FEDERAL COURT OF AUSTRALIA

D Marks Partnership by its General Partner Quintaste Pty Ltd v Commissioner of Taxation [2016] FCAFC 86

ORDERS

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The appellants are to pay the respondent’s costs of the appeal, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

LOGAN J:

1    I have had the benefit of reading in draft the respective reasons for judgment of Griffiths and Pagone JJ.

2    Pagone J has set out the grounds of appeal and the resultant issues which fall for determination. His Honour has summarised in his reasons for judgment facts found by the Tribunal or otherwise uncontroversial on the hearing of the appeal. He has also summarised or extracted pertinent statutory provisions and the submissions of the respective parties. These I do not repeat, save only to the extent necessary to explain my reasons for judgment.

3    If the Marks Partnership were a limited partnership within the meaning of s 995-1 of the 1997 Act and a corporate limited partnership within the meaning of s 94D of the 1936 Act, it fell to be taxed as a company. If so, the parties to the Marks Partnership were entitled to imputation credits and that the loans were not, as the Commissioner and Tribunal in his place considered them to be, taxable as deemed dividends (s 109D issue).

4    The starting point in resolving which of these positions is correct must be the text of the 1997 Act and of the 1936 Act, rather than that of the 1988 Queensland Act. It is in the former, not the latter, that the definitions relevant to the taxation liability issues are found. Consideration of the 1988 Queensland Act will be necessary if and only to the extent made necessary by those definitions.

5    Working through those definitions leads to the question becoming whether, for the purposes of the s 995-1 definition of “limited partnership”, the Marks Partnership was:

[A]n association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited ...

6    The utility, if any, in the review proceeding before the Tribunal of a certificate by the Registrar under s 8(3) of the 1988 Queensland Act was for such proof as it offered that the Marks Partnership was an association of persons with the characteristics described in the definition in s 995-1 of a “limited partnership”.

7    The Tribunal had before it a certificate under s 8(3) of the 1988 Queensland Act dated 23 October 2003 with respect to the formation that day and the composition of the Marks Partnership.

8    Approached, as I consider it ought to be, via the gateway of the s 995-1 definition of “limited partnership”, the question behind the second of the grounds of appeal is whether the Tribunal was obliged, in light of the certificate, to conclude that the factual elements of that definition were proved?

9    The effect of such a certificate is stated by s 8(4) of the1988 Queensland Act:

(4)    A certificate issued under subsection (3)-

(a)    shall be conclusive evidence that the limited partnership to which it refers was formed on the date of registration referred to therein; and

(b)    shall be evidence and, in the absence of evidence to the contrary, conclusive evidence that the partnership to which it refers consists or, as the case may be, consisted of the general partners and limited partners named therein as such.

10    The challenge to the objection decision might alternatively have taken the form of a taxation appeal in the original jurisdiction of this Court. Had the applicants availed of that alternative, and there being nothing to the contrary arising from the Constitution or a law of the Commonwealth, the effect of s 79(1) of the Judiciary Act 1903 (Cth) (“the Judiciary Act”) would have been that this Court was bound to give such evidentiary effect to the certificate as was required by the terms of s 8(4) of the 1988 Queensland Act.

11    Section 79(1) of the Judiciary Act did not apply to the proceeding in the Tribunal but the terms of s 8(4) of the 1988 Queensland Act were perfectly general in their application.

12    A provision such as s 8(4) of the 1988 Queensland Act is evidentiary in effect and “operates to change what otherwise would be the operation of the relevant laws of evidence”: Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146 at 166, [65] per Gummow, Hayne, Heydon and Crennan JJ.

13    In contrast with the alternative of a taxation appeal in this Court, a proceeding in the Tribunal for the review of an objection decision is not one where the rules of evidence must be applied: s 33(1)(c), Administrative Appeals Tribunal Act 1975 (Cth) (“the AAT Act”). Thus, s 33(1)(c) of the AAT Act might be regarded as a Commonwealth law to the contrary, to the extent that the Tribunal would otherwise have been bound, by the generality of the application in Queensland of s 8(4), to apply it.

14    That does not mean that, if a relevant fact is, according to the law of evidence, which includes s 8(4) of the 1988 Queensland Act, proved as a consequence of the tender by a party in a Tribunal proceeding of a particular certificate, the Tribunal is entitled, without cause, to ignore that consequence: Re Pochi (1979) 2 ALD 33, at 40-41 per Brennan J (sitting as President of the Tribunal).

15    Here, the Tribunal did not proceed on the basis of ignoring the certificate; rather it proceeded on the basis of its understanding of its evidentiary consequence. That the Tribunal so proceeded makes it unnecessary to consider what may have been the operation of s 118 of the Constitution with respect to s 8(4) of the 1988 Queensland Act and any question of constitutional legislative competence to any extent, if at all, that s 33(1)(c) of the AAT Act in its application to the Tribunal as an arm of the executive government of the Commonwealth and in the review of a taxation objection decision, operated contrary to the giving of full faith and credit to that State law which specified part of what I later term to be the taxable substratum.

16    Approaching the subject first as a matter of ordinary language, my view is that a number of propositions flow from the text of s 8(4)(a) of the 1988 Queensland Act. The effect of the tender of the certificate was that a limited partnership formed under that Act by the name of the D Marks Partnership (termed the Marks Partnership in this appeal) on 23 October 2003 was conclusively proved. Also conclusively proved was that the Marks Partnership had all of the characteristics of a limited partnership in terms of that Act. The definition of “limited partnership” in s 4(1) of that Act was, “a partnership formed and registered in accordance with the provisions of this Act”. In other words, one element of what was conclusively proved was that what constituted a partnership for the purposes of that Act existed. Subsection 4(2) of that Act dictated that, subject to the provisions of that Act, it was to be, “read as one” with the 1891 Queensland Act. For the purposes of the latter Act and thus the 1988 Queensland Act, a partnership described, “the relation which subsists between persons carrying on a business in common with a view of profit”: s 5, of the 1891 Queensland Act. Thus, another element of what was conclusively proved was that the persons who constituted the Marks Partnership were in a subsisting relationship of carrying on a business in common with a view of profit. Yet another element of what was conclusively proved was that whoever was the limited partner in that limited partnership of that name had the limited liability for which s 10 of the 1988 Queensland Act provided. The words, “limited partnership … was formed” in s 8(4)(a) carry all of this with them in my view, either expressly or by necessary implication.

17    Again as a matter of ordinary language, the effect of s 8(4)(b) of the 1988 Queensland Act was that the persons who were the members of the limited partnership known as the Marks Partnership, including the identity of the person whose liability was limited, was not necessarily proved conclusively by the tender of the certificate. In this regard, the certificate offered at least evidence of these facts and, in the absence of evidence to the contrary, conclusive evidence. There was no evidence to the contrary before the Tribunal other than that Quintaste was the general partner and Mr Marks, as trustee of the Marks Trust, was the limited partner.

18    Thus far, it might be thought that all of the necessary factual elements for the proof that a limited partnership in terms of the 1997 Act definition existed were proved, and, in the circumstances, conclusively proved, by the tender before the Tribunal of the certificate.

19    That is not how the Tribunal or, for that matter, the Commissioner, both earlier when assessing and in his submissions on the appeal, approached matters. That was because they considered that the parties to the deed by which the Marks Partnership was created did not carry on any business with a view of profit and that they were at liberty to treat the certificate as not extending to the proof of this fact.

20    That those parties did not carry on any business with a view of profit was, the effect of the certificate aside, accepted before the Tribunal. It should be recorded that the Tribunal did not find, and there was no suggestion in submissions, that the registration of the Marks Partnership was procured by fraud.

21    As, in the events which transpired, the relationship between the parties to the Marks Partnership was not one of carrying on a business in common with a view of profit, the Commissioner and, in his place, the Tribunal, considered that the foundation for the conclusiveness of the certificate disappeared. Their position was that there was, in truth, no partnership and thus no limited partnership with a characteristic of the limited liability of at least one member. In effect, their approach to the certificate was that it was a stream which could not rise higher than its source, which was the existence of a relationship having all of the characteristics of a partnership.

22    As it happens, the point is not free from recent authority in respect of the cognate conclusive evidentiary provision in the materially analogous legislation governing limited partnerships in the United Kingdom, the Limited Partnerships Act 1907 (UK). That authority is Bank of Beirut SAL v Prince Adel El-Hashemite [2016] Ch 1 (Nugee J) (Bank of Beirut SAL) The relevant UK provision, s 8C, states:

(1)    On registering a limited partnership the registrar shall issue a certificate of registration.

(2)    The certificate must be –

(a)     signed by the registrar, or

(b) authenticated with the registrar’s seal.

(3)    The certificate must state –

(a)    the firm name of the limited partnership given in the application for registration,

(b)    the limited partnership’s registration number,

(c)    the date of registration, and

(d)    that the limited partnership is registered as a limited partnership under this Act.

(4)    The certificate is conclusive evidence that a limited partnership came into existence on the date of registration.

23    Of this provision, Nugee J observed in Bank of Beirut SAL at 898, [85]:

Once a partnership has been registered, the plain effect of section 8C(1) is that the Registrar is under a duty to issue a certificate of registration; and the plain effect of section 8C(4) is that that certificate is conclusive evidence that a limited partnership came into existence on the date of registration. If that means what it says, it would appear to follow that whatever the circumstances which led to the registration, once the certificate has been issued the partnership must be regarded as having come into existence.

[Emphasis added]

Later, at 900, [91], his Lordship introduced a detailed analysis of the authorities in that country concerning conclusive evidence certificates by summarising his understanding of their effect, which was, “There is no doubt that in general a conclusive evidence provision means what it says.” The view which I have already expressed as to what flows as a matter of ordinary language from s 8(4) of the 1988 Queensland Act accords, precisely, with the view of Nugee J in Bank of Beirut SAL as to the effect of the analogous UK provision.

24    Bank of Beirut SAL is not, in my view, distinguishable on the basis of a difference in language between the UK provision and the 1988 Queensland Act. Even so, it is persuasive not binding authority. In determining the weight to afford it, it is helpful to look first to the authorities in the United Kingdom which were applied by Nugee J in reaching his conclusion. Especially that is so because, as will be seen and hardly surprisingly, that line of authority has been influential in Australia.

25    The root authority in the United Kingdom for his Lordship’s general proposition would appear to be Bowman v Secular Society Ltd [1917] AC 406 (Bowman v Secular Society). That case, to adopt the accurate summary of it by Nugee J in Bank of Beirut SAL at [91], “was concerned with the provision in s 1 of the Companies Act 1900 (UK) that a certificate of incorporation given by the Registrar in respect of any association should be conclusive evidence that all the requirements of the Act in respect of registration and of matters precedent and incidental thereto had been complied with, and that the association was a company authorised to be registered and duly registered under the Act.”

26    Section 1 of the Companies Act 1900 (UK) was, as Nugee J explains in Bank of Beirut SAL at [91], a remedial provision, designed to address and overcome a perceived defect in a predecessor provision exposed by an earlier case, In re National Debenture and Assets Corpn [1891] 2 Ch 505 (In re National Debenture and Assets Corpn):

This replaced a less extensive provision in section 18 of the Companies Act 1862 (25 & 26 Vict c 89) which had merely provided that the certificate should be conclusive evidence that all the requisitions of the Act had been complied with, and was passed to clear up doubts caused inter alia by the decision of Kekewich J in In re National Debenture and Assets Corpn [1891] 2 Ch 505 where he found that a company had not been duly incorporated where there had only been six subscribers to the memorandum instead of seven …

27    The approach taken by Kekewich J in In re National Debenture and Assets Corpn was that, because a statutory condition precedent to incorporation namely, that the memorandum of association was signed by at least the statutory minimum number of subscribers was not, in truth, satisfied, a certificate of incorporation which was, by statute, “conclusive evidence that all the requisitions of this Act in respect of registration have been complied with” did not foreclose a conclusion by him that the company had not come into existence. On the basis of his conclusion as to the absence of satisfaction of the condition precedent, Kekewich J held that he lacked jurisdiction to make a winding up order, because the company did not exist. On a subsequent appeal to the Court of Appeal, the correctness of the approach to the certificate was upheld but because, by leave, further evidence was adduced which showed that the required number of subscribers had in fact signed the memorandum of association, a compulsory winding up was ordered: In re National Debenture and Assets Corpn [1891] 2 Ch 505 at 517-519 (Lindley LJ), 519 (Bowen LJ) and 519-521 (Kay LJ).

28    This background about the perceived defect which the parliament sought to address by the provision considered in Bowman v Secular Society is of importance not just in respect of the statements made by their Lordships in that case as to what was achieved by that measure but also for the present case. One issue in Bowman v Secular Society was whether the objects of the Secular Society Ltd, which had been registered under the Companies Acts, were unlawful and one argument was that the certificate of incorporation given under the remedial measure was conclusive to show that the objects of the society were not unlawful. The certificate’s conclusiveness was held not to extend to this. The certificate was though held in Bowman v Secular Society conclusively to prove that the Secular Society Ltd existed as a duly incorporated company, the following pronouncements being made:

    per Lord Finlay LC, at 421: “What the Legislature was dealing with was the validity of the incorporation, and it is for the purpose of incorporation, and for this purpose only, that the certificate is made conclusive”;

    per Lord Dunedin, at 435: “The certificate of incorporation in terms of the section quoted of the Companies Act, 1900, prevents any one alleging that the company does not exist”;

    per Lord Parker of Waddington, at 439: “The section does, however, preclude all His Majesty’s lieges from going behind the certificate or from alleging that the society is not a corporate body with the status and capacity conferred by the Act”; and

    per Lord Sumner, at 452: “The certificate proves ... that the respondent society is a complete person in law.”

29    The reference by Lord Parker of Waddington to “all His Majesty’s lieges”, with its feudal overtones, was, with respect, even for its time, an antiquated, albeit colourful, turn of phrase but doubtless intended by his Lordship to convey the pervasiveness of application of the statutory provision for conclusiveness via a certificate. If anything, to confine its application just to a liege was, strictly, to understate matters. The provision applied according to its terms to all those within the legislative competence of the United Kingdom Parliament, be they His Majesty’s lieges or not. This aside, the statement by Lord Parker of Waddington is, in my view, of like application to what is made conclusive by s 8(4) of the 1988 Queensland Act. In my view, that Queensland provision is not materially distinguishable from s 8C of the Limited Partnerships Act 1907 (UK). Thus, subject to a possible fraud exception, which it is not necessary to discuss, the certificate, on its tender, precluded, per force of s 8(4)(a) of that Act, any allegation not just that the Marks Partnership was not a limited partnership but also that it did not have the “status and characteristics” of such a limited partnership. And one such characteristic was that it was a partnership and thus that the persons in it were in a relation of carrying on business in common with a view to profit.

