FEDERAL COURT OF AUSTRALIA

De Simone v Commissioner of Taxation [2009] FCAFC 181

TAXATION – income tax – partnership – finding by Administrative Appeals Tribunal of scheme to obtain deduction – purpose of scheme – whether taxpayer must have relevant purpose

ADMINISTRATIVE LAW – Administrative Appeals Tribunal – lengthy adjournment granted to enable applicant to issue summons for attendance of witness – applicant aware that summons not properly served – witness fails to appear at resumed hearing – further adjournment refused – whether request for further adjournment reasonable – whether applicant given reasonable opportunity to present case – whether denied natural justice

Administrative Appeals Tribunal Act 1975 (Cth) s 44(1)

Administrative Appeals Tribunal Regulations 1976 (Cth) reg 15

Income Tax Assessment Act 1936 (Cth) s 92

Income Tax Assessment Act 1997 (Cth) s 8‑1

Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321 cited

Calder v Federal Commissioner of Taxation 2005 ATC 5050 applied

Commissioner of Taxation v Consolidated Press Holdings Pty Ltd (2001) 207 CLR 235 applied

Federal Commissioner of Taxation v Cooke 2004 ATC 4268 applied

Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597 applied

Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation (2007) 243 ALR 728 cited

Sullivan v Department of Transport (1978 20 ALR 323 cited

GIUSEPPE DE SIMONE and SERAFINO DE SIMONE v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 405 of 2009

SUNDBERG, STONE AND EDMONDS JJ

22 DECEMBER 2009

MELBOURNE

THE COURT ORDERS THAT:

1.         The appeal be dismissed.

2.         The appellants pay the respondent’s costs of the appeal.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

BACKGROUND

1                          In the 1999 year of income the appellants were investors in a proposed theatrical production called “Jolson – The Musical”. Investment in the production was promoted by Michael Brereton, a lawyer experienced in the entertainment industry. The financing of the production involved a partnership in which investors would be the partners. Their capital contributions would provide the initial finance, with subsequent funding to be derived from the revenue generated by the staging of the production.

2                          Each partner was to contribute $500,000 to the partnership. The partnership would be managed by Jolson Management Pty Ltd. Another company, Jolson Australia Pty Ltd, would produce the show on behalf of the partnership pursuant to a production services and licence agreement entered into with Jolson Management on 30 June 1999. Under the agreement the partnership was to be entitled to the net profit derived by the production until running expenses were fully recouped. Thereafter the net profits were to be shared between the partnership and Jolson Australia on a 60/40 basis.

3                          $400,000 of each partner’s $500,000 contribution was to be borrowed from a finance company, introduced by Mr Brereton, which would have recourse only to the income from the production. The other $100,000 was to be provided in cash by the partner.

4                          The appellants together took up a single share in the partnership. They paid the cash contribution, and the finance company was to provide the balance. Overall, $14,962,000 was to be contributed by the partners, of which $2,993,600 was to be in cash and $11,974,400 was to be contributed by the finance company. The Administrative Appeals Tribunal (the Tribunal) found that the finance company had not contributed its part, and that the only start‑up funding was the cash contributions of $2,993,600 from the investor partners.

5                          Under clause 2 of the production services and licence agreement Jolson Management agreed to pay Jolson Australia a “production service fee”. In the agreement Jolson Management is called “the Manager” and Jolson Australia is called “Jolson”. Clause 2 is in part as follows:

2.1       Appointment

The Manager appoints Jolson and Jolson hereby accepts the appointment to provide all the Production Services to the Partnership to facilitate the Production within the provisions of this Agreement.

2.2       In consideration for the performance by Jolson of its obligations hereunder and in full discharge of all the Manager’s obligations to Jolson in connection with the Production, the Manager agrees to pay and Jolson agrees to accept the Production Service Fee at a time and in the manner mutually agreed by both parties. In the event of a dispute the Manager’s decision shall prevail.

