KLOPPER & ANOR v FC of T

Judges:
Nicholson J

Court:
Federal Court of Australia

Judgment date: 13 February 1997

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Nicholson J

This is an appeal from a decision of the Taxation Appeals Division of the Administrative Appeals Tribunal (``the Tribunal'') constituted by Associate Professor RD Fayle (Senior Member) given on 25 January 1996 in which the Tribunal affirmed the decision under review to the extent that it relates to the non-deductibility of the gifts under s 78(1)(a) of the Income Tax Assessment Act 1936 (Cth) (``the Act'').

By further amended notice of cross-appeal and contention, the respondent seeks to vary that part of the decision the subject of the appeal which qualified the extent to which the decision under review was affirmed. It also contends that the decision of the Tribunal should be affirmed on an additional or alternative ground.

Applicant's circumstances

The circumstances in which the issues arise as they appear from the reasons of the Tribunal are as follows.

The applicants are husband and wife. The first applicant is a pastoralist who has a long history of being involved in sailing and especially in offshore racing.

In 1987 the first applicant used part of the proceeds from the sale of a business to build a fast-going yacht (the ``True Blue'') for offshore racing completed at a cost of $300,000. In March 1989 True Blue was entered in the Admiral's Cup Trials in Victoria and was selected as one of three boats to represent Australia.

Australian representation for that event is organised by and is the responsibility of the Ocean Racing Club of Australia (``ORCA'') which was so authorised by the Australian Yachting Federation (``AYF''). The first applicant entered into an agreement with ORCA (``the ORCA Agreement''), the operative portions of which read as follows.

``IN CONSIDERATION OF ORCA selecting the Owners to represent Australia in the 1989 Admiral's Cup on the conditions as appeared in the Trial's race documentation.

1. ORCA hereby agrees to organise, manage and arrange for the crew of the Team Yachts and such other persons as are appointed by ORCA (hereinafter referred to as the Team Personnel), and the Team Yachts (hereinafter collectively referred to as the Team) to travel to the United Kingdom, be housed and boarded there to train for and compete in the Admiral's Cup 1989 and to return to Australia.

2. The Owners and each of them hereby appoint irrevocably ORCA to manage the Team as ORCA shall in its absolute discretion see fit and each agree to be bound by the direction from time to time of the Team Manager, the Team Coach and ORCA.

3. The Owners and each of them hereby jointly and severally:

• (i) indemnify ORCA for all expenses, costs and disbursements incurred by ORCA in the management of the Team;
• (ii) agree to pay to ORCA within seven days of written request such sum of money as is requested by ORCA on account of the Team expenditure;
• (iii) indemnify ORCA for damages, costs, injury or loss of the Team Yachts and/or Team Personnel howsoever arising;
• (iv) agree to settle accounts with ORCA within seven days of written presentation;
• (v) agree to ORCA and the [Australian Yachting Federation (`AYF')] deducting from all donations to the Australian Sports Aid Foundation four per cent of such donations.

4. The owners agree with ORCA and acknowledge that ORCA is entitled to exclusively (sic) to arrange and contract all sponsorship of the Team Yachts, Team Personnel and the Team and further agree to

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accept the directions of ORCA in respect of ORCA complying with the obligations of ORCA's various agreements with ORCA's sponsors.

5. The owners each of them hereby agree to procure all crew members of their yacht to sign and comply with the obligations of the Crew Agreement' annexed hereto and marked with the letter A, and to return such Signed Agreement to ORCA on or before 5.pm on Monday 13 March 1989.

6. In default of the observance of the provisions hereof the Owners and each of them hereby acknowledge that ORCA is empowered to exclude the owner and his yacht from the Team and select such other owner(s) and yacht as ORCA shall determine whereupon the Owner shall forthwith pay to ORCA the proportionate costs, expenses and disbursements of the Team as are detailed in writing in ORCA including costs associated with the replacement yacht.''

In April 1989 ORCA informed the applicants of difficulties in raising finance. ORCA suggested the applicants make funds available either by way of loan to it or donation to the Australian Sports Aid Foundation. ORCA's estimate of expenses for True Blue's participation was around $200,000.

