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Administrative Appeals Tribunal of Australia |
COURT
ADMINISTRATIVE APPEALS TRIBUNALCATCHWORDS
Income Tax: "purchase" of an "annuity" with the aid of "borrowings" - "annuity" greater in later years and "interest" less in those years - in years concerned "annuity" assessable to extent of $508 and "interest" deduction claimed $127,000 - "interest" allowed only to extent of $506 and $508 respectively - whether greater deduction allowable in terms of section 51(1) - whether "sham" of no legal effect - whether void in terms of section 260 - whether additional tax correctly imposed in terms of section 226.Income Tax Assessment Act (1936) (Cth) ss. 26AA(1), 51(1), 226, 260
Roppihan Tin N.L. and Tongkah Compound N.L. v F.C. of T [1949] HCA 15; (1949) 78 C.L.R. 47
Snook v London and West Riding Investments Ltd. (1967) 2 QB 786
Grant v F.C. of T. 85 ATC 4306
F.C. of T. v Grant 86 ATC 4413
Napier v National Business Agency Ltd. (1951) 2 A.G.R. 264
HEARING
CANBERRADECISION
The questions for decision in these applications arise out of the "purchase" of an annuity with the aid of "borrowings" and the consequent claims for deductions in respect of "interest" upon the borrowings. The persons and/or entities involved are:- A - the applicant
B - husband of A and a public accountant2. In her return of income for the year ended 30 June, 1981 A returned under item 16 $127,508 (schedule described as annuity received from E), claimed under item 36 undeducted purchase price of annuity $127,000 and additionally claimed under item 21 interest on borrowings paid to D $127,000. By assessment dated 26 March, 1982 an amount of $126,494 interest was disallowed "being incurred, in producing exempt income" and an objection of 15 April, 1982 followed claiming the $126,494 was allowable whilst the imposition of additional tax for incorrect return of $18,603.75 was wrongly levied. In relation to $126,494 the objection, inter alia, stated:-
C - another public accountant
D - ) companies in which C a shareholder and
) of which Mrs C and one T were the sole
E - ) directors
H - business associate of A
L - a series of numbered trusts
L Pty. Ltd. - another company of C's
M - a third public accountant
O - a company or division of the W.K.D.
Investments Group of Companies
T - an employee of C
"On 22 May, 1981 I purchased an annuity for the sum of3. The taxpayer's 1982 return was basically in similar terms except that the relevant schedule gave a little more information; viz.:-
$1,016,000. During the year ended 30 June, 1981 I
derived assessable income from the annuity amounting to
$127,508. From this amount an amount has been deducted
under Section 26 AA (2) of $127,000 leaving an amount of
assessable income of $508.
In order to secure the purchase of the annuity I
borrowed
the sum of $1,016,000 at a rate of interest of 12.5%
and paid interest of $127,000 on 22 May, 1981.
It is claimed that in view of the decision in AGC
(Advances) Ltd and the Total Oil Co. cases that the
whole of the interest paid is an allowable deduction
under the terms of Section 51 of the Income Tax
Assessment
Act, such item being not private, capital or
domestic expenditure nor being incurred in the
production
of exempt income and that such interest expenditure
was necessarily incurred in the production of assessable
income.
Alternatively, that even if some part of the whole of
the amount of interest not be deductible, which is not
admitted, then the remainder of the whole of the
interest
is an allowable deduction under Section 51 of the
Income Tax Assessment Act and a deduction should have
been allowed for that portion of the whole of the
interest, but that if a determination of a portion is
applicable it is considered that the $508 allowed in the
tax assessment is not a proper representation of that
portion.
It is further contended that the Commissioner was not
authorized by Section 51 or Section 82KK, 82KJ, 82KL or
any other Section of the Act to disallow any of the
interest as claimed."
ITEM 36 UNDEDUCTED PURCHASE PRICE OF ANNUITYBy notice of 2 May, 1983 an amount of $126,492 was similarly disallowed as "being incurred in producing exempt income" and additional tax of $6,372.20 imposed. The subsequent objection contained the following grounds in relation to the sum of $126,492 disallowed:-
Purchase Price 1,016,000
Less Purchase Price Deducted 127,000
---------
$ 889,000
----------
Remaining Term 7 years
AMOUNT OF DEDUCTION CLAIMED $ 127,000
==========
The above items were first included in my 1981 Income
Tax Return. The Commissioner saw fit to make adjustment
to that Return to which a formal objection has been
lodged and to which decision is pending.
In the absence of any ruling on my objection it is my
honest belief that my investment in an annuity is fully
and properly disclosed in both my 1981 and 1982 Returns.
At no time do I consider I have submitted any incorrect
or false returns."
"In the course of business during the year ended 304. It will be noted from the 1982 objection there is a reference to a partnership and in the calculation to an amount of $13,500,000. It would appear to be an incorrect use of a pro forma as there is for A no partnership involved nor a figure of $13,500,000.
June, 1981 I purchased an annuity for the sum of
$1,016,000. In order to finance the purchase of this
annuity I borrowed the sum of $1,106,000 from an
independent finance company.
For the year ended 30 June, 1982 I received income from
the annuity of $127,508 from which I am entitled to
deduct, under Section 26AA(2), an amount of $127,000
representing one eighth of the purchase price of the
annuity. This leaves me with assessable income, under
Section 26AA, of an amount of $508.
It is further claimed that I am entitled to a tax
deduction of an amount of $127,000 representing interest
at the rate of 12.5% p.a. as per the executed Loan
Agreement, on the borrowing of $1,016,000.
It is claimed that the whole of this interest is
deductible as it was incurred in gaining or producing
assessable income.
However, if the whole of this interest is not deductible
(which is not admitted) then part of this interest is
deductible and it is claimed that this amount represents
44.86% of the total interest paid as this is the
proportion
expended to produce assessable income over the
terms of the Annuity Contract.
It is claimed that the deduction allowed to the
partnership
should be calculated in the following manner:-
Based on an Annuity Cost of $1,016,000 for a period
of 8 (eight) years, and a loan of $1,016,000
carrying interest at the rate of 12.5% p.a.
Annuity Income 127,508
Less Section 26AA(2) Deduction 127,000
-------
Assessable Income - Section 26AA 508
Interest Paid - 12.5% on
$13,500,000 127,000
-------
Net Loss for Year $126,492
=======
My loss was $126,492 and this is the amount which should
be allowed to me as a deduction in the 1982 return of
income.
It is further claimed that none of the Sections 51, 82
KK, 82 KJ, 82 KL, Section 260 or any other Section of
the Income Tax Assessment Act, 1936, as amended, can be
invoked by the Commissioner to deny me a deduction for
the interest paid or the portion of the purchase price
of the Annuity as allowed under Section 26AA(2).