2.3       Calculation of Production Services Fee

(a)     The parties agree that the Production Service Fee in respect of the Production will be calculated on the basis of the actual cost to Jolson of providing the Production Services (as disclosed in the budget) together with a margin (if any) as agreed by the Manager from time to time;

(b)     The Manager hereby irrevocably undertakes to pay Jolson the Production Service Fee as provided in Schedule 1 hereto, upon execution of this Agreement;

(c)     Jolson shall not provide Production Services to the Manager requiring payment of any amount in excess of the Production Services Fee;

(d)     The parties acknowledge and agree that until the Partnership has fully recouped the Running Expenses, the Manager (on behalf of the Partnership) shall be entitled to all Net Profit derived from the Production, thereafter Net Profits shall be shared 60% as to the Partnership and 40% as to Jolson.

The production service fee (clause 2.3(b)) was $14,968,000.

6                          In the 1999 year Jolson Management (or the partnership) earned no income and had no expenses other than the production service fee. In their income tax returns for that year each applicant claimed a deduction of $250,000. The Commissioner disallowed the deductions.

BEFORE THE TRIBUNAL

7                          The appellants appealed to the Tribunal pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act). They contended that the $14,968,000 production service fee was the trading loss of the partnership for the year, and the share of each of them, for the purposes of s 92 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act), was $250,000. The Tribunal was of the view that there was no loss or outgoing incurred by the partnership of $14,968,000. It said there was no evidence of a loan or outgoing of $11,974,400 by the finance company. There were no loan agreements executed and no evidence of any payment towards the costs of the production. The Tribunal accepted that of the amount of  $250,000 claimed by each appellant, only $50,000 was an allowable deduction. This was the cash amount actually contributed in the year of income. The Tribunal varied the Commissioner’s decision accordingly.

8                          In case it was incorrect in disallowing the full amount of  $250,000 claimed by each appellant, the Tribunal went on to consider the Commissioner’s alternative submission that the deductions should be disallowed under Part IVA of the 1936 Act. It said:

Pursuant to s 177D of that Act it could be readily concluded, looking objectively at the arrangement, that the promoter and the partners entered into the scheme purporting to borrow funds to increase the claim for expenditure beyond that actually incurred for the purpose of obtaining a tax benefit by inflating the amount sought to be deducted. As stated earlier, 80 per cent of the amount claimed as a deduction was attributable to funds allegedly provided by a financier by way of a loan to the partners but no actual funds were provided and, not unusual in situations such as these, a round robin of book entries was entered into. The effect of such a finding is that s 177F(1) would disallow the deduction claimed. However, in common with many other schemes which have been considered by the Tribunal and the courts, it is appropriate that a compensating adjustment be made under s 177F(3) to allow as a deduction the expenditure actually incurred by the participants.

BEFORE THE PRIMARY JUDGE

9                          The primary judge upheld the appellants’ contention that by treating the deductibility of the  $250,000 claimed by each of them as dependent upon whether the partnership had in fact paid, as distinct from having agreed to pay, the full sum of of $14,968,000, the Tribunal applied the wrong legal test to the operation of s 8‑1 of the Income Tax Assessment Act 1997 (Cth).

10                        However, his Honour went on to uphold the Tribunal’s conclusion that Part IVA applied to disallow the deductions. He rejected the appellants’ contention that they did not derive a tax benefit within the meaning of s 177C because they were in fact each out of pocket in the sum of $250,000 with respect to their investment in the partnership. He did this on the basis that the submission sought to take issue with a finding of fact made by the Tribunal. No question of law was raised.