In April 1989 the applicants donated $100,000 through a partnership account to the Australian Sports Aid Foundation (``ASAF''). In June 1989 ORCA received $99,500 from the Australian Yachting Federation (``AYF'') which ORCA credited towards an account styled ``1989 Australian Admiral's Cup Team - True Blue Account''.

In May 1989 ORCA borrowed $25,000 from the applicants for True Blue's shipping costs to the United Kingdom.

In July 1989 the applicants made another donation of $100,000 to the ASAF in response to requests by ORCA. In September 1989 ORCA received a further sum of $99,500 from the AYF which was credited to the same account as the previous receipt. In the agreed facts before the Tribunal it was stated that the ASAF had paid each of the amounts of $100,000 to the AYF which in turn made payment to ORCA after deduction of a fee.

In August 1989 the applicants advanced $42,261.40 to ORCA's UK account to cover the return freight of True Blue to Australia.

In October 1989 ORCA refunded $40,000 to the applicant. At the conclusion of the series ORCA refunded a further $7,326.99 to the applicants.

Of these transactions the Tribunal said:

``In sum then, the True Blue account received $199,000 from the AYF and $67,261.40 (being
$25,000 and $42,261.40) advanced from the applicant [Plus some other small credits relating to
insurance and miscellaneous transactions.], and refunded the applicant $47,326.99. The receipts and
payments by or on account of ORCA can be summarised as:

Donations from AYF                199,000
Advances by the applicant  67,261
Miscellaneous receipts              1,151
                                  -------
Total                             267,412
Less expenses as detailed         220,085
                                  -------
Refunded to applicant              47,327''
      

It was not disputed that the amount characterised by the Tribunal as ``advances'' were by way of loan (although not so described in the Tribunal's reasons) and that the AYF deducted $5,000 from each of the donations made to ASAF prior to credit to the True Blue account. Additionally, it was not disputed that $3,000 was deducted from the donations by ORCA.

The ASAF was established under the Australian Sports Commission Act (No 12 of 1989). Its Objects, as provided for in the Memorandum of Association, are: to raise money for the development of sport; to transfer money and property to the Australian Sports Commission; to encourage the private sector to contribute to the funding of sport to supplement assistance by the Commonwealth; and to consult and co-operate with appropriate authorities of the Commonwealth of the States and Territories, and with other organisations and associations and persons, on matters related to its activities. Any funds raised are transferred to the Australian Sports Commission.

The ASAF, in conjunction with the Australian Sports Commission, published a brochure entitled ``Assistance to Sport- Donations''. The brochure, under the title ``Fund Raising'', said donations would be of

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two types: preferred donations for which the donor nominates a preferred sport for the allocation of the donation and general (non- preferred) donations for the general development of sport.

By arrangement between ASAF and the AYF, donors supporting the Admiral's Cup Challenge were to send donations to ASAF under cover of a letter stating the donation was unconditional but indicating a preference for the allocation of the donation to the ``AYF (Admiral's Cup Appeal)''.

When the applicants sent each of the two donations of $100,000 to the ASAF there was an accompanying letter in the above form except that the words in parenthesis read ``Ocean Racing Club of Australia'' and they added their cheque was enclosed and made payable to the ASAF.

The ASAF issued a receipt for each donation on which was endorsed the statement ``Donations $2 and over are tax deductable: s 78(1)A(lxxxiv)''.

The applicants each claimed $50,000 as a deduction arising from the donation by them to the ASAF in the year ended 30 June 1989. They made a similar claim for deduction in respect of the amount paid in the year ended 30 June 1990.

In issuing the amended assessments that came for review before the Tribunal, the respondent assessed each applicant for additional tax pursuant to s 223 of the Act for incorrect returns. The assessment included a 25 per cent penalty for culpability and a prescribed per annum component, partially at 9.6 per cent and 14.026 per cent.

Statutory provisions

Section 78 of the Act, as it then was, relevantly reads:

``78(1) The following shall, subject to section 79C, be allowable deductions-

• (a) Gifts (not being testamentary gifts) of the value of $2 upwards of money or of property other than money which was purchased by the taxpayer within 12 months immediately preceding the making of the gift, made by the taxpayer in the year of income to any of the following funds, authorities or institutions in Australia:
• ...
  • (lxxxiv) the Australian Sports Aid foundation.
  • ...''