30    Another pertinent United Kingdom authority is the Court of Appeal’s judgment in Exeter Trust Ltd v Screenways Ltd [1991] BCLC 888 (Exeter Trust Ltd v Screenways Ltd). I share the view of Nugee J that this is a case to like effect to Bowman v Secular Society in relation to the consequence of a conclusive evidence certificate issued under a provision analogous to s 8C of the Limited Partnerships Act 1907. The conclusiveness issue in Exeter Trust Ltd v Screenways Ltd related to the registration of a charge with the Court of Appeal holding that the Registrar’s certificate was conclusive that the requirements for registration had been met. That outcome is relevant by analogy in relation to the effect of a certificate issued pursuant to s 8(3) of the 1988 Queensland Act. It is consistent with a view that the effect of the certificate in the present case was that it was a partnership, with all of the attendant characteristics of a partnership, which was registered.

31    In Bank of Beirut SAL, it was further necessary for Nugee J to consider whether the court had power to go behind the Registrar’s certificate in a case where it had been procured by fraud. His Lordship held, at 906, [105], that such a power did not exist. For present purposes, what is relevant about that conclusion is his Lordship’s acceptance, also at [105], of a submission based on an explanatory document, issued in respect of amendments made to the legislation he was considering, of the policy rationale for the conclusive evidence provision. That rationale was that, in the absence of absolute conclusiveness, “any investor joining an existing partnership would be at risk of an allegation that the partnership had not been duly registered after all and should be removed, thereby raising the spectre of unlimited liability”. That policy rationale is just as apt for s 8(4) of the 1988 Queensland Act. Another way in which the risk presented by subversion would exist is if it were allowed to be put, in the face of a certificate, that there was not a partnership in existence. This rationale reinforces my view that the certificate proved, for the purposes of this case, the requisite elements of the definition in s 995-1 of the 1997 Act of “limited partnership”.

32    By virtue of s 23A of the 1988 Queensland Act, it is possible for the registration of a limited partnership to be cancelled on the basis that it no longer exists. That basis might be supplied by a cessation of the partnership’s business or even by a conclusion that it had never carried on business. But the power to cancel registration is consigned to the Registrar, not to the Commissioner. Further, the registration cancellation process entails a public notice requirement, which reinforces my view as to the applicability of the policy rationale in respect of s 8(4) being the same as its United Kingdom analogue. The Commissioner and, in his stead, the Tribunal are strangers to the cancellation process. Unless and until cancellation of registration occurs, their place is to give effect to a certificate of registration according to its terms, not, as officious bystanders, to subvert them.

33    Is this view to be relinquished because of the effect of Australian authority?

34    The Commissioner submitted that Mune v Centro Argentino of Victoria Inc [1996] 2 VR 82 (Mune v Centro Argentino) was an authority to the contrary. I disagree.

35    Each of these cases must be read in light of the particular statutory provision in respect of conclusiveness and what was sought to be proved by the certificate. In Mune v Centro Argentino, at 90-91, Ormiston JA (with whom Winneke P and Hayne JA agreed) held as much. The outcome in that case was the result of the section providing for the furnishing of a certificate having conclusive evidentiary effect saying nothing about the certifying of which hitherto unincorporated body of persons was incorporated or, put another way, whether the incorporated association was the successor to a particular unincorporated association. That being so, a certificate could not prove this, again in effect because the certificate stream could not rise higher than its statutory source. Ormiston JA added at 94, that his conclusion “should not be taken as denying the conclusive effect of a certificate of incorporation as to the valid registration and incorporation of a corporation named in such a certificate”. His Honour further added that it was “unnecessary to express an opinion as to precisely what matters ‘precedent and incidental’ to the registration should be treated as conclusively proved by the certificate”. His Honour’s use of the phrase, “precedent and incidental” was part of his discussion, at 94, of the sequel in the United Kingdom to In re National Debenture and Assets Corpn. As to that sequel, I have referred above to Bowman v Secular Society. Ormiston JA referred to another case decided shortly after the legislative response to In re National Debenture and Assets Corpn, Moosa Goolam Ariff v Ebrahim Goolam Ariff (1912) 28 TLR 505 (Ariff).

36    Ariff was a Burmese appeal to the Judicial Committee in the course of delivering the advice in which, as Ormiston JA mentions, Lord Macnaghten, in discussing prior authority, observed that the “precedent and incidental” amendment which had followed In re National Debenture and Assets Corpn was unnecessary. One of the cases to which Lord Macnaghten referred in Ariff, at 506, in making that observation was Oakes v Turquand (1867) LR 2 HL 325. In that case, which concerned a statutory conclusive evidence certification provision which did not expressly refer to matters “precedent and incidental”, the then Lord Chancellor, Lord Chelmsford, had stated, at 354, “I think the certificate prevents all recurrence to prior matters essential to registration”.

37    In Mune v Centro Argentino, at 93, Ormiston JA also refers to what he describes as an “interesting discussion of the legislative history and the cases” by Evatt J in H A Stephenson & Son Ltd (In liq) v Gillanders, Arbuthnot & Co (1931) 45 CLR 476 at 497-500 (H A Stephenson & Son Ltd (In liq) v Gillanders, Arbuthnot & Co). In the culmination, at 500, of that discussion, Evatt J refers with apparent approval to the statement, just mentioned, made by Lord Chelmsford in Oakes v Turquand.

38    On analysis, Mune v Centro Argentino is, in my view, nothing more in its outcome than a case in the same class as Bowman v Secular Society and thus one exemplifying the limits of a conclusiveness provision. Within those limits, and Mune v Centro Argentino also recognises this in the references to prior authority, matters “precedent and incidental” are made conclusive, even if the statutory provision for a conclusive evidence certificate does not expressly say so. Rather, so much follows by necessary implication in any event.

39    Thus far then, Australian authority leads to no different conclusion than that suggested by reference to the text and to overseas authority.

40    The Commissioner though submitted that another Australian authority, Federated Engine Drivers’ and Firemens’ Association of Australasia v Broken Hill Proprietary Company Limited (1911) 12 CLR 398 (FEDFA v BHP), supported the Tribunal’s conclusion that the certificate issued pursuant to s 8(4) of the 1988 Queensland Act did not prove conclusively that the Marks Partnership was a limited partnership.

41    FEDFA v BHP was not cited by Evatt J in his review of authority in H A Stephenson & Son Ltd (In liq) v Gillanders, Arbuthnot & Co. I rather doubt that was inadvertence on that part of that learned judge, especially given that FEDFA v BHP was a judgment of the High Court. Be this as it may but perhaps explanatory of the omission of reference to it in the judgment of Evatt J, FEDFA v BHP stands for a quite different proposition in relation to conclusive evidence certificates than that for which the Commissioner has cited it. The proposition is that a certificate by an administrative official as to a matter, even if parliament has purported to give it a conclusive quality, cannot deprive a court of competent jurisdiction from determining the legality of that matter.

42    In FEDFA v BHP, the High Court answered a number of questions of law stated for the opinion of that court by the then Commonwealth Court of Conciliation and Arbitration. Before the latter court, which had (at least so it was thought at the time) jurisdiction to determine the issue, an objection had been taken that the FEDFA was incapable of being registered. That industrial organisation had in fact been registered by the industrial registrar. There was provision in the then Federal industrial legislation for the Registrar to issue a conclusive evidence certificate in respect of the registration of an industrial organisation. Before the Commonwealth Court of Conciliation and Arbitration this had been said to be a complete answer to the objection taken in respect of the FEDFA. One of the questions which fell for answering by the High Court was whether this certificate prevented the Commonwealth Court of Conciliation and Arbitration from determining whether the objection concerning the registration of FEDFA. It was held that it did not. The statement by Griffiths CJ, at 413, in that case that, “The notion that a certificate by the Registrar, which is a mere ministerial act, should have the effect of validating a thing which the law does not allow to be done is prima facie improbable” must be read in light of the jurisdictional context in which the question fell for answering. The present context is altogether different. Neither the Tribunal nor this Court has any jurisdiction to determine whether the Marks Partnership met all of the preconditions for registration under the 1988 Queensland Act.

43    There is no disharmony between Australian and overseas authority in relation to conclusive evidence certificates in relation to the incorporation of a body corporate or the registration of a partnership. Even in the absence of express provision, they also carry with them conclusiveness in respect of matters “precedent and incidental”. To construe them otherwise so as to permit post-registration collateral questioning, other than in a court or by an official of competent jurisdiction, of conditions precedent, is subversive of their policy rationale.

44    The Tribunal was, in my view, upon the tendering of the certificate from the Registrar given pursuant to s 8(3) of the 1988 Queensland Act obliged in fact and in law to conclude that the Marks Partnership was an association of persons with the characteristics described in the definition in s 995-1 of a “limited partnership”.

45    The Commissioner is no more entitled to assess, in contravention of facts proved by this certificate than, in the face of a certificate given by the Australian Securities and Investments Commission under s 1389 of the Corporations Act 2001 (Cth) (Corporations Act) in respect of the registration of a company, he would be entitled to assess the members of the company on the basis that the company’s income is really theirs’ jointly, because of a view on his part that the required number of corporators had not in fact sought the company’s registration. The ASIC certificate would oblige him to treat the income as that of the company. And the same would apply in respect of any review by the Tribunal of an objection decision affirming an assessment subversive of a certificate of incorporation.

46    That s 8(4) of the 1988 Queensland Act would operate in the same way and to the same end as a provision such as s 1389 of the Corporations Act was in the contemplation of the Queensland Law Reform Commission in the report which preceded the enactment of the 1988 Queensland Act: see Queensland Law Reform Commission, A Bill to Establish Limited Liability Partnerships, Working Paper No 27, July 1984, p 46 and the reference there to a predecessor to s 1389, being s 549 of the Companies (Queensland) Code.

47    There is, in my view, an analogy to be drawn between the position in which the Commissioner finds himself in this case in the face of the conclusive evidence certificate and the position in which the Commissioner found himself in Executor Trustee and Agency Co of South Australia Ltd v Deputy Federal Commissioner of Taxes (South Australia) (1939) 62 CLR 545. In that case, a State Supreme Court had determined the rights of beneficiaries under a will. The Commissioner was not a party to those proceedings but based his assessment of land tax on that determination. The taxpayers in that case submitted that the construction of the will adopted by the Supreme Court was wrong. In rejecting that submission, Latham CJ, at 561-562 observed:

But the commissioner cannot impose land tax upon interests in land which, if a contrary decision had been given, the taxpayer ought to have, but in fact does not have; nor can he impose tax upon income which the taxpayer does not derive but which, upon the hypothesis of a contrary decision, he would have derived.

See, also, per Dixon J at 569-570 and McTiernan J at 572.

In that case, the relevant right, which formed part of a taxable substratum, had been conclusively determined by a judicial determination in a court of competent jurisdiction. In this case, the relevant part of the taxable substratum is conclusively determined not by a judicial determination but rather by legislative provision and the consequential tender of a certificate given pursuant to that provision. Each, to adapt the language of Dixon J in that case, “controls the situation”. The underlying principle is no different. Absent anti-avoidance provisions, the Commissioner takes the taxable substratum, which includes taxable facts and matters arising under the general common and statute law, as he finds it and must assess accordingly.

48    It follows that the Tribunal should have concluded that the Marks Partnership was a corporate limited partnership in terms of s 94D(1) of the 1936 Act and, as a consequence, that it was entitled to be taxed as a company: s 94J of the 1936 Act.

49    On the view which I have reached as to the effect of the certificate, it is unnecessary to consider the alternative that the members of the Marks Partnership were “tax partners”. Necessarily, the s 109D issue does not arise.

50    The next issue is whether the Z class shares in HL Securities allotted to the Marks Partnership were a debt or an equity interest or both for the purposes of Div 974 of the 1997 Act?

51    The appellants concede that the allotted Z class shares were an equity interest. Having regard to the meaning of equity interest in a company in s 974-70 and the test for an equity interest in s 974-75 of the 1997 Act, that concession was properly made.

52    That concession is not determinative, because in s 974-5(4) is to be found what Parliament has prosaically termed a “tie breaker”:

(4)    If an interest satisfies both the debt test and the equity test, it is treated as a debt interest and not an equity interest.

So the question becomes whether the allotted Z class shares are also a debt interest, because they satisfy the debt test?

53    The test for a debt interest is found in s 974-20 of the 1997 Act, which Pagone J has excerpted in his reasons for judgment. For reasons which his Honour explains, of the elements of the test in s 974-20, only those in s 974-20(1)(b) and (c) were or remain controversial between the parties. In the circumstances of this case, if the appellants demonstrate that the Tribunal was in error in concluding that either or each of these elements was satisfied, its consequential conclusion that the debt test was satisfied will necessarily be in error.

54    As to s 974-20(1)(b), the Tribunal’s conclusion (at [50] of its reasons) was that, by the allotment of the 10 Z class shares to the limited partnership, at a face value of $10, HL Securities received a “financial benefit”.

55    What constitutes a “financial benefit” is defined by s 974-160, which Pagone J has also excerpted. A feature of that definition is that it refers, materially, to “anything of economic value”.

56    The Tribunal concluded (at [50] of its reasons) that the payment of, or a liability to pay, $1.00 per share in return for the allotment of 10 Z class shares to the Marks Partnership indicated that HL Securities had received a financial benefit. The Tribunal considered that the sum of $10, paid or payable, was of economic value and hence a “financial benefit” to HL Securities. The Commissioner contended that this was correct.

57    The appellants’ submission was that the Tribunal’s conclusion that HL Securities had received a financial benefit was necessarily predicated upon a preference for form over substance, which was antithetical, in the context of Div 974, to the concept of “economic value”.

58    As I understood it, the appellants’ submission was that the focus of Div 974, evident from s 974-5(1), on economic substance as the basis for distinguishing debt interests from equity interests carried with it ramifications as to the meaning that one afforded the adjective “economic” in governing the word “value” in the definition of “financial benefit”. From this it was said to follow that, when one had regard to the balance sheet of HL Securities as at the time of the allotment, which showed total assets of some $1.4 million and total equity of $1,111,434, the receipt (even if it was that) of $10 by HL Securities in respect of the allotment was, in substance, of no economic value when received. It was, so the submission went, in effect just a drop in the ocean.

59    This textually and contextually derived approach was said to be supported by passages in the relevant Explanatory Memorandum (extracted by Pagone J). I do not consider that these secondary materials either add to or detract from the appellants’ submission.

60    That “economic value” means something other than sentimental value may be accepted. Further, in the context of the debt interest test element found in s 974-20(1)(b), the question is has the relevant entity, here HL Securities, received or will it receive a financial benefit, something of “economic value”? That means that the subject is not entirely an abstract one.

61    The point underlying the appellants’ submission was that, in its use of “economic substance” and “economic value” in Div 974, Parliament is directing recourse to economic or business concepts. They submitted that to treat “economic” just as a synonym for “monetary”, in the sense of capable of monetary measure, no matter how small, does not give effect to this direction. There is merit in this submission. Economic conceptualism is a feature of Div 974.