As to Section 260 of the Act:-
That at no time did I enter into any contract,
agreement, or arrangement of the kind referred to in
Section 260 of the act nor does the Section permit the
Commissioner to treat as not allowable as a deduction
any of the amounts claimed to be deductions in the
foregoing grounds of objection, either in calculating my
individual interests or my taxable income."
5. Turning now to the facts established before the Tribunal it should be said initially that evidence was given by A, B and T. However neither C nor M gave evidence whilst in respect of the most important documents originals were not tendered - only photocopies. The originals were said by T to have been forwarded shortly after execution of two thereof by T to M on C's instructions (T keeping only a flow chart and a work sheet) but are now said to be missing. As will be seen there is a dispute as to the date of execution of at least one important document and there was no explanation given for the failure to call M or C who might also have assisted. Additionally the source or sources of the photocopies tendered were not revealed to the Tribunal.
6. From the evidence given by T it would appear that C who did a lot of tax
advising developed (or obtained from some unknown source)
a taxation plan
using annuities (a firm of actuaries had made some calculations but T was not
aware of them since, although he had
seen a particular document, he had paid
little attention to it as it was too technical for him) and that M as, inter
alia, a promotor
or salesman endeavoured to interest parties in the plan in
return for a "commission" on their introduction to C. M in the course
of his
activities brought the plan to the attention of B. T admitted in
cross-examination that he had seen amongst the various papers
concerning the
plan an attachment headed "Annuity Plan". This document was in the following
terms:
" ANNUITY PLAN ATTACHMENT Athe minimum
Based on deduction of $100,000 per annum. For Sole Traders,
Professionals, Companies and Trusts.
ANNUITY FINANCE
COMPANY COMPANY
(2) (1) (4)
$1,800,000 $226,000 annuity $1,800,000 $225,000
Annuity income years 1-5 loan @ interest of
Purchase $712,000 years 12.5% p.a. which
Cost 6-8 for 8 years $101,000 is
deduction.It will become apparent that this was the basis of the plan adopted in the present references.
(3)
TAX-
PAYER
1. Taxpayer borrows $1,800,000 at 12.5% p.a. from a finance
company in the form of a promissory note.
2. Taxpayer purchases an 8 year annuity yielding 15% p.a. from
an annuity company for a purchase price of $1,800,000 which
is settled using a promissory note.
3. The annuity returns assessable income of
$226,000 p.a. years 1-5
$712,000 p.a. years 6-8.
4. Taxpayer pays annual interest of $225,000 up to 12 months in
advance (by June 30th), partly by cheque (fee) and partly by
promissory note. Under Section 51, the annual interest
payment
is an allowable deduction. (See note (4), page (2)
regarding minimum deduction of $101,000).
5. Section 26AA entitles the taxpayer to offset against annuity
income the average annual cost of purchasing the annuity
(i.e. $1,800,000 divided by 8 years = $225,000 p.a.).
6. Prior to year 6, it is envisaged that the taxpayer may assign
his interest in the annuity to satisfy loan obligations.
7. Taxpayer resultant tax position in years 1-5 is:-
Annuity Income $226,000
Less Annual Purchase Cost $225,000 (S26AA)
Minimum Interest Deduction $101,000 (S51)
-----------------------------------------------------
NET TAX DEDUCTION $100,000"
--------
7. B deposed that in about April 1981 M rang him and described an investment plan based on an annuity that he thought B (or his clients) might be interested in. B subsequently went to see M, had the plan outlined to him and left to think about it (taking with him draft papers to study). In late April or early May 1981 B had a discussion with A. He informed her of the proposition received from M and said she should look at it since she was having a highly successful year as a result of which she was facing debt due to provisional tax and needed a plan to protect her business. B explained that in order to achieve what was acquired she would have to borrow in excess of $1m - to be covered by the annuity - and ran through the figures using the example given in the draft papers he had received from M (it would appear these drafts are no longer available). A relied on the judgment of B and told him she would like to go ahead (as also did her business associate H) and another meeting took place between B and M in early May 1981.
8. At this meeting M had the necessary documents there and ran through them
with B. It was explained a power of attorney from A was
required as the
paperwork would be done in the ACT to save stamp duty and that T would be her
attorney. B was shown where the papers
had to be signed and witnessed and he
took three (3) unexecuted documents relating to A away with him - a power of
attorney, a loan
agreement and an annuity agreement of which only the first
was to be executed by A. There is no dispute that the unexecuted power
of
attorney was in the following terms:-
"A POWER OF ATTORNEY created on the day of. ITEM 2 THE SUM OF:- . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1981 by the party appearing in Item 1 of the Schedule
hereto (hereinafter called "the Principal")
WHEREAS the Principal is desirous of having certain Deeds more
fully described as being a Deed of Loan annexed with the letter
"A" for the borrowing of funds from E, totalling the amount
specified in Item 2 of the Schedule hereto and a Deed of
Agreement annexed with the letter "B" for the purchase by the
Principal of an annuity for the amount specified in Item 2 of the
Schedule hereto using the said borrowed funds executed outside
the State of Queensland and within the Australian Capital
Territory
AND WHEREAS the Principal is unable to travel to the said
Australian
Capital Territory for the purposes of executing the said
Deeds
AND WHEREAS the Principal is desirous of appointing the party
appearing in Item 3 of the Schedule hereto (hereinafter called
"the Attorney") to execute such Deeds.
NOW THIS DEED WITNESSETH:-
1. The Principal hereby nominates, constitutes and appoints
and in his place and stead puts and deputs "the Attorney" his
true and lawful attorney for him and in his name and as his act
and deed or otherwise as he may otherwise deem expedient to
execute
sign seal and deliver the certain Deeds annexed hereto and
marked with the letters "A" and "B" respectively and to receive
and give receipts and discharges for any loan moneys payable to
me from time to time in respect of any moneys lent to me
pursuant
to the Deeds annexed hereto and marked with the letter "A"
and to open any account or accounts with any bank to operate by
and in all usual ways on any such account and for me and in my
name to sign draw and endorse accept or negotiate any draft or
drafts order or orders banker's or other cheque or cheques
promissory notes or promissory notes bill or bills of exchange
and other instruments of a similar nature associated with the
obligations under the said Deeds annexed hereto and marked with
the letters "A" and "B" and the Principal hereby ratifies and
confirms and agrees at all times to ratify and confirm whatever
the attorney shall lawfully do or cause to be done in and about
the execution of his duties pursuant to this power of attorney
and to indemnify and save harmless the attorney from and against
the same AND DECLARES that this power of attorney shall be
irrevocable
and remain in full force and effect and be binding on my
executors and administrators.