Section 78A of the Act qualifies the deductibility of gifts otherwise available under s 78 and, in context, states:

``78A(2) Subject to this section, a gift of money, or of property other than money, made by a person (in this section referred to as the `donor') after 7 April 1978 to a fund, authority or institution is not an allowable deduction under section 78 where-

• (a) by reason of any act, transaction or circumstance that has occurred, will occur, or may reasonably be expected to occur, being an act, transaction or circumstance occurring as part of, in connexion with or as a result of-
  • (i) the making or receipt of the gift; or
  • (ii) any agreement or scheme entered into in association with the making or receipt of the gift,

  the amount or value of the benefit derived by the fund, authority or institution as a consequence of the gift is, will be, or may reasonably be expected to be, less than the amount or value at the time when the gift was made of the property comprising the gift;

• (b)...
• (c) by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege other than the benefit of any deduction that, but for this section, would be allowable from the assessable income of the donor under section 78; or
• (d)...

78A(1) In this section-

`agreement' includes any agreement, arrangement or understanding, whether formal or informal or express or implied, and whether or not enforceable by legal proceedings (whether or not the agreement, arrangement or understanding was intended to be so enforceable);''

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Tribunal findings and reasons

The Tribunal considered there were three issues before it for determination, namely:

• ``(i) were the payments to the ASAF totalling $200,000 gifts?
• (ii) if so, are those gifts allowable deductions pursuant to s 78 bearing in mind the provisions of s 78A?
• (iii) should the applicants have been assessed for additional tax and if so, is the level appropriate in the circumstances?''

On the question whether the payments to the ASAF were gifts, the Tribunal turned first to authority in the case law on what constitutes a gift. It cited
McPhail v FC of T (1968) 15 ATD 16 at 19-20; (1968) 117 CLR 111 at 116 per Owen J;
Leary v FC of T 80 ATC 4012 at 4014-4015 per Wickham J at first instance and at 80 ATC 4438 at 4441 per Bowen CJ as well as Deane J at 4455. The purport of these dicta is that a payment can only be characterised as a gift when there is the element of voluntariness and the absence of consideration; that is, where there is truly a notion of benefaction so there is no advantage of a material character being received in return.

The Tribunal then turned to the evidence before it citing the following:

``Under examination, Mr Klopper made the following statements in evidence:

`Mr Sceales: Now, the payment of $100,000 made on 19 April 1989, would you please tell the tribunal how that came to be made? - Well, we realised - well, ORCA realised that they weren't going to get sponsorship. They came back to us because we're indemnifying them against all expenses. So they came back to us and said, ``Well, its going to cost around about $200,000 per boat and, you know, you'll have to do something about it''; which we'd signed an agreement so we had to do something about it whether we liked it or not. And they said we've got the option of just giving them the 200,000 or-

When you say ``giving them''; paying ORCA 200,000? - Paying ORCA 200,000. Or they said we could go through the Sports Aid Fund which they outlined to us and they said that money - you put in there through the AYF and eventually it comes back. And they said ``It has in the past in other events and it was legitimate - very much a legitimate thing''. So we accepted that. We weren't in a position to lay our hands of [sic] $200,000 that quickly so we put in $100,000 into it.

Now according to the documents we went through this morning, on 3 July '89 a further cheque was made out of $100,000 to the credit of the Australian Sports Aid account. Could you tell the tribunal briefly about that payment? - Well, that was just the follow-up of the previous one and we put it through the same way.'

During cross-examination of Mr Klopper by Mr Colvin, the following questions and answers were given:

`... when you signed [the ORCA agreement] you understood that you were taking on an obligation to indemnify ORCA for costs relating to the team? - At the time I had high hopes of finding sponsors.

Yes, but -? - I realised what I was doing, yes. Didn't like it much.

Yes. And if there were no sponsors, or if there were not enough, you would have to make up the difference, you jointly with the other owners? - That would be the case, yes.

And in fact when the time came and you were asked to contribute money you understood that you had an obligation under the agreement to contribute that money? - Yes.'

