anybody, if you really want my opinion.

Q. That would mean, would it not, that the client of Mr. C had paid $2,500 to you for something that was completely worthless to your knowledge? A. For

ATC 511

flimflam, I agree with that, I think it is nonsense. It makes him feel better but I think this sort of thing is nonsense.

Q. So he paid you $2,500 for flimflam?

A. Yes, I agree with that.''

and later:

``Clyne: There is no possible way that this thing could deceive a tax investigator, but it does make the client feel much happier. He sleeps well at nights.

Q. And it helps sell books, does it? A. It is a tranquillizer, it helps to sell books. It is a favourite topic at Rotary meetings when I give lectures there.

Q. When you give lectures, do you sometimes tell them that this method is all flimflam? A. As a matter of fact I do. Sometimes I do and I do not encourage people to take what I say all too seriously, as you tend to do. I think I have been known to do just that.

Q. I am going to have to ask you later to identify the serious and the non-serious parts of various writings? A. You will never succeed Mr. Priestley.

Q. Can you not tell one part from the other? A. They are inextricably mixed.''

48. On the subject of keeping records Mr. Clyne had this to say:

``Q. Mr. Clyne I was asking you earlier about the policy of not keeping records and whether you had advocated that people should not keep records, and you wanted me to supply you with particulars before you answered the question? A. I think you are not quite accurate. You were asking me about whether I advocated that people should destroy their records which is a bit different.

Q. I see. There is a distinction there? A. I have often advocated, I think wrongly perhaps, that people should not keep records, and I am beginning to discover the difficulties that flow from that policy.

...

Clyne: I am opening and shutting these accounts all the time because they pay interest - I do not know whether I am making this clear. A trading account pays no interest, a deposit account pays interest so when I have any substantial sum of money that I do not immediately need it goes into one of these accounts, and that is my practice. When that book is finished with it is usually torn up to avoid confusion, and I throw it away. I cannot tell you...

Q. What confusion does destruction of a record which has accurate details in it cause? A. I see what you mean. Shall we say to avoid...

Q. To avoid detection, would that be the purpose? A. To avoid any - I do not like detection, but confusion was not very accurate. I would say deliberately those books, when they are finished with, are not kept because I would not want them to fall into the hands of the Commissioner of Taxation; does that satisfy you?

Counsel: I think it is a complete answer to the question. A. I thought it might.

Q. I have another question however: is the reason why you do not want the information to fall into the hands of the Commissioner because you do not wish him ever to know the full extent of your income? A. The less he knows about my affairs the better, but he seems to know far more than I would like.

Q. You take positive steps, do not you, to prevent him ever ascertaining the full extent of your assessable income? A. Yes.

Q. Has this particular book been destroyed, the one we are talking about, Sacre Coeur PC5 [a secret account]? A. Oh yes. I have no passbooks, no secret accounts at the moment that have not been destroyed.''

49. On disclosure of income:

``Q. Have you in the course of your evidence in these references disclosed all the sources of assessable income received by you in the three years in question? A. To the best of my ability, yes.

Q. Are you able to answer the question without qualification? A. No.

Q. And there is no other person, apart from yourself, who would know the answer to that question is there? A. No.''

50. On telling lies:

ATC 512

``Q. So that, whenever one finds writings of yours, the knowledgeable reader will not know whether to take them seriously or not? A. That is right.

Q. And it is only the unwary who may be silly enough to take you seriously? A. I do not agree. I do not write for silly people.

Q. Would you not agree that there is a risk...? A. But I am a writer. I mean, these are books, not affidavits, and they are basically to amuse and entertain.

Q. That is something else I will have to ask you afterwards in more detail and that is do you not agree that you have said in various places in your writings that there is nothing wrong with telling lies when you are not on oath? A. Yes, I think I have said something like that. I am not in favour - again, it is difficult when you put things out of their context. I think what I have said is that there is nothing legally wrong with telling lies when you are not on oath, except in the United States where you go to gaol for three years for lying to a tax officer, but in Australia there is nothing legally wrong - I am not in favour of telling lies, personally - nothing legally wrong with telling lies when you are not on oath. I happen to tell the truth whether I am on oath or off oath, irrespective.

Q. You always tell the truth? A. I try to, yes.

Q. What about when you are dealing with the media? A. I know the passage you are thinking of, where I said I had to tell them a few lies to make it more exciting.

Q. Well, did you tell them a few lies to make it more exciting? A. Oh yes.

Q. So you are prepared to lie to the media? A. Are you speaking about the Wall Street Journal article?

Q. I am asking you whether you are prepared to lie to the media? A. Often, yes.''

51. On payment of tax debts:

``Q. You said in another of your books, How Not To Pay Your Debts, at p. 9...? A. It is the only one that is not in evidence, I think. But it is part of How To Survive, it is reprinted in How To Survive.

Q. All right. But there is a sentence in it: `There are some legal debts which are not morally due'? A. Yes.

Q. This is one of the things I wanted to try and separate out from the serious and the non-serious. Do you yourself believe that there are some legal debts which are not morally due? A. Yes I do.

Q. And do you include taxation debts amongst those? A. Indeed, that is the one that springs first to my mind. It may not have been what I was writing about there, I think I was talking about...

Q. No, this was just ordinary creditors? A. I was talking about finance companies and guarantees and that kind of thing, but I will certainly say that that is my view in relation to taxation.''

52. On the subject of secret bank accounts:

``Q. Have you followed your own advice and opened a secret Viennese account? A. Frequently.

Q. Did you open any in the three years in question? A. May I just complete the - I do not have any at the moment. I open them as the need arises and I close them when the money is spent.

Q. I see. We are talking about accounts opened into which you place your money? A. These are numbered accounts, they come in the form of passbooks with a number on them and a password. In order to withdraw from that account you write down your password. They have no owner at all. The answer to your question is I have opened such accounts frequently for my clients, occasionally for myself. When the money from them is spent I close them again and throw away the book. I do not, at the moment, have any such passbooks containing money belonging to me.

Q. During the three years in question, do you remember opening a secret Viennese account into which you lodged money of yours? A. I think in the last year I did. I am not sure about that. In the first two years I had no money overseas at all and there was nothing to put into a secret

ATC 513

account. When I transferred the money that I was speaking of, of course that was used to buy shares overseas and in due course those shares were sold and the proceeds would have been put into such an account.''

and then later:

``Q. Are you able to say whether as at 1 July 1979 there was then in existence a previously opened secret account for yourself in Austria? A. Yes I am able to say, and no there was not.

...

Q. First of all is that a secret Viennese account? A. Yes.

Q. Was it opened for self on 27 August 1979? A. Yes. Now that you have shown me that, I would have to concede that the evidence I just gave is not accurate.''

53. For the foregoing reasons I find:

54. I uphold the decision of the Commissioner on the objection and would confirm the amended assessment for the year ended 30 June 1978.

 

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