SCHEDULE
ITEM 1 THE PRINCIPAL:- . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNED SEALED AND DELIVERED by).
the said )
in the presence of: )
GIVEN under the COMMON SEAL of)
)
by authority of a resolution )
of the Board of Directors in )
the presence of: )
9. The Deeds said to be annexed to the above and marked
with the letters "A" and "B" respectively were said to be the
loan and annuity agreements but it is not known exactly how they
were in the unexecuted form. The photocopies of the executed
documents are all in the same typescript (no blanks filled in by
hand, etc.) but if the Deeds annexed were like the power of
attorney, blank as to dates and schedules but otherwise the same
as the executed agreements, then they were likely to have been as
follows (I have assumed some information was in the schedules):-
LOAN AGREEMENT
THIS DEED is made this day of , 1981
BETWEEN THE LENDER referred to in the schedule hereto and the
BORROWER referred to in the said schedule.
WHEREBY:
1. This Agreement shall be made in the Australian Capital
Territory and the Principal Sum shall be repaid to the Lender or
as it may direct in the Australian Capital Territory.
2. The Lender hereby agrees to lend to the Borrower the
Principal Sum referred to in the Schedule.
3. The Borrower hereby agrees to repay the said principal
sum to the Lender on the due date referred to in the Schedule.
4. The Borrower hereby agrees to pay interest to the Lender
at the rate set out in the Schedule, such interest to be payable
annually on the due date for payment of interest as set out in
the said Schedule each payment of interest being for one period
of 12 months.
5. (a) In order to secure to the Lender performance by the
Borrower of his obligations under this Agreement,
the Borrower hereby agrees to execute and enter
into in favour of the Lender, upon the Lender's
request and at the cost of the Lender, a charge
and/or other security (as the Lender may require)
over any property or interest in any property
acquired by the Borrower with the principal sum or
any part thereof, to secure repayment of the
principal
sum and interest provided for pursuant to
this Agreement.
(b) For the purposes of this clause the Borrower hereby
agrees to make available to the Lender from time to
time and upon request details as to the manner in
which the principal sum advanced has been expended
by him and as to any property and/or interest in
property so acquired.
(c) The Borrower will do fall such acts and execute all
such documents as are reasonably necessary or
desirable, in the opinion of the Solicitors for the
Lender, to give effect to and perfect the matters
contemplated by this Clause 4.
6. The Lender will upon request made by the Borrower within
three (3) months prior to the due date for repayment of the
principal
sum, extend the date for final repayment for an extended
period as hereinafter provided, provided however that the
Borrower
shall have complied in all respects with its obligations under
this Agreement. The Lender will during such extended period
accept repayments from the Borrower of the moneys referred to in
the Schedule hereto in full satisfaction of the repayment of the
principal sum and interest payable thereon.
7. Should the Borrower make default in the payment of
principal
or in the payment of any instalment of interest payable
pursuant to this Agreement and should such default continue for a
period exceeding one calendar month, then the principal sum shall
become immediately due and payable, together with such interest
(if any) as is necessary to yield to the Lender interest at the
rate aforesaid over the whole period for which the principal sum
is outstanding.
8. In this Agreement, and unless the context otherwise
indicates, words importing the singular shall include the plural
and vice versa and words importing any gender shall include each
other gender.
IN WITNESS THEREOF the parties hereto have hereunto affixed their
hands and their seals on the day and year first hereinbefore
mentioned.
SIGNED FOR AND ON BEHALF OF
(A) by (T) duly appointed
Attorney, who has no notice
of revocation thereof, in the
presence of: . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
SIGNED FOR AND ON BEHALF OF
(B) BY (T) duly appointed
Attorney, who has no revocation
thereof, in the presence of: . . . . . . . . .
THE SCHEDULE.
THE LENDER (D)
THE BORROWER (A)
THE PRINCIPAL SUM
DUE DATE FOR PAYMENT
OF THE PRINCIPAL SUM
INTEREST IS PAYABLE
AT THE RATE OF
INTEREST SHALL BE REPAID on or before the 30th day of June in
each and every year during which the agreement subsists.
THE EXTENDED PERIOD shall be for the term of three years.
THE MONIES PAYABLE DURING SUCH EXTENDED PERIOD shall be the sum
of which is payable on the day of in each
year of the extended period.
THE FIRST OF SUCH PAYMENTS shall be due on the day of
, the second of such payments on the day of ,
and the final payment on the day of .
ANNUITY AGREEMENT
THIS DEED is made the day of , 1981
BETWEEN THE GRANTOR and THE ANNUITANT as described in the
Schedule hereto.
WHEREBY for the consideration set out in the Schedule payable by
the Annuitant to the Grantor the Grantor does hereby grant to the
Annuitant his heirs, executors, administrators and designs an
annuity for the period and in the amounts as set out in the
Schedule and payable on the due dates thereto referred to. For the
purposes of this Agreement and unless the context indicates
otherwise words importing the singular shall include the plural
and vice versa and words of the male gender shall include the
female and vice versa.
IN WITNESS THEREOF the parties hereto have hereunto affixed their
hands and their seals on the day and year first
mentioned.
SIGNED FOR AND ON BEHALF OF
(A) by (T) duly appointed
Attorney, who has no notice
or revocation thereof, in the
presence of: . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . ..
SIGNED FOR AND ON BEHALF OF
(A) by (T) duly appointed
Attorney, who has no notice
of revocation thereof, in the
presence of: . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .9. After taking the three documents away from M's office B read through them again and met A and H in A's office (adjoining B's) and told her (them) these were the papers for the annuity arrangement. B also probably had his work papers (no longer available) and explained the figures to them. A just listened but H said it was a pretty big loan figure and was told it matched the annuity and didn't matter. A then signed her power of attorney with H witnessing her signature and H signed his with A witnessing.
THE SCHEDULE
THE GRANTOR (E)
ANNUITANT (A)
THE CONSIDERATION
THE PERIOD shall be eight years expiring on the day of
, 1989.
THE ANNUAL AMOUNT shall be as follows, namely:-
Years one to five inclusive
Years six to eight inclusive
THE DUE DATE FOR PAYMENT shall be the day of in each
and every year commencing on the day of , 1981.
10. There is a dispute as to the date A signed her power of attorney and, as indicated earlier, the original document was not tendered. However there came into evidence three photocopy powers of attorney each of which is different insofar as the "blanks" in the form set out in para. 8 above are concerned. The source of these copies is unknown and the first (exhibit B) bears only the signatures of A and H (attestation section also blank). The second (exhibit 3) in addition to the signatures has had (Twenty Sixth . . . May" inserted by hand along with in item 1 in the schedule the first full Christian name of A (but only initial of her second) - same inserted into attestation clause - and "$1,016,000" in item 2 with item 3 still blank. The third (exhibits E and M) also with signatures has "20 May" written in with the full name of A in item 1 and the full name of T in item 3 - item 2 and attestation clause left blank. The signatures of A and H on each photocopy are identical and identically positioned and I have no doubt (and so find) that the signatures were affixed to the document in blank, that the document so signed was photocopied (by whom and for what purpose or purposes is unknown) and that the second and third versions are copies produced from the use of those photocopies. I will return to the date aspect later.