Mr Colvin's cross-examination, in relation to Mr Klopper's expectations when he made the payments, and Mr Klopper's reply is:

`And if the money was passed through to ORCA you understood that that would reduce any liability that you had to pay money directly to ORCA? - Well, it was paying money - they told us that it had been happening before, money had been put through this way, when they run out of money at ORCA, that happened before and they said, you know -

But you understood that when you paid the money to the Sports Aid Foundation

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and when it found its way through to ORCA the result would be that you would not have to pay $200,000 directly to ORCA? - If they had enough money, yes.'

Later, during Mr Colvin's cross-examination the following question and answer obtained:

`Now apart from this occasion, that is, of these two donations which you made of $50,000 each and your wife made a $50,000 (donation) in each of the two tax years, having [sic] you made any other donations to support yachting? - No, I think I've done enough, don't you?'''

From this evidence the Tribunal concluded it could not make a finding of detached benefaction in respect of the payments. Although the evidence related to the first applicant, on the basis that the second applicant had not opposed her husband's decision to make the payments, the Tribunal inferred her intention was to conform with her husband's wishes.

The Tribunal went further with the evidence:

``The evidence also supports a finding that at the time Mr Klopper entered into the agreement with ORCA, he had little expectation that sufficient sponsorship would be achieved. When giving evidence in chief he said in relation to the ORCA agreement:

`Mr Sceales: Would you tell the Tribunal what happened on conclusion of the trials and the events leading up to signature of this document? - Well, to be in the trials we had to sign this document because this empowered the Ocean Racing Club of Australia to handle everything: which is probably understandable because they were looking for sponsorship and it was not - as it points out there, we were just chosen to represent Australia - that is all we were doing - and it was not an individual effort or anything like that. There were three boats chosen to go to England to represent Australia and that is what happened. So they made us sign this and they were in control of the money side of it and everything. But at the time - people could probably cast their minds back to the end of the 80s was when all the high-flyers were, sort of, having a lot of trouble and there was just no sponsorship around anywhere.'

Therefore, in the opinion of the Tribunal, at the time of making the first payment to ASAF, Mr Klopper, having entered into the agreement, was obliged to make a payment one way or another to fund True Blue's share of expenses for the Admiral's Cup challenge.''

The Tribunal then concluded, after examination of additional evidence, it was not open to be found that ORCA, in meeting its obligations under the agreement, conferred any material benefit on either of the applicants (unless it be equated to the value of sails retained at the conclusion of the racing series). The Tribunal then qualified that conclusion by stating the first applicant received a material benefit to the extent the payments to ORCA avoided him having to meet financial obligations under the ORCA agreement. This was a sufficient basis to bring the payments by the first applicant within s 78A(2) of the Act and to affirm the decisions under review in relation to him.

In relation to the second applicant the Tribunal found the benefit to her spouse of obviating this real or contingent liability under the ORCA agreement was too remote to confer any direct benefit on her. However, by reason of marriage the second applicant was an associate of the first applicant: see s 78A(1) definition of ``associate''. Nevertheless the Tribunal found s 78A(2)(a) could not apply to deny her the deduction under s 78(1)(a) because to do so the act, transaction or circumstance must be as a result of her having made the gift concurrent with her having entered into an ``agreement'' which reduces the value of the gift derived by the fund. As the second applicant had not entered the ORCA agreement, that circumstance was not present.

Turning to s 78A(2)(c) the Tribunal said the conditions of its application were established. The fact that she was an associate of the first applicant who derived a benefit from the payments was sufficient. The paragraph therefore operated to deny a deduction to the second applicant in each of the years under review.

The Tribunal therefore affirmed the decisions under review.

The Tribunal then turned to the question of penalties. It had previously found the first

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applicant a truthful and forthright witness who was told by persons in whom he put his trust, namely the principals of ORCA, that he had options to pay ORCA direct or to make a donation to ASAF, most of which would eventually be paid over to ORCA for the specific purpose of the Admiral's Cup Challenge. In dealing with the question of penalties the Tribunal repeated these findings.

The Tribunal continued:

``The 1988-89 income tax return of each applicant, prepared by their agent filed on or about 14 March 1990, discloses under Item 25 (disclosure by applicants in italics):

`DEDUCTIONS

Item 25 Gifts. State full name of institution of fund shown on receipt.

AUSTRALIAN SPORTS AID FOUNDATION $50,000 approved fund 78(1)(lxxxiv). G $50,000.'