62    Given this feature of Div 974, there are subtleties about the term “economic value” which are not fully revealed just by recourse to standard dictionary definitions of the adjective, “economic” (Macquarie Dictionary, (online edition) https://www.macquariedictionary.com.au/ viewed 1 June 2016 – “relating to the production, distribution, and use of income and wealth”; Oxford English Dictionary (online edition) http://www.oed.com/ viewed 1 June 2016 – “of or relating to the management of domestic or private income and expenditure; relating to (personal) monetary considerations, financial”). Those subtleties become evident when one looks to reference works about what is the meaning of “economic” and “value” when conjoined in the term, “economic value”. As found in the Cambridge Business English Dictionary, the term is defined as “the value of an asset calculated according to its ability to produce income in the future”: Cambridge Business English Dictionary (online edition) http://www.cambridge.org/gb/cambridgeenglish/catalog/business-professional-and-vocational/cambridge-business-english-dictionary viewed 1 June 2016. A similar meaning of “economic value” is offered by the Oxford Dictionary of Finance and Banking, “the present value of expected future cash flows”: Oxford Dictionary of Finance and Banking (4th rev. ed, Oxford University Press, 2008, p 137).

63    Without more, these definitions, reflecting, as they do, understandings of the term, “economic value” derived from usage in business and finance and in economic theory and practice, suggest that something will have economic value if it has income earning potential and that one values it by reference to the present value of that potential.

64    However, the term, “economic value” must also be construed in context. Within Div 974, that context relevantly includes s 974-35(1)(a).

65    There is a direction in s 974-35(1)(a)(i) that “the value of a financial benefit received or provided under a scheme” is “its value calculated in nominal terms if the performance period … must end no later than 10 years after the interest arising from the scheme is issued”. “Nominal value” is used in contradistinction to “present value terms”, which is the calculation method ordained in respect of those cases to which s 974-35(1)(a)(ii) applies (which have a “performance period” greater than 10 years).

66    The Tribunal thought its approach was in accordance with s 974-35(1)(a)(i). And so the Commissioner contended. But it remains the case that it is a “financial benefit” as defined which must be valued in accordance with the direction found in s 974-35(1)(a)(i), not that term as undefined. And the definition of “financial benefit” – “anything of economic value” – does not change according to whether the applicable calculation method is that found in s 974-35(1)(a)(i) or s 974-35(1)(a)(ii).

67    When the specialist meanings that the term “economic value” generally carry are understood, the reference to nominal value as a method of calculating economic value in s 974-35(1)(a)(i) may well to economists or some in banking or business introduce a confusion of concepts. Even so, there is a need, if possible, to reconcile the provisions within Div 974. That Parliament has introduced nominal value as an alternative in some cases to present value as a method of calculating the value of a thing of “economic value” does suggest that the specialist meanings to which I have referred cannot apply in their full rigour. The term “economic value” in the definition of “financial benefit” must therefore carry a meaning at a more general level of abstraction. The point though remains that unless the thing which is said to be a financial benefit is one of “economic value”, and that the relevant entity has received or will receive “economic value”, it does not fall within the debt interest test element found in s 974-20(1)(b) at all.

68    To accommodate each of the valuation calculation methods, the present value element, which would otherwise be a feature of a specialist meaning of the term, “economic value” must necessarily be excised. Even so, the term must still carry with it a qualitative connotation in keeping with the economic conceptualism which is a feature of Div 974. It is possible to derive a meaning of “economic value” at a more general level of abstraction which is consistent with economic theory.

69    According to the internet based, Business Dictionary.com (online edition) http://www.businessdictionary.com/definition/value.html, viewed 1 June 2016, “value” in economics is:

The worth of all the benefits and rights arising from ownership. Two types of economic value are (1) the utility of a good or service, and (2) power of a good or service to command other goods, services, or money, in voluntary exchange.

70    This definition of “economic value” sits well with the discussion of value by the Scottish economist and philosopher, Adam Smith, in his classic work, The Wealth of Nations (5th ed, Metheun & Co Ltd, 1776) at ch 5, http://www.econlib.org/library/Smith/smWN2.html#B.I,%20Ch.7,%20Of%20the%20Natural%20and%20Market%20Price%20of%20Commodities viewed 1 June 2016: See Book 1, ch 5, where Smith moves from the labour required to obtain a thing to exchange as a measure of value. It is that work which is generally regarded as the foundation of modern economics (The New Encyclopaedia Britannica, “Economic Theory”, (15th ed, Encyclopaedia Britannica Inc., 1990) vol 17, p 942).

71    From this, the meaning which I derive for “economic value” is value either in terms of the use to which a thing can put or in terms of its ability to be exchanged for other goods or services.

72    This is not the approach which the Tribunal adopted. Rather, what the Tribunal did was to conflate the measure of value with the relevant “thing”, two separate although not unrelated issues. It looked just to a nominal, monetary value without first asking whether the thing received or which will be received was of “economic value” at all. On this approach, one might say that the receipt of a 5c coin, the lowest in the Realm, for the allotment of a share would have economic value but it is extremely difficult to see that such a receipt would be of any economic value in the sense described. A fortiori this is so when its economic value is examined from the perspective of the relevant entity recipient, in this case HL Securities. In the same way, the receipt of $10 for the allotment of 10 shares is, effectively, worthless, both in an absolute sense and even more so to a company with net assets of $1,111,434 and issued and paid up capital of $763,835 (HL Securities Pty Ltd Financial Statements for the year ended 30 June 2004 – Appeal Book, tab 4.133).

73    The appellants also sought to rely upon certain observations made by Barwick CJ (with whom McTiernan J agreed) in Ord Forrest Pty Ltd v Commissioner of Taxation (1974) 130 CLR 124 (Ord Forrest). Before turning to those observations, it is necessary to understand the context in which they were made.

74    Ord Forrest was a gift duty case. The Commissioner had issued an assessment predicated on the proposition that an allotment of eight (8) ordinary shares of $1, at a premium of $99, in circumstances where, on a winding up, the holder of those shares would be entitled to receive all of the assets of the company, less a sum representing the par value of the company’s issued preference shares. The amount of the alleged gift was calculated by deducting from the total assets of the company the total of an amount in respect of the rights of the preference shareholders and the amount in consideration of the allotment of the eight (8) ordinary shares.

75    In the original jurisdiction Stephen J dismissed the challenge to the gift duty assessment. On the subsequent appeal, the Full Court of the High Court was evenly divided. Barwick CJ and McTiernan J were disposed to allow the appeal and Gibbs and Mason JJ were disposed to dismiss it. By statute, that even division of judicial opinion meant that the appeal was dismissed.

76    While the observations made by Barwick CJ formed part of a chain of reasoning that led to his conclusion about the merits of the gift duty assessment, they state a number of propositions the correctness of which is not, in my view, affected by the outcome of the appeal. Those observations with some necessary addition so as better to give context to them, were:

at 140:

The assignment of a money sum to the shares in the capital of a company incorporated with limited liability under the company legislation performs several functions in the structure and operation of the company. The amount at which the share is rated in the capital of such a company sets the upward limit of the amount the shareholder can be called upon to contribute to the company's financial affairs: it also operates, along with the number of shares respectively held by shareholders, to fix their relative participation in the assets and income of the company so far as they are at any time distributed by the company. But, in my opinion, that sum, though spoken of as the “par value” of the share, is not in any presently relevant sense the value of the share, nor in any proper sense is the amount paid on allotment a price paid for the share. The amount is the contribution to the capital of the company which the company requires for the possession of a share in that capital. The amount paid on allotment is a liability of the company, so shown in its balance-sheet.

…

at 141:

There is, in my opinion, no necessary relationship between the amount paid for or paid up upon a share in a company and the value of that share. There may be no exclusive method of determining that value but at any rate it is not to be ascertained by finding the “par value” or the amount paid on allotment for a fully paid up share.

…

at 142:

A company in allotting a share in its capital does not sell or transfer the share. Having its capital divided into shares of a nominal or par “value”, it allots a share to an applicant therefor on payment of a sum of money. In no sense, in my opinion, is there a transfer or alienation of property by the allotment: nor is the allotment money what it purports to be - a contribution to the capital of the company. It is not in any relevant sense a consideration. The company does not part with any property, though by the allotment it diminishes its capacity to continue to allot shares: i.e. it reduces the amount of its unissued capital. But, of course, taking suitable steps, it may increase that capital. When it does so, it does not increase its property any more than it diminishes its property when it allots a share.

[Emphasis added]

77    The appellants’ point was that, when these observations about par value were taken into account, “it is plain that the issue price [for the allotted Z class shares] was not a financial benefit to the issuer”. They did not, in their submissions, seek to develop any argument, based on Ord Forrest and the net assets of HL Securities at the time, that, to allot a Z Class share just for $10, given the rights attached to that share, was effectively to confer a gift on the Marks Partnership and thus that the payment or amount payable in return for that allotment was of no economic value to HL Securities, perhaps even a detriment. Such an analysis of the facts does not seem to have been pursued by the appellants before the Tribunal. In a matter of this kind that would be the place for any such factual evaluations and conclusions.

78    Neither did the appellants advance a submission that the amount paid on the allotment was, in law, a liability of the company and thus of no economic value to it. Rather, the point of the reference to Sir Garfield Barwick’s observations seems to have been that the par value of a share was not in any sense a measure of its value. That is true. But the relevant questions were whether the amount paid or payable to HL Securities for the share allotment was of economic value as received and, if so, of what value?

79    Of greater assistance, given that it is the relevant entity which must be held to have received (or will receive) something of economic value are cases decided in the Family Court on the subject of value to an owner, which take into account additional economic benefits which are conferred by ownership of that thing. This has particularly arisen in that court in relation to rights conferred by the ownership of shares in proprietary companies, even if the open market value of those shares may be modest: see, for example, Reynolds and Reynolds [1985] FLC 91-632 at [80111]; Turnbull and Turnbull [1991] FLC 92-258 at [78738] and Harrison and Harrison [1996] FLC 92-682 at [83087]. The related rights may give particular shares economic value if received or held even though those shares may not be readily realisable or only of modest value on an open market. Of course here, HL Securities allotted rather than received shares. Nonetheless, for it, what was paid or payable in return for that allotment was so inconsequential as necessarily to be of no “economic value”.

80    As it is then, acceptance of the appellants’ textual and contextual submission as to the meaning of “economic value” is sufficient to show that the Tribunal erred in law in relation to its conclusion with respect to s 974-20(1)(b).

81    I turn then to s 974-20(1)(c) of the 1997 Act. One reason why the Tribunal’s conclusion that this element was satisfied was in error flows from the error which it made in concluding that HL Securities received any financial benefit. In the absence of any such benefit, neither of the specified conditional alternatives in s 974-20(1)(c) could be applicable. I took this to be a facet of the appellants’ submission that, if the $10 for the allotment for a Z class share were not paid (and the Tribunal recorded an absence of satisfaction in this regard at [50]) s 974-20(1)(c) could not be satisfied. But even if it were paid, on the true meaning of “economic value”, there was no financial benefit.

82    This aside, the appellants’ submission that the amendment of HL Securities’ constitution so as to make provision for the Z class shares did not create an effectively non-contingent obligation should be accepted.

83    The meaning of the term, “effectively non-contingent obligation” is supplied by s 974-135. The Tribunal’s reasons for its conclusion that there was such an obligation are, with respect, compressed. They do not engage with the detail of the term as defined but are said to reflect a view reached as to the effect of the amendment to the constitution.

84    A number of contingencies are evident on the evidence before the Tribunal:

(a)    having regard to the terms of the amendment to the company’s constitution, the Z class shares could cease to exist at the end of 47 months, “whether or not its redemption price has been paid”;

(b)    by cl 6.1 of the company’s constitution, shares are in the control of the directors, who have a power to forfeit shares for non-payment of a call (cl 13 and 21 of the constitution), in which event, the redemption price would not be paid (and note also cl 16, by which a sum payable on allotment of a share is taken to be a call); and

(c)    if the “financial benefit” is not the redemption price but rather dividends, whether or not these are ever paid depends on a resolution of the directors (cl 102.1) and whether there are any profits to form the basis for such a resolution.

85    As to the last of these contingencies, s 974-135(3) must be taken into account:

An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation.

The “ability” to pay a dividend might be regarded as referring to a power to pay a dividend and a “willingness” might be regarded as a disposition by the directors to pass the requisite resolution. Even so, if the “economic performance” of the company were such that there were no or no sufficient profits the dividend could not be paid. To equate “ability” with the existence of profits would be to subvert the deliberate inclusion of economic performance as a contingency.

86    For these reasons, the Tribunal erred in law in concluding that s 974-20(1)(c) was satisfied.

87    It follows that the Tribunal was in error in concluding that the debt test was satisfied. The Z class shares in HL Securities did not constitute a debt interest, only an equity interest. That has the consequence that any recipient of the dividends in respect of those shares, be that the Marks Partnership or otherwise, was entitled to the benefit of the related imputation credits.

88    As to the adequacy of the Tribunal’s reasons, I have already described them in one respect as compressed. They are though comprehensible and do address the issues which fell for determination. Further, their adequacy must be measured against the way in which those issues emerged and related proofs were offered in the particular case. When that is taken into account and for the reasons which Pagone J gives, I do not consider that the reasons of the Tribunal failed to meet the statutory minimum (s 43(2B), AAT Act). Some might think that is to damn them with faint praise but the Tribunal was required to do no more than this, however much others might have chosen to offer a more detailed treatment of the submissions and issues. It is not a matter of deciding whether the reasons would warrant a grade of pass conceded or a pass with high distinction or a grade in between, only whether they meet that statutory minimum.

89    For the reasons set out above, I am in respectful disagreement with Pagone J both as to the limited partnership issue and the debt interest issue. That is in contrast with Griffiths J, who does agree with Pagone J on these issues.

90    On the view which I have reached in respect of these issues, there could be no administrative penalty under Div 284 of Sch 1 to the Administration Act. I would allow the appellants’ appeals in full.

91    Were it necessary to consider the administrative penalty issue, and in the view of the majority it is, Griffiths J has identified and then elaborated upon five bases which cause him to disagree with the analysis of Pagone J in relation to that issue. With respect, I likewise disagree with Pagone J, for the five bases identified by Griffiths J and those which I set out below.

92    On the authorities, the test with respect to a “reasonably arguable position” is an objective one. On the corporate limited partnership issue, the appellants’ “position” was that a certificate given under s 8(3) of the 1988 Queensland Act was, given the conclusiveness for which s 8(4) of that Act provided, determinative of the status of the Marks Partnership as a corporate limited partnership. It had no need before the Tribunal, which stood in place of the Commissioner in respect of penalty as well as tax liability issues, to make other than a formal submission that its position was reasonably arguable, because its position had already been made clear in the “carefully and skilfully” presented submissions (Tribunal reasons at [73]) made in relation to the effect of the certificate. Necessarily, that formal submission was a submission that the Tribunal ought to conclude, on the basis of those submissions, that the position was reasonably arguable.