11                        The primary judge also rejected the appellants’ contention that they were not themselves parties to any scheme of a kind referred to in Part IVA. He said:

To the extent that this submission involves a question of law, there is no substance in it. Under s 177D of the 1936 Act, a scheme is one where, having regard to various enumerated factors, “it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme …” This provision, which requires an objective approach, is concerned with the purpose of the person, or any of the persons, who entered into or carried out the scheme.  It need not be the purpose of the taxpayer. It is apparent from the extract from the Tribunal’s reasons set out above that the Tribunal took an objective approach, and concluded that “the promoter and the partners entered into the scheme purporting to borrow funds to increase the claim for expenditure beyond that actually incurred for the purpose of obtaining a tax benefit by inflating the amount sought to be deducted”. To avoid the operation of s 177D, it would not be enough for the applicants to establish that they did not have the purpose there referred to: they would have to show that none of the persons who entered into or carried out the scheme had such a purpose. Notwithstanding their own protestations, the Tribunal’s finding on that point was one of fact which was amply open to it. To the extent that it involved an (objective) inference about the purpose of the applicants (along with that of other partners), it was equally open to the Tribunal. It involved no error of law.

12                        The final issue before the primary judge did not arise out of the Tribunal’s reasons. It involved the appellants’ complaint of a denial of natural justice occasioned by the Tribunal proceeding to hear and determine their applications notwithstanding the absence from the witness box of Mr Brereton to whom they had caused a summons to be issued under s 40(1A) of the AAT Act. The facts which form the background to this issue can be summarised as follows:

(a)     It was the appellants’ intention to have Mr Brereton give evidence as part of their case.

(b)     On 23 April 2007 the first appellant informed the Tribunal that Mr Brereton had refused to give evidence voluntarily, and had said that if summoned to appear he would refuse to answer questions in order to avoid self‑incrimination.

(c)     Mr Brereton did not give evidence during the hearing of the application for review over the period 19‑21 November 2007.

(d)     At the end of their evidence, the appellants informed the Tribunal they could go no further without Mr Brereton’s presence.

(e)     The Tribunal decided to hear final submissions before deciding whether to adjourn the hearing to give the appellants a further opportunity to produce Mr Brereton.

(f)      On 21 November the Tribunal decided “with strong reservations” to grant an adjournment to a date to be fixed so that Mr Brereton could be called. It did so on condition that on or before 5 December the appellants provide confirmation to the Tribunal and the Commissioner from Mr Brereton that he would attend and give evidence on one of a range of dates specified by the Tribunal.

(g)     Having ascertained from the Tribunal that it would resume the hearing on 11 March 2008, the appellants caused a summons to Mr Brereton to be issued which was left with a staff member at his office on 13 February.

(h)     On 20 February 2008 the first appellant sent an email to the staff member seeking confirmation that she had brought the summons to Mr Brereton’s attention.

(i)      On 21 February 2008 the Commissioner’s solicitor drew the first appellant’s attention to the fact that reg 15 of the Administrative Appeals Tribunal Regulations 1976 (Cth), which requires a summons to be served on a proposed witness personally, had not been complied with, so that Mr Brereton was not obliged to obey the summons. On the same day the first appellant responded that he had been told by a Tribunal officer that service could be effected by leaving the summons at Mr Brereton’s office. However, he would attempt to serve Mr Brereton personally, but the latter will “most probably seek to avoid this fate”. There was no evidence of any further service or purported service.

(j)      On 27 February 2008 Mr Brereton wrote to the first appellant. After referring to the summons, he requested that the appellants agree to adjourn their matter in the Tribunal until after Mr Brereton’s own matters (“Jolson and other matters”) had been dealt with. The first appellant replied to the effect that there would be no problem with the adjournment so long as the Commissioner consented. The Commissioner made clear that he would not consent.

(k)     By letter to the appellants of 7 March 2008 Mr Brereton claimed that the summons had not been served as required by reg 15. He also complained about its width, and the fact that the appellants had arranged a resumed hearing date without consulting him as to his availability. He said he would not be attending the Tribunal on 11 March 2008. He sent a copy of the letter to the Tribunal. The Tribunal received the letter before the resumed hearing. The appellants did not.