34. The following year's tax returns were filed in March 1991, pursuant to s 169A of the Act, using the `self-assessment' printed forms which require no detail about deductions claimed. The applicants, having made a correct disclosure in the previous year in relation to the same matter, and having had no adverse assessment or inquiry from the respondent, were not on notice that the deduction previously claimed may be disallowed. Therefore, they had no reason to make a request pursuant to s 169A(2) in those returns. In the circumstances it is difficult to see how the applicants could be considered to have made either a false or misleading claim.''

The Tribunal supported this by reference to the respondents Taxation Ruling IT 2141, particularly pars 18 and 21.

The Tribunal found the first applicant had questioned the procedure but was given assurances. It expressed the opinion that even the most sceptical business person (excepting a tax professional) would be influenced by the brochure put out by the Australian Sports Commission.

The Tribunal therefore concluded there was negligible culpability on the part of the applicants and such culpability, if any, as existed was mitigated by reliance on perceived competent advice from third parties assuring the first applicant he would be following a tried and tested practice and by the fact that the income tax returns in question were prepared by the applicant's tax agent. The Tribunal therefore reached the view the penalty pursuant to s 223 should be remitted pursuant to s 227(3) such that no culpability component was imposed whilst the per annum component was maintained.

Amendment of assessments

The first ground of appeal is that the Tribunal erred in law in finding it was entitled to consider and rule upon the deductibility of the payments in the year ending 30 June 1989 when the Commissioner and the Tribunal were precluded from altering or making additions to the assessments for that year by virtue of s 170(2) of the Act. That section as it presently reads provides that, subject to the section, where there has been an avoidance of tax, the Commissioner may, relevantly, within four years from the date upon which the tax became due and payable under the assessment, amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment.

The assessment for the year ended 30 June 1989 issued on 14 March 1990. The amended assessments, those now under challenge, issued on 16 September 1994.

With effect from 17 January 1990, s 170 was amended by the Taxation Laws Amendment Act (No 5) 1989, s 31(1)(a). The effect of that amendment was to repeal the subsection and to substitute the present subsection. The former subsection read:

``170(2) Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may-

• (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
• (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment,

amend the assessment by making such alternations therein or additions thereto as he thinks necessary to correct the assessment.''

The present subsection became applicable to assessments for the year of income ending 30 June 1990 and all subsequent years made on or

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after 17 January 1990: Taxation Laws Amendment Act (No 5) 1989, s 31(2). The consequence is that the former subsection applied to the assessment for the year ended 30 June 1989. This has two consequences: the first is that the six year limitation period applies rather than the four year period. The second is that the power of the Commissioner to amend within that period is contingent upon the taxpayer not having given ``a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax''.

Avoidance of tax means no more than less tax was paid than ought to have been paid as a result of non-disclosure:
Australasian Jam Co Pty Ltd v FC of T (1953) 10 ATD 217 at 222; (1953) 88 CLR 23 at 34. The test for ``full and true disclosure'' is ``if advice were to have been sought by the taxpayer whether or not the sum in question was a taxable (item), would the person from whom that advice was sought have required more information that this return disclosed to the Commissioner?'' -
Austin Distributors Pty Ltd v FC of T (1964) 13 ATD 429 at 433;
AL Hamblin Equipment Pty Ltd v FC of T 74 ATC 4001 at 4011-4012; (1973-1974) 130 CLR 159 at 175;
Slater Holdings Ltd v FC of T 80 ATC 4136 and 4139. The onus of establishing there has been such a disclosure rests on the taxpayer:
McAndrew v FC of T (1956) 11 ATD 131.

The return filed by the applicants for the year ended 30 June 1989 did not disclose the existence of the ORCA agreement with the first applicant and the fact that the payments were intended to be, and were in fact, used to meet expenses of the first applicant's participation in the Admiral's Cup. This non-disclosure included material facts which a person giving advice would have required to determine whether the sum in question was a taxable item. In my opinion the preconditions to the exercise of the power of amendment by the Commissioner as contained in the former s 170(2) were satisfied.