11. A corroborated B's evidence to the extent that she said he, whilst preparing her final year accounts, called her in and said she would have a large provisional tax bill of $100,000 (not strictly correct except as a total tax figure). A asked him what she should do and B said he would think about it. Later he told her she should take out an annuity, a loan would be required but it would be reinvested at a higher rate and over 8 - 10 years when terminated there would be a small profit of $60 - 65,000. This way the provisional liability would be deferred for 3 years and A would then be better able to handle taxation. A said she would be guided by his advice and subsequently was shown some documents. B said sign here and she did so. At this stage A said she expressed concern about the blanks whereupon B filled them in as per the third version referred to above. I do not accept this evidence as it conflicts with the existence of the first version, does not agree with what B said on one view (B was to say the least very imprecise on when and where he made the entries which on the third version are in his handwriting) and conflicts with the dates of the cheques which A thought were signed on the same date as borne by the third version i.e. 20 May - see following para. re dates of cheques. It follows that as B said he did not copy the power of attorney and there is no given reason why A would sign more than one I am unable to accept that B dated it and filled in items 1 and 3 in the schedule in front of A on the same day as she signed it.
12. B deposed that after A and H signed their powers of attorney he took them on that same day to the office of M and handed the documents to an employee of M along with cheques for the fees payable in relation to the arrangements. Such cheques (totalling $9,150 for each of A and H) were drawn by B on the joint accounts of A and B and were, with one exception, dated 26 May, 1981. They were for amounts of $5,000 and $4,150 respectively in favour of E (M said this was what was needed). The one exception was a cheque postdated 5 June, 1981 for $4,150 to enable H to reimburse A and B. There is no suggestion that the 26 May, 1981 appearing on the cheques was other than the day they were made out and handed by B with the signed powers of attorney and other documents to the employee of M. Although both sets of cheques for $5,000 and $4,150 were all made out to E only those for $5,000 reached C's offices being endorsed by T on 5 June, 1981 to the credit of L No. 101 - the $4,150 cheques were retained by M and endorsed apparently by a partner or associate of M to the credit of O.
13. After receipt of the documents from B, M or his employee apparently forwarded them to C who gave a bundle to T with instructions to attend to the necessary details - the bundle insofar as A was concerned comprised a power of attorney, a loan agreement, an annuity agreement and a worksheet (cheque not mentioned although as indicated T dealt with it). A was not the only party for whom the arrangements were being made and T performed the paperwork, etc. for all. As a result of C's instructions certain meetings were held, documents prepared and journeys undertaken. T had no independent recollection of any of the events and could only "date" them according to the dates on the various documents. The first in sequence were directors meetings of D and E which bear the date 21 May, 1981 and in respect of which T said he dictated the minutes "contemporaneously".
14. The minutes of E as Trustee for the L Trust No. 75 (used exclusively for the parties introduced by M) record that T and Mrs C were present "and in attendance (C)". At this meeting it was resolved, inter alia that E as trustee would advance $1,016,000 to D "subject to the terms and conditions of the draft loan Agreement tabled", that T be appointed the company's attorney to sign all agreements, etc. in the ACT concerning the "aforementioned matters" - all loans - and that T be authorised "to accept, sign and endorse cheques, Bills of Exchange and Promisory Notes in connection with the aforementioned loans". The other meeting of D as trustee for the L Trust No. 76 (same persons present and in attendance) resolved, inter alia, to, in its capacity as trustee borrow $1,016,000 from E and to appoint and authorise T as set out above for E. It is noteworthy that they did not resolve to make a loan or enter into an annuity agreement with A respectively and authorise T to act in relation thereto.
15. T in preparation for his trip to the ACT prepared a flow chart to assist him in the preparation of the necessary Bills of Exchange (cheques not used) and other documents required. The Bills of Exchange were prepared (dated 22 May, 1981) as was the loan agreement between D and E (not sighted but presumably also dated 22 May, 1981). The loan agreement between D and A and the annuity agreement between E and A were not said to have been prepared by T and may have already been sent by M to C as complete documents (dated 22 May, 1981) requiring only execution in the ACT by T. Based on the dates on the documents T deposed he took all the required documents to Canberra on 22 May, 1981. He was on his own and in the loungeroom of the Lakeside Motel he executed the loan agreement between D and E, the loan agreement between A and D, the annuity agreement between A and E and endorsed the required bills of exchange (also documents in respect of other participants). The agreements between A and D and A and E have attestations clauses as set out in para. 9 above but T signed without a witness. Shortly after his return from Canberra T sent all documents (other than Bills of Exchange) relating to A (and other clients of M) - including the loan agreement between D and A - to M. M, according to the photocopies tendered, then signed the attestation clauses as a witness.
16. Turning now to the wholly typed complete documents executed by T, D lent A $1,016,000 (with the due date for payment of the principal sum being 22 May, 1981 - same as date document bears) at 12.5% per annum interest to be repaid on or before 30 June in each and every year during which the agreement subsists (as per clause 4 of agreement para. 9 "each payment of interest being for one period of 12 months). The extended period was stated to be for the term of three years (although since the term could only be extended by request made "within three (3) months prior to the due date for repayment of the principal sum" it is hard to see how such could operate) with the monies payable during this extended period to be $338,667 the first of such payments to be due on 22 May, 1986 with final payment on 22 May, 1988 - such payments to be "in full satisfaction of repayment of the principal sum and interest payable thereon". Taken at its face value and accepting the extended period applies the agreement on one view is a "strange" document. $1,016,000 at 12 1/2% per annum yields an annual interest figure of $127,000 whilst 3 repayments at $338,667 yield a total of $1,016,001. As this total equals the full principal sum and is full satisfaction of the principal sum plus interest thereon there is no interest for the last three years and thus an overall interest rate of less than 12 1/2% per annum - $635,000 being 5 years at $127,000. However if the agreement is interpreted as each $338,667 relating to the principal and interest on that sum only with interest accruing on the balance of the principal after each $338,667 is taken into account there would be an additional amount of interest of $127,000 ($84,667 by 30/6/86 and $42,333 by 30/6/87). D would then "receive" a total of $762,000 representing 12 1/2%.
17. The annuity agreement provides that for a consideration of $1,016,000 E would pay A an annuity for 8 years expiring on 22 May, 1989 with the due date for payment being 22 May in each and every year commencing 22 May, 1981. The annual amount was to be for years one to five inclusive $127,508 and years six to eight inclusive $401,800. With the first payment to commence on 22 May, 1981 the eighth payment would be on 22 May, 1988 and the reference to 8 years expiring on 22 May, 1989 is not understood. This is also a "strange" document in that it commits E to a total payment of $1,842,940 whereas (assuming the loan agreement between D and E is in the same terms as that for D and A) it will receive only $1,651,000 ($1,016,001 plus interest $635,000) in one view i.e. a loss of $191,939. On the other view set out in the preceding paragraph a loss of $64,939 ($1,842,940 less $762,000 and $1,016,001). Either is a particularly strange result since D and E have no funds ($2 capital only) and the L Trusts No. 75 and 76 $10 settlement figures only and T conceded they were not earning income by way of cash and did not intend to earn cash - nor intended to have funds.