93    Objectively, the appellants’ position on this issue was always at least reasonably arguable, as it was in respect of the other controversial issues. Indeed, for all of the reasons set out above, I consider the appellants’ positions to be the correct ones.

94    As to the conclusiveness issue, the authorities discussed reveal that the extent to afford certificates conclusiveness has been an enduringly controversial issue for at least 150 years. When the course of authority over this time is recalled and with all due respect to the Tribunal, the appellants’ position about the effect of the certificate hardly entailed, as the Tribunal described it, a “strained construction”.

95    Because the appellants’ positions were reasonably arguable, no “shortfall amount” could arise, unless an alternative foundation existed. The existence of that shortfall is a pre-requisite to the ascertainment of a base penalty amount: see ss 284-75(2), 284-80 and 284-90 of Sch 1 to the Administration Act. One alternative foundation for a shortfall amount can be the making of a false statement to the Commissioner: ss 284-75(1) of Sch 1 to the Administration Act. Here, upon the view reached by Pagone and Griffiths JJ in relation to grounds 1 to 5, an alternative foundation does exist, because it necessarily follows from that view that the appellants made a false statement to the Commissioner. What is “reasonably arguable” and what is a failure to take “reasonable care” are two different concepts: Commissioner of Taxation v Traviati (2012) 205 FCR 136 at 144, [36] – [37]. The appellants did not choose to contest their liability to penalty on the basis that they took reasonable care. Thus, on the basis that it is necessary to consider ground 6, I agree with Griffiths J that the appellants have not shown a sufficient basis upon which to set aside or vary the administrative penalties. To conclude that their position was reasonably arguable neither removes the alternative false statement foundation nor demonstrates that they took reasonable care. Pagone J has set out something of the history of the present administrative penalty regime. It is possible further to trace that history to the penalty and remission regime found in ss 226(2) and 226(3) of the 1936 Act as originally enacted. That provided for a fixed penalty formula, subject to a minimum penalty (£1), coupled with a discretion on the part of the Commissioner to remit that penalty for reasons which he thought fit. Over time and for reasons of good public administration the Commissioner developed guidelines in an endeavour consistently to inform the exercise of that discretion but reserving always the application of common sense in the circumstances of an individual case. We have now in Sch 1 to the Administration Act and at elaborate length an intricate, codified form of what were once only terse guidelines but with the notable omission of common sense. That there can be differences such as those exposed by the present appeal as to whether a position is “reasonably arguable” ought to give pause for thought about whether, truly, the current regime is an improvement over the historic.

Associate:

Dated:    22 June 2016

REASONS FOR JUDGMENT

GRIFFITHS J:

96    I have had the advantage of reading the reasons for judgment of Pagone J in draft form. I respectfully agree with his Honour’s reasons and conclusions for rejecting grounds 1 to 5 of the notice of appeal. For the following reasons, however, I respectfully take a different view in relation to some aspects of ground 6, which relates to administrative penalty. For convenience, I will adopt the same abbreviations as those used by Pagone J.

97    It is desirable to set out some relevant background matters before explaining why I have a different view concerning the proper construction and application in the circumstances of this case of s 284-15 of Sch 1 to the Administration Act, which relates to the issue whether a matter is reasonably arguable.

98    It is important to note at the outset that, following an audit, the Commissioner arrived at a “primary view” and an “alternative view”, upon which assessments for the relevant taxation years (30 June 2004 to 30 June 2006) were issued. Under the primary view, the D Marks Partnership was not considered to be a valid corporate limited partnership in the relevant years and was instead treated as a “tax law partnership” with its income flowing through and assessable to its partners accordingly. Significantly, however, under the Commissioner’s alternative view, the D Marks Partnership was considered to be a valid corporate limited partnership in the relevant years and hence would be treated as a company for tax purposes pursuant to s 94J of the 1936 Act and assessable on its income at company tax rates. The taxpayers were informed that the Commissioner intended to collect tax under the primary assessments only and no payment was required in respect of the alternative assessments. For reasons which will be developed below, the fact that the Commissioner saw fit to issue primary and alternative assessments has some bearing on the taxpayers’ claim that they had a reasonably arguable position.

99    The Commissioner’s reasons for decision for rejecting the taxpayers’ objections to the assessments for the relevant years (the reasons) make clear that the basis for imposing an administrative penalty for each of those years was because the Commissioner found that the taxpayers or their agent had made a statement which was false or misleading and this produced shortfall amounts (see s 284-75(1) of Sch 1 to the Administration Act). The Commissioner also concluded, pursuant to s 284-90 of Sch 1 to the Administration Act, that the base penalty amounts should be calculated by reference to 25 per cent of the shortfall amount in circumstances where the shortfall amount resulted from a failure by the taxpayers or their agent to take reasonable care to comply with a tax law. After discussing the concept of “reasonable care” and referring to the Commissioner’s miscellaneous Taxation Ruling MT 2008/1 (entitled Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard), the reasons refer to the fact that, as part of the objection process, Quintaste had claimed that it had exercised the care that a reasonable person would have been likely to have exercised in the circumstances, but no further explanation was provided by it to support this claim. The reasons further record at [272] that, in a letter dated 12 November 2010, the Commissioner requested a detailed explanation and supporting evidence for this contention but that, as at 27 August 2013, the Commissioner had no record of receiving a reply to this request. The reasons concerning the objections record at [276] that the Commissioner maintained his prior determination that there had been a lack of reasonable care by the taxpayers to comply with the tax laws in the relevant taxation years.

100    The reasons then address the issue whether s 284-75(2) of Sch 1 to the Administration Act had any application. It is evident that this was in response to the taxpayers’ contention as part of the objection process that it was reasonably arguable that the way in which they had applied the law to the dividend was correct (see [288] of the reasons). The reasons also record that no further explanation or evidence was provided by the taxpayers in support of this particular contention.

101    Two points arise from this background. First, it appears that the taxpayers’ claim that they had adopted a reasonably arguable position was limited to the issue of the law applying to the dividend and not to the broader issue of whether the D Marks Partnership was a valid corporate limited partnership. Secondly, the taxpayers did not elaborate upon their claim that their position on the limited issue of the dividend was reasonably arguable.

102    The reasons refer to relevant aspects of the revised Explanatory Memorandum which accompanied the A New Tax System (Tax Administration) Bill (No 2) 2000 and which related to whether a matter is reasonably arguable or not. They also refer to some parts of miscellaneous Taxation Ruling 2008/2, which is entitled Shortfall Penalties: administrative penalty for taking a position that is not reasonably arguable (MT2008/2). MT2008/2 sets out the Commissioner’s views on the imposition of an administrative penalty for taking a position that is not reasonably arguable. In [286] of the reasons, the following material from [43] of MT2008/2 is extracted (emphasis added):

The absence of authority for a particular position, other than the legislation itself, will not be detrimental to an entity seeking to establish a reasonably arguable position. What is required in such cases is that the entity has a well-reasoned construction of the applicable statutory provision which it could be concluded was about as likely as not the correct interpretation.

103    For reasons which will be developed below I consider that this extract reflects a proper construction of s 284-15.

104    In determining the taxpayers’ objections, the Commissioner rejected their claim that they had adopted a reasonably arguable position. The Commissioner noted that the tax shortfall amounts for Quintaste in the three relevant years resulted from:

(1)    a failure to include in its assessable income for the year ended 30 June 2004 an amount of $23,096;

(a)    including dividend income of $674,188 in its assessable income, claiming franking credits of $202,256 and not including an amount of $4,719 in its assessable income for the year ended 30 June 2005; and

(b)    not including in its assessable income an amount of $10,683 for the year ended 30 June 2006.

105    The Commissioner concluded that Quintaste did not have a reasonably arguable position for not including these amounts in its assessable income for these years or to claim franking credits for the year ended 30 June 2005. In [291] of the reasons the Commissioner stated that Quintaste and/or its representatives had made an incorrect interpretation of the income tax law in relation to these matters which was unsupported by any of the relevant authorities.

106    The Tribunal’s reasons for decision correctly record at [68] that the taxpayers were assessed for an administrative penalty based on a failure to take reasonable care. Reference is also made there to the taxpayers having raised before the Tribunal that their position was reasonably arguable, but that they did not elaborate on the point. The Tribunal rejected this claim after referring to the principles established in cases such as Walstern, Cameron Brae and Allen. The Tribunal concluded at [73] that, although the taxpayers’ primary argument before it concerning the existence of a limited partnership “was carefully and skilfully presented”, the Tribunal found that “it involved a strained interpretation of the legislation or a challenge to the fundament nature of a limited partnership under the PLLA”. It added at [74] that the taxpayers’ other contentions on statutory interpretation were similarly unsustainable.

107    The Tribunal’s ultimate conclusion in rejecting that aspect of the taxpayers’ appeal which concerned penalty is reflected in [75] of its reasons for decision:

Having regard to all of the above, I am not satisfied that the applicants’ contentions were reasonably arguable so as to satisfy the above test so that the decisions on penalty should be set aside or varied. There is no occasion for remitting any of the penalties.

108    It is evident from the Tribunal’s reasons for decision that:

(a)    the taxpayers did not challenge the Commissioner’s determination that the administrative penalty amount for making a false or misleading statement should be calculated by reference to the finding that reasonable care had not been taken;

(c)    the taxpayers conducted their appeal to the Tribunal on the issue of administrative penalty solely by reference to their claim that their position was reasonably arguable and without challenging the Commissioner’s finding that there had been a lack of reasonable care; and

(d)    the taxpayers’ case on penalty in the Tribunal was directed solely to having the decisions on penalty set aside or varied and no specific challenge was made to the Commissioner’s refusal to remit the administrative penalty.

109    Ground 6 of the notice of appeal to this Court claims that the Tribunal erred in law in construing and applying s 284-15(1) of Sch 1 to the Administration Act in determining that the taxpayers’ contentions were not reasonably arguable and the Tribunal ought to have set aside the objection decisions insofar as penalties and interest were imposed on the taxpayers.

110    It is notable that the notice of appeal contains no express challenge to the Commissioner’s finding that administrative penalties should be imposed because the taxpayers failed to take reasonable care.

111    In their outline of written submissions in the Court, the taxpayers acknowledged that they had been assessed to administrative penalty tax at a rate of 25 per cent on the tax shortfall amounts for adopting a position of failing to take reasonable care to comply with the tax law and that this applied to both the Commissioner’s primary assessments and the alternative assessments. Further, the taxpayers acknowledged in [75] of their written submissions that the provisions dealing with reasonable care and with a reasonably arguable position “are concerned with different standards”, citing Commissioner of Taxation v Traviati (2012) 205 FCR 136 at 150, [70]-[71] per Middleton J. They submitted that their arrangements and the application of the relevant tax legislation was open to be construed in the way they contended and that such construction was one which was made even though some other construction was reasonably open, citing Cameron Brae and Allen. They challenged the Tribunal’s conclusion that their position involved a strained interpretation of the legislation or a challenge to the fundamental nature of a limited partnership under Queensland legislation. The taxpayers’ outline of written submissions on this issue concluded at [82] with the proposition that the “penalties imposed ought to be remitted”, even if they failed on one or more of their principal arguments.

112    As noted above, the notice of appeal contained no ground relating to the Commissioner’s failure to remit the administrative penalties. The taxpayers’ challenge should be determined on the basis that, as set out in ground 6 of the notice of appeal, they were seeking to have the Commissioner’s determination on administrative penalties set aside or varied.

113    Having regard to the terms of ground 6 of the notice of appeal, it is difficult to see how the issue of the proper construction and application of the relevant provisions relating to “reasonably arguable position” is material in the appeal. Even if the taxpayers were able to persuade the Court that the Tribunal misconstrued and misapplied those provisions to their particular circumstances, that would not be sufficient to set aside or vary the administrative penalty in circumstances where:

(a)    the penalty was imposed on the basis that the taxpayers or their agents made a false or misleading statement; and

(b)    the base penalty amount was calculated by reference to the Commissioner’s finding that there had been a failure to take reasonable care (and not on the basis of the taxpayers’ position not being reasonably arguable even though the Commissioner also considered and determined that this was the case).

114    The Commissioner raised no objection in the appeal that the “reasonably arguable position” point did not properly arise. The Commissioner made detailed written and oral submissions on the issue of the proper construction and application of s 284-15 and appeared to accept that that issue arose for determination in the appeal. Assuming that the issue properly arises, I respectfully disagree with some aspects of Pagone J’s analysis of this issue.

115    The terms of s 284-15 of Sch 1 to the Administration Act are set out in [131] of Pagone J’s judgment. His Honour helpfully outlines the history of the provision, which can be traced back to ss 222C and 226K of the 1936 Act, as well as relevant legal authorities on both the current and earlier relevant statutory provisions. The matters upon which I respectfully disagree with Pagone J’s analysis may be expressed as follows.

116    First, in considering whether or not s 284-15 applies it is necessary to give close attention not only to the terms of that provision but also to the particular circumstances of the case. The importance of paying close attention to the particular circumstances is reinforced by the express reference in s 284-15(1) to a matter being reasonably arguable “if it would be concluded in the circumstances, having regard to relevant authorities…” (emphasis added). There is potentially a myriad of circumstances in which this issue might arise. Each case will necessarily have to be approached by reference to its own particular facts and circumstances. There is no reason to doubt the correctness of the principles identified by Hill J in Walstern, which have been adopted and applied in many subsequent cases. However, the application of those principles needs to accommodate the different circumstances in which the question of whether or not a position is reasonably arguable arises for determination. In Walstern, for example, the issue whether the taxpayers’ position was “reasonably arguable” turned on factual conclusions about the taxpayer’s purpose in relation to s 82AAE of the 1936 Act. Similarly, in Pridecraft, the issue turned on competing views as to whether or not the dominant purpose in restructuring a profit share bonus scheme was to obtain a tax benefit or to pursue a genuine commercial objective. In contrast, in both Cameron Brae and Allen, the issue related to competing constructions of relevant statutory provisions.

117    Secondly, Pagone J’s approach seems to require that, for s 284-15 to apply, the taxpayers’ preferred construction of the relevant substantive legislative provisions needs not only to be more than “arguable”, but must also be supported by some external reference point, such as a public ruling or an opinion of an experienced senior counsel or other advisor dealing with this specific point which independently supports that construction. This is reflected in his Honour’s observation that a “taxpayer relying only upon the terms of a provision to advance an unsuccessful construction of a provision must do more than argue for its construction for it be reasonably arguable in the statutory sense”. In my respectful view, this approach fails to give full effect to the terms of s 284-15(3), which defines the “authorities” which are relevant for the purposes of s 284-15(1) (without limiting that provision). In the circumstances here the “authorities” included the proper construction of the relevant provisions in both the 1936 and 1997 Acts and Queensland’s legislation relating to partnerships generally and limited partnerships specifically.