(l)      On the resumed hearing on 11 March Mr Brereton was not present. The appellants thereupon ascertained from his office that he was at an airport on his way overseas and that it was not known when he would return. The Tribunal then announced that it was not prepared to adjourn the matter any further. It said:

·          it had no doubt that any attempt to enforce the summons in the courts would be strongly defended by Mr Brereton;

·          it had no confidence that Mr Brereton’s own matter would progress with any great speed;

·          it suspected that it would be a long time before “we’re actually going to get Mr Brereton down to a hearing and giving evidence”;

·          it had some reservations about an adjournment on the last occasion, and that’s why it imposed the condition that the appellants confirm that Mr Brereton would attend on the adjourned date;

·          it had no confidence that Mr Brereton would appear to give evidence; “my guess is he has no intention of appearing”.

The Tribunal proceed to determine the application adversely to the appellants.

13                        After referring to s 39(1) of the AAT Act, which requires a party to be given a reasonable opportunity to present his or her case and to make submissions, and noting that a failure to accede to a reasonable request for an adjournment can constitute procedural unfairness (Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597 at [40]), the primary judge said:

there could be no suggestion that the period between 21 November 2007 and 11 March 2008 was not a reasonable one to enable the applicants to take such steps as were necessary to procure Mr Brereton to give evidence. However, when the hearing resumed on 11 March, Mr Brereton was not present, but had sent a letter to the Tribunal contending that he had not been properly served with the applicants’ summons. If there was substance in that contention, I do not think the applicants would be in any position to say that Mr Brereton’s absence was the result of an unexpected supervening event for which they had no responsibility.  At this point, the court is confronted with an unresolved question of fact … The Tribunal made no finding on the subject of the efficacy of the applicants’ service on Mr Brereton. Neither have the applicants led any evidence on the subject in the present proceeding. The matter was, quite clearly, one on which the applicants carried both the legal and the evidentiary onus.  In the circumstances, I cannot take it to have been established in point of fact that Mr Brereton was duly served in accordance with reg 15 of the AAT Regulations. Indeed, the applicants’ own email to Mr Brereton’s office of 20 February 2008 implies that personal service was not effected.

14                        His Honour went on to say that the appellants’ failure to establish that Mr Brereton had been duly served was fatal to their contention that their application for an adjournment was a reasonable one, and to their allegation that they were denied natural justice.

THE APPEAL

15                        The first ground of appeal is that there was a denial of a fair hearing where, having said to the appellants “Now, I’m not criticising you. Your understanding was that he would appear”, the Tribunal nevertheless refused an adjournment in relation to a critical witness who had refused to appear. Section 39(1) of the AAT Act requires that a party be given a reasonable opportunity to present his or her case. This provision is a statutory recognition of an obligation the common law would in any event imply: Sullivan v Department of Transport (1978) 20 ALR 323. In that case at 343 Deane J said:

the relevant duty of the Tribunal is to ensure that a party is given a reasonable opportunity to present his case. Neither the Act nor the common law imposes on the Tribunal the impossible task of ensuring that a party takes the best advantage of the opportunity to which he is entitled.

In Bhardwaj 209 CLR at [40] the High Court said that a failure to accede to a reasonable request for an adjournment can constitute procedural unfairness. The primary judge’s conclusion that the appellants’ failure to establish that Mr Brereton had been properly served was fatal to their contention that their application for an adjournment was a reasonable one, was open on the evidence to which he referred. The appellants’ attention had been drawn to the need for personal service. They knew there had been no such service. The first appellant said he would attempt personal service, but that Mr Brereton would probably seek to avoid service. As the primary judge said, there was no evidence that this acknowledged problem had later been cured or that any attempt had been made to cure it. This ground of appeal has no substance.

16                        The second ground is that the primary judge erred in finding that it was fatal to the appellants’ case that they did not prove personal service of the summons, when they had been told by someone in the Tribunal’s Registry that a copy of the summons could be left at Mr Brereton’s office. This ground also fails. Whatever may have been the first appellant’s initial understanding about service, he was aware on 21 February 2008 that reg 15 required personal service. He accepted that there had been no such service, and told the Commissioner’s solicitor that he would attempt to serve Mr Brereton personally. Despite this, the appellants provided no evidence of actual or attempted personal service.