18. Just as the interest under the loan agreement was to be paid in effect yearly in advance so was the annuity and T therefore took with him to Canberra as well as the other documents three (3) Bills of Exchange each dated 22 May, 1981. Bill No. 1 was to D to the order of A for $1,016,000. T signed it as attorney for A, accepted it as attorney for D, endorsed it on behalf of A to E and on behalf of E endorsed it to D. Bill No. 2 was to E to the order of A for $127,000. T signed it as attorney for A, accepted it on behalf of E, endorsed it on behalf of A to D and on behalf of D endorsed it to E. Bill No. 3 was to E to the order of A for $508. T signed it as attorney for A, accepted it on behalf of E, endorsed it on behalf of A to L Trust No. 90 and on behalf of that trust endorsed it to E. The overall effect of Bill No. 1 was for D to loan A $1,016,000, A to pay E $1,016,000 for the annuity and for E to loan D $1,016,000. The overall effect of Bills No. 2 and No. 3 was for A to pay D $127,000 interest, for D to pay E $127,000 interest, for E to pay A $127,508 first annuity and for E to receive back the balance of $508 from A over and above the $127,000 received by it from D.
19. T prepared journal entries to give effect to the above (and other like transactions) and consistent with the last sentence of para. 18, the balance sheet of L Trust No. 75 as at 30 June, 1981 shows a "deficiency" of $7,583 over the $10 "beneficiaries" capital - such arising because its Profit and Loss account for the year showed income "Interest Received $1,067,000" less expenditure "Annuity Expenses $1,074,583". As assets it disclosed, apart from the $10, "Investment $8,536,000" - loans to D - and as liabilities "Loan $4,268" - no doubt from L Trust No. 90 - and "Annuity Funds $8,539,315" - $8,536,000 amounts received and loaned to D plus "annuity expense" $3,315.
20. By letter of 4 August, 1981 O wrote to A enclosing details "to enable the
preparation of your 1981 Tax Return". The details agree
with those set out
earlier except that the principal repayment date for the loan from D to A was
given as "May 22nd, 1986" - not
22 May, 1981 as per the exhibit. It concluded
with the following paragraph:-
"As has been previously explained to you we have beenB was unaware of how the letter from O came to arrive - he had never heard of O and had made no approaches to it for information. B did not contact C until June/July 1982 when he wanted the 1982 figures and then only after he contacted M who gave him C's number.
advised by various Queens Counsels that either 44.86% of
the interest paid ($56,972.20) or 100% of the interest
paid ($127,000.00) may be claimed as a deduction from
your assessable income. The opinions we have are
equally divided on this point but in our opinion you
should claim the total amount and allow the Commissioner
to reduce your claim if he considers it warranted. At
that time you may consider whether or not to object
against such reduction."
21. Despite B being unaware of O and having no recollection whatever of the correspondence, on 8 February, 1982 he wrote to a person at O (addressing letter "Dear Ralph") in relation to H's 1981 income tax notice of assessment wherein the Commissioner "reduced the claim for interest paid to (D) from $127,000 to $508". B stated that "on behalf of Mr (H) it would be appreciated if you would prepare an appropriate Notice of Objection which, it is believed, is warranted. When you have completed the objection would you please ensure that it is forwarded to me as I will attend to the formal lodging of the notice to the Taxation Office". By letter of 15 February similarly addressed B sent to D "as requested by you the other day" a copy of H's 1981 income tax return. I found this part of B's evidence unconvincing. He conceded he had seen many advertisements for tax schemes and that probably several of his clients had made enquiries of him (prior to May 1981) but professed no knowledge of W.K. & D's activities or anything specifically about what he had seen and what his clients had enquired of him. Generally his evidence when it came to specifics was imprecise and unhelpful - he could not even recall what M was told in relation to the quantum of relief A was seeking to overcome her tax difficulties.
22. In May, 1983, 1984 and 1985 T made trips to Canberra in order to process further Bills of Exchange identical to Bills Nos. 2 & 3 for May 1981 and continued his "bookkeeping". The accounts tendered only go as far as the year ended 30 June, 1984 by which date E as trustee for the L Trust No. 75 has a deficiency of $188,422. Its only assets were still the $10 and $8,536,000 (loan to D) whilst it had liabilities of loan $17,072 and annuity funds $8,707,360. As at 30 June, 1985 the deficiency would have been higher as the modus operandi was unchanged. B as suggested in para. 21 obtained later years figures for the purposes of A's returns of income from C. In an affidavit sworn on 31 July, 1985 concerning her assets and liabilities A did not refer to either the annuity or loan.
23. In cross-examination A was pressed as to whether she had signed any documents other than those already referred to. No doubt such cross-examination had in mind step 6 set out in the Annuity Plan para. 6 and A finally revealed that in June of this year she had signed another piece of paper. She did not have the piece of paper - given to B who gave evidence before A - and could not remember to whom it was addressed - she thought E. In explanation A deposed she had been told she needed to pay a further $21,000 to cover a shortfall between the annuity and the loan and that when she said she didn't have $21,000 it was suggested she release the annuity (would be "purchased" for $39,000) and reinvest the $39,000 in a further annuity to provide a nest egg upon retirement. Exactly how this alleged nest egg or deficiency would arise or have arisen was never explained. T in chief deposed there were different transactions for 1986 and in cross-examination that A had decided to commute her annuity and purchase another - he was not sure if all other participants had done the same. Like the earlier transactions this "commutation" (for which no documents were tendered) was handled per medium of Bills of Exchange. T made no mention of any alleged shortfall.
24. Reviewing the transactions overall in the light of the facts that the only cash involved was the fee of $9,150 (which did not go to E) and that it was never intended there should be anything other than Bills of Exchange and book entries I am unable to accept there was any expectation that $60,000 profit i.e. cash would arise at the end of the eight year period. Much was said of borrowing at 12 1/2% and purchasing an annuity yielding 15% but where in the circumstances was the excess to come from? Bills of Exchange merely drawn and endorsed cannot create anything and B, upon whom A relied and who was an investment adviser as well as a public accountant, would have known this very well indeed. The same situation applies in relation to the so-called "nest egg" upon retirement.