118    One of the “authorities” defined in s 284-15(3) is “a taxation law” (see s 284-15(3)(a)). A “taxation law” is defined in s 995-1 of the 1997 Act to mean, inter alia, an Act in respect of which the Commission has the general administration (including a part of an Act to the extent to which the Commission has the general administration of the Act). An essential issue in the proceedings was whether the D Marks Partnership was a corporate limited partnership in accordance with s 94D of the 1936 Act in the relevant taxation years and whether Quintaste Pty Ltd, as partner in the D Marks Partnership, was assessable on its share of the income of the D Mark Partnership for the relevant years pursuant to s 92 of the 1936 Act. The 1936 Act is undoubtedly “a taxation law” within the definition in s 995-1 of the 1997 Act.

119    As Pagone J notes, s 995-1 of the 1997 Act contains the following definition of partnership:

partnership means:

(a)    an association of persons (other than a company or a *limited partnership) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly; or

(b)    a limited partnership.

120    Furthermore, a “limited partnership” is defined in s 995-1 as meaning (relevantly):

(a)    an association of persons (other than a company) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly, where the liability of at least one of those persons is limited… .

121    There was no dispute that regard had to be had to the relevant terms of Queensland legislation relating to partnerships and limited partnerships for the purposes of applying the relevant substantive and definitional provisions in the 1936 Act and the 1997 Act. In other words, the proper construction and application of the relevant substantive and definitional provisions in Commonwealth taxation legislation necessarily required consideration to be given to legislation in that State relating to partnerships and, specifically, limited partnerships. In this context and having regard to the particular circumstances of this case, the Queensland legislation is relevant to the operation of a “taxation law” as defined in s 995-1 of the 1997 Act because ss 92 and 94D of the 1936 Act operate in effect by reference to the laws of a State or other jurisdiction relating to partnerships generally and limited partnerships specifically.

122    It might be noted that, in [43] of MT 2008/2 (which is set out in [147] above), the Commissioner acknowledged that the absence of authority for a particular position, other than the legislation itself, is not detrimental to an entity seeking to establish a reasonably arguable position and that, in such a case, the entity will need to have a well-reasoned construction of the applicable statutory provision which it could be concluded was about as likely as not the correct construction. In my view, that approach is correct and is consistent with authorities such as Cameron Brae and Allen. The presence of a relevant external reference point, such as a public ruling or an opinion of an experienced practitioner may strengthen a claim that a position is reasonably arguable but I do not consider that their absence is determinative.

123    Thirdly, I respectfully disagree with Pagone J’s view that the considerations which led the Full Court in Cameron Brae and Allen to hold that a position was reasonably arguable were not present in this case and that a different conclusion should be arrived at here. In particular, in common with those cases, at the relevant time (i.e. when the taxpayers made the statements which attracted the administrative penalty), there was no judicial authority which was squarely in point on the proper construction of the relevant statutory provisions relating to the question whether the D Marks Partnership was a valid corporate limited partnership. Having said that, however, given the potentially wide range of circumstances in which the issue of “reasonably arguable” position may arise, I see limited utility in approaching the matter by asking whether or not the circumstances of a particular case align with the circumstances of another decided case on whether a taxpayer’s position is “reasonably arguable”.

124    Fourthly, a construction of s 284-15 of the Administration Act which acknowledges that a taxpayer may have a reasonably arguable position based solely upon a well-reasoned construction of a relevant statutory provision, even if there is otherwise an absence of “authority” within the meaning of s 284-15(3), is consistent not only with the terms of s 284-15, but also is consistent with the canon of construction that remedial or beneficial provisions (of which s 284-15 is an example) should be interpreted liberally in the sense that it should be given as full an effect and operation as a fair meaning of its terms permit (see, for example, Bull v Attorney-General (NSW) [1913] HCA 60; (1913) 17 CLR 370 at 384 per Isaacs J and Nilant v Macchia [2000] FCA 1528; 104 FCR 238 at [42] per Weinberg J and see generally D C Pearce and R S Geddes, Statutory Interpretation in Australia, 8th Edition at [9.2]-[9.4]).

125    Fifthly, I prefer to avoid an approach to the construction of s 284-15 which involves paraphrasing the terms of that provision or substituting for those terms a test which is designed to give effect to the provision by reference to different terminology. As the plurality observed in Spencer v The Commonwealth [2010] HCA 28; (2010) 241 CLR 118 at [58] with reference to the phrase “no reasonable prospect” in s 31A of the Federal Court of Australia Act 1976 (Cth):

How then should the expression “no reasonable prospect” be understood? No paraphrase of the expression can be adopted as a sufficient explanation of its operation, let alone definition of its content. Nor can the expression usefully be understood by the creation of some antinomy intended to capture most or all of the cases in which it cannot be said that there is “no reasonable prospect”. The judicial creation of a lexicon of words or phrases intended to capture the operation of a particular statutory phrase like “no reasonable prospect” is to be avoided. Consideration of the difficulties that bedevilled the proviso to common form criminal appeal statutes, as a result of judicial glossing of the relevant statutory expression, provides the clearest example of the dangers that attend any such attempt.

126    Sixthly, it is notable that the Commissioner himself issued primary and alternative assessments, the latter being based on the hypothesis that, as was contended by the taxpayers, the D Marks Partnership was a valid corporate limited partnership in the relevant years. It is relevant to have regard to the fact that the Commissioner issued primary and alternative assessments predicated respectively on whether the D Marks Partnership was a valid corporate limited partnership because this fact is part of “the circumstances” as referred to in s 284-15.

127    Having regard to all these matters above, I consider that the issue of the construction and interpretation of the relevant provisions here in both the relevant Commonwealth and Queensland legislation was “reasonably open and arguable” in the sense described in Cameron Brae at [70] by Stone and Allsop JJ and is consistent with the approach applied subsequently in Allen. The taxpayers contended that, if it was necessary to show for the purposes of s 995-1 of the 1997 Act that, for there to be a limited partnership, such a partnership had to be created under legislation enacted for that purpose, the D Marks Partnership was in fact registered as a limited partnership under the 1988 Queensland Act. They contended that this was effective, at law, in providing the limitation of liability referred to in s 995-1 and that the certificate of registration was conclusive having regard to the terms of s 8(4) of the 1988 Queensland Act (which provided that the limited partnership to which the certificate referred was formed on the date of registration referred to in the certificate). This approach was reasonably arguable.

128    For these reasons, I consider that the Tribunal erred in concluding that the taxpayers’ position was not reasonably arguable on the issue whether there was a valid corporate limited partnership. However, this is insufficient to set aside or vary the administrative penalties, not the least because those penalties were imposed on a basis which related to the Commissioner’s finding that the taxpayers and their agents had failed to take reasonable care. This finding was not challenged by the taxpayers in the Tribunal, nor was it raised by them in the appeal to this Court.

129    Finally, although I consider that, in this limited respect, the taxpayers’ position was reasonably arguable within s 284-15, nothing I have said above should be taken as condoning the way in which the taxpayers dealt with this issue either before the Commissioner or the Tribunal. It appears that the basis for the taxpayers’ claim that they had a reasonably arguable position was asserted but not elaborated upon by them at all in both the objections process before the Commissioner and in the Tribunal. It was only during the course of these proceedings in the Court that the taxpayers’ claims on this issue were developed. That is unsatisfactory and should not be encouraged.

130    I would make the orders proposed by Pagone J but for different reasons in respect of ground 6 of the notice of appeal.

Associate:

Dated:    22 June 2016

REASONS FOR JUDGMENT

PAGONE J:

131    This is an appeal under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from a decision by the Tribunal affirming decisions by the Commissioner disallowing objections in respect of the income years ended 30 June 2004, 2005 and 2006. The primary issue in dispute concerns the effectiveness of transactions by which Quintaste Pty Ltd (“Quintaste”) and the trustee of a trust called the D Marks Trust (“the Marks Trust”) claimed to have established a limited partnership called the D Marks Partnership (“the Marks Partnership”) within the meaning of s 995-1 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”).

132    Dividends were paid to Quintaste (in its capacity as general partner of the Marks Partnership) by HL Securities Pty Ltd (“HL Securities”) in each of the years in dispute and loans were made in the 2004 year by HL Securities and RMI Australia Pty Ltd (“RMI”) to Quintaste in its capacity as general partner of the Marks Partnership. HL Securities and RMI were two companies associated with Mr David Marks in connection with the business of insurance broking. A business of insurance broking which had been carried on by RMI for some years was sold for some $4 million which was paid in two tranches in early 2004 and 2005. The main business activity of RMI for the 2004 year was described as “general insurance broking” and that of the HL Securities as “investment operation other than shares, stock trading”. The financial statements for RMI reveal that it had traded profitably during the 2004 year and recorded $3,036,256 as an extraordinary profit relating to the sale of the insurance business during the 2004 year. Its balance sheet recorded total assets as at 30 June 2004 of $4,378,491 including receivables of $1,962,088 from the Marks Partnership and $291,982 from HL Securities. The balance sheet for HL Securities recorded total assets as at 30 June 2004 of $1,439,846 including loans of $676,009 from the Marks Partnership. Mr Marks had been the sole director of RMI as from 11 December 1995 and of HL Securities from 29 October 1995

133    A number of transactions were entered into during the 2004 year of income designed to enable Quintaste and the trustee of the Marks Trust to receive dividends and loans on the basis of being partners of a limited partnership for tax purposes. On 29 August 2003 Quintaste was registered with ASIC in Queensland. On 23 September 2003 the Marks Trust was created as a discretionary trust of which Mr Marks was described as the Principal Beneficiary. On 23 September 2003 Mr Marks was appointed as the sole director of Quintaste and held 12 issued shares in Quintaste for the Marks Trust.

134    On 10 October 2003 a deed prepared by Cleary Hoare solicitors was executed by Quintaste and Mr Marks. The deed is described as a “Deed of Limited Partnership” and is expressed to have been made by Quintaste as general partner and by Mr Marks as trustee of the Marks Trust. Clause 4 of the Deed expressed the purposes of the parties to the deed to include that they engage in business, but it was accepted that the parties to the deed did not carry on any business for profit and that they did not have between them the relation of carrying on business in common with a view of profit within the meaning of s 5 of the Partnership Act 1891 (Qld) (“the 1891 Queensland Act”) or under general law. On 24 October 2003, however, the Marks Partnership was registered under the Partnership (Limited Liability) Act 1988 (Qld) (“the 1988 Queensland Act”) and a “certificate of formation and composition” was issued pursuant to s 8(3) of the 1988 Queensland Act.

135    On 24 October 2003 HL Securities resolved to create a new class of shares known as Z Class shares with an issue price of $1 per share. Quintaste applied for and was allocated 10 Z Class shares in HL Securities on behalf of the Marks Partnership. Dividends were declared by HL Securities to Quintaste of $347,597 on 24 October 2003, of $471,932 on 30 November 2004, of $48,316 on 1 July 2005, and of $1,015,200 on 10 November 2005. In the 2004 financial year two loans were made to Quintaste for and on behalf of the Marks Partnership. One was by HL Securities in the sum of $676,009 and the other by RMI in the sum of $1,962,088.

136    The taxpayers maintained that they were to be assessed for tax on the dividends and loans upon the basis that they were a limited partnership for tax purposes and, therefore, that they were entitled to imputation credits for the dividends and that the loans were not to be taxed as deemed dividends. The Commissioner took a different view after an audit and assessed the taxpayers on alternative bases. The Commissioner’s primary assessments were on the basis that the Marks Partnership was not a limited partnership for tax purposes and, therefore, that the parties to the Marks Partnership were not entitled to imputation credits and that the loans were taxable as deemed dividends. The alternative assessments treated the Marks Partnership as a limited partnership but treated the shares upon which the dividends were paid as debt interests under Division 974 of the 1997 Act which did not entitle the recipients to claim franking credits.

137    The Commissioner’s assessments were issued in June 2010 and were referred to the Tribunal for review under Part IVC of the Taxation Administration Act 1953 (Cth) (“the Administration Act”). The first issue considered by the Tribunal was whether the Marks Partnership was a limited partnership within the meaning of s 995-1 of the 1997 Act and a corporate limited partnership within the meaning of s 94D of the 1936 Act which was to be taxed as a company. The second issue considered by the Tribunal was whether the shares issued by HL Securities were a debt or an equity interest within the meaning of Division 974 of the 1997 Act. The Tribunal also considered whether the position taken by the taxpayers was reasonably arguable for the purposes of s 284-15 in Schedule 1 to the Administration Act. The Tribunal decided that the Marks Partnership was not a limited partnership for the purposes of the 1997 Act, that the Z Class shares issued by HL Securities were a debt interest rather than an equity interest, and that the position adopted by the applicants was not reasonably arguable within the meaning of s 284-15(1) of Schedule 1 to the Administration Act.

138    The taxpayers challenge the Tribunal’s decision on the following six grounds:

1.    The Tribunal failed to give proper and adequate reasons for its decision.

2.    The Tribunal erred in law in:

a.    Failing or refusing to find that D Marks Partnership was a limited partnership

i.    Under the relevant State law; and

ii.    Under the ITAA 1936 and 1997;

b.    Finding that a general law partnership had to exist before there could be a limited partnership;

3.    The Tribunal erred in law in determining that the members of the D Marks Partnership were ‘tax partners’.

4.    The Tribunal erred in law in finding that the Z class shares issued by HL Securities Pty Ltd were a debt interest, and ought to have found that they were an equity interest.

5.    The Tribunal erred in law in finding that s 109D of ITAA 1936 applied to the loans made by HL Securities and RMI Australia Pty Ltd.

6.    The Tribunal erred in law in construing and applying s 284-15(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) in determining that the applicants’ contentions were not reasonably arguable, and ought to have set aside the objection decisions in so far as penalties and interest were imposed on the Applicant.

It may be convenient to deal first with the challenge to the Tribunal’s conclusion, in the second ground of appeal, that the Marks Partnership was not a limited partnership able to be taxed as a company.

139    Whether the Marks Partnership was a limited partnership within the meaning of s 995-1 of the 1997 Act is a question which arose in the context of the claim that Quintaste was to be taxed as a company and was entitled to receive imputation credits on the dividends received from HL Securities in each of the three years of income in dispute. Division 5A of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) provides for certain limited partnerships to be treated as companies for tax purposes: see s 94A. A partnership that is a “corporate limited partnership” is taxed as a company subject to the modifications effected by Subdivision C in the Division: see s 94H. Such a partnership is not taxed as if it were an ordinary partnership (see s 94K) but is taxed as if it were a company or body corporate (see s 94J). Section 94D defines a corporate limited partnership for these purposes but applies only to a partnership which is “a limited partnership”.

140    The term “limited partnership” is relevantly defined by s 995-1(1) of the 1997 Act as:

[A]n association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited...