17                        The third ground is that the judge erred in law in finding that the Tribunal can determine an application for review in the absence of a material witness for an applicant. That general proposition is not sustainable. Section 39(1) of the AAT Act requires a party to be given a “reasonable opportunity” to present his case. The primary judge’s conclusion that there had been no failure to afford a reasonable opportunity was amply supported by the matters to which he referred: see [13] and [14] above. What we have said about the first two grounds of appeal is applicable to this ground.

18                        The fourth ground is that the primary judge failed to apply his own statement of the law – namely that a failure to accede to a reasonable request for an adjournment can constitute procedural unfairness – to the facts of the case. The contention is that instead of determining whether the request for an adjournment was reasonable, his Honour asked whether the appellants had personally served the summons. This misstates what his Honour said, as appears from the passage in fact relied on by the appellants in this ground of appeal. What his Honour said at [24] was that while in a particular case it might be a denial of natural justice to refuse an adjournment merely because of the non‑attendance of a proposed witness who had been duly served, the appellants’ failure to establish that Mr Brereton had been personally served was fatal to their contention that their application for an adjournment was a reasonable one. His Honour’s conclusion was plainly open to him, especially where the Commissioner’s solicitor had alerted the first appellant to the need for personal service, and told him that Mr Brereton would be under no obligation to attend unless he was personally served. Further, as we have said earlier, the first appellant accepted that there had to be personal service and said he would attempt to effect it. This ground must be rejected.

19                        The fifth ground of appeal is that the primary judge erred in law in finding that Mr Brereton, the promoter of the scheme, could be the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme and did so for the purpose of enabling the appellants to obtain a tax benefit in connection with the scheme, when Mr Brereton was not acting in accordance with his instructions and was in breach of his duties to them as his clients. The Tribunal’s finding that “the promoter and the partners entered into the scheme purporting to borrow funds to increase the claim for expenditure beyond that actually incurred for the purpose of obtaining a tax benefit by inflating the amount sought to be deducted” was, as the primary judge correctly held, open to it on the evidence. It is neither here nor there, if it be the case, that Mr Brereton was not acting in accordance with his instructions or was in breach of his duties to the appellants. Section 177D asks simply whether it would be concluded that a person who entered into or carried out the scheme, did so for the specified purpose. That person need not be the taxpayer: Commissioner of Taxation v Consolidated Press Holdings Pty Ltd (2001) 207 CLR 235 at [95]; Calder v Federal Commissioner of Taxation 2005 ATC 5050 at [113]‑[115]; Federal Commissioner of Taxation v Cooke 2004 ATC 4268 at [88]. We add that the appellants’ assertions about Mr Brereton’s conduct were no more than that.

20                        The sixth ground of appeal is that the primary judge erred in law in determining that it was reasonably open to the Tribunal to find that “the promoter and the partners entered into the scheme purporting to borrow funds to increase the claim for expenditure beyond that actually incurred for the purpose of obtaining a tax benefit by inflating the amount sought to be deducted. It is said that the Tribunal had failed to take into account “all the relevant considerations and in particular the investigation of the Australian Crime Commission into the fraud committed by Brereton against the appellants”. The appellants’ several Statements of Facts, Issues and Contentions make reference to enquiries being made by the Crime Commission, but we were not referred to any report of the Commission and we have found nothing in the extensive appeal volumes that throws any light on the matter. This ground is disposed of by what we have said about the fifth ground.

21                        Although we have dealt with the fifth and sixth grounds of appeal on what might be called the merits, they are in fact not available to the appellants. In the notice of appeal they are described as “questions of law raised on appeal”. They were not questions of law specified in the notice of appeal before the primary judge. The jurisdiction of the Federal Court with respect to an appeal under s 44(1) of the AAT Act is confined to the specific questions of law identified in the notice of appeal. New questions cannot be added on an appeal to the Full Court: Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation (2007) 243 ALR 728 at [60]‑[61] per Edmonds J, with whom Greenwood J agreed. Even if these questions had been specified at first instance, they are not pure questions of law: Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321 at [18]. At best they may be mixed questions of fact and law.

Associate:

Dated:         22 December 2009