25. Just as the alleged "nest egg" and shortfall was not explained neither was the $60,000 profit. However if one adopts the alternative views set out in paras. 17 and 18 above, A under the annuity agreement would "receive" $1,842,940 and "pay" $1,778,001 i.e. make a "profit" of $64,939 - conversely E was to incur a "loss" of the same amount (para. 18) and E was an entity never intended to have funds (para. 18). On the same basis in year 6 the annuity would be $401,800 and principal and interest $423,334 ($338,667 plus $84,667) a deficiency of $21,534. In years 7 and 8 E would have deficiencies with the net deficiency for years 6 to 8 inclusive being $64,939. Since everything else was carried out per medium of Bills of Exchange the suggestion (para. 24) A needed to pay by way of cash a further $21,534 is difficult to accept (and I do not accept it) anymore than I can accept she was to receive a cash profit at the end of the arrangement.
26. Turning now to the arguments advanced it was contended on behalf of the
Commissioner that:-
(a) there had been no expenditure by A in that theFor A it was contended that:-
power of attorney was not validly granted (for a
number of reasons) and had not been subsequently
ratified;
(b) the arrangements constituted a "sham";
(c) the terms of section 260 applied:
(d) in terms of section 51 (1) no greater amounts than
allowed were allowable; and
(e) no evidence had been adduced to support any further
remission of the additional tax imposed in terms of
S. 226 by virtue of the lack of expenditure by A.
(a) the power of attorney was validly granted or,27. If it were not for the issue of S. 226 I would not find it necessary to consider the opposing contentions in terms of (a), (b) and (c) set out above for I have formed the clear view that no greater amounts than those already allowed would be allowable in terms of Section 51 (1). Section 51 (1) provides, inter alia, that amounts "to the extent to which they are incurred in gaining or producing the assessable income . . . shall be allowable deductions except to the extent to which they are . . . of a private or domestic nature, or are incurred in relation to the gaining or production of exempt income" - "exempt income" being defined as including "income which is not assessable income" - and it has been long held that where there is "a single outlay or charge which serves both objects indifferently" apportionment is necessary (Ronpibon Tin N.L. and Tongkah Compound N.L. v. FC of T [1949] HCA 15; (1949) 78 CLR 47) The Full High Court in the course of its judgment at p. 60 said that it was necessary to "make an apportionment which the facts of the particular case may seem to make just . . ." and that "this must be done as a matter of fact". In the present case more than one object was involved whilst the annuity produced comprised both an assessable income component and a component of income (an annuity would normally be wholly assessable income) which is not assessable income. Accordingly apportionment is necessary and I am unable to find that the amount allowable exceeds that allowed by the Commissioner. I have not in making this finding of fact ignored the situation that greater amounts of assessable income might have been derived in years six to eight inclusive but on the other hand, I have also not ignored the situation, that, has happened, nothing might have eventuated for such years - the annuity plan step 6 foreshadowed this but such might have eventuated for reasons unconnected with step 6.
alternatively, had been ratified, so that there was
expenditure incurred by A;
(b) the parties intended the documents would have
effect and therefore there could be no "sham";
(c) section 260 could not "operate to defeat or reduce
any deduction otherwise truly allowable under
sub-5.51 (1);
(d) "the fact that the dominant motive of the taxpayer
in incurring the interest expenditure is to be
found in the taxpayer's prospective" tax liability
does not prevent the amount being allowable in full
in terms of S. 51 (1) or alternatively allowable to
the extent of 44%; and
(e) if the Tribunal finds an outgoing was incurred then
the Commissioner was not entitled to impose any
penalty under sub-S. 226 (2) - no submissions in
the alternative concerning further remission were
advanced.
28. Insofar as the opposing contentions re (b) i.e. sham are concerned I
agree with those advanced on behalf of the Commissioner.
I accept, although
Mr. Hill QC was critical of previous decisions, the test as set out in Snook
v. London and West Riding Investments
Ltd (1967) 2 QB 786 per Diplock J at p
808 viz:-
"I apprehend that, if it has any meaning law, it meansbut I am satisfied on the evidence that this text is met.
acts done or documents executed by the parties to the
"sham" which are intended by them to give to third
parties or to the Court the appearance of creating
between the parties legal rights and obligations
different
from the actual legal rights and obligations (if
any) which the parties intended to create. But one
thing, I think, is clear in legal principle, morality
and the authorities . . . that for acts or documents to be
a "sham", with whatever legal consequences flow from
this, all the parties thereto must have a common
intention
that the acts or documents are not to create the
legal rights and obligations which they give the
appearance of creating".
29. Mr. Hill QC submitted that for the Tribunal to find sham it "must refuse to accept both (A) and (T) as witnesses of truth" and that "there is no evidence which would properly permit (it) to take this course". I do not agree. Both A and T's recollections were far from clear and whilst honestly given, it does not follow that everything they said has to be accepted. Rather their evidence has to be taken having regard to its totality and, so doing, I have reached the conclusion set out in the preceding paragraph. As set out in paras. 25/26 I am unable to accept that there was ever an intention that A would receive the "profit" the documentation provided for. Additionally T immediately forwarded to M (on C's instructions) the document that he agreed was most vital i.e. the loan agreement between D and A thereby casting grave doubts (to say the least) as to whether there was ever any intention for the document to operate according to its tenor. These are but two elements and, as I have found, I regard the evidence overall as satisfying the necessary test without it being necessary to refuse to accept both A and T as witnesses of truth.
30. Having found "sham" it is unnecessary to proceed further and, like Yeldham J. and the Full Federal Court in Grant's case (85 ATC 4806 and 86 ATC 4413) I refrain from doing so. It is also not necessary to consider contention (e) in para. 27 for the "sham" finding carries with it the further finding that there was no expenditure incurred by A - no evidence being led (or arguments advanced) in relation to any further remission of the additional taxes imposed by virtue of section 226.
31. For the above reasons I would affirm the Commissioner's decisions upon the applicant's objections to her assessments for the years ended 30 June, 1981 and 1982.
The applicant (A) is and was at all material times, the wife of a public accountant (B). She embarked on a business enterprise of her own which swiftly became very successful, with the result that in April/May 1981 B advised A that her next assessment of income tax and provisional tax would call for payment of about $100,000. The applicant claimed that the position she then faced was that, unless she invested in an "annuity" (to be later mentioned), she would not be able to meet the assessment of provisional tax in which event (it was said) her business would have been "finished". No evidence was presented to support that conclusion. Some few days later B raised with the applicant a proposal that she should invest in an "annuity". In response to her enquiry as to what an "annuity" was, B advised her that it was a means of providing an "income" for the future: it involved borrowing moneys for reinvestment at a higher rate of interest over some 9 - 10 years and it was proposed in this instance that then a "small" profit of some $60,000 would emerge. (The "profit" referred to would arise from the fact that the annuities to be "received" would exceed "outgoings" by $64,940 - cf. para.10.) In the interim the proposal would have the effect of deferring liability to provisional tax for about three years or so until her business was better established and she would be better able to handle payment of provisional tax. A told her husband that, not being conversant with financial matters, she would be guided by his advice. Thereafter she acted in reliance on his advice.