One of the elements of this definition is that the liability of at least one of the partners is limited. The Tribunal held that this requirement was not satisfied by the Marks Partnership because the members were not partners carrying on business together with a view of profit and, therefore, (a) that it was not a limited partnership within the meaning of the definition and (b) that it could not be treated as a corporate limited partnership for the purposes of Division 5A of the 1936 Act. The Tribunal reasoned that the Marks Partnership was not a limited partnership because registration under the 1988 Queensland Act contemplated registration of persons who were in business in common with a view of profit. The Tribunal found, therefore, that the Marks Partnership was not a limited partnership notwithstanding its registration under the 1988 Queensland Act. It reached that conclusion on the basis that the relationship between the entities did not create a partnership under s 5 of the 1891 Queensland Act or under general law notwithstanding that Quintaste and the trustee of the Marks Trust may fall within the extended definition of partnership in s 995-1 of the 1997 Act for tax purposes in the sense of being in receipt of income jointly.

141    The Marks Partnership was registered as a limited partnership under the 1988 Queensland Act. The Deed provided for the formation of the limited partnership in clause 2 of the Deed and was expressed to commence “on the date of this Deed” being 10 October 2003 as stated in Part 1 of the Schedule to the Deed. The parties to the Deed were identified to be Quintaste (as the general partner) and David Marks as the trustee of the Marks Trust (as the limited partner). The former was shown by Part 3 of the schedule to have an initial capital contribution of $1.00, being 1% of the initial capital contribution, and the latter to have an initial capital contribution of $99.00, being 99% of the total initial capital contribution. Clause 8.1.1 provided that the liability of the limited partner would not exceed the initial contribution.

142    The Marks Partnership was registered under the 1988 Queensland Act 13 days later (on 23 October 2003) and on that day a certificate of formation and composition was issued under s 8(3) of the 1988 Queensland Act. Section 10 of the 1988 Queensland Act limited the liability of a limited partner to contribute to the liability of the firm to the amount shown in the register in relation to the limited partner. A limited partnership to which those provisions applied was a partnership identified by s 6(1) of the 1988 Queensland Act which provided:

A limited partnership is a partnership –

(a)    that exists between 2 or more persons, of whom 1 or more shall be a general partner or general partners and 1 or more shall be a limited partner or limited partners;

(b)    that is formed under this Act.

A “limited partnership” contemplated by this provision was not any association of people or any association of entities but, rather, (as expressly provided) an association that was “a partnership”. The provision provided, in other words, for partners to a partnership to apply to have their partnership registered as a limited partnership.

Section 6(1) expressly specified the existence of a partnership as a quality of a limited partnership formed under its provisions. The association of persons could not be a limited partnership unless formed as such under the provisions of the 1988 Queensland Act, but it was only a partnership that could apply to become a limited partnership. Thus, s 6(1) begins by identifying the potential subject matter of its operation by reference to the words “limited partnership is a partnership” (emphasis added). The view that an association needed to be a partnership before applying to be formed as a limited partnership is supported also by the words “that exists” which appear in s 6(1)(a). Subsection 6(2) then provided that a corporate person could be either a general partner or a limited partner in a limited partnership. Section 7 provided for the formation of a limited partnership upon registration in the office of the registrar of a statement in a prescribed form containing, amongst other particulars, a statement in relation to each limited partner to the effect that he or she is a limited partner whose liability to contribute is limited to the extent of an amount of money specified in the statement. The provisions of the 1988 Queensland Act were replaced in 2004 by those in Chapter 3 of the 1891 Queensland Act. The provision in Chapter 3 of the 1891 Queensland Act are to much the same effect as those in the 1988 Queensland Act and s 49 of the 1891 Queensland Act provides that a limited partnership “is a partnership […] that exists” between two or more persons where the liability of one or more is limited and that is formed under Chapter 3 of the 1891 Queensland Act.

143    The operation of s 6(1) of the 1988 Queensland Act, and subsequently of s 49(1) of the 1891 Queensland Act, depends upon the existence of a partnership before registration. The 1988 Queensland Act did not define “partner” but s 4(2) provided that its provisions were to be read “as one with the Partnership Act 1891” which provided that a partnership was “the relation which subsist[ed] between persons carrying on a business in common with a view of profit”. The provisions of the 1988 Queensland Act did not purport to confer limited liability upon any association other than one which was a “partnership” as contemplated by that word in s 6(1). The Tribunal’s decision was that the Marks Partnership was not a limited partnership because it did not exist as a partnership before registration as a limited partnership under the 1988 provisions. That was because the relationship that existed between those who obtained registration as a limited partnership did not have the relationship between them of persons carrying on a business in common with a view of profit. The Tribunal recorded at paragraph [32] that the Commissioner had concluded that no business had been carried on by the partners at any relevant time. The Tribunal went on to observe that this was supported by the evidence of an interview with Mr Marks, as the sole director of Quintaste, on 31 May 2011 which the Tribunal understood had not been contested. The Tribunal concluded that it had not been satisfied by the taxpayer that the entities claiming to be the Marks Partnership did carry on business or ever intended to carry on business.

144    The Tribunal’s decision was, therefore, that an essential condition was absent for Quintaste to rely upon the relevant provisions of the 1936 Act and the 1997 Act. Quintaste could not rely upon the provisions because the Marks Partnership was not an association of persons whose liability had been limited by registration under the 1988 Queensland Act. Those provisions attached only to a partnership coming within its terms and did not purport to extend to a partnership, for example, created by the extended definition of partnership under Commonwealth legislation for tax purposes. The word “partnership” in s 6(1) of the 1988 Queensland Act is to be read as a reference to the meaning given to that word by s 5(1) of the 1891 Queensland Act by virtue of s 4(2) of the 1988 Queensland Act. Section 5(3) of the 1891 Queensland Act (before incorporation of the 1988 Queensland Act with it) provided that a limited partnership formed under the 1988 Queensland Act was a partnership within the meaning of the 1891 Act but that presupposed that the association of persons had first qualified for registration as a limited partnership. It was unnecessary to provide for the matters in s 5(3) once the terms of the 1988 Queensland Act were enacted as Chapter 3 of the 1891 Act.

145    The taxpayers did not challenge the Tribunal’s finding that the two entities constituting the Marks Partnership did not carry on business with a view to profit (and therefore were not partners in the sense required by s 5 of the 1891 Queensland Act) but contended that the production of the certificate under s 8(4) provided conclusive evidence of the formation of a limited partnership notwithstanding the fact that the Marks Partnership would not have been a partnership under s 5(1) of the 1891 Queensland Act or under general law. Section 8 required the registrar to keep a register of all limited partnerships and provided for the issue of a certificate as to the formation and composition at any time of a limited partnership. Section 8 also provided for the issue of a conclusive certificate which was issued in the present case and upon which the taxpayers rely. In that regard s 8(4) provided:

(4)    A certificate issued under subsection (3) –

(a)    shall be conclusive evidence that the limited partnership to which it refers was formed on the date of registration referred to in the certificate; and

(b)    shall be evidence and, in the absence of evidence to the contrary, conclusive evidence that the partnership to which it refers consists or consisted of the general partners and limited partners named in the certificate as such.

The taxpayer’s submission about the tender of the certificate were rejected by the Tribunal and should not be accepted on appeal. The conclusivity conferred by s 8(4)(a) was limited to the fact that a limited partnership was formed “on the date of registration” referred to in the certificate. The conclusivity of the date of registration is important because it is the temporal reference point by which any liability is limited, but it does not confer conclusivity beyond that. It does not extend to confer conclusivity of the association being a limited partnership if the association which had sought registration was not a partnership. Conclusive evidence provisions are to be construed strictly: see Mune v Centro Argentino of Victoria Inc [1996] 2 VR 82 at 83, 89-90, 92 and 94. The ordinary and natural meaning of the words in s 8(4)(a) describe the temporal aspect of formation and not otherwise to the fact that what was formed carried the legal characteristics of a partnership. The purpose of the 1988 Queensland Act supports that construction. The 1988 Queensland Act did not purport to create a more general system of limited liability for people, entities or other associations beyond those which existed as partnerships. It did not create a new fictional category of “limited partnerships” upon registration of associations which had not otherwise been partnerships. Those seeking registration as limited partnerships need not have commenced trading (and, therefore, need not yet have incurred liabilities) but they must have done sufficient to create the relations between themselves of “carrying on a business in common with a view of profit”: see Khan v Miah [2000] 1 WLR 2123, 2127-2128; Lindley & Banks on Partnership (19th Edition, Sweet & Maxwell, 2010), 10 [2-03], 456 [13-18], 991-992 [29-02]-[29-08]. There is no suggestion that the association which came into existence on 10 October 2003 upon execution of the Deed were carrying on a business in common with a view for profit when they sought registration on 23 October 2003. Indeed, it might be added, although it is unnecessary to do so for the disposition of the issues in this proceeding, that the parties to the Deed intended to create on 10 October 2003 an appearance of legal relations between them which were not the true legal relations between them to obtain registration under the 1988 Queensland Act.

146    The recent decision of Bank of Beirut SAL v Prince Adel El-Hashemite [2016] Ch 1 might be thought to express a contrary view. In that case Nugee J held that the effect of a conclusive evidence provision similar to that in s 8(4)(a) of the 1988 Queensland Act provided conclusive evidence that a limited partnership came into existence even if the registration had been procured by fraud or forgery. The case concerned a claim by a bank that Prince Adel El-Hashemite had falsely registered a limited partnership with the Registrar of Companies and had used the certificate of registration as an instrument of fraud. The bank sought orders which included the removal of the partnership from the register. Nugee J refused to make such an order reasoning, in part, that the conclusiveness of the certificate required the conclusion that “the partnership must be regarded as having come into existence” notwithstanding that it was based upon fraud or forgery.

147    The provision considered in Bank of Beirut which was similar to s 8 of the 1988 Queensland Act is found in s 8C of the Limited Partnership Act 1907 (UK) which provides:

(1)    On registering a limited partnership the registrar shall issue a certificate of registration.

(2)    The certificate must be-

(a)    signed by the registrar, or

(b)    authenticated with the registrar’s seal.

(3)    The certificate must state-

(a)    the firm name of the limited partnership given in the application for registration,

(b)    the limited partnership’s registration number,

(c)    the date of registration, and

(d)    that the limited partnership is registered as a limited partnership under this Act.

(4)    The certificate is conclusive evidence that a limited partnership came into existence on the date of registration.

Nugee J expressed the view that the effect of these provisions was that a limited partnership had come into existence on the date of registration and at [85] said:

Once a partnership has been registered, the plain effect of section 8C(1) is that the Registrar is under a duty to issue a certificate of registration; and the plain effect of section 8C(4) is that that certificate is conclusive evidence that a limited partnership came into existence on the date of registration. If that means what it says, it would appear to follow that whatever the circumstances which led to the registration, once the certificate has been issued the partnership must be regarded as having come into existence.

At [106] Nugee J concluded:

I conclude therefore that the certificates of registration of each partnership issued by the Registrar are indeed conclusive evidence that each partnership came into existence on the date of registration as section 8C(4) of the 1907 Act provides; and the fact that the registration of each partnership was procured by fraud and forgery does not make any difference to this.

The conclusion by Nugee J that the certificate provided conclusive evidence that the limited partnership must be regarded as having come into existence did not, however, result in the partnership being treated as a partnership for any purpose other than on the question of whether the registrar could be required to remove the registration. Other aspects of the judgment indicate an acceptance by Nugee J that the partnership did not in fact exist and that the register might be annotated in such a way to make that clear. Thus, for example, at [107] Nugee J said:

That leaves the question as to what should be done with the register. It is obviously unsatisfactory that the register should simply record the partnerships as if they were bona fide valid existing partnerships. This would simply be misleading. However it is to be noted that although the 1907 Act requires partnerships to be registered, it does not contain any provision for de-registration. […]

At [108] Nugee J reasoned that the register could not be regarded as simply “a register of existing partnerships” but as a register of partnerships “that have come into existence” and approved the registrar’s annotation clarifying the registration to indicate that an order had been obtained “declaring the application for registration to be false, fraudulent and made without the authority of the Bank of Beirut SAL”. The decision is not, therefore, authority for the proposition that registration gave legal effect to the falsely registered limited partnership.

148    The decision in Bank of Beirut should not, however, be followed to the extent that it may be thought to state a wider proposition, namely, that the conclusiveness of the certificate conferred upon the registered association the legal qualities of a partnership which it otherwise did not have. The conclusiveness provisions in the UK legislation considered by Nugee J are not the same as those in s 8 of the 1988 Queensland Act. Section 8(4)(b) of the latter expressly excludes the composition of a partnership from the conclusive effect of a certificate where there is evidence to the contrary. The composition of a partnership, limited or otherwise, is fundamental to the identity of a partnership which cannot exist apart from those who comprise it. A certificate under s 8(3) of the 1988 Queensland Act, however, is by s 8(4)(b) not conclusive evidence that the limited partnership consists of the general and limited partnership named in the certificate where there is contrary evidence. The UK provision had no equivalent to s 8(4)(b) and the impact of such a provision was not an issue for consideration by Nugee J. The decision in Bank of Beirut seems also not to have considered the argument that the terms of s 8C(4) required the more narrow reading advanced by the Commissioner in the present appeal, namely, that the conclusiveness was limited to the date of registration as distinct from whether that which was registered had the legal effect of being a partnership when it otherwise was not. It may not be surprising that an argument to that effect was not put or considered in Bank of Beirut because in that case the proceeding was directed to whether the Registrar had the power to expunge the register, and whether the Court had power to require the Registrar to expunge the register, in circumstances where the limited partnership ought never to have been registered. The issue before the Court in that case was not whether the limited partnership existed as a limited partnership but, rather, whether there was power to correct the register in circumstances where it was clear that the registration ought never to have occurred.

149    The appellants also criticised the Tribunal for not having decided one of three points of construction which had been raised by the taxpayers. The taxpayers submitted that the Tribunal did not decide whether the first and second elements in the definition of “limited partnership” in s 995-1 of the 1997 Act are alternatives. However, the Tribunal did not err in not expressly dealing with the point of construction which the taxpayers had relied upon because the issue that was not considered did not arise on the Tribunal’s construction of the provisions. The Tribunal had referred to the submissions made by the taxpayers at paragraphs [8] to [11] as follows:

8.    Under s 995-1(1) of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”), a limited partnership is defined, relevantly, as:

an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited.

9.    The applicants contend there are three elements to this definition. The first of these, constituted by the words “an association of persons carrying on business as partners …” is referred to as the general law definition of partnership.

10.    The second element is said to be constituted by the words “…or in receipt of ordinary income or statutory income jointly…”. This, it is contended, is an alternative to the first element, so that the legislation contemplates a situation in which two or more persons receive ordinary or statutory income jointly, and are not in a general law partnership.

11.    D Marks Partnership was, it is said, in receipt of ordinary or statutory income, in the form of dividends. So much is conceded by the respondent. (Emphasis in original)

It was unnecessary, however, for the Tribunal to consider whether the first and second elements are alternatives in relation to whether the Marks Partnership was a limited partnership because the Tribunal considered at [30] that the 1988 Queensland Act did not apply to an association of persons “in receipt of ordinary income or statutory income jointly”. The Queensland legislation providing for a limited partnership applied, as the Tribunal found, only to partnerships within the ambit of its provisions and not to associations which might have been deemed to be partnerships for other purposes in other legislation. The Tribunal had no need, therefore, to consider whether the first and second elements in the definition were alternatives.