There is an alternative aspect to this ground of appeal. Section 170(10), which was not the subject of any amendment in 1989, provides that nothing prevents the amendment, at any time, of an assessment for the purpose of giving effect to the provisions of (inter alia) s 78A. This means that if the position is truly that the gift giving rise to the initial assessment is a gift which attracts the application of s 78A(2), nothing in s 170 (and therefore in s 170(2)) prevents the amendment of the assessment which initially allowed the gifts as deductions.

It follows the first ground of appeal is not made out.

Whether payments gifts

The second ground of appeal contends the Tribunal erred in law in finding the payments of $50,000 by each of the applicants in the relevant years to the ASAF were not made as a gift or donation under s 78(1)(a)(lxxxiv) of the Act.

The submissions in support appeal to the terms of the covering letter from the first applicant to the ASAF which it is said support the inference that the payment was given unconditionally. However, the Tribunal was required to reach its conclusion with regard to all the evidence before it, including the evidence of the first applicant in-chief and in cross-examination. The terms of the covering letter were but one circumstance in a range of circumstances required to be weighed by the Tribunal.

It is also contended that the second applicant, having no contractual obligation with either the ASAF, the AYF or ORCA, can be shown on objective examination to have had intentions showing the necessary elements of benefaction. In my opinion, that was the implied position which the Tribunal took in concluding it was unable to affirm the decisions in relation to her without regard to the impact of s 78A.

In further support of this ground it is submitted the facts in the present matter are not the same as those in either McPhail (supra) or Leary (supra). This is the case, it is submitted, because here the total amount paid was in no way reduced from that which would have been payable. No benefit was received by the first applicant apart from the deductibility of the payments. There was, it is said, no benefit which passed from the ASAF to the applicants. Expressed another way, it is submitted the facts here do not establish any direct link between payments by the first applicant to the ASAF and any liability of the applicant to ORCA.

In my opinion these submissions overlook that there is an express link between the ORCA agreement and the making of donations to the ASAF and the AYF. Clause l3(v) of the ORCA Agreement, whereby the first applicant agreed

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to ORCA and the AYF deducting certain commission from all donations, leads to an inference that donations by the applicants to the ASAF were to pass to ORCA and/or the AYF. How else would ORCA and AYF be linked to the applicant or the applicant's consent be required for deductions by either of them?

The contentions for the applicants then turn to
Cyprus Mines Corporation v FC of T 78 ATC 4468 where it is said that such link does not establish a direct outcome and lacks the necessary causality. In Cyprus Mines (supra) at 4481 reference was made by Smith J to the statement by Owen J in McPhail at ATD 20; CLR 116, known as ``the McPhail Rule'' namely:

``But it is, I think, clear that to constitute a `gift', it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.''

In Cyprus Mines the clause at issue required the joint venturers to pay the State a royalty amounting to $500,000, excepting where it elected to make a gift of not less than that amount to a fund prescribed by s 78(1)(a) of the Act and situate or resident in Western Australia. In Cyprus Mines the appellant's counsel submitted these provisions did not impose any obligation on the joint venturers to make a donation to the recipient body and therefore the first limb of this rule was satisfied. As to the second limb of the rule, it was said by counsel in that case the phrase ``by way of return'' required not only that the quid pro quo be connected to the gift, but that it flow from the recipient of the gift. It was disputed there was evidence to support an inference of any return to the plaintiff from the recipient body, so it was submitted the second limb was satisfied.

Smith J at 4481 said in relation to the submissions concerning the first limb that they overlooked that the payment must not only be free from contractual obligation but also take place voluntarily. He said that while the clause in question did not in express terms impose an obligation on the joint venturers to pay to the recipient body the monies, it nevertheless bound them to make a payment of the same sum and afford to them alternative means of discharging the obligation. The result, he said, was that the will of the joint venturers was free to operate upon the question of to whom that payment was to be made but not upon whether a payment of that amount be made. He concluded that in those circumstances it could not be said the payment was either free from contractual obligation or voluntary.

Smith J continued (4482):

``... It also seems to me that the transaction infringed the second limb of the rule. In formulating the rule, Owen J adopted Viscount Radcliffe's description of a gift in
Rennell v Land Revenue Commissioners (1964) AC 173 at p 193, `a present made without return of any kind'. Owen J went on to say at p 116:

`The words ``of any kind'' are perhaps too wide and should I think be read as referring to a return of something of material advantage to the disponor.'

Counsel for the appellant seeks to further limit Lord Radcliffe's description of a gift by restricting `return of any kind' to a benefit which emanates from the transferee of the property. To my mind there is no warrant for such a restricted interpretation. In the transaction under consideration, a direct outcome of the payment made by the appellant was the elimination of its liability to the State. In such circumstances I do not think it can be said that no advantage of a material character was received by the appellant.''

The ORCA Agreement is distinguishable in that while it requires the applicants to indemnify ORCA for expenses, costs and disbursements incurred in the management of the Team (as therein defined), it does not itself prescribe the alternative means of payment. However, cl 3(v) gives rise to the inference that donations to the ASAF would pass to ORCA and/or the AYF. The effect of the ORCA Agreement considered in its full evidential context is no different to the matters before the Court in Cyprus Mines. The McPhail Rule falls to be resolved in its application in the same way. In my opinion, the reasoning in Cyprus Mines applying the McPhail Test cannot be distinguished on the basis that it was applicable to a positive obligation for payment as distinct from the liability under an indemnity in this proceeding.

Additionally it is contended the liability which arose in the first applicant pursuant to cl

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3(1) of the ORCA Agreement was the sum of $20,000 only, being the amount not refunded to him. The net effect of the transactions (on the applicants' case) was that $200,000 was paid by way of donation and a further $20,000 approximately pursuant to the indemnity. However, it is not the payment pursuant to the indemnity which is relevant on the reasoning in Cyprus Mines applying the McPhail test, but rather the liability to indemnity so that relief from that liability by the alternative means of payment constitutes the material advantage.

Nor is this reasoning effected by the fact that liability under the indemnity may not become payable until the accounts are struck at the end of the particular racing venture so that only then the extent of the liability to which the indemnity is applicable is known. It is the existence of the liability which is the relevant factor in the finding of the Tribunal of material advantage in the alternative means of payment.

It is also contended for the first applicant it is significant the payment made by the first applicant to the ASAF could not be traced to ORCA. However, it is clear that the payments were in fact used to meet the expenses of the first applicant's yacht and not expenses related to any of the other members of the Team.

In my opinion the grounds of appeal directed to these issues are not made out.

Whether section 78A(2)(c) precludes deductibility

The same arguments advanced on behalf of the first applicant in respect of the question of characterisation as a ``gift'' were redirected to the conclusions of the Tribunal made in respect of the second applicant that, because the payments conferred a benefit on the first applicant, s 78A(2)(c) operates to deny deductibility to the second applicant. Those contentions having been found not to support the premise cannot support the dependent proposition.

Penalties

The cross-appeal raises the question whether the Tribunal ought to have found, as a matter of law, that a culpability component of 25 per cent was reasonable in circumstances where the applicants failed to state in their taxation returns the material fact that, by the ``donations'', the liability of the first named applicant to meet the cost of the participation of True Blue in the Admiral's Cup Challenge was discharged.

In support of these grounds it was argued it was clearly misleading in a material particular for the applicants to describe the payment in the manner in which they did when it was made to discharge the liability of the first applicant under an indemnity. I have already concluded that there was not full and true disclosure by the applicants of all the material facts necessary for the assessment.

The cross appeal also raises the ground that the Tribunal erred in fact and law in finding the applicants relied upon the competent advice of others. Confining the ground to error of law - see the Administrative Appeals Tribunal Act 1975 (Cth), s 44 - it is apparent the Tribunal found the first applicant was led to the belief of entitlement to a tax deduction by officials associated with ORCA and the persons in whom he trusted. It did not find that he relied on professional advisers in that particular respect. The Tribunal also relied on the effect of the brochure put out by the Australian Sports Commission. In my opinion there was evidence upon which the Tribunal was entitled to arrive at the conclusion which it did and no proper basis for interference with that conclusion has been made out.

Conclusion

For these reasons I would dismiss the appeal and the cross-appeal. It is unnecessary to consider the contention.

THE COURT ORDERS THAT:

(1) The appeal be dismissed.

(2) The cross-appeal be dismissed.

(3) The applicants pay the costs of the respondent on the appeal and the respondent pay the costs of the applicants on the cross- appeal.