2. Earlier B had responded to an invitation from an entrepreneur (M) to consider investing in an annuity plan. B received a set of "pro forma" documents and a sample set of figures. The sample documents embraced a power of attorney, a loan agreement (in which the investor was to be the borrower); and a purchase agreement (whereby the investor was to effect his purchase). B said that it was explained to him that the power of attorney was necessary so that documents could be executed in Canberra in order to save stamp duty. The person proposed as an attorney was not named in the "pro forma" documents but was proposed to be an accountant (T) residing in a country town where he was employed by a chartered accountant (C) carrying on business in that town. T was quite unknown to A and B.
3. B gave evidence that he read through the documents and satisfied himself as to them, although he made no enquiries as to the lender company (D) or the vendor company (E) or as to the identity of persons controlling them, or as to their capacity to perform their roles in the proposal. In the same period he advised H, an associate in business of A, to also invest. H did so on the same scale as A.
4. In due course - I leave for the moment questions as to the date of execution of the power of attorney and as to the form of the documents at the time of execution - A signed in blank a form of power of attorney claimed later to have been acted on by T. The power of attorney and copies (unexecuted) of the loan and purchase agreements were delivered to M, together with cheques in favour of E for $5,000 and $4,150 respectively. Those cheques were drawn by B on a joint account of A and B. B understood the $9,150 to be the fee to M for implementation of the scheme. In fact $4,150 was appropriated to M for his entrepreneurial services in promoting the scheme and $5,000 was appropriated by a company controlled by C. I accept that from the time of delivery up of documents to M neither A nor B was aware in detail of what was to happen or of what did happen. Both assumed that the proposed "investment" had been made because A received particulars from a stranger giving details said to be relevant to the preparation of A's 1981 income tax return which information was adopted by B in preparing it and A in executing it. However, upon the evidence it is also clear, and I so find, that neither A nor B took any steps to prepare in either the short term or the long term for the performance of any of A's obligations pursuant to the loan agreement (to immediately and thereafter annually for seven years to pay $127,000 interest) or to benefit from any entitlement pursuant to the purchase agreement (to receive $127,508 p.a. during the initial five years and $401,801 during the following three years). It is possible that neither expected any action would be required of them because (a) it was never intended that any obligations would fall to be discharged by A or that any entitlements would become enforceable by her; or (b) that such obligations and entitlements would not require responses by or action on behalf of A for several years; or (c) that A and B believed on the advice of the entrepreneur M, that the entirety of her interests would be protected by the attorney. I shall further consider those possibilities later.
5. For the moment it is sufficient to say that the essence of A's evidence as to her expectations was that the course she had set in train was to achieve deferment of payment of provisional tax (part of approximately $100,000) for two or three years by investing $1,016,000 which was to be borrowed from an unknown company controlled by unknown persons by an unknown attorney on her behalf to be invested by him in the purchase from an unknown company of unknown resources of an annuity payable over a term of eight years and which would result in the latter part of that period in a "profit" of some $60,000 to the applicant. Of the expectation of the deferment of provisional tax I observe that that end was sought to be achieved by establishing a non-taxable situation for the year (about to end) of 30 June 1981. No evidence was offered as to how the proposed small annual "surplus" ($508 p.a. in the initial years) was to be collected or applied. As to the prospect of profit, I shall analyse that later.
6. In summary at this point it seems that the applicant had spent $9,150; had assumed a debt for loan moneys in a sum exceeding $1,016,000 together with liability to pay interest - $762,000; had acquired an asset - the right to an annuity payable over a term of years: in all $1,842,940 - from an unknown company of unknown financial capacity; and that the applicant was now to sit back and do nothing (at least for several years) except claim the fiscal advantages thought to flow from the arrangement, pending the receipt in later years of a "profit" - she said - of some $60,000.
7. In fact what happened was that (a) the $9,150 was distributed to others by way of fees and was not available to contribute to the generation of any profit or the performance of the obligations of any party to the scheme; (b) the lender (D) had an issued capital of only $2 and had no assets capable of supporting a loan; (c) E was a trustee of numerous trusts and in its own right its only assets were $2 by way of paid up capital and the right of indemnification to the extent to which it was available against assets of particular trusts; (d) A was not expecting to introduce into the scheme any moneys over and above the fees already mentioned; and (e) T and the wife of C were the only Directors of D and E.
8. Against that background it was contended that there were legally effective bargains and legally effective financial transactions which would ultimately generate a profit in the hands of A; and that in the interim she would be assessed to income tax on an annuity and entitled to a deduction of the undeducted purchase price of that annuity and of interest on moneys borrowed in order to purchase that annuity entitlement.
9. To achieve the financial advantages said to be offered by the investment, despite the non-availability of funds, it is claimed that the applicant borrowed the required purchase price from the lender (D) and paid the amount so borrowed to the vendor (E) in satisfaction of the purchase price of the annuity. Had there been no more to the exercise than that it would have been unremarkable. But much more was involved. The applicant was investing a very large sum with a vendor whose substance was unknown to her; who was without substance; and who, under the arrangements proposed, did not at any time have the capacity to perform its undertakings or any prospect of performing them. Further, the applicant was borrowing (so it was said) $1,016,000 from a company which had nothing to lend. This, it was contended, could be and was achieved by the applicant and the lender (D) entering into a loan agreement whereby the lender satisfied its obligation to advance the loan moneys by accepting a Bill of Exchange drawn on it by the applicant. Then, it was contended, the applicant satisfied the purchase price by endorsing the Bill of Exchange drawn on the lender (D) to the vendor (E) who was willing to accept it in payment of the purchase price of the annuity. To round out the circle, the vendor then endorsed the self-same Bill of Exchange to the lender in the satisfaction of its obligation to advance moneys to the lender pursuant to an agreement to lend to the lender in terms identical to the terms of the loan agreement between the lender and the applicant.