150    It is next convenient to consider the other main issue identified by the Tribunal, namely, whether the Z Class shares issued by HL Securities were a debt or equity interest. The significance of the issue, as the Tribunal identified, was that the recipient of the dividends was entitled to claim franking credits if the shares were an equity interest. The fourth ground of appeal in this appeal is that the Tribunal ought to have found that the Z Class shares were an equity interest within the meaning of Division 974 of the 1997 Act.

151    On 24 October 2003 the Constitution of HL Securities was amended to increase its capital by issuing 1000 Z Class shares at an issue price and value of each share at $1. On the same day Quintaste as General Partner of the Marks Partnership resolved to apply for 10 Z Class shares in HL Securities and upon application was issued 10 Z Class discretionary dividend shares on that day as General Partner of, and on behalf of, the Marks Partnership for a total of $10.

152    HL Securities declared a fully franked dividend of $347,597 to Quintaste on the 10 Z Class shares on the day that they were issued, namely, on 24 October 2003. Fully franked dividends were subsequently declared in each of the next two years of income of $471,932 on 30 November 2004, $48,316 on 1 July 2005 and $1,015,200 on 10 November 2005. Quintaste contended that it was entitled in each of the years to the franking credits that would flow with the dividends unless the Z Class shares are to be regarded as a debt interest rather than an equity interest.

153    Division 974 of the 1997 Act applies to determine whether an interest is a debt interest or an equity interest with the consequences that flow from the difference. Section 974-1 explains that Division 974 tells a taxpayer whether an interest is a debt interest or an equity interest for tax purposes. The section goes on to explain that whether an interest is a debt interest or an equity interest matters because returns on debt interests are not frankable. Section 974-5(1) explains that the test for distinguishing between debt interests and equity interests focuses upon “economic substance rather than mere legal form” and is designed to assess “the economic substance of an interest in terms of its impact on the issuer’s position”. The section contemplates that an interest may be both a debt interest and an equity interest and that in such circumstances the interest is to be treated as a debt interest and not as an equity interest: see s 974-5(4).

154    The parties in this proceeding agreed that the issue before the Tribunal, and on appeal, was whether the test for a debt interest in s 974-20(1) had been satisfied. There was no dispute about whether there was a “scheme” but the parties disagreed about whether HL Securities would receive a “financial benefit” within the meaning of s 974-20(1)(b) or had “an effectively non-contingent obligation” within the meaning of s 974-20(1)(c). The section relevantly provides:

974-20    The test for a debt interest

Satisfying the debt test

(1)    A *scheme satisfies the debt test in this subsection in relation to an entity if:

(a)    the scheme is a *financing arrangement for the entity; and

(b)    the entity, or a *connected entity of the entity, receives, or will receive, a *financial benefit or benefits under the scheme; and

(c)    the entity has, or the entity and a connected entity of the entity each has, an *effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when:

(i)    the financial benefit referred to in paragraph (b) is received if there is only one; or

(ii)    the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and

(d)    it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and

(e)    the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil.

The scheme does not need to satisfy paragraph (a) if the entity is a company and the interest arising from the scheme is an interest covered by item 1 of the table in subsection 974-75(1) (interest as a member or stockholder of the company).

Note:    Section 974-30 tells you when a financial benefit is taken to be provided to an entity.

For present purposes it may be accepted, as was agreed by the parties, that the conditions in (a) and (e) are not in issue in the appeal. Whether (d) had been satisfied had been in issue before the Tribunal but that ceased to be an issue during the appeal because it was accepted by the taxpayers that the scheme was governed by s 974-35 and that the scheme had a performance period under 10 years which required that the value be worked out in the nominal terms of the money amounts of $10 for the issue price and the redemption amount of the Z Class shares.

155    The first matter remaining in dispute between the parties in the appeal in respect of the debt or equity interest issue, therefore, was whether the $10 payable to HL Securities for the Z Class shares was a “financial benefit” within the meaning of s 974-20(1)(b). The words “financial benefit” are defined in s 974-160 in broad terms, namely,:

974-160 Financial benefit

(1)        In this Act:

    “financial benefit”:

(a)    means anything of economic value; and

(b)    includes property and services; and

(c)    includes anything that regulations made for the purposes of subsection (3) provide is a financial benefit;

even if the transaction that confers the benefit on an entity also imposes an obligation on the entity.

(2)    In applying subsection (1), benefits and obligations are to be looked at separately and not set off against each other.

(3)    The regulations may provide that a thing specified in the regulations is a financial benefit for the purposes of this Act. (Emphasis in original)

The Tribunal found these words to be satisfied by the “payment of $1 per share for 10 shares, or the entitlement to receive such payment”. At [50] the Tribunal said:

The applicants submit that conferring a $10 benefit on HL Securities is inconsequential especially having regard to that entity’s other assets. I reject this approach. An amount of $10 is still a financial benefit; something of economic value. I do not think that the legislation contemplates a comparison of the value of the alleged benefit with the relevant entity’s net worth. I should mention, although I do not consider it strictly necessary, that I am not satisfied that the $10 was not paid.

In doing so the Tribunal accepted that the definition of “financial benefit” in s 974-20(1)(b) was “in broad terms”.

156    The applicants challenged this conclusion and the Tribunal’s reasoning. They submitted that the Tribunal had failed to analyse the meaning that the word “economic” appearing before the word “value” in the definition of “financial benefit” in s 974-160(1)(a), and submitted that a consideration of the financial statements in the 2004 financial year of HL Securities would show that a receipt of $10 “could hardly be regarded as a matter of economic substance to the issuer, nor [the] sort of transaction contemplated as being caught by the legislation, as adverted to in the Explanatory Memorandum […]”.

157    The Tribunal was correct in its conclusion and reasons. The operative words for the Tribunal to construe were “anything of economic value” and their breadth was correctly applied to the conclusion that they encompassed the payment of an amount of $10 notwithstanding that $10 might not be a significant amount to a company with the assets of HL Securities. It is plain from the language of the provisions, and the Explanatory Memorandum, that the definition was intended to operate broadly and was not made to depend upon an evaluation of the economic significance of a receipt to a recipient. The provisions do not require any consideration of whether what is received represented market value or an arm’s length consideration or might be judged to be desirable or significant by a recipient. It is sufficient that the benefit, in this case the $10 paid or payable, was something which could be described as something of economic value. The word “economic” preceding the word “value” does not require the qualitative analysis of the significance of the receipt to the recipient as submitted by the appellants. The presence of the word “economic” no doubt excludes from the meaning of “value” that which may not be regarded as “economic” in character (like, perhaps, something that might have emotional or sentimental value) but it does not require any analysis of whether what was received was economically significant to the recipient.

158    The taxpayers sought to gain support for the contrary view from a passage in paragraph 1.6 of the Explanatory Memorandum to the New Business Tax System (Debt and Equity) Bill 2001 (Cth), but that passage does not require a contrary conclusion. Paragraph 1.6 of the Explanatory Memorandum stated, in part:

…[T]he tax law draws the borderline separating the 2 (debt/equity border) in such a way that the legal form of an interest cannot be used to result in a characterisation at odds with its economic substance.

At paragraph 2.2 of the Explanatory Memorandum it was said:

…The new rules classify an interest in a company as equity or debt according to the economic substance of the rights and obligations of an arrangement rather than its mere legal form[…]

The Explanatory Memorandum explained at paragraph 2.5 that a relevant inquiry in addressing the threshold question about whether something was an equity interest was whether the scheme was a financing arrangement. Each of these statements in the Explanatory Memorandum explain, in broad terms, an overall objective sought to be achieved through Division 974, but the statements point against a conclusion that the broad definition of “financial benefit” is to be construed in the way submitted for the appellants. None of the statements in the Explanatory Memorandum to which reference was made suggest that the provisions were intended to operate in a way that narrowed the meaning of “financial benefit” to capture something which the recipient might regard as economically desirable. The provisions neither require, nor are made to depend upon, such analysis as may be found in a requirement that the financial benefit be at market value or be an arm’s length consideration. It is sufficient to the operation of the provisions, and it is consistent with the objectives of the Division as a whole, that the words “financial benefit” have the meaning given and applied by the Tribunal. It also follows that it is not relevant to consider the observations in Ord Forest Pty Ltd v Federal Commissioner of Taxation (1974) 130 CLR 124, 140-142, which were concerned with considering whether the subscription price for shares was the same as the true worth of the shares.

159    The next requirement that needed to be satisfied in application of the debt/equity test was that HL Securities had an “effectively non-contingent obligation” under the scheme to provide a financial benefit after the time when it received the financial benefit. For present purposes one may accept the broad description of this requirement given by the appellants, namely, that “the debt has to be repaid”. On that view the provisions of the section operate in circumstances where something of financial benefit is received which in due course is to be repaid.

160    The Tribunal found this condition satisfied in the amendment to the Constitution of HL Securities at the time of the creation of the Z Class shares. The amendments to the Constitution included sub-clause (ii)(b) which provided that the shares were redeemable in the following terms:

Each share shall be redeemable at the direction of the directors, at any time, for the issue price, and, at the end of 47 months following its issue, shall be automatically redeemed at its issue price and cease to exist at the expiration of that time, whether or not its redemption price has been paid.

The Tribunal referred to this provision at [51] of its reasons and at [52] concluded by saying:

In my view this is “an effectively non-contingent obligation under the scheme” satisfying this requirement of the debt test. I do not accept the applicants’ submissions to the contrary, including that the amendment to the constitution does not impose any obligation on HL Securities to repay the issue price. On my reading of the amendment, in full, that obligation arises irrespective of whether the shares are redeemed at the direction of the directors or automatically redeemed.

The appellants criticised this paragraph by claiming that there was “effectively no reasoning”. However, a fair reading of the Tribunal’s reasons shows that it explained that its reading of the provision resulted in the automatic redemption of the shares at the issue price unconditionally at the expiration of 47 months. The Tribunal may not have explained in detail why the appellants’ submissions were not accepted, but the Tribunal’s reasons did explain that it reached its conclusion on the basis of the words found in the amendment to the Constitution which the Tribunal correctly considered to mean that the redemption was not made to depend upon any prior payment by Quintaste of the issue price.

161    The appellants also submitted that sub-section 974-20(1)(c) could never be satisfied if the prior financial benefit of $10 had not been paid in the first place by the limited partnership. They also contended that there was “an obvious contingency to the repayment, namely the shares ceasing to exist and repayment not being made, an event [said to be] contemplated by the clause [referred to above]”. It was also contended that there were further contingencies to the redemption price being paid by reason of the shares being under the control of the directors “who can impose conditions, terms and the like” including the power to forfeit shares for non-payment of a call. However, the Tribunal was not required to consider hypothetical possibilities in the construction and application of s 974-20(1)(c). Whether there is an “effectively non-contingent obligation under the scheme to provide a financial benefit” does not depend upon having to discount future possibilities that are not part of the obligation according to its terms. The relevant provision in the Constitution provided for the redemption of the shares for the issue price whether at the direction of the directors or automatically at the end of 47 months. There was no need for the Tribunal to explain how sub-section 974-20(1)(c) could be satisfied if the financial benefit had not in fact been paid because the terms of the clause, as correctly construed by the Tribunal, was that the issue price was payable upon redemption and was not made to depend up on the prior payment.

162    The third ground of appeal challenged the Tribunal’s determination that the members of the Marks Partnerships were “tax partners” in the sense of being in receipt of income jointly for the purposes of s 995-1(1) of the 1997 Act. The fifth question of law was linked to this ground and was posed in the following terms:

Whether the Tribunal failed to identify and properly apply the relevant legal test in the proper construction of ‘tax partners’ in s 995-1(1) ITAA 1997 as it applied to the members of the D Marks Partnership.

The appellants submitted that the members who had claimed to be limited partners of the Marks Partnership could not be partners under tax law if they were not members of a limited partnership or members of a general law partnership.

163    The Tribunal found that the individuals who had claimed to be members of a limited partnership were partners for tax purposes notwithstanding that they were not members of a limited partnership or a partnership at general law. That is because the definition of “partnership” for Commonwealth tax purposes includes an association of persons who are not otherwise partners but who are “in receipt of ordinary income or statutory income jointly”. This category of association of people need not be carrying on business with a view of profit but are treated by Commonwealth tax law as partners merely because they are in receipt of income jointly. The Tribunal reasoned as follows at [58]-[62]:

58.    I have found that D Marks Partnership was not a corporate partnership, a limited partnership, or a partnership at general law. However, s 995-1 of the ITAA 1997 defines partnership as follows:

“partnership” means:

(a)    an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b)    a limited partnership.

59.    It is common ground, as I have said, that Quintaste and the David Marks Trust were in receipt of income jointly. I accept the respondent’s submission that D Marks Partnership was a partnership for tax purposes, pursuant to s 995-1 of the ITAA 1997.

60.    As D Marks Partnership is not a corporate partnership, but is a partnership as defined by s 995-1 of the ITAA 1997, then the partners are assessed on the dividends. The respondent submits that the apportionment of that income should be in conformity with their interests under the deed: 99% as to the trustee of the David Marks Trust, and 1% to Quintaste.

61.    The applicants submit that if there is no limited partnership, as I have found, then there is no occasion for giving effect to that apportionment: “If the respondent says the limited partnership must go, so too must that apportionment.”

62.    The deed, however, contains a sufficient expression of each partner’s interest in joint income. Quintaste was to receive 1% of joint income, and the trustee of the David Marks Trust was to receive 99% of joint income. I am not satisfied that the same apportionment should apply to the partners as members of a tax partnership.

The appellants submitted that the Tribunal’s decision erroneously ignored the legal reality that the shares had been issued to Quintaste and not to Quintaste and the trustee of the Marks Trust jointly. The basis of the Tribunal’s apportionment, however, took into account the undoubted fact that those who had sought to be partners had agreed amongst themselves to an apportionment of the income which they had intended to receive as limited partners. The Tribunal’s conclusion that they had failed in achieving their objective of securing the benefit of being a limited partnership did not mean that the Tribunal could or should ignore the agreement between them about the proportions each was to receive of the income to be derived through the association they had intended. The Z Class shares were not applied for by Quintaste in its own right or as undisclosed agent for a principal but expressly as the general partner of, and on behalf of, the Marks Partnership. The resolution by HL Securities to accept the application for the Z Class shares, and to issue the shares accordingly, was not to accept the application for Quintaste in its own right, or to issue the shares to Quintaste in its own right, but to do so expressly as partner of, and on behalf of, those who had intended to constitute the Marks Partnership. The dividends declared by HL Securities to Quintaste were likewise not expressed to be declared to Quintaste in its personal capacity but rather as one of, and on behalf of, those who had intended to constitute the Marks Partnership. The parties to the Deed may not have succeeded in giving to themselves the legal character of a limited partnership but they had agreed upon how their receipts were to be apportioned between themselves. In those circumstances the Tribunal was correct to conclude that Quintaste was to receive 1% of the joint income and that the trustee of the David Marks Trust was to receive 99% of the joint income.