10. If one construes the documents in evidence before us in a fashion
favourable to the applicant the prospective "profit" appears
to have been made
up as follows:
Annuities:-637,540
May 1981 to 1985 - 5 x $127,508
May 1986 to 1988 - 3 x $401,801
1,205,400
1,842,940
Less: Purchase price 1,016,0001,778,000
Interest @ 12 1/2%
$1,016,000 May 1981 - May 1985 5 x $127,000 635,000
$677,334 May 1986 84,667
$338,667 May 1987 42,333
Profit
$64,940
The result for tax purposes would (or could) have been:127,508
(a) for the years ended June 1981 - 1985 (inclusive)
Annuity
Less Undeducted purchase price 127,000254,000
Interest 127,000
Nett loss
(126,492)
x
5
(632,460)
(b) for the years ended June 1986 - 1988 (inclusive)401,800
Annuity
Less Undeducted purchase price
127,000
274,800
(c) Interest payable would have been $84,667 at190,133
May 1986; and $42,333 at May 1987. No
interest would have been payable at May
1988. The nett gains would have been:
June 1986
697,400
(d) which after deducting prior nett losses (ante) of
632,460
(e) results in a nett "gain" to A of
$64,940
11. There is nothing inherently improbable about such an arrangement. What makes the venture of special interest in this instance is that it purported to confer a "profit" on A through her dealings with E when E started with no assets (in practical terms); and never improved its financial position. I find that the prospect of profit was always an illusion. At the very date the scheme commenced the nett worth of E - at best $2 - fell by $580. It was already insolvent and its financial position continued to worsen year by year. By 1986 the arrangement would not have provided enough for A's notional receipts to cover her notional outgoings. She would have had to raise further funds because her obligation to repay principal ($338,667) and to pay interest ($84,667) to the lender for the coming year would have fallen short of the incoming annuity ($401,800) by $21,534. (That circumstance was not expressly adverted to in the course of evidence. However, it may explain why in about May 1986 the applicant entered into some unspecified arrangement to "commute" the entitlement under the annuity agreement and accept some other entitlement in lieu). There never was a prospect of profit. The circulation of the Bills of Exchange year by year generated no new wealth and there was no other wealth to redistribute. At the end of the term the lender's accounts were supposed to have been in balance with outgoings equalling receipts; and the applicant (it was said) would have made a profit, assuming that E had wished to diminish its wealth - had it had any - to so advantage A.
12. It lies at the heart of the applicant case that a "loan" can be made by a person without assets by the expedient of accepting a Bill of Exchange drawn on him by his borrower; and that that borrower can effect payment of a price by endorsing such Bill of Exchange in favour of a purchaser willing to accept it. The argument assumes that because some Bills of Exchange have value, that therefore all bills of exchange have value. In my view the value of a Bill of Exchange does not lie in its form, but only in the willingness of endorsees to attribute value to the bill and give value for it in marketable terms upon making assumptions based on perceived facts about the capacity of the acceptor, the drawer and endorsers to honour the bill. That value might reflect the negligible risk in dealing with a Bill of Exchange accepted or endorsed by a reputable and substantial trading bank or the varying degrees of risk attending Bills accepted or endorsed by others. It extends to valueless Bills such as those before us, valueless because they depended for value on D and E. On the evidence before us, only the applicant ever had any capacity (other than merely nominal capacity) to honour any of the bills: the lender knew it; the vendor knew it; and T, as a director of both lender and vendor and as attorney for A, knew it.
13. In response to that view it might be contended that once the Bills of
Exchange had been drawn, accepted, and endorsed and negotiated
for value, it
would not be open for any party to the Bills defending an action brought upon
them to contend that any Bill was anything
less than a valid and enforceable
Bill of Exchange. That contention gives rise to two questions. The first is
whether the transactions
were ever intended to be enforceable - an issue of
fact. The second is whether the courts would lend their aid to the enforcement
of the transactions so entered into. As to the former, I have regard to the
following findings of fact which I make, namely -
* The impossibility of the arrangements ever generatingIn face of those findings I conclude that in May 1981 it was not intended by D, E or A (or any of them) that any of the agreements entered into or any of the Bills of Exchange to be drawn, accepted, endorsed or transferred by or between them would give rise to any legally enforceable relationships between any of them. Having so found it is not necessary to consider the question whether the Courts would have refused to enforce the Bills of Exchange in proceedings between A, D and E (or any of them) in actions brought upon the Bills by reason of any considerations of public policy such as influenced the Court of Appeal in Napier v National Business Agency Ltd (1951) 2 AER 264; or the quite different question as to whether the Bills might have been enforced against A - the only "party" to the Bills worth suing - at the instance of a holder in due course who might have acquired that status without notice of the circumstances giving rise to the existence of the Bills does not arise.
anything other than a "paper-profit".
* The failure of A to claim and of T to account to A for the
"paper-profit".
* The failure to make any arrangements for the carrying out
throughout the term of actions necessary to perform
obligations or claim entitlements.
* The failure of A to ever take any steps prior to 1986 to
represent, advance or protect her interests.
* The shoddiness of and deficiencies in the documentation,
having regard to the supposed magnitude and duration of the
undertaking.
* The delivery up during 1981 to M, as the entrepreneur
introducing A, of all documentation (other than the Bills of
Exchange of May 1981), including in particular the loan
agreement between D (as lender) and A.
* The failure to so preserve the original documents aforesaid
that they could be placed in evidence.
* The impossibility of E ever being able to perform in full its
obligations under the "annuity agreement".
* The surrender by A of all control over her "investment" and
responsibility for protecting it to, at best, unknown
persons.
* That there was no advantage in the arrangement for either D
or E.
* That there was no attempt by the holder of any Bill of
Exchange to realize its "value" by dealing with any person
outside the group.
14. That being so I conclude that no annuity was purchased; no income, whether assessable or not, was derived by way of annuity; no money was borrowed in order to pay, and no money borrowed was used to pay, the price for any annuity; and no loss or outgoing by way of interest was incurred by the applicant in either of the years in question before us.
15. I conclude by briefly commenting on three other aspects of these matters
as argued before us:
(a) The Commissioner contended that even if there was an16. I would affirm the decisions of the Commissioner on the objections.
enforceable arrangement giving rise to expenditure by way of
interest in the amount of $127,000 in each of the years in
question, no part of that expenditure or, alternatively part
only of that expenditure, was deductible pursuant to section
51 of the Act. In my view as stated above, even the paper
surplus of $508 arising in each of the years before us
(annuity $127,508 less interest $127,000) did not constitute
assessable income. No objection was taken by the applicant
on that account but fortunately that occasions no significant
injustice because the Commissioner, in raising the
assessments, did allow $506 as an interest deduction.
(b) The documentation, the evidence surrounding its coming into
existence and the steps taken in implementation of the plan
were thoroughly and properly criticised. Many of the
criticisms - but not all - are sound. However, rather than
deal with them in detail I prefer to determine the matter on
a more basic level which I have detailed earlier in these
reasons. This is not a case of a plan which was sound in
concept and which failed only because of deficiencies in its
documentation or execution. It was not a sound plan at all
and would not have succeeded no matter how skilfully
documented or how precisely and carefully implemented. For
the rest, I adopt the findings of fact expressed by my
colleague Mr H.P. Stevens, who presided at the hearing of
this application, in his reasons for decision.
(c) The Commissioner also placed reliance in the alternative on
section 260 of the Act. In view of the findings I have made
it is unnecessary to consider those submissions. The scheme
was unsound and for that reason failed. There is nothing
which, in the absence of section 260, would have operated to
reduce the tax liability of B.
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URL: http://www.austlii.edu.au/au/cases/cth/AATA/1986/266.html