164    The fifth ground of appeal effectively raises the same issue as that in the third ground of appeal but in the context of the application of s 109D of the 1936 Act in respect of the loans made by HL Securities and RMI to Quintaste. The Marks Partnership was lent, in the 2004 year of income, $676,009 by HL Securities and a total of $1,962,088 by RMI. Each of the loans was made pursuant to a loan agreement which described the borrower as “Quintaste Pty Ltd ACN 106 133 984 as General Partner of, and on behalf of, the D Marks Partnership (a Limited Partnership)”. The submissions by the appellants were, in essence, that the loans were made by each lender with Quintaste in its own capacity and not on behalf of itself and the Marks Trust. The submission was summarised by the Tribunal at paragraph [64] as a contention “that if there is no limited partnership then there is no loan agreement to which the trustee of the David Marks Trust is a party”. On appeal the submissions were put to the same effect, namely, that the agreements were between the lenders and Quintaste. At paragraph [68] of the appellant’s written submissions it was contended that there was “no loan agreement to which the trustee of the D Marks Trust is a party”. However, this submission ignores the description of the borrower in each of the loan agreements. In each case it cannot be said that Quintaste was borrowing on its own account or to the exclusion of the Marks Trust. Quintaste may incorrectly have described itself as borrowing on behalf of itself and the trust “as limited partners” but it was not borrowing to the exclusion of the other entity which was claimed to be a limited partner. That is what the Tribunal decided saying at [63] to [67]:

63.    I refer now to the loans. There were two loans each to D Marks Partnership and each in the 2004 financial year: from HL Securities in the sum of $676,009; and from RMI Australia Pty Ltd of $1,962,008.

64.    The applicants submit that if there was no limited partnership, then the issue is who borrowed the moneys. They contend that if there is no limited partnership then there is no loan agreement to which the trustee of the David Marks Trust is a party.

65.    In those circumstances they argue that the loan agreements are between the lenders and Quintaste. They accept that the two loans are then caught by s 109D of the ITAA 1936, and properly treated as dividends forming part of Quintaste’s assessable income.

66.    Consistent with what I have said above, I do not accept there can be no loan to D Marks Partnership if that entity is not a limited partnership. There was a tax law partnership and the rights and obligations of the partners, where permitted, were subject to the deed.

67.    I accept the respondent’s contention that the loans were made to the tax law partnership being an entity within s 109D(d) of the ITAA 1936.

The Tribunal was correct in reaching its conclusion and to reason as it did. The loan agreements expressly provided that Quintaste was borrowing for itself and for another, albeit that the borrowers may erroneously have been described as a limited partnership. The loans were always intended to be received jointly by Quintaste and the Marks Trust albeit that they intended their receipt to be in a capacity with the legal character that they did not achieve.

165    The first ground of appeal was that the Tribunal failed to give proper and adequate reasons for its decision. It follows from the foregoing that this ground is not established. The case was conducted in the Tribunal without oral testimony or affidavits. The facts were largely set out in the Tribunal documents including primary documents and some records of interview conducted by representatives of the Commissioner. The Tribunal was not called upon to make any findings of disputed fact but to determine issues presented by the parties in their respective statements of issues and contentions by reference to detailed written and oral submissions. The Tribunal was not required to consider every argument put and it explained its conclusions adequately to enable the parties to understand the reasons for its decision.

166    The last ground of appeal was that the Tribunal erred in construing and applying the penalty provision in s 284-90(1) of Schedule 1 to the Administration Act. In this context the appellants’ written submissions at [77] were as follows:

It is submitted that the Appellants’ arrangements and the application of the tax legislation was open to be construed as the Appellants contended on the language of the relevant State legislation, and the tax legislation; being a construction as to which some other construction was reasonably open.

The test of whether something is reasonably arguable requires careful application of s 284-15. Section 284-15 is concerned with when a matter is reasonably arguable. The relevant text of the section relied upon by the parties provides:

284-15    When a matter is reasonably arguable

(1)    A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.

(2)    To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with law.

(3)    Without limiting subsection (1), these authorities are relevant:

(a)    a *taxation law;

(b)    material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901;

(c)    a decision of a court (whether or not an Australian court), the AAT or a Board of Review;

(d)    a *public ruling.

The text of the provision in these terms was introduced with effect from 2005 by the Tax Laws Amendment (Improvements to Self Assessment) Act (No 1) 2005 (Cth) which inserted the word “about” after the words “argued for”.

167    Provisions to broadly the same effect as those now found in s 284-15 were previously found in s 222C and 226K of the 1936 Act. Section 226K of the 1936 Act imposed a penalty by reference, in part, to whether a taxation statement by a taxpayer treating an income tax law as applying in a particular way was not “reasonably arguable” when the statement was made. Section 222C(1), however, supplied a specific meaning to the words “reasonably arguable”, namely:

(1)    For the purposes of this Part:

(a)    the correctness of the treatment of the application of a law…

is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied … it would be concluded that what is argued for is about as likely as not correct.

Section 284-15(1) substituted the words “that what is argued for is [about] as likely to be correct as incorrect, or is more likely to be correct than incorrect” for the test in s 222C(1), namely, “that what is argued for is about as likely as not correct”.

168    Hill J considered the correct approach to the application of s 226K in the context of s 222C(1) in Walstern v Commissioner of Taxation (2003) 138 FCR 1 and said at 26-7 [108]:

[…]

1.    The test to be applied is objective, not subjective. This is clear from the use of the words “it would be concluded” in para(1)(b) of the section;

2.    The decision-maker considering the penalty must first determine what the argument is which supports the taxpayer’s claim;

3.    That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision-maker at this point will need to compare the taxpayer’s argument with the argument which is considered to be the correct argument;

4.    The decision-maker must then determine whether the taxpayer’s argument, although considered wrong, is about as likely as not correct, when regard is had to “the authorities”;

5.    It is not necessary that the decision-maker form the view that the taxpayer’s argument in an objective sense is more likely to be right than wrong. That this is so follows from the fact that tax has already been short paid, that is to say the premise against which the question is raised for decision is that the taxpayer’s argument has already been found to be wrong. Nor can it be necessary that the decision-maker form the view that it is just as likely that the taxpayer’s argument is correct as the argument which the decision-maker considers to be the correct argument for the decision-maker has already formed the view that the taxpayer’s argument is wrong. The standard is not as high as that. The word “about” indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer’s argument can objectively be said to be one that while wrong could be argued on rational grounds to be right;

6.    An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be “about as likely as not correct” when regard is to be had to the material constituting “the authorities”; and

7.    Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of “authority” a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer’s view is ultimately seen to be wrong it is nevertheless “about” as likely to be correct as the correct view. A question of judgment is involved.

That approach was adopted by the Full Court in Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450, [108]. The Full Court in Allen & Anor v Federal Commissioner of Taxation (2011) 195 FCR 416 at 436 [75], however, expressed the view that Stone and Allsop JJ (as the Chief Justice then was) had taken a “somewhat less strict” approach of whether a question was “open to debate in the sense of being arguable” in Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468 at [70]: see also Sent v Federal Commissioner of Taxation (2012) 85 ATR 1, 44 [216].

169    The decision of the Full Court in Allen, like that in Cameron Brae, and in contrast to that in Walstern, turned on a question of statutory construction which was free from statutory authority squarely covering the point: see at 436 [78] and [79]. In Cameron Brae Stone and Allsop JJ (as the Chief Justice then was) said at 488 [70]:

In our view, the question of construction and interpretation of s 82AAE was reasonably open and arguable. No authority squarely covered it. The proper interpretation depended upon the construction of s 82AAE informed by a full appreciation of the statutory history. The argument about the applicability or satisfaction of s 82AAE was arguable. That question can be seen as subsuming s 8-1, if it were answered one way. If it be necessary to decide, we are also prepared to conclude that the issue as to the characterisation of the outgoing as capital or revenue was arguable. Whilst in our view it is clear that it was a payment of a capital nature, the question is open to debate in the sense of being arguable.

In Allen the Court said at 436 [77]-[78]:

77    The present case, like Cameron Brae, and in contrast to Walstern, turns on questions of statutory construction. Walstern was a case where the erroneous position advanced in a taxpayer’s return was founded upon an unreasonable view of, or a disregard for, the facts. See Walstern at [113].

78    In this case, as in Cameron Brae, the questions of statutory construction on which the case turns were free from authority squarely covering the point. And as our reasons on the substantive issues show, the taxpayers’ position was debatable. […]

It was submitted on behalf of the taxpayers that their position that they were a limited partnership was reasonably arguable.

170    The test in s 284-15(1) requires a conclusion that “what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect”. Those words informed the approach taken by Hill J in Walstern, and Stone and Allsop JJ in Cameron Brae did not purport to adopt a different test from that which had been enunciated by Hill J in Walstern and which had been adopted by the Full Court in Pridecraft. The test is not whether a position argued for is arguable in a more general sense and the test is not satisfied because something has been argued cogently or at length by senior counsel. Penalties imposed under tax legislation are an integral and underpinning feature of the taxation regime. The imposition of penalties is not dependent upon whether an incorrect position is “arguable” in a general sense, but the penalties may be reduced if the specific test of “reasonably arguable” is satisfied. It is a test which contains a statutory standard (“that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect”) and a reference point by which that standard is to be applied (“having regard to the relevant authorities”).

171    The approach adopted by Hill J in Walstern took into account the legislative context introducing the “reasonably arguable” test and the mischief it sought to address. His Honour noted that the same Act introducing the test of “reasonably arguable” had also introduced a provision imposing by way of penalty additional tax where a taxpayer failed to take “reasonable care”: Walstern at [106]. The legislature plainly intended the test of “reasonably arguable” to be different from, and be a more rigorous standard than, the test of “reasonable care”: see Walstern at [106]-[108]. The legislature also intended the test to be objective and to be determined by reference to authorities. The provisions were aimed to ensure that people who had made an honest and genuine attempt correctly to determine their taxable income would not be penalised. The provisions were not intended to support or encourage doubtful or dubious positions to be taken but to be relied upon where the taxpayers arguments were, to adopt the language in the Explanatory Memorandum referred to in Walstern at [107], “cogent, well-grounded and considerable in its persuasiveness”.

172    The taxpayers in the present case relied only upon their construction being “open”. Their written submissions were that their “arrangements and the application of the tax legislation was open to be construed” as they had “contended on the language of the relevant State legislation, and the tax legislation; being a construction as to which some other construction was reasonably open”. However, those are not the words of the statutory test for a matter to be reasonably arguable. The submissions do not engage with the statutory standard or the reference point by which that standard is to be applied.

173    A taxpayer claiming a matter to be reasonably arguable within the meaning of s 284-15(1) must show that it would objectively be concluded that what was argued for was “about as likely to be correct as incorrect, or [was] more likely to be correct than incorrect”. That must be done by having regard to relevant authorities. In some cases a taxpayer may be able to establish the statutory test by pointing to a favourable court decision or dicta, or to a passage from some ruling giving positive support to the matter claimed to be reasonably arguable. In Walstern Hill J held that the claim for deductions was not reasonably arguable because it turned not upon the construction of a provision but upon the particular findings of fact made by his Honour upon which the deductions depended: Walstern at [113]-[114]. His Honour also held that whether the contributions were on capital account was a question that was not “sufficiently” open as to be reasonably arguable: Walstern at [114].

174    Statutory construction often confronts courts with choices (see Nezovic v Minister for Immigration and Multicultural and Indigenous Affairs (No 2) (2003) 133 FCR 190, [52]), but s 284-15 is not to be construed as making the imposition of penalties to depend upon whether a proposition argued for by a taxpayer is merely “open”. The application of s 284-15 will usually require some reference point by which an arguable proposition may be said to be both “open” and “sufficiently” open. A taxpayer relying upon s 284-15 will generally need to show that the matter argued for was despite being wrong, cogent, well-grounded and considerable in its persuasiveness. Showing arguability or openness does not engage with the statutory test that what is argued for is “about as likely to be correct as incorrect, or is more likely to be correct than incorrect”. In Cameron Brae Stone and Allsop JJ did not apply the reasonably arguable test on the basis merely that the construction maintained by the taxpayers was arguable. Their Honours said at [70]:

In our view, the question of construction and interpretation of s 82AAE was reasonably open and arguable. No authority squarely covered it. The proper interpretation depended upon the construction of s 82AAE informed by a full appreciation of the statutory history. The argument about the applicability or satisfaction of s 82AAE was arguable. That question can be seen as subsuming s 8-1, if it were answered one way. If it be necessary to decide, we are also prepared to conclude that the issue as to the characterisation of the outgoing as capital or revenue was arguable. Whilst in our view it is clear that it was a payment of a capital nature, the question is open to debate in the sense of being arguable.

Their Honours’ conclusion that the construction and interpretation of s 82AAE was relevantly reasonably arguable was based upon their Honours’ earlier construction of s 82AAE by the full appreciation of its statutory history. The fact that there had been no authority that squarely covered the question of construction and interpretation of s 82AAE was one factor leading to their Honours’ conclusion in the context of complex questions of interpretation informed by a full appreciation of the statutory history leading to the provision. The additional observation about the characterisation of the outgoing as capital or revenue being “arguable” was otherwise obiter and could not have been intended to substitute arguability for the statutory test of reasonably arguable or to depart from the analysis of Hill J in Walstern which had been adopted by the Full Court in Pridecraft.

175    The considerations which led the Full Court in Cameron Brae and Allen to hold that a position was reasonably arguable are not present in this case. The taxpayers in the present case depended primarily upon their contention that they could take advantage of s 8(4) of the 1988 Queensland Act in circumstances where they had not been partners seeking registration as limited partners. They are entitled to make an argument that the effect of s 8(4) extended to those obtaining registration notwithstanding that they were not otherwise partners, but had no objective reference point to support their construction beyond their argument. The same is true about each of the other constructions for which they contended in the appeal. It was for the taxpayers to establish that their construction was not just argued, but that it satisfied the statutory test of being reasonably arguable, and they have failed to do so. The taxpayers did not, for instance, rely upon or point to a public ruling or an opinion by experienced independent senior counsel or other adviser dealing with the specific point (c.f Walstern at [112]) which independently supported the construction they advanced. A taxpayer relying only upon the terms of a provision to advance an unsuccessful construction of a provision must do more than argue for its construction for it to be reasonably arguable in the statutory sense. There needs to be a foundation for the court to conclude that the unsuccessful argument was, despite its rejection, nonetheless ‘a close call’ (to use a popular expression). I am unable to regard the taxpayers’ unsuccessful argument in this case as a close call. The construction was argued, and at length, but it lacked substance and merit. It was not persuasive.

Associate:

Dated:    22 